貝萊德 (BLK) 2010 Q3 法說會逐字稿

Good morning, my name is Christie and I will be your conference facilitator today.

At this time I would like to welcome everyone to the BlackRock, Inc.

third-quarter 2010 earnings teleconference.

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

Fink; Chief Financial Officer, Ann Marie Petach; Vice Chairman, Susan L.

Wagner; 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.

Thank you.

Good morning, this is Bob Connolly; I'm 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 may 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 to and does not undertake to update any forward-looking statements.

And with that I'll turn it over to Ann Marie, our Chief Financial Officer.

Good morning, everyone.

Today we're reporting record as adjusted earnings of $2.75; this is evidence that the historic BGI and BlackRock businesses have come together as One BlackRock.

There was a strong product performance and customer focus resulting in earnings growth.

We've included some supplemental slides in our earnings release for the first time.

I'll refer to these slides as I discuss the results.

And I'll be talking as usual primarily about as adjusted results.

Starting with slide 1, third-quarter net income was $537 million; operating income was $737 million; and earnings per share were $2.75.

Net income and earnings per share reflect a 16% improvement compared to the second quarter and really steady improvement over time.

Operating income increased 2% compared to the second quarter; this excludes $17 million expense in the third quarter associated with some launch costs for 1.2 billion Build America Bond trusts.

It's the first closed end fund we were able to do in about two years and I think really is successful traction in the business.

Moving on to slide 2, the year-to-date operating margin of 38.7% reflects early synergy realization and initial investments to fund future topline growth.

Our 2010 margin has improved over time and exceeds our 2007 margin by 1.3 percentage points.

The 2010 margin exceeds the 2009 pro forma margin by almost 2 points, and this reflects synergies associated with bringing the two firms together.

And while we're being committed to the margin, we also are committed to achieving topline growth and are investing in the future -- including iShares, retail, defined contribution, solutions, Asia, alternatives and our global trading platform.

Our commitment to these and other opportunities gives us confidence in BlackRock's long-term organic growth prospects.

Moving on to slide 3, you can see on the right-hand side of this slide we've laid out the 2010 markets.

I would note that in the third quarter markets improved as illustrated through movements in the Dow by really about 10%.

At the same time if you look at the average markets in the third quarter compared to the average markets in the second quarter, they are actually down about 2%.

This is interesting to reflect on because our base fees really reflect average markets.

So our base fees do not yet reflect the full improvements in the market; those improvements will begin to be reflected in our fourth-quarter results.

At the same time, really our co-investments in our products do get marked on a period end basis, so do fully reflect the market.

With that, move along to slide 4.

On the right-hand side of the slide you can see our earnings per share of $2.75.

Those were composed of $2.51 of operating earnings and $0.14 of non-operating earnings.

It's good to see non-operating earnings for the first time in a little while compared to non-operating expense.

You can see that these improved compared to the second quarter both in operating improvements of $0.15 and non-operating improvements of $0.23.

I'd also note we've reduced the third-quarter year-to-date as adjusted tax rate from 33.5% -- to 33.5% from 35%.

This reflects the benefits of favorable tax rulings and resolution of certain tax provisions.

These are ongoing benefits.

We expect the full-year tax rate to be consistent with the year-to-date rate and we do expect the ongoing tax rate next year to reflect a full point of this 1.5 point improvement.

The tax adjustments related to that first six months of the year included in the third quarter are about $0.11.

Moving on to slide 5.

Third-quarter revenues of $2.1 billion are up about 3% from the second quarter.

Strong investment performance across both absolute and relative return-based products resulted in $114 million of third-quarter performance fees.

Performance fees improved $64 million from the second quarter explained by extremely strong performance on the UK emerging companies fund and that fund had a third-quarter loss, gains on liquidation of fixed income hedge funds.

With all of that it's worth noting that the fourth quarter is still our primary quarter for performance fee lock.

BlackRock Solutions and Advisory second-quarter revenues remained strong at $101 million, that's down $13 million from the second quarter reflecting the timing of completion of advisory assignments offset partially by growth in ongoing Aladdin revenue.

The pipeline is strong with active interest in Aladdin and advisory services.

We're working on some of the largest claim opportunities we've seen and feel really good about the mix of ongoing business and the continuing opportunity.

Moving on to slide 6, base fees of $1.794 billion remain consistent with the second quarter.

Markets and positive net new business contributed to higher revenues associated with fixed income, multi-asset and cash products, while equity revenues were affected by lower fees on security lending where in quarter is the peak, and lower average equity markets.

Moving on to expenses on slide 7.

Third-quarter as adjusted expenses was $1.355 billion; expenses were up about 5% but the increases were closely linked to revenue and AUM growth and positive product performance.

That performance led to higher incentive comps.

It's important to note that our quan revenue ratio for the third quarter at 35.7% remains right in line with our long-term quan revenue ratio of 35%.

The other expense to note is the $17 million of fund launch costs associated with that Build America Bond trust that I mentioned earlier.

Finally, I'd note that G&A expense did improve by $15 million driven in part by higher than assumed recovery rates on year-to-date value added taxes.

I don't have a slide on the non-operatings, but the non-operating earnings of $39 million do include $66 million of positive marks on [Cohen] ceded investments and $27 million of net interest expense.

The total value of the investment portfolio stands at $1 billion or $950 million when you exclude those things that are hedged or which represent hedges of liabilities.

The increase from the second quarter reflects both strong performance of our products as of September 30 and that's the $66 million of positive marks and that's across multiple asset categories and the ceding of two new funds.

We ceded a new US retail fixed income product, the floating-rate income fund and a new distressed credit fund called Value Credit Partner.

We've already seen assets flowing into both of these products.

We're confident that these new funds will be good opportunities for our clients.

