BlackRock profit tops estimates on strong inflows

By Emily Chasan

NEW YORK (BestGrowthStock) – BlackRock Inc (BLK.N: ), the world’s largest asset manager, posted sharply better-than- expected third-quarter earnings on Wednesday, as it attracted more assets from clients and earned stronger fees on the back of a stock market rally in September.

The strong growth could be an indication BlackRock is finally turning the corner in melding its iShares exchange- traded fund business with its actively managed investment products business.

But the company’s shares were off about 2.7 percent on Wednesday afternoon as some questioned the importance of performance fees and other nonrecurring items that contributed to the higher profit.

BlackRock reported third-quarter adjusted earnings per share of $2.75, trouncing the average estimate of $2.46, according to Thomson Reuters I/B/E/S. Its adjusted earnings exclude a tax benefit, restructuring and merger integration charges.

Investors had hoped to see strong inflows from BlackRock, which has been trying to stem outflows of client money following the $13.5 billion acquisition of Barclays Global Investors and its iShares business last year.

“We believe we’re in the stabilization phase,” Chief Executive Laurence Fink, said on a conference call. “We feel we are in much better shape prospectively going into 2011.”

BlackRock said it saw inflows of $52.6 billion in new long-term assignments from clients. The firm said outflows of $34.4 billion were related to clients rebalancing portfolios after the merger. Net new business during the quarter totaled $50.1 billion and assets under management rose to $3.45 trillion from $3.15 trillion in the second quarter.

But William Katz, an analyst at Citigroup, called the quarter a “low quality” beat.

“Solid new business is mostly negated by sustained BGI merger ‘dis-synergies,'” Katz said in a note to clients, adding those trends were likely to continue through the first quarter of 2011.

The net inflows came largely from institutional investors, which assigned $36.9 billion to BlackRock, while $13.6 billion of new inflows went into its iShares ETFs. Investors have worried the firm’s ETFs, which generate lower fees but higher margins, have been stealing business from its actively managed products, which earn higher fees.

Meanwhile, performance fees from hedge funds and alternative assets at the firm more than doubled to $114 million, boosted largely by growth in U.K. equity hedge funds. Performance fees dried up somewhat during the financial crisis in 2008, but Fink said he was beginning to see more consistency on those fees as funds move back above high water marks this year.

READJUSTING

For BlackRock — whose shares are now down almost 27 percent year-to-date and have lagged behind other asset managers such as Franklin Resources Inc (BEN.N: ) and Invesco Ltd (IVZ.N: ) — proving its iShares acquisition will put it in a better position and boost returns has been a major sticking point.

On the conference call with investors, Fink said he expected the firm still needed one year to complete the technology integration of the two firms, but after that, he felt the “New BlackRock” could reach operating margins of about 40 percent. For the year through the third quarter, the firm posted adjusted operations margins of 38.7 percent.

For the quarter, the New York-based firm said net income rose to $551 million, or $2.83 per share, from $317 million, or $2.27 per share, a year earlier. Last year’s third quarter did not include the BGI acquisition.

BlackRock also said third-quarter revenue edged higher to $2.09 billion from the second quarter’s $2.03 billion. Analysts on average expected $2.01 billion.

Fink said on Wednesday he was trying to position the firm to benefit from a rebalancing of assets by U.S. pension funds, which are starting to reassess how they to fund their liabilities in a persistent, very low interest rate environment.

BlackRock is starting to see more inflows into equity products, Fink said, reversing the trend earlier in the year when investors rushed into fixed income products. He also said the “greatest opportunity” for the firm lays outside the United States, in places such as South America and Asia, as he expects investors to continue moving away from dollar-denominated assets.

Looking ahead, BlackRock said that, as of last week, the pipeline of net new business that is funded or will be funded totaled $46.1 billion. It said $40.7 billion of that was for long-term products.

Fink also had “much greater confidence” about 2011 and was already seeing strong inflows into some products in the first few weeks of the fourth quarter.

“We actually expected to have more inflows in the third quarter from new clients; some of it was rolled over into the fourth quarter,” Fink said. “I’m more certain about our business model than I’ve ever been.”

In afternoon trading on the New York Stock Exchange, BlackRock shares were down 2.7 percent, or $4.69 at $169.94.

(Reporting by Emily Chasan; editing by Derek Caney, Maureen Bavdek editing by Andre Grenon)

BlackRock profit tops estimates on strong inflows