貝萊德 (BLK) 2012 Q1 法說會逐字稿

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

At this time I would like to welcome everyone to the BlackRock Incorporated first-quarter 2012 earnings teleconference.

Our host for today's call will be Chairman and Chief Executive Officer, Laurence D Fink; Chief Financial Officer, Ann Marie Petach; and General Counsel, Matthew Mallow.

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

After the speakers remarks there will be a question and answer period.

(Operator Instructions)

Thank you, Mr.

Mallow you may begin your conference.

Thanks very much, this is Matt Mallow, I'm the General Counsel of BlackRock and before Larry and Ann Marie make their remarks, let me point out that during the course of this conference call we may make a number of forward-looking statements.

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

BlackRock has filed with the SEC reports which lists some of the factors that may cause our results to differ materially from any forward-looking statements we make today.

And finally, BlackRock assumes no duty and you should not expect that we will undertake to update any forward-looking statements.

With that I would like to turn it over to Ann Marie.

Thanks, Matt good morning, everyone.

Uncertain markets continue in 2012.

Markets began the year strong globally, buoyed by hopes for stability in Europe and positive economic data in the US.

However, the mood remains fragile and some of those initial gains have sold off as confidence and mood vary with each new data point.

You can see that just in the last two days.

The initial market improvement and investor activity supported BlackRock's strong first-quarter results with EPS up 7% compared to a year ago, and 3% compared to the fourth quarter.

Our financial performance highlights our strong focus on our clients' needs and our ability to work with them supported by the breadth of our product set, our global presence, and our unmatched risk tools.

These strengths uniquely position us to meet the diverse needs of clients in this complex and ever evolving market.

As seen in our branding campaign, BlackRock is focusing on products and solutions that are especially important to investors in this environment.

And, this alignment with client needs is supporting our flows and our revenues.

Our five client focus areas drove our net new revenue for the quarter.

We expect them to be substantial contributors to our organic revenue growth throughout 2012.

At the same time, we saw the out flow of the previously identified $36 billion, low-fee fixed-income index mandate related to a single client who insourced that asset.

The revenues associated with this mandate was about $4 million.

Despite starting the year behind on high water marks strong performance in the first quarter allowed us to maintain stable performance fees compared to the first quarter of 2011.

Our cost base is benefiting from actions we took in 2011 and supporting our margin.

Supported by strong cash flow, the Board approved the 9% increase in our first-quarter dividend and increased our share repurchase authorization back up to 5 million shares.

In the first quarter, we repurchased 648,000 shares for about $125 million.

The key takeaway for me is that our breadth and diversity have positioned us well for organic growth and ability to perform well in various market environments.

With that, let me quickly walk you through the results.

As I make my comments I will be referring to the slides in the supplement which you can get from our website and as usual, I am going to be talking primarily about as-adjusted results.

I've already talked about the trends, so I am going to move us right ahead to slide 3.

Our first-quarter operating margin was 38.6%.

The margin improved sequentially when you adjust for two items.

First of all, we had seasonally high performance fees in the fourth quarter of 2011, and second of all the first quarter had seasonally high employment taxes.

Sequentially, the margin reflected the benefits of the lower base comp resulting from the restructuring we did last year so this is partially offset by a sequential increase in marketing associated with our commitment to the brand.

Our comp-to-revenue ratio of 36.2% was consistent with the long-term range of 35% when you normalize for the seasonal payroll taxes.

Taking a look at markets as shown on slide 4, the strong recovery in all global markets benefited every -- all asset classes since the fourth quarter and you can see that on the right-hand column of the page.

I am focusing on average markets since the majority of our equity fees price daily.

Then if you look at the second column in, although markets are up compared to the fourth quarter, compared to a year ago the story is quite different.

US markets are up on average 3%, but world markets, as seen in MSCI, European markets, emerging markets, Asian markets, are still between 4% and 9% below the first quarter 2011.

As a result of the diversity of our equity business, about a half of our equity AUM is tied to non-US markets.

These mixed-market results obviously impacted our revenues compared to a year ago so created headwinds for us coming into the year, though new business with clients and other revenue strength helped to buffer the headwinds associated with these market effects.

I will start with a comparison of results to a year ago then discuss results compared to the prior quarter.

On slide 6, you can see that earnings per share of $3.16 included $3.10 of operating earnings and $0.06 of non-operating income.

EPS benefited from growth in long-dated assets, expense discipline, and share repurchases.

The first-quarter as-adjusted tax rate was 31.5%.

This sequentially is a half a point improvement and this reflected the positive effect of state and local tax legislation and those benefits will continue for us going forward.

Operating earnings of $825 million, which you can see on slide 7, reflected expense discipline and improvement in long-dated base fees.

Our business model benefits from diverse revenue sources.

We've got a revenue slide laid out for you on slide 8.

First-quarter revenues were $2.249 billion.

This includes about $2 billion of base fees, $80 million of performance fees, and $123 million of BRS revenues.

Flows into most long-dated products helped to drive growth in long-dated base fees.

At the same time, low rates and regulatory uncertainty have been a drag on our cash products.

As I mentioned before, strong performance in the first quarter allowed us to generate performance fees that were comparable to 2011.

And while our performance varies by funds, the gap to high water marks for some funds was eliminated completely and for other funds was narrowed to a couple of percentage points.

We also continue to benefit from strong performance on our traditional products which generated $28 million of the total performance fees.

BlackRock Solutions and advisory revenues of $123 million were relatively stable compared to the first quarter of 2011.

An almost 20% increase in our core '11 revenues was sufficient to offset, first of all the non-recurrence of a larger assignment in the first quarter of 2011, and secondly, the successful disposition of assets from our advisory portfolios.

The $49 billion decrease in advisory assets compared to a year ago was driven by dispositions which have broadly benefited US taxpayers.

The appetite for BRS remains strong both on the Aladdin -- the advisory side, something Larry is going to talk more about.

Despite the effects of negative world equity markets, first-quarter base fees which you can see on slide 9, on long-dated assets are up compared to 2011.

This is driven by clients putting assets into income, multi-asset, and index products, and two, an improved sec lending environment.

