貝萊德 (BLK) 2010 Q1 法說會逐字稿

Good morning.

My name is Christy and I will be your conference facilitator today.

At this time I would like to welcome everyone to the BlackRock, Incorporated, first-quarter 2010 earnings teleconference.

Our hosts for today's call will be Chairman and Chief Executive Officer Lawrence D.

Fink; Chief Financial Officer Ann Marie Petach; and General Counsel Robert P.

Connolly.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions) Thank you.

Mr.

Connolly, you may begin your conference.

Good morning.

This is Bob Connolly, the General Counsel of BlackRock.

Before Larry and Ann Marie make their remarks, I want to point out that during the course of this conference call we will make a number of forward-looking statements.

We call to your attention the fact that BlackRock's actual results may differ from these statements.

As you know, BlackRock has filed with the SEC reports which list some of the factors which may cause our results to differ materially from these statements.

Finally, BlackRock assumes no duty and does not undertake to update any forward-looking statements.

With that, I will turn it over to Ann Marie.

Thanks, Bob.

Good morning, everyone.

As we report first-quarter earnings, we are reporting our first full quarter of results including the BGI transaction, which closed on December 1.

Due to the size and transformational nature of the BGI transaction, the acquisition is the single largest driver of the comparison to prior period results.

Therefore, I will discuss the revenue and cost components of the combined business and the positioning of the business relative to key market trends with a shortened discussion of period-over-period results.

We are pleased with the progress of the integration and the capabilities of the combined business.

As usual, I will be discussing primarily as-adjusted results.

First-quarter net income was $469 million or $2.40 per share.

This includes $2.42 per share of operating earnings and $0.02 per share of non-operating expense.

Net income improved 24% compared to the fourth quarter and was more than 4 times the first-quarter 2009 results.

EPS, which now includes a full quarter of the share issuance associated with the BGI acquisition, was up $0.01 from the fourth quarter and about triple first-quarter 2009.

The first-quarter tax rate was 35% and reflects both the geographic mix of the combined Company and a period of no unusual items.

As-adjusted results exclude BGI integration costs of $52 million pretax in the first quarter.

Combined with 2009 integration costs, total integration costs to date were $235 million and are on track to align with the $300 million to $350 million estimate we provided at the time of the transaction.

The key drivers of future spending are projected space consolidation, rebranding, and other actions to achieve operational efficiencies.

As-adjusted operating income of $727 million improved $166 million or 30% compared to the fourth quarter, and $420 million or 137% compared to a year ago.

The BGI acquisition and organic governing growth were the key drivers of the operating income improvement.

The operating margin as-adjusted of 38.9% reflects early synergy realizations and initial investments in initiatives to fund future top-line growth.

We remain committed to achieving synergies as we integrate the business, recognizing full integration is going to extend into and perhaps beyond 2011.

At the same time, we will be investing in future growth opportunities including our iShares platform, the defined contribution platform, BlackRock Solutions, Asia, multi-asset class strategies, and our global trading platform.

Through the balance of synergies and investing, we expect to maintain a stable margin relative to BlackRock's historic margin.

Having summarized total results, I am moving on to revenue and key revenue drivers.

BlackRock revenues are benefiting from asset allocation trends into passive products, improving markets, strong retail and ETF distribution models, multi-asset class capabilities, and a global footprint.

Our strong domestic and international retail product offerings and distribution relationships have allowed us to benefit as investors have re-risked.

At the same time, revenues are being affected as clients continue to migrate out of cash funds seeking higher returns and out of quantitative products as this product category has generally underperformed industrywide.

With the BGI transaction, BlackRock is now a leading provider of index products, including iShares, the leading ETF platform.

As a result, index equity and passive fixed-income revenues now represent about a third of base fees compared to less than 1% in legacy BlackRock.

Active equity and fixed income revenues represent about 40% of the total.

First-quarter revenues of about $2 billion improved by $451 million or 29% compared to the fourth quarter and were up over $1 billion or about double a year ago.

The improvement in revenue from the fourth quarter is more then explained by $499 million of improvements in base fees associated primarily with a full quarter of the $1.8 trillion of acquired AUM related to BGI.

Additionally, base fees reflect $51 billion of positive market net of FX effect on AUM, $9 billion of positive long-term asset flows, and $40 billion of cash outflows.

First-quarter revenues included performance fees of $50 million, a decrease of $75 million from the fourth quarter reflecting a period of fewer locks, an improvement of $39 million from a year ago, reflecting improved fund performance, more products above high-water marks, and a larger firm with more products eligible for performance fees.

Performance fees, along with the seasonality of EPS flows, are expected to contribute to seasonality in our results, with fourth quarter being the period with the most locks and the heaviest historic EPS inflows.

BlackRock Solutions and advisory first-quarter revenues remained strong at $113 million, reflecting a continued appetite for analytic and online services and continued advisory assignments.

Still the pace of advisory assignments has slowed relative to a year ago as a result of greater financial market stability.