As I've said before, we do not run any proprietary investments but rather invest alongside our clients or cede new products as required for the base business.

Moving on to slide 8, we generate substantial cash flow and return a meaningful amount of that to shareholders.

We've done this consistently over time.

During the quarter we repurchased approximately 900,000 shares, about $140 million, and that is out of our 5.1 million share authorization.

We are well positioned to benefit from business trends and well positioned for future growth.

Our clients' appreciation for our business model and the products and tools we offer them is reflected in our $46 billion price line which Larry will discuss in a moment.

Our broad diversity of investment products and risk management tools allow us to support clients' needs and position us well to expand our client base going forward.

With that I'll turn it over to Larry.

Thank you, Ann Marie.

Good morning, everyone.

During our last quarterly call I updated to our shareholders the changes we made in our governance model and our leadership changes.

BlackRock needed to be prepared to take advantage of changes in the global capital markets, regulatory reform and the opportunities we have from our historic merger with BGI.

Our third-quarter results really illustrated the tremendous opportunities we have in helping our clients deal with the tax of low rates.

We're providing advice in portfolio composition by delivering a multi-asset class solution, a risk management solution to our clients.

No other firm has the breadth of products utilizing beta and alpha products like BlackRock and we are in a very strong position to take advantage of these opportunities as clients struggle with this environment.

We don't know of any liabilities that clients are processing that can be achieved through these low rates.

And it's going to have to be done through construction of a multi-product strategy to achieve something close to their liabilities.

This is going to be a big issue especially as we roll into 2011 and as our clients worldwide have to reassess how large our liability has grown due to low interest rates.

So pension funds in the United States are going to have to reassess what their increased liability is because of the low 10-year rate.

And this is going to create much more noise going into the first quarter in 2011.

And as I said, no other firm has the capabilities and breadth of products to take advantage of this.

In less than one year our merger with BGI has become a big success.

We could not have provided the range of products, ideas and creativities to our clients before our combination.

After the second quarter we finally brought all of the organization together in a comprehensive cohesive way.

We are working together as one firm; Ann Marie spoke about One BlackRock.

But it's very important to note now that in the third quarter and certainly rolling into the fourth quarter we are a unified firm; we have a great level of community now at the Firm; the Firm feels and understands, I'm talking about our citizen's, understand the opportunities we have and they all see these opportunities we have with our clients and they're getting that type of feedback.

This is not just a US issue; this is worldwide throughout our platform of the comprehensiveness of the one firm BlackRock today.

We still have one more year in our technology conversion, so integration is not over.

And I need to remind everybody that, I need to remind all our employees at BlackRock.

We have a big job to complete, the technology conversion, to bring all our resources, all our products onto one global risk management system, but we are right on track, maybe a little ahead of schedule, but we still have a large need to making sure that we have everything put together.

So we're right on schedule, right on track on technology and I would say relative to our Merrill Lynch merger in 2006 we're actually further ahead today in our cultural togetherness.

And so we've made great strides over the last three quarters and we're now beginning to see the elements of success from all the hard work that everyone put together.

Let me review the assets and give a little more clarity.

Closed the quarter at $3.44 trillion, up 9%.

But I'd like to also give color on only 34% of those assets are active, $1.18 trillion.

So, the argument that we're so large, there are other firms as large as we are, $1 trillion and active.

We believe there are great opportunities for us in the alpha side and this is just not a beta play.

On Beta an index obviously because of our iShares platform and our leadership position in terms of institutional indexing, that represents 53% of our platform.

And then we have about $284 billion in cash which is 8% and our advisory business, which as you saw, which I'll discuss and close in a minute, you see about a $4 billion decline in our advisory -- that's basically payments of the normal principal and interest payments that are going to our clients and that will be -- that is part of that advisory assignment as the assets slowly roll off.

That should always be taken into consideration.

Another good example of the opportunity we have is the regional makeup of our assets, from the $3.46 trillion, $2.1 trillion are in the Americas, that includes South America, that includes Canada, and obviously the US.

$983 billion in EMEA and $374 billion in Asia and the Pacific.

As I said in repeated calls, we believe the greatest opportunity for us is outside the United States.

And when we talk about outside the United States, it will be included in the Americas because we see huge opportunities in South America, continued growth in EMEA and strong opportunities we have in Asia Pacific.

As Ann Marie discussed related to flows, $52.6 billion of long-dated flows; $1.8 billion of cash, which I want to talk about in a minute in terms of a stabilization in the money market business; and the $4.3 billion of advisory prepayments which I discussed negatively to bring our total flows approximately $50 billion.

As we discussed in the second quarter and I did speak at an investor conference, we still saw some of the outflows or dyssynergies that we expected, one large pension fund where we had over 40% of their plan with planning in the third quarter to reduce their -- our role with them.

And they did at the end of the quarter redeem about $17 billion of very low fee business.

Let me talk about the ins and outs because people are concerned about the dyssynergies.

The average basis points of dyssynergy losses is about 8 basis points.

The $50-odd billion of inflows is approximately 15 basis points.

So we are -- we have been consistently telling you that the businesses that we're losing are businesses that we are working with the clients where we have dyssynergies and the opportunity we have obviously carries over into the higher feeing businesses, and this is very important to take note.

The other thing that I would like to give everyone a real perspective, since June of last year, June 2009 when we announced the transaction, we knew we were going to have large dyssynergies.

But let's put this in perspective now.

We've had dyssynergies from the date of the announcement today, over one year and one quarter; we've had less than 5% of dyssynergies in the overall platform.

This is not a big issue.

And in our opinion way too much has been focused on it and this is why we're trying to give a little more clarity about it.

We are actually very excited about the flows, the opportunities we have.

And as I said, much of these flows, which I'll talk about in a minute, are because of the multi-asset strategy platform that BlackRock has.

