4th UPDATE: BlackRock 2nd-Quarter Net Down 11%
07/18/2012| 04:23pm US/Eastern
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--Fink: Not pleased with core U.S. ETFs
--Equity ETFs lost $5.4 billion, offset by $11.7 billion inflows among fixed-income ETFs
--Will have plan to address issue in next few months
(Updates with comments from Chairman and Chief Executive Laurence Fink on the regulation of U.S. money market funds in paragraphs 16 to 18.)
By Amy Or
NEW YORK--Second-quarter profit at BlackRock Inc. (>> BlackRock, Inc.), the world's largest money manager, slid 11% on declining investment advisory revenue and investment losses, and its chief executive said changes are being made to compete with lower-cost investments from competitors and to address the underperformance of the firm's stockpickers.
BlackRock reported a profit of $554 million, or $3.08 a share, compared with a year-earlier profit of $619 million, or $3.21 a share, as revenue slipped 5% to $2.23 billion. Stripping out one-time items, per-share earnings rose to $3.10 from $3.
The results beat analysts' expectation for earnings of $3.01 a share on $2.26 billion in revenue, according to a poll by Thomson Reuters.
While Chairman and Chief Executive Laurence Fink hailed the firm's resilience despite "market headwinds and the growing defensive posture of investors," BlackRock's leading position in exchange traded funds was slightly chipped away by rivals, especially in core U.S. equity funds. Equity funds lost $5.4 billion in assets in the second quarter, but the decline was more than offset by the $11.7 billion in inflows into fixed-income products.
Mr. Fink said he understands that investors are cost conscious and said Blackrock will have a plan to address this highly competitive environment over the next few months.
"It is a big issue and I have to give a lot of credit for [BlackRock competitor] Vanguard. They are a trustworthy brand and they've taken market share from BlackRock in the U.S. core type of equity products," he said on the earnings conference call. "We're holding our own obviously worldwide. We're holding our own in fixed income, but I am not pleased in our positioning to-date in the core commoditized products in the United States."
Mr. Fink was also critical of its fundamental equity strategy, in which managers select stocks for investment vehicles like mutual funds. Only about 40% of such products performed above the benchmark or peers' median for the past 12 months, compared to 71% outperformance among BlackRock's taxable fixed-income products.
"That is not acceptable and we are working towards building that platform up and making sure those issues are addressed," Mr. Fink said.
For BlackRock's investment platform as a whole, however, Mr. Fink said the firm is "in a better position than we were last year" given extraordinary, ongoing market volatility.
BlackRock's total assets under management fell to $3.559 trillion in the second quarter from $3.659 trillion a year earlier and $3.684 trillion in the first quarter. The decline was driven largely by $94.7 billion in market-related declines in valuation and outflows from some products.
U.S. equity markets started off 2012 with a solid rally but turned in the second quarter on recurring concerns over the European sovereign-debt crisis and a slowdown in global growth momentum. The Standard & Poor's 500 index declined in May and ended the second quarter down 3.3%.
About $32 billion in mortgage securities that BlackRock advised the Federal Reserve Bank of New York on were also recorded as outflow as the portfolios wind down. The Fed said earlier this week it is set to sell by next month the last of the assets taken on during the bailout of insurer American International Group Inc. (>> American International Group, Inc.), in vehicles known as Maiden Lane.
BlackRock's pipeline of new capital raised remained strong at $54.8 billion at July 12, including $42.7 billion in mandates related to index-tracking products and $2.1 billion in products that are actively managed.
On Europe, Mr. Fink said volatilities will likely persist for many years.
"When you have to make real structural changes that impact society, it takes a long time to change. We should not expect to see this miracle out of Europe anytime soon," he said.
In the U.S., Mr. Fink also touched on the debate over the Securities and Exchange Commission's plans to further regulate the $2.5 trillion U.S. money market mutual fund industry. SEC Chairman Mary Schapiro earlier this year floated additional restrictions on the industry, which were met by fierce opposition from money market fund companies. Ms. Schapiro also has not been able to convince a majority of the SEC's commissioners to sign on to a proposal for new rules.
Mr. Fink, who said he visited Washington on Tuesday, said in BlackRock's earnings call that "the gridlock within the SEC may be broken" and that the proposal for new regulation might finally be issued for public comments.
"I may be premature in talking about it, but that's the type of noise I heard in Washington," Mr. Fink said. In a later interview he declined to specify who he met with in Washington.
Mr. Fink also warned the nation isn't only facing uncertainties related to the presidential election in November, but also the so-called fiscal cliff next year. Lawmakers need to decide by year end whether to change current policy. If no action is taken, taxes will rise and federal spending will be cut, which is expected to weigh on growth and possibly drive the U.S. back into a recession.
BlackRock, which agreed to acquire Swiss Re AG's (SREN.VX) European private equity and infrastructure fund of funds franchise earlier this month, said it is still on the prowl for acquisitions, though the nature of deals probably won't be so meaningful that it will transform the company.
"We are involved in adding on to our products and distribution platform globabally," Mr. Fink said.
BlackRock shares fell 0.6% to finish at $175.05 Wednesday.
(Kirsten Grind and Saabira Chaudhuri contributed to the article.)
-Write to Amy Or at amy.or@dowjones.com
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