BRS continues to have a strong pipeline of financial market advisory, Aladdin, and risk recording opportunities as the focus of clients has shifted from short-term assistance to long-term solutions.

Now moving on to expenses, the as-adjusted expense base of the combined firm was $1.268 billion.

That's up from $983 million in the fourth quarter and $680 million in the first quarter of 2009.

As-adjusted compensation costs were $734 million in the first quarter.

The increase compared to prior periods reflects primarily incremental employees associated with the BGI transaction and higher incentive comp associated with higher operating income.

Base compensation, benefits, and incentive compensation are the key drivers to (technical difficulty) expense.

Our first-quarter comp-to-revenue ratio was 36.8%.

As a reminder, first quarter is our peak period of payroll taxes, which tend to push our comp-to-revenue ratio a little higher in that quarter.

We do not view the first-quarter ratio as representative of our full-year expectations, which should be in line with historical trends.

G&A expense of $255 million increased relative to prior periods primarily due to the BGI transaction.

So it remains a relatively stable percent of total expenses at about 20%.

Within G&A, key expense drivers are occupancy, marketing and T&E, technology, portfolio services, and professional fees.

First-quarter G&A included a $12 million benefit from balance sheet related foreign currency effects.

In the fourth-quarter income statement we introduced a new expense line item, direct fund expense, which includes among other things the index license fees on the (technical difficulty) product and custody, transfer agent, and fund accounting fees.

Direct fund expense was $113 million in the first quarter, reflecting BGI.

This line item now represents about 9% of total expenses compared to about 2% of total expenses in legacy BlackRock.

I would also note that distribution and servicing cost of $100 million now represent about 8% of total firm expense compared to 18% of the expense base at legacy BlackRock.

The decline in this expense as a percent of total expense reflects the unique distribution model of the iShares product and the institutional collective funds nature of the remainder of the historic BGI business.

Those distribution models do not incur these expenses.

Distribution costs declined by $6 million from the fourth quarter due to industry-related outflows in cash products.

Non-operating expense of $6 million includes $30 million of positive marks on co- and seed investments.

A full interest on the $2.5 billion of term debt we issued in December drove the $36 million of net interest expense.

The total value of the investment portfolio now stands at about $950 million, or $845 million excluding investments which represent hedges or which are hedged.

The value of our investment portfolio has increased from $840 million in the fourth quarter to $950 million, reflecting both the positive marks on the portfolio which I just mentioned and the seeding of two new fixed income funds for retail investors which we launched on April 19.

Our new multisector and strategic income opportunity funds represent our commitment to offering great fixed income opportunities to retail clients.

As I have said before, we do not run any proprietary investments but rather invest alongside our clients or seed new product as required for the base business.

Our exposures are aligned with the interests of our clients.

I would also note that due to the introduction of FAS 167 we will be consolidating approximately $1.3 billion of assets, $1.2 billion of liabilities, and $100 million of equities associated with certain CDOs which BlackRock manages but in which we have no economic interest.

In summary, we are well positioned to benefit from business trends and are balancing synergies and investments in the business.

Given our relatively strong product performance, our institutional business is well positioned for growth as clients become increasingly comfortable with the combined firm.

Our broad diversity of investment products and risk management tools allow us to support clients' needs with their knowledge that we are working solely as a fiduciary on their behalf.

With that, I will turn it over to Larry.

Good morning.

Thank you, Ann Marie.

Let me go over my view of our quarter and talk about what we have done during the quarter and where we are moving into the second quarter.

So as I reflect on the first quarter, I am very proud of the progress we have made in a very short period of time, bringing our merged two firms, BGI and BlackRock, into the new BlackRock.

We did this at a time when clients worldwide were uncertain about the direction of the global markets and their portfolio.

After the markets fell in 2008 and the beginning of 2009, clients have been very cautious, directing and accumulating large allocations to cash and to short-dated bonds.

As we ended 2010, clients slowed their decision process and asked for help.

BlackRock provided this help.

We work with our clients by providing a thoughtful asset allocation analysis utilizing both our beta products and our alpha products, and utilizing these strategies to help our clients.

As the first quarter closed and continuing into the beginning of the second quarter, we are beginning to see clients allocating now money from cash and short-dated bonds into higher expected return assets.

I expect this to continue to carry on as the year plays out, as clients are starting to start moving now away from their cash and short-dated bonds.

Furthermore, in the first quarter our overall performance in alternatives, equities, and bonds have been strong.

What I am most proud of, integration did not interfere with our performance.

Investment performance is always our number-one priority and we showed that to all our clients worldwide.

In terms of integration, integration is ahead of schedule.

At BlackRock we're building a unique and differentiated organization to help our clients to have a better financial future.

But let me also remind everyone that mergers are tough, they are hard, and they take a long time to bring the overall firm together as one.

Due to all the hard work from so many of our team, we are in the process of building the most respected investment management organization in the world.

