BlackRock Inc., the world's biggest asset manager, on Wednesday reported double-digit profit gains as investors plowed money into lower-cost index funds, but the company saw its share price trimmed as revenue disappointed analysts' expectations.
Revenues of $2.8 billion came in 2 percent below analysts' estimates as advisory and distribution fees declined. Chief Executive Officer Larry Fink said the miss was not attributable to the fees it charges for managing funds.
Nonetheless, while BlackRock's assets grew 22 percent from a year ago to $5.4 trillion, fees for managing those assets and lending out the securities grew by a smaller 12 percent.
"There is a greater belief that long-term returns are structurally lower than they were 10 and 20 years ago," Fink told analysts on a conference call. "Fees take up a lot of that return. And as long as we believe the world is going to be in a low-return environment, our clients are under a lot of pressure.
BlackRock shares were down about 1.5 percent.
"They have a history of exceeding expectations," said Macrae Sykes, an analyst at Gabelli & Co, which owns BlackRock shares. "This quarter they didn't."
Investors poured $82.2 billion into its index funds and iShares exchange-traded funds during the first quarter, while its pricier active funds posted $1.8 billion in withdrawals.
Financial markets traded vibrantly last quarter as a new U.S. president and congress took office, and investors tried to size up whether they would pass tax and other reforms that could give new life to an aging bull market in U.S. stocks.
Investors increasingly are choosing to make those bets—whether optimistic or pessimistic—using ETFs that track indexes at a relatively low cost.
Very few companies in the industry have been able to build a successful index fund franchise like iShares, and the flight of customers to lower-cost products has consequently squeezed margins.
BlackRock's net income rose to $862 million, or $5.23 per share as its tax rate declined in the first quarter ended March 31, from $657 million, or $3.92 per share, a year earlier.