BlackRock Looking Like a Jewel

On Wednesday, asset manager BlackRock (NYSE: BLK  ) posted a tripling of its second-quarter profit, to $222.2 million. The firm's impressive performance answered the question I posed following its first-quarter results: whether BlackRock could effectively integrate the investment arm of Merrill Lynch (NYSE: MER  ) , which it acquired in October 2006. The answer is "yes."

BlackRock has proved that it can manage both money and post-merger dynamics. The firm credits its impressive bottom line mostly to the effects of the Merrill combination. Assets under management rose to $1.23 trillion at quarter's end, including $51.4 billion of new business, as its strong global distribution force raked in money from 28 countries.

Total revenue increased an impressive 204% to $1.1 billion, up from $360.7 million a year ago. The company also posted a 9% increase in first-quarter revenue this year.

Still, some rough spots need buffing up. Equity product performance remains mediocre; while performance fees grew to $25.7 million, up $3.3 million from the first quarter, that figure still represented a decline from the year-ago $44.2 million. Adjusted operating margin also slipped to 36.1%, from 36.7% in the first quarter, thanks largely to higher incentive compensation and foreign currency costs.

Most of the new capital inflow went into fixed-income funds, displaying that BlackRock's historic roots as a small bond shop continue to hold the most appeal to bond investors. Instead of taking a hit from subprime sector troubles, management feels the firm is actually benefiting from it. CEO Laurence Fink believes that the firm's more conservative fixed-income investment style boosted demand for those products.

While current market conditions make many investors favor more traditional fixed-income choices, the glamorous appeal of hedge funds can complement BlackRock's investment product mix. Going forward, the firm is expanding its array of funds, including alternative investments. During this past quarter, BlackRock also agreed to acquire Quellos, a fund-of-hedge-funds manager with $20 billion in asserts under management, for $1.7 billion.

CEO Fink is optimistic going into the third quarter, with a $25 billion pipeline of money flows at hand. As BlackRock's global salesforce continues to flex its muscle, and the firm increases its investment array, there's little reason to doubt that conviction. Although BlackRock's equity performance has been a diamond in the rough, performance is improving. For the one-year period ended in June, 77% of mutual fund equity assets ranked in the top half of their peer groups. With a bit more polish in this sector, BlackRock could shine as brightly as any gem.

Further first-quarter Foolishness from BlackRock:

Fool contributor S.J. Caplan does not own shares of the companies mentioned in this article. The Fool's disclosure policy is rock solid.


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