Just to note a few highlights, revenues on multi-asset class products are up 11% compared to a year ago, and to put the growth of iShares revenues into perspective, the revenues are up 7% from the first-quarter of 2011, and up 28% from the first quarter of 2010.

The only long-dated asset class with a notable revenue decline compared to year ago is Active Equity.

And that is explained by the flows out of quant products over the past year.

Given our strong performance on these products, and really on a three-year basis we are now 80% above benchmark.

We continue to believe that this trend will reverse itself and as a matter of fact, the quant outflows were at their lowest level in a single quarter since the BGI merger.

Compared to a year ago, we also saw about a 20% decline, a little more than that, from the exodus of cash products; low yields driving that.

Looking at expenses now on slide 10, our expense discipline continues.

Combined with an absence of closed end launches resulting in a 3% decrease in as-adjusted expenses.

In addition to the reduced launch costs, G&A benefited from lower occupancy costs as we eliminated double rents booked in Princeton and London when we were moving to new locations.

We also maintained stable marketing costs.

This is despite the launch of our major new brand campaign which I hope and assume everyone has seen at this point.

Keep in mind that the first-quarter campaign launched in late February so reflected only one month of our actual advertising expense.

This is an important long-term investment already paying off in the volume and quality of dialogue with our clients, also something Larry is going to talk more about.

Compensation expense was more than explained by an increase in base comp.

We have invested in the business and added great talent over the past year.

Our investments were focused around EPS, income, retirement, solutions, and alternatives.

These are at the same themes which have resonated with our clients and generated the organic revenue growth.

Further, as evidence of our investment in the business, in the first quarter we closed the Claymore transaction, that is our Canadian ETF platform, we launched 44 new iShares products.

Moving on to sequential results, operating results were relatively stable despite seasonal factors.

Aided by favorable markets and a strong client response.

On slide 12, EPS improved by $0.10 compared to the fourth quarter including $0.14 associated with improved marks on our co- and seed investments.

Relatively stable operating income of $825 million, as seen on slide 13, reflected strong markets and seasonal factors which I will talk about as we continue on slide 14 looking at revenues.

Organic growth and strong markets resulted in $114 million sequential base fee improvement shown in the green, offset by lower seasonal performance fees, $67 million, the fourth quarters are peak locked periods for performance fees.

And recall that in the fourth quarter of 2011 we completed a very large advisory assignment in BRS accounting for the decline in BRS revenues.

As discussed earlier, the combination of strong market and flows benefited all asset classes.

Base fees are shown on slide 15.

There was particular strength in iShares resulting in revenues of $594 million and now representing almost one-third of our total base fees.

We did put a new slide in the supplement with various breakouts of revenue that we thought would be beneficial to you.

We saw robust flows into both equity and fixed-income iShares.

Specifically, emerging markets and a large array of income-oriented products.

Further, we saw continued strength in both the asset class revenues and strength in first-quarter defined contribution flows.

It's encouraging to see the themes we believe to be so critical to our clients playing out in our flows and revenues as we begin the year.

I mentioned earlier continued expense discipline.

I'm now on slide 16.

The base comp benefits of our fourth-quarter personnel reduction were more than offset by the seasonal effects of first-quarter payroll taxes driving that increase in comp and benefits sequentially.

Directed fund and distribution expense increased with our strong asset growth.

The $34 million reduction in G&A included a $15 million increase in sequential marketing expense associated with our brand campaign that was more than offset by other cost reductions including we had no fund launch costs in the quarter, lower occupancy expense, and lower professional fees.

Nonoperating income of $15 million is shown on slide 18 and included $55 million of positive marks, primarily, as you can see, on our co-investments in private equity on the left-hand side and distressed credit in the middle bar.

The value of the investment portfolio was up about 18% closing the quarter at $1.2 billion excluding hedges.

The growth related primarily to seeding including we seeded two new European income funds important for future growth and markets.

As a reminder, we invest alongside and align with our clients and seed new products as required for the base business, but we have no proprietary investments.

Our revenues and business model are predicated on acting as fiduciaries on behalf of our clients and receiving a fee for providing those services.

Our balance sheet remains small, with less than $8 billion of economic tangible assets, primarily composed of cash, receivables, and the investment portfolio.

So, wrapping up summing up on slide 19, we delivered a healthy margin and returned a large amount of cash to shareholders, resulting in over 70% payout in the first quarter.

Our cash flow generation allows us ample opportunity to reward shareholders consistently.

Our operating cash flow in the quarter reflected both the strong operating results and also the fact that we make our annual incentive comp payments in the first quarter.

Looking ahead, we are extremely excited about opportunities we have to work with our clients in 2012, and believe we are uniquely positioned to continue helping them navigate this challenging environment.

We entered the year benefiting from our business model and client focus.

Our intense focus on delivering to clients' needs generated top-line revenue growth across long-dated asset classes as clients responded to investment themes designed to benefit them in these times.

With that, I'll turn it over to Larry who will discuss the external environment, his dialogue and what we're seeing with our clients, and the ways in which we can help them navigate these markets.

Good morning, everyone, thank you, Ann Marie.

Before I talk about 2012 and the first quarter and going forward, it probably makes sense for me to reflect on how we got into 2012 and talk about 2011.

The volatility we saw in 2011 really froze many, many clients worldwide.

Cash buildup grew up throughout 2011 investing in bonds, short-term bonds as a means to preserve wealth was the norm for most investors worldwide.

And we saw, as an overall portfolio in 2011, pronounced de-risking.

Although the markets had risk on, risk off, risk on, risk off, I would say the preponderance of invested -- investors worldwide added more cash and short-term bonds over the course of 2011 than they did and some incremental investing in more risk-on products.

We certainly also saw in 2011 more barbelling strategies going in to beta products index and ETFs and going into alternatives.

And it was the uncertainty of -- from the US in terms of our management of our deficits and our fiscal discipline and which was essentially the lows from the latter part of the second quarter going into the third quarter and then we had the European crisis coming to a real crisis in the third and fourth quarter last year.

We began to see stability in the world as the US economy started showing some rays of hope that there was stability, but more importantly the actions from the ECB, with their long-term financing vehicle, LTRO that provided the necessary liquidity to stabilize Europe.

