BlackRock predicts ‘trillions’ in fixed income investment as profits rise

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BlackRock predicted a surge of investment into bond funds once the US Federal Reserve stops raising interest rates as the money manager beat earnings expectations and reported assets under management had recovered to $9.4tn.

Investors have flocked to money market funds to take advantage of rising interest rates — pushing the total in US MMFs above $5tn — but BlackRock said much of that horde was poised to shift into fixed income once investors feel sure that yields would not be hit by further Fed action.

“There is finally income to be earned in the fixed income market and we are expecting a resurgence in demand,” said Rob Kapito, chief operating officer. “There are trillions . . . that are ready, when people feel rates have peaked, to flood the market and we need to position ourselves to capture that.”

While some analysts believe the Fed could pause after another quarter-point increase at its July meeting, BlackRock and its chief executive Larry Fink have repeatedly suggested that rates would have to remain higher for longer.

Global bond exchange traded funds crossed $2tn in assets this week, double their total just three years ago, and BlackRock has predicted assets will triple to $6tn by 2030.

The New-York based group reported $1.4bn in net income in the second quarter, a rise of 27 per cent over the same period last year, even though overall revenue was down 1 per cent year on year to $4.5bn and operating income was down 3 per cent.

Assets under management benefited as a handful of major tech stocks drove a recovery in the benchmark S&P 500 index, and net inflows in the quarter topped $80bn, below expectations of $92bn. BlackRock’s cash management products had inflows of $23bn.

BlackRock’s rising profits come as rival asset managers struggle with compressed margins and increased competition, and despite sustained attacks from Republican politicians in the US for what they contend is a “woke” approach to investing.

The group has sought to deflect the criticism by emphasising the breadth of its offerings, from index trackers to alternatives. “Clients want more from BlackRock, not less,” Fink said. BlackRock shares were down 1.4 per cent by mid-morning in New York.

BlackRock’s recent cost-cutting efforts have enabled it to claw its way back to an adjusted operating margin of 42 per cent, almost where it was in the second quarter of 2022.

“It was a fine quarter and the longer-term growth story is still intact” despite the lower revenue, said Michael Brown, analyst with KBW.

BlackRock reported $9.06 in diluted earnings per share, up 28 per cent year on year. The adjusted figure of $9.28 was above the $8.41 analysts polled by Bloomberg had expected.

Revenues from the group’s Aladdin risk management system and other technology services rose 8 per cent year on year to $359mn, above analysts’ expectations. The company said at last month’s investor day that two-thirds of its 25 largest clients had given BlackRock a bigger share of their spending over the past five years.

“They have built a better mousetrap in terms of having better technology and options across all asset classes,” said Kyle Sanders, equity analyst at Edward Jones. “Most asset managers are shrinking and BlackRock has been growing.”

T Rowe Price on Thursday reported net outflows of $20bn for the quarter, although assets under management climbed to $1.4tn because of rising markets.