貝萊德 (BLK) 2014 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the BlackRock, Incorporated second-quarter 2014 earnings teleconference.

Our hosts for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Gary S. Shedlin; President, Robert S. Kapito; and General Counsel, Matthew Mallow.

(Operator Instructions).

Mr. Mallow, you may begin your conference.

Thanks very much.

Good morning, everyone.

Before Larry and Gary make their remarks, let me remind all of you that during the course of this call, we may make a number of forward-looking statements and of course, 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.

And as we usually warn you, BlackRock assumes no duty and does not undertake to update any forward-looking statements.

So with that, let the call begin.

Gary?

Thanks, Matt and good morning, everyone.

It is my pleasure to be here to present results for the second quarter of 2014.

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

As usual, I will be focusing primarily on as-adjusted results.

At our Investor Day last month, I reaffirmed the growth framework predicated on driving organic growth, using scale to create operating leverage in a consistent capital management strategy.

BlackRock executed on each of these drivers during the second quarter resulting in continued earnings growth.

We generated second-quarter earnings per share of $4.89, up 18% compared to the second quarter of 2013.

Operating income was $1.1 billion, 15% higher than a year ago.

Non-operating results reflected a $37 million increase in the market value of our [Steed & Co.] investments.

Recall that non-operating income in the second quarter of 2013 reflected a $39 million pretax gain related to PennyMac's IPO and that results in the first quarter of 2014 were impacted by the monetization of a non-strategic opportunistic private equity investment.

Our 24.8% as-adjusted tax rate for the second quarter benefited from several favorable non-recurring items and an improved geographic mix of earnings.

As a result of increased growth in our international businesses, we now estimate that 29% is a reasonable tax rate for the second half of 2014.

And based on what we know today, 30% represents a reasonable projected tax rate for 2015.

Our second-quarter results were driven by $38 billion of long-term net new flows representing an annualized organic growth rate of almost 4%.

Flows were driven by our retail and iShares client businesses.

As we discussed at Investor Day, faster growth in these businesses will drive favorable change in our revenue mix and we once again saw organic base fee growth meaningfully outpacing organic asset growth during the quarter.

Second-quarter revenue was $2.8 billion, up $296 million, or 12% from a year ago and was driven by continued growth in base fees, performance fees and revenue from BlackRock Solutions.

We once again experienced year-over-year base fee growth across all long-dated asset classes.

Base fees increased $257 million, or 12% from a year ago as average AUM increased due to organic growth, market appreciation and the acquisitions of the Credit Suisse ETF and MGPA real estate businesses.

Base fees were up 6% compared to the first quarter aided in part by the seasonal increase in securities lending activities we typically see in the second quarter.

Performance fees for the quarter increased $26 million or 29% from a year ago driven by stronger performance in our broad suite of single strategy hedge funds, as well as certain long-only equity strategies.

Recall that first-quarter performance fees included a significant fee associated with the planned final liquidation of an opportunistic 2007 vintage closed-end mortgage fund.

BlackRock Solutions revenue of $146 million was up 6% year over year, but down 5% compared to the first quarter.

Our Aladdin business, which represented 75% of BRS revenue in the quarter, grew 11% year over year.

Flat sequential quarter results for Aladdin were once again impacted by the timing and recognition of certain revenue as we continue to onboard a number of large clients onto the Aladdin platform.

We anticipate that several of these large clients will go live in the coming months generating revenue uplift as we move past the implementation phase.

Our financial markets advisory business continues to transition from a crisis management orientation to a more institutionalized advisory business model with continued momentum in bank regulatory-related assignments, including ECB AQR and Fed CCAR diagnostics.

As we mentioned last quarter, FMA results have recently reflected higher levels of revenue associated with asset disposition assignments.

While the second quarter of 2014 was also positively impacted by residual disposition activity, the revenue impact was at a lower level than recent quarters.

Other income increased $17 million sequentially as a result of higher transition management service fees, earnings from certain strategic investments and real estate-related disposition fees.

Expense for the second quarter rose $145 million year over year driven primarily by revenue-related items, including compensation and direct fund expense and an increase in general and administration expense.

While compensation as a percentage of revenue declined year over year as a function of aggregate levels and mix of performance fees and timing of certain accruals, quarterly comparisons are less relevant and our overall compensation policies have not changed.

G&A expense increased $36 million year over year or 11% driven primarily by increased occupancy and office-related costs and other expense, including elevated legal and regulatory expense.

Aggregate G&A expense in the first half of the year benefited from a delay related to the timing of our total marketing and promotional spend, the balance of which is expected to be incurred during the remainder of 2014.