And from that we then began to see clients starting to focus on how de-risked they were.

And then going into 2012, we certainly saw large-scale clients moving from cash positions into longer-dated bonds, into credit type of products, into dividend-like equity products, all the types of themes we are focused on in our campaign.

So overall we saw some re-risking into the market.

However, if you think about the internal generation of cash I would still say the fears of the investor still is more overwhelming than the hope for a better future.

So, despite the rally in global equities from its lows I would still qualify the market to be quite fragile.

Attitudes are basically on the borderline of pessimism than optimism and also we are also seeing this, from our perspective, with CEO behavior.

We are still seeing most companies being very risk adverse.

I think we are going to see in the first quarter above forecast earnings.

Essentially the reason for that is everybody is overlaying an overall view of pessimism not optimism, and we are actually seeing performance better than that pessimistic view and therefore we are seeing, in terms of corporate earnings, more exceeds than misses.

But as we enter the second quarter I still believe there is a great deal of uncertainty ahead of us.

It is very hard for investors and CEOs and politicians to decipher between the good news and the bad news.

It is very difficult for investors to have truly a long-term view and so this growth in investing in bonds continues, cash buildup continues, mostly through bank deposits, less in money market funds as an industry.

And so I don't believe that the future is much different than it has been, but it is remarkable to think about how strong equity markets were in the first quarter with just some incremental investing in equities.

This is why, as I said, October last year as I said February this year, I still believe in equities more than ever before because we witnessed with just some small investing, a pretty substantial rally in the equity markets.

And that is just a great sign of how de-risked people are and as you look back in the first quarter we saw large-scale repurchase of stocks from corporations, a very modest calendar of IPOs.

And so, as we enter the second quarter, the outstanding of equities in the world is less today than it was in January 1.

And so, we are seeing CEO behavior purchasing shares back, raising dividends, all fundamentally strong foundations for a better equity market, but let us be clear, we are not seeing major changes in investor behavior.

We are seeing some re-risking so incrementally versus the third and fourth quarter last year, yes we are seeing a lot more investing but I don't believe it's at a point where we can say the markets are going to be really strong because a strong transition out of the cash, out of more bonds into equities.

That's just not happening yet.

Despite all that, BlackRock fared very well which I'm going to talk about a minute.

I think the US economy will be and will continue to be a strength in the world economy.

We believe the US economy can grow between 2.5% and 2.8%, we are seeing stability in the employment market, we are seeing incremental from the private sector, some job growth.

We are still seeing some negative jobs created from the public sector and I should remind everybody, if we ever do tackle our federal deficits, that is another way of saying we will have less jobs in our federal government as we tackle our deficits.

And so we do need a robust private sector and we do need a robust job creator in the private sector and that is going to be very important going forward.

Volatility in the world will continue in the next few weeks.

We have a serious important election in France, we have elections in the United States in November, and it's very important that everyone focus on the issues around the US deficits.

We, in our quest of trying to stabilize our fiscal discipline we created this $1.2 trillion mandatory decline in spending beginning next year of which $700 billion will be for our military budget.

This should start having an impact on our economy in the second and third quarter as businesses that are chiefly doing business with our military, and our defense, they are going to have to start focusing on what does this decline in defense spending mean for their companies?

And so, I have spent time in Washington urging Congress to focus on this today because this is not an issue that they need to focus on in November as they sink their backs against the wall, I am trying to alert Congress today, their back is against the wall this moment.

Business behavior has to respond, not as quickly as politicians, but over a multi-quarter period of time and I do believe you are going to see business behavior change as we head toward the ultimate decline in military spending, if we don't address that.

One last thing, on the macro issues.

I do believe oil is going to play a more significant role in terms of the outcomes of different parts of the world.

I think the oil prices have a real influence on the ECB behavior.

I do believe the ECB has to ease.

Their interest rates are at 1%, but because of oil playing a significant issue around inflation, the reluctance to ease in Europe is going to be very pronounced if we don't see a reduction in oil prices.

If we can see an oil price reduction of some magnitude, I do believe the ECB will ease, will ease aggressively because it is our opinion that the euro has to fall in value for the southern-rim European countries to ever find growth.

Right now the southern-rim politicians are constantly working on fiscal discipline which arose the economy, which creates greater strains on their population, greater strains on the issues of unemployment in the southern rim.

And so, we also need to find ways of growth in Europe and growth beyond the northern rim.

If we don't find that growth, we will have more serious issues as I said earlier, the ECB issues is not a three-year problem to work it out, it's a four-, five-, six-, seven-year issue.

What does this all mean for BlackRock with all this noise?

We have seen a great interest with our clients worldwide in working with BlackRock to help them in guidance with advice in terms of how they should navigate their liabilities, how they should invest in their assets to meet those liabilities.

So I do believe our business model today has never been more valid than it is today in terms of working with clients as they try to decipher the good news and the bad news, the push and pull of markets and I believe we are witnessing a real, large increase in this type of advice.

We are certainly seeing this in the form of our BlackRock Solutions area, but we are seeing this in our multi-asset class area, we are seeing that in BMACS, we are seeing that in our defined contribution business.

Some of this is being manifested in increased performance in our ETF iShares platform, some of it in as I said defined contributions, some of it in our alternative business.

So excluding as Ann Marie discussed on this one-time previously announced outflow of a piece of index business that was out of our control, this organization portfolio was assumed by a government and they internalized the assets.

We had approximately $25.7 billion of long-term flows, very diversified, and when I look at the environment of the world, we were very pleased with that type of organic growth across many spectrums.

And, it actually -- these long-term flows actually corresponded to our brand campaign, our focus areas of ETFs, retirement income, multi-asset strategy solutions and alternatives.

So it validated our platform.

As our press release announced, we have approximately $3.685 trillion of assets, we witnessed over $200 billion of net growth in long-term assets, to $3.34 trillion.

And what I think is also interesting as we focus on BlackRock's mix, our mix continues to increase in the multi-asset strategy area, very close to $246 billion, we added more assets in alternatives to $110 billion, fixed income ended the quarter with $1.244 trillion, and equities $1.744 trillion.

