BlackRock Inc. pulled in another $103.6 billion in the second quarter, further solidifying the largest trend in asset management where billions keep flooding into lower cost funds, often at the cost of money run by human stock and bond pickers.
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The net new money from investors was a quarterly record for the firm. Of the total, $73.8 billion flowed into its iShares exchange-traded fund unit.
While the growing popularity of ETFs is helping many firms with significant lineups of passive investment strategies, BlackRock stands out among its peers. The firm's $1.5 trillion ETF business gives the world's largest asset manager a major competitive edge. Its assets have swelled to $5.69 trillion, up 16% from the same time last year while fund firms without large ETF franchises have struggled to gather assets.
"We are seeing more and more active investors using ETFs for active management," Chief Executive Laurence Fink said in an interview.
Those shifting preferences, however, mean lower fees and therefore revenue for fund providers. BlackRock's revenue rose 5.7% to $2.97 billion, while analysts polled by Thomson Reuters had projected $3.02 billion in revenue. The firm's stock was down 3% in early trading.
Mr. Fink said changing regulations governing retail investing and advice globally were also helping BlackRock attract net new money. The Labor Department's fiduciary rule in the U.S. and the Markets in Financial Instruments Directive II in Europe are reshaping investor portfolios and shifting more assets away from traditional portfolios run by humans and into so-called model portfolios that include a number of lower-cost ETFs.
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In the U.S., brokers and advisers who work with tax-advantaged retirement savings must be "fiduciaries" who act in the best interest of their clients. That has led to increased adoption of fee, rather than commission-based advice, and allocating assets across groups of cheaper ETFs.
"I do believe the changes in the ecosystem in retail are giving us accelerated flows," Mr. Fink said.
More broadly, Mr. Fink said that despite political gridlock in Washington and tepid economic growth, global investors still think the U.S. is the best place to put money to work.
"If you had a view that we were going to have rapid infrastructure and tax reform, those people probably are disappointed," Fink said. "We believe this will all take time," he said.
The growth of passive funds has increased fee pressure and forced asset managers to better control costs. As BlackRock has grown its iShares ETF unit, it has looked for new ways to use technology to save money and generate additional revenue.
Its Aladdin risk and portfolio management technology system, which the firm has invested heavily in in recent years, is now used by money managers, custodians, risk managers and wealth advisers. Mr. Fink said on a call with analysts Monday that the firm had also used Aladdin internally to significantly reduce its own trading costs.
BlackRock's technology and risk management revenue grew 12% year-over-year. Still, at $164 million, the business makes up little more than half a percent of its top line.
In traditional actively managed products, flows turned positive compared with last quarter. During the second quarter, investors added $7.5 billion to the company's actively managed funds including retail fixed-income products and multiasset strategies for institutional investors.
It continued to suffer net withdrawals from its active equity business. The firm is in the throes of a revamp of its stockpicking unit, a process that puts a greater emphasis on quantitative investing rather than traditional equity selection.
"It's doing better than we feared," Mr. Fink said of the project, referred to internally as Monarch. Uncertainty and management changes have led some clients to withdraw assets, but the effort remains on track, he said.
The firm posted a significant improvement in performance among its scientific active equity products, which are its quantitatively-managed equity strategies. Over one year to the end of June, 9% of assets in scientific active equity products underperformed their benchmark or peers, compared with 60% at the same time last year. Over three years to the end of June, 8% of assets in those strategies underperformed, compared with 18% at the same time last year.
In all, BlackRock reported a profit of $857 million, or $5.22 a share, in its second quarter, up from $789 million, or $4.73 a share, a year earlier. Excluding certain items, BlackRock earned an adjusted $5.24 a share, up from $4.78 in the year prior. Analysts polled by Thomson Reuters had projected $5.39 a share in adjusted earnings.
BlackRock's stock was up 15% so far this year through Friday's close.
Imani Moise contributed to this article
Write to Sarah Krouse at firstname.lastname@example.org
(END) Dow Jones Newswires
July 17, 2017 12:25 ET (16:25 GMT)