貝萊德 (BLK) 2012 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the BlackRock 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; President, Robert S. Kapito; and the 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.

Thank you very much.

Good morning, all.

This is Matt Mallow, I am 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 future 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 those future results to differ materially from what we say today.

Finally, BlackRock assumes, and you should understand that we assume, no duty to and do not undertake to update any forward-looking statements.

So, with that, I will get out of the way and turn it over to Ann Marie.

Thanks, Matt.

Good morning, everyone.

As we sum this quarter, volatile markets, driven in part by political, policy and regulatory uncertainty, continued.

Until confidence increases, investors are biased toward short-term [dependence].

We saw this evidenced in the second quarter, based on investor preferences for income products and liquid instruments such as ETFs.

World markets continue to fare worse than US markets.

Compared to the first quarter, US markets were on average relatively flat, while global, European and emerging markets were down 3% to 6%.

Despite these market challenges, BlackRock delivered a strong 39.2% operating margin and delivered operating results that were up compared to the first quarter.

Our financial performance highlights our strong focus on 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.

BRS is continuing to grow, as risk insights and tools earn ever-increasing demand.

Our commitment to our brand has helped us to connect to our clients at a time when they need and want advice more than ever.

Our cost discipline has supported our strong operating margin.

We remain committed to long-term growth opportunities, and you saw this evidenced in our announced acquisition of Swiss Re's Private Equity fund-to-fund platform.

The second quarter also allowed us to continue our journey of transforming the ownership of the firm.

Post the main secondary offering of Barclays shares, the ownership of the firm is almost 80% broadly held, and that compares to 20% just 18 months ago.

The Barclays secondary offering was a great opportunity to communicate with investors about our organic growth opportunities and to take advantage of the cash-generative nature of our business model.

We participated in the Barclays sale via a $1 billion, 6.4 million share repurchase, which was incremental to our core repurchase program.

After the secondary closed, we resumed our regular repurchase program, and were able to purchase an additional 250,000 shares in the few remaining non-blackout days in the quarter.

Going forward, returning cash to shareholders regularly remains a priority.

We also took advantage of a robust debt market and the secondary investor roadshow to lock in $1.5 billion of term debt at historically attractive rates.

The key takeaway for me is that our breadth and diversity have positioned us to perform well in various market environments and to consistently reward shareholders.

I'm going to walk through the specific results now.

As I make my comments, I will refer to the slides in the earnings supplement, which you can find on our website.

And I'm going to be talking primarily about as-adjusted results.

So, if you look at the supplement, I'm going start on slide 3. Second-quarter earnings per share of $3.10 reflected year-over-year EPS growth of 3% and sequential operating income growth of 1%.

I just want to contrast the as-adjusted results to the GAAP results which are presented in the headlines of Net Income Down 11%, and remind people that in the second quarter of 2011, we benefited from a $52 million non-cash tax benefit -- really, the revaluation of our deferred tax liabilities.

Because it was non-cash, we never took credit for this benefit in our as-adjusted results, because we didn't think it really benefited our shareholders.

So, the way we look at it, it really is a 3% increase in net income.

Moving to slide 4, our second-quarter operating margin was 39.2%.

Expense discipline and seasonal factors allowed us to improve the margin 0.6 points sequentially, despite the market-related revenue pressure and an increase in marketing expense associated with the commitment to our brand.

Our comp-to-revenue ratio was 35.1%; that is exactly in line with the 35% we have been running for several years.

The next slide, slide 5, is something we pulled ahead that had been in the appendix last quarter.

We think it's an important slide because it highlights the diversity of our business, as well as the dramatic difference in business mix as measured when you use revenue compared to when you use AUM.

From a base fee perspective, we are an evenly balanced business, with about one-third of our revenue coming from institutional, one-third from retail, and one-third from iShares.

Well, the AUMs view really distorts the business mix, as it is dominated by institutional.

Slide 6 shows the decline in average global markets compared to both a year ago and first quarter.

While US markets are up on average 2% compared to a year ago and flat compared to the first quarter, the global markets across various indices were down 7% to 17% compared to a year ago and 3% to 6% below the first quarter.

Reflective of the diversity of our business, about one-half our equity AUM is tied to non-US markets.

So, these markets obviously affected our revenues.

I will start with the comparison of our results compared to a year ago, and then I will move on to the sequential results.

On slide 8, on the right-hand side, you can see that earnings per share up $3.10 included $3.27 of operating earnings and $0.17 of non-operating expense.

Operating EPS benefited from expense discipline and share repurchases offsetting market effects.

Non-operating results reflected a stable investment portfolio and higher interest expense.

The year-to-date as-adjusted tax rate was 30.4%.

The improvement compared to the first quarter reflected the positive resolution of certain outstanding tax positions and the reductions in our foreign tax rate.

31% is a good modeling level for the rest of the year, based on what we know right now.

Operating earnings of $832 million, which you can see on slide 9, reflected expense discipline, more than offset by market-related revenue declines, which we will move on to on the next slide.

Our business does benefit from a diversified set of revenues.

Second-quarter revenues were $2.2 billion; this includes $2 billion of base fees, $41 million of performance fees, and $131 million of BRS revenues.

Market factors drove the decline in long dated base fees, which is that red bar.

BlackRock Solutions and Advisory revenues of $131 million were up 13%, but that is driven by a 21% increase in our poor Aladdin revenues.

And as we have said in the past, Aladdin revenues represent the bulk, about two-thirds, of the BRS revenues, and are very sticky; once people get on Aladdin, really, they stay.

Our managed disposition of assets in Maiden Lane I and III has broadly benefited US taxpayers, as those funds have been fully paid with interest earlier than originally expected.

This is the key driver of the $68 billion decrease in advisory assets compared to a year ago.

The appetite for BRS remains very strong, allowing us to continue great dialogue with our clients, both regarding advisory as well as Aladdin.

And this is a global phenomena at this point.

Looking at base fees on slide 11, revenues are benefiting from our balanced business model and product offerings.

While the material declines in world equity markets more than explained the 11% decline in base fees on equity assets compared to 2011, this has been muted by an 8% revenue increase on fixed income and multi-asset class revenues.

So, you see the strength of the balanced business model coming through.

Also compared to a year ago, we saw the revenue effect of withdrawals from really very low-yielding cash products.

Now turning to slide 12, our expense discipline resulted in a 5% decrease in as-adjusted expenses.

G&A was down 6%, as we reduced occupancy costs associated with 2011 double rents and more than offset our branding investment.

Our branding initiative resulted in only a 14% increase in marketing costs, as other year-over-year marketing efficiencies offset a portion of the branding expense.

We have been really encouraged by the client reaction to the campaign.

We have gotten some great initial feedback on the number of people who really recognize our name post the campaign.

And so, we remain highly confident that this is a critical long-term investment in the business that is going to pay off over time.

Compensation expense was down 3%; that is explained by decreases in incentive comp and temporary help.

Larry is going to discuss our continued investment in and commitment to great talent.

Moving onto sequential results, and beginning on slide 14 now -- sequentially, EPS benefited from a $0.17 increase in operating EPS, but that was more than offset by a $0.23 decrease in non-operating EPS.

