BlackRock Inc., the world’s biggest money manager, reported third-quarter earnings that beat analysts’ estimates as rising stock markets lifted assets and the firm’s exchange-traded funds drew client deposits.
Net income climbed 7.9 percent to $642 million, or $3.65 a share, from $595 million, or $3.23, a year earlier, the New York-based company said today in a statement. Excluding certain one-time items, profit of $3.47 per share exceeded the $3.32-a-share average estimate of 19 analysts surveyed by Bloomberg.
Chief Executive Officer Laurence D. Fink has cut costs of some ETFs to fend off competition and urged investors to get back into equities as they’ve remained concerned by Europe’s sovereign-debt crisis and slowing economic growth worldwide. Assets rose 3.2 percent in the quarter to $3.67 trillion, fueled by market gains of $134 billion. Investors poured $20.5 billion into equity ETFs, helping BlackRock counter the impact of $55 billion in net client redemptions.
“Equity ETF flows were certainly above our expectations,” Luke Montgomery, a research analyst who covers asset managers at Sanford C. Bernstein & Co. in New York, said in a telephone interview. Earnings also beat estimates because of higher performance fees and more shares repurchased, he said.
BlackRock fell 0.44 percent to close at $189.13 in New York. The shares have gained 6.1 percent this year, compared with the 20 percent increase in the 20-member Standard & Poor’s index of asset managers and custody banks.
BlackRock’s iShares ETF unit drew $25.2 billion in investor deposits, the most since BlackRock’s acquisition of the unit from Barclays Plc in 2009. Investors removed $5.1 billion from active stock funds during the three months ended Sept. 30. BlackRock said a single institutional investor pulled more than $72 billion from a fixed-income portfolio, after the firm didn’t want to rebid for the business at lower fees.
“I am not going to chase business for window dressing,” Fink said during today’s conference call with analysts and investors. BlackRock will sacrifice business that may look big, yet has small revenue, he said.
BlackRock’s revenue increased 4.3 percent from a year earlier to $2.32 billion as a result of new business, higher performance fees and market gains. Investment-advisory fees rose 3.8 percent to $2 billion and performance fees for beating benchmarks rose 13 percent to $103 million. BlackRock Solutions, the unit that helps analyze hard-to-value assets, had 18 net new assignments during the quarter, and its revenue increased 9.4 percent to $128 million.
BlackRock’s earnings were boosted by $17 million in non-operating income as the value of co-investments alongside clients rose, compared with a non-operating expense of $87 million a year earlier.
The MSCI ACWI Index of global stocks rose 6.2 percent in the third quarter and the U.S. benchmark Standard & Poor’s 500 Index increased 5.8 percent.
BlackRock repurchased 960,100 shares in the quarter, bringing the total to 8.2 million shares this year. BlackRock bought back more than 6 million shares in the three months ended June 30 valued at about $1 billion after Barclays sold its 19.6 percent stake in BlackRock to meet Basel rule requirements. The British bank took the holding when it sold Barclays Global Investors to BlackRock in December 2009.
On Oct. 9, BlackRock agreed to release Barclays from coverage provided for default on 52 covered securities in two cash-management funds as part of the acquisition, in exchange for payment to the funds of $70 million by Barclays, according to the statement.
BlackRock said this week it’s cutting fees for six ETFs and creating four new ones as it seeks to compete with companies such as Vanguard Group Inc. and Charles Schwab Corp. While its iShares unit, with $526 billion in U.S. ETF assets, is the biggest in the business, Vanguard is growing faster in the U.S. this year. ETF fee cuts weren’t driven by a “price war” with Vanguard, Fink said during today’s call.
Investors put about $34 billion into BlackRock’s U.S. ETFs this year through Sept. 30, according to data from State Street Global Advisors. Vanguard had net deposits of $42 billion, bringing ETF assets to more than $230 billion.
The ETF fee cuts imply an annualized loss of $35 million to $40 million in revenue, which means less than a 1 percent decrease in earnings per share, Montgomery said in an Oct. 16 research note.
“We view fee cut announcements as providing closure, and segmentation strategy as a strong step towards recapturing share in retail and preserving institutional leadership,” wrote Morgan Stanley analysts Matthew Kelley and Kevin Kaczmarek in an Oct. 16 note.
Investor deposits into passive ETFs industrywide more than doubled from the previous quarter to $52 billion, according to data compiled by Morningstar Inc. in Chicago. Deposits into active funds increased almost 10 percent to $43 billion during the same time period, Morningstar said.
Fink, who co-founded BlackRock in 1988, said earlier this month the U.S. is about a year away from having a more robust economy and has recommended investors put cash into equities as bond yields have shrunk to record lows. BlackRock started the third phase of its five-year branding campaign on Oct. 3, with a series of advertisements telling savers to get out of cash and low-yielding bonds and suggesting they put money in high-quality stocks, ETFs and products that generate higher income.
BlackRock offers actively managed stock and bond funds, passive strategies, hedge funds and portfolios that use mathematical models.