But it is not without a lot of stress with our organization, stress with our people; and that will continue on as we bring our two firms together.

Let me review the quarter.

$3.363 trillion, up approximately $17 billion.

What I would like to do is just break out the categories so as we now talk about the combined firm everyone has a better framework how to think about BlackRock.

So out of the approximately $3.3 trillion of assets, $1.7 trillion of the assets are index, passive portfolios from our index product and our ETF products.

$1.2 trillion is the active portfolios.

$300 billion are cash.

And about $160 billion is advisory.

The total of $3.363 trillion.

So a very robust, differentiated platform with the amount of beta and alpha products.

The other thing that I want to focus on is our breakout between international and US-Canada.

$1.297 trillion is international, or about 39%.

And US and Canada, about $2.066 trillion or 61% of our business in the US.

Another very large change in our mix can be seen through our revenues.

Approximately 50% of our revenues comes from our equity products.

Only 20% of our revenues come from fixed income.

18% of our revenues comes from multi-products, global allocation and other products; and about 7% come from cash.

A very different business mix in terms of products and in terms of revenues.

As Ann Marie discussed and our release shows, our pipeline is robust at $35 billion and we continue to have many more meetings with clients about their future and how they should think about their portfolios.

The one thing that was very clear in the first quarter, we saw huge churn in the portfolios.

We had large-scale movement of client money from one product to other.

Some clients because of mergers and other activities moved away from BlackRock.

We had some dissynergies that were totally budgeted.

But let me give you an example, the rebalancing, the inflows and outflows at BlackRock.

In the first quarter we had over $122 billion of inflows and about $135 billion of outflows.

This is -- much has to do with the merger, much has to do with the consternation of our clients.

But this was a great example of what was happening in the first quarter.

So the combination of rebalancing -- some clients were actually de-risking who had large profits in equities, large profits in credit, and they went into passive.

We also saw very large flows into passive in our ETF platform, which I will discuss in a minute.

But we saw a great deal of movement in all our portfolios; and I really think this really illuminates what is going on.

Let me talk about our iShares product for a second.

Despite all the new announcements of new fund complexes going into ETFs, BlackRock's iShares platform as of the end of February -- I don't have this data as of March -- had the same market share as we did at the end of the last year.

Approximately about 48% market share.

So we are holding our own with all the new entrances.

And we, unlike our forecast, achieved very good growth in our US iShares.

As Ann Marie discussed there is great seasonality in ETFs, where generally in the first quarter you have outflows; and we happen to have strong inflows, way beyond our budget for the product.

In addition, the innovation of the teams, we launched 17 new products.

So we continue to build out.

We continue to try to be differentiated and offer our differentiating product.

We announced at the beginning of the quarter our marketing venture with Fidelity.

I am pleased to say that is going very, very well.

We saw some very unusual mixtures of businesses in our iShares.

We saw strong retail flows; and we actually saw some institutional outflows.

Now, the institutional outflows plays into the seasonality.

The seasonality is we're starting -- a lot of institutions for tax selling at year end buy the ETFs in the fourth quarter and sell their stock; and then they repurchase stock and then sell out their ETFs in the first quarter.

But in retail, obviously we did not see that.

We saw very strong retail demand for the product.

That will continue to -- that continues to bode well into the second quarter as we continue to see ETFs play a larger role in both institutional and retail clients in terms of their portfolio mix.

We actually also saw some very large movement in ETFs from sovereign wealth funds as they begin to use ETFs as an asset allocation alpha strategy.

So they're using beta strategies for alpha, as they are asset allocating across different geographic investments and different products.

BlackRock's mutual funds continues to grow, continues to grow at a very strong clip.

Our US mutual fund platform grew by about $11 billion in net sales.

Our international mutual funds had about $5.1 billion.

It is interesting to note in our US platform we were ranked number one in gross sales in the first quarter and number four in mutual fund third-party sales.

We continue to build out our brand, and we continue to bring out extensive types of products for our distribution platforms.

In addition, we are starting to see more and more countries open up open architecture.

And so we have more opportunities in the -- continue to buildout of our international mutual fund platform.

BlackRock Solutions now has about 179 clients.

We had in the quarter -- this is including Helix -- about 32 net new assignments.

For Aladdin, we had two new assignments, totaling now 40 Aladdin assignments that we have in terms of enterprise platforms.

We are presently working on six Aladdin assignments implementations.

So we have a huge pipeline for Aladdin.

And we are seeing obviously a very different type of business in our BlackRock Solutions.

As the world economies improve, as portfolios are stabilized, one thing is very certain.

Clients, their regulators, their supervisors, and their boards are requiring a much more risk-management approach to their business.

And we are one of the firms that are benefiting from the risk-management desires from our clients.

In addition, we announced in the first quarter the rollout of an equity Aladdin platform.

So not just in fixed income, in loans and all forms of credit, we are now providing an equity module for our clients.

This was done from much of the growth within the overall BlackRock platform.

