貝萊德 (BLK) 2011 Q3 法說會逐字稿

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

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

third-quarter 2011 earnings teleconference.

Our host 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 B.

Connolly.

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

After these speakers remarks, there will be a question-and-answer period.

(Operator Instructions)

Mr.

Connolly, you may begin your conference.

Good morning everyone.

Before Larry, Ann Marie and Sue 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.

And 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.

With that, I will turn it over to Ann Marie, our Chief Financial Officer.

Thanks Bob.

Good morning, everyone.

I am pleased to report that really, despite an adverse and volatile market in recent months, BlackRock delivered strong results in the quarter.

It's a confusing environment out there.

Clients more than ever are looking for advice and solutions in the face of uncertainty.

And BlackRock's diverse mix of business leaves us well-positioned to meet their needs.

BlackRock was able to provide tools and products that were especially important to investors in this environment.

We experienced large index flows in both our institutional ETF products.

The liquidity of these products allowed clients to react rapidly to the environment, and, more efficiently, move into or out of asset classes.

We generated inflows into multi-asset class products across each of our channels.

BlackRock is uniquely suited to meet the growing demand for these products.

We also saw clients getting into income oriented products in the face of the sustained low-interest rate environment.

Of course, we are not immune to the effects of negative market on AUM flows revenues.

While revenue is down from the second quarter, the diversity of our product set and clients allowed us to lessen the impact of the negative flow environment such that our flows were relatively flat in the quarter.

The nature of our cost base meant we were able to maintain strong margins as we balanced data-driven revenue effects with expense management.

In combination, this resulted in cash flow generation of $1.7 billion year-to-date and allowed us to return a large amount of cash to shareholders.

Larry is going to be talking a lot more about the environment, the flows we are seeing across our business and what we believe this means for our clients and for BlackRock, but first I will just focus on results themselves.

As I said, it's a good story.

Indeed for me, the key takeaway is that our performance in the face of really tough global headwinds illustrates the strength of BlackRock's business model, our diversified global platform, our broad mix of product and client capability.

Now I'm going to be referring to the slides in the earnings supplement.

You can find those on the website and as I go through results, I will be discussing primarily as adjusted results.

I am going to start us out on slide 1.

You can see on slide 1, on the right-hand side, our operating results of $849 million.

These were up 15% year-over-year.

That's driven both by revenue growth and margin improvement.

Third-quarter EPS, which you can see on the right-hand side, came in at $2.83.

Moving onto again the strong margins story, which you can see on slide 2, our operating margin came in at 40.1% in the quarter.

And that showed improvement of over 1.5 points compared to the third quarter 2010.

More importantly, as margin can vary a bit from quarter to quarter, our year-to-date margin of 39.6% also showed improvement compared to full-year 2010.

And, in the face of the lower revenue environment, our comp-to-revenue ratio was 34.2%, which is exactly consistent with the first and second quarters, and is really well within the long-term range we've been running of about 35%.

We believe this highlights our financial discipline and the variable nature of our expense base.

Just pausing for a second on the environment, and looking at slide 3, you can see that S&P declined -- everyone knows this --14% in the third quarter.

But when you take a look at average markets compared to average markets in the second quarter, the decline was 7%.

World markets fared even worse, driven by the European uncertainties.

While recent volatility of market declines are affecting AUM and investor sentiment, average markets in the third quarter were still 12% better than a year ago.

I'm going to walk through a comparison of the results of this year compared to last year, and then I will move on to sequential results.

I'm going to move ahead to slide 5.

And on slide 5, you can see that operating EPS was up $0.51 year-over-year, and that is the green bar on the page.

The growth in operating EPS reflected the 15% or $112 million gross in operating income that I mentioned earlier.

The EPS in the quarter also benefited $0.16 from our June share repurchase.

Earnings-per-share which you can see on the right-hand side of $2.83 included $3.12 of operating earnings in the dark blue, offset by $0.29 of nonoperating expense.

Our third quarter as-adjusted tax rate was 32.3%.

The GAAP tax rate was 13.7%.

And the GAAP tax rate reflected changes in the value of our deferred tax liability.

And those changes resulted from both UK tax legislative change and a US state tax election.

Since these benefits, totaling $129 million, were non-cash, we excluded them from as adjusted results.

I'm going to move ahead to revenues, which you can see on slide 7.

In the third quarter, we generated revenues of $2.2 billion.

That's up 6% from 2010 primarily driven by a 9% growth in base fees, which is the large green bar on the slide, and helped by a 16% growth in BRS revenue.

But before I get into base fees, it's really worth noting the benefits to our business model of our diverse revenue sources.

This quarter we generated $276 million of revenue or 12% of our total revenues from sources other than base fees.

Sources other than base fees are also contributing uniquely to our improvement in revenue.

So if you can to take a look at year-to-date revenue increases compared to 2010, we've improved $33 million in BRF, $47 million in sec lending which is a part of base fees, and $10 million in performance fees.

