貝萊德 (BLK) 2013 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the BlackRock Incorporated third quarter 2013 earnings teleconference.

Our host for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Gary Shedlin; 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 session.

(Operator Instructions)

Mr. Mallow, you may begin your conference.

Thanks very much.

Good morning, everyone.

I am Matt Mallow, the general counsel of BlackRock.

Before Larry and Gary make their remarks, let me point out, as I do in each of these calls, that during the course of this call with me make a number of forward-looking statements.

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

As you know, BlackRock has filed reports with the SEC, which lists some of the factors that may cause the results of BlackRock to differ materially from what we say today.

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

With those formalities out of the way, let's begin the call.

Thanks, Matt.

Good morning, everyone.

It is my pleasure to be here to present our third-quarter results.

Before I turn it over to Larry to offer his comments, I will review our quarterly financial performance and business results.

I'll be referencing selected pages from our earnings supplement, which has been posted on the BlackRock investor relations website, and discussing primarily as adjusted results.

BlackRock delivered third-quarter EPS of $3.88 up 12% compared to 2012.

Operating income was $978 million also 12% higher.

Excluding the impact of fund launch costs in the year-ago quarter, operating income was up 9% on the year over year basis.

Non-operating results reflected a $23 million increase in the market value of our seed and co-investments, largely driven by private-equity real estate and distressed credit and mortgage investments.

Recall that nonoperating income in the second quarter of 2013 reflected a $39 million pretax gain relating to PennyMac's IPO.

Our GAAP tax rate for the quarter was impacted by a non-cash revaluation of our deferred tax liabilities based on various UK and domestic state tax law changes, which we exclude from as adjusted results.

The third quarter as adjusted tax rate was approximately 30% consistent with a 31% annual run rate which remains an appropriate intermediate-term planning assumption based on what we know today.

In the third quarter, we saw approximately $25 billion of long term net new flows, representing an annualized organic growth rate of 3%.

We again demonstrated the consistency of our highly diversified, multi-client platform with Retail and iShares driving our organic growth this quarter, more than offsetting the outflows we saw in our Institutional business.

We've raised approximately $124 billion of long-term net new business over the past 12 months representing a 4% organic growth rate.

Because 86% of these net flows were generated by our Retail and iShares channels, our organic revenue growth exceeded asset growth as these channels have higher effective fee rates compared to the Firm's overall fee rate.

This same dynamic held true in the third quarter.

As you can see on page 10 in the supplement, third-quarter revenues were $2.5 billion up $152 million or 7% from a year ago.

Revenues were driven by base fees excluding securities lending which increased as a function of both organic growth and market appreciation offset by reduced securities lending revenue reflecting ongoing softness in the hard to borrow or special collateral market.

Sequentially, total base fees, which include securities lending, declined by 1%, driven by mix and a seasonal decline in securities lending activity.

As a function of the market volatility we witnessed in the later half of the second quarter, we entered the third quarter with lower assets under management than our average AUM for the second quarter.

During the second quarter, we were also impacted by iShares outflows and a negative beta driven mix change in markets linked to some of our higher fee businesses.

We experienced the opposite phenomenon during the third quarter with iShares inflows and positive beta, which will benefit our base fee run rate as we enter the final quarter of the year.

Performance fees for the quarter reflected solid results in our diversified single strategy hedge fund platform.

Our performance fee eligible products flow into a broad range of asset classes and investment strategies and are normally not dependent on a single fund or market theme.

While the fourth quarter is generally our seasonally highest quarter of the year for performance fees, recall that last year's fourth quarter included a large, one-time fee related to the wind down of the US government PPIP portfolio.

Our BlackRock Solutions franchise benefited from robust activity in the third quarter.

Revenues were $156 million up $28 million compared to 2012.

Our Aladdin business, which represented 72% of BlackRock Solutions revenue in the quarter, grew 19% year over year benefiting from trends favoring global investment platform consolidation, clients seeking multi-asset risk solutions, and a growing client base that is progressing through multiple phases of implementation.

Our FMA business had a very strong quarter with year over year revenue growth of 29% driven by advisory fees related to completed assignments and deliverables.

While our FMA business continues to benefit from ongoing regulatory change, especially in Europe, the revenue profile of FMA will be lumpier than the Aladdin business on a quarter-to-quarter basis.

Revenue classified as other fell sequentially, primarily driven by our decreased ownership stake in PennyMac and lower transition management activity in the quarter.

As we discussed on last quarter's call we now hold an ownership stake of approximately 20% in PennyMac down from 33% prior to PennyMac's IPO and our subsequent charitable contribution.

Turning to page 12 of the supplement, expenses rose $50 million year over year driven primarily by increased marketing and promotion spend and revenue related items including compensation and direct fund expense.

As we have previously indicated, the investment in our brand may vary quarter to quarter, but our full-year 2013 investment will be in line with 2012.

Direct fund expense is largely linked to AUM levels primarily in our indexed and iShares businesses.

Adjusting for fund launch costs in the third quarter of 2012, expenses rose up 5% year over year compared to a 7% increase in revenue over the same period and resulted in an operating margin of 41.2%, a 50 basis point increase versus a year ago.