But in addition, the BGI integration, the analytics, is going to help us to have even a more robust Aladdin platform for equities.

I would like to just also emphasize the acquisition of Helix which is going to give us a much more robust platform in commercial real estate debt.

We now have the ability unlike almost any -- no other firm has in terms of identifying by asset in every pool, by loan, by asset, the month-to-month performance of each loan in a structured or mortgage-backed commercial loan and security.

This is something that we believe is going to be more and more necessary as questions around rating agencies, about questions around in terms of underwriting of loans -- investors are going to need to have a much greater understanding of each asset, how those assets perform on a month-to-month basis.

And we have the technology and the information to provide that.

Institutional flows, as I discussed early, were fairly skewed.

A lot of churning.

So we saw a huge rebalancing, as I discussed, in terms of rebalancing and balancing.

But we did see large amounts of movement toward beta in both equities and fixed income.

As I said earlier, our fixed income performance and our equity performance was very strong.

And this bodes well for our future.

The legacy BGI fixed income, the legacy BlackRock fixed income teams, had a very good quarter.

I am very pleased to say now this is now our fifth quarter in a row with BlackRock fixed income performance has had a very strong turnaround.

Our team leadership is committed to continue to build out the performance both in retail products and institutional products.

And we are beginning to see now more modest and stronger flows in our mutual fund fixed income platform.

On the equities side, I would like to just mention our whole European platform that continues to have stellar performance in our European, in our UK, in parts of our Asian products across the spectrum.

We continue to have very strong flows in those products.

Our natural resources funds too continue to do quite well.

Let me spend a little time talking about cash.

Obviously as an industry the industry has seen record amounts of outflows.

BlackRock did a little better than our competitors in this.

Our market share was modestly better.

That is only a modest concession, because of the nature of the business.

This money is not moving in total out the risk curve.

Much of the liquidity money is moving out from mutual funds into bank deposits.

Banks are offering rates for overnight anywhere between 40 and 50 basis points, which competes very handsomely over mutual funds.

As the Federal Reserve begins its tightening phase, which we believe will be the latter part of this year, we will start seeing a rebalancing back into money market funds.

So we are working with our clients on this, and we continue to work with them very carefully.

But we don't expect to see any real turnaround in money market mutual funds until the Federal Reserve begins its tightening of rates.

In our alternative space, in our fund of funds, in our single hedge fund strategies, we had a very strong first-quarter performance.

We are starting to drive new flows.

As clients, as they start looking to re-risk, many clients are doing barbell strategies by allocating more beta and index products and allocating more money towards specialized alpha products like hedge funds.

So we continue to see more and more opportunities there.

The one area that we have begun to see a little stability is real estate.

But I do believe commercial real estate will be -- 2010 will be a year in which we believe the real estate area will be mending and not healing -- mending and healing but not performing that well until we see the refinancing of many of these projects and we see new equity capital going into real estate.

As we discussed at the end of the fourth quarter, we now have this new category called multi-class.

This is our global strategy and our global allocation products that we are putting there.

It is our fiduciary businesses.

It's a business that we continue to be differentiated where we continue to grow.

And we believe this is going to be the area where we are going to see very large growth over the next year.

So let me just talk about -- in addition to what we have done in the first quarter and Ann Marie discussed this, we determined in the first quarter that we need to continue to build out our platform, a stronger product.

And we are investing in a number of products.

Primarily we are investing in our iShares platform.

We're investing in defined contribution as we see more business going there.

We are investing in Asia where we believe we need to rapidly grow out our manufacturing platform in Asia.

We are clearly investing in our branding as we rolled out our iShares brand messaging and our BlackRock brand messaging in the last few weeks.

We are working towards building out our global trading system platform where we believe our scale will differentiate ourselves to allow us to have the best execution for our clients and to reduce the friction costs of our trading.

This is a huge priority for us, and we are on our way in terms of building that out.

Another thing that we are building out is in terms of our global offices.

In Singapore, we consolidated our offices last week.

In June, we are consolidating our two offices in Hong Kong into one.

And early in the quarter we announced the buildout of a new office in London in which we are going to be bringing all our platform onto one common platform.

This buildout of this office will take about a year and a half.

But we continue to build out to have a stronger platform.

We are wildly bullish on Asia, DC, and our iShares business, in addition to the other products.

And it is going to require additional hiring and additional buildout of technology.

I am very pleased with the rollout of branding.

I do believe it is evidence of our iShares market share in the first quarter, as evidence of our mutual fund market share and growth.

The brand continues to grow.

It continues to build out.

And this is not just a US phenomenon.

This is a global phenomenon, and it is really benefiting our overall platform and is building and will allow us to build a much stronger future going forward.

Let me just discuss a few other things related to our position for the future.

We have much to do.

We have a great deal of work to do in terms of our integration.

We're spending a great deal of time on working on our new governance model in terms of how we build out our platform globally.