The other thing that we saw -- we actually expected to have more inflows in the third quarter from new clients, some of it was rolled over into the fourth quarter.

Ann Marie spoke about a pipeline about $46 billion of pipeline of which $40.7 billion is long-dated flows.

In the first few weeks we had netting of over $7 billion of inflows that were funded already in the first few weeks.

So some of that we thought was going to close the last day of the month, it was carried over into the fourth quarter.

I think it's also very important to note that in terms of fees, base fees, as Ann Marie suggested, average equities over the quarter were down 3%; obviously at the end of the month equities were up about 9%-ish, 10% and that's certainly going to be powering the opportunities we have in the fourth quarter in 2011.

Let me just break out a few other product areas and then I would like to speak heavily about alternatives and performance fees.

Our iShares business continues to be very strong, year to date about $29 billion of flows; we've seen some very good flows so far this month.

About $12.7 billion of flows were in the third quarter.

This business -- we see a huge rotation.

At the very beginning of the year we saw large inflows in fixed income.

We are now beginning to see, and as evidenced in the stock market rally, we've started to see more flows into equity ETFs, both internationally and in the United States.

And this continues to be a very large driver of the opportunities we have at the Firm.

Another area that I would like to give credit to is our new position in the defined contribution business.

I spoke about this briefly last time, but year to date we've seen over $12 billion of flows in our defined contribution business, some very large chunky wins.

We have become a leader in the defined contribution business because of the unique position we're in by having both beta and alpha.

And it gives us great opportunities to really go to these plans and provide them a comprehensive product list.

As we all know, the defined contribution business is growing into fewer and fewer platforms and I believe the combination of the two historic firms, BlackRock and BGI, and now the new BlackRock, has given us that opportunity to become one of those big providers in the defined contribution business.

On cash, we had new flows for the first time in eight quarters.

I think what is going on is because of now a longer view of low rates, especially in light of the possibility of a second run of quantitative easing -- quantitative easing by the Fed, the persistence of low rates is probably going to continue.

The banks who were aggressive at the beginning of the year and last year in taking down deposits have become less competitive and the money market industry is now offering a competitive product related to bank deposits.

And I think that trend will continue going into 2011.

So I think we're going to see a shift in flows and we're certainly seeing that already in the fourth quarter where we're seeing increased liquidity flows in the first two weeks of the fourth quarter.

And I think that is another big change in the dynamic of BlackRock for the last two years where, as a large money market player, we were seeing significant outflows quarter by quarter by quarter, and now we're beginning to see a reverse of that.

The second area that I want to emphasize is the alternative space.

Prior to 2008 we consistently had -- a part of our core earnings was performance fees.

It was a large component of our platform and obviously the last two years some of those performance fees, because of the failures of 2008, carried into 2009 until we had the high water marks.

And now in 2010 we are beginning to see a greater consistency in terms of performance fees.

We had performance fees in over eight products in the third quarter.

We've had great successes in our fixed income funds, great successes in some of our equity hedge funds and great successes in our global macro funds.

This is a core part of our franchise, especially as clients are looking to barbell.

As clients are looking for multi-asset strategy solutions our alternative platform has to grow, has to become a larger component of our business.

Ann Marie spoke about some of our investments we make; I need to just reconfirm that.

We will not ever be in proprietary trading.

All our investments, this is not operating, obviously, are co-investments alongside our clients.

This is generally in the alternative space.

This is going to be a very large part of our business going forward.

This is a very large part of our conversations we have with clients.

And so we believe going -- we believe this area, as we continue to build this out, especially in light of the changes of Fin Reg with the sell side of leaving the proprietary businesses, it just presents much greater opportunities for our platform to provide these opportunities to our clients.

So, this is not, in our opinion, going to be a periodic issue, this is going to be a component of our business going forward as we prepare to build out our platform under the -- in the new Fin Reg Basel III environment.

And more importantly, as low rates continue to be a drag for our clients and our clients are looking for more of these multi-asset category solutions, alternatives represent a larger component of that conversation.

And we need to have more and more product in there and we are going to emphasize more and more of that in the future.

This does not take away any of our opportunities we have in core fixed income; this does not take away any of the opportunities we have in our core equity products.

In both core fixed income and core equity we continue to see very good opportunities ahead of ourselves and we believe we're in a very good position when and if the market becomes aware that equities is probably the most inexpensive asset class in the capital markets today.

We are one of the firms that will be able to take good advantage of that.

Let me talk about solutions -- as our numbers showed in the third quarter, we have a great business, we have a huge pipeline of business; these are more chunky Aladdin type assignments.

We are in the cusp of winning two very large Aladdin assignments right now.

And because of Fin Reg, because of Basel III we're having more conversations, more institutions as they reassess what they need under these new -- this new regulatory environment, what type of risk systems they need.

And we are taking advantage of this and try to help our clients in this.

In addition, as we become more of a multi-asset class category investment firm, it also incorporates risk management.

And this gives us that advantage as we talk about -- as we talk about equities, alternatives and fixed income we also work with our clients on risk management and the utilization of our risk management systems.

Let me just speak about an area that I know other firms spoke about yesterday and this is related to sec lending.

Sec lending is down quite a bit year to date from the last few years.

And if you look at utilization rates, utilization rates are down about 30% to 40% from prior years in terms of how much demand there is for security lending.

I personally believe this is temporary and let's talk about the dynamics of why sec lending slowed down so much.

One, Wall Street's proprietary debts are being separated.

They were a large user of sec lending in their proprietary businesses, so that's one area that has slowed down.

And what we can see almost globally -- a de-risking of hedge funds.

Another reason why I'm a little more constructive on the global capital markets; by looking at utilization rates you see how much de-risking has occurred in the last two quarters.