And while I just mentioned that year-to-date we're up in performance fees, during the third quarter, performance fees came in $91 million which were actually down $23 million compared to a year ago.

Our performance fees in the quarter included $51 million of fees related to alternative products and $40 million on long-dated products primarily based on relative performance.

A majority of our performance-fee eligible active equity products generated healthy performance over the measurement period.

So as a result of that, performance fees generated based on relative performance were actually better than a year ago.

At the same time, recent market turmoil, negatively affected the level of fees generated on our absolute return product with several of our large hedge funds now below high watermarks.

We do expect this to affect negatively the level of fourth-quarter performance fees compared to a year ago.

And then just BlackRock Solutions and advisory revenues came in the quarter at $117 million.

That included continued growth in our core Aladdin business as clients are seeking tools to manage risk in the face of this crazy, uncertain environment.

The growth in BRS revenues this year has come almost exclusively from ongoing core assignments which will continue to benefit the revenue base in 2012 and beyond.

So, now moving on to base fees, which came in at $1.9 billion and were the key driver to revenue increases up 9% from 2010 and laid out for you on slide 8.

We had revenue growth in all long-dated asset classes.

This was offset partially by the revenue effect of the exodus from low-yielding cash products over the past year.

The diversity of long-dated offerings across active and passive products serving multiple client types is one of our core strengths and has been key to the revenue growth.

And you can really see that across all the green bars on the bottom of page 8.

Moving on to expenses on slide 9, third quarter as-adjusted expenses were $1.4 billion, up only 2% from 2010 and remember, put that back into perspective of the 9% growth in base fees we just talked about.

And so that disproportionate level of increases is what's really contributing to the margin expansion.

As I mentioned on the last call, BlackRock entered into a lease for new office space in the city of London.

Last week, Larry was in the London office commemorating the opening.

The office brings into a single location all of our London employees and really enhances our ability to work together and serve our clients.

We are already seeing the benefits of being in a single space.

As a result of the move to this new office, we recorded a $63 million one-time charge related to the acceleration of the remaining lease obligations on our prior London spaces.

We have excluded this charge from as-adjusted results.

The charge was below the range I had mentioned on the last call of $75 million to $100 million and that was primarily due to the opportunity to sublease a portion of the space.

I'm now going to move on to sequential results, and there are 3 primary factors I would like to focus on as we get into sequentials -- the market effects on base fees, lower expenses, and the market effects on our co-investments.

Within your slides, I'm going to move ahead to slide 11.

Our operating EPS this quarter improved $0.03 from the second quarter.

Nonoperating expense increased $0.20.

The increase in non-operating expense reflected market driven, non-cash marks of our co-investments.

I will discuss that more in a minute.

I'd also point out that our share repurchase in June resulted in $0.10 incremental benefit to EPS compared to the second quarter.

On slide 12, you can see that in the face of revenue decreases of $122 million, we reduced expenses by $88 million.

And looking at slide 13, you can see that base fees decrease compared to the prior quarter by about $150 million where the key driver to the revenue decrease -- about one third of that decrease in base fees related to sec lending which is seasonally strong in the second quarter and the remaining related primarily to the effect of unforgivable markets on equity AUM which you can see on slide 14 -- the bigger red bars are all about the market effect on equity.

Moving ahead to slide 15, and at the same time expenses decreased $88 million.

That related primarily to the effects of lower AUM and revenue on compensation on distribution and servicing and on direct fund expense.

Management action led to lower G&A expense and that primarily was lower marketing expense.

Moving ahead now to slide 17, non-operating expense for the quarter came in $79 million.

That included $42 million of negative marks.

Those were primarily on our co-investment in distressed credits.

The spreads on those products widened significantly during the quarter.

It's worth noting that despite recent market declines, year-to-date marks on the investment portfolio are still positive $11 million.

Net interest expense in the quarter was $37 million.

The value of our investment portfolio was stable at about $1 billion, or $930 million when you exclude hedges or items which are hedged.

We see the 2 new retail products this quarter, which offset the effect of lower markets on the value of the portfolio.

Those 2 new products are for retail investors.

One is a hedge fund of funds in the US and the other is a European absolute bond return fund in Europe.

We believe these are both great opportunities that are strategically important for our retail clients.

I always like to remind everyone that we do not have any proprietary investments.

Our business model is to act as fiduciaries and to manage assets on behalf of our clients.

We're not in business to make money from our balance sheet and our investments on the balance sheet are extremely small.

The relative amount of investments we have are just alongside clients or seeding new product.

So, when we think of the size of what we do for our clients of over $3 trillion, again there is less than $1 billion sitting there that we are invested in.

Moving on to slide 18, I like to end by discussing our free cash flow.

I started out mentioning that in the beginning.

We continue to generate substantial cash flow, about $1 billion this quarter.

You can see on the slide $1.7 billion year-to-date.

That is up about $300 million from what we have produced year-to-date last year.

And including on the left-hand side of the slide, you can see that, including our recent repurchase of Bank America's remaining stake, our payout is 150% including a 43% dividend payout.