The whole quest is to making sure that we have worldwide a one BlackRock platform.

Bringing all our technology onto one common platform.

Having the ability to deliver to our clients globally a global investment management platform, but to deliver it in a localized basis to take advantage of our presence on a global footprint.

Let me just touch on financial reform.

We believe that financial reform is necessary.

We came out last week through advertising in support of financial services reform.

We believe it will put the markets in a better footing for a better future.

It is very clear to me as regulators worldwide, not just in the United States, as regulators contemplate how to effectuate too-big-to-fail and to manage the risk associated with large leveraged balance sheets, it is very clear to us the outcome of having larger capital charges on capital and on assets, it leads me to believe that all the regulators worldwide believe that we are going to have a stronger and more resilient capital market.

As we move capital away from balance sheets, and as we move towards the capital markets as the provider of liquid capital worldwide, not just in the United States but in Asia and in Europe, and we are seeing that evidenced through the corporate bond issuance and IPOs in Asia; we're seeing that here in the United States with the extreme amount of corporate bond issuance.

Financing the developed and the developing world is being done through the growth of the global capital markets.

There is no other firm that is in better position to take advantage of that growth of the global capital markets than BlackRock.

This is why we are investing so much for the future.

Because we believe, as we see financial reform changing the landscape, we need to be aggressive in making sure that we are going to work with our clients and achieve the globalized platform that we need.

We need to be much stronger in Asia.

We need to have manufacturing in Asia.

We need to -- making sure that we have strong risk management technology worldwide.

So we are spending a great deal of time focusing on financial reform, how it will impact ourselves, our clients.

And how will it impact, obviously, the markets?

If you do believe global financial reform will put more constraints on balance sheets with banks, obviously there will be less capital for market-making from these institutions too.

Another reason why we need to continue to build out our global trading system platforms.

So, much of our investment is very related to our view of the landscape and how the landscape will be evolving.

We believe if we do not take advantage of this, if we don't take advantage of our global footprint, our scale we are not going to be serving our clients worldwide.

As I said, we are preparing for a new financial future.

We believe we're in the best position for that.

I am very optimistic about BlackRock in 2010.

But I am even more constructive about our position going out 2011 and 2012.

Once again, I just want to thank all the employees for the incredible hard work, sometimes very frustrating hard work.

But I think we have made a lot of progress in terms of the integration.

Sometimes it wasn't easy, but I can see it in everyone's faces now; we have made a lot of progress as we think out in the latter part of April that we have made a lot of progress in that we have a really bright future.

Thank you, everyone.

Let's open it up for questions.

(Operator Instructions) Robert Lee, KBW.

Thanks, good morning, everyone.

A couple of quick questions.

Larry, I'm just curious.

You've seen this, as you describe it, this move to continue to move to passive, whether it is in iShares or I guess other products.

As you look out ahead, what do you think it is going to actually take to start seeing, at least among institutional investors, any kind of movement back to the active products?

Do you think this is really just -- it's been a trend the last I guess couple years or year or so; do you see it changing at all?

Yes.

We are seeing much more active dialogue now, and it only started like the last two weeks of March, with clients starting to ask more questions about active products.

But I would say, Rob, as I said earlier, we're seeing more and more clients just use beta product as alpha.

As clients are able to asset allocate across sectors and regions with liquidity, as I said we're seeing even sovereign wealth funds using iShares products now to asset allocate.

And they use that as alpha.

So that is just a trend that we're seeing worldwide.

But our conversations with institutional clients now in the last four or five weeks have been quite robust.

And the majority of the ideas is related to active strategies, and in many cases it's related to alternatives and other products.

Okay.

Obviously your new business pipelines remain pretty full.

But I am just curious to the extent you had some I guess outflows related to the merger.

Is there much of that to go?

Do you think it's pretty much with just a little bit in the first quarter or so, or do you see that there is any kind of pushback from just -- how broad and deep you guys are and how many places you touch (multiple speakers)?

Well, some of it is seasonal.

What we have learned, you see a lot of seasonality in the index products.

So some of that was the churn.

Some of it was the budgeted dissynergies where we saw it.

And we saw a lot of that movement out where clients where we had more than 20% of their total portfolio, and for governance reasons they needed to bring it down below that.

That was certainly the case in a few areas.

Some of them were certainly planned as we did budget out dissynergies.

And some of it was because of the underperformance of the quantum equity, which is an industry problem.

There are outflows in that product and there continued to be some outflows.

So much of it was planned -- or expected, I shouldn't say planned, but expected.

Much of it was seasonal.

And some of it was performance related, and that's why we saw such an extraordinary amount of churn.

But as I said, that churn has slowed down and we are starting to see an upswing in terms of dialogue with our clients, with the idea of reallocating back to higher risk expected assets.

Okay.

Maybe a question on the regulatory front.

You did touch on it, about your views of broader financial reform and the impacts.

But more specifically, as it relates to asset managers, first off it seems like anything related to the money fund businesses kind of still -- I don't know; I guess I will call it in background or discussion stages.

