BlackRock Earnings: The Market Owns It Now

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(Bloomberg Gadfly) -- BlackRock has become the world's largest asset manager by offering index funds that basically own the market. Increasingly, though, it is looking as if it's the market that owns BlackRock.

The world's biggest asset manager on Thursday morning reported first-quarter results that were largely good except for this: Net inflows into its global iShares exchange-traded funds declined 46 percent to $34.6 billion from a year ago. That was not unexpected. The market, U.S. stocks in particular, had a rocky quarter. The iShares funds are mostly owned by individual investors, and when the market is rocky, individual investors tend to sell, or at least not invest as much as they would when the market is rising.

BlackRock does much more than manage large exchange-traded index funds. 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 the main driver of growth over the past few years, and what has propelled the firm to nearly $6.5 trillion in assets, are its stock index funds and the overwhelming belief among investors that low-cost funds that track the market are the best way to invest.

The problem for BlackRock is that when your main product is essentially the market, your results are going to start looking a lot like the market. It hasn't quite happened yet. BlackRock's first-quarter earnings rose 27 percent, after adjusting for a gain from the recent tax cut. That gain solidly beat expectations and well outpaced the market overall, which is down 1 percent this year. And BlackRock's popular ETFs are still taking market share from other asset managers, even when the market is down, so assets under management still rose. Investors were reacting positively to the earnings report. Shares were up just more than $8.50, or 1.7 percent, in pre-market trading. More generally, BlackRock's shares have outperformed the market for the past few years and trade at a premium to the market because the firm has been able to draw in assets much faster than pretty much any of its competitors, except its index rival Vanguard.

But eventually BlackRock will have grabbed all the market share it can, and at $6.5 trillion, it may be nearing that point. Investing in BlackRock isn't quite the same as investing directly in the market. It is sort of a lower risk way to do it. BlackRock doesn't lose money when the market goes down, it just loses the fees on the money it manages. But it is also a lower reward as well.

BlackRock has succeeded by selling the idea that investors are better off owning the market than individual stocks. Won't it be ironic if, at some point, its own investors come to the same conclusion.

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

Stephen Gandel is a Bloomberg Gadfly columnist covering 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.

©2018 Bloomberg L.P.

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