We believe sec lending is a powerful business, we believe it presents very large opportunities as the world becomes more comfortable with the future of the capital markets.

On quantitative equity, obviously a drag, part of the dyssynergies.

In the third quarter we announced very large leadership changes and a big change under Ken Kroner to really reinvigorate this area.

I am very pleased to say we have visited worldwide our clients on this and our clients have looked at this -- the changes as something very strong and good.

We believe we're in the stabilization phase and we believe there are opportunities ahead for us in the quan equity area.

We still may have some dyssynergies from that area in the fourth quarter, but we feel we are in much better shape prospectively going into 2011.

So some of the major headwinds, whether it is sec lending, whether it is cash and most certainly the quan equity side, we believe much of the headwind problems are behind us.

And so we feel very good about where we are in all the opportunistic areas and we've done a very good job of addressing these issues.

Overall in the -- let me just -- before I get into that, let me just say one other thing about performance because we're as good as our performance.

Our performance throughout the year has been quite strong in fixed income.

We are very proud of our performance now going over seven quarters now in our fixed income team.

Our performance has been quite strong, it was a very strong third quarter.

And our global equity platform another great year so far, some really outstanding outperformance.

And we have pockets here in the United States in our equity team in terms of outperformance.

We still have some drags in our US domestic equity team that we want to really address.

We did announce in the third quarter a hiring of our US equity CIO who will be starting in November, I believe.

And so, we are spending a great deal of time, money and attention of really building out our active portfolio of teams.

We did that two years ago in fixed income, we continue to do that and now we are really doing that in our global equity platform on the active side.

So performance has been strong, which gives me much greater confidence going into 2011.

And last, I just want to say before we open up for questions, is our business model.

I'm more certain about our business model than I've ever been.

It's much easier to be more certain about our business model when we're getting it reconfirmed by our clients.

But most importantly, I'm getting this reconfirmed by our team -- that they're hearing from our clients that our products, our footprint gives us an advantage that no other firm has.

Our business model of being more global is very essential for our future growth.

Let us not be confused -- a weakening dollar is very difficult for global investors who own dollar-based assets.

We are beginning to see some global investors sell out dollars and buying other products, obviously that's why the dollar is weakening.

There are net sellers of dollar-based assets going back into other currencies.

And so, I believe one of the headwinds in 2011 for the asset management business is going to be some selling from global platforms of dollar-based assets.

So if you are not a multi-asset platform that is offering more than just dollar-based investments, those investment firms are going to have -- are going to see some headwinds in 2011.

This is a big shift and if we are trying to do -- as a result of quantitative easing a weakening dollar, that will probably slow down global flows in dollar-based assets.

We should not be confused about it, that is a net result of the Federal Reserve's policy.

And we're having more and more dialogue with our global investors about investing in non-dollar-based assets.

We are in -- we're well positioned for that, unlike so many other investment firms.

So overall I'm very confident about where we are going into the fourth quarter and I feel very good about what we accomplished in the third quarter.

It was not easy, it was a lot of hard work, it was a lot of stress at times, but it's all been worth it now with all the opportunities we have ahead of ourselves.

Let me open up for questions.

(Operator Instructions).

Robert Lee, KBW.

Good morning, Larry, Ann Marie, thanks a lot.

A couple questions.

First, could we maybe talk a little bit about the ETF business?

I mean, obviously it's been in the news a lot about price competition and whatnot.

It appears to me it's mainly in kind of what I'd call the more commoditized basic S&P 500 kind of products.

But can you comment about how you see that shaping up and how you think that's impacting you going forward?

Well, I think our best example of -- fees are not always a prime mover of ETFs.

It is our experiment in lowering our fees and our global ETFs in our Gold ETF product, IAU.

We are offering fees now 15 basis points lower than our competition.

We certainly saw an increased percent of flows into our product versus our competition, but we saw a fraction of what we expected or what we thought could happen.

And it's a great example that most investors of ETFs are more concerned about liquidity and once they get -- and liquidity is one of the prime movers of ETFs.

So there's no question that fees are a consideration and will continue to be a bigger driver possibly in the future for ETFs, but we have not seen really any -- any real dramatic change because low fees.

It is about client service, it's about client education which we spend a great deal of time on, it's about tracking error.

If I could cite about one of our ETFs where we witnessed less flows than one of our competitors and one of our products is because in 2009 one of our international products had more tracking error than one of our competitors and as a result they saw more flows.

So, it's much more complex than the simplicity of just fees.

Clients want more education in these products than any other retail product that we know of.

And so, it's a lot about client service, it's a lot about education -- we try to spend as much time as any firm in terms of the education process of ETFs, how you could utilize ETFs as a strategic instrument in a portfolio.

Fees are a consideration.

So we are focusing on fees, we ask that question every quarter, every time we have our quarterly updates with our leadership teams.

And so, we're mindful of it, but we are not seeing any real industry wide pressure at all.

Obviously one of our competitors lowered their fees on -- and they're a few basis points less than ours, you suggested, in the S&P type of indexes, we'll see.

But as I said, I'm not terribly worried about it.

I think the next two years it's going to be all about innovation.

One of the areas that we were working on is trying to create almost an asset allocator ETF in itself.

Now the SEC doesn't allow that yet, but those are the types of things that we're looking for, much more of a multi-asset strategy ETF.

These are a little more complex, we believe there's great demand for it.

Our global opportunities mutual fund crossed over the $70 billion market.

That's a great example of clients looking for multi-asset strategy products.

We have that in the mutual fund side; we would love to have something like that in the ETF side.

Okay, thanks.

And maybe a follow-up question actually on securities lending, which you touched on.

I mean, should we be thinking of that as that's mainly -- from here forward for that piece of your fee revenue stream to improve is really more a function of the rate environment?