We remain committed using our cash flow to optimize shareholder value with our first priority to invest in our business.

We completed the acquisition of the Credit Suisse ETF business in July adding $16 billion in assets under management, extending BlackRock's footprint in Switzerland and bringing a broader range of opportunities to Swiss investors.

In addition, while not included in the third quarter, on October 4, we completed the previously announced acquisition of MGPA, a private equity real estate investment advisory company.

This deal doubles the size of BlackRock's real estate advisory business, extends our reach to the Asia Pacific and EMEA regions and reinforces our commitment to offering investors access to markets worldwide.

As previously noted, both transactions will not be material to our earnings per share.

Our capital management policy remains consistent.

We repurchased approximately $250 million worth of shares in the third quarter in line with the past two quarters.

As we have previously stated, in the current environment we would expect to maintain this level of repurchases for the remainder of the year.

Our solid financial results once again reflect the benefits of our diverse a platform and strong partnership with our clients.

We saw positive inflows across all major asset classes and regions with Retail and iShares driving growth in our client businesses.

Similar to the second quarter, the breadth of BlackRock's platform was demonstrated by 10 funds across Retail and iShares, each generating more than $1 billion inflows.

We spoke at our investor day about our excitement around the global retail growth opportunity.

This quarter we saw long-term flows of $8.3 billion in Retail, driving 7% year-to-date annualized organic growth, a significant increase compared to the 3% organic growth we saw for the full-year 2012.

Results were driven by many of our key themes including income-, alternatives- and outcome-oriented solutions.

US Retail saw long-term net inflows of $3.4 billion with strong flows in unconstrained fixed income and alternatives.

This represents a continuation of the momentum we witnessed in the second quarter with both our strategic income opportunities and global long/short credit funds again delivering more than $1 billion in new flows.

In the face of sizable industry outflows this quarter, BlackRock's strong investment performance, proactive client conversations and breadth of product offerings once again drove net inflows in fixed income.

On the equity side we saw moderate outflows.

Larry will spend some time on the positive investment performance trends of our recent hires later in his remarks, but we are still punching below our weight in equities and we have consistently recognized it will take time to see an inflection.

International Retail saw strong long-term net inflows of $4.9 billion, representing an 18% annualized organic growth rate.

Flows were similarly driven by our global themes, including alternatives and outcome based solutions.

We experienced strong flows into equities led by our top performing European equity franchise and experienced ongoing momentum in multi asset as clients leveraged our solutions oriented strategies, including global allocation, managed volatility and dynamic asset allocation.

Global iShares benefited from strong industry flows in September, as risk appetite improved, and once again demonstrated its leadership position.

iShares remains the vehicle of choice for investors who want to quickly and efficiently express their views in the market.

Following the macro driven redemptions we experienced late in the second quarter, investors once again turned to iShares to increase risk allocations, driving significant inflows.

In addition, we continue to see robust secondary market liquidity, which adds to the depth of markets for our clients.

For the quarter, iShares raised $20.2 billion of long-term net new business.

Equities led the way with approximately $21 billion in net inflows, while fixed income experienced modest redemptions.

Year to date, iShares has accumulated nearly $45 billion of net flows representing a 31% share of global industry flows for the quarter and 27% year to date.

Our institutional business experienced $3.3 billion of net long-term outflows globally.

However, we saw continued momentum in defined contribution and to liquid alternatives.

We saw passive outflows of $3.4 billion in the quarter with equity outflows more than offsetting fixed-income inflows as market uncertainties slowed institutional fundings and re-risking strategies and caused some clients to tactically rebalance away from passive equity.

Active flows were roughly flat for the quarter with strong inflows into fixed income and multi asset offset primarily by equity outflows.

Fixed-income inflows were driven by EMEA and APAC clients while multi-asset inflows were paced by our LifePath and Target Date franchise, which experienced $3 billion of net inflows representing a 17% annualized organic growth rate.

BlackRock now manages more than $80 billion of LifePath assets, which are a key driver of growth for our defined contribution business.

Active equity outflows were driven by both scientific and fundamental strategies and were primarily performance related.

Barbelling remains a prominent theme with Institutional clients and we saw another strong quarter for a liquid alternatives.

Year to date we have now secured nearly $5 billion of commitments which will generate future net new business as those dollars are invested.

Overall, it was a very solid quarter and with that I will turn it over to Larry.

Good morning, everyone, thanks, Gary, and thanks for joining the call.

The current market environment remains challenging.

Uncertainty is high and fundamentals are taking a backseat to policy decisions.

The narrative in Washington surrounding the debt ceiling debate is reducing the confidence in investors and business leaders leading to a short-term focus and risk aversion.

Rather than investing in new equipment or job creation, CEOs are focused on increasing stock buybacks and dividends which does little to drive long-term economic growth.

Even with a deal to avoid a default, the damage has been done by the fact that we have had a debate questioning whether the US will pay its bills.

The impact will be a slowdown in economic growth.

In the face of this market uncertainty, BlackRock diverse platform continues to perform.

