NEW YORK (Reuters) – BlackRock, the world's biggest asset manager, on Wednesday reported double-digit profit gains but missed revenue forecasts, results that underscore pressure on the fund industry as investors plow money into lower-cost index funds.
Investors poured $82.2 billion into index funds and iShares exchange-traded funds during the first quarter that ended March 31, while its pricier active funds posted $1.8 billion in withdrawals.
Total assets under management grew to $5.4 trillion.
"Stepping back, the quarter likely has mixed implications for both [BlackRock] and the industry at large," Citigroup analyst William Katz said in a note.
Chief Executive Officer Larry Fink told Reuters in a telephone interview that he is considering three or four small acquisition transactions that would be focused on shoring up the company's technology and its investment expertise in different assets and within new geographic regions.
"I believe you're going to see a consolidation in our industry."
BlackRock shares were down in early trading, about 1.3%.
Financial markets traded vibrantly last quarter as a new U.S. president and Congress took office, and investors tried to size up whether they would pass tax and other reforms that could give new life to an aging bull market in U.S. stocks.
Investors increasingly are choosing to make those bets—whether optimistic or pessimistic—using ETFs that track indexes at a relatively low cost. Very few companies in the industry have been able to build a successful index fund franchise, and the flight of customers to lower-cost products has consequently squeezed margins.
iShares Acquisition Key For BlackRock
BlackRock, which bought iShares from Barclays in 2009, is an exception. Wall Street has rewarded it with a price-to-earnings ratio of 20.1, compared with 16.8 for a grouping of the company's rivals measured by Thomson Reuters.
BlackRock's net income rose to $862 million, or $5.23 per share, in the first quarter, from $657 million, or $3.92 per share, a year earlier. Excluding items, the company earned $5.25 per share. That beat the $4.89 forecast of analysts polled by Thomson Reuters and was helped by a lower tax rate.
Revenues of $2.8 billion missed forecasts by nearly 2%.
While assets grew 22.2% over the year prior, fees for managing those assets and lending out the securities grew by a smaller 12.1%.