Or do you actually see that there's an opportunity to increase the --?

The utilization?

Yes, (inaudible).

Rob, it's two functions.

Obviously rates, low rates are one drag on sec lending revenues and the other one is demand from people who wish to borrow stock.

I think the biggest change in the third quarter was a reduction -- we already had low rates.

I think the biggest one is the utilization rates by the industry were down quite a bit as people are trying to reassess what is Fin Reg and its implications.

But I do believe as these proprietary debts move to non-bank entities, as there is a -- if there is a future of re-risking in the alternative space area utilization will go up.

Okay, thanks.

And maybe one last question just on Fin Reg.

I know it's still a lot to be sorted out, but can you maybe touch on it a bit?

I mean, it might, if I remember correctly you guys end up getting regulated as a bank holding company because of the ownership structure to some degree.

How do you -- any sense at this point that you can kind of get out from under that or if not that somehow we don't your ability to do different types of business or how do you think of that?

Well, A, we are regulated today by the Fed, by the OCC, by the FSA, by the SEC and on and on and on.

So we are already a very regulated institution.

To date we have not seen any issues related to or related to the issues around being regulated.

I think you're asking the question related, would a BlackRock be considered a systemically important institution?

And until we see how the regulators come up with a definition of what is systemically important we don't know if we would be part of that inclusion.

We have told the regulators -- I don't have a problem of being part of that group, as long as it is a comprehensive group that's included alongside with us.

And so, we really don't see much of a problem in terms of Fin Reg and how that impacts BlackRock at all.

All right, great.

Things for taking my questions.

Craig Siegenthaler, Credit Suisse.

Good morning, everyone.

Appreciate the color on the $17 billion mandate this quarter.

But can you help us with the expected timeline of the merger-related redemptions?

Should we expect a decline in the fourth quarter?

Maybe, and if you ex out the $17 billion mandate?

And when can these merger-related redemptions get back to zero?

Probably next year, early next year, first-quarter something.

Sue, do you have that?

Yes.

I mean, there is -- we made a note about what's netted out of the pipeline.

There is one that's netted out of the pipeline now that we don't think the client is going to be ready to affect until very late first quarter, or it could be early -- even early second quarter.

And that is really driven by the client.

So we're netting it out now because we know it's coming.

It's a little hard to say because the clients have to decide when they can -- when they want to affect stuff.

And we're trying to flow that information through to you as soon as we have it.

Can you give us a ballpark on that mandate?

Is that around $10 billion, is it that large?

Yes.

It is $10 billion, but it's netted in the $46 billion.

Right, it's netted out of $46 billion.

$46 billion is net of that.

Right, great.

And then just one follow up question.

On your multi-asset platform, have you experienced any situations where the level of wins here have been a little slower than you expected?

Do BlackRock's ownership -- or excuse me, level of management of assets with the potential client?

No.

No, because so much of this is -- some of it's fiduciary outsourcing where that's a new trend.

These are just very lumpy types of businesses.

It's going very strong in Europe, it's LDI.

Low rates could slow down LDI if rates continue to go lower.

But no, we're in active dialogue with many, many institutions, the RFPs are very strong.

If anything the RFPs are probably as robust as they've ever been.

All right, great.

Thanks for taking my questions.

Mike Carrier, Deutsche Bank.

Just one question on the allocations.

I think on the retail side, we all track it and try to gauge when equity flows are going to return.

On the institutional side, it just seems like you've got a lot of different parties and how they can fund the gaps differ.

So you have got the public pensions that can obviously contribute cash if there is a gap there.

You've got the government pensions where it's a lot harder because you might have to raise taxes.

And then I am not sure on the international side because it is not as close there.

But when you look at the different players out there, it just seems like when you start getting into the first quarter of 2011, it is going to be very hard for consultants to be talking about allocating more to fixed income when the yields are where they are and given that --.

I agree, totally agree.

But does it differ by customer?

Meaning will the public -- or will the company pensions be able to remain allocated to fixed income, but just contribute more cash versus the government pensions where they are in a bind right now so they might have to allocate more in equities?

I believe all pension plans worldwide are going to have to reassess their asset allocation.

They are going to have to reassess their risk, how they evaluate risk.

This is why I call low rates a tax on pension funds and savings.

We don't talk about that enough.

Obviously, we need low rates to reinvigorate our economy, but low rates is a great subsidy for borrowers and a great tax on savers and pension plans and we don't talk about that.

And so if one believes we are going to have a persistence of low rates for a while globally, it is going to -- it is going to be -- I believe, and this is the type of conversations we are having with foundations and endowments that they are going to have to allocate more into equities and alternatives.

So these are very difficult conversations.

As we know, the reason why we have had so much flow into fixed income over the years was institutions determined they needed to derisk.

Accounting makes owning equities look more -- it's a more volatile asset class, so people have favored fixed income.

And I do believe, as a fiduciary, these plans are going to have to accept a little more volatility and take more risk to achieve their liability.

So either going to have to go back to their constituents and lower their liabilities, which obviously they are trying to do that in Paris and we see the results of the -- the protesting you have in the UK today, talking about a major reduction in how they look at the public payrolls.

So this is not just a US phenomenon.

Mike, this is a giant issue.

And as you said correctly, this is going to be a big first-quarter issue as they have to reset their liability rate and with low interest rates, low 10-year rates, the gap grows.

Okay.

And then just, on the second-quarter call you mentioned and Ann Marie was saying that your target is to try to maintain the operating margins given that you continue to reinvest and watch some of the expenses where you can.

If we just look at what the market has done, and just assuming stable markets from here with assets up 9%, like, are we closer to realizing some positive operating leverage as we get into fourth quarter next year, just given the market rise and then later in 2011 some of the BGI synergies?