We saw $25 billion of net inflows this quarter driven by positive flows in all major product categories in all regions of the world.

The flows we're seeing today and the stability of our platform are the result of the investments we made in the business over the past few years.

After acquiring BGI in 2009, BlackRock went through a period of integration that led many clients and consultants to take a wait-and-see approach.

Could BlackRock marry active and passive investing to create a more holistic solution for our clients?

We addressed this challenges of merging two organizations, performance issues in certain products and creating a single cultural identity.

During this time we never lost our focus of identifying and focusing and attending to the needs of the clients.

We re-dedicated ourselves to - one, the pursuit of alpha generation leveraging our rick management and analytic capabilities to better advise clients and create solutions.

Two, we built our brand.

Three, strategically positioned BlackRock to address key investment themes.

The combination of strong performance and risk management focus, continued investment in our brand, a strategic focus and strengthening of client relationships positions BlackRock well beyond 2014.

Top-sport's-call investment performance is critical for BlackRock to be the world's premier investment manager.

Several years go went to a restructuring of our active fixed-income business.

What was a weakness coming out of the financial crisis is now a strength.

We are seeing the payoffs.

Our strong performance track record across our fixed-income book once again drove positive flows in a challenging market for that asset class.

We saw more than $7 billion in active fixed-income inflows this quarter despite outflows in the industry.

Our one, our three and importantly our four and three-quarter year performance is meaningful in excess of our key competitors.

In total return, unconstrained, in high yield and low duration products, we are all well positioned for a continuing rotation within fixed income.

BlackRock's early investment in the unconstrained fixed-income space portions us to capitalize on what I believe will be one of the defining themes of the foreseeable future as investors reassess risk in their fixed-income portfolios and look to limit the impact of duration in a rising rate environment.

Our unconstrained bond strategy, the strategic income opportunity fund, had its third straight quarter with more than $1 billion in net inflows driving growth in Retail.

On the Institutional side, we are having active conversations with our clients about the diversification benefits of a unconstrained allocation and we expect to see more momentum coming from Institutional on that front.

Moving to equity performance as we've discussed in the past.

One critical area for investments for BlackRock has been our US fundamental equity franchise.

Much of the confidence I have been making these changes in our equity platform stems from the success we had in the rebuilding of our fixed income side.

BlackRock did see $5 billion of outflows this quarter in our active equity business.

While we're not satisfied with that outflow, we are pleased with the investment performance we are seeing in some of our managers.

And as Gary suggested, that outflow really came more from International side that was more idiosyncratic than outflows that were stemming from portfolio manager turnover.

Our basic value fund is more than 450 basis points above its benchmark and is in the fourth percentile.

Our large cap core product has risen from the 76 percentile to the 35 percentile and since these funds came under new management.

We have seen more than $2 billion in new institutional mandates in our fundamental large cap growth portfolios through the third quarter and an additional $1.8 billion mandate, which funded earlier this month.

Our commitment to rebuilding our active equity business is just a strong as the commitment we made to rebuild our active fixed-income business and I expect to see the same positive results in flows over time.

Just as BlackRock needed to refocus on our investment performance, we also needed to build our brand to drive growth in our Retail businesses.

The investments we made in the BlackRock and iShares brands are now delivering those results.

As we have grown and diversified the firm over time, communicating a clear message has become a critical component of our client interaction.

Over the past year, we have been reaching out aggressively to clients to educate them on the risk of fixed income and the need to prepare more effectively for retirement.

We are linking those messages directly to investment strategies and individual product offerings.

We are seeing the benefit of those efforts in the increased traffic to our websites, much higher brand recognition, better client dialogue, more pulls from clients and improved flows in products targeted through our marketing and communication efforts.

Retail is the key focus area for BlackRock's marketing efforts.

As Gary mentioned earlier, our global Retail business has grown organically at a 7% annualized rate this year, more than double our 3% growth in 2012.

These results are an outcome of our continue to focus on driving investment performance across the entire platform and our investment in the BlackRock brand.

International Retail was a significant growth driver raising nearly $5 billion in new flows, the most in a quarter since 2009.

The success we're seeing international reflects our strategic plan to diversify this platform.

Our active equity franchise drove nearly $2 billion in net flows led by European equities, and the nearly $3 billion in flows we saw in active fixed income, multi asset and alternatives demonstrated the benefits of a deeper relationships we're been building across our global client base.

Outcome oriented investing is another driver for Retail.

This is a high-growth market were BlackRock has a unique ability to package active and passive strategies backed by BlackRock Solutions' risk management and analytical capabilities.

No other firm has that ability to put those three components together on a outcome oriented investing platform.

We launched our model portfolio initiative last year and now have more than 8,000 live subscriptions.

We've seen strong client appetite for our package solutions with nearly $2.7 billion in combined flows this quarter across our 2 flagship strategies, our multi asset income and our global allocation product.

In addition to driving growth in Retail, we continue to be focused on positioning for the long-term secular trends in the ETF market.

Clients use iShares as an efficient and transparent portfolio construction tool, to move quickly in and out of investment exposures and increasingly as buy-and-hold vehicles to build core exposures.