The non-operating EPS reflected that the value of the investment portfolio was stable this quarter, whereas in the first quarter, the value of the investment portfolio actually increased.

So, it's a non-repeat of an increase in the first quarter.

Operating income -- improvements in sequential operating income were driven by the same themes really driving the year-over-year result, plus seasonal factors which I'm going to be getting into as I move on to slide 16.

If you look on the left side, starting with base fees, $46 million of the improvement in base fees was associated with the seasonal increase and maturity blending associated with the European dividend season.

So, despite negative markets, we delivered a $13 million improvement in base fees.

BRS revenues increased 7%, while performance fees declined, reflecting both a trend of lower performance fees in the second quarter compared to the first quarter, and volatile performance in a volatile period.

In these markets, we have some fees -- some funds performing very well, but also we have funds that are volatile in a volatile market.

Some of our larger hedge funds have moved up or down multiple percentage points over days or weeks, and this leaves it highly uncertain exactly where the funds will be relative to high watermarks on the lap date.

We can talk more about that next quarter as the vast majority -- the biggest number of [losses] in the fourth quarter, though some are in the third quarter.

As discussed earlier, a strong appetite for income products led to a $25 million improvement in fixed income base fees, which you can see on slide 17, while the seasonal factors we just talked about supported growth in equity index base fees.

Expenses, on slide 18, are down 2% sequentially, reflecting the seasonal benefit of lower payroll taxes, which peaked in the first quarter, and lower incentive comp, offset partially by our brand initiative, which would you can see in the G&A expense.

Slide 20 shows our non-operating expense of $43 million, which in this quarter reflected $44 million of net interest expense, including the interest on the $1.5 billion of incremental debt that we issued in May.

The value of the investment portfolio, as you can see, was completely stable, with gains offsetting losses.

The purpose of the portfolio is both to seed new product and co-invest with our clients.

And just to give you some data on the benefits of those seedings -- funds that we seeded since fourth-quarter 2011, specifically we seeded a multi-asset income fund, an emerging markets fund, and a global long short fund, have provided great new investment options for our clients and gathered over $800 million in new assets in this short period.

So, we are really seeing the fruits of the seeding.

Our balance sheet remains small with approximately $8 billion of economic tangible assets composed of cash, receivables, and the seed and co-investment portfolio.

Moving on to 21 and summing up, we delivered a healthy margin, we generated strong operating cash flow, returned a large amount of cash to shareholders, and transformed the ownership of the firm.

Looking ahead, we are extremely excited about the opportunities we have to help our clients navigate this challenging environment and help them to balance between near-term unknowns and long-term opportunity.

Our balanced business model, client focus, and commitment to long-term growth are benefiting the business.

Near term, we are well-positioned to service client's immediate needs, risk appetite, and desire for liquidity in products such as ETF.

We are also well-positioned to work with our clients in the long-term, as risk appetite and the need for returns balance out.

Our commitment to alternatives remains strong, as evidenced in our announced acquisition to private equity -- of the private equity fund-to-funds business.

Though you have to recognize in this environment and also in these asset classes, that decision-making timeframes have lengthened; these are long decision -- longer-term decisions for people.

So, this opportunity is going to play out over time.

We think it is a very important opportunity, which will generate strong results both for our clients and for our shareholders.

With that, I will turn it over to Larry, who will discuss the external environment, what we are seeing with our clients, and our focus on performance.

Thank you, Ann Marie.

Welcome, everyone.

While the first two months of 2012 started with a lot of optimism, we, like the rest of the industry, witnessed a softening in our net new business beginning in March and lasting through the quarter-end.

I have discussed this quite a bit, the risk on/risk off, and I think the issues going on right now with all the uncertainty which I will talk about has really created a change in attitude by investors, as they are trying to redetermine how they should think about their portfolios, which I will talk about quite a bit later.

As Ann Marie did suggest, global markets were down from the last quarter and down even more dramatically from one year ago.

With the MSCI Barra World Index average in the second quarter down about 7.4% from a year ago, this uncertainty continues to be fueled by the fragility of the European banking sector, by the European sovereign debt issue, and also the overall economic situation throughout the world today.

That includes China.

This has put investors in a more of a defensive nature, and it is our job and we are spending a great deal of time with our clients in trying to help them think about how they should think about these issues.

We all know where the safe haven assets are -- they are in US treasuries, they are in [Boons].

US treasuries today are trading below 1.5%, Boons at quarter-end ended at 1.58%.

So, we are talking about extraordinary low yield levels.

We are talking about yield levels that cannot meet the long-term objectives of anybody.

So, the global growth -- so, the safe havens, over the long run, may not be true safe havens.

Global growth maintains muted -- the most recent data from Bloomberg indicates that the real annualized GDP growth in the first quarter turned flat in the Eurozone, remained sluggish in the United States, between 1.7% and 2.2%, and fell to a level that people didn't think was going to happen in China, with China falling to a 7.6% growth rate, down from the first quarter of something close to 8.1%.

This uncertain climate has shortened the horizons for decision-making in short, and shaken the confidence of investors worldwide.

But not only just investors have been shaken, I do believe CEO attitudes have been shaken by this.

This is a big change, from my perspective, from 2011.

Throughout 2011, despite a similar type of volatility, certainly the same type of issues we had faced, I do believe CEO behavior has changed much more this time than we have seen a year ago.

I do believe CEOs have truncated their field of vision, in addition -- on top of all of the truncated time horizons of investors.

The issue that I think is really critical is that 1.5% in treasury yields equates to negative returns.

1.5% over 10 years as a return will not get you to a retirement.

I do believe, and I was in Washington yesterday, I do believe the greatest crisis in America will be not healthcare in the next 10 to 20 years, but the inadequacy of retirement throughout this country.

Yesterday, a very large pension plan, public pension fund announced that their one-year fiscal year return was 1%.

They paid out their actuarial tables of 7.625%.

Obviously, that type of mismatch cannot persist.

As paying out large numbers only destroys the corpus, the corpus creates a greater mismatch, and this crisis is only going to get worse if we don't find solutions to address it.

Compounding the impact of low interest rates is the fact that people are living longer and longevity is accelerating.

While longer life should be a good thing, people are going to have to work much longer to reach their needs as a retiree.

This in turn will create issues for our younger generation wanting to enter the workforce.

There will simply be fewer jobs and our younger generation will likely have an increasing financial burden funding the retirement needs of their parents and families.

I believe that in the future, this underfunded pension and retirement plans will be more significant for governments in the United States and other parts of the world.

We believe at BlackRock we have the tools and the ability to combat these issues.

We are working with our clients in trying to have them focus on that.

We believe it's important to start focusing on returns over long periods of time, which requires focus on what type of long-term investing -- not investing in products, but its outcome-oriented solutions.

So, this is not the traditional style box, and this is a much longer conversation.

And we are having these types of very long, but very exhaustive, types of conversations with our clients in trying to help them navigate with these difficult situations.

So, for the remainder of 2012, unfortunately, all eyes are still going to be on politics and the economy.

In the United States, we have elections in November, followed by the impending fiscal cliff and the sequester.

