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BlackRock Falls on Withdrawals After BGI Takeover

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BlackRock profit doubles after BGI acquisition
CEO Laurence D. Fink is trying to convince shareholders that the firm can use its size to attract more clients after the stock fell the most among the largest U.S. firms this year. Photographer: Rick Maiman/Bloomberg

July 21 (Bloomberg) -- BlackRock Inc. said clients withdrew money for a second straight quarter following the $15.2 billion acquisition of Barclays Global Investors.

BlackRock fell 4 percent in New York trading after reporting net withdrawals of $30.4 billion in the three months through June, including from its money funds and quantitative strategies. The outflows contributed to a 6.3 percent decline in assets under management, the New York-based firm said today in a statement.

Chief Executive Officer Laurence D. Fink, who built BlackRock from a fixed-income firm into the world’s largest asset manager by adding the biggest lineup of exchange-traded funds with the BGI deal, last week reshuffled management and set up three regional units to help integrate the new business. BlackRock, the top stock among the 10 largest publicly traded asset managers last year, has become the worst performer this year, losing 38 percent of its market value.

“I think expectations were very large after we announced the merger with BGI last June,” Fink said in an interview with Bloomberg Television’s Erik Schatzker. “We expected the outflows to be significant at the time of the merger and we factored that into the merger.”

Earnings Beat

BlackRock fell $6.03 to $143.33 at 4:15 p.m. in New York Stock Exchange composite trading. It is the worst performer this year in the 202-member Russell 1000 Financial Service Index, which is down 3.2 percent. BlackRock surged 73 percent in 2009, four times the rate of index, helped by news of the BGI purchase.

Net income rose to $432 million, or $2.21 a share, from $218 million, or $1.59 a share, a year earlier, BlackRock said. Excluding costs to integrate BGI and certain compensation expenses, earnings of $2.37 a share beat the $2.30 estimate of 11 analysts surveyed by Bloomberg.

“The long-term flows improved but the churn got worse,” Jeffrey Hopson, an analyst with Stifel Nicolaus & Co. Inc. in St. Louis, said in an interview. “The churn will run its course, but I would like to see it run its course sooner rather than later.” Hopson expected BlackRock to earn $2.40 a share, excluding certain one-time items.

Quant Funds

BlackRock had $33.9 billion in withdrawals related to the acquisition of BGI, including $26.3 billion from quantitative funds. Cash funds lost $24.9 billion. Excluding its quantitative business, which uses mathematical models to pick securities, customers added $28.4 billion to long-term products and the advisory business.

“Going into the merger we knew that some clients would have to address concentration issues and that the active quantitative style was under stress industrywide,” Fink said in the statement. “As expected, these two issues continued to drive outflows, and are expected to do so for at least another quarter.”

The withdrawals and stock market declines in the quarter reduced assets under management to $3.15 trillion, from $3.36 trillion at the end of March. Equity market declines and foreign exchange movements erased $194.1 billion during the quarter, accounting for more than 90 percent of the drop in managed assets.

Clients ‘Froze’

During the quarter, some clients “froze” after markets declined starting in May because of the debt crisis in Europe, Fink told analysts and investors on a conference call. Low interest rates combined with investor uncertainty about where to get higher yields “aggravates the situation,” Fink said.

Fink said the firm’s pipeline of new business from investors who have agreed to put money into BlackRock’s funds is $59.5 billion, giving the firm “momentum.”

BlackRock last week named Rich Kushel as head of portfolio management and Charles Hallac as chief operating officer, and created three regional units for the Americas, Asia-Pacific, as well as Europe, the Middle East and Africa. James Charrington, 58, will lead the EMEA region and Rohit Bhagat, 46, will oversee the Asia-Pacific unit.

Investors in the U.S. deposited about $50 billion into stock and bond mutual funds in the quarter ended June 30, with most of that going into fixed-income funds, preliminary data from the Investment Company Institute in Washington show. Exchange-traded funds pulled in $30.5 billion during the quarter, according to Morningstar Inc. in Chicago.

Dividend, Buybacks

BlackRock, co-founded in 1988 by Fink, began as a fixed-income firm and has expanded through a series of acquisitions. In 2005, BlackRock bought State Street Research & Management to add more stock, real estate and hedge funds. In 2006, it expanded its equity business with the purchase of Merrill Lynch & Co.’s money-management unit. In 2008, BlackRock acquired a division of Quellos Group LLC to add hedge-fund assets. The purchase of BGI, the biggest seller of index-tracking ETFs, was its largest takeover.

BlackRock will consider raising its dividend and increasing share buybacks as it generates more cash, Fink said on the call. The firm may contemplate small acquisitions, especially what Fink called “orphan” ETF businesses.

“In terms of any large-scale merger related to asset management, I would say that would be highly improbable.”

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net.

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