By Dawn Lim 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 16, 2019).

BlackRock Inc.'s profits fell by 8% in the third quarter as the investment giant's assets shifted into less lucrative products.

Investors sent $84.2 billion in net new money into BlackRock during the three-month period. The firm's assets rose to $6.96 trillion from $6.44 trillion a year ago.

BlackRock became the world's largest money manager with the rise of exchange-traded funds that trade rapidly and index funds that track markets cheaply. The third quarter's mixed returns show its fortunes are tied to the ebb and flow of markets and how investors steer money.

The firm saw far bigger net inflows into ETF and index products over its actively managed products. It also saw larger net inflows into cash and bonds over equity funds, a sign of growing investor caution. The moves mean that new money is generally finding its way into less profitable strategies.

BlackRock Chief Executive Larry Fink said he isn't fazed by the shift.

"What we're trying to do is win more of our clients' share of wallets," he said. "I can't control the mood and atmosphere of the world and markets."

Wall Street has come to terms with a new normal where a deluge of assets no longer automatically guarantees higher profits for money managers.

BlackRock's revenues were in line with analysts' expectations; profits exceeded their estimates.

BlackRock's investment advisory, administration fees and securities lending revenue -- the biggest component of its revenue -- increased by over 3%.

That increase was muted by the rise and fall of markets. A stronger U.S. dollar helped to lift assets in BlackRock's U.S. strategies while reducing the assets -- and the fees BlackRock was able to collect -- in more lucrative international strategies. A selloff in overseas markets also reduced the share of assets in its funds that invest internationally.

BlackRock said price changes to some products ate into revenue. Performance fees -- the money BlackRock gets for beating markets in actively managed strategies -- fell 19.9%.

The mixed returns for BlackRock bode new troubles for an industry roiled by a price war. In addition, there is a new uncertainty for asset managers: Many e-brokerages have eliminated the costs to trade ETFs on major platforms. Some industry executives have said this could make asset managers more susceptible to shifts in investor sentiment because investors can trade in and out free.

Mr. Fink said in an interview the elimination of such transaction costs helps major players like BlackRock and could help drive more money into products such as its fixed-income ETFs.

"We look at this as another barrier that has fallen down," he said of the elimination of commissions.

Already, bond exchange-traded funds are a growing piece of the cash engine that is the firm's iShares ETF business. All types of BlackRock's bond funds took in about $35 billion in net flows while equity funds added roughly $10 billion in net flows.

The firm offers everything from software for Wall Street to funds to tools to build portfolios. There are signs that it is making progress diversifying its revenue streams. BlackRock, which has fierce ambitions to make a bigger dent in private markets, took in $5 billion in net inflows and investor pledges into illiquid alternatives in the third quarter.

The firm has a suite of software it sells to financial institutions that is used to evaluate risks. These sales helped increase technology services revenue by about 30%.

BlackRock is also looking outside the U.S. for new growth. Looser regulations on foreign asset managers in China is pushing firms like BlackRock to explore new ways to make their fortunes in the world's second largest economy.

Mr. Fink said the firm's conversations with potential partners in China have been "meaningful" and "deliberate." He has traveled to China this year and expects to return soon.

As the 2020 presidential race in the U.S. ramps up, Mr. Fink, whose close ties to Washington and governments has prompted some observers to ponder his political ambitions, said Tuesday that "right now my focus is BlackRock."

Patrick Thomas contributed to this article.

Write to Dawn Lim at dawn.lim@wsj.com

 

(END) Dow Jones Newswires

October 16, 2019 02:47 ET (06:47 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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