BLK BlackRock Inc

By Dawn Lim 

Money-management giant BlackRock Inc.'s quarterly profit rose 21% as investors leaned on its bond funds to make rapid bets in volatile markets roiled by the coronavirus pandemic.

Driving the company's performance, BlackRock's bond exchange-traded-funds did a brisk business in the quarter as traders and financial institutions used ETFs to zip in and out of markets, make wagers, or hedge their portfolios during unprecedented volatility. ETFs are collections of instruments that trade like stocks on exchanges.

BlackRock bond ETFs took in a record quarterly $57 billion in net flows. The firm also posted net inflows overall into all ETFs in the second quarter, with more complex, higher-fee ETF strategies generally taking in the bulk of flows.

BlackRock's gains signal that the firm with $7.3 trillion under management stands to cement its power in a world shaken by Covid-19.

A quarter ago, asset managers came under acute pressure as markets sold off. But after the Federal Reserve rushed in to stabilize markets, many investment firms reaped the benefits of the Fed's intervention in the second quarter. Higher asset prices translate to bigger revenues for managers like BlackRock. Asset managers take a cut of fees on money they oversee for investors.

"The quarter illuminates the importance of the ETF market," Chief Executive Laurence Fink said in an interview.

The challenge BlackRock faces is maintaining investors' trust that its funds can hold up in market stress as a pandemic continues to ripple through the markets and economy.

In midmorning trading, BlackRock stock rose more than 3% and was the best performer on the S&P 500, according to Dow Jones Market Group. The firm beat revenue and profit estimates by Wall Street analysts, who say the firm's sprawling lineup and early-mover advantage in areas such as bond ETFs will insulate it from the market turmoil more than smaller managers.

BlackRock gains show the confounding reality of a post-coronavirus world, where big winners have emerged even as the economy remains in an extended downturn. As the coronavirus pandemic continues, Mr. Fink said BlackRock clients are looking for more contextual information and support.

"We're seeing an economy that is almost bipolar," he said. "Some parts of the economy are doing quite well, and some parts are doing quite poorly."

For the second quarter, the investment firm posted a profit of $1.2 billion, or $7.85 a share, up from the year-prior period of $1 billion, or $6.41 a share. Its revenue rose 4% to $3.6 billion.

Partly helping the firm's revenue gains, BlackRock sells software, including a suite of tools called Aladdin, to banks and other institutions to evaluate financial risks. Its technology-services revenue -- which includes fees from Aladdin -- rose by 17%.

That technology gives BlackRock a vantage point into markets and helped the firm's advisory arm land a coveted, but highly scrutinized, role in helping the Fed buy ETFs and bonds to support credit markets. A small portion of BlackRock ETF bond flows were powered by Fed purchases, though the firm is waiving fees on any Fed money going into its ETFs.

The firm wasn't immune to the challenges of the quarter.

BlackRock said that price changes to some products cut into revenue. The firm faces an escalating fight with other investment firms for dollars and clout. It expects to undertake more fee reductions on products after announcing some earlier this year. The fee wars have put acute pressure on issuers both big and small.

The rise and fall of markets compounded price pressures for BlackRock. As U.S. stocks rose and the dollar appreciated, so did assets that BlackRock manages in cheaper products that track U.S. markets, analysts say. Meanwhile, a fall in other equity markets outside the U.S. reduced assets -- and fees BlackRock could charge -- on what are generally more lucrative strategies.

BlackRock's earnings are also significant because they help show how money moved through the firm's sprawling lineup of investment strategies in the quarter. Those flows provide cues into how investors are behaving more broadly.

Investors were cautious with the coronavirus shutting down swaths of the economy. BlackRock investors pulled money from BlackRock's equity funds, mirroring a broader flight across the industry from stock to bond funds.

Investors drove about a quarter of the net new money BlackRock took into cash products -- a less lucrative business for the money manager -- but still a way to park money with the firm until they are ready to move into other funds. BlackRock's active-equity strategies took in record inflows, as investors sought the expertise of managers that seek to beat rather than mirror markets.

Big investment institutions pulled money from BlackRock indexed products but added net flows to the firm's actively managed products. Money coming in from retail investors helped to offset outflows from institutional clients.

In coming months, Wall Street will be watching for signs of whether BlackRock plans to be more aggressive with acquisitions in the asset-management or technology sphere. In a tough market environment, many predict a shakeout in the asset-management space.

During the last financial crisis, BlackRock swooped in to buy the investment-management business of Barclays. The 2009 deal turned the firm into a behemoth. PNC Financial Services Group Inc., BlackRock's longtime largest investor, recently exited its stake in the asset manager, locking in a tidy profit.

Write to Dawn Lim at dawn.lim@wsj.com

(END) Dow Jones Newswires

July 17, 2020 12:41 ET (16:41 GMT)

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