Or can you maybe update there?

And any change in your thoughts about what ultimately will be required in the money fund business?

No, I mean we have -- we believe this is -- the money fund business will change.

We believe there is a great need for a liquidity bank.

We are in favor of it, despite some poor reporting.

We have been always in favor of the liquidity bank.

We do also believe that there is going to be a need for some form of capital associated with the money market funds.

And/or as the SEC has now proposed, more the shadow NAV.

Much greater disclosure in terms of where the real NAV is for money market funds.

So there is going to be a lot of dialogue between -- over the next six to 12 months related to how we build confidence and structure in the money market funds business.

But it's going to change, and it's going to probably have more expenses associated with it, whether it is in the form of a liquidity bank or it's in the form of a liquidity bank and some form of capital associated with the money market fund business.

I do like the idea that the SEC proposed on the shadow NAV.

I think it gives much more transparency to the investors.

And I think it will differentiate those who are navigating risk much better.

So we're in favor of this.

The last thing that we are against is any socialization of risk in terms of credit risk.

This is what we're concerned about.

If we created some form of insurance for the overall industry, we think that is inappropriate.

And I think the insurance should be provided by the individual investment manager.

All right, great.

Thank you very much.

Mike Carrier, Deutsche Bank.

Thanks.

Just one question on the active products.

It looks like if you separate the quantum products out, then the fixed income side, that is where you saw some of the relative weakness.

It looks like it is more institutional and international.

So I guess just in that product area, when you are talking to clients, is there any way to gauge for this quarter how much of it was related to maybe just the concentration risk versus the pipeline still being pretty healthy, and over the next six to 12 months you are still able to generate positive flows in that area?

Yes, most of it was the dissynergies that we expected.

There was one $5 billion client in itself where there was dissynergies.

So that was a good component of that.

As I said, that was expected.

But we did see trends.

Certainly a continued trend in the ETF space for fixed income indexing.

We are still seeing that in the -- we're seeing that in some of the institutional side.

And we expect fully to see much more robust fixed income active flows in the future.

You know, we did not see much inquiry; but we are working on it a lot right now in terms of our financial institution group.

And all of that is more active, and we are in heavily dialogue with some very large institutions now.

And so we are -- we feel very comfortable about the future of active fixed income, and we believe that will continue to drive growth.

Okay.

Then just on some of the investments for future growth, it looks like you have a lot to opportunities out there, whether it's iShares, the defined contribution in Asia.

When you look at those different areas, Asia obviously must be just the attractive growth rate.

In the DC channel, is it either taking more market share given some of the new products that you have?

And maybe a shift in that distribution channel in terms of where investors or where product lineup is headed?

Then in the iShares, just any color from your guys' perspective on how much that business is institutional versus retail, and where you see the growth going forward?

Sure.

It is our expansion of our products that has really been driving our re-focus and our investments towards defined contribution.

Having both the beta products, the expansive alpha products.

So we're working with a great many corporations and distribution partners in terms of offering our products.

And we believe we have an opportunity to really start moving more and more share into our DC channel.

We saw that in the first quarter where we had nice growth.

And we continue to believe we will be benefiting from our product profile for DC.

In terms of the ETFs and iShares, we would say there are really two stories, a US story and a non-US story.

Let's just talk about the non-US story.

Internationally, we believe at least 70% of the flows are institutional.

It could be even larger, where institutions use beta product for alpha.

I cited some of the sovereign wealth funds and other products.

We are working very closely with some large distribution platforms throughout the world to try to move these products more into a retail channel.

I think that is going to take some time, but we are making progress with some of the large distribution platforms in Europe.

I would also cite as the financial services reform bill goes through, especially in terms of for derivative contracts, one will also see added expenses associated with ETNs as margin posting will be required.

That will also differentiate between ETNs and ETFs, which I think we will be -- we'll have an improved position if that ever happened.

In terms of the US iShares, we believe the mix between institutional and retail is about 50-50.

Where we think retail is fully engaged in the use of ETFs, obviously the mutual fund business in the US is more robust than it is anywhere else.

And so the natural growth in ETFs in terms of mutual funds it is just much more prominent than in Europe.

But in the US, we still see strong institutional demand for beta products.

But I would also add indexation institutionally is a larger product in the US than it is in other places.

And for large-scale clients instead of going to ETFs, they will generally just go towards a single product index product.

Okay.

Then just one last one on the margin.

I guess near-term, I understand all the investment that is going on.

If we do continue to have a strong market backdrop, then does that play into it?

Meaning markets are up greater than you expect and you should be able to generate some operating leverage.

Then once this investment phase is done, say 2011/2012, what would be your incremental margin?

So we can start to think of -- just given the scale, whether it's on the trading side or on the product side -- that you could still generate some operating leverage longer-term?

