BlackRock Inc (BLK.N), the world's largest money manager, said third-quarter profit rose 8 percent as investors poured cash into its iShares line of exchange-traded funds.
The New York-based company fired on all cylinders during the quarter, also showing strength in bond mutual funds, its Lifepath funds for 401(k)-type retirement accounts, hedge fund performance fees and risk management services. The results highlighted the firm's breadth of offerings built and acquired by Chief Executive Laurence Fink over the past two decades.
Fink said customers dealing with market volatility and uncertainty gravitated to BlackRock products. "BlackRock was built for these times, to be responsive to our clients, to helping our clients overcome the uncertainty around all these big macro issues," Fink said on a conference call with analysts.
He pointed to record quarterly flows into iShares since BlackRock acquired the business in 2009 and the highest flow into retail bond funds in more than 10 years.
Net income for the third quarter totaled $642 million, or $3.65 per share, compared with $595 million, or $3.23 per share, a year earlier, BlackRock said.
BlackRock slightly exceeded Wall Street expectations on two key metrics closely followed by investors, analysts said. Earnings per share, excluding some one-time items and deferred compensation costs, jumped 23 percent from a year ago to $3.47. Analysts, on average, expected $3.31, according to Thomson Reuters I/B/E/S.
And BlackRock's profit margin adjusted for the same items hit 40.7 percent, up 1.5 percentage points from a year earlier.
"Enough moving parts as always but earnings, (assets under management) and flows are growing," Nomura analyst Glenn Schorr wrote in an initial report on the earnings. "The stock is still attractive in our view."
ONE BIG OUTFLOW
Overall, investors withdrew $43 billion from BlackRock's long-term funds and accounts. Excluding $74 billion an institution withdrew from an indexed bond account, BlackRock took in $31 billion from investors.
That included a record $25 billion going into iShares funds, with more than three-quarters flowing into stock ETFs, $6 billion into retail bond funds and $10 billion into funds aimed at 401(k)-type defined contribution retirement accounts.
BlackRock declined to name the client that moved to competitors and sought to play down the impact, with CEO Fink describing the lost business as "one of our lowest fee products." The firm lost $36 billion from a similar one-client move in the first quarter.
"I am not going to chase business for window dressing my (assets under management) as some of our competitors are certainly doing," Fink said. "It does not make economic sense in this case."
Total assets under management at BlackRock hit $3.67 trillion, up 3 percent during the quarter and up 10 percent from a year ago.
ETF FEE CUT IMPACT
The strong quarter for iShares came despite competition from lower-cost competitors in the United States like Vanguard Group and Charles Schwab Corp (SCHW.N). On Monday, BlackRock unveiled a plan to cut fees on six iShares funds and introduce four new low-cost funds.
The fee reductions could reduce BlackRock's annual revenue by $35 million to $40 million, BlackRock President Robert Kapito said on the call with analysts. But growth produced by the four new ETFs could overtake the losses, he said.
"We expect to see incremental flows that will over time more than offset potential revenue impacts," Kapito said.
BlackRock's fee cuts followed ETF price reductions by Schwab last month as well as Vanguard's announcement on October 2 that it was switching to lower cost index providers on 22 of its largest ETFs, likely as a prelude to reducing fees.
But Vanguard's decision to switch away from leading index provider MSCI (MSCI.N) to lesser known competitors is prompting some investors to switch to BlackRock funds, which still track MSCI indexes, Fink said.
Vanguard denied that the index change was having a negative effect on its ETF flows. "Vanguard's planned benchmark changes and the future associated cost savings have been very well-received by our clients," spokesman John Woerth said. "Vanguard is leading the U.S. ETF industry with $41 billion in net cash inflow through September and our momentum continues unabated in October."
BlackRock's Fink took pains to deny that the industry was engaging in a price war. "We have got to move on from this myth about a price war," Fink said in his most heated remarks on the 90-minute call. "We had our healthiest quarter. We are very optimistic about where we are."
Overall, third-quarter revenue at BlackRock rose 4 percent from a year earlier to $2.3 billion. Performance fees jumped 12 percent to $103 million on strong gains at BlackRock's hedge funds and other accounts that garner a portion of profits based on their investing track records.
Revenue from risk management advice and other services at its BlackRock Solution unit rose 9 percent to $128 million.
Shares of BlackRock were down 17 cents at $189.80 in afternoon trading on the New York Stock Exchange on Wednesday. The shares had gained 7 percent so far this year through Tuesday's close, trailing the 16 percent gain in the Standard & Poor's 500 Index .SPX.
(Reporting by Aaron Pressman; Editing by Lisa Von Ahn, Jeffrey Benkoe and Steve Orlofsky)