We see liquidity-oriented investors turn to iShares as the preferred vehicle when they want to increase market exposures as they did in mid-September and when they want to reduce exposures as they did at the end of the second quarter.

Given the volatility on the liquid side of the product set and the seasonal trends we've seen over time, we tend to look at growth in iShares in a rolling, 12-month basis.

In the last 12 months, iShares has seen more than $80 billion of inflows, driving organic growth of 11%, consistent with our long-term expectations.

As we further penetrate the buy-and-hold segment, both through the core series and our strategic partnership with Fidelity, we expect more stable, quarterly flow patterns.

The iShares' core series has delivered positive flows in every quarter since its launch date, including more than $9 billion of net flows year to date and more than $13 billion of flows since inception, representing organic growth of 20%.

On the Fidelity platform, we've seen iShares grow at an annualized organic rate of 13%, also led by our core series.

International expansion will also serve to increase diversification.

iShares brought in more than $5 billion of flows in Europe this quarter, and we increased our presence in the market following the closure of Credit Suisse ETF platform acquisition in July.

BlackRock continues to invest in the ETF space to drive adoption and the new usage by broadening the client base using ETFs and launching innovative products.

In the quarter, with saw our first bank client purchase of iShare bonds and we launched near a short-duration bond fund that is well positioned for the current fixed-income environment.

Let's talk about performance, investing in our brand and how our investments in key themes position BlackRock to deliver value.

The key to growth is translating that progress into strengthening our relationships with our clients.

The depth and richness of conversations that BlackRock is having with clients have progressed substantially in the last couple years.

I see that in my own discussions with clients and I hear the same from my colleagues across the Firm worldwide.

The BlackRock Investment Institute, or BII, is an example of all that we are building coming together.

BII sits at the center of our 1,600 portfolio managers, analysts and researchers worldwide.

The Institute was created with a single goal in mind, to harness the best insight from our global investment team and leverage that insight through a robust dialogue across the entire BlackRock platform to drive performance.

I do believe our performance results recently speak loudly about the value of this Institute.

With the creation of BII, not only are our investment teams better equipped to produce alpha, but BlackRock is also positioned to identify market themes and share our investors thoughts and ideas with our clients.

As an example, we hosted a call earlier this month on the fiscal challenges in Washington, which was led by several of our top strategist and portfolio managers and was attended by more than 1,000 clients.

Additionally, in the last few weeks, we've had strong attendance and positive reactions at client events in Asia, in Brazil and in Washington.

Our reputation for problem solving continues to build as more and more people turn to us for insight and counsel.

They appreciate the perspective that BlackRock and our platform affords them in helping them solve these challenging financial problems.

What BlackRock brings to the table is resonating with clients.

Our products are on more retail platforms and buy lists than ever before and we're seeing that positioning drive growth.

In bringing together our Retail and iShares sales force, we're having more holistic conversations with FAAs and RIAs, and you're seeing that manifest in flows in these businesses.

I met with a number of Institutional clients over the last few months, pension funds, consultants, central banks, sovereign wealth funds, and the reception is better than I have ever seen.

The identity we're building and the clarity of message that we are delivering is differentiating BlackRock's value proposition.

As the uncertainty in Washington impact Institution client allocation decisions in late September, we saw passive equity outflows for the first time since 2008 driven by profit taking in equities, rebalancing and a reduction in risk.

However, we benefited on the other side of that relocation with nearly $7 billion of net flows into fixed income, largely driven by international financial institutions turning to BlackRock for domestic credit exposure and more than $4 billion in new money from official institutions across active and passive strategies.

We also saw strong BlackRock Solutions' results.

BRS continues to be a key differentiator for us and clients seeking risk management solutions.

Our financial markets advisory business is benefiting from the ongoing regulatory change, particularly in Europe.

We continue to have robust dialogues regarding the benefits of our Aladdin risk management platform.

We are close to signing one of our largest ever Aladdin assignments.

Before I wrap up, I'd like to spend a minute addressing the regulatory process.

Last month the Treasury's Office of Financial Research released its study for the FSOC on asset managers.

As requested, we will submit a letter to the SEC detailing our views on the report by November 1. We think the study reinforced some of the important fundamental points in which we wholeheartedly agree.

The report stated first, asset managers our agents.

They're not principals.

Asset managers act as fiduciaries on behalf of our clients.

Second, asset managers are different from banks and insurance companies.

Asset managers don't take deposits.

Asset managers are not wholesale funded.

Asset managers don't benefit from any government guarantees, and we aren't levered in any material way.

The study also raises a number of potential risks related to specific investment products or investment practices.

We agree with some of those additional regulations and we agree that it is warrant to look at this, as we have advocated reforms to address many of these risks.

However, since these risks are unrelated to the size of asset managers, we believe regulation targeted at specific products and practices will be more effective than company-level regulation or just a few firms.

Looking ahead, BlackRock will continue to see the benefits of our investments we've made in our performance, in our brand, in our strategy and our relationships with our clients.

