BlackRock’s Cash Engine Gets Boost, but Its Profit Falls

BlackRock
Inc.


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’s second-quarter profit fell about 7% as the money-management giant was squeezed by price pressures.

A torrent of investor money and a rising U.S. stock market helped lift BlackRock’s assets to $6.8 trillion. Net inflows into the firm rose more than sevenfold to over $150 billion.

BlackRock took in a surge of money into bond strategies and its iShares exchange-traded funds roughly doubled net inflows to over $36 billion.

The world’s biggest money manager helped steer a revolution in financial markets with exchange-traded funds that trade rapidly and index funds that track markets cheaply. But BlackRock’s results show how in the hypercompetitive industry, an influx of assets doesn’t always translate to higher profits.

The prices of the most commonly offered strategies are falling near zero. Rival State Street Corp. also reported earnings on Friday. The firm’s investment management arm posted higher second-quarter assets under management from a year ago but its revenue fell.

BlackRock Chief Executive Laurence Fink, left, in Paris this month.


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The rise and fall of markets compounded price pressures for BlackRock.

As U.S. stocks rose, so did assets in cheaper products that track those markets. Meanwhile, a fall in other equity markets outside the U.S. reduced assets—and fees BlackRock could charge—on more lucrative strategies.

BlackRock Chief Executive Laurence Fink is pushing to make the firm less exposed to how investors direct their money and the ebb and flow of markets. The firm is a financial superstore that provides everything from bond-picking funds to workplace retirement products and technology for Wall Street.

“I have to focus on what we can control,” Mr. Fink said in an interview. “And what we can control is the diversity of our investment platform.”

The firm earned $1 billion, or $6.41 a share, in the second quarter on revenue of $3.5 billion. Earnings and revenue fell from a year ago and missed analyst expectations.

In the latest quarter, investment advisory, administration fees, and securities lending revenue fell by 1.4%. The firm said price changes to some products and lower securities lending revenue also offset the boost in assets.

Performance fees—the money BlackRock gets for beating markets in actively managed strategies—fell about 30%.

Technology-services revenue rose 20%, reflecting higher revenue from BlackRock’s acquisition of French software firm eFront. The transaction, the firm’s largest acquisition by size in a decade, added to technology tools BlackRock offers financial institutions to measure risk. Its technology business helps smooth any swings in markets and gives it new reach across the technology infrastructure that connects Wall Street.

BlackRock, unlike rivals such as Vanguard Group, has no channel of its own to directly distribute products to everyday investors. But it is turning to other ways to influence the ecosystem of wealth managers and advisers that oversee the money of individuals. It has taken positions in a number of financial technology firms with digital channels to reach consumers.

Chief Financial Officer Gary Shedlin told Wall Street analysts Friday that BlackRock is looking to use its spare cash more aggressively in partnerships with outside companies.

Total net flows rose to $150.99 billion in the quarter, up from $20 billion a year earlier. Net flows are the difference between investor money going into BlackRock and money leaving. The surge in new cash into BlackRock comes after a 2018 slowdown of flows across major asset managers raised investor concerns about whether their growth engines were sputtering.

As BlackRock sucks in more assets, its power to influence markets and responsibility as a shareholder across myriad companies could face more scrutiny from academics, investors and some regulators.

“People question the scale,” said Mr. Fink. “Scale also allows us to provide lower fees and better outcomes for investors.”

On the firm’s scale, he added, “I don’t see it as a liability. It’s giving us broader and deeper conversations with more organizations.”

The changes in BlackRock’s asset mix reflected shifting investor sentiment.

BlackRock had record second-quarter flows in bond strategies as investors and financial institutions made bond bets as the likelihood of an interest-rate cut increased. Others were hedging against a possible downturn in stocks as many major indexes reached new records. Investors also surged into cash.

Net inflows into cash-management services increased more than fourfold from the year ago period.

“Broadly, money going into lower fee products such as fixed income and cash means the fees are under pressure for asset managers,” said Michael Cyprys, an analyst at Morgan Stanley.

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

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