So, once again, it's this business model of mix, it's a global business model, it's a solution-based business model that truly helped us navigate what I would call a very uncertain time in the marketplace.

The other thing that I think is important to relate, especially relative to the S&P, we entered this year with below market level of revenues because of the performance of global equities outside the US in the third and fourth quarter.

And so when everyone focused on the S&P, the S&P was flat, and yet as Ann Marie discussed earlier, there were some obviously very negative market performance numbers overseas in the third and fourth quarter.

We had a big hole to overcome -- we did, and so this is another reason why I'm particularly proud of how we navigated in this quarter.

Before I get into some of the business highlights, let me just discuss some of the investments we made.

Obviously we're making investments in our brand.

We believe our brand is becoming more and more important, it is significant for us to expand our brand, our retail distribution partners have told us you need to expand your brand, we need to have some demand pull instead of sell push.

And we are accomplishing that.

The brand recognition is growing, the types of inquiries we receive globally in terms of our brand initiative has been quite strong.

It is that brand campaign that has helped us to distinguish and help our clients decipher some of the noise, it is helping them understand where they should be focusing on these uncertain times and how they can navigate higher returns and mitigate some of the associated risk.

We had more inquiries than we've ever had with our website, we had more inquiry with our telephone operators than we've ever had before, not just in the US but worldwide.

And so the impact is immediate and we expect that impact to transform into sales over the course of the next few quarters and years.

So we continue to believe in this, we believe it is differentiating us, we believe we are being thoughtful, helpful, and most importantly, we want to come across as a solution provider to all our clients from our retail clients to our largest institutional client.

The other area that we continue to invest and we will continue to invest, and that is investing in our people as we see more and more opportunity to expand our platform.

As I said over multiple quarters, we are not actively looking at large-scale acquisitions, I could tell you today we are continuing to not look at large-scale acquisitions.

I've never seen an environment with more companies for sale but we have not shown any interest in doing that.

What we are doing though is looking for talented teams to augment our platform already.

We added emerging market debt team in Europe, we added a new head of one of our emerging market equity teams, we are adding more people across our capital markets, trading platform, marketing communication, we're adding heavily in technology which I'll get into in a minute, and risk and our quantitative analysis group.

The one thing that I think the world doesn't understand in terms of cost and that's the regulatory environment.

The regulatory environment continues to take shape, I don't know what this totally means for BlackRock but we are investing large sums of money to become compliant and stay ahead of regulation.

This regulation will be required for all asset managers, all hedge funds, all private equity firms.

We are talking about regulations such as Form PF, which is going to be requiring reporting derivative holdings to the CFTC and to the SEC.

This is a large-scale need, this is client-by-client reporting that has to be done on a continuum, we have FATCA which we are going to have to report.

This is a big issue for our EMEA area.

We have the AIFMD, the Alternative Investment Fund Management Directive in EMEA.

This is all requiring a buildup of technology, this is requiring building up more, a larger team with our regulators.

This is not just a BlackRock phenomenon, this is an industry phenomenon, this is going to be a large-scale need, worldwide.

One of the reasons why -- which I will talk about it later on, why we are seeing more and more interest in Aladdin and BlackRock Solutions -- is because of the need for better technology, better systems.

This is not just for a risk management reason, it is for reporting purposes, too.

Having a single technology platform is going to be imperative to properly submit all your necessary regulatory requirements to all the regulators worldwide.

So we are trying to stay ahead of this, we are investing money and time for this and I do believe this is going to be a very large component of how other asset managers are going to have to respond.

This is, I just want to underscore, this is not a BlackRock-only situation, it is an industry-wide issue.

Society is looking for greater transparency, greater information and we are staying ahead of that making sure we are compliant with all our clients worldwide and we do believe because of our position we have a higher fiduciary standard in making sure we do this as properly as possible.

Let me discuss quickly some of the business things, Ann Marie did a very good summary of a lot of the business issues.

Our iShares business was a standout in the quarter with $18.2 billion of net new business, which was remarkable.

This was in line with our growth in the fourth quarter.

Traditionally the first quarter we have sometimes outflows as you saw big inflows in the fourth quarter and outflows in the first quarter.

The whole industry saw a very large increase in the utilization of ETFs.

As I said, I think a lot of the ETF flows was related to this modest risk on.

Clients took added risk, added beta, as they were probably mismatched in too much concentration in cash and in bonds, they added more exposure, more beta, whether it was long-term bond beta or high-yield beta, or beta in equities or commodities, they did it through ETFs.

We are seeing a trend, though, of more and more investors using beta products as alpha.

We are seeing more and more investors tactically allocating using ETFs to get greater exposure to an asset category to a region and ETFs are playing a more demonstrable role in that.

I believe that will become a larger and larger component and this is why we believe ETFs will continue to drive more and more growth.

We are still not seeing ETFs cannibalizing the mutual fund business.

Mutual fund business is slow because people are not adding risk and I will get into that in a minute.

I don't believe much of this is cannibalization, I believe most of the growth in ETFs are new participants in these products.

Much of it is institutional as they use beta for alpha.

Demand across the ETF platform was oriented towards fixed income for us, we had $9.4 billion of net flows, we captured 46% of the fixed income flows for the quarter.

Particularly great were our US and Canada iShares products growing by $14.5 billion, that was a lot driven in emerging markets and more of our high-yield products.

Our emphasis in dividends was rewarded also because we saw equity income grow, we saw high-yield grow to about $8.2 billion in inflows.

We also saw, as people went back into the emerging market, markets had huge outflows in the third and fourth quarter, we had $2.7 billion inflows in our emerging market ETF product and now it stands to be about $40 billion.

Ann Marie suggested we closed the Claymore transaction.

It was a wonderful timing to close on it, we had good flows in Canada, and more importantly, we have the dominant position both institutionally and retail in the ETF market in Canada which we are very happy with.

BlackRock, legacy BlackRock was much stronger institutionally in Canada, the Claymore transaction really helped us on the retail side.

So we cannot be more pleased with our position in Canada today, and as I said earlier, we will be looking to do end market types of transactions like that, if we could find opportunities to augment our position in different products such as ETFs.

