Passive Powers BlackRock to Nearly $6 Trillion in Assets -- Update

The world's largest money manager oversees almost $1 trillion more investor cash now than it did a year ago.

BlackRock Inc.'s assets under management climbed to $5.98 trillion at the end of September, helped by rising equity markets and billions of dollars flowing into its large lineup of exchange-traded funds. That compares with $5.12 trillion in assets under management a year prior, continuing the New York firm's ascent.

BlackRock and rival Vanguard Group, the two largest money managers globally that also boast the largest stables of ETFs by assets, have garnered an unprecedented amount of new investor cash as investors increasingly embrace the low-cost products. The two firms now manage about $10.7 trillion, almost as much as the gross domestic product of China, the world's second-largest economy at $11.2 trillion in 2016.

Money managers have become a more powerful force than ever since the financial crisis as banks scaled back. They have a growing say on market structure and corporate governance matters and play a bigger role in Wall Street's product development and plumbing.

In the third quarter, BlackRock pulled in a net $96.1 billion in new investor money, more than half of which flowed into iShares ETFs. For the first nine months of the year, it set a record for inflows with a net $264.3 billion flowing into its products, topping the $202.2 billion pulled in for all of 2016.

Overall, BlackRock beat earnings estimates for its third quarter, reporting adjusted earnings per share of $5.92, more than the $5.56 analysts polled by Thomson Reuters expected.

"It's humbling," BlackRock Chief Executive Laurence Fink said of his firm's growth in an interview. He expects even more money to flow into ETFs in the coming three to five years as a result of new regulations in Europe and the U.S. "I think that's the backdrop we're living in," he said.

In the U.S., the Labor Department's so-called fiduciary rule requires stewards of retirement assets to act in their clients' best interests. It has accelerated a continuing shift toward fee-based advice and, in turn, broader adoption of lower-cost funds as advisers charging a percentage of assets try to keep other costs down. Europe's sweeping Markets in Financial Instruments Directive, meanwhile, is expected to improve pricing and trading transparency in the fund industry, which some market observers say could spur wider ETF adoption.

Mr. Fink said ETFs also will continue to replace some derivatives, moving onto exchanges some assets that were previously in so-called over-the-counter markets.

Rising equity markets bolstered BlackRock's assets under management and better fund performance helped boost its performance fees in the third quarter. Mr. Fink said performance fees rose in part because of the success of its European hedge-fund business.

Efforts to revamp the firm's active stock-picking unit continue, he said. "We are pleased with where we are in this long-term process."

Some 41% of the firm's traditional active equity assets underperformed their benchmark, or peer median, over one year, compared with 50% a year earlier. Over three years, 20% of assets underperformed, compared with 34% at the end of September 2016.

In the firm's so-called scientific active equity or quantitative equity products, performance improved more markedly. Over one year, 14% of assets underperformed their benchmark or peers, compared with 69% at the end of the same quarter a year ago. Over three years, 11% of assets underperformed over three years, compared with 17% a year earlier.

As its assets have swelled, BlackRock has sought new markets for its internal Aladdin risk management and technology platform, pushing further into services for custodians and wealth managers. That growth has broadened its reach and deepened its connectivity to the largest financial firms.

Blackrock's revenue of $3.2 billion was up 14% from a year ago. Technology and risk management revenue, powered by Aladdin, grew 15% to $175 million. Mr. Fink said he expects continued "double digit" revenue growth from that technology.

In all, BlackRock posted second-quarter net income of $947 million and adjusted earnings of $969 million. Analysts were expecting net income of $899 million.

BlackRock shares rose 0.6% to $468.14 in recent trading.

Write to Sarah Krouse at sarah.krouse@wsj.com

(END) Dow Jones Newswires

October 11, 2017 10:50 ET (14:50 GMT)