(Bloomberg News) BlackRock Inc., the world's biggest money manager, reported third-quarter earnings that beat analysts' estimates as exchange-traded funds drew client deposits and assets rose.
Net income climbed 7.9 percent to $642 million, or $3.65 a share, from $595 million, or $3.23, a year earlier, the New York-based company said today in a statement. Excluding certain one-time items, profit of $3.47 per share exceeded the $3.32-a- share average estimate of 19 analysts surveyed by Bloomberg.
Chief Executive Officer Laurence D. Fink has cut costs of some ETFs to fend off competition and urged investors to get back into equities as they've remained concerned by Europe's sovereign-debt crisis and slowing economic growth worldwide. Assets rose 9.8 percent compared with a year earlier to $3.67 trillion as net client redemptions of $55 billion were offset by market gains of $134 billion during the quarter.
"They struggle a little bit with active equity flows," Luke Montgomery, a research analyst who covers asset managers at Sanford C. Bernstein & Co. in New York, said in an interview before the earnings were announced. "On the ETF side, it's a fast-growing market, but they've been losing market share to Vanguard."
Investors poured $25.2 billion into the iShares ETFs, the most since BlackRock's acquisition of the unit from Barclays Plc in 2009, while removing $5.1 billion from active stock funds during the quarter. BlackRock said a single institutional investor pulled more than $72 billion from a fixed-income portfolio, after the firm didn't want to rebid for the business at lower fees.
"We achieved these results through robust new business generation across each of our channels with particular strength in key growth areas on which we've focused, including retail and iShares," Fink said in today's statement.
BlackRock said this week it's cutting fees for six ETFs and creating four new ones as it seeks to better compete with companies such as Vanguard Group Inc. and Charles Schwab Corp. While its iShares unit, with $526 billion in U.S. ETF assets, is the biggest in the business, Vanguard is growing faster in the U.S. this year.
Investors put about $34 billion into BlackRock's U.S. ETFs this year through Sept. 30, according to data from State Street Global Advisors. Vanguard had net deposits of $42 billion, bringing ETF assets to more than $230 billion.
The ETF fee cuts imply an annualized loss from $35 million to $40 million in revenue, which means less than a 1 percent decrease in earnings per share, Montgomery said in an Oct. 16 research note.
"We view fee cut announcements as providing closure, and segmentation strategy as a strong step towards recapturing share in retail and preserving institutional leadership," wrote Morgan Stanley analysts Matthew Kelley and Kevin Kaczmarek in an Oct. 16 note.
Investor deposits into passive ETFs industrywide more than doubled in the three months ended Sept. 30 to $52 billion compared with the previous quarter, according to data compiled by Morningstar Inc. in Chicago. Deposits into active funds increased almost 10 percent to $43 billion during the same time period, Morningstar said.
BlackRock's revenue increased 4.3 percent from a year earlier to $2.32 billion as a result of new business, higher performance fees and market gains. Investment-advisory fees rose 3.8 percent to $2 billion and performance fees for beating benchmarks rose 13 percent to $103 million. BlackRock Solutions, the unit that helps analyze hard-to-value assets, had 18 net new assignments during the quarter, and its revenue increased 9.4 percent to $128 million.
The MSCI ACWI Index of global stocks rose 6.2 percent in the third quarter and the U.S. benchmark Standard & Poor's 500 Index increased 5.8 percent.
BlackRock repurchased 960,100 shares in the quarter, bringing the total to 8.2 million shares this year. BlackRock bought back more than 6 million shares in the three months ended June 30 valued at about $1 billion after Barclays sold its 19.6 percent stake in BlackRock to meet Basel rule requirements. The British bank took the holding when it sold Barclays Global Investors to BlackRock in December 2009.
On Oct. 9, BlackRock agreed to release Barclays from coverage provided for default on 52 covered securities in two cash-management funds as part of the acquisition, in exchange for payment to the funds of $70 million by Barclays, according to the statement.
Fink, who co-founded BlackRock in 1988, said earlier this month the U.S. is about a year away from having a more robust economy and has recommended investors put cash into equities as bond yields have shrunk to record lows. BlackRock started the third phase of its five-year branding campaign on Oct. 3, with a series of advertisements telling savers to get out of cash and low-yielding bonds and suggesting they put money in high-quality stocks, ETFs and products that generate higher income.
BlackRock offers actively managed stock and bond funds, passive strategies, hedge funds and portfolios that use mathematical models.
BlackRock announced results before the start of regular U.S. trading. The shares gained 6.6 percent this year through yesterday, compared with the 18 percent increase in the 20- member S&P index of asset managers and custody banks.