This will likely create additional uncertainty and lead to more soft business sentiment and probably a reduction in consumer spending.

The global regulatory environment will continue to be more difficult towards financial institutions, forcing more deleveraging, creating more compliant requirements.

But let's be clear -- asset managers will share in the increasing cost of this regulation.

Europe will take, as I said earlier this year, anywhere between five to eight years to sort out their issues.

This is a long-term issue.

There is no silver bullet.

We are talking about transforming the social contract between government and their populations.

This cannot happen over a one-month, one-quarter, one-year situation.

On top of that, the Europeans are going to have to find ways of growing, in addition to these austerity plans.

In the near term, as I said earlier this year, I expect the ECB to be more aggressive on rates to drive the euro close to parity with the dollar.

This is one way that they could grow -- find growth for Europe on top of these austerity programs, by making them more competitive.

This, on the other hand, is not a positive for the United States.

We have benefited -- and our corporations certainly have benefited by having a weakening currency, and now our currency is becoming a more valued currency, it will put some pressure on this country if the euro does indeed fall to the parity level.

I think at this time, BlackRock assumes the euro is going to be falling to the $1.10, $1.15 area, but there are some people who believe it needs to fall lower.

Let me talk about this -- what does this all mean for BlackRock?

Let me first start off in talking about people.

As a global organization and a leader of our industry, we are committed to adapting our organization to meet the needs of our clients in this changing environment.

As our clients' needs change, we have to change or we will be less important for our clients.

Change, when it is prescribed, when it is planned, is both necessary and healthy for an organization.

That includes change to ensure that how we are delivering our performance to our clients, that is also in our architecture and how we have discussions with our clients.

We recently witnessed some turnover in our portfolio management group with the departures of Bob Doll and Dan Rice.

We actually wish both of them well.

While we endeavor to keep turnover low to ensure consistency in our portfolio management teams, there will always be some level of turnover.

We certainly will make changes whenever necessary to avoid even the appearance of conflict of interest.

We use change to enhance our performance whenever that is an issue.

Another change we saw this quarter, which I would like to highlight, is totally unrelated to the portfolio management changes, was my good friend and partner's Sue Wagner's decision to retire.

This does not change anything within BlackRock.

We are actually fortunate with Sue agreeing to joining the BlackRock Board in October, and I am sure we will benefit from her insight, her intelligence, going forward as a member of BlackRock's Board of Directors.

Overall, our turnover at BlackRock remains to be very low, far lower than the rest of the industry.

Our turnover rate at the MD level is under 1%, and turnover across the firm is also very low -- approximately 4%, which is compared to an industry norm of about 10% to 12%.

BlackRock has always had a strong focus on talent development, including investing in our people, hiring top-tier talent with the ability to have immediate and a long-term impact on our Company.

As in the past, we are constantly attracting proven leaders who are excited to bring their deep expertise and client-centric philosophy to BlackRock.

We highlighted Phil Hildebrand, who will be joining us October 1, formerly the head of the Central Bank of Switzerland, who will be taking a very important international role from our London office, working on solution-based relationships with our 100 most important clients.

We noted earlier this year in the hiring of Mark McCombe, who is now our head of Asia-Pacific and had a dramatic impact already on our business in Asia.

We also have announced the hiring of many different investment teams -- a number of investors in our Fundamental Equity team, where we were in need of upgrading due to performance issues, and we were very pleased with bringing on board an entire Emerging Market Debt team that will really enhance our position in global bonds and our positioning worldwide in the fixed income arena.

So, we are a organization in which many people are seeking to join this organization, and I think we are in a very unique position, unlike so many other financial services companies.

And we are going to continue to find opportunities to bring on very high-talented people, high-talented portfolio managers, to help us build and navigate together.

I'm also proud to highlight that our incoming analyst class this year is over 200.

It is filled with some of the best and brightest minds from the top schools globally.

Providing oversight of our talent agenda and succession plannings, we are fortunate to have an extremely strong and active Board that was recently recognized as one of the top five boards for its strong corporate governance.

I believe were ranked one when I saw the analysis.

They are highly engaged in guiding the Firm's strategy overall.

On an annual basis, our Board conducts a comprehensive review of each of our core businesses, including results, strategy, outlook, succession, and talent planning.

Recognizing the importance of our human capital, each year Management and the Board reviews our top talent across the firm, and we have a complete review of succession plans at all levels.

That meeting will occur in October, like it has done for the last five years, so this is nothing unusual, nothing strange.

This is what we believe we need to have a high fiduciary standard, and this is what we believe, working with our Board, to making sure that we review Management succession issues across all our businesses -- not just one business or one leader.

We believe this planning makes a better and more resilient organization and differentiated organization among so many different firms that have had issues around talent.

Let me talk about performance, which is the key to any investment management firm.

We have had some notable performance in a wide variety of products supporting our key themes, despite poor global markets.

We also recognize there are a few areas where we need to improve, and we are going to take action.

I am pleased to say performance was strong across our fixed income, with our fundamental fixed income products demonstrating continued improvement and moving to the top quartile with 71% and 81% of our active taxable fixed income AUM exceeding its benchmarks or peer medium for the one- and three-year period.

And particularly, our high-yield team again was very strong, with 80% of the AUM exceeding benchmark or peer medium for the three-year time period.

Municipals also were consistent, with over 60% of the other assets up above benchmark for one- and three-year period of time.

I am pleased to say our performance in our alternative products have been quite strong in some of the cases, reversing some weaker performance that we saw in 2011.

Our fund-to-funds of hedge funds, BAA, has now had 13 -- I want to underline, 13 consecutive quarters of positive performance relative to the benchmarks and peers.

Obsidian, our fixed income hedge fund, year to date is up over 20% -- and it's clearly outperforming its benchmark and is now back to its high watermark, or close to its high watermark, going forward from last year.

FIGA, our model based fixed income product, is up 7% year to date and outperforming its benchmarks.

And I'm even more pleased to say it now has 14 consecutive quarters of positive absolute performance -- not just relative performance, absolute performance.

Our scientific active equity team, which as we were very public about three years ago when it had some very poor one- and three-year performance numbers -- over the last few years, we have changed the leadership team, we have added many more portfolio members, and also analysts to help us navigate this.

And I'm pleased to say performance over its benchmark exceeds 67% for the one-year and 85% for the three-year.

So, we can now move from a defensive position explaining what happened, to now, going forward, we have the ability to focus on more positive opportunities for asset flow.

The area where we still are not hitting as well as we need to, and that is the fundamental equity.

This is where we have had some -- where we hired new portfolio managers.

We will be announcing other hires in the most recent months to come.

We have less than 50% of our AUM above the one-year; it's approximately around 44%.

That is not acceptable, and we are working towards building that platform up and making sure those issues are addressed.

We have also had a challenging year in part for our multi-asset product area, global allocation, and it's a little under 50% in its benchmarks.

In its one-year period, it's actually in the 32% area right now.

So, we are working on that with Dennis Stattman, who has had a 10-year great track record.

So, Dennis, we have total confidence with he and his team, but these are the issues that we try to make sure that we stay on top of and address.