Yes, I think that first of all, both with respect to improving markets when you just have the revenue side being affected without the need -- except for certain compensation expense -- to increase the expense side, and with respect to the longer term, there is opportunity on the margin side.

I do think we are going to continuously balance the question with respect to margin.

Because while we want it to increase with respect to markets appropriately, we also want to be appropriately investing for the long term.

As I mentioned in my remarks, some of the synergy activities and the integration activities will continue into 2011 and beyond.

And certainly if and as appropriate we will let some of those flow through to the bottom line.

Yes, I think right now, because of the financial services reform we are paying more attention to making sure we are prepared for that in terms of our business.

But beyond that, as Ann Marie suggested, it is our expectation that margins will improve.

Okay.

Makes sense.

Thanks a lot.

William Katz, Citigroup.

Thank you.

If you talk about -- look at iShares for the next six to 12 months, you mentioned you are seeing the use of beta for alpha, if you will.

But where do you think you are going to see the greatest lift?

Do you think it's the United States as you reinvest in the branding?

Or you think it is just further efficacy outside the United States?

Well, there is no question there is greater growth in the United States than overseas.

The acceptance of ETFs in the US is further along.

It is much more of a -- as I said earlier -- a much more robust product retail here in the States than it is internationally.

But this is our buildout of brands in Europe to continue to make sure that we are there as ETFs grow in terms of acceptance by retail platforms.

But most certainly ETFs are growing overseas on the institutional side.

Okay.

Just back to the margin discussion for a moment.

Ann Marie mentioned that you plan on investing through 2011, possibly in 2012.

So, Larry, when both of you talk about the incremental margin opportunity, are we really talking 2011?

Or is it really more 2012 where we should be thinking about some kind of lift on margins, assuming the top line were to grow?

I would say -- my hope is it's 2011.

It's a function of where the market is as we go through this year.

It is our view that the markets will be higher.

I am a very large believer that, as we see from investors worldwide, that they are so underinvested in equity beta that we believe the greater risk is for a bigger rally than a fall in the market as we move throughout the year.

So we're pretty constructive.

If we have all that, we are not intending to add more margin, not adding more expenses to the buildout.

And I would expect to have a lot of that increase to flow into margin.

So much of the margin buildout is the framework that we believe the market will continue to do well, and we are not showing that our budgeting that; but it is our view that the markets will be better and those -- and that market -- that improvement will flow into margin.

But this year we made a very strong statement, saying financial services reform is going to happen and we have to be prepared.

I don't think anyone else is doing that.

We are just loudly saying it, that we need to continue to build out a presence in Asia.

We need to build out our trading platform to take us -- to making sure that we have the best and most efficient trading platform in light of less capital being risked in market-making.

So we have some big issues that we have to continue to build out.

So overall, we are constructive on -- I am constructive on our future and I am constructive on the future margin.

Okay.

Just one last one if I may.

You are generating probably now a little north of $2 billion of free cash flow, just based on this quarter run rate.

Yes.

You just recently took the dividend up a little bit.

I guess you paid down some debt.

Could you talk a little bit about priorities for the cash flow on a roll forward basis?

For this year, we continue to expect to pay off the billion-dollar line that we took in terms of the BGI transaction.

There is no question with our cash flow beyond that; our Board will review either raising dividends even much more substantially if the cash flows are that large, or stock purchases.

We are going to look at those in the same way.

I think those are trade-offs, whether it's a high dividend rate or stock purchases.

Okay, all right.

Thank you very much, guys.

Craig Siegenthaler, Credit Suisse.

Thanks and good morning.

First, just a follow-up to Bill's first question on iShares specifically; really on the ETF retail side.

I am just wondering what barriers are holding that up in Continental Europe and really Asia, and when we could start seeing more meaningful flows from those areas?

You mean in terms of retail?

Yes.

I think it's just education and knowledge.

I think, too, I think some of the distribution platforms are uncomfortable with the model of no retrocessions.

Retrocessions in Europe are a very large component as these large distribution platforms try to struggle how to introduce ETFs into their platform and trying to find a way to making money.

That is probably the biggest issue overall why ETFs have not been as robust in Europe.

Got it.

Then on the integration-related redemptions in the first quarter, how should we think about these flows normalizing over 2010?

Can you really help us quantify that level?

Well, you know, as we said, we expected the dissynergies.

We saw almost the same thing, if you go back to our MLIM transaction; we had the same type of outflows in the first and second quarter after closing MLIM.

So this is --.

What I think is important to say, this is -- we are not concerned.

We are not seeing anything that is systemic or problematic.

Our dialogues with our investors are as robust as ever before in fixed income and other products and the opportunities that we have in building flow is strong.

As I said, we did not see any real financial institution growth, where we have these large platforms of wins.

But we are in heavy dialogue with some very large platforms.

So I would -- and the dissynergies we saw were very frontloaded, as we expected.

Got it.

Maybe just a quick one for Ann Marie on the margin.

The contribution of your expenses now, at least in my view, is much more variable with the addition of BGI.