Really, despite declining and volatile markets, we delivered a healthy margin, we generated substantial cash flow, and we have returned a large amount of cash to shareholders.

Over time, our intention is to continue to return a meaningful amount of cash to shareholders while also reinvesting for future growth.

We're more confident than ever in our business model and our growth opportunity.

Our broad-based diversified platform allows us to respond to client needs, especially in this uncertain challenging environment.

With that, I would like to turn it over to Larry, who is going to discuss the market environment and what we are seeing with our clients.

Larry.

Thank you Ann Marie.

Welcome everybody.

I'm sitting here at the Plaza Hotel in New York City.

We are, at this time, having a conference with over 250 of our clients.

Our clients are confused.

Our clients are really asking quite a bit of questions right now.

This is a 2-day affair and it's going quite well.

But, it's obviously very clear to all of us that the global market have been very challenging and it's producing some real stress with many of our clients.

You're witnessing record low yields which changes the value of their liabilities, we are seeing declining equity markets and their gap between their assets and liability.

In some cases, they may be irretrievable.

They may not be able to ever achieve their objectives.

In most cases, I think investors will do that.

And they will find ways to make it.

But they are looking for solutions.

It's going to be solutions that are heavily based on advice by BlackRock, and I do believe we are in probably the best position to provide that advice, because we are agnostic related to our clients.

If they are looking for passive strategies alongside alpha strategies, global strategies, domestic strategies, with an overlay of risk management, there's no firm in the world that can provide that.

And the information content that we are able to provide because of our footprint has been very helpful to our clients.

As we reflect on the third quarter, as we help our clients digest all this, the third quarter was obviously very challenging.

It was exasperated by governmental policies worldwide, not just here in the United States.

Politics and government are playing a major role in market performance and market volatility.

Long-term investing has become more difficult as a result of this.

When government focuses on short-termism -- when government focuses on blogs, when government is not focusing on how to best prepare an economy over a long cycle, it becomes really difficult for investors to focus on long-term investing, too.

And this is one of the greatest issues that we are trying to confront with our clients.

How do you manage these short-term issues, the extreme volatility, this enormous uncertainty, but focus on long-term investing.

This is not an easy answer, because some clients who may have 10-year, 15-year, 20-year liabilities, they may be judged by their shareholders or by their board or by their pension fund committee by quarterly results; they may be judged by annual VAR, if you are an insurance companies, and that's how your regulators look at you.

And so there's an incredible mismatch, and it's at, in my mind, severe proportions right now, how accounting is forcing unbelievable short-termism.

So we have the problems of accounting and governmental policy that, in my mind, is causing this great disruption in our pension funds, and great disruptions in our marketplace as fewer and fewer people that are able to cope with long-termism.

With governments not focused on the long-term and with governments, in many cases, just doing the wrong thing, we have many clients worldwide who are confused, frozen, and looking for answers.

But the markets are testing governments, and we see that -- we saw that all throughout the third quarter, how the market has tested the European situation continually.

It's the incrementalism of the Europeans that really have tested the market and the markets have resoundedly been pretty negative with this incrementalism of trying to fix the problems in Europe.

Hopefully, this weekend we will see something more than short-termism, hopefully more than incrementalism, but a grand solution.

A good example of what I would call government's failure is the European stress test, where just 10 weeks ago, the governments indicated in their stress test results that a bank like Dexia, a client of BlackRock's, had capital of 10%, tier 1 capital of 10%.

Only to have that bank nationalized a few weeks ago.

And it's that sort of information and problems is really unsettling to the marketplace.

I don't need to tell you that, but to me, this is just a glaring example of how government has really unsettled the marketplace.

We just can't understand how they could have an institution that is cited in the top 10 most capitalized banks in Europe, then weeks later, nationalize it.

It just doesn't feel right, and as a result, people are de-risking.

And if you look at our flows, the most amount of de-risking in flows that we have seen in our high-C business has been in our European mutual funds which I will talk about, where we saw the greatest amount of outflows because of fear in Europe, because of things like that have been the most severe.

Worldwide, clients are de-risking.

But I need to remind clients and I need to tell everyone that this is not 2008 and 2009.

This is a confidence crisis, not a liquidity crisis.

There's trillions and trillions of dollars sitting on the sideline, as we know, that's why we have such low rates.

And if we can have a sensible, longer-term view beyond the next blog, if we can have a sensible long-term positioning in fixing these problems, these structural problems in Europe, and our budget deficit and growth issues and job issues of the United States, I do believe investors would rush right back into the marketplaces and we would have a very strong markets, which would then, in my mind, would propel the economy to higher growth rates.

During the third quarter, we had substantial declines in the global equity markets, as Ann Marie discussed.

S&P was down 14%; the European blue-chip index of stocks was down 23%; the MSCI emerging market index was down 23%; the Hang Seng was down 21%.

If you think about that, investors who diversified their portfolio, thinking that was the right thing, it has produced even worse returns than those who stayed totally in the United States.