The positive impact that these investments have delivered make me more confident that we're on the right path.

As Gary noted, investing in our business where we see opportunities for our organic growth is a key objective.

I see substantial growth opportunity for BlackRock on the horizon.

When I talk to clients, I see them looking at BlackRock differently than they have in the past.

They see us as a partner, as a firm that can deliver solutions unlike anyone else in the industry.

Our ability to combine active and passive solutions on a single platform backed by risk management and analytical capabilities our BlackRock Solutions business position us to take our client dialogue to a higher level, and this is a higher level both in Institutional and now in the Retail side.

We're seeing those conversations drive an acceleration in our business and I expect to see that acceleration continue.

Finally, I would like to thank all of our employees for the hard work and contribution to BlackRock.

We look forward to the continuing to partner with our clients around the world to deliver them all that BlackRock has to offer.

With that, I'll open it up for questions.

(Operator Instructions)

Matt Kelley, Morgan Stanley.

You mentioned model portfolios.

I just wanted to dig a little bit deeper there because that is something that we've heard a lot about on our end.

Can you help us size this in your mind, and how important building modeled portfolios with advisors are in terms of getting increased penetration for high shares in the channel?

I have Rob Kapito here.

Rob, you want to come over and answer?

Because Rob is spending a great deal of time working with these channels, especially the Morgan Stanley channel, related to models and how that impacts our active and our iShares.

Clients are now looking for a more holistic solution to their clients' portfolios and they are looking for more asset allocation.

We are finding that clients have both active and passive in their portfolios, and what they are requiring now is for us to build model portfolios that they could use our products in them or use other products in them.

iShares is certainly a significant part of that asset allocation, so we think by providing these models to the advisors that that will stimulate their use of our products in their portfolios.

That should help the growth of iShares as well as our other passive and active portfolios.

Matt, one other thing that we're trying to do, and we're not there yet, is making sure that we -- can we use some of the Aladdin capabilities on the Retail side, too?

That's something we are studying.

We are in dialogue with many different distribution platforms, and so the first component of really adding value to the Retail side is this model portfolios, which we are developing, but also can there be some analytical support in addition?

Okay, that's helpful.

Maybe this one's a little bit more for Gary, but you mentioned the fee rates in some of the iShares' products and how there's a little bit of a tailwind now at your back given what we have seen in the fourth quarter.

It's been a lot of focus from investors on EEM.

I'm hoping you can give us a little bit of -- maybe help us size a little bit better both the impact on fee rate and sec lending fees from the shift that you saw during the third quarter and now into the fourth quarter?

If there is anything incremental you can give us?

Matt, I would make the following observations - I think as we entered the third quarter we saw really three different dynamics that basically created a little bit of headwinds for us as we came into the quarter.

One, obviously as I mentioned, was that our spot assets under management at the end of the second quarter basically ended up being below the average for the second quarter.

That obviously was one element.

Two, as we saw some clear outflows in iShares, particularly around EEM, in the latter part of the second quarter, as we mentioned.

The third element was overall beta mix, which it think is very important, where we basically saw significantly worse beta performance in markets like the emerging markets, natural resources, the world index, which obviously is relevant because we have some of our higher fee products in those markets.

As it relates to the third quarter, as we basically get through the third quarter, we basically saw all of those trends reverse.

We basically end up actually having a spot AUM at the end of the third quarter, as you can see in the tables, about 3% higher than our average for the quarter.

We obviously benefited from strong inflows in iShares in September at the latter part of the quarter.

As you note, some of that was driven by EEM.

Finally, we actually saw beta improvement in those markets that at our higher-fee products completely opposite of what we saw in this past quarter.

That all sets us up well to basically enter the fourth quarter with a better run rate.

On the other hand, on securities lending, as you mentioned, which as you know is part of our base fee line, we did see meaningful compression in spreads.

While we saw our average on-loan balances go up roughly by about 7% year over year, we did see significant spread compression primarily around the liability spreads where we saw those spreads decline a little over 30%.

I would say that that's obviously created a drag.

Let me just add one more thing, Gary, on that.

Sec lending is a result of a need for people to borrow stock whether it is a hedge fund or our people wherein -- and generally you see a lot of activity around mergers and some type of corporate event.

We all know the merger market/corporate event market has been rather low compared to other years and hedge fund behavior has predominantly been more of a de-risking type of strategy this year as evident of a lot of hedge fund results relative to the SMP.

The sec lending liability spreads have come down quite a bit.

Whether this is a seasonal issue or a secular issue, we will find out.

Unquestionably, sec lending volumes are down quite a bit in terms of the fees.

Matt, just to finalize in that.

I would just basically say, as Larry said, that is driven primarily by the special collateral mark.

I would say that unless we see a meaningful change in the conviction of hedge funds around their trading activity, change in leverage, or change in the M&A environment, I do not think we would expect to see a major change in that in the coming quarter.

Okay, great.

One quick follow up from me, is just on the OFR report.

Larry, you mentioned it and I know there's a lot still to be determined there, but can you give us a sense for what your conversations have been with the regulators coming into that, going out of that?

