BlackRock Inc. (BLK) , the largest U.S. money manager, reported its first drop in profit in two years as market turmoil in late 2018 sapped investment-advisory fees and caused assets under management to drop below $6 trillion, a milestone that the firm had surpassed in 2017.
Net income tumbled 60% to $927 million, the New York-based company said Wednesday in a press release. Earnings per share were an adjusted $6.08, falling short of the average analyst estimate of $6.28 in a FactSet survey.
The results were distorted by a big tax benefit recorded in the fourth quarter of 2017, as well as by a $60 million "restructuring charge" taken in the recent quarter to cover severance and previously granted deferred compensation for about 500 employees, or 3% of the workforce.
But even adjusting for those matters, BlackRock's net income still would have fallen by 4%, according to the press release.
Revenue slid by 9% to $3.43 billion, driven by a drop in investment-advisory fees and performance-based fees.
The company's shares rose along with many other financial companies, gaining 3.1% to $413.04.
BlackRock, led by founder and CEO Larry Fink, has benefited from the surging popularity in recent years of exchange-traded funds, which investors have flocked to because of their ease of trading and low cost. Yet the firm's active stock- and bond-picking funds have suffered along with the rest of the money management industry, as more investors balked at the higher fees.
In the fourth quarter, BlackRock was hit with $12.3 billion of net redemptions from its actively managed funds, even as the company's "passive" index-linked and ETF funds attracted $55.9 billion of new money.
Assets under management ended the year at $5.98 trillion, down from $6.29 trillion at the end of 2017.
And since many of the firm's fees are set based on the level of assets under management, a decline in market levels typically leads to lower revenue.
On a conference call with analysts on Wednesday, Fink said BlackRock was benefiting from the "diversity of its platform," given the breadth of product offerings that include actively managed funds, ETFs and index-based funds.
"The industry is shifting from approach of picking product or stocks to one of building portfolios," Fink said. "As a result, both clients' needs and our industry are changing rapidly. This all along has been BlackRock's approach."
For the full year, BlackRock's adjusted net income rose by 18% to $4.36 billion, as revenue climbed 4%.
Kyle Sanders, an analyst at the brokerage firm Edward Jones in St. Louis, noted in a report that the workforce reduction showed discipline in its expense control. While it costs money to terminate employees because of severance and other benefits, executives usually expect to recoup the expense through lower operating costs in future periods.
"Despite a tough market backdrop, BlackRock's profit margin was resilient at 43.5%, as the company effectively adjusted its cost base in response," Sanders wrote. "BlackRock's softer revenue trends highlight that no asset manager is completely immune to market swings."