* Adjusted EPS $3.42 vs Street view $2.90
* Net inflow $23.9 bln excluding merger withdrawals
* Adjusted operating margin 40.7 pct
* Shares up 2 pct (Rewrites first paragraph; adds analyst comment, S&P index plans, graphic link)
By Aaron Pressman
BOSTON, Jan 25 BlackRock Inc's (BLK.N) profit soared 77 percent in the fourth quarter, beating all expectations, as the world's largest asset manager benefited from increased hedge fund fees and inflows into its massive exchange-traded fund business.
With both actively and passively managed funds contributing, the behemoth with $3.6 trillion of assets under management -- created when Chief Executive Laurence Fink bought Barclays's (BARC.L) investment unit for $15 billion just over a year ago -- finally appears to be paying off for investors.
BlackRock attracted net inflow of $23.9 billion from clients in the quarter, including $13.4 billion for its iShares exchange-traded fund unit. The total excludes withdrawals of $38.7 billion that BlackRock said largely stemmed from clients who had accounts with both firms before the merger and felt uncomfortable leaving the total with one firm.
The overall results reflected solid investment performance and big inflows for iShares, Nomura analyst Glenn Schorr said. "The net new business pipeline is strong and BlackRock showed progress in the retail, defined contribution, and multi-asset spaces," Schorr said in an initial report on the earnings.
BlackRock's profits are rising even with the merger-related outflows because fees on the lost business appear to be much lower than fees on the new money coming in, said Macrae Sykes, an analyst at Gabelli & Co. "The average fee rate has been going up and performance fees are strong," Sykes said.
Shares of New York-based BlackRock, which have gained 16 percent over the past three months anticipating stronger results, rose 2 percent to $197.42 in afternoon trading on the New York Stock Exchange on Tuesday.
Still, the stock remains well below $226.74, its close on Dec. 1, 2009, when the deal for Barclays Global Investors was completed. Since then, the stock is down about 15 percent, compared with a rise of 16 percent in the the S&P 500.
In the fourth quarter, earnings, excluding certain items, totaled $670 million, or $3.42 per share, up 77 percent from $379 million, or $2.39 per share, a year earlier. Analysts had expected adjusted earnings of $2.90 per share, according to Thomson I/B/E/S.
MARGINS IN FOCUS
It has taken a while for investors to catch on to the merits of the Barclays deal. BlackRock's operating margin excluding some items has been lower than expected when the deal was in process in 2009. The margin hit 40.7 percent in the fourth quarter but for all of 2010 was 39.3 percent, less than the 40 percent or more investors expected.
(For a graphic on BlackRock's improving margins, click on r.reuters.com/dyr67r)
Fink said he is plowing money back into the firm but declined to forecast what BlackRock's margins might be in the future. "I can promise you an upward bias," he said on a call with analysts. "Whether it's 40.7 percent, 41.7 percent, 42.7, I'm not going to hold that to a target."
One key spending project, to allow BlackRock's managers and customers to cross trades on a private network known as a dark pool, is expected to begin operations in the second half of this year, Fink said. "We're spending a great deal of money rolling this out," he added. [ID:nN25261422]
Some investors have been concerned with the amount of merger-related withdrawals, which totaled $121 billion, or 7 percent of the acquired assets, in 2010, according to BlackRock.
"We believe merger-related outflows are largely behind us," Fink said in a statement.
A single client withdrew almost $24 billion from an indexed account in the fourth quarter. BlackRock had $13.6 billion of pending further withdrawals at the end of the quarter.
Assets under management totaled $3.56 trillion at the end of the fourth quarter, up 6 percent from $3.35 trillion a year earlier and gaining 3 percent during the quarter.
BlackRock acknowledged for the first time on Tuesday that it hopes to be included in the widely followed Standard & Poor's 500 Index .SPX. Chief Financial Officer Ann Marie Petach said the firm became eligible after a secondary stock offering in November. To maintain eligibility, BlackRock has paused stock buybacks for now, she said. [ID:nN25256254]
Fourth-quarter revenue jumped 61 percent to $2.49 billion. Strong results at some of BlackRock's hedge funds helped boost high-margin performance fee revenue to $326 million from $125 million a year ago. Revenue at BlackRock Solutions, the firm's risk management outsourcing unit, gained 22 percent to $132 million.
Analysts who track BlackRock follow the firm's preferred measure of profitability, which excludes costs from merger integrations and closed-end fund launches. Costs from compensation programs related to Bank of America Corp's (BAC.N) Merrill Lynch and PNC Financial Services Group Inc (PNC.N), both still shareholders in the firm, are also excluded.
Using generally accepted accounting principles, BlackRock earned $657 million, or $3.35 per share, in the fourth quarter, up from $256 million, or $1.62 per share, a year earlier. (Reporting by Aaron Pressman; editing by John Wallace)