Any steps you have already taken to satisfy any requirements from them, or anything else you can give us incremental would be helpful?

A, we had no conversation with any of the regulators prior to the publication.

That would have been considered lobbying under Dodd-Frank, so we did not have any dialogue.

We read the results simultaneous with everyone else.

We are, now with the publication, we are in dialogue with the different regulators, the different participants in the FSOC and all I could say is the conversations are good.

They're robust.

Our letter will most probably be public when we submit it in November 1, but it's just a process and we are very comfortable with the dialogues and the process that the regulators are putting forth.

Kenneth Worthington, JPMorgan.

This is actually Alex Kigel in for Ken.

Ken apologizes he was not able to join us today.

We basically just wanted to know about your fixed-income business.

It seems like June was, in part, an inflection point for the fixed-income investors.

What are your thoughts about 3Q sales as an indication of fixed-income investor behavior?

As we continue to see rates potentially move higher at some point, can we look at BlackRock's solid fixed-income sales for the third quarter as an indication of your resilience of the fixed-income franchise as we see, potentially, rates start to rise?

A, I think the activity in Washington is going to probably mute the fixed-income rate rise for some time, so I disagree with your proposition right off the bat.

I think we are in a lower rate environment, a lot of people suggest today and, as I said, I do believe the behavior in Washington is dragging our economy down.

I actually believe the Federal Reserve is probably more reserved in terms of any movement related to tapering.

There's going to be a lot more -- they're going to probably pause and waiting to see if indeed the economy is impacted by Washington's behavior.

It is our view that we are well-positioned, as I said.

We are very well-positioned in fixed income because of performance.

We are very well-positioned because our position in unconstrained fixed income, and we are well-positioned because of our solid performance in credit and high yield.

You put all of those things together, if there is going to be flows, if there is rotation, I think we are very well-positioned for that.

As we saw in the third quarter, we did see people look to us in terms of adding fixed income exposures and I would say, very clearly, the dialogues we are having with clients related to fixed income are more active than they have been in years for us.

If the dialogue we are having with clients worldwide, Institutionally and Retail, if that is an indicator of forward growth then I think we are going to have consistent growth in the future.

Great, thanks.

Just as a follow up, can you please update on the progress you feel you are making in pitching fixed income ETFs to Institutional investors, i.e.

particularly banks and financial institutions?

And as well as Institutional investors in actively managed short-term fixed-income products?

We continue to have, as I said, when I talk about dialogue in fixed income it does translate also to dialogue in iShare bond.

It's not just the active fixed income unconstrained side.

As I said in my prepared remarks, iShare bonds, we have our first bank client.

We have many conversations going on now and our new ETF product the NEAR, which is a low duration type of product for those who are frightened of the longer duration products.

As I said, we have constant dialog whether they are ETF bonds and/or our active products.

Brennan Hawken, UBS.

Quick question, maybe hoping you could give some color on how you guys have positioned the money funds given everything going on in the potential US default?

And not only maybe avoiding technical issues that could arise, but also some of the knock-on effects that could come about as well?

Let me just state, overall, we have dozens of teams working on contingent plans throughout the organization.

Our job is to be a fiduciary and our job is to focus on even the unanticipated risk associated with any default.

So, beyond our money market funds, though, I think it would be incorrect to think that that's all we are focusing on related to default.

There are many, from the municipal bond market to collateral management of swaps to working with the custodians.

You have to understand the rating agencies, even if only one Treasury bond misses a coupon payment, definitionally the entire sector then is considered a defaulted security.

We have to be prepared for all the contingencies whether they are T-bills or any other US bond instrument.

I think we're doing a very good job, without getting in any of the details, to making sure that we are anticipating those unanticipated problems associated with this type of event.

As we all know, when you think back about the Lehman Brothers result, everybody thought that Lehman Brothers was it, but then when the Reserve fund had that Lehman Brothers exposure, that is when I believe we really fell off a cliff, five years ago.

Our job is having these task teams working towards all the unanticipated possibilities that would occur in terms of collateral management, in terms of clearing, in terms of what is considered good collateral and bad collateral.

In addition to our money market funds, where we are obviously very focused on it, we are focused it across all different of our platforms.

Thanks for that color.

A question on the regulation, you had mentioned that you guys have started up a really active dialogue with the regulators here on the back of this OFR report.

Just curious, because one thing that I'm trying to struggle to get my head around is, if there is some kind of SIFI designation for a large asset manager, how does that manifest itself?

What does it mean?

Does it just mean enhanced supervision?

Does it doesn't mean capital?

In your dialogues, do you have any sense of that or can you give us any color?

No, but let me step back for a second.

I think you are aware, we have capital set aside for operational risk, that was a condition we had with our UK and US regulators.

So, unlike many other asset managers, we are already in that position.

We are already regulated because of PNC, his 20% ownership of us by the Federal Reserve.

We are regulated by the Comptroller of the Currency because of our bank trust division that we acquired when we bought BGI.

We have, we're a firm that is very heavily regulated across region and across all the different regulators.

Your question is a good question, but I can't answer it.

