By Ashley Lau
NEW YORK (Reuters) - BlackRock Inc, the world's largest money manager, said on Thursday first-quarter profit rose 20 percent, boosted by strong performance fees and strength in its retail business as investors poured money into long-term funds.
The New York-based asset manager, which now manages $4.4 trillion in assets, said it had positive net flows across equity, fixed-income, alternatives and multi-asset funds during the quarter.
"Even with all of the turmoil in the markets that we saw a few weeks ago, every day during that turmoil, we had net inflows," Chief Executive Officer Laurence Fink said in an interview on Thursday, referring to the company's retail client base. Fink noted most of that turmoil was due to "fast money" exits, with hedge funds moving out of their positions rather than any broad-based selling among long-term investors.
Revenue at BlackRock grew 9 percent to $2.67 billion, with revenue generated by performance fees paid by investors for outsized earnings in some funds surging 46.3 percent to $158 million from a year earlier.
BlackRock's quarterly results exceeded Wall Street estimates, but analysts tempered that beat by noting that some of the upside came from non-operating drivers and larger-than-expected gains on investments.
"It was certainly a fine quarter from an earnings standpoint, but these performance fees and expense items are certainly lumpy and some of them are one time in nature," said Edward Jones analyst Jim Shanahan.
Shares of BlackRock were down 0.7 percent at $307.95 in afternoon trading on the New York Stock Exchange.
Of the $26.7 billion that investors poured into long-term funds during the quarter, roughly half came from retail investors who accounted for $14 billion of long-term net inflows during the quarter. Retail fund assets at the end of March totaled $508.7 billion, representing 12 percent of total assets under management at the end of March.
While institutional investors put money into lower-fee institutional index funds, they pulled money out of actively managed funds. Institutional investors had net outflows of $8 billion from actively managed equity funds and $7 billion from actively managed fixed-income during the quarter.
That could be a concern going forward, according to Edward Jones' Shanahan. Most of the growth delivered during the quarter was in lower-fee institutional index portfolios rather than actively managed funds and other high-fee products, he said.
FLOWS ACROSS ASSET CLASSES
BlackRock has remained largely insulated from the market volatility experienced in early 2014, because its broad menu of investment products, exchange-traded funds and mutual funds span various asset classes and world regions, analysts say.
BlackRock's strong performance through the market volatility "highlights the flexibility of their model and their ability to drive revenue from different sources of their business," said Gabelli & Co analyst Macrae Sykes.
Investors poured $15.6 billion into BlackRock's fixed-income funds and $3.8 billion into equity funds. They added $5 billion to multi-asset portfolios, while adding $2.3 billion to alternative funds.
With the bulk of long-term net inflows going into fixed-income during the quarter, Fink noted that much of the investor interest there has shifted toward "unconstrained" fixed-income products that are not targeted to any duration. A lot of those flows are driven by money moving into defined contribution plans and the de-risking of pension plans, he said.
BlackRock's strength in fixed-income comes as rival bond-market money manager Pimco has been shedding assets.
In a research report on Monday titled "Investors Return to the Bond Market, Just Not to Pimco," Morningstar's Michael Rawson said Pimco Total Return Fund saw a net $3.1 billion outflow in March while intermediate-term bond funds had a $7.4 billion inflow for the same time period.
Fink, when asked about Pimco, said he doesn't comment on competitors, but said BlackRock is in a "great position" with both institutional and retail clients. And analysts see the giant money manager playing a bigger role in fixed-income.
"There's an ability (for BlackRock) to take share in fixed-income, given what we've seen on the competitive landscape with some of the bigger firms" in the industry, Sykes said.
INSTITUTIONAL ACTIVE LAGS
BlackRock has been working to strengthen its U.S. active equity business, which has lagged in recent quarters.
In all, institutional investors pulled $12.6 billion from active funds, with the bulk of those outflows coming from active equity and fixed-income. BlackRock has been working on bulking up its U.S. active equity business, but said "it will take time to build long-term track records."
The company last month named JPMorgan Chase & Co's Christopher Jones as chief investment officer (CIO) for stocks in the Americas to head BlackRock's Fundamental Active Equity team in the Americas. Jones, formerly CIO for JPMorgan Asset Management's growth and small-cap U.S. equity team, will also be the global co-head of fundamental equity, alongside Nigel Bolton, head of BlackRock's European equity team.
Analysts are looking for more growth in the company's actively managed and higher-fee products, rather than lower-fee index funds.
"Flows are certainly volatile, but this concentration of flows in institutional index funds is in my mind a negative development and continues this pressure on weighted average fee rates," Edward Jones' Shanahan said.
BUILDING BLACKROCK'S BENCH
BlackRock earlier this month announced a reorganization of its senior management ranks as it works towards an eventual succession plan for Fink, 61. The company said it would be shifting at least 10 senior executives into new or expanded roles in June as it seeks to groom its next generation of potential successors to Fink.
But Fink reiterated on Thursday that he has no plans to depart anytime soon.
"I'm not going anywhere," he said. "It was just a continuation of our building out our bench."
The idea of the reorganization is to allow senior managers to take on greater responsibility and gain a broader experience within different divisions of the company, he said.
BlackRock reported net income of $756 million, or $4.40 per share, up from $632 million, or $3.62 per share, a year earlier.
Excluding certain long-term compensation expenses and other one-time items, earnings were $4.43 a share. On that basis, they beat analysts' average forecast of $4.11 a share, according to Thomson Reuters I/B/E/S.
(Reporting by Ashley Lau in New York with additional reporting by Jennifer Ablan; Editing by Franklin Paul, James Dalgleish, Linda Stern and Chris Reese)