BlackRock Inc , the world's largest money management firm, reported weaker-than-expected quarterly earnings on Monday as its funds businesses saw outflows and customers shifted money to lower-margin index funds over actively managed ones.
The asset management firm's shares fell as much as 8.8 percent as investors focused on the weaker-than-expected earnings as well as lower-than-forecast revenue numbers, even as overall profits more than quadrupled with the addition of Barclays Plc's former exchange-traded funds business.
BlackRock Chief Executive Officer and founder Laurence Fink blamed the uptick in outflows from the firm's funds on decisions by clients to rebalance their portfolios. The firm's clients include big companies, pension funds and sovereign wealth funds.
Much of this has to do with the consternation of our clients, said Fink during a Monday morning conference call, referring to low yields on cash investments. Some of our clients were derisking, while some were rebalancing.
Overall, net outflows from BlackRock funds totaled $33 billion, with some $22 billion pulled out of actively managed equity and bond funds. At the same time, customers sank some $18 billion in new money into less-actively managed index funds, including ETF-related products.
Fink said the fact that clients redeemed more money than they put into BlackRock funds in the quarter was not an indication of any trouble with the firm's acquisition of Barclays' ETF business, called iShares.
Our integration is ahead of schedule, said Fink. But mergers are tough and they take time to bring the overall firm together as one.
A particularly strong area for BlackRock was its array of fixed-income index funds, which took in $13.6 billion in net new money in the quarter. The company said the inflow of new money included $7.1 billion for its iShares bond funds.
PASSIVE VERSUS ACTIVE FUNDS
But the shift toward more passive products could be troubling if the trend continued. That's because passive index funds like the ones managed by iShares don't typically generate the same kind of fees as more actively managed investment products.
We are lowering our fee income projects to reflect flows to lower margined products, Standard & Poor's equity analyst Matthew Albrecht wrote in a research note.
The fees charged on a passive index fund often can range from 5 to 7 basis points, depending on the size of the total investment, based on guidance from a person familiar with BlackRock. By contrast, the fees on an actively managed fund often reach the high-double digits -- as much as 50 basis points -- depending on the amount invested.
The lower fees on passively managed funds are an issue, said Timothy Ghriskey, chief investment officer for Solaris Asset Management.
Solaris doesn't own any BlackRock shares. But Ghriskey said his fund is monitoring the firm to see how it handles the integration before deciding to buy any shares.
BlackRock stock closed at $192.95, down $18.07, or 8.56 percent on the New York Stock Exchange. That was the worst one-day performance for the stock since April 20, 2009, when it closed down 9 percent.
Still, the Barclays deal is helping BlackRock's bottom-line.
On an adjusted basis, BlackRock earned $469 million, or $2.40 a share, compared with a year before, when the asset manager earned $110 million, or 81 cents a share.
Analysts were expecting BlackRock to earn $2.45 a share, according to Thomson Reuters I/B/E/S. The adjusted figure does not include some costs and one-time items management contends should be ignored.
On a generally accepted accounting principles, or GAAP, basis, BlackRock earned $423 million, or $2.17 a share, compared with $84 million, or 62 cents a share, a year earlier.
Revenues also fell short of what analysts were expecting. For the quarter, BlackRock revenue was $2 billion, more than double the prior-year quarter but short of the $2.2 billion analysts had anticipated.
QUANT FUNDS SEE OUTFLOWS
It is hard to compare BlackRock on a year-to-year basis because the current results were greatly enhanced by the addition of the big exchange-traded funds business the firm acquired late last year from Barclays.
The first-quarter results were the first to include all revenues and assets under management assumed by BlackRock in that blockbuster deal, which turned the New York firm into the world's largest money manager.
In the quarter, BlackRock reported net outflows of $8.8 billion from its quant funds, which rely on mathematical formulas to pick stocks and other assets.
Cash management funds, which are largely money market funds, were hit hardest by investor redemptions. The firm said net outflows from cash-related investment products were $39.6 billion.
While our record is not unblemished, we have achieved strong investment performance across much of our platform, said Laurence Fink.
On Friday, BlackRock reported that Fink took home $17.65 million in base pay and bonus in 2009. His base salary was $500,000, the same as in 2008.
His 2009 bonus consisted of $9 million in cash and $8.1 million in stock. In 2008, Fink got a $19.7 million bonus, which was paid in cash and stock.
BlackRock's earning's miss dragged down the performance Monday of several other asset managers that also report this week, including Franklin Resources Inc and Affiliated Managers Group .
(Reported by Matthew Goldstein; Editing by Gerald E. McCormick, Dave Zimmerman, Phil Berlowitz)