BlackRock Sees Record Flows Into Low-Cost ETFs as Passive Rules

  • Revenue gained 1 percent, missing analysts’ estimates
  • BlackRock trimmed expenses on six smart beta ETFs last month

BlackRock Inc., the world’s largest asset manager, is hauling in investor cash at a record rate.

There is one issue: the money is moving into low-fee products which track indexes, pinching revenue. BlackRock managed to boost profits in the fourth quarter, though revenue barely grew.

The firm was a prime beneficiary of a record year in exchange-traded funds. BlackRock attracted $140 billion to its iShares business last year, including $60 billion in fixed-income ETFs. Vanguard Group Inc., the second biggest player in the ETF business, gathered $93 billion. But asset managers are also in a race to the bottom on fees to win investors. In December, BlackRock trimmed expenses on six smart beta ETFs, signaling that the price war was moving beyond plain vanilla products.

“In 2016, it is fair to say across all investor types there was a movement more toward passive strategies,” Chief Executive Officer Laurence D. Fink said in an interview Friday after the earnings were released. “When I am able to increase margins and increase market share through price cuts I am going to do that. The key element is scale.”

BlackRock expanded its operating margin from a year earlier also by keeping company costs down. The shares gained 1.6 percent to $384.28 at 9:43 a.m. in New York on Friday.

ETF Boom

The company’s fourth-quarter earnings of $5.14 a share exceeded estimates. Revenue rose 1 percent to $2.89 billion, falling short of analyst estimates of $2.93 billion. Lower performance fees and a stronger dollar contributed to the modest revenue growth.

Investors poured money into U.S. stock ETFs after the election of Donald Trump as they anticipated that tax cuts, spending on infrastructure and lighter regulation would lead to a stronger economy.  But asset managers are being stung because the cheapest ETFs are attracting investors. Over half of the ETF inflows are going to products with an average fee of 0.09 percent or less, according to an analysis from Bloomberg Intelligence.

Quarterly assets under management increased 11 percent to $5.15 trillion from a year earlier and, for all of 2016, the company had the biggest net inflows in its history.

While the firm has swallowed ETF assets, its stockpicking business hasn’t fared as well. Investors pulled $546 million from actively managed funds in the quarter and added $88.3 million into iShares ETFs and index funds.  
 
Also today, BlackRock’s board approved a 9 percent increase in the quarterly cash dividend to $2.50 per share. 

The company is the first big U.S. money manager to report fourth-quarter earnings, providing a view of how other firms may have navigated financial markets and the shift by investors to low-cost investments.

In 2016, BlackRock rose 12 percent, compared with an 8.4 percent increase for S&P’s 19-company index of asset managers and custody banks.

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