UPDATE 5-BlackRock profit rises 24 percent on equities demand

Thu Jan 17, 2013 5:15pm EST

* Q4 EPS $3.93 vs $3.05 year earlier

* Adjusted EPS of $3.96 beat Wall St view of $3.73

* Investors added $47 bln to long-term funds

* Assets under management totaled $3.8 trillion

By Aaron Pressman

Jan 17 (Reuters) - BlackRock Chief Executive Laurence Fink may finally be proving to skeptics that he was right to spend $15 billion buying Barclays' investment business to create the world's largest money manager.

The New York-based firm said Thursday that its fourth-quarter profit increased 24 percent on a 14 percent revenue gain. Investors poured $47 billion into BlackRock long-term funds, including $31 billion into higher-fee stock funds.

Shares of BlackRock closed up 4.4 percent at $232, the highest level since shortly after the Barclays deal closed in December 2009.

The former Barclays exchange-traded fund unit, iShares, has been a stellar performer all along -- it brought in $36 billion of new business alone in the fourth quarter. But investors spent years disappointed with Fink as the rest of the combined firm struggled with performance and integration issues that depressed profits.

Now, after overhauling underperforming funds, cleaning up a real estate investing mess and launching a massive branding campaign aimed at individual investors and their advisers, Fink is pleasing investors with expanding profit margins. Shares of BlackRock, which traded for less than $170 during the summer, have gained 24 percent in just the past two months.

And Fink is back on the expansion trail, snapping up Credit Suisse's ETF business last week and opening a new line of cheaper "core" ETFs in the United States in October.

"We are seeing proof that the investments we have made in people, products and technology over the past three years are paying off," the CEO said on a call with analysts. "This quarter we saw positive asset flows across every client channel in every geographic region."

Big money managers make their profits by charging fees as a percentage of assets under management. And because it doesn't cost the firms much more to manage their portfolios when asset values -- and fee revenues -- rise, they should show increasing profit margins in bull markets.

INCREASING PROFITS

From 2008 through 2011, however, BlackRock's annual adjusted profit margin was stuck in range of 38 percent to 39 percent even as stock markets staged one of the biggest recovery rallies in history.

Finally, in 2012, Fink's firm has cracked the 40 percent mark for the year, reaching almost 43 percent for the fourth quarter.

With bond yields stuck near historic lows and equity markets surging, investors have begun to shift their money to stock funds after years of sticking with more conservative fixed-income products. That benefited BlackRock and other money managers since fees on stock funds tend to be higher than those on bonds funds.

New York-based BlackRock benefited doubly from the strong global equity markets. The MSCI All-Country World Index gained 2.5 percent in the fourth quarter and 13.4 percent over the past year, increasing the value of BlackRock's asset base to a record $3.8 trillion, and encouraging investors to put more money to work in its higher-fee stock funds.

Analysts said the results demonstrated that even a firm as large as BlackRock could still post strong growth. Glenn Schorr at Nomura Securities called the results "a pretty darn good quarter," with customer inflows, revenue and profits all coming in ahead of analyst expectations.

"Momentum in asset gathering was very strong, driven by its ETF business," added analyst Mac Sykes at Gabelli & Co.

The fourth-quarter shift toward stocks mainly reflected growing concerns about the riskiness of bonds, CEO Fink said on a call with analysts. Interest rates are so low that an increase of 15 hundredths of a percentage point could wipe out a year of performance gains, Fink said.

INFLOWS CONTINUE

"What we are seeing is clients understanding the embedded risk at these low interest rates for bonds and now migrating into equities," Fink said.

The trend toward stocks appeared to have accelerated into 2013. Investors added $7.5 billion into U.S.-based equity mutual funds last week, the biggest weekly inflow in 11 years, according to data from Lipper, a unit of Thomson Reuters.

"So far this year, we're seeing strong inflows after a strong fourth quarter," Fink said on the call.

BlackRock's net income totaled $690 million, or $3.93 per share, in the fourth quarter, compared with $555 million, or $3.05 per share, a year earlier. Analysts, on average, expected BlackRock to earn $3.73 per share, excluding certain items, according to Thomson Reuters I/B/E/S. On that basis, BlackRock earned $3.96.

As the largest manager of ETFs, BlackRock also benefited from growing investor desire to use the low-cost, index-based funds instead of actively managed funds that have tended to underperform the market in recent years.

Of the $47 billion added to BlackRock's long-term funds, almost $36 billion went into iShares. Investors withdrew $5.4 billion from BlackRock's actively managed equity funds and $374 million from active bond funds.

BlackRock new line of even cheaper "core" iShares ETFs, better positioned to compete with offerings from Vanguard Group and Charles Schwab Corp, attracted $4.6 billion from customers in the quarter.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.