BlackRock Needs to Prove It Can Handle Success

(Bloomberg Opinion) -- BlackRock Inc. proved last year that it can beat the market. What the world’s largest asset manager still needs to prove is that it won’t get tripped up by its own success.

Fourth-quarter earnings were down and missed expectations, BlackRock announced on Wednesday morning, but that shouldn’t surprise anyone. BlackRock oversees about $6 trillion in assets, about half of which are in index or exchange-traded funds that largely just track the stock market. I have written before that, because of its size and success, investing in BlackRock is increasingly the same as investing in the market. The market went down late last year, so BlackRock followed suit.

Earnings per share came in at $6.08 after adjustments and one-time expenses, compared with $6.19 a year ago. Analysts thought the company’s quarterly earnings could rise to $6.28 a share, but investors didn’t seem as caught off guard. Shares of BlackRock, already down nearly 30 percent in the past year, jumped after the earnings report, up $19, or nearly 5 percent.

The surprise, and a good one, was that BlackRock’s revenue for the year, despite the market decline, was up. BlackRock reported sales of $14.2 billion, up 4 percent from $13.6 billion the year before. Earnings, after adjustments, were up as well for the year. BlackRock does a lot of things: Its roots are in bond funds, and it has a popular risk-management system. It advises governments on how to manage and fund their debt. But in the last year or so, its increasingly large stock market index business has threatened to overshadow all those other businesses.

Last year, BlackRock was able to escape that trap a bit. It made a new push into alternative investments. In October, it announced it was moving $400 million of its clients’ money into a private equity fund. And that sort of worked, as illustrated by the annual revenue gain.

But only sort of. BlackRock’s shares fell more than the market, and in the fourth quarter, when the market took the biggest hit, the firm’s revenue fell 9 percent. Its higher-cost offerings were the biggest losers of client money while its index funds continued to attract inflows, even as its overall assets dropped to just under $6 trillion from as much as $6.5 trillion earlier in the year.

BlackRock emerged from the financial crisis a winner, and it has basically been on that streak ever since, aided by the market and its positioning as a low-cost indexer. The problem is that BlackRock hasn’t fully embraced its low-cost model. That wasn’t an issue when revenue rose 22 percent in 2017 and expenses 11 percent after adjusting for an accounting change, but it will be in years when the market falters, like last year.

The good news is that BlackRock CEO Larry Fink seems to understand this. Earlier this month, BlackRock said it would cut 500 jobs, or about 3 percent of its workforce, as well as consolidate and streamline some of its operations. That’s a good start. With rival Fidelity offering no-cost indexing, and with the bull market likely more over than not, more aggressive cost controls are probably needed. BlackRock has benefited from a huge shift in the market. But now that it clearly has the scale, it needs to prove that it can harvest the economic benefits that come with that.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephen Gandel is a Bloomberg Opinion columnist covering banking and equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

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