Bond ETFs Fuel BlackRock Profit Beat

Company’s iShares ETF unit helps power revenue increase.

Reviewed by: Trevor Hunnicutt
Edited by: Trevor Hunnicutt

(Reuters) – Investors piled into BlackRock bond ETFs and paid more in hedge fund fees in the third quarter, helping the world's largest asset manager beat Wall Street's earnings forecasts and offsetting a higher tax hit that cut profits 8 percent from a year earlier.

Rough-and-tumble markets saw BlackRock trim core investment advice and administration fees by $12 million from 2014 and give up 5 percent of assets under management from the second quarter.

But both institutional and retail investors sent a net $23.3 billion in new money to the firm's iShares exchange-traded funds unit, the company said in an earnings report on Wednesday. That, plus a gain in performance fees by one of its hedge funds, helped bolster revenues to $2.9 billion, up $61 million from a year earlier.

Clients Putting Money To Work

"We had a great quarter because of our positioning as an organization," said BlackRock chairman and chief executive officer Laurence D. Fink. "Despite the volatility, clients have to put their money to work."

BlackRock shares were up 3.45 percent in trading Wednesday in New York.

New money moving into BlackRock's long-term asset management business rose to $35 billion from $29 billion a year earlier in net terms, including the iShares business. Seventy-nine percent of all the new money BlackRock saw moved into fixed-income products.

But the new money wasn't enough to offset the impact of volatile markets that hurt assets, and currency swings that hurt fee income. It took a hedge fund to do that.

Strong Performance Fees

While the New York-based company took in more revenue during the three months that ended Sept. 30 this year than it did during the same period in 2014, that growth was driven "primarily," the company said, by a single unnamed hedge fund whose "strong" annual performance was measured during the quarter. Performance fees were up $75 million for the quarter to $208 million.

"We think they'll continue to build out their alternatives platform, which could lead to quarters like this where they have strong performance fees," said Rory Callagy, an analyst at Moody’s Investors Service.

BlackRock earns sharply higher fees on alternative investments, such as hedge funds, private equity, infrastructure and real estate than traditional stock and bond products. While they account for 3 percent of the firm's long-term assets under management, they account for 8 percent of base fees, as well as additional performance-based revenue not included in that 8 percent number.

Net Income Beats, But Slips

Overall, BlackRock's net income fell 8 percent to $843 million, or $5 per share, from $917 million, or $5.37 per share, a year earlier. Analysts on average were expecting a profit of $4.57 per share, excluding transactions that don't affect the company's value, according to Thomson Reuters I/B/E/S.

"I cannot control the world’s activities, and net income was a function of global capital markets," said Fink.

The company did manage to put a stop to net outflows for now. In the second quarter, long-term net outflows were $7.3 billion, the company's first net outflow since 2012.

In the third quarter, BlackRock paid $342 million in taxes, up $110 million from the same period a year ago.

Inflows Outlier

The firm's strong sales may be an outlier among its competitors for the quarter. JPMorgan Chase & Co., whose asset management unit has been a top seller of actively managed mutual funds, on Tuesday reported outflows of $4 billion from its long-term products for its third quarter. J.P. Morgan did not respond to a request for comment.

"Investors seem to be focused on cost of investments, so unless that goes away, ETFs will continue to be attractive given their fee rates," said Callagy.

BlackRock has been working to improve the investment performance in its "fundamental" stock-picking business. Eighty percent of its products in that segment are above their benchmark or peer averages over a one-year period, BlackRock said on Wednesday, citing its own figures.

Overall, BlackRock ended the quarter with $4.51 trillion in assets under management, down 5 percent from $4.72 trillion in the second quarter.

Trevor Hunnicutt is a staff writer for Reuters.