As a result of market instability and this lack of confidence, clients worldwide have de-risked, they are delaying investment decisions, and that is what drove the negative flows across the industry and across the globe.

Clients are now asking questions about how should they be reviewing their liabilities in light of these large declines, and we expect renewed activity very shortly.

But we are not going to have, what I would call, normalized flows until we have -- our clients have a better understanding of their liabilities and that will then determine how they than manage their assets and their duration.

Let me talk about BlackRock.

Ann Marie really did a great job in talking about our earnings and the texture of our earnings.

As report noted that we did have negative flows, much of it was related to -- totally unrelated to our merger.

We don't have any merger-related outflows.

In our pipeline, a significant change was related to a client who in-sourced $30 billion-odd of index business basically and so -- but what I think the quarter really showed, and which really gave the leadership team of BlackRock great encouragement, is our business model has proven to be an incredible differentiater.

We have growth businesses that we have not seen in a long time, the diversity of our business model has really produced what I would call very good revenue flows and importantly, very good operating income ratios.

In these periods of uncertainty, and volatility, we are really well-positioned today to serve our clients.

I think this is one of the great feelings we have yesterday and today with our clients here, and we are seeing that repeatedly worldwide as we are working with more and more clients related to what we can bring to them.

And we are seeing, as the information showed in our third quarter, we are seeing a huge increase in requests for BlackRock Solutions products as clients are trying to truly understand how to navigate their risk on a global basis.

But what impressed me related to our quarter, and what we are really pleased with is that diversified business model.

We had growth in BlackRock Solutions, growth in sec lending, in transition management, which is becoming a bigger business as clients are trying to reassert how they should position their portfolio, there is much more transitioning being done, and BlackRock multi-asset class strategies where clients are looking for much more comprehensive solution-based assignments.

And this is what is driving this 9% year-over-year increase in base fees.

Even with these really difficult market headwinds, we saw continued organic growth across global iShares.

We saw, actually, growth in our US retail channel.

We had growth in our defined contribution channel and as I said, in our multi-assets class offering.

In multiclass offerings, we had over $3 billion of inflows, across almost every channel.

We are expanding the product range now into our retail products, not just institutional products.

And it came across in almost every category from alternatives equities to fixed income.

And clients are increasingly looking for strategies that rely on indexing or ETF products, as bar-belling and multi-asset class strategies are what clients are looking for and, as I said earlier, no firm has that product mix.

No one has the research in terms of how we can best position our clients for these complex multi-asset class strategies.

The other thing about the third quarter we needed to make sure -- we needed to find ways to continue to grow because we see some great growth opportunities.

But we needed to make sure that we were pretty disciplined.

As we did in terms of the market setbacks of '08 and '09, we were very disciplined and ahead of the curve in terms of what we had to do.

We remain to be very vigilant in terms of making sure where we spend our money, we spend it well.

The areas that we continue to invest, even with our margins above 40%, we were investing in our retirement solutions, we invested more in alternatives, we invested more in ETF, and importantly, we have been able to invest in some very high caliber professionals who will help fuel our future growth.

A good example is Mark McCombe who is the new head of Asia Pac who will be joining us at the end of the fourth quarter.

Another great example of our investing to making our better platform, as Ann Marie discussed, opening of our London new office.

Since our merger, we were operating in 2 different offices.

And we did move people around but it was certainly not the best of circumstances to really grow one BlackRock.

Everybody is in one common building today in London, and now our London office happens to be our largest city location in the world, bigger than our corporate headquarters in New York.

And so things like this are obviously a cost, but we expect these costs will really generate more continuity, hopefully better performance as our portfolio managers are all together.

But importantly, better dialogue amongst our teams which will produce better dialogues with our clients, which would produce more opportunities for our business.

As Ann Marie suggested, we continue to generate a lot of cash flow; $1.8 billion year-to-date.

We have a long history of returning capital to our shareholders and this year we already increased our dividends, I need to remind everybody, at 37.5%.

We've repurchased $2.5 billion of shares as recently as June.

And I can tell everyone today we will continue to take appropriate steps to be well-positioned to capture opportunities.

I am here to tell you, I don't know of any opportunities at this moment, so I'm not here to suggest and I'm not trying to forewarn that I know of anything going on, but we will be well-positioned if there are opportunities to do things.

And obviously, when it is not until the first quarter of the new year where the board of directors would look at our dividend policy.

So, let me go over some of the businesses in the texture of the industry and BlackRock.

Let me start off with retail.

Our US retail business had positive flows, which was unusual in our business, and while Europe and Asia saw de-risking.

For a reference point, US mutual fundsex-ETFs had $48 billion as an industry in outflows in the third quarter.

BlackRock had $1.8 billion of inflows globally, but we had long-term flows of $3.5 billion.

Our US retail saw positive long-term flows in the third quarter, about $2.6 billion, really concentrating on some of our unique products, global allocation, our equity dividend, our high yield funds, and this is where we actually believe more and more growth will go.

We are seeing more and more people questioning core fixed income, where fixed income is only producing 2%-ish-plus returns and what is the future of rates going forward.