Let me move on to regulatory.

This uncertain regulatory environment and recent bank missteps in financial services will undoubtedly be called for even more regulation, and asset managers may be impacted.

This is a new reality, and BlackRock is trying to stay ahead of the curve in preparing for increased global regulation.

Let me just discuss money market funds.

Being in Washington yesterday, I believe we are going to see the SEC finally come up for comment period a proposal.

I don't know what the proposal is, but I think the gridlock within the SEC may be broken.

I may be premature in talking about it, but that is the type of noise I heard in Washington.

We have been publicly acknowledged -- we have publicly acknowledged the need to further reduce the systemic risk in money market funds without undermining the money market fund source of value to investors and funding to the short-term capital markets.

We have remained -- we have maintained a constructive posture with the SEC, with the FSOC staff throughout this debate.

SIFI designation -- the Office of Financial Research is conducting a study of asset managers.

We have encouraged them to try to be more transparent in their study.

The study should be completed sometime in fall, and then there is going to be a likely comment period.

So, at this moment, I don't have any information what does that mean for BlackRock or any other non-bank organization that is being reviewed with the Office of Financial Research.

So, at this time, I can't give any more color on this, but we will learn the same time everyone else learned when the official proposal is introduced by the FSOC.

Turning to the business -- our focus on our strategic themes continues to be -- to drive flows across ETFs, retirement, income and multi-asset solutions.

So, let me give you some of the highlights.

Institutional investors generally remain to be in a holding pattern, while the trend for active to passive continues.

Globally, our institutional business has experienced about a $4 billion net long-term outflows; however, they were strong pockets of growth momentum, including defined contribution and in official institutions.

Our strategic focus on retirement solutions continues to gain momentum as our DC clients generated $7.8 billion in net inflows slightly tilted towards passive strategies.

Our LifePath offering saw significant net flows of $3.1 billion.

In alternatives, there was a lot of noise this quarter.

We actually redetermined what should be an alternative product and what should be just a normalized active product, and $2.4 billion of that number was a redefinition of the product, It was not an outflow, but on the net difference it looks like an outflow.

There was also $1 billion of capital return because of successful reasons when we paid off a product.

We are seeing outflows in the global ascent, which offset some of the great momentum we had in other products, including our multi-strategy hedge fund, our emerging market hedge fund, our model based fixed income hedge fund, FIGA, and our renewable energy fund achieved our first closing this quarter.

Internationally, flows were essentially flat, as we witnessed again a mixed picture of client behavior.

Obviously, in Europe, because of the situation in Europe, we have seen a real slowdown in client activity.

Some clients are derisking their portfolios, worried about what this all means, and that is where we had an $8 billion active outflows; while others needed to add risk and we had $8 billion of passive inflows, largely indexed equities.

So, it really depends on a client, their situation, their liability.

So, there wasn't one dramatic trend, it was a mix of trends within Europe.

Let me just turn to our pipeline.

We are very pleased with our net new business pipeline, totaling approximately $55 billion as of July 12 -- up $30 billion from the first quarter.

This pipeline includes $9.3 billion of mandates that were funded since quarter-end and $45 billion of awards to be funded.

While this increase of our pipeline is clearly positive, I should remind everyone it is important -- much of the unfunded pipeline is in passive; and then, two, this only reflects -- I will underscore, only reflects our institutional business.

The majority of that number is institutional business, I think we are reflecting our ETF flows year to date -- quarter to date.

But that said, the underlying momentum in a number of areas across the firm is being masked by the environment that we are living with.

We have strong momentum in alternatives right now, both in the US and Europe, which is creating increased diversification across our alternative platform.

Similarly, performance across our EMEA fixed income products is leading to good opportunities in EMEA, retail, and with our financial institution platform.

And I'm very excited to tell you that these investments that we made over the last few years are beginning to pay off.

Let me move to retail, the US institutional, then I will move to iShares.

Again, the industry flows were down significantly from the first quarter.

Our retail franchise delivered strong results with $1.6 billion in long-term net inflows globally, with particularly strength in US fixed income.

Again, most firms in mutual funds had outflows in the second quarter.

In the US, retail and high net worth generated $2.9 billion of long-term net inflows across all asset classes.

And we continued to deepen our relationships in the SMA business, or the separately managed accounts space, yielding strong results with $1.6 billion of net inflows, largely into municipals, US core, and other fixed income products.

BlackRock is the largest and most recognized SMA platform in the country, with now $55 billion of AUM.

International retail -- another example of risk off in Europe -- we had outflows of $1.3 billion, predominantly in equities, which is consistent across what we are seeing worldwide.

Across our broad retail platform, though, we continue to innovate, we continue to bring new products to market.

Internationally, we expect to capitalize on certain of our newer funds, which are reaching their third anniversary with strong track records -- principally, our European credit fund and our high-yield fund in Europe.

So, once again, this rebirth, this renewal, this investment in investment teams, it doesn't happen overnight with getting assets.

But you bring these teams in, you nurture them, they have good performance, and after two to three years you start seeing inflows and we expect that from those teams.

Global iShares -- despite muted activity industrywide, iShares captured $6.1 billion in net inflows.

We captured over 50% of the market share of industry fixed income flows for the quarter, with $11.7 billion in net inflows, while derisking -- which is impacting even ETFs, is impacting the flows at our international equity and emerging market funds.

I would say organizationally, we have 250 ETFs.

And when you see risk off globally, BlackRock's ETF platform, our iShares platform, will probably be more harmed in outflows because we have a multitude of products that are international based, that they are -- I would call more aggressive type of strategies than the core what I would call -- the core indexed, the core fundamental strategies.

So, that is one of our explanations in terms of market share issue, I could talk about that later.

This quarter, we started off strong because we did see some modest risk on, with $3.5 billion of net inflows so far this month, which is in line with our historical market share.

Consistent with our culture of innovation and strategy into new markets, we launched 60 new iShare products and special emphasis on fixed income and local equity strategies, including our green ETF launched in Brazil, which generated over $200 million in flows in the quarter.

Let me move to BlackRock Solutions.

BlackRock Solutions continues to be an industry leader.

BlackRock Solutions continues to be in huge demand.

The need for strong risk management and analytics made the second quarter a resilient quarter despite the market adversity.

BlackRock Solution revenues were up both for -- over the period quarter and over a year-to-year basis.

This is on top of a reduction of over $61 billion of Maiden Lane assets, which I will talk about in a second.

So, what is also important -- we saw a 21% increase in growth in our Aladdin revenues, which now represents more than two-thirds of our BRS revenues.

Just three years ago, Aladdin represented about one-third of the BRS revenues, and these are the long-dated, more sticky form of revenues, as clients put Aladdin and other -- our green package, our risk management tools, onto their platform.

The Aladdin pipeline continues to be very strong, and increasingly we are having -- our clients are now adapting not just our fixed income platform on Aladdin, but our clients are now looking to integrate our equity platforms.

So, we are working on Aladdin conversions now on the equity side for some of our existing fixed income clients, and I do believe having now a full product array of equities and fixed income on Aladdin is going to make Aladdin even more robust.

