UPDATE 5-BlackRock profit up, but outflows worry investors

* Q2 adj EPS $2.37, beating Wall St view

* Revenue rose 97 pct to $2.03 billion

* Assets under management slip 6 pct to $3.15 trillion

* Shares close down 4 percent on outflow concerns (Updates with closing share price)

By Emily Chasan

NEW YORK, July 21 (Reuters) - Money manager BlackRock Inc (BLK.N) failed to impress investors with better-than-expected second-quarter profits on Wednesday, amid continuing concerns that founder and Chief Executive Laurence Fink's big move into exchange-traded funds is making the firm more dependent on low-fee products.

Shares of the world's largest asset manager were down 4 percent in afternoon trading as the firm's results showed clients were picking up passively managed products, like its iShares ETFs, and getting out of more-lucrative actively managed stock and bond funds.

The second quarter results were a big improvement from the first quarter, when BlackRock missed Wall Street expectations, but showed that the sizable movement of client money out of its actively managed funds in the first quarter was a continuing trend.

"There was probably some disappointment in the outflows," said Macrae Sykes, an analyst at Gabelli & Co who follows asset managers. "It certainly decreases revenue potential because the asset base is shrinking by those flows."

BlackRock shares have been falling like a rock this year -- down 37.1 percent since the beginning of the year-- and the second quarter results did nothing to alter the trajectory.

As the firm's revenue mix shifts away from higher fee generating funds, investors may be deciding BlackRock shares do not deserve the normally rich multiple at which they've traded compared with other asset managers. Historically, the firm has traded at about a 25 percent premium to its peers.

Still, BlackRock's profits rose sharply in the quarter, boosted by a comparatively stronger market and the $13.5 billion acquisition of Barclays Global Investors late last year, with its popular iShares ETF business.

BlackRock, which oversees $3.15 trillion in client assets, said net income rose to $432 million or $2.21 per share for the quarter, compared with $218 million, or $1.59 per share, a year earlier.

Adjusted earnings per share were $2.37, topping analysts' average estimate of $2.29, according to Thomson Reuters I/B/E/S.

Revenue rose 97 percent to $2.03 billion, while analysts were expecting $2.01 billion.

"LUMPY" FLOWS

Fink, in a conference call, attributed much of the shift out of active funds and into ETFs as part of the process of clients readjusting their portfolios in the wake of the iShares deal.

"It is very lumpy," BlackRock founder Fink said on the call. "We have witnessed in the second quarter very large inflows and very large outflows."

Overall, the firm saw $33.9 billion in outflows from institutional investors in the quarter, some of which are trying to reduce their overall concentration of assets at the firm, after the merger.

BlackRock, in its earnings release, said a good chunk of that was tied to a large client which had taken $3.4 billion out of several actively managed fixed-income funds. On the conference call, Fink said he expects another big investor, who had 40 percent of its assets with BlackRock following the merger, to pull out $15 billion from the firm in the third quarter.

Meanwhile, BlackRock said the iShares deal is helping it attract new client money. Around half of BlackRock's $28.4 billion in inflows in the quarter came from iShares investors.

BlackRock said new net business in its pipeline was $59.5 billion as of July 15, including the expected $15 billion withdrawal.

CHANGING THE MIX

BlackRock blamed most of the outflows on client withdrawals from so-called quantative strategies, which make investments based on mathematical formulas. The outflows from those mainly equity-focused funds totaled $26.3 billion.

Cash management products saw outflows of $24.9 billion, but Fink said he thought cash outflows could be smaller in the future if money market funds started competing better with bank deposits.

The company said overall assets fell 6 percent to $3.15 trillion, largely the result of a sharp decline in stock prices in the second quarter.

Employee compensation and benefits rose to $315 million in the quarter, also due to the acquisition, excluding merger integration costs of $4 million.

BlackRock said its board had approved a repurchase of up to 5.1 million shares to neutralize the effects of stock and option grants to employees over the next several years.

The firm's shares closed down 4 percent on the New York Stock Exchange at $143.33 after falling as much as 5.6 percent to $141.01 earlier in the day. (Reporting by Emily Chasan; editing by Lisa Von Ahn, Gerald E. McCormick and Andre Grenon)