I can say, we have regulatory oversight by many of those regulators that other firms, if they were a SIFI, do not at this present time.

It's a good question.

What does that mean?

Because the OFR did state, we are not a bank.

We are a fiduciary or an agent.

The OFR stated that these are not our assets.

We're not leveraged.

I honestly don't know what it would mean if they designated a bunch of firms as SIFIs.

That's why my comment was very specific related to one of the ways that we have read into the OFR is that maybe they are going to regulate specific products like money market funds, but they may begin some type of supervision over let's say all types of products that have some x amount of leverage.

So, that would incorporate leverage type of hedge funds and other types of products like that.

We are not -- this is too early in the dialogue, too early I believe in the regulatory reviews of what they are going to do.

I think the OFR report was a very fair, in my mind, a very just report about what asset managers are and it justly cited some risk associated with some of the types of businesses that asset managers are in.

So, we are working alongside with regulators and responding to their questions as best we can.

Mike Carrier, Bank of America Merrill Lynch.

Larry, first on the flows, you gave a of a lot of detail and it seems like maybe current quarter there's been some different trends than what we have seen year to date.

If I look just the disclosure you guys give, iShares Retail you have been gaining some momentum, Institutional has been more subdued and you guys have talked about that being a little bit more mature.

When I look at iShares and I look at the say $45 billion of flow here to date, if you segmented that into the Retail population or the Retail channel versus the Institutional, where is that breaking up?

Particularly in terms of -- because if I look at your Retail equity flows they have been more subdued, but that is more on the active side.

It seems like the momentum is still there.

Just wanted to get some color on the iShares' penetration in the two channels and how that would shift the flows for Retail versus Institutional?

I'm going to give this to Rob because Rob is working very closely with the whole team.

Basically, we have been focused on a few areas of iShares' penetration.

The first is still in the education mode, so there are a lot of institutional clients that are first learning how to use iShares and their portfolios for liquidity reasons and for access to markets before they actually find an active manager to manage those assets.

They, also, are looking for asset allocation from the iShares.

That is a primarily on the Institutional side.

We have very good penetration in there, but it is a process that is really just at the early stages.

If you think that iShares is actually grown already, we think that it is just the early stages of the growth of iShares Institutionally.

On the Retail side, again, it is a larger education process, but a lot of the FAs who manage these particular portfolios are using iShares more and more in their asset allocation models that I talked about before.

We are very focused on what we call a core series, which goes directly at what we think Retail clients are looking for and already this year we have raised $9 billion in the core series.

These are more of the buy-and-hold type of Retail investors, which is a segment that we have begun to spend a lot of time focusing on.

The other thing is that since I mentioned to you that we believe that clients have both active and passive strategies in their portfolios, we have combined our sales forces and we will now have the largest sales force of any asset manager going out and educating both the Institutional and the Retail advisors on how to use iShares.

Lastly, we're building up our distribution because being in the iShares business, or in the ETF business, it is really capturing the flag and providing the largest funds that have the transparency and the liquidity.

Of course, you recognize some of the partnerships that we have established, one most recently being with Fidelity and we are seeing really good results early on from that relationship and we have several other relationships as well.

We are seeing continued growth in iShares, continued ideas for the use of iShares and specifically because we are going into markets where a lot of liquidity concerns are emerging, certainly iShares will help in providing liquidity in the markets where there may not be as much liquidity as in the past.

Thanks.

That's helpful.

Just as a follow up, Gary, you gave some helpful color on the fee rate and how to frame the outlook.

If I combine that with AUM up around 6% in the quarter, just going into the fourth quarter, it seems like it is setting up for some decent operating leverage.

Anything on the expense side that is more seasonal that would offset that?

Or it is just seasonally you're going to have more momentum heading into the fourth quarter?

Just want to make sure there's nothing else that we should be thinking about?

I think, frankly, well we have already talked a lot about compensation on the variable side and direct fund expense, which we have talked about.

I think if you look at the -- obviously, performance fees will drive relative changes in compensation levels, but beyond that on the G&A spend I would say that if you compare the second and the third quarter sequentially, you saw a little bit of a dip in the third quarter based on marketing spend going down, which is really all of the difference.

I think as we have been fairly consistent in our statements, that marketing spend is going to vary quarter to quarter.

We would naturally see probably a lift up in the fourth quarter versus the third quarter, but beyond that, in G&A, I think with the exception of that, I think the run rate is pretty well established.

Bill Katz, Citi.

Thanks for the entire comments this quarter, very much appreciated.

In terms of my questions, on the core series having just phenomenal success and you highlighted some very good organic growth, just curious, as that portfolio builds, would there be any natural internal pricing pressure for the remainder of the business to reset pricing lower, just given what would likely be a pick up of liquidity in the core series?

I don't think so.

I think this is just another leg to stand on here, where there are specific clients and we are looking at a segment that's called the buy-and-hold segment.

That typically has lower fees than those that look for more crating.

We are seeing both.

It is pretty much equally spread.

So, it's really different segments of the market, and this is actually a new segment for us.

I don't really think it impacts the other fee segments in the iShares business.