I just want to take a moment and say that because we are in a period of time that most positive is a negative and negative is a real negative in our atmosphere as of today, but there is one thing that I'm very proud of, and that is our successful payback of the asset disposition related to the Maiden Lane vehicles.

There is not -- people don't pause and think about -- this was money that the government gave to these -- to Bear Stearns to make the Bear Stearns merger work with JPMorgan and to stabilize AIG, to a lot of negative press, a lot of uncertainty.

The American taxpayers were paid back in full with interest, and there are still opportunities remaining for more profits with the remaining portfolio in these items.

This is a pretty big success for our country, for our regulators, in terms of what they are trying to attempt to do in stabilizing our economy back in 2008 and '09.

And the results were very strong, and not enough success is being illuminated -- we are spending more time focusing on failures.

Let me talk about brand.

Our investment in our recently launched Investing for a New World campaign continues to deliver results.

Building our strong brand is an extremely important long-term commitment that we are looking to make retail and our name recognition in the retail side to become a much stronger platform-branded name.

This is not just in the United States, but globally.

We now have clients who have never spoken to us before calling us and finding out more about our offerings.

We now have more hits to our internal website than ever before, and we are having more conversations with more FAs than ever before.

Let me give a couple final comments.

In this climate, we are very proud of our platform, we are very proud of being a fiduciary committed to always doing what is right for our clients' best interest.

Once again, I would like to really thank our employees for their continued discipline and diligence in serving our clients across the globe, and I want to extend my gratitude to all our clients who have entrusted us with their financial future.

With that, I will open it up for questions.

(Operator Instructions) Marc Irizarry, Goldman Sachs.

Just digging a little deeper into performance of active equity, and fundamental equity in particular.

Can you talk just a little bit about some of the people changes?

And then, should we expect that there is sort of a go-forward replacement cycle?

Because if you look at the organic growth rate in active equities, it actually improved sequentially.

So, should we think about some of the people changes maybe pressuring where you are with consultants in fundamental equity and just maybe address the performance of people changes there?

You know what?

That is such a good question, I'm going to give it to Rob.

So, Mark, good morning.

We have continued to build investment teams that can weather the different cycles in the marketplace.

And we are looking for teams to deliver consistent long-term performance.

And as you know, we spent a lot of time and money over the last few years investing in the right talent to build out the right teams needed to deliver performance.

And you should expect that we are going to be very focused on this going forward, especially in areas where we see or feel that there has been underperformance.

Let me give you a little bit of a broader answer to that, beyond just fundamentals, and I will touch on that.

The first thing is that in our alternatives area, you see that we have expanded our product suite and addressing this with several new teams that are around infrastructure where we think a lot of investments will be made -- private equity and real estate.

And Ann Marie did cover a bit of that by announcing the addition of the new Swiss Re Private Equity team into our products suite.

Larry mentioned a little bit about fixed income, where we have focused on the process to make sure our teams can deliver strong performance.

He mentioned our fundamental fixed income products, which we are very proud to say have now moved back to top-quartile performance, and the numbers are over 80% in active taxable fixed income exceeding the benchmark.

And then in iShares, continuing to innovate the product suite, where our index funds continue to deliver very strong results over 95% or above their performance tolerance.

And now, finally, the equity area, which you highlight, we have brought in a brand-new emerging markets equity teams to raise the bar.

We hired a gentleman named Timothy Keefe to head a new flexible equity team.

We have Chris Leavy, who is a tremendous hire for us, who is focusing now on strengthening our performance in the large cap series and the fundamental large cap growth in energy and global opportunities products, as well.

So, I can to you that Larry and I are going to be less tolerant of performance that is not up to par with what we need to do to drive growth and raise assets.

But when I look at performance, I also want to focus your attention on our focus areas and how this translates into areas of growth for our Firm.

So, we have an income theme, and there we have focused attention on our equity dividend product.

It has not only had strong performance, but is rated five stars by MorningStar and is the Lipper Leader for total return.

And our global dividend income, which has produced really good income, and 85% of the holdings that they have, have increased their dividend.

So, here is an area where we have fundamental equity with good performance, and that translates into driving growth.

Also in the income area, investors are being served by the high-yield team that Larry cited, which is continuing to be in the top 14% of their peers in raising a significant amount of assets and driving because of the performance that they have.

And I will just mention a couple of others in alternatives, just to highlight a few that may not have been mentioned as well as it should have been -- our core appreciation composite, which is our alternatives flexible fund and hedge fund, has outperformed the target by a significant amount, and we continue to attract interest.

And this GlobalAlpha product that we started in fixed income is up over 7% net of fees year to date.

That is a very exciting product for us going forward.

Within Solutions, the one product Larry mentioned was the global allocation fund, and I would just say that this is a long-term team, and while the second quarter was a bit underwhelming, the absolute performance year to date is positive and clients have focused on the good long-term performance and the ability of this team to generate a good [alpha] in very different environments.

And lastly, in the retirement space, we created, as you know, the first target date fund.

And 20 years later, we are very well-positioned with our life cap funds.

They have outperformed an average of 84% of their peers across all the vintages in 2011.

And we also continue to see good flows in the ETFs and index products, with notables flows in the fixed income area.

So, I would say that performance can be described as very good in most areas, turnaround finally in a few areas that you have all focused on in the last few calls, but most especially the strong performance in our five key focus areas and the continued investment in our portfolio teams are really driving the business at this point.

Okay, great.

And then, just on the alternative bucket, it looks like maybe some of the core products experienced volatility.

Is the volatility there you are seeing, is it in line with what you have seen historically?

And are we moving to a new place with alternative allocations, where maybe manager selection is mattering more?

And is volatility becoming more important?

I don't know if that is for you, Larry, or Rob.

I'm going to give it to Rob.

Carry on.

It 's really -- the only change has been the volatility in the risk on and risk off.

We still rely upon a process that the individual managers have, which has really not changed.

But I think that you may see more volatility in the numbers, just because of this risk on/risk off situation, which is happening globally.

But I believe the long-term performance in those and the current process that we have will bear out the right performance numbers for the client --

And you would expect your flows to sort of follow the volatility pattern a bit more, as well?

Yes.

And I think that the highlight that I mentioned, the fee [gut], and some of these products which are the go-anywhere product, giving flexibility to the managers, is going to help their returns.

And we are -- already see that attracting flows and also the clients that are interested -- the amount of visits and interest are up on those.

Okay, great.

Thanks.

Daniel Fannon, Jefferies & Company.

On the alternatives -- just thinking about the performance fee outlook -- obviously, it's very difficult to pinpoint or forecast.

But can you give us a sense of how you think about performance fees today versus maybe this time a year ago?

Or, as we think about even on a short-term basis next quarter, and obviously you have a big ramp potentially in the fourth quarter.

But any guidance on how you are thinking about that outlook would be helpful.

Well, as I mentioned in my remarks, volatility in the environment has made it difficult for me to pinpoint even my own internal forecast on performance fees, because we have seen -- as I have been observing where these -- some of the biggest funds are relative to high watermarks, I see them above high watermarks one week and the next week below them.

And it is so much a single point in time measurement that -- that is what makes the forecasting hard.

