BlackRock Inc.’s first-quarter net income rose 24% but failed to meet analysts’ expectations, as investors withdrew money from the firm’s core bond funds to put into lower-fee cash investments.
While the company posted earnings of $1.82 a share, Investment Banking up from $1.48 a share, a year earlier, analysts surveyed by Thomson Financial forecast on average had expected the New York-based asset manager would earn $2.01 a share. In 4 p.m. composite trading on the New York Stock Exchange, BlackRock shares rose 21 cents to $205.40.
Best known for its fixed-income investment-management prowess, BlackRock for the first time saw clients pulling lots of money from fixed-income and putting it into cash instruments, which are less lucrative for money managers, Chief Executive Laurence Fink said in a conference call with analysts.
“Clients are confused,” he said.Investment Banking “It’s very hard to make any real return on owning Treasury securities or being even in a core fixed-income strategy.”
BlackRock is advising many clients to transfer funds from conservative bond investments into alternative investments, particularly into the firm’s new “special situations” funds that invest in distressed mortgages, leveraged-buyout loans and other areas.
Mr. Fink conceded that those funds generally lost money in the first quarter because the distressed assets they bought continued to lose value. “It is a disappointment for me,” he said, but “it is our strategy to continue to build our investments alongside with our clients and if the marketplace does turn itself around, obviously we are going to show some vast improvements in those areas.”
In the first quarter, BlackRock recorded an investment loss of 12 cents a share and costs of eight cents a share for compensation owed to Merrill Lynch & Co. and PNC Financial Services Group Inc., BlackRock’s two biggest shareholders, as a result of its takeover of Merrill’s asset-management business. For BlackRock, that 2006 deal gave it a collection of Merrill mutual funds, which are the fastest-growing fund family in Europe.
BlackRock’s revenue climbed 29% to $1.3 billion, meeting analysts’ average estimate. BlackRock’s operating margin rose to 30.4% from 27.1% in the year-earlier quarter.
Assets under management totaled $1.364 trillion as of March 31, up 1% from Dec. 31 and 18% from a year earlier amid a $27.4 billion loss on net asset values. Net new business grew 11% in the first quarter, totaling $35.2 billion.
Mr. Fink said markets “remain highly unstable and continue to be a challenge for investors world-wide,” but BlackRock intends to keep investing strategically. “I expect to see a dramatic consolidation in the investment-management business,” he said, as financial companies struggling with low price-to-earnings ratios seek to “embellish their capital” by divesting themselves of their asset-management units. But he cautioned that he wasn’t suggesting BlackRock will do a deal “anytime soon.”
Mr. Fink said commercial banks, investment banks and asset-management firms like BlackRock are working with regulators to find a broader solution for investors stuck with the frozen securities, but added that his firm wouldn’t sacrifice returns for its equity investors to get it done.
“We will know if we have a solution for the entire auction-rate market in the next probably week or two,” he said, referring to efforts to create a secondary trading market or to allow money-market mutual funds to purchase some of the securities Investment Banking.
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