Well, A, I think the investments are going to have to continue as I worry about the outflows in dollars, as we have to -- I think our statement the last few quarters, we've got to build Asia, we've got to build our investment teams in non-dollars -- I mean, to me that's more essential than ever before.

But I think it's Ann Marie's and my view that our target is a margin about 40%, I think that is achievable.

That is what we have said to all our business leaders, that type of target.

And we believe over time we're going to be able to do that.

We still have another year left in terms of technology integration.

When that's finished that will reduce -- that will increase our margin somewhat right there.

And so we believed we could achieve those targets.

I will say anything over 40% is probably a statement that we're over -- we're not investing enough.

And so we just have to -- we have to make sure we're doing the right thing for the competitive nature of the business.

So it's not a hard target, it is a soft target.

But I do believe, and Ann Marie speak up about it, I believe we'll be able to achieve that 40% margin.

Yes.

And certainly the context you put it in, Mike, is very important.

I mean, we've had -- and haven't yet fully realized some of these market tailwinds and that certainly -- certainly that helps to flow through to the market.

Yes, I guess just when you do to the budget process, I'm just trying to figure out when you're planning for a year, the way that we look at things it's average markets or normal markets.

So if you get a 10% tailwind to the market that you weren't expecting, like (multiple speakers).

Our margins will increase.

Yes, absolutely.

Okay, okay, yes.

And then Ann Marie, just one quick thing on the tax rate.

You mentioned there were some nuances there.

Can you just say like what the year-to-date tax rate is on what you consider core?

And then next year I think you said a point lower, but I just want to make sure I got that right.

Yes.

The year-to-date on core, and this is the same as the expected full-year rate on the core, so this is our as adjusted rate at 33.5%.

And so, that's down 1.5 points from where we had been running at 35%.

And so, for next year what I said is that's a 1.5 point improvement, 35% to 33.5%.

We expect 1 point of that to be an ongoing benefit going into 2011.

So our new tax rate, Mike, is a permanent change for us.

We've been able to work with the tax authorities on the types of taxes we pay and we've been able to change our tax rates going forward.

Okay, that's helpful.

Thanks a lot.

Bill Katz, Citigroup.

Good morning, everybody, thanks for taking my questions.

Just come back to the decision discussion for a moment.

So I'm sort of curious, Larry, what percentage of the client base has now registered with you, if you will, in terms of their potential of removing any assets just related to any kind of just combined exposure?

Bill, I don't think we track that.

I think it's important to say that in AUM it's less than 5% and they're chunky.

So it's smaller than that, it's just a small component.

There are a few others, but it's really not that significant.

It's something that we talked about at the deal time and it's just rolling it through.

Sue, do you have any --?

Yes.

So, Bill, the only thing I would add is that obviously we're talking with and meeting with all of our clients on a regular basis.

There are, as we forecasted with this pipeline, a handful of others where we know that there are actions they will be taking.

And we think that there's yet another handful that are probably still evaluating concentration issues.

We think that (inaudible) clearly has a number of clients coming to the end.

But again, as we've indicated, some of these can be very large AUM numbers at very low [key] levels.

And we're trying to flow through the information as we have it.

Okay, that's helpful.

I just want to come back to the margin discussion for a moment.

Maybe I was just writing down so quickly, but it sounds like of that -- so, ins versus outs, you're losing stuff in single digits and you're gaining things in sort of that 15 basis point range.

So at the margin, if you're bringing things in that are sharply lower than your run rate, fee rate, what's the incremental margin on I guess the index and iShare platform relative to the legacy business?

And how does that square up relative to your thoughts that your margin could trend toward 40%?

It sounds like more of a 2012 phenomenon.

Well, and some of our flows are in the -- as you suggested, iShares, some of the flows are in index.

Those are high margin businesses.

Some of the fiduciary outsourcing businesses are lower fee businesses, Bill.

So, if we can continue at that trend in that type of business our margins even in 2011 will increase.

And I don't expect a 40% margin in 2011, but I do expect improvements in our margins in 2011.

Great, that's helpful.

And this last question, I think you broached this at a conference recently and you have a slide in your supplement which we appreciate.

Talk about dividend payout; I know that Board looks at that in February, paying about 50% I guess on a combined buyback and dividend payout.

Any thoughts here given your free cash flow and product breadth about any kind of material dividend change?

So next year our free cash flow will be over $2 billion, we know that.

This is a consideration that our Board will look at.

We don't anticipate any major inorganic change in our platform, we may look at little things to add whether it is a little asset management firm and a small -- overseas.

But so, I think we will look at a revaluation of our dividend and share repurchase policy, there's no question.

I think one of the considerations that I have to consider -- and this is why I'm glad it's February, not now -- is what will the government do related to tax rates and dividends.

If they change the tax rate and dividends I would argue stock repurchases may be more powerful than dividends.

If dividends stay at the same rate I would argue dividends are more powerful than stock repurchase.

And so, until we understand how the government tech policy plays out I don't know how we're going to balance those two items.

But I think it's essential to assume we have an up -- just by our earnings generation we're going to have an upwardly biased dividend.

Okay.

All right, that's helpful.

Thanks for taking my questions.

Marc Irizarry, Goldman Sachs.

Oh, great, thanks.

Hey, Larry.

So just on the upcoming Fed meeting and potential QE2, you mentioned that it seems like there are some more cash mandates coming in.

But can you talk about what the outlook is for fee waivers, where fee waivers stand today?

And with prime and Government money market funds, yield potentially heading lower, what's the expectation for fee waivers?

Well, I don't think QE2 is focused at all on the short end.

QE2 is focused on the 10-year, the five- to 10-year area.

There are suggestions -- the Fed has not discussed it, but you've heard conversations about QE2 is going to be rate targeted.

And I think rate targeting is not the short end, because the short end is essentially 10 basis points.