So clients are asking for solutions, whether that might be in more high yield solutions, there could be in other types of credit solutions, dividends as a solution preferred, and these are some of the things that we are trying to really position BlackRock to handle our clients needs.

Cross-border, or the European flows, as an industry, had $28 billion of outflows, and we had, as a firm, about $6 billion of outflows.

As I said, that's where the great de-risking was worldwide, especially in the mutual fund arena.

Despite the $6 billion of outflows, we actually picked up market share, though.

So we lost less than the industry as a whole.

So, the third quarter, despite all this noise, has told me we are picking up market share.

We continue to position ourselves and we are continuing to be innovative in terms of creating products that our clients need in this new paradigm.

Let me talk about global iShares.

We had, in the quarter, $10.8 billion of net new business.

We had really positive flows in Europe, and flows in the US.

As an industry we saw about $28 billion of flows, as an industry.

But I should give a little more texture -- the flows were significantly in July.

And the industry did see significant slowdown in flows in August and September.

As you are seeing, that capitulation and that uncertainty even in the iShares product.

In EMEA, we had $10.8 billion of global flows -- I'm sorry, in total, but EMEA was $6.5 billion of flows.

Investors are looking for safety in the region, particularly in Germany.

And importantly, we are as well-positioned in Europe as we ever have been in our ETF space.

There's a great amount of consternation and confusion in Europe related to ETNs or exchange-traded notes, which are derivative-based products.

There are some regulatory review of these types of products.

There are many platform distribution platforms that are now forbidding these sales of ETNs.

And as the largest provider of ETFs in Europe, we have been a huge beneficiary.

I don't expect these market shares to persist, but in the third quarter we picked up 80% of the net new business in Europe in the third quarter.

We do believe though, in the United States, in Europe, we are going to see substantial regulatory review of these products.

We have been very assertive in our statements that clients need to understand what they are buying.

There needs to be greater transparency.

There is a big difference between a physical ETF and a derivative-based ETN.

In derivative-based ETN, you have credit exposure with that issuer.

Some of these issues may be very fine credits, but the disclosure of what you are buying, what is the underlying product, is pretty opaque.

And we are suggesting to the SEC and to other regulators as they think about ETFs in the future, that we have much greater transparency, much greater clarity in terms of the product.

We have always been pretty rigorous in terms of making sure that clients understand that ETFs should be physically based.

Obviously, in some cases, they're going to have some hedges or some derivative based around it, but we need to have -- even some of our products that where we have 80% physical and some derivative-based, that we need to have much clarity.

So as ETFs have grown, no different than what we saw in the mortgage market in the 80s, and then in the 90s and in this decade, a simple product morphed into something that was very complex and risks were contained in these products that maybe investors did not know.

That was the failure of the mortgage market.

As one of the founders of the mortgage market in the 70s, 80s and watching the failure of disclosure in that market occur, we need to be very assertive as a firm and outspoken that we will not allow at BlackRock the lack of disclosure on these products.

We believe these products can have a huge future and we need to be a lot more assertive making sure that risk and complexity is understood by all investors.

We are trying to bring down the risk of ETFs.

There is great amount of noise about it, there is a hearing today in Washington about ETFs, and we are trying to take a very large position on terms of making sure these products grow, this industry grows, and I would love for some of my peers to be as assertive as BlackRock in making sure we have a great industry and a great product going forward.

In the Americas, we had $4.6 billion of inflows.

We saw investors shift to fixed income in the US, offset by some outflows in equity ETFs.

We are not happy with our US results and we are addressing it.

We put in place a new global leadership team under Mark Wiedman stepping up as the global head of iShares in September and this is consistent with the steps we took to address the performance problems we had in SAE or scientific active equity, which is now paying off, which is actually one of our highest performing products this year.

As we reinvested in that product because we believed in it, obviously we were building a bigger, finer, great team.

We are adding more teams to our ETF platform and we believe, with Mark's, and all our great leaders of our ETF platform, we will once again reassert our market share in the United States.

We continue to innovate in the ETF platform.

We launched a few commodity and fixed income products in Europe.

Our tactical allocation ETF product is garnering a lot of attention.

We believe more and more tactical allocation products are going to become larger and larger as we witness from our global allocation mutual fund as one of the fastest-growing mutual funds.

Institutional, the picture is mixed.

We saw clients de-risking while others took advantage of the steep market declines and were forced to rebalance.

It really depends on some of our clients' needs.

If a client did an LDI in 2003 and they're sitting with 6% long-dated bonds, they were less stressed than those companies that were under-invested in fixed income, in terms of having their core interest-rate that they were looking for, and now with the reduction in interest rates are sitting with some big gaps in terms of their income needs.

Total long-dated outflows for BlackRock was $17 billion driven by a single outflow in a passive fixed-income strategy for our particular clients' liquidity needs.

It had a de minimis revenue impact for us.

And we continue to see modest outflows in our SAE.

