Changing of the Vanguard? BlackRock's ETF dominance slipping

Losing market share to index-fund specialist; 'we are not happy ...'

Jul 19, 2012 @ 10:50 am

BlackRock
+ Zoom
Bad quarter at BlackRock ((Photo: Bloomberg News))

For years, BlackRock Inc. (BLK) has struggled to profit from an investor preference for actively managed bond funds that has largely eluded the world's largest asset manager. Now Chief Executive Officer Laurence D. Fink is facing a new headache.

BlackRock, the world's biggest provider of exchange-traded funds, is losing market share in the ETF business to Vanguard Group Inc., the company best known for its low-cost index funds. BlackRock's U.S. market share declined by 1.4 percent this year to about 41 percent as of June 30, according to a report by State Street Global Advisors. Vanguard, the third largest ETF manager after No. 2 State Street Corp. (STT), had a market share increase of 1.7 percent to 18 percent.

“We are not happy with our market share in the second quarter in U.S. equity ETFs,” Fink said in a telephone interview today. “You saw risk off, even in ETFs, you had many flows into what I would call the commoditized ETFs, the large, index products, and Vanguard has taken a lot of the share of those flows in those products.”

BlackRock has failed to benefit from almost $750 billion in industrywide deposits into actively managed bond funds since 2009 as investors put money with top-performing rivals such as Bill Gross's Pacific Investment Management Co. and more recently with Jeffrey Gundlach's DoubleLine Capital LP. On the ETF side, Vanguard had attracted almost twice as much in investor deposits as BlackRock this year as of June 30, according to data from State Street.

Active Bonds

The firm didn't benefit like some of its competitors from deposits into active bond funds following weak performance in 2008, Fink said during a conference call with analysts and investors in January 2011. Investors have pulled about $20 billion from active bond funds since 2011, according to quarterly earnings reports.

Fink said today in a conference call with analysts that BlackRock's performance at fixed-income funds has rebounded and that the firm has hired managers to help expand into global bonds. He also said the firm has a plan to address iShares' strategy in coming months, without elaborating. BlackRock's active taxable fixed-income products are beating 71 percent of peers over the past year and 81 percent over the past three years, Fink said.

BlackRock acquired iShares when it bought Barclays Global Investors in December 2009. In the three months ended June 30, investors withdrew about $5.5 billion from BlackRock's iShares stock ETFs and deposited $11.7 billion into its iShares bond ETFs. That's the lowest combined level of deposits since the fourth quarter of 2010, when the company started reporting the numbers separately for iShares.

Profit Fell

The company's fixed-income ETF deposits for the second quarter as well as year-to-date through June 30 represent more than 50 percent of the industry's flows, said Mark Lake, a spokesman for BlackRock.

BlackRock said today that second-quarter profit fell 11 percent as slumping markets worldwide eroded fees for overseeing client assets. Net income decreased to $554 million, or $3.08 a share, from $619 million, or $3.21, a year earlier. BlackRock's net income compared with the $3 a share average estimate of seven analysts surveyed by Bloomberg.

The firm's assets fell 3 percent to $3.56 trillion, as market losses totaled $76.2 billion and client redemptions were $29.4 billion during the quarter.

Shares Decline

“Active equity will continue to be a challenge for them and others,” Robert Lee, an analyst with Keefe, Bruyette & Woods Inc. in New York, said in an interview before the earnings were announced. ETFs “will be a growing source of assets,” said Lee, who rates BlackRock shares outperform.

BlackRock fell 0.6 percent to close at $175.05 in New York. The shares are down 1.8 percent for this year, compared with the 9.4 percent gain in the 20-member S&P index of asset managers and custody banks.

Clients pulled a combined $6.5 billion from BlackRock's active stock and bond funds in the quarter. Excluding the impact of the planned disposition of advisory portfolios, which reduced assets by $31.6 billion, the firm said long-term net deposits were $3.7 billion.

BlackRock's investment advisory fees fell 5.2 percent to $2 billion compared with a year earlier. Performance fees, earned by funds for beating certain benchmarks, decreased 18 percent to $41 million. BlackRock's revenue fell 5 percent from a year earlier to $2.2 billion.

Maiden Lane

Revenue for BlackRock Solutions, the unit that advises financial institutions and governments on hard-to-value assets, increased 13 percent from a year earlier as the unit added new assignments and clients who use the Aladdin investment- management system increased assets.

BlackRock, which was selected by the U.S. in 2008 to oversee tainted holdings at the peak of the financial crisis, disposed of advisory assets for investors, mainly related to liquidations of former portfolios held by Bear Stearns Cos. and American International Group Inc. (AIG), known as Maiden Lane I and Maiden Lane III, the firm said.

“On the one hand BlackRock's strategic positioning is strong,” Citigroup Inc.'s William Katz, who's based in New York, wrote in a July 9 note to clients. “On the other hand, flow prospects are mixed and investors continue to question margins and business continuity given seemingly elevated employee turnover.”

'Robust' Bench

Fink, who has built the firm through purchases of rivals, is seeking to expand by attracting investor deposits as the firm's acquisition spree comes to an end. That's gotten harder as Europe's sovereign-debt crisis and slowing economic growth worldwide have prompted investors to pull money out of actively managed equity funds.

Susan L. Wagner, who led BlackRock's growth by overseeing purchases including the fund units of Merrill Lynch & Co. and Barclays Plc, retired last month, signaling that BlackRock will rely on internal growth for future expansion. Wagner will join BlackRock's board of directors in October and will continue to serve as a director of DSP BlackRock Investment Managers, the firm's joint venture in India.

Fink said on the conference call today that BlackRock has a “robust” bench of executives and that the firm is committed to change as it tries to improve its business. He said the turnover rate is less than 1 percent for managing directors and about 4 percent firmwide, compared with the industry average of about 10 percent.

Wagner's departure was announced the same month that Robert Doll, former chief equity strategist, said he was leaving and Daniel Rice, who helped manage five energy and natural resource mutual funds, stepped down to avoid the appearance of a conflict of interest. Philipp Hildebrand, the former head of the Swiss central bank, will join BlackRock in October to help expand relationships with institutional clients overseas, the firm said in June.

--Bloomberg News--

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Jun 27

Webcast

Emerging Market Debt: 5 Forces at Work

When it comes to emerging market debt, there are a series of forces that help you drive better results for your clients. In today's continually changing market environment, it is critical to know the forces at play to help keep your investment... Learn more

Accepted for 1 CE Credit from the CFP Board. Approved by IMCA for 1 CIMA®/CIMC®/CPWA® CE credit. Approved for 1 CFA Credit.

Featured video

Events

Should I stay or should I grow?

Advisory firms stand a unique crossroads: Is it time to expand? Philip Palaveev, founder and CEO of The Ensemble Practice, offers some key insights.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Collective investment trusts getting more attention from 401(k) advisers

The funds are catching on due largely to lower costs and more product availability, but come with some inherent drawbacks.

Vanguard rides robo-advice wave to $65B in assets

Personal Advisor Services, four times the size of its closest competitor, combines digital and human touch.

CFPs, including brokers, may have to adhere to a stricter fiduciary duty

CFP Board revises its standards and aims to beef up fiduciary requirements of certificants.

CFP Board's proposal to expand fiduciary duty draws praise, carries risks

Some question whether brokers will drop the CFP mark or if the CFP Board will strictly enforce its new standard.

Meet our new 40 Under 40s

Introducing 40 young leaders in financial advice. Learn how their passions are driving their success and fueling the future of the industry at large.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print