International iShares we grew by $3.7 billion, we had 59% of the EMEA market.

Much of that had to do with a lot of market participants, we are leaving the note related or the derivative-types of ETN product and moving into the physical based products.

We have been the large beneficiary of that as we have aggressively discussed the attributes of physical based ETFs versus derivative-based ETFs, and the credit exposure that investors have with derivative-based ETFs.

As another example of our culture of innovation, we continue to build out more products, we added 44 new iShares products, as Ann Marie discussed, and those products that attracted already in the first quarter $700 million of new flows, and we continue to try to be as innovative as any organization.

On the retail side, we continue to see strength in the US and we continue to build our presence in the US, so where many participants had outflows in retail mutual funds, we actually in the US had $1.2 billion of net long-term flows, another example of how we are building our brand, we are building our presence in the retail area.

In our European mutual funds we had a modest $100 million of outflows, that is an example of the uncertainty in Europe and some of the uncertainty in Asia.

We hopefully, we can stabilize the businesses in Europe but I think the European mutual fund business is going through this transition as the marketplace tries to understand what it means with the sovereign debt crises of Europe.

In terms of institutional business, we are still seeing clients being very, very cautious.

Most of our clients institutionally are, if they are adding beta, they're adding beta mostly in passive strategies, to gain that market exposure.

But we are seeing some inflows in our active products, in our Americas institutional business we had $7.7 billion of growth, which was driven $5.7 billion in our active products.

A lot of that was in our multi-asset class solutions.

We also had a $1 billion award of a very large international client, that is a best idea strategy for BlackRock, a huge award with a very large international client.

Our defined contribution continues to grow nicely.

We had close to $10 billion of growth split evenly between active and passive strategies, of which $3 billion was in our LifePath multi-asset strategy offering.

And as we discussed in our branding campaign and as we discussed in many other forums, we believe a focus on longevity is essential.

We do not believe so many Americans are adequately investing for their retirement properly.

We believe they are miscalculating how long they are going to live and we have a serious growing crisis in this country in terms of meeting the needs of longevity of life.

As I said in many forums, we spend so much time focusing on health, we as humans are trying to find new ways of extending our life but we are spending so little time how to afford that longevity.

This is something that where BlackRock is trying to provide answers, solutions, hope, and I think we are beginning that dialogue with many people on trying to find that solution.

But it is essential that we all, all of us in our industry, focus on the needs of financing longevity in this country.

This is not, I should state, this country -- this is a worldwide problem, it's just as dire in other parts of the world to making sure that we are saving enough.

In EMEA, institutionally, generated by $1.5 billion in inflows, despite all this caution and de-risking, particularly that was for a large defined benefit plan, and we continue to see growth in our index strategies.

But we lost about $3 billion in some of the active strategies in Europe, predominantly in the UK equities as people de-risked in the UK and some of the credit strategies.

I am particularly pleased in the first quarter our growth in alternatives we had about $800 million of net new business during the quarter, but we are involved with so much dialogue.

We've never had more dialogue with our alternative strategies as we've ever had before.

This is what we've been talking about over the last year or so as we were seeing clients barbelling, using beta and using more alternative as a strategy.

That is persisting, that is continuing to grow, that is not just a US phenomenon, that is a worldwide phenomenon.

And in Asia-PAC, we had some outflows in Japan, particularly, we had $3 billion of outflows.

We actually are seeing some very good inquiries in Japan right now and more opportunities.

So I don't believe there is anything that is systemic about what happened in Asia.

Let me talk about BlackRock Solutions, the need for strong risk management, analytics continues to drive demand for our Aladdin-based services.

What is particularly encouraging, while BRS revenues were down year-over-year by $5 million, we saw a 19% growth in Aladdin revenues.

So we transformed our one-time wins in to long-dated sticky revenue.

So, this 19% growth in Aladdin was one of the biggest growth rates we've had in the last few years, is indicative of what we see and the opportunities we have in Aladdin.

You have to remember, we had, as Ann Marie discussed, some large dispositions in our advisory business which reduced our fees, and we also had one very large governmental assignment, one-time advisory assignment, the first quarter last year that we obviously, it was a one-time assignment.

So, if you look at the consistency of growth in the Aladdin side, this really encourages us to believe that we have huge growth opportunities going forward as we are becoming more and more, as a percent of revenues being Aladdin, versus the one-time advisory revenues.

I'm not trying to suggest that the advisory revenues are not good, they are wonderful, they actually -- in many cases, the one-time advisory revenues translates into Aladdin contracts so it is a very, very important component of the BlackRock Solutions business.

The momentum is strong as I said in Aladdin, we won a very large assignment in Japan another example as we are becoming more global in this platform.

We now have $12.3 trillion in the Aladdin platform that we are navigating risk for clients and providing an operating system.

And that is a record level.

There has been quite a bit of noise related to the BlackRock Aladdin trading network.

Let me try to give a little more clarity about this.

We are responding to the regulatory regime that is transforming the future ways of the sell side does business.

Under Basel III, banks are going to be required to have higher capital.

Because of the Volcker Rule, banks are going to have more inhibition and some prohibition to doing principal trading.

The natural outcome of that will be probably wider bid-ask spreads, and I want to underline probably.

If we could see a narrowing in bid-ask spreads, quite frankly we don't need the Aladdin trading platform.

We are doing this with the idea that we want to be the most and highest level of fiduciary to our clients and if we are seeing a persistent widening in spreads we believe the system will continue to be -- will flourish and grow.

And so we are doing this with ourselves right now, where we are trying to cross more and more trades.

And through our Aladdin clients wishes, they ask to come onto this platform.

And so we are beginning the process in which we are going to be adding some clients to this platform and let me underscore, it will only be Aladdin-based clients that are going to be permitted to go on this platform.

For BlackRock, trades, there is no commissions on this.

We are not going to make -- we're not trying to become a broker-dealer, we are trying to be a fiduciary in minimizing our friction cost of trades.

For our clients that are on the Aladdin system we are going to try to charge a fee that overcomes our cost and that is it.

It is our intention through this platform in terms of revenues -- hopefully this will be another mechanism and another reason why clients want to go into the Aladdin system and if they are allowed, if they are on the Aladdin system for risk management, they will have access to this platform.