It's going to be in areas where small and new businesses need to fund.

It's going to be obviously the target mortgage origination.

To me that's what the Federal Reserve is trying to do is target a rate so you could stimulate the economy, whether through asset inflation in the form of rising equity markets and/or availability of cheap financing in mortgages and in terms of (inaudible), and also the availability of money by institutions for small and new businesses.

It's essential, if you look at all the statistics, job growth in America is almost entirely from small and new companies.

If you net out all the large companies it's basically flat for the last five years.

And so, I think the Federal Reserve -- obviously they're doing this to try to get a stimulated job market and it's all about jobs.

My opinion is if they're targeting they're targeting, define ways of reinvigorating the small and new company creation, which would then create jobs.

Okay.

And on fee waivers?

Oh, I'm sorry, fee waivers -- institutional, I don't believe there are any fee waivers.

On the retail side we have some fee waivers but they're small.

And compared to the second quarter we really haven't seen any change.

Okay, great.

And then, Larry, just on the non-Agency RMBS put back issue, what are you -- how big is that business for BlackRock?

And then what percentage of that business do you think could potentially be put back to the banks?

I think you guys are a meaningful player in that space.

Well, let me just talk about -- that's a giant component of the mortgage market from the originations of I guess 2006, 2007, 2008.

I'm not going to comment whether we're involved or not involved.

I would say, and I always say this consistently, BlackRock's number one job is to be a fiduciary for investors and making sure that we are looking out for our investors' interests.

We are a player in the non-agency market.

I would call ourselves a significant player in that area.

But even if we were an insignificant player in that market our job is to be -- if there is indeed an issue around the underwriting of loans put into a security, it is our fiduciary responsibility of inspecting that.

And so I -- from my perspective it's not as significant for the banks as some of the players believe though.

I believe whether we are involved or not involved in this, I believe it's essential that if investors do believe there's an issue they have a right to inspect.

But I think the market reaction to bank stocks was probably overdone.

It's obviously another drag on earnings for those who are involved who actually indeed had those issues, but not all the firms had these issues.

So let me just leave it at that.

Okay, great.

And then just on global allocation, the funds obviously continue to be big gainers of flow.

Can you talk about why there's -- why at $70 billion you're not capacity constrained in global al?

And how big do you think that fund can get or how big do you want to get as a percentage of your business?

Well, A, I think global al is a function of the global capital markets.

As global couple markets grow and opportunities grow, as IPOs flourish overseas and are much smaller in the United States, which we're seeing total evidence of that -- a global al product actually has more opportunity today than they did a few years ago.

I asked that question to our portfolio team maybe two weeks ago, because obviously we're always worried about it and if we believe we can't earn alpha we're going to close it.

And the team came back and said, they believe the opportunity is quite large and they would not -- they would not -- they believe even -- managing over $100 billion would not be an issue for them.

But we always ask those questions; we have to make sure we're doing the right thing and the team is very confident of their model and the opportunities they have going forward.

They have also repeatedly said as a team that the information they get from the One BlackRock cross-fertilization is very powerful.

And so they're getting even more ideas in our platform.

We also have, and this is one of the products that has performance fees, we have a global macro hedge fund that they cross fertilize ideas from the hedge fund side to the mutual fund side to -- but their styles are different.

But just -- I think the flow of information in BlackRock has really given us those types of opportunities.

In both cases I think the global ascent fund, which is approximately $7.8 billion, could be way north of $10 billion.

And we hope that's some of our growth in the alternatives space.

And the global opportunity fund with our team, we're comfortable for it to be significantly larger.

Okay, great.

Thanks.

Glenn Schorr, Nomura.

Larry, I'm curious as the banks go through their increased risk weightings and adjusting to the new reality, does that create some opportunities for you on the reg arbitrage side to potentially offload some of their higher risk weighting assets?

You touched on it a little bit, but I don't know if that's a huge opportunity for solutions or a huge opportunity for BlackRock itself in the funds.

Well, I think some institutions are selling some of their balance sheets.

And actually if you look at some of the security firms, their balance sheets actually grow in the third quarter.

So, but -- I would say the greatest opportunity for us related to Fin Reg and Basel III is going to be on the solutions space.

I mean, we may have an opportunity related to asset flows, but we would participate alongside all the other investors.

So I don't think we'd have an advantage in any way.

But clearly institutions, especially in Europe, are -- we're involved in some significant conversations now with institutions who understand that they're going to need a much more comprehensive risk system.

And we're in dialogue right now, or in implementation, and we're in dialogue now -- we're in contract negotiation dialogue, that's how far along we are in some of these.

Good deal.

Switching over to performance fees, obviously good to see it come through in the third quarter through I think you mentioned eight funds, and you also mentioned fourth quarter is more of the main quarter.

Any way you could put it in terms of products or AUM in the funds that have eligibility?

Because with performance trending the way it's going you're just trying to get arms around how to model, that's all.

Yes, it's a good question.

I don't know if I have that at my fingertips, I'm going to ask Ann Marie to follow up on that.

But let me go over -- our whole view on this space, especially as we're talking to clients, we need to continue to build this out.

We need to show our investors, our Company and our clients that we have more than just a few products.

So we're going to have 10 or 12 key products that we could offer, they're going to be in equities, they're going to be in fixed income, they're going to be in global macro.

And I would like to say in the coming year that we actually have some real estate products.

We actually have -- our real estate platform in the UK has done great, we've had flows in there.

So it's not just a negative story worldwide; it's actually a stable story that's here in the United States and a positive story in the UK.

So it's -- all we can say is we're seeing more and more clients looking to barbell.

As they start focusing on the low tax, low rate environment they're looking to -- we're seeing more indexing of equities as a trend and of bar belling and more alternatives or more what we would call active strategies, active alpha strategies in equities.