But we have enormous amount of dialogue now and we believe, because of the performance over the last year in our investment in our SAE teams, we are going to start seeing new inflows.

Quite frankly, many of our peers got out of this business, and we're one of the few organizations that stayed into it, reinvested in it and, as I said, we stabilized it, we are seeing still some modest outflows, but the conversations we're having now with clients gives me a good feeling about the future in terms of the inflows there.

As I said earlier, our [insigent] clients are really struggling with the low interest rate environment and the declines in the equity markets.

We are seeing very unusual behavior by our clients.

Clients are looking for help and that's what we are trying to do.

Our performance, as I said earlier in quant and multi-asset products was strong and I'm very encouraged by our equity performance and its positions well for the future.

As I said earlier, low interest rates is going to have most probably some structural changes in fixed income in the next few years as an industry.

It's very hard to see how interest rates are going to continue to go lower to produce more than the 2.5% returns that we see, as we see in the market today.

And so what we expect clients to start re-looking at within fixed income, this is a lot of trim business.

They are going to go moving from maybe core types of fixed strategies to credit strategies; they are going to go into a go-anywhere strategy in fixed income; some of them may go into preferreds and other types of securities.

We expect out of the European situation -- we hope to see a large amount of preferreds being issued by banks as a means to recapitalize, although at this moment, preferreds are not considered tier 1 capital in Europe.

Hopefully, that will change as banks are trying to lobby their regulators as they are going through their stress tests again, as they're trying to achieve a 9% tier 1 capital charge.

At these low equity rates, it would be very powerful if the regulators would allow preferreds to be tier 1, perpetual preferreds I must say -- perpetual preferreds to be tier 1.

I believe there would be billions and billions and billions of dollars of interest in the world for that as bond investors meet coupon or in this case dividends.

The pipeline was confusing.

We had this big outflow that Ann Maria talked about.

I mentioned it earlier, where a very large client of ours is internalizing a $30 billion-plus mandate.

They are doing it for cost containment, and so this is something that will probably happen mid-next year, but we are giving you an advance word.

This is not going to happen in this quarter, may not even happen in the first quarter, but we have been told this will happen sometime mid-next year.

But despite that, we have seen some very good flows and what I am also particularly excited about, we are seeing good flows in what I would call long-dated products, higher fee-paying products.

We are continuing to see some real opportunities in our alternative space.

We did have outflows in our currency type of products.

And that's related to the big swings in dollar or in euro.

But we did have to offset that $1 billion inflows of our commodity products which totally offset these currency types of outflows that we saw in the third quarter.

BlackRock Solutions, I just can't say enough of how this is helping us in the positioning in the new paradigm.

During the quarter, we were hired by the National Bank of Greece, so we're inside working with the regulators of Europe, and Greece to try to help them understand and ascertain the situation there.

This is a similar assignment that we won in Ireland earlier in the year.

We are working with more European banks than we have ever done in our platform.

We have more opportunities in the Middle East, more opportunities in Asia than we've ever had before.

In the quarter, as we noted, we have 13 new assignments.

These are offsetting a lot of the one type of assignments that we had.

This is totally offsetting the consistent reduction in our outstanding of advisory business, as some of our clients are bringing down some of their troubled, assets, and so this has been an extraordinary year so far for us.

And more importantly, we are starting to see much more stickier revenues in our solutions business as we are winning more and more Aladdin-like assignments.

We continue to have dialogue with a few substantial Aladdin assignments.

The last thing I would say about Aladdin, we are implementing our first Aladdin assignment that is not just fixed income, but it is now equity and fixed income.

This is what we believe will become a cornerstone of our growth as our equity modules are as industry first class as our fixed income modules in our risk management.

Lastly, as I said earlier, we continue to invest in our platform.

I mentioned hiring Mark McCombe in Asia, but we hired Mark Taborsky in our BlackRock multi-asset class strategy.

And we are very excited about the individuals that we are seeing who are looking to join our firm.

We have never enjoyed such a position in which we could hire industry leaders to help us build this platform.

This is across region and across product.

In summary, I know I've been talking a long time.

We are really uniquely positioned for this environment, I think better positioned than any organization that I know of in the industry.

With the persistence of volatility in our market places, with low interest rates, a low growth environment, all our investors are reevaluating their investment strategies and asset allocation decisions.

We hope we are in that position to help our clients, that is our number 1 job.

Our job has to be an ally and we have to be there working alongside with our clients.

We have a challenging world of demands, a better and a more robust range of solutions.

We have higher demands that we provide value-added advice, better risk management tools.

And so the demands on our time are growing and that is why we have to continue to invest.

So in summary, we're pretty well positioned here.

I would like to thank all the employees for working with our clients, helping our clients, and producing the results that we did in the third quarter.

I will open it up for questions.

(Operator Instructions)

Glenn Schorr, Nomura.

Obviously, a brutal quarter for the markets, and I can understand the outflows.

Now the markets have bounced here in October, so far.

Have the clients settled down, as you said, as the outflows calmed down, or is that just an ongoing process that takes a few quarters to run through?