Bill, I would add one more thing to that.

If you think about the manner in which investors buy the buy-and-hold of the core series, these are much more stickier assets.

So, you can have much greater dollar amount and still have a much lower amount of liquidity and transactions because of the nature of the investor.

Unless we saw a mix change of investors on the core series, which would then lead you to think maybe there would be some cannibalization of the other one, we are not seeing any evidence of a migration from them.

I would say that the investors are looking for more liquidity into the core series.

That's helpful.

My follow up, you didn't talk about it too much this quarter.

I'm curious, maybe an update of demand and positioning in the scientific portfolio?

Our performance is really good and we are having more dialogue, but we have not seen any real pickup in demand in that one area.

What we do have in one of the scientific areas is our fixed income global opportunity fund, which we closed mid year.

There's a possibility we will reopen it.

It's been a very, very successful fixed income hedge fund and we will probably think about opening it next year.

That had just about $400 million this quarter, in terms of growth.

It was a scientific equity where we saw that one outflow in the Internationally.

That was just one client looking to move out of that asset category.

No, I am disappointed that we are not seeing more opportunities because we really do have a great track record in that area and it is an asset category that's just take more time to have the investors come back into the platform.

Keep in mind, I think investors are now using more and more beta products instead of scientific and they're using beta as alpha.

I think that is one of the changes in mix, in the mix and style that maybe five, six, seven years ago people were using quant strategies and today more and more of those investors are going to beta strategies but actively managing that beta strategy.

Marc Irizarry, Goldman Sachs.

Larry, on the fixed income active inflows can you give just a little more color on, do you think what you saw this quarter was a function of more manager replacement and manager rotation amongst the competition?

Or is there more of a rethinking going on given the outlook for rates from Institutional investors?

On the Institutional side, I don't think it was -- I think some of it was -- I don't know if it was a rotation out of other fixed-income managers.

I think it was more the fixed-income client were just generating more and more cash because of their operations.

We are winning these new assignments as they generate more balance sheet because of our performance and our long-term relationship.

Some of these clients we won are existing clients with other products, so they did some form of RFPs and because of our performance and our position, we won.

On the Retail side, I do believe some of it is rotation into BlackRock.

I believe it is just the beginning to put it very strongly.

Okay, helpful.

Maybe this is a question for Rob on the alternative business.

I'm particularly interested on outside the US just in terms of it looks like this quarter you saw an uptick in inflows and alternatives first quarter and several that you have seen inflows there.

Maybe can give us an update on the Retail build out of alternatives and what you expect for that business?

We are very bullish on providing alternative investments to the Retail investor.

It is all been about providing the appropriate wrapper in order for the Retail investors to get involved in that area.

We have the alternative investments, and as you know, for a period of time people have been separating alpha and beta and getting there beta from passive and iShares and their alpha for more alternative investments.

We've had those products and have been able to do that allocation for Institutional clients.

What held us up on Retail is providing the wrapper for them.

Now, within the 1940 Act companies in the US and also outside the US, we have the wrappers and have been very successful in finding investors to go into those.

Fortunately, we have track records in those products as well that are long term, so I think it is going to be pretty exciting to watch, especially in the long/short credit where we have significant expertise and track records.

In this particular environment that gives people a lot more opportunity for yield, which is what they are looking for.

This will help us provide the Retail investor with the same alpha-beta separation as we are doing the Institutional and I would look for significant increased sales in those particular areas because it makes sense for the client.

I would add one other thing, Marc, our single-strategy hedge funds have done quite well in terms of performance.

Our objective, just like building our brand in Retail, we are aggressively trying to build our brand in alternative space, too.

That's going to be an important component of our future growth that we are identified, not just as a passive manager in an active equity and fixed-income manager, but we are identified as a strong solution for alternative needs.

Importantly, we have a very big forward calendar in terms of commitments in our liquid products.

We are seeing more and more dialogue with our investors in the alternative space.

Rob talked about the Retail side, but the Institutional side is quite robust, too.

Yes, I was just going to ask along those lines.

I know the pipeline is something you guys don't necessarily disclose much, but could you give maybe some color on what the composition in the pipeline would look like across the Firm?

I just got kicked by my General Counsel.

(laughter) We've determined that we don't talk about our forward calendar anymore or forward commitment, but we are fine.

On the -- I will leave it at that.

I'm being kicked again.

Okay, that's enough kicking.

We'll leave it there.

You don't want me to be bruised do you?

(laughter)

This concludes our teleconference.

Mr. Fink do you have any final remarks?

Yes, I am going to the hospital the fix my bruised legs now.

No, I just want to thank everybody for the commitment they have.

This was a truly a differentiated quarter for us.

I'm very happy with the results, especially with all the debates that are going on in Washington.

As I said in my formal comments, I think we're very well positioned due to the platform that is unparallel in terms of active/passives, of platforms with an overlay of risk management and that's going to continue to drive these unique dialogues that we have with our clients.

I look forward to talking to everybody after the fourth quarter.

Hopefully, everyone has a very good end of the year.

Thank you.

This concludes today's teleconference.

You may now disconnect.