By Kirsten Grind
At BlackRock Inc., it is a tale of two divisions.
The world's largest asset manager is seeing strong growth and
performance in its bond shop. But its U.S. actively managed equity
business is still struggling to keep up, despite broad stock market
gains.
The New York-based firm posted $808 million in profit for the
second quarter Wednesday, or $4.72 a share, up from $729 million,
or $4.19 a share a year earlier. Revenue jumped 12% to $2.78
billion from the previous quarter, beating analyst expectations of
$2.72 billion. Analysts polled by Thomson Reuters had expected
earnings of $4.46 a share.
The company's assets under management ballooned to $4.6
trillion, up 19% from the previous year's quarter, largely on the
strength of inflows into its exchange-traded funds and asset
appreciation.
After BlackRock announced the results, the company's shares
climbed to an all-time high of nearly $332. But the rally was
short-live in part, one analyst said, because of weakness in the
stock-picking division that was raised on the company's earnings
conference call. In early afternoon trading, the shares were up
slightly at $324.
BlackRock's active equity business--made up of mutual funds run
by managers selecting stocks--has been beset by poor performance
and outflows over recent years. As a result, BlackRock has
reshuffled managers in the division and hired new ones, but that
effort will take time to show results, Laurence D. Fink, chairman
and chief executive of BlackRock, said in an interview Wednesday
morning before the conference call.
"We have basically completed most of our hires and now we'll
know over the next three years whether we hired the right team,"
Mr. Fink said.
Over a one-year period, only 35% of the firm's active equity
products are beating their benchmarks or their peers, BlackRock
said in its earnings statement. The three-year track record is 47%.
Longer-term track records are crucial in convincing investors to
put money in mutual funds.
As a result, BlackRock saw its large institutional
investors--pension funds and endowments, for example--pulled $5.3
billion from the firm's actively-managed equity funds during the
quarter, while the company's actively managed fixed-income funds
saw inflows of $9.6 billion, according to the company.
"We recognize we've remained in a rebuilding phase in this
business," Mr. Fink said on the conference call. Investors,
however, did pour $20 billion into BlackRock's equity ETF business.
BlackRock's entire equity business has $2.5 trillion of assets
under management.
BlackRock is hoping for a win in its equity business like the
one it is seen in its fixed-income division. In that division, the
company made a long-term retooling effort by introducing new
managers and streamlining the investment process, Mr. Fink said in
the interview. "It's all coming together now," he said.
The firm said it saw $21.2 billion in net inflows into its
fixed-income products--mutual funds and separate accounts for
larger clients--during the second quarter, boosting assets under
management in the division to $1.3 trillion.
Flows into fixed income led BlackRock's retail division, which
saw inflows into bond funds of $10.1 billion, despite the looming
plan by the Federal Reserve to stop its bond-buying program. Mr.
Fink said the coming tapering has already been telegraphed to
investors.
"Do I think we'll have higher volatility in the future and most
probably higher rates? Yes." Mr. Fink said in the interview.
Performance also has been stellar--84% of the firm's actively
managed fixed-income products are outperforming their benchmarks or
peers over a one-year-period and 90% over three years, the company
said.
Analysts say they are willing to give BlackRock the time to
rebuild its equity business, in part because other well-performing
divisions are buoying the results of the entire firm.
"The longer they are doing well in the other businesses, the
more patience investors will have with this business," says Rob
Lee, an analyst at KBW Inc
Write to Kirsten Grind at kirsten.grind@wsj.com
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