Got it.

One last one.

Just a follow-up on this notice of nonperformance to the servicer and trustee that you may or may not be part of.

I'm curious on your thoughts on both the timing, meaning this issue has been out there for a good 18, 24 months now, and the fact that the underlying MBS markets haven't had a huge run.

Does that speak towards what you all think is the magnitude of the success or lack thereof of pursuing this?

I mean, I totally get the fiduciary duty part, but the fact that the underlying markets haven't gapped up and this is coming after 18, 24 months of being out there, does that mean anything?

Glenn, I asked that same question to a bunch of people yesterday, why now versus six months ago.

And please don't take this as a firm position, you're asking me of my opinion, I'm offering you my opinion on this.

I think it has to do with a greater -- first off, I'm told this has been something that's been discussed for months and months and months and months.

I think what happened was it got in the news because it was mentioned in another press conference.

But I think this was in the news, this was going on for months and months and months.

So I can't explain the timing of it yesterday.

But I do believe why it became much more of a lightning rod yesterday, it's all related or linked to the foreclosure issue that became a lightening rod three weeks ago.

I think it's just a statement that the mortgage market still has problems, it has a problem related to -- we have a really big problem as a nation with millions of potential foreclosures in our economy.

I think it also is a statement that if there are that many foreclosures, could some of those foreclosures been because of badly underwritten loans at the beginning?

So I think it's all linked and that's just my opinion.

And so I don't want to -- but I do believe -- but I do know that these conversations have been going on for months and that the lightning rod was this week.

Okay, that's great.

I appreciate it, Larry.

Jeff Hopson, Stifel.

Thanks a lot.

Larry, you mentioned the bar belling and I know you have a lot of products on the alternative side; flows there have been I guess neutral.

Any sense of when I guess the collection of buckets will move in the right direction?

Good question.

We reorganized that whole effort; we're hiring a team of specialists working alongside our generalists on this.

I think we did not see as many flows as we expected to.

Obviously we were working on integration and we needed to have individuals working with the manufacturing teams who have a much more close connection with the alternative space and so we're doing that.

We are actually seeing some good flows now.

And I do believe because of the performance that we had in the third quarter and a consistent year now going into 2011 we're going to start seeing some flows.

We're certainly having more road shows, we're certainly having more meetings on some of our key alternatives than we've had in the entire year.

Okay.

And fiduciary business, is that included in the pipeline?

Yes.

Yes.

Okay, because I've seen a couple of bigger wins that I guess haven't funded, is that --?

Well, some of them have, some of them have.

Okay, got you.

I think it's [next] year.

Okay, great.

Thanks a lot.

Roger Smith, Macquarie.

I guess I just want to go back to the discussions that you're having with the clients on re-risking.

What -- like after you have these conversations do they just look at you with a blank face or what's the problem?

Yes, some of them do.

Like what's -- what actually gets them to do something?

Well, I would say right now a lot of clients are frightened, they're not doing as much as they want and I think they're very worried because they see where the 10-year rates are and they know they're going to have a widening gap issue.

I think clients are in the introspection phase right now.

I've met with many public Boards and private companies' teams recently and these are the types of conversations we're having.

I think they know this is what they need to do if they're trying to achieve that liability.

In some cases some are going to say, well, we're not going to, we're not going to re-risk, we're going to create a greater gap, or we're going to have to find some ways of changing the benefits.

It's a very complex difficult question, it's not -- this is certainly not something that can be addressed in one meeting.

But they are looking for our advice, I'm sure they're talking to many other people.

We are seeing some institutions, I'm aware of a couple institutions that are in the process of really reducing their fixed income and they started a process of buying equities, global equities.

And so I'm aware of a few institutions that are doing that.

As I -- if you just look at the ETF trends you're starting to see for the first time this year where more money is going -- more money is going into equity ETFs.

So you're starting to see that change there too.

Okay, great.

And then on the DC platform, can you just give us an update on how ETFs could fit in there?

Sue, do you want to do it?

I think I would say two things generally about ETFs.

One is that on the DC platform critical (inaudible) is our target date fund, the LifePath portfolios.

And the LifePath portfolios use ETFs inside.

So that's one of the ways in which we're seeing those products get used.

We think there will be other opportunities that create products for target dates that will use ETFs as a [buy].

In addition, there has been an initiative ongoing to work with administrators, primarily I would say in mid- and small-sized plans, to permit ETFs to be used directly on those platforms.

And that I think is less of an impact today, but it continues to be what we're doing.

Okay, great.

And then just lastly on the BlackRock Solutions numbers.

Can you sort of give us an idea of what's going on inside there from a structured -- like a structuring fee or one-time fee level to what might be sort of an ongoing number so we can get a gauge on how that should look going forward?

Well, I think what we're seeing is -- you're seeing more longer dated business flows and less one-time advisory fee type of business.

The two -- one example is this one thing I said we were going into a contract negotiation right now, it began as a one-timer that is now migrating into a full fledged long-term assignment.

And so, the conversations on these longer-term assignments, Aladdin type assignments, are picking up.

And that's what we are trying to obviously migrate our clients to so we have greater certainty of our flows.

And maybe really just sort of repeating what Larry said, what I would say year to date this year compared to year to date a year ago, we have a much heavier mix of ongoing revenues than the advisory revenue.

They're both very important to us and I don't want to say we value more than another.

But a lot of the places where we did work on advisory assignments actually translated into ultimately ongoing assignments.

So I mean they're both very important to us.

And one often can translate into the other over time.

Great, thanks very much.

We have reached the allotted time for questions.

Mr.

Fink, Ms.

Petach, are there any closing remarks?

No.

Thank you, everyone.

This concludes today's teleconference.

You may now disconnect.