Really depends on the situation.

In some of our inflows and some of our pipeline, we had a very large international client that, actually in spring, took $12 billion out of the marketplace, and most recently added I think -- I know $2.6 billion is in our pipeline.

But they are starting to reinvest back into the marketplace.

And so we are seeing -- we had another big fund that did the same thing in spring and then put $5 billion -- that's in our numbers.

It really depends on the clients; those are the more international ones.

I would say the pension fund, the insurance companies -- I don't think they are paying attention to the 1 week, 2 week market movement.

They are going to committees right now, they are asking us to help.

We actually have a lot of presentations with our institutional clients in the next month or so to try to help them come up with a strategy, working alongside their consultants.

So it really depends on the situation, as I said.

If some of those clients who got out of the marketplace in spring or late spring, early summer, we are seeing those clients coming right back in right now.

It really depends on the situation.

Got you.

And maybe I want to get your thoughts on Volcker.

I know it's a long process ahead of us.

But in general, the way I see it is, most of the implications actually have a direct impact on you and your clients, just by potentially removing liquidity from the system and increasing the cost for you to interact on behalf of your clients.

Just curious on A, if you agree with that, and B, how BlackRock response to the regulators.

We love our regulators.

A., there is no question, it is not just the Volcker rule.

The Basel III -- as banks are going to be required to have much more capital, the utilization of their balance sheets are going to affect everybody.

The spreads are going to be widening because of these institutions are going to need to make some form of profit for putting their balance sheet in front of you.

This is one of the reasons why we have been very rigorous in spending a lot of money building our trading platform to cross trades for our clients.

This is one of the actions that we are doing and we continue to do that and we are continuing to build it, and so what we are trying to use, that scale of ours, to differentiate us with our clients, and hopefully to reduce that friction cost that we are going to see in the marketplace, and so this is something that we are quite sensitive on.

In terms of interaction with our regulators, we are actually having some very good dialogues with the regulators.

We are trying to be above the line with them and really working with them in terms of trying to help them understand the difference between asset management and organizations that work on their own balance sheet.

We are trying to make sure that in their conversations related to ETFs, they understand the difference between ETFs and ETNs.

We have been very rigorous in terms of -- and an outlier in the industry, in the money market fund industry suggesting that capital should be put into place to buffer any -- declines.

We do believe regulators are going to begin to focus on the money market fund industry, because I do believe, from every regulator I speak to, they believe money market funds do present risk in the system.

And, there's going to have to be some ways of protecting the system.

And so we are trying to work with regulators in terms of understanding the type of risk that is presented at how best to effectuate and minimize that risk.

In terms of everyday business, until we really get more dialogue, Glenn, and more certainty of how they are going to implement some of these strategies, it's hard for us to say how that will further impact BlackRock or how we work with our clients.

But it is moving, it's a moving dialogue.

And I can promise you, we are involved in the dialogues with the regulators, when they want to hear our opinions, we are offering them as loud as possible.

I think as you know, we do have an office now in Washington, working alongside with our regulators.

That happens to be one of our biggest businesses now, working in Washington.

It's a core competency that we have to work with our regulators and working with our politicians to help our investors.

One thing I said to our investors at our conference, we are one of the lone sheep working with Washington in trying to protect investor's interest and investor rights.

Thanks very much.

Craig Siegenthaler, Credit Suisse.

First, just to start on the margin.

I'm wondering, was there any impact from performance fees in helping margin in the third quarter maybe hurting it?

And then as we walk forward into the fourth quarter, if we see flattish margin returns through December 31, what should be our expectation for the margin going forward?

Craig, on the first one of those, whenever we have a quarter with performance fees, we usually get a little bit of margin boost from that because other than the payout of revenue shares, really there is not incremental expense associated with generating those revenues.

As far as the fourth quarter, what I said in my comments, I really said, focus on the year-to-date margin when you are thinking about margin.

I think every quarter, the margin can move around a bit.

But I just think in that range, as far as -- that's what we have achieved year-to-date, that's what's going to drive the full-year margin, and all things being equal, we should be delivering something.

Now, we know the margin can vary widely based on changes in market and levels of performance fees.

And those are 2 big unknowns.

Thanks.

And also on the pipeline for funded -- excuse me, won but unfunded wins, was the decline there in your view, and it sounds like it is, more cyclically driven by investors reacting to what has just happened in the market over the last 3 or 4 months and differences between the assets they are investing and the duration of their liabilities, or is this more of a structural issue?

I think this is more of an environmental issue.

So, as you just described it, I think this is a period of time that the pipeline and flows get affected as people have to pause and reconsider what is the right action.

Great, thanks for taking my questions.

Bill Katz with Citigroup.

Let's stay on the regulatory front and Larry, in your commentary on some of the liquidity business, what I'm hearing is that the Squam Lake proposal seems to be down on arrival and so we are back to the drawing board.

You mentioned capital buffer in your prepared remarks, talk a little bit about how you see the most likely course for reform on a go-forward basis and what the impact would be on the economics of the business?

