DJ - BlackRock's Investor-Cash Inflows Slide -- Update

By Asjylyn Loder

Investors radically slowed the torrent of cash flowing into investment giant BlackRock Inc. this spring, a sign that a changing global economy and trade rifts may be unsettling a decadelong embrace of passive stock investing.

BlackRock said Monday it received $20 billion in net inflows in the second quarter. While the sum is enormous, it was down from more than $100 billion a year ago. BlackRock is the world's largest asset manager and a bellwether of low-cost index-based investing.

BlackRock isn't alone: For the first six months of 2018 the amount of money going into all U.S. passive mutual funds and exchange-traded funds was down 44% from the same period a year earlier, according to data compiled by research firm Morningstar.

Just as the simplicity of index ETFs made it easy and cheap for investors to load up on a broad exposure to the stock markets, it allows them to move out quickly at a time when many are questioning the longevity of the bull market.

ETFs package stocks, bonds or other assets into a single share that, unlike mutual funds, can be bought and sold on an exchange just like shares of Apple or Amazon.

To be sure, money is still coming in to BlackRock and its peers. Yet if anxiety deepens and markets begin to decline, the slowdown shows these companies could suffer outflows.

For now, there have been only small signs of investor unease: U.S. stocks continue to march upward in 2018. The S&P 500 is up 4.7% this year while the tech-heavy Nasdaq Composite has gained 13.1%.

"If it turns into a big, bad bear market, then I think we could see outflows from ETFs," said Craig Siegenthaler, an analyst at Credit Suisse Group AG. "There's been a lot of hot money that's gone into equity ETFs in the past five years."

In an interview Monday, BlackRock Chief Executive Larry Fink said the slowdown reflected growing investor uncertainty amid political upheaval in Europe and worsening skirmishes over tariffs between the U.S. and its trading partners. China and the European Union are both battling the U.S. over tariffs that the Trump administration said are needed to compensate for unfair trade policies.

"One of the foundational components of international investing is that globalization is good for the world and for world global markets. The U.S. is throwing some of those foundational assumptions into question," Mr. Fink said.

The slowdown at BlackRock, one of the landmark winners of the post-financial-crisis world, comes as many analysts and investors are on the lookout for signs of an end to the unprecedented rise of low-cost, passively managed funds.

Such a move would reshape markets and the global economy given that for much of the past decade, investor cash has surged into BlackRock and fellow passive investing giant Vanguard Group. The two companies hold more than $11 trillion in assets combined, collecting it from institutional investors like banks, pensions and hedge funds, as well as from individuals.

The slowdown in the $3.6 trillion ETF industry has been particularly noticeable after last year's record gains. Investors poured $123 billion of new cash into U.S. ETFs in the first six months of 2018 -- down by about half from the same period last year, according to data from Morningstar Inc. Inflows into Vanguard ETFs also slowed, while State Street Corp.'s ETF business has seen net outflows, according to Morningstar.

That risk aversion was apparent across BlackRock's businesses. Investors bailed out of stock funds and instead sought the relative safety of bonds, especially as rising returns on short-term debt investments sweetened the appeal.

Mr. Siegenthaler noted that pension funds and sovereign-wealth funds were both cutting back on stocks and instead opting for the steady returns provided by debt investments. Institutional investors yanked $21 billion in the second quarter from BlackRock stock-index products that seek to match market benchmarks rather than beat them, and instead invested $7.2 billion in products that track bond indexes, BlackRock reported.

Retail investors acted similarly, pulling $1.6 billion from BlackRock equity products, including mutual funds, while buying $6.2 billion in bond investments.

Speaking generally, Jeffrey Costa, a trust and investment officer at First County Advisors in Stamford, Conn., said his mostly retail clients have been rattled by the escalating tariffs.

"The biggest anxiety I'm seeing is new cash," said Mr. Costa referring to clients with money to invest who are afraid that they are too late in the current economic cycle to enjoy gains from the stock market.

In all, investors pulled $22.4 billion out of BlackRock stock products in the second quarter while buying $26.4 billion in fixed income, the company said.

Mr. Fink said he remains optimistic about the future of ETFs, which he predicted could reach $10 trillion to $12 trillion in assets world-wide by the end of 2023. Flows were also slowed by investors taking advantage of higher returns on money market accounts, Mr. Fink said.

BlackRock's earnings rose 26% from the 2017 period, while revenue grew 11%. Its shares fell 0.6% Monday to close at $503.96.

"There's definitely some disappointment there," said Kyle Sanders, an analyst at Edward Jones. "People got accustomed to seeing record eye-popping growth every quarter."

Despite the slowdown in flows, BlackRock's profitability expanded as the company made gains in other business lines. Technology services revenue, including its Aladdin risk and portfolio management tools, rose to $198 million, up 25% from the same quarter last year.

Another bright spot was BlackRock's performance fees on actively managed investments, which rose to $91 million, a 90% increase from the 2017 quarter.

--Sarah Krouse contributed to this article.

Write to Asjylyn Loder at asjylyn.loder@wsj.com

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