That will be the revenue model as we designed this.

But, this is not going to transform BlackRock in any way.

This is not going to change our behavior, our relations with the sell side, they're going to be powerful, counterparties and powerful partners for us.

And so, I just want to diminish this noise around this.

We look at this as raising the bar is fiduciary standard, hopefully this will augment more Aladdin-like revenues over the course of the next few years, but let's be clear, this is a long-term, multi-year strategy, this is not unlike when we've launched the Aladdin trading, Aladdin technology platform as a mechanism to expand our relationships with our clients.

We are going to continue to invest in our Aladdin system, I am very pleased to say that we are now winning more assignments in equities.

So Aladdin system used to be only bonds, it's now in equities, so we are now having great opportunities across all our existing clients to offer the Aladdin system across all the different asset categories.

Our FMA business, although we had those one-time wins last year and we had some dispositions for our clients, continues to generate strong returns and we have been awarded another country assignment which I am not going to divulge, so we are working with another European country right now.

It is public that we work for Ireland and it has been public that we've been re-engaged by Ireland this quarter, it is public that we are working on behalf of the Greek Central Bank, it is not public related to another central-bank assignment in Europe.

So we continue to be a firm that institutions are looking for advice and help and it continues to drive and differentiate BlackRock for the future.

Let me just talk about some notable performance.

We had very good performance in our hedge funds, we overcome some of our high water mark hurdles in products like Obsidian, our FIGA product continues to differentiate itself, R3 had a very good first quarter.

Our Equity Dividend Fund continues to grow and continues to differentiate it.

European equities year after year, quarter after quarter they have done an amazing job, Global Allocations outperformed our benchmarks in the first quarter, that is our $80 billion go anywhere product that Dennis Stattman runs.

Our fixed income mortgage operation had a very good quarter performance, Global Bond continues to do well.

Municipal Retail has had another good quarter.

So overall I would say it was a very good quarter in terms of our products, our performance, and the performance in the product that we are really pushing.

Ann Marie discussed quite a bit about capital management, we are committed to increasing shareholder value through capital management decisions.

We increased our dividend by 9%, we continue to repurchase shares, we have authority for 5 million share repurchase.

We continue to think and believe that we have great opportunity.

We do have about $3 billion-plus of free cash flow.

As I said earlier in this talk I am not here thinking that we are ever going to do a large merger again so, I would suggest that our position about utilizing our free cash flow for dividends and for capital management through shares is going to be a position that we are going to take over the course of the next few years.

We are very interested in, as I said, doing fill-in mergers, but we are with the opportunity that we have in lift alpha teams as we showed that we are able to do that in the first quarter we will continue to do that, too.

So, overall, the first quarter was a good one and I am very proud of how we have positioned ourselves going forward this year and I am remarkably excited about where we are and where we are going.

I am -- I really do believe we are as well positioned as any asset manager in the world as we are as well positioned at BlackRock as we've been in the last six years.

We don't have mergers to worry about, we don't have a world collapse to worry about.

We're focused on clients, we are focused on providing solutions for clients and we are well-positioned globally worldwide with our team to provide those solutions.

Once again, thank you, we can open it up for questions.

(Operator Instructions)

Glenn Schorr, Nomura.

The first question I have is Larry just mentioned a $3 billion or plus in free cash flow.

The 72% payout was bigger than where you had been running the last call it two years and just curious, on if that is a higher level of payout that we should expect or if 50% is your best guesstimate going forward as you indicated in the past?

No.

Well, the 70%-odd is a combination of stock repurchases and dividend.

Our payout ratio of dividend is going to be between 40% and 50% I don't want to ever to be higher.

But last year I think we paid out 120%-something I don't know --

That's correct.

In terms of -- so, I expect -- I think to be very frank, we expect to use our free cash flow opportunistically up to the Board approval in terms of utilizing that free cash flow to do whatever is necessary to support a robust stock.

Fair enough.

On the trading system, just curious on the basic principles of it, is it a similar cross-theme network that you see in some of the equity markets where trades get done when there are same security, same price at the same time trades?

Crossing at the same time, and can you preload pre-existing trades underneath the covers so to speak and wait for them to be hit?

Just curious on how it's going to actually work?

I believe that is the design.

That is the design of the platform.

Right now, it is obviously crossing and all that, as we get more and more players on it, there's going to be some transparency where the underlying desires of sellers and buyers will be.

Got it.

One other question on -- the new product pipeline has been good and you've been able to consistently launch new funds.

I think you've launched four new fixed-income ETFs in April so I guess the question is, is there's been some attention in the press to credit ETFs in terms of promoting volatility in the market, just curious if it gotten any regulator attention and how you feel about that?

Because it is obviously a big growth business.

There is certainly regulatory reviews on all things related to ETFs, at the moment much of it in Europe has to do with derivative-based ETFs, there is obviously reviews by the SEC and a freeze in terms of leverage ETFs, they are not allowing new ETFs with any leverage to be created until they have a full review.

Specifically in terms of credit ETFs I am not aware of any inquiry from any specific regulator -- Matt?

No, I am not aware of any either.

I believe there is greater and greater demand for credit, whether you see that in separate accounts with, or you see it in -- or you see that in ETFs.

ETFs just give you more transparency and clarity where the market is going, but I don't think ETFs are adding anymore volatility than when you see a large-scale demand in any one product, whether it is in physical-based securities, separate account or through a publicly traded vehicle like an ETF, I can not understand why somebody would say that ETF creates more volatility than demand in any other physical-based separate account.

So I don't understand that noise, if there is such noise I will just leave it at that.

Okay.

And then last one is just on margin.

There's always a bunch of moving parts and obviously the first quarter has the performance fee give back.

But given higher asset levels and what's clear, expense control even in the face of the marketing campaign, any reason to think that margins won't be in and around that 39% level that you've been in for a long time?

I see no reason why over the course of the year -- margins will be consistent, they were last year, 39% is a good benchmark, 39.5%, whatever that comes in it should be a good benchmark.

I just want to overlay the issue around regulatory issues.

I was trying to be very specific on that.

