Low-fee trackers squeeze revenue

BLACKROCK Inc, the world’s largest asset manager, is hauling in investor cash at a record rate.

There is one issue: the money is moving into low-fee products which track indexes, pinching revenue.

BlackRock managed to boost profits in the fourth quarter, though revenue barely grew.

The firm was a prime beneficiary of a record year in exchange-traded funds.

BlackRock attracted $140 billion to its iShares business last year, including $60bn in fixed-income ETFs. Vanguard Group, the second biggest player in the ETF business, gathered $93bn.

But asset managers are also in a race to the bottom on fees to win investors. In December, BlackRock trimmed expenses on six smart beta ETFs, signalling that the price war was moving beyond plain vanilla products.

“In 2016 it is fair to say that across all investor types there was a movement more towards passive strategies,” chief executive Laurence Fink said in an interview on Friday after the earnings were released. When I am able to increase margins and market share through price cuts, I am going to do that. The key element is scale.”

Expanded

BlackRock expanded its operating margin from a year earlier, also by keeping company costs down. The shares gained 1.6 percent to $384.28 during morning trade in New York on Friday. The company’s fourth-quarter earnings of $5.14 a share exceeded estimates. Revenue rose 1 percent to $2.89bn, falling short of analyst estimates of $2.93bn.

Lower performance fees and a stronger dollar contributed to the modest revenue growth.

Investors poured money into US stock ETFs after the election of Donald Trump as they expected thattax cuts, spending on infrastructure and lighter regulation would lead to a stronger economy.

But asset managers are being stung because the cheapest ETFs are attracting investors. Over half of the ETF inflows are going to products with an average fee of 0.09 percent or less, according to an analysis from Bloomberg Intelligence. – Bloomberg