BlackRock Seen Posting Biggest Profit Since 2011 on ETFs

BlackRock Inc., the world’s largest asset manager, may show its biggest earnings gain in six quarters as its sales of U.S. exchange-traded funds set a record last year.

Net income in the fourth quarter probably rose 15 percent to $641 million, or $3.67 a share, according to the average estimate of 10 analysts in a Bloomberg survey. IShares, the ETF unit BlackRock acquired as part of Barclays Global Investors in 2009, won $35.7 billion in new money in the period, making it No. 1 by deposits among all exchange-traded fund managers in 2012.

“IShares is a very profitable business and is one of their key growth drivers,” Robert Lee, an analyst at Keefe, Bruyette & Woods Inc. in New York, said in a telephone interview. “It’s a big chunk of their revenue, but its contribution to profitability is probably even higher.”

Chief Executive Officer Laurence D. Fink, 60, in August reorganized BlackRock’s senior leadership and product distribution, and in October created a series of lower-fee ETFs in a bid to reverse a decline in its U.S. market share. The moves, and decision by Vanguard Group Inc. to change the index provider for its funds, helped boost the New York-based company’s ETF deposits 42 percent from the previous quarter.

BlackRock gained 16 percent in the three months ended Dec. 31, the third-best performer in the Standard & Poor’s 20-member index of asset managers and custody banks. The stock increased 11 percent in the past month, hitting $221.01 on Jan. 11, the highest since March 2010.

Fastest Growth

The consensus estimate for growth in net income would be the fastest since the second quarter of 2011, when it increased 43 percent. The company, which is scheduled to report results on Jan. 17, may post record adjusted operating income of $3.70, helped in part by a decline in shares outstanding, according to the average of 20 analysts in a Bloomberg survey. The measure, which doesn’t conform to generally accepted accounting principles, excludes some costs.

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 Nov. 30, ETF assets in the U.S. increased 24 percent to $1.3 trillion, compared with 11 percent for mutual funds, which hold $12.9 trillion, according to data from the Washington-based Investment Company Institute.

BlackRock will be the first publicly traded asset manager to announce fourth-quarter results. BlackRock and Invesco Ltd., which sells stock and bond mutual funds, ETFs and alternative investments such as private equity, are among managers that are best positioned for growth, wrote Morgan Stanley analysts led by Matthew Kelley in a Jan. 4 research note.

Growth ‘Runway’

“With ETFs still representing less than 7 percent the total global pool of mutual funds and ETFs, we see significant runway for future growth,” the Morgan Stanley analysts wrote.

Invesco’s profit increased 2.3 percent to $207 million, according to the average of six analysts surveyed by Bloomberg. Net income at Franklin Resources Inc., manager of the Franklin and Templeton mutual funds, rose 3.6 percent to $494.6 million, according to the average estimate of eight analysts surveyed by Bloomberg.

T. Rowe Price Group Inc. is expected to report a 23 percent profit increase to $231.3 million, the average of six analysts surveyed by Bloomberg shows. The company hasn’t had a quarterly loss since going public in 1986. Legg Mason Inc., the money manager searching for a new CEO, is expected to post a net loss of $109.5 million, the data show.

Performance Fees

BlackRock, which manages about $3.7 trillion, is unique among money managers in having equally big businesses devoted to passive and active strategies. BlackRock’s iShares manages about $759 billion in ETPs and offers about 600 funds. The firm had about $942 billion in active stock and bond strategies, and $113 billion in alternatives as of Sept. 30.

Performance fees, earned by funds for beating certain benchmarks, may also boost BlackRock’s earnings in the fourth quarter, said Luke Montgomery, an analyst who covers asset managers at Sanford C. Bernstein & Co. in New York. Montgomery is expecting fees of $198 million compared with $147 million a year earlier, which would be a 35 percent jump.

Investors pulled $12.7 billion from BlackRock’s active stock funds while depositing $1.3 billion into its active bond funds in the nine months ended Sept. 30, the firm’s third-quarter earnings statement shows. BlackRock has tried to woo investors back into its active equity funds by replacing the group that oversees investment products with five specialized units in August, in the most sweeping overhaul since its 2009 takeover of Barclays Global Investors.

Equity Managers

Fink has brought in managers including OppenheimerFunds Inc.’s Chris Leavy, who joined in October 2010, Bartlett Geer from Putnam Investments, and UBS AG’s Lawrence Kemp to improve equity-fund performance.

The company also started a five-year branding campaign last year as it seeks to get investors back into higher-yielding assets such as stocks and expand its retail business.

BlackRock’s move into passive strategies came with the December 2009 purchase of Barclays Plc’s San Francisco-based investment unit, which owned iShares, the world’s biggest provider of ETFs. Last week, BlackRock agreed to buy Credit Suisse Group AG’s ETF unit, which has $17.6 billion of client assets under management and 58 funds.

In 2012, BlackRock made changes to its ETF unit after losing market share to Vanguard, which has boosted assets in ETFs with lower-cost products. BlackRock saw its U.S. ETF market share fall 1 percentage point in 2012 to 41.8 percent, compared with an increase of 2.1 percentage points for Vanguard to 18.3 percent, according to State Street Global Advisors.

Vanguard’s Decision

BlackRock in October created the iShares Core Series, which is made up of six ETFs with lowered fees and four new ones, to attract individual and institutional clients looking to invest over the long term. It had earlier combined the sales teams for iShares and BlackRock’s retail funds to increase market share.

BlackRock’s dominance in the fourth quarter was also helped by Vanguard’s decision to drop MSCI Inc. as the benchmark provider for 22 index funds, which was announced Oct. 2. The firm’s $60 billion Vanguard FTSE Emerging Markets ETF had $886 million in withdrawals for the three months ended Dec. 31, compared with the $8.9 billion of deposits into BlackRock’s $52 billion iShares MSCI Emerging Markets Index Fund, according to data from research firm IndexUniverse LLC.

“People became much more focused on which index to use for their portfolios,” Daniel Gamba, head of iShares Americas’ institutional business at BlackRock, said in an interview. “Our flows were due in part to having the right benchmark.”