Rob had the luxury of talking over time, and I totally agree the performance over time is going to be strong.

But I'm -- and I know you -- the question you are asking is the performance on a single date, and that becomes challenge.

Of course, last year, also, was not our most robust year ever in performance fees.

And year to date, we have tracked broadly in line with last year.

But that being said, this environment does make -- (multiple speakers)

But I would say things like Obsidian is now back to close to its high watermark is an opportunity to now going forward.

And we have other products that are doing quite well, like FIGA and R3, BAA.

So, I think because of the volatility, it is hard to track actually what the out -- amount of performance fees.

But I would say we are in a better position at this moment than we were last year, in terms of where we are and in terms of high watermarks and other issues.

So, it is now up to the PM to perform, but we are in a pretty good position.

But the volatility is pretty extraordinary.

Great, that is helpful.

And then, I guess on the expenses -- Ann Marie, you mentioned that there was a 14% increase in marketing within the broader G&A line.

So, could you help us understand what the dollar amount that is?

And maybe as we think about expenses going forward, how much -- where you are in that spending, kind of marketing campaign?

And think about maybe the ramp, or is that a good run rate thinking about the rest --

Let me just say one thing before Ann Marie discusses the specifics.

Obviously, all our spend is a function of what our commitment to everybody is related to our margins.

They are -- not one expense is looked at separately from a total view of where -- how we are tracking in our margins.

Our margins are up about 0.5%, I think, and depending obviously where beta, I can give you a much better degree of where our margins will be.

But I don't -- one should not just lock in a spend on anything hard, because we are going to mitigate spend as we think about margins, as we think about going into 2013.

But that said, we are very committed in this brand campaign.

It is a long-term strategy and a major component of where we believe this Firm needs to go.

With that, Ann Marie, I will give you more of the -- can give you much more of the granularity of that.

Yes.

So, just to give you the specifics -- so, sequentially, marketing expense was up a little more than $20 million.

I would say that that would be a reasonable rate at which we could run, but there will be some seasonality in our marketing.

So, you are not going to see -- like Larry said, we are going to spend it the way it makes sense.

When everyone is on vacation in July and August, we are not going to be running the same amount of ads, we are going to spend less money, and you are going to see that come down.

In the fourth quarter, when people are ready to invest, you are going to see it come up.

So, we are going to spend -- I think the important thing is, we are going to spend the money in a way we think we are going to get a real return on it.

And versus the overall level of where the Firm is.

Great, thank you.

Craig Siegenthaler, Credit Suisse.

Just a question on the composition of the institutional pipeline.

Can you talk about what was the largest mandate in the pipeline?

It's multi-billions.

It's less than $10 billion.

I can't -- my guess is $6 million or $7 billion.

Got it.

(multiple speakers) Maybe $6 billion to $8 billion.

It's in that range.

I know the client, but I don't remember the exact dollar amount.

And I must say, these are not [in the pipeline].

I met with a client last week, and we are looking at a portfolio-- I'm not here to tell you we're going to win it, but we are working on a strategic relationship with a client that is -- it's over $15 billion.

We are working on other clients that are looking to outsource a large component -- this is something that Rob is working on, that may be possibly outsourcing a large component of their balance sheet.

So, we are not even close to winning these yet, so I don't want to put these in any models or businesses.

But we are -- because of this uncertain environment, clients are looking for more, as I said earlier, more thoughtful, more strategic type of conversations.

And some of the conversations we are having are really robust.

But I think on a general basis, Craig, our pipeline makeup is really consistent with the past types of pipeline compositions.

Got it.

And then, just a follow-up on the new trading platform initiatives -- I was wondering if you can give us any update, and also talk about -- is all the expense for this platform really in the run rate today?

And then, also, maybe talk about what is the opportunity to revenue from the trading effort in your Solutions business?

Well, A, I learn about a lot of it from the press.

They seem to know more than I do.

So, we did do a beta testing, which the press actually accidentally got, and we are not trying to hide from it.

It was very successful.

I'm not even going to talk about how many clients were on it, but it was successful.

We all seem pleased about it.

The run rates is probably appropriate -- whatever is in our platform already.

But if we start seeing it ramped up, we will have a higher run rate once we start really implementing, if we have tens and tens and tens of clients a part of it after we go from the beta testing.

And then, when you look at in terms of revenues, we haven't focused on the revenue model component of it yet, because we are focused and making sure the functionality -- and if the functionality is good, if we can show the clients that this is a good -- a better execution, the clients are aware that ultimately this is going to be some form of a revenue model.

Let me be very clear, though -- as BlackRock as a participant for our clients that we are navigating trades for our clients, we are charging no commission.

So, that has to be very clear -- we cannot do that, that would be illegal.

It would be against a lot of the ERISA laws and all the other things.

So, we are doing that flat and clear with the idea that we are a higher fiduciary and we are getting better execution.

For clients who are on the Aladdin platform, there would be, obviously, a transaction cost fee; it's going to be cost plus something, which would be very de minimus.

So, I look at this not unlike when we first created Aladdin, when we all started offering risk management service for our clients.

It was really meant to be a cost ability for us to fray some of our technology costs.

Obviously, it transformed into something way beyond that.

We are looking at this as -- if we earn enough revenues to offset all of our trading platform costs across BlackRock, that is a huge win.

It helps our margins.

So, I don't want anyone to model out something that this is going to be a massive transformational revenue area, because I don't expect it will ever be that, but it may.

And [never would have expected] BlackRock Solutions Aladdin to be as strong and robust as it is.

But we are looking at it primarily to raise the bar as a fiduciary standard to minimize execution costs for our clients.

Great.

Thank you, Larry.

And Craig, as I said to everybody over the last few years, we would not be upset if the market makers of today make the most tightest markets ever and that there is not a need for our trading platform.

We are doing this only on -- because of the issues around -- surrounding Basel III, Volcker Rule, all the other issues where we believe there is going to be less capital in the marketplace for the security firms to be making markets for.

And so, as a result, we believe there will be a long-term need for this type of platform to reduce our cost of execution.

Great, thanks.

Matt Kelley, Morgan Stanley.

So, just taking what you said about -- and we see it too in the asset liability [grabs] from your clients and how that has widened out, versus your pipeline and where you are seeing new flows -- what you think stems the disconnect here?

And when do institutional clients take on more risk?

What is it needed to get them over the hump?

Well, let me just tell you a funny story I had.

I was -- this is not an institutional client, but -- let me restate it -- this is not a pension fund client.

I was having dinner with one of the large sovereign wealth funds, which clearly is multigenerational pools of capital.

And all our conversations over dinner were about talking about long-dated solutions.

And by dessert, though, they said -- but we are still measured quarterly.

That is the dilemma.

And that is the dilemma that everyone is facing.

We are -- clients are frightened of short-term volatility, and so they have derisked.

And as you cited and what we have said in the past, is derisking is actually causing much greater pain over a longer-term period of time than -- and so, importantly, if you were a -- even if you were an individual retiree, one of our defined contribution clients, if they are 35 years old and they have been sitting in bonds for five years during the area where you are supposed to start ramping up the compounding of your return to get an adequate retirement, you were really harmed.

