By Trevor Hunnicutt and Sudarshan Varadhan
(Reuters) - BlackRock Inc (N:BLK) said on Thursday it will cut 400 jobs and take a $76 million restructuring charge after posting a 20 percent drop in first-quarter profit amid a dramatic reversal in financial markets.
The world's largest asset manager's investment performance stumbled and its net inflows, albeit still tens of billions of dollars last quarter, fell as U.S. markets marked a rough start to the year.
"We did have a tough quarter," BlackRock Chief Executive Officer Larry Fink told Reuters. U.S. stocks, corporate bonds and energy all fell sharply in the beginning of 2016 but regained their footing in February. "The entire industry had a tough quarter in active management and we were no different."
Investors took the disappointing earnings in stride, initially selling, then bidding up shares by 1.7 percent to $354.32 by midafternoon.
Fink attributed a portion of the earnings shortfall to lower fees collected on so-called "active" investments, including hedge funds and many mutual funds, in which managers study companies and financial markets, making bets on future performance.
The businesses produce higher profit margins than BlackRock's popular index-tracking funds, which took in $27.5 billion despite the stormy markets.
Net income fell to $657 million, or $3.92 per share, in the quarter, from $822 million, or $4.84 per share, a year earlier. Overall revenue of $2.6 billion was offset by expenses and taxes of nearly $2 billion.
With results adjusted to exclude the restructuring charges, BlackRock earned $4.25 per share, short of the average analyst estimate of $4.29, according to Thomson Reuters I/B/E/S.
"It was a quarter of a little bit of retrenchment, using the opportunity to take stock of where they're spending money and refocus a bit," said Neal Epstein, senior credit officer at Moody's Investors Service. "They continued to raise assets and under the circumstances it was not a bad quarter."
PERFORMANCE SLIPS
BlackRock's relative investment performance slipped during the quarter, according to its own metrics.
Nearly two-thirds of the assets in its tax-exempt bond funds lagged their benchmark over one year. Only 41 percent of assets in the company's so-called "scientific" active equity business outperformed. That group mines reams of data for insights on how to pick stocks.
The company has focused on integrating new stock fund managers and boosting team performances. During a reshuffling announced in January, Fink and BlackRock President Rob Kapito combined the "scientific" and more traditional "fundamental" stock team under four managers.
Investors pulled $17.7 billion out of stock-focused products during the volatile first quarter.
Net investment in fixed income was $52.2 billion for the quarter, while $2.2 billion went into alternative investments, a relatively higher-fee unit that includes hedge funds, real estate and infrastructure.
"The biggest challenge for them currently is the continuing effort to revamp and improve their actively managed strategies," said Daniel Culloton, a Morningstar analyst.
Fink said the company will continue to hire in the lucrative alternative unit as part of the restructuring. The company will also build its sustainable-investing operation, tailoring portfolios to reflect social, corporate governance or other values, he said.
The company did not give details on the job cuts.
Despite the cuts, the company will hire in technology and its iShares exchange-traded funds businesses, Fink said. He expects to continue to increase the overall headcount this year.
BlackRock Solutions, a unit offering risk-management and investment-analytics services to other Wall Street firms, governments and investors, was a bright spot as revenue rose 16 percent to $171 million.Overall, BlackRock attracted total long-term net inflows of $36.1 billion in the quarter, down from $70.4 billion a year ago.
Most of that, $24.3 billion, went into iShares, down from $35.5 billion a year earlier, with the lion's share invested in lower-fee bond ETFs.
BlackRock ended the first quarter with $4.74 trillion in assets under management, up from $4.65 trillion at the end of 2015.