BlackRock Inc. (BLK - Get Report) , the world's largest publicly traded money manager, said first-quarter profit surged 27% as investors continued to pour money into its iShares exchange-traded funds at the expense of mutual-fund firms focused on active stock-picking.
Net income rose to $1.09 billion from $859 million a year earlier, the New York-based company said Thursday, April 12, in a statement. Adjusted earnings per share climbed to $6.70, beating the $6.40 average estimate of analysts in a survey by database provider FactSet.
BlackRock co-founder and CEO Larry Fink continues to reap rewards from his $13.5 billion acquisition in 2009 of Barclays Global Investors, bringing the iShares ETF business that has fueled so much growth that competitors are now scrambling to catch up. Whereas BlackRock used to primarily rely on portfolio managers who actively picked stocks and bonds to beat the market, the firm now gets two-thirds of its $6.32 trillion of assets from iShares and mutual funds that merely try to replicate the performance of benchmark investment indexes.
"BlackRock's ability to generate strong asset flows with iShares during the quarter was encouraging and reinforces our overarching belief that ETFs are driving long-term changes within the asset-management industry," Kyle Sanders, an analyst at the brokerage firm Edward Jones, wrote Thursday in a report.
BlackRock's stock price climbed 2.6% to $539.90 on Thursday. Over the past 12 months, the shares have risen 41%, triple the gains over the period for the S&P 500.
In the first quarter, iShares attracted $34.6 billion of new investments, and institutional investors pumped $10.4 billion into BlackRock's index-tracking mutual funds, known as "passive" funds. Meanwhile, BlackRock's actively-managed asset-picking mutual funds that cater to institutional investors saw $7.1 billion of outflows, according to the company's statement.
"Clients continued to use iShares at the core of their portfolios to drive active returns and as simple, efficient tools to manage risk exposure amid market volatility," Fink said in the statement.
Overall, BlackRock netted $56.9 billion of client inflows during the quarter, leaving overall assets under management up 17% over the past year.
Fink has acknowledged that the firm's success is increasingly tied to the massive iShares unit, which has thrived due to the lower costs and ease of buying ETFs as rival mutual-fund companies that specialize in active stock-picking have suffered from waning investor demand and complaints over fees. ETFs are traded stock exchanges and generally track markets rather than trying to beat them. In turn, the vehicles usually charge lower fees than traditional mutual funds.
As one of the biggest purveyors of ETFs, BlackRock has positioned itself in the sweet spot of an industry trend. Over the past decade, actively managed stock funds have seen net outflows of $1.1 trillion, but index funds and ETFs have pulled in a net $1.4 trillion, according to the Investment Company Institute, the main lobbying group for money managers.
Yet the strategy's boom has made it more expensive for new investors to buy BlackRock's shares. The stock price trades at about 19 times estimated 2018 earnings per share, compared with an average 12 times for large asset managers, according to an April 11 report by the brokerage firm Jefferies.
Some analysts worry that BlackRock's runaway success with ETFs could attract competition that might eventually erode the company's dominant position in the arena, squeezing profit margins.
Earlier this week, Invesco Ltd. (IVZ - Get Report) , an Atlanta-based money manager that sells ETFs under the PowerShares brand, completed its $1.2 billion purchase of Guggenheim Investments' ETF business, which has about $38.8 billion of assets. Dan Draper, head of Invesco's ETF franchise, which now has about $215.3 billion of total assets, is a former Barclays Global Investors executive.
There are few signs of shrinking profit margins at BlackRock so far. The company's operating margin, a key gauge of profitability, climbed to 44.1% in the first quarter from 42.6% a year earlier.