BlackRock Inc.'s second-quarter results failed to impress Wall Street on Monday as the world's biggest asset manager cut fees to lure a wave of investor cash into its exchange-traded funds, sending shares down more than 3 per cent.
Investors of all types have been piling into ETFs and dumping more expensive alternatives, and BlackRock's fees on some products have raced toward zero while competitors such as Vanguard Group and Charles Schwab Corp. offer ETFs at, or near, the cost of managing them.
New York-based BlackRock's largely index-tracking iShares ETFs pulled in a record $74-billion (U.S.) during the most recent quarter, up from $16-billion a year earlier. Overall flows totalled $104-billion, compared with just $7-billion a year ago.
Assets under management jumped 16 per cent to nearly $5.7-trillion, but revenue gained just 6 per cent to $2.97-billion and earnings a share rose 10 per cent to $5.22, or $5.24 after adjusting for non-recurring items and other charges.
That fell short of analysts' average target of earnings a share of $5.40 and $3.02-billion in revenue, according to Thomson Reuters I/B/E/S. The company acknowledged that fees were lighter owing to "previously announced pricing changes."
The company's shares were last down more than 3 per cent at $424.67.
BlackRock announced a major cut for its ETFs last October and just last week lowered fees to $9 a year from $27 for every $10,000 an investor holds on a $10-billion iShares mortgage-backed securities ETF.
BlackRock chief financial officer Gary Shedlin said on a conference call that the company has recouped "over 75 per cent" of lost revenue from the October fee cuts thanks to a growing investor base.
Already benefiting from a move by wealth advisers and brokers to use low-fee products, BlackRock has been looking for growth from burgeoning groups of clients, such as insurers.
Chief executive officer Larry Fink said on a conference call with analysts that the ETF industry's growth potential reminded him of his younger days in the 1970s developing the mortgage-backed securities market.
Edward D. Jones & Co., LP. analyst Kyle Sanders said he had expected higher revenues this quarter because international markets performed strongly and BlackRock can charge higher fees on products focused abroad.
"If there ever was a quarter for this to work out, it was this quarter," said Mr. Sanders, discussing the revenue shortfall. "The trend is here to stay, and it's going to bleed out."
BlackRock's revenue has not topped analysts' estimates since the fourth quarter of 2015, according to Thomson Reuters data.
Revenues were lower in part because "episodic" performance fees had declined, Mr. Fink told Reuters. Higher-cost, actively managed products earn those fees only when they beat their targets.
Mr. Fink also touted technology and risk-management fees that rose 12 per cent to $164-million.
"All the drivers that we really control that can grow quarter over quarter over quarter – the momentum is accelerating, not decelerating," Mr. Fink said.
"When you think about where we're taking the firm we're very happy."
Net income rose 8.6 per cent in the most recent quarter to $857-million.
Michael Venuto, chief investment officer of Toroso Investments LLC, which recently launched an index tracking the performance of asset managers, said BlackRock cut fees to "respond to the Vanguard phenomenon," but that they are also creating higher-value ETFs that will eventually boost the company's profit margin.
"They're an innovator," Mr. Venuto said.
The company has kept a tight leash on expenses, using investments in technology to deliver long-run savings. In a statement, Mr. Fink credited technology with helping to drive down the cost of executing a typical BlackRock trade by 80 per cent over the past 5 years.
And BlackRock's performance has improved in a few key areas, including in stock-picking funds that have been a source of concern.
Seventy-six per cent of BlackRock equity assets are in funds with a top-half performance ranking over three years, up 36 per cent from a year ago, according to a Credit Suisse Group AG analysis of Lipper and Simfund data.
Still, outflows accelerated in stock funds BlackRock had announced plans to revamp in March. BlackRock said then it would cut fees, rebrand, change portfolio managers or rely more on data-crunching for a number of equity products.
Those funds posted $775-million in withdrawals last quarter, up from $567-million the quarter prior, according to Morningstar Inc. The analysis did not include funds that were liquidated, merged or for which no flows data were available.
During the conference call, BlackRock executives said they anticipated the outflows and that it was too early to measure progress because some changes did not take effect until June.