Sue?

Bill, on the money market reforms, as you know, we've been going back and forth around a variety of possibilities.

So the Squam Lake proposal is one that's interesting, although I think the discussions most recently have focused on whether or not it's really practical, given that it requires subordinated capital to be raised for each fund for each issuer.

So I think -- at the same time, we're not really hearing the capital buffer is favored either.

So I think the regulators are still engaged in an active discussion with industry participants and we are very much at the forefront of that; we have been helping think through different alternatives for how we might support this business.

And as you know, and as Mary Shapiro testified before Congress, floating rate NAB is still out there as a possibility as well.

And there will be -- if that comes to pass, the business will find a new level but it will still be a valuable business for investors.

We continue to work with them.

There's not a lot of clarity out there on it.

Okay, that's helpful.

My second question comes back to ETF business.

I think BlackRock filed with the SEC a few weeks ago, maybe a month or so ago, to get into the act of the fundamental side of the business.

And seems a little bit of a sea change relative to the cap weighted business.

Talk about, maybe the philosophy and the reasoning behind that?

Does that pertain, embedded view about the cap weighted side of the business?

Again, Bill, I will try to answer that.

I think that we want to have the flexibility to provide investors with a wide range of products off a wide range of indices.

We also have a view that there are opportunities, both in fundamental weighted indices and as you know from that same filing the opportunity potentially to create our own indices to be able to offer clients products that might be more tactically used by them in asset allocation.

It's part of a broader range of possibilities.

I think as you also know the SEC -- the registration processes take a long time.

So, part of this is just widening out our capability to offer a range of product to clients.

I would say Bill, we do not believe actively managed ETFs will be anything close to the scale of the market-based or index-based products.

But we do believe that clients are going to be looking for lower cost solution, whether that is multi-products, they're looking for liquidity, and so we are going to explore and expand in those product areas, but our expectations are that it's not going to be driving massive growth, but it will be more incremental.

That's helpful, thank you very much.

Cynthia Mayer, Bank of America.

Larry, in terms of how the institutional investors are reevaluating, going from core to credit, you mentioned possibly, or maybe to preferred, looking at new products -- would any of this have any impact on the mix shift and the fee rate?

Or do you see it more as a move among similar price products?

And in general, do you see institutional clients still going to passive over active?

It really depends.

So, A., I think you're going to see a huge movement into indexation of bonds.

Much lower fees.

As I said, if you don't believe interest rates have that much further to go down over the next few years, you're only earning a few hundred basis points of return, and so we are going to start seeing other -- we're going to see clients looking to use beta as a bigger flow.

You saw that in ETF flows over the last quarter, so we continue to expect that to continue.

We are seeing more and more inquiry in high yield, and more and more inquiries in the higher-yielding fixed income products, whether it is in Europe or the US.

Once again, it's more barbelling.

Indexing obviously is a lower fee, higher margin result, and the credit and the other types of products are going to be higher fees, in many cases lower margin business.

I think we are going to be as best positioned to handle that and take that in.

I should remind everybody, indexation, even institutional indexation of fixed income is not like indexation of the S&P.

There are thousands of bonds in the Barclays index or other fixed-income type of indexes.

You have to have a lot more technology to replicate the movements of fixed income to get close to an index.

It's much harder for institutions to internalize fixed-income indexing.

We look at that as -- even if institutions went that way, we would expect to be a huge beneficiary of that.

The second thing, in terms of equities, we are going to continue to see more barbelling.

As you saw the flows, people were de-risking in core type of products; they were going into more specialty type of products.

They are going into more alternatives and they are using as a baseline a foundation --they are going into index.

It really depends on each client's issues, where they are with their liability, what is their horizon.

But I think it is very clear across the board, investors are looking for some form of advice.

Okay.

And then just briefly on expenses in [Arrow 1], it looks like excluding the UK charge, G&A dropped.

Or actually, it was lighter than what I expected.

What are the trends there, and I think you mentioned marketing.

How sustainable would cost control be in G&A?

You're right, the key driver in the decrease was marketing.

And I actually think it's been great.

We've had Linda Robinson coming into the firm, and what she is bringing in is really looking across everything we were doing.

Really, we were duplicating ourselves, we weren't always spending our money as efficiently to get our messages across clearly.

And so we actually expect going forward to be able to do more with less.

We have reached the allotted time for conference.

Mr.

Fink, you do have any closing remarks give her

No, hopefully the markets continue to improve and stabilize in the fourth quarter.

I think we are all waiting to hear what Europe has to tell us this weekend related to this new round of stabilization in Europe by the authorities and politicians in Europe.

It is my hope that we find a stabilization.

I have to remind everybody, if Europe does find a way to stabilize its future, it will put all the pressure on to the United States to make sure the United States now focuses on a long-term solution.

I don't think volatility is going to be going away this quarter.

But I do believe the opportunities ahead of us and ahead of BlackRock are even larger than ever before.

Thanks, everyone.

This concludes today's conference call.

You may now disconnect.