And I don't believe in our country today and other countries, we do enough to focus on how does one get to the nest egg that is necessary to live comfortably during their retirement ages?

We spend so much time focused on healthcare, we spend so much time focusing on how to live that extra day, week, month, or year.

And yet, we spend so little time focusing on -- how can we build the appropriate nest egg to have that life during retirement?

I think in the short run, what we have seen, we have talked about this over quarters and quarters, we are seeing more barbelling.

We are seeing clients barbelling, going into beta products, and then going into alt.

Some of it, unfortunately, is not -- they are going into alts because of accounting, because in some -- like in some private equity areas, the accounting is longer dated, and therefore, they have less volatility.

And so, I hope those are fewer and fewer of our clients who are doing alts only for accounting reasons.

Obviously, another reason why clients are going into alts and barbelling is because they are looking more for absolute return -- strategies not relative to return strategies, and they are absolutely looking for return strategies that meet -- that exceed at least 7.625% return, so they can meet their liabilities.

So, I would say what we are seeing now, like I mentioned a $15 billion client -- this client is worried about low interest rates and how it's impairing it, and they have given us this ability to relook and recreate what they should do with this $15 billion.

And we are going to be looking at over a multi-period of time.

And so, what I do believe clients are beginning to do, they are asking the question -- how should we frame this out?

We are actually spending more time talking to the boards of some of the pension plans, trying to help the board understand this.

Their fiduciary responsibility for retirees and for current employees is a very difficult one.

So, these are very hard questions to answer.

And if we continue to have low rates and if some of these plans only earn 1%, these issues become even more enlarged.

So, I really do believe our platform has proven to be a differentiator in these conversations.

So, not only do we have the breadth of products, but we have the risk management tools to help them think about it.

And this gives me a great amount of comfort about what we are doing and how we are positioned.

Okay, great.

And then, one follow-up from me on the opposite end of your barbell strategy, then.

There has been a lot of talk lately about your iShares strategy and the low-cost competitors gaining shares.

So, just curious where you think for your business specifically you will see the most growth going forward, both by asset class and by product?

Sorry -- by region and by asset class.

Well, when there is a -- as I said earlier, when there is a risk on in the world, with our breadth of products that are worldwide, we will have more than our market share.

As I said in the beginning of the third quarter, we have had more of our industry type of market share because there was a little risk on in the week or so of July.

But when we are head-to-head in a commodity-based product, I think you are correct in saying -- when a commodity-based product, that one of the core strategies where price becomes more dominant because competitors have equal liquidity, equal tracking [air], price is even a more dominant issue.

Without going into much detail, we are -- we believe we have a plan to address it over the next coming months.

And it is a big issue, and I have to give a lot of credit for Vanguard -- they are a trustworthy brand and they have taken market share from BlackRock in the US core type of equity products.

We are holding our own, obviously, worldwide, we are holding our own in fixed income; but I am not pleased in our positioning to date in the core commoditized products in the United States.

Okay.

Thanks for taking my questions.

Michael Carrier, Deutsche Bank.

First question, just on the fee rate -- usually in the second quarter, there is the [sec] lending fee, so it's a little tough to try to measure.

But if we just look sequentially, it's an unusual quarter because your average core AUM -- ex advisory, the assets would be up a little over 1%.

But if you look at the fee rate, it's down.

And if you strip out the incremental [sec] lending fees, it would be down a decent amount.

So, I was just wondering -- you mentioned some of the weight on international equity markets, but if you look on an average basis, they were not down as much.

And so, I guess I'm just trying to figure out -- did you really see a lot of core fee rate pressure?

Or when we just take the period-end AUM numbers, given the rally of the market in June, it's just a bad average AUM number.

Right --

Michael, I think the number-one issue is the mix of business.

We saw flows out of equity, flows into fixed income, different margins.

So, on top of the beta, out of some active strategies and the beta strategies -- but the key, and this is an industry issue, much more outflows in equity globally and much more inflows in fixed income -- the risk off trade.

Okay.

All right, that is helpful.

(multiple speakers)

No, I was going to say -- there were no fee issues.

It's all --

We had no fee issues this quarter.

But even within equity, it's a mix issue, going from what I would call the higher risk areas to the more core areas, and those tend to be higher fee to lower fee.

So, it's all mix --

But also, if you look at where markets degraded the most, so there are some in the higher fee area, in emerging market products, energy products -- that is where the greatest degradation of absolute returns were, where we had these larger negative returns, and those are the higher fee products.

Right, okay, that makes sense.

And then, maybe just on the succession that you mentioned, just in terms of the overall Firm -- yes, it's really most asset managers that the firms tend to be run for the investors, and that is where a lot of the focus is on.

And so, from the investor side, we don't see the full bench.

So, with Sue retiring, what is your outlook?

Who is on the bench?

Obviously, Rob.

But what is -- how do you see BlackRock going forward over the next couple of years?

Sue was visible, working alongside with me.

But the bench actually has increased over the last few years.

We have a robust Executive Committee of men and women, part of it.

As you said, Rob is the President actively working on the Firm's issues every day alongside Charlie Hallac, who is our Chief Operating Officer and has been the Chief Operating Officer for two years.

We have Rich Kushel, we have -- our bench is actually growing, not decreasing.

And adding the Mark McCombes and the Phil Hildebrandts has enlarged our bench, and we have some young men and women in our Firm who are really taking on much more of the responsibility.

You are going to hear more and more as investors about Rob Goldstein, he is the individual who runs BlackRock Solutions.

He is a -- he has done a fabulous job, he has been at the Firm 20-ish, 18 years to be exact.

And he has done an incredible job.

And so, the bench is growing and I'm forgetting some of the names or I'm not mentioning all of the names, but I would tell you the bench is strong.

It is robust, and I'm very proud of the process in which we are engaged in elevating our team and making sure we have a robust team.

Rob, do you have any comments on that?

No, I think the Board goes through succession planning, and we have just done an exhaustive review that is going to be presented.

And that is part of our goal, is to make sure that we are bringing up individuals, giving them more responsibility, and having a very broad bench.

And we will continue to do that, and I think the focus has been on several people that have left the firm, unfortunately.

No one is talking about all the people that we have recently brought into the firm.

And we are -- we will continue to do that and raise the bar for talent.

But I agree with Larry, we have a very strong bench that has been built over many, many years.

But we have heard the investors ask for more transparency with -- having more visibility with more of our team, and we are planning to do that.

And in fact, we have thought about doing investor days at BlackRock.

I think we are planning to do that later this year or next year?

June.

June of next year.

June of next year.

Okay.

So, I was -- so, that is already on the schedule, so we have much more transparency and visibility with our leaders of the Firm.

Okay.

Thank you for the color.

Thanks.

Robert Lee, KBW.

Question on -- I appreciate the -- your highlighting the different revenue characteristics of the different asset mix, iShares and whatnot.

But maybe it would be helpful also to -- if you could provide some incremental color on the margin variance.

I mean, my general sense is maybe iShares and index, even though it's clearly lower fee utilization rates, may actually be higher margins in some instances.