Regulation cost a lot of money.

And so I don't want -- I am not here to tell you we are lowering our margin expectations so I'm not saying that, but I am saying that we are spending a great deal of time on making sure we are compliant and I don't believe this could be a one-time cost that's going to be very large, once we get it routinized on the system, and certainly once we get it on the system costs will be less but it really depends on how we are going to be regulated and how many more people do we need to interface with regulators as regulation of asset managers increases across the board.

So, at this moment I am not saying it is going to have any major impact on margins.

Okay.

I'm good.

Thank you very much.

Craig Siegenthaler, Credit Suisse.

If we look at the core institutional pipeline the sequential change there, I'm wondering if you could just comment on what drove the decline there if we back out the $36 billion mandate?

And also, are you seeing a mixed shift in your institutional clients into ETF out of passive mandates?

There is no question you are seeing, for those institutions who are adding beta for tactical purposes they are doing, a lot of institutions are using ETFs.

A couple of the sovereign wealth funds who historically use index funds are now using ETFs.

And so, yes, there is a change in mix but it's not entirely, our pipeline I don't think it's sequentially that much lower, $24 billion, but keep in mind we are not forecasting ETFs (inaudible) suggested or for retail in those flows.

But there are, you're seeing behavior change with some institutions going using ETFs because they value liquidity more than the cost of the asset management fee.

Obviously, for those clients who believe that they are going to be sitting with a beta exposure over a period of time, they will go into index funds with lower fees.

But to get that liquidity we are seeing, as I said like some sovereign wealth funds are using ETFs more extensively.

And then on sec lending fees, the second quarter is always your seasonally strong quarter for these fees, so if we think about the changes in rates over the last year, and really what hedge fund activity is doing which seems to be another driver, how should we think about the step up in sec lending fees which flows through management fees in the second quarter?

Well we had obviously a very good first quarter and yes we are seeing more hedge funds shorting stocks looking for shares, so utilization was up in the first quarter.

And we still see utilization strong in the second quarter.

And, quite frankly, in the very short end of the curve there is a yield curve.

It's only a few basis points but there is a yield curve at the very shortest period of point of -- and so a combination of utilization rates and then some yield curve at the very shortest one of the yield curve has allowed sec lending fees to grow.

Ann Marie did you have any comments (inaudible) second quarter?

(inaudible)

Great, thanks, Larry, thanks, Ann Marie.

Marc Irizarry, Goldman Sachs.

Maybe you guys could talk about just the insourcing, this quarter.

When you look across your AUM, is there some more of that low fee index, index-oriented mandates that might be at risk as you look forward?

No.

We don't know of any.

Okay, great.

Thanks.

And then, Larry, on the world of fixed income in terms of the barbelling between alpha and beta strategies if you will, can you just talk a little bit about what's happening in core, core plus and just how important credit is becoming in institutional allocations?

Well, it's very hard for pension liabilities to meet their liability needs without having some type of income in credit strategies.

They are not going -- they're certainly not going to do it at duration anymore with the long end being so low in yield.

So, we are seeing across the board a very strong interest in credit types of strategies.

We're seeing an increased interest in hedge fund-like strategies in fixed income and in credit, but core strategies with the treasury market being so dominant in core strategies, you're seeing more core plus interest and more credit-oriented strategies across the board.

More strategies that are global in nature, emerging markets in nature, so you are seeing institutions really reflect on how they're going to maneuver out of core strategies over the course of the next two years.

Now, obviously for those who have the luxury of having their assets and liabilities pretty matched, owning bonds is a very sensible thing to do.

And so I am not trying to suggest across the board owning fixed income or owning treasuries is not a thing to do.

Unfortunately, so many of our pension clients are sitting with very large underfunded liabilities.

And they are all addressing it.

And then there is another reason why we're seeing more interest in dividend-related strategies.

So it's not -- looking for other strategies that can produce income and obviously try to reduce as much beta exposure as you can.

But, I think, Marc, we are going to be living with this for a couple of years in this low-rate environment and unfortunately this low-rate environment is a real task on savers, on pension funds and it is a real question, can these organizations tolerate for a couple more years and sit in bonds and core strategies over the next few years, is that the sensible thing to do.

Obviously, if you are incredibly risk-averse that might be the sensible thing to do but it comes at a cost and we are trying to identify to our clients, what type of costs this is going to have on the organization so as we heard earlier in the first quarter, the average pension fund had greater mismatches as a result of market performance last year.

As we saw lower rates also the liabilities went up and the value of their assets went down.

So, it's not a pretty picture.

Okay, great.

Thanks.

Cynthia Mayer, Bank of America Merrill Lynch.

I apologize if you mentioned this but, are you guys still targeting a constant revenues ratio around 34.5% or 35%?

Yes, we are still in the 35% range.

It's a little higher in the first quarter because you get your annual bonus payments related payroll taxes, all hitting you there.

So, it's always a little higher in the first quarter.

Got it.

Okay.

And then, on the move to the physically-backed ETFs overseas, do you feel as though that still has room to grow?

That you could still gain more share there?

Or, has that pretty much run its course at this point?

I'm not sure we are going to gain more share but I don't think it's run its course.

I think more and more people are looking at physical-based ETFs there and you even saw one of our -- one of the derivative-based ETF players translate its business into physical-based.

So, I don't think it's run its course because I do believe most buyers are going to be looking for physical-based products and I think that awareness has been, is becoming more apparent.

Obviously we have 55% market share in Europe, so the last thing I'm going to do is forecast a higher market share.

Got it.

That makes sense.

Thank you.

Matt Kelley, Morgan Stanley.

So, Larry, you had mentioned that the discussions you're having with clients on alternative products has never been stronger and I think you said similar commentary the prior quarter in showing up in your flows a little bit more this quarter.

So just wondering if you could segment your client base a little bit for the alternative interest so which institutional clients are most interested, the least interested, and how are they thinking about barbelling?

I don't -- we are winning with a retail platforms even within our organization we have a couple alternative strategies for Morgan Stanley borrowing platform but institutionally, it's across the board where were are having dialogue.

