July 18 (Bloomberg) -- BlackRock Inc., the world’s biggest money manager, said second-quarter profit climbed 32 percent as investor deposits into multi-asset products and index funds boosted fees.
Net income rose to $729 million, or $4.19 a share, from $554 million, or $3.08, a year earlier, the New York-based company said today in a statement. Excluding certain items, adjusted earnings of $4.15 a share beat the $3.81 average estimate of 21 analysts surveyed by Bloomberg. Profit included a pretax gain of $39 million related to the initial public offering of PennyMac, a mortgage firm BlackRock backed in 2007.
Chief Executive Officer Laurence D. Fink, 60, has said BlackRock has the potential to increase its asset base by about 5 percent annually by developing new exchange-traded funds to meet client needs and expanding its reach among individual investors. Market declines reduced BlackRock’s assets from a record in the first quarter to $3.86 trillion as of June 30. Investors put a net $11.9 billion into BlackRock’s funds in the quarter, while market losses cut assets by $62.3 billion.
Deposits into BlackRock’s funds were “better than expected,” Daniel Fannon, a San Francisco-based analyst at Jefferies & Co., wrote today in a note to clients. “The primary difference was inflows into index fixed-income products and multi-asset products,” said Fannon, who had expected net withdrawals of $1.5 billion in the quarter.
BlackRock rose 2.4 percent to close at $278.91 in New York. The shares have gained 35 percent this year, compared with the 29 percent increase in the 20-member Standard & Poor’s index of asset managers and custody banks.
Stock and bond markets worldwide fell in June amid concern that the Federal Reserve may reduce its bond purchases. Investors pulled about $60 billion from U.S. bond mutual funds in June, the biggest monthly redemptions in records going back to 1961, according to estimates from the Investment Company Institute. Stock funds industrywide gathered a net $300 million in June, according to ICI estimates.
“Institutions worldwide stayed the course,” Fink said today in a telephone interview. “We are seeing a rotation from index-oriented fixed-income products to more unconstrained products -- that’s where we believe this great rotation will come from.”
BlackRock, which acquired Barclays Global Investors in December 2009 to expand into passive investments, was helped by the diversity of its product offerings during the quarter, Fink said. The firm offers actively managed stock and bond funds, the iShares ETFs, hedge funds and portfolios that use mathematical models.
The firm saw deposits of $5.1 billion from individual clients, driven by sales of unconstrained bond funds and multi-asset income funds, and $7.8 billion from institutions, mainly into index products. Investors pulled $963 million from the firm’s iShares exchange-traded funds, mainly those tracking emerging markets, bonds and commodities.
BlackRock has revamped equity and fixed-income teams to revive deposits into active products. Chris Leavy, chief investment officer of BlackRock’s fundamental equity unit in the Americas, replaced portfolio managers at strategies that represented about 40 percent of the division’s $115 billion.
About 42 percent of BlackRock’s actively managed stock funds have beaten benchmarks over the past five years. Fink said in today’s interview that rebuilding its active equity brand is a two-year to three-year process. Active stock funds lost $4.3 billion to client redemptions during the quarter, while their ETF counterparts attracted $2.7 billion.
Money managers such as BlackRock, which earn fees based on the assets that they manage for clients, traditionally benefit from rising stock markets and investor deposits into higher-fee active funds. The U.S. benchmark Standard & Poor’s 500 Index increased 2.4 percent in the second quarter while the MSCI All Country World Index of global stocks fell 1.2 percent.
BlackRock’s investment advisory fees, earned for managing client money, rose 9 percent to $2.2 billion from a year earlier. Performance fees, earned by funds for beating certain benchmarks, more than doubled to $89 million.
BlackRock in October created the iShares Core Series, which is made up of six ETFs with lowered fees and four new ones, after the firm lost market share to Vanguard Group Inc., the Valley Forge, Pennsylvania-based money manager that boosted assets in its funds with lower-cost products. BlackRock had earlier combined the sales teams for its iShares unit, the world’s largest provider of ETFs, and BlackRock’s retail funds. In March, BlackRock enhanced its partnership with Boston-based Fidelity Investments to sell more ETFs directly to retail investors.
“We view BlackRock’s institutional-heavy client mix and ETF market leadership as providing downside support against any prolonged retail outflows,” Morgan Stanley analysts led by Matthew Kelley wrote in a July 8 research note.
ETFs have been the fastest-growing segment of the asset-management business, benefiting money managers such as BlackRock, Vanguard and State Street Corp. In the 12 months ended May 30, ETF assets in the U.S. increased 33 percent to $1.48 trillion, according to data from the Washington-based Investment Company Institute.
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