Is there any kind of color to provide on how would you think of the variance, and --

I'm going to want to have Ann Marie really get into it, but once again, I would say twofold -- A, the mix really does have strong impact on the margin.

You are absolutely correct -- the margin-specific index on ETFs are higher, but obviously, the equities have a higher margin than fixed income.

And so, you take into the mix, you take into where -- where do you have the greatest market declines?

Those are the highest fee type of products.

And I think it's just -- it's heavily into the mix.

But Ann Marie, help me.

(laughter)

No, I think the margin -- you are absolutely right with the ETFs and the index both being [considered] low incremental cost -- with managing those assets, you can put on a lot of volume.

It's the beauty of that part of the business model.

Okay, appreciate that.

And, Larry, understanding that you don't -- we really don't know what the FSOC will come up with, whether it relates to naming you or others as SIFI, and what that even means from a capital's perspective or otherwise.

But how is that uncertainty playing into your thoughts over the next coming quarters, a year about capital management?

Is it at the margin, making you a little -- your appetite for, say, share repurchase a little less robust?

I mean, how should we think about that?

There is no question that it's an element of our process of thinking.

It's not a major element.

I think if it was an element, I would not have bought $1 billion of shares back in May.

We intend to continue our share repurchase; in our conversation with our Board, we believe that will be an essential component.

I think you should consider share repurchase as a continuation.

We believe that is -- with our huge free cash flow, that is just going to be a continuation of our business model.

So, we don't -- once again, I don't believe we are going to do any large-scale acquisitions.

However, we are going to continue -- we continue to see small fill-ins, whether was the Claymore transaction in ETFs or what we did in the fund to fund, which really fulfill our need, because we have a very strong US fund to fund to private equity.

The Swiss Re transaction makes it a global fund to fund of private equity platform, and actually enlarges our whole -- our products in infrastructure, also.

We are actually looking at a couple of fill-ins right now -- one exclusively, and we hope that is something that makes sense once we do some due diligence.

So, we are in the market of making sure we have the best platform and taking advantage and being opportunistic in terms of fill-ins, as I suggested as part of our business strategy.

But I will make it very clear -- utilization of our free cash flow for share repurchases and dividends is also a major component of our plans for the future.

Whether we are a SIFI or not, as you said, we don't know what that means for capital.

We already have approximately $1.2 billion of capital set aside from -- because of regulators' request as a result of the BGI transaction.

So, we, unlike most asset managers, we already have capital set aside.

We all -- and another thing, everyone -- you are aware of it, I may need to remind everybody we are already regulated by the OCC, the Federal Reserve, the FSAs, the SEC.

And so, I'm not sure how that translates if we are one, and what does it mean?

It probably will have bigger impact if there were other firms who are not regulated by these entities, who have a more pronounced impact than it would on us.

And possibly, and I'm not saying it's going to happen, there is a possibility that if you are designated as a SIFI, it might be a good thing.

Maybe you are because you are so properly reviewed and scrutinized, you have a higher fiduciary standard, and people -- investors want that.

The mood is changing dramatically.

It was always suggested for banks who are designated SIFIs, and I think this is going to be true, that their liability costs are going to be less, because they are going to have more associated capital And I do believe in efficient markets, their liability costs should be less than other firms.

Now, since we don't have those type of capital needs and debt, it doesn't have that type of impact, but we will see.

We will see how this all plays out.

What I can say is, we are trying to be as constructive and helpful when asked by regulators on helping them what it means to be an asset manager.

We have spent time educating them on asset managers.

So, they have -- we have had requests from regulators, can we educate them?

Obviously, one component of Dodd-Frank, I have to remind everybody -- we are not allowed to have conversations to the regulators about this, or it becomes a public disclosure item.

This is very different than most other forms of regulation or potential regulation.

And so, let me be clear about it -- we are not going to regulators and trying to lobby or try to go against them.

We are trying to be cooperative when asked.

And so, that is why we are still in the dark somewhat about how this all plays out.

Counselor, was that okay?

Fine.

Good.

And correct.

(laughter)

Great.

Thank you very much.

Thanks for taking my question.

Alex Kramm, UBS.

Just wanted to come back to the ETF business and the equity side, in particular.

Obviously, we saw the outflows and you gave some good color, and obviously emerging markets and other business also you guys were a little bit weak.

So, I hear that.

But just the idea that we had outflows, and in general wondering if that means anything to you in terms of the maturity of the business -- not just your iShare business, but equity ETFs as a whole -- do you think the access to [passage] is slowing down?

Or is this really a risk on/risk off kind of move we are seeing here?

I have asked my team that specific question, because obviously that would have a meaningful impact on the future.

So, we believe it is entirely a risk on/risk off type of transaction.

As I said, we have had $3.5 billion of inflows so far in July.

Those are more of the non-fund -- a core type of ETF; they are more in what I would call the risk on type of products.

And so, no -- more than ever before, I think if you think about it, what area has done some of the worst performance to our areas like emerging markets?

It is Europe and it is energy product, it is mining -- some of the ETFs that were very big winners a year ago,

And one thing I think is very important to note, as I suggested in other quarterly calls -- we see very large active institutional participation in ETFs when they are searching for equity exposures, whether it is in Europe or emerging markets.

So, you have to also think -- this is not outflows from retail, it was more of the institutional managers worldwide who use ETF for beta exposures.

They are -- they took off risk, and so it is just -- to me, using this flow information is a great indicator of mood.

And when -- I don't believe it is an indicator of a transition into a new pattern of growth.

I think it is a real indicator of mood, which is consistent with what we are seeing across our other products.

Okay, fair enough.

And then, just lastly, switching to the active side, I think you mentioned a little bit about the -- the [Kwanzaa] scientific equity product and how you finally have a better performance.

But I feel like you have talked about the better performance already for a couple of quarters now.

So, what is changing now that you think you have a better conversation with clients to actually turn this into inflows --

(multiple speakers) -- product?

Yes, yes.

We are having better conversations.

Those conversations have not transformed yet into flows, but we are having better conversations.

We are actually having some clients who had us on watch lists before who have now taken us off watch lists, and one client actually gave us more money.

Now, that was one example.

It is -- so, as you know, when -- this area had severe underperformance three, four, five years ago, and now we have proven that over the three years, we are -- we actually have consistent performance a couple hundred basis points over most indexes.

And it's just time.

And -- but the conversations are more robust.

The conversations are better.

So -- and I would just say the outflows in that area are at the lowest levels that we have seen in the past six quarters.

So, it's -- the conversations are more frequent.

I could tell you the consultant conversations are totally changed from one that -- what is going on, to -- tell us more.

And so, it is just time.

I wish I could tell you, time is today.

I don't have that understanding yet.

But generally, we see after three-year anniversaries, you begin to see a slow and modest uptick, and then you start seeing some real flows.

All right -- very, very good.

I guess something to look forward to.

Thank you.

Yes, and I am looking forward to it too.

Thank you, everyone.

Thank you, all the employees.

I look forward to talking to everybody at the -- with a report at the end of the third quarter with a risk on mood.

But we will see.

Have a good quarter, everyone.

This concludes today's teleconference.

You may now disconnect.