A lot of that is driven from the direct expense pickup.

Should we expect a much more closer correlation between non-comp expenses and revenues going forward just due to the composition now of both alternatives and ETFs?

Certainly, in particular, and that is why we broke out that particular line item, because that is going to vary very much with revenues.

Okay.

All right, great.

Thanks for taking my questions.

Jeff Hopson, Stifel Nicolaus.

Thanks a lot.

So I had a question on the, I guess, equity index business.

Different than the ETF in terms of seasonality.

Big year last year; first quarter at least on the surface not as strong.

So I am just curious about what is the nature of the seasonality there?

Then, are you seeing any pressure on fees on the index side?

There was one big deal, I guess, one of the states that you guys missed out on; and it apparently was at low fees.

Can you comment on that?

I will let Sue Wagner, who is here, talk about it.

Yes, good morning.

On the seasonality, actually we also -- historically, BGI has also seen seasonality in institutional flows in index in the first quarter as well.

I think some of that -- then last year's flows worked out enormous in magnitude as people quickly tried to get market exposure as the market was rallying.

So I think there's two things happening in the index market.

One is a little bit of seasonality, which is just a historical trend.

And the other is we think that there was some -- Larry talked about the churn.

Some institutions sort of using index to get quickly to tactical asset allocation exposure to those markets, and then working on searches to reallocate as they see fit to either after products or alternatives, or elsewhere in the market.

So we think that some of what was happening in the first quarter, particularly in the first couple of months, and then as we reached the end of the quarter we started to see that come around.

So the inflows were fairly strong late in the quarter, and we continued to see interest at those levels.

On the fee pressure, I think the index is a very fee-competitive business.

So I am not -- there was reporting on one mandate that was very fee competitive.

I don't think that we have observed it being more fee-pressured than in the past.

Okay.

Thank you.

Marc Irizarry, Goldman Sachs.

Hey, everybody.

Larry, just a question on fees related to performance fees.

What is the level of AUM now?

-- I don't know if you have the detail there -- that generates performance fees?

And are you seeing any more institutional uptake in performance-related fees?

There is no question -- do we have the numbers?

Yes, we haven't disclosed the number of assets subject to performance fees.

I think a good base to look at is start thinking about our alternatives as being a component of the base.

But you might remember we also earn performance fees on relative performance on some of our traditional assets.

But overall, alternatives we have about $100 billion; so you could use that as a benchmark.

I'm sorry, Marc, what was the question related to --

(inaudible)

Oh, yes.

I'm sorry, yes.

So we're seeing, no question, large, large interest in alternatives.

I think more and more institutions are asking the question about using more beta and then more alternatives, more barbelling.

And we're seeing that across the board from Europe, Asia, and the United States.

So we are in heavy dialogue with a lot of institutions related to alternative products.

So we are seeing that type of interest.

There is no question.

As an industry we believe the hedge fund industry is seeing pretty close to as large of flows as some of them saw in '07.

Actually a lot of hedge fund managers are closed again.

So there is very large movement towards beta type of product -- alpha type of products in conjunction with using beta as an asset allocating product.

Okay.

Then in your traditional active strategies, are you starting to see clients also opt for more alpha-sharing arrangements where they participate more -- where there is more performance fees on traditional products?

Not really.

I mean a lot of clients just can't do that.

So depending on the client -- a lot of ERISA accounts have issues and so depending on that -- and sharing.

So we're not seeing that.

We welcome it, but we are not seeing it.

Okay, great.

Then can you just talk about the institutional US clients versus non-US institutional?

It looks like there was outflows from non-US institutionals and there was inflows into US institutions.

Is there -- is some of that related, the non-US, is that related to some of the merger-related dissynergies that you would have expected?

Yes.

Well, most of it was that; and some of it was we saw -- in some of our actually mid -- Gulf region clients we saw a lot of derisking.

Clients really a little worried about the dollar, a little worried about where to take it.

We have seen more -- some international investors move from dollar-based assets to non-dollar-based assets.

So I would say most of it was the dissynergies we expected; but some of it was just derisking out of dollar-based assets into other products.

Okay.

Then just along those lines, where do you think your distribution organization is globally in terms of being able to hold on to some of those assets?

I mean $130-billion-plus in gross outflows, it would seem that maybe some of that -- you can hold on to some of those assets as the distribution evolves further as a new Company?

Where do you stand in terms of --?

I don't believe any of those outflows were anything related to our distribution platform and all that.

I think it has to do just -- the new company, the dissynergies, the movement from alpha to beta, some derisking going on.

So I think we don't expect that type of churn even in the second quarter.

Okay, great.

Thanks.

We have reached the allotted time for questions today.

Mr.

Fink, are there any closing remarks?

No, there isn't.

I just wanted to thank everybody for a very strong quarter, a lot of hard work, and look forward to talking to everybody at the conclusion of our second quarter.

Thank you.

This concludes today's teleconference.

You may now disconnect.