I would say our penetration with foundation endowments is growing, we are seeing more participation there, we are seeing more active opportunities with pension plans, especially in Europe.

EMEA has been a very strong growth area, hopefully we are going to be closing one of our private equity types of strategies, a lot of participation in that, in Europe.

And so, it is growing worldwide, our penetration is particularly strong with smaller institutions, but there's not one area or one type of client that I could suggest to you that is looking to add alternative with BlackRock.

But I can say geographically Europe has been a particularly large area of growth for us.

Okay, great.

Thanks.

So, one follow-up for me.

Just curious to get your thoughts on what we need for retail investors to truly reengage in equity mutual funds.

I know you said that the markets are still skittish and I am sure you feel like the clients feel like they have been burned a couple of times in the market, so what do you think we really need?

Of my gosh, look, I think -- it's all a confidence game.

It's a confidence game from our politicians, we need leadership, it's a confidence game with our CEOs, we need leadership, it's a confidence from the FAs to get people more confidence.

In the United States, I think as we see a stabilization in housing, which we expect to see next year, that will be a foundation for growing confidence.

But the issues of trying to navigate this European situation is frightening for a lot of people who just don't understand.

As we are trying to show in our branding initiative there is a huge cost of doing nothing and we have to educate more and more people by doing nothing and market timing that is not a good answer.

And we need to really engage everybody in talking about what type of, in terms of individuals, what type of pool of money do you need upon retirement and how are you going to achieve that earning very little, staying in cash, and the question is does the noise of today does that have any impact on a 30-year objective?

And unfortunately, as we watch financial news on television, and listening to it on radio and reading it in print through blogs, it's all about minutia and day-to-day strategies.

And so it actually accelerates the short-term-ism but as advisors we have to focus on, focus on what your needs are and that is what we are trying to do, not at just retail with mutual fund buyers but we are trying to do that institutionally, worldwide.

And it's very important for us to do that.

Thank you very much, guys.

Michael Carrier, Deutsche Bank.

Ann Marie, just on the expenses, G&A a bit lower, you mentioned the marketing I think you said this quarter was around $15 million, I just want to make sure we have that right, so if we run rate that, would it be another $30 million for the second quarter?

And then I guess on the flipside, when I look at the comp, any way to size up the payroll tax impact?

Because that would obviously moderate to provide some offset there?

Yes.

I can take those all off line, but the payroll was probably about $27 million and the marketing is directionally correct, I will talk to you more.

Okay.

And Larry, if you look at recent trends on the institutional part of the business and you compare that to say like the past 10 years, what is the level of activity?

Meaning engagement, making decisions, because it seems like the flows are improving but it still seems like industry-wide there is still a lot of uncertainty.

And then, just one follow-up on the trading platform.

Just if we do go the route, where Volcker is more draconian then in a good scenario for you guys and your clients, what do you guys anticipate being the max of your ability to internalize?

Meaning a percentage of the volume?

To answer your first part of the question related to the activity of dialogue, dialogue has never been stronger but it takes a lot more time to try to get clients to move.

So their behavior is more of one of reluctance, fear, of trepidation, but the dialogue is probably more unique than ever before.

But, more importantly, the dialogue is different.

10 years ago dialogue was on a core strategy, for a fixed-income strategy, a large-cap strategy, those conversations don't happen anymore.

The conversations today are more about multi-asset strategy.

It's about alternatives, it's about overlaying assets versus liabilities.

It is much more complex.

So, the dialogue is longer, the timing in which people commit is much longer.

Trepidation is large and that is what I tried to say at the beginning, although we have some nice market movements we've seen some nice long-term flows at BlackRock, there is still an overwhelming amount of reluctance.

It is not a reluctance because, because they don't want to do something, it's a reluctance overlaying fear.

Will this cost my job?

How do I respond?

We are trying to hit hard to everybody doing nothing could cost your job even more.

You've got -- we have to respond to these open issues, so I think the key is the dialogue is different, it is more comprehensive, multi-asset strategy, alternative, barbelling, much different.

And I should also state as, if you've looked at our pipeline, our pipeline speaks about that.

Our pipeline is much heavily oriented to multi-asset strategy and a lot more alternatives.

So, when you see our pipeline you'll see more of that type of behavior and those types of dialogue.

In terms of our trading platform, if the Volcker Rule is more draconian, I hope it is not, that's not in our interest as investors, it may be in the interest of society but there is a fundamental cost with that and investors are going to have to pay for that.

Right now I think we are crossing about 6% of our trades, our hope is that we can get it up to 30% that would be magnificent.

That's a big very high bar to achieve, so let's go at 1% at a time, from 6% to 7% to 8%, and obviously, we don't know the magnitude of how many clients from Aladdin will go onto it.

If we ever achieve those objectives of 20% or 30% of crossing it's going to have to mean a lot more participation with many more clients.

But if it is more draconian, and markets are much wider, I think more clients will want to be part of this platform and that will accelerate the utilization rate of the trading platform.

Okay, makes sense.

Thanks a lot.

Bill Katz, Citigroup.

This is actually Neil filling in for Larry, I was wondering if you could give us your thoughts today on money market reform and the likely outcomes?

Thank you.

We believe money market reform should be a priority.

We believe the industry has been reluctant to change, we need to be working with the SEC on Monday market reforms.

I have had dialogue with some of our fellow asset managers who work together on money market reform, working with the SEC.

It is our position that if we do not work together with the SEC on money market reform, the FSOC committee will make it for us.

So, we have been much more aggressive on addressing money market reform.

We believe it is necessary for this industry to begin growing again as we witnessed the industry is shrinking every quarter.

We have been isolated, though, with that opinion.

We have been remarkably, one of the only firms to aggressively believe that we need money market reform, working with the SEC to a sensible, industry- and client-oriented solution.

And so, but I must say, in recent weeks we've through our dialogue, off-line dialogue with other firms, I believe there is a good opportunity in front of us to work with the SEC for money market reform.

Thank you.

And then we avoid the FSOC telling us what money market reform will do to us.

That's it.

Good.

Thanks, everyone, thanks for a good quarter every one of the firm, look forward to talking to you next quarter.

Talk to you later.

This concludes today's teleconference, you may now disconnect.