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(Reuters) - BlackRock Inc (BLK.N), the world's largest money manager, said on Wednesday its second-quarter profit fell 11 percent as tumultuous market conditions cut into fee income.
Net income at New York-based BlackRock dropped to $554 million, or $3.08 per share, from $619 million, or $3.21 per share, a year earlier.
Investors fretting about Europe's debt crisis and overall global economic weakness moved out of higher risk -- and higher fee -- stock funds and into bonds and short-term securities, BlackRock Chief Executive Laurence Fink said. BlackRock benefits more when investors move the opposite direction, from what Fink called a "risk off" position to "risk on."
"For the remainder of 2012, unfortunately, all eyes are still going to be on politics and the economy," Fink said on a call with analysts. U.S. elections and the coming budget showdown "will likely create additional uncertainty and lead to more soft business sentiment and probably a reduction in consumer spending," he added.
Investor interest in BlackRock's iShares unit, the top manager of U.S. exchange-traded funds, saved the firm from an even deeper profit decline. Investors added a net $6.1 billion into iShares funds in the quarter, while withdrawing $2.3 billion combined from BlackRock's other long-term funds.
But the inflows were overwhelmed by the impact of declining worldwide markets, which cut $76.8 billion from BlackRock's long-term assets during the quarter, and currency moves, which trimmed another $16 billion.
The MSCI All Country Index lost .MIWD00000PUS 6.4 percent in the second quarter while the Standard & Poor's 500 .SPX lost 2.8 percent.
All told, BlackRock's assets under management at June 30 totaled $3.56 trillion, down 3 percent during the quarter and down 3 percent from a year earlier.
Since the quarter ended, iShares alone has pulled in another $3.5 billion in July so far, Fink said on the call with analysts.
But despite the inflows, BlackRock's ETF unit has lost market share in the United States to rival Vanguard Group, particularly in some of the largest and most basic fund categories where Vanguard charges much lower fees.
Fink acknowledged the challenge. "I have to give a lot of credit to Vanguard," he said, adding he was "not pleased" about the loss of market share. BlackRock will have a plan to address the issue in coming months, he said without giving any details.
BlackRock founding partner Susan Wagner announced her retirement during the quarter, raising some questions about succession planning at the firm.
BlackRock President Robert Kapito said on Wednesday the firm had a "very strong bench" and stressed that it had engaged in formal succession planning and annual reviews of top talent for years.
The firm plans to hold an investors day next year to introduce more of its leadership team to investors, he said.
BlackRock's second-quarter revenue declined 5 percent from a year earlier to $2.2 billion. Investment advisory and related fees dropped 5 percent to $2 billion.
Performance-based fees, which can provide a high-margin boost to BlackRock's bottom line, declined 18 percent to $41 million. But the fees could get a boost later in the year as some of BlackRock's hedge funds have posted strong performance. The firm said its fixed income Obsidian fund is up 20 percent this year.
Excluding certain expenses, BlackRock earned $3.10 per share. On that basis, analysts, on average, expected $3.01, according to Thomson Reuters I/B/E/S.
Shares of BlackRock dropped 0.8 percent to $174.84 in midday trading on the New York Stock Exchange on Wednesday. The shares had lost 1 percent so far this year through Tuesday, trailing the 8 percent gain in the price of the Standard & Poor's 500 Index.
Reporting by Aaron Pressman in Boston; editing by Lisa Von Ahn, Jeffrey Benkoe and Gunna Dickson