Sequentially, G&A expense increased $64 million from the first quarter primarily reflecting the timing of marketing and promotional spend, increased occupancy expense reflecting the dilapidation reversal in the prior quarter and the previously mentioned increased level of legal and regulatory expense.

Overall, total expense increased 10% from a year ago compared to a 12% increase in revenue over the same period resulting in an as-adjusted operating margin of 42.4%, 110 basis points higher than last year's second quarter.

We remain committed to a consistent and systematic capital management policy.

During the second quarter, we repurchased an additional $250 million of stock consistent with repurchase levels during the last few quarters and view that as a good planning rate over the balance of the year.

Through both transformational acquisitions and targeted organic growth, we built the industry's broadest asset management platform.

Our diversification, whether in terms of clients, products or geographies, is a critical component of our strategy and enables us to deliver more consistent growth and more stable financial results over time.

Another element of our strategy is the growth opportunity in global retail.

We saw long-term net flows of $13.1 billion during the second quarter driving 10% annualized organic growth with positive flows across products and regions.

Results were driven by our outcome-oriented offerings, including multi-asset alternatives and unconstrained fixed income and efficient beta.

International retail once again demonstrated strong results generating long-term net inflows of $8.9 billion in the quarter.

Equity flows of $2.9 billion were led by net inflows into index funds, which have witnessed accelerated activity as the post-RBR European distribution model revolves and demand for efficiently-packaged retail investment vehicles increases.

Multi-asset net inflows of $1.4 billion reflected continued demand for our global allocation fund, a key component of our packaged outcomes offering.

Fixed income net inflows of $4.7 billion were driven by flows into short duration, unconstrained and high yield bond products, as well as index funds.

Within international fixed income, we saw $1.4 billion of flows into our BGF Euro Short Duration bond fund and nearly $850 million into our Fixed Income Global Opportunities fund or FIGO, which is the cross-border version of Strategic Income Opportunities or SIO, our flagship domestic unconstrained fixed income fund.

US retail's quarterly long-term net inflows of $4.2 billion were led by our duration-managed fixed income suite and packaged outcomes, including our multi-asset income and global long/short credit funds.

Unconstrained fixed income continues to be led by SIO where we are seeing strong interest from both retail and institutional clients.

We also saw growing momentum in our unconstrained Strategic Municipal Opportunities fund or SMO, which raised over $500 million.

Global iShares generated $30.4 billion of net new business in the quarter, representing annualized organic growth of 13% driven by strong equity flows.

Organic growth for iShares over the last 12 months has returned to low double digits, consistent with our longer-term targets.

Equity flows of $20.6 billion were driven by a rebound in emerging markets and demand for developed market exposures.

In emerging markets, EEM generated over $6 billion of quarterly net flows and in developed markets, we saw continued demand across a variety of exposures and geographies.

Fixed income net flows of $9.5 billion represented the leading share of fixed income ETF flows during the second quarter paced by flows into longer duration US treasuries, investment grade corporates, emerging markets debt and high yield.

The buy-and-hold segment remains a key part of the growth story for iShares.

During the quarter, we generated $5.5 billion of flows into the US core series while also extending its reach and launching a European version of the core.

Our institutional business experienced $5.5 billion in quarterly long-term net outflows as net inflows into institutional active mandates were more than offset by net outflows in index equities.

Institutional active net inflows of $1 billion included $5.3 billion of net inflows into multi-asset class products driven by continued demand for our LifePath target-date suite and fiduciary wins.

Strength in fundamental fixed income drove net inflows of $900 million with demand across unconstrained strategies, regional credit mandates and CLOs.

Institutional active equity outflows included fundamental and scientific outflows of $2.4 billion and $2.1 billion respectively.

We continue to experience outflows in fundamental equity products that are performance-challenged though SAE outflows were primarily driven by partial redemptions from clients harvesting gains in appreciated portfolios.

In core institutional alternatives, net inflows into alternative, hedge fund and private equity solutions mandates were offset by outflows in certain single strategy hedge funds and capital successfully returned to investors.

Nonetheless, strong momentum continues in alternatives with an additional $1 billion of commitments raised in the second quarter.

Since the beginning of 2013, we have raised $8.5 billion of commitments across alternatives, $6.7 billion of which has yet to be deployed.

Future net new business will be generated as these commitments are invested.

Institutional index equities experienced net outflows of $7.9 billion driven primarily by portfolio rebalancing.

In the face of strong equity markets and improved funding ratios, pension clients continue to rebalance their portfolios and as interest rates rise, we expect to see additional immunization activity if equity markets remain at or near current levels.

This quarter once again demonstrated the breadth and depth of our business model.

BlackRock's diversification continues to enable us to deliver consistent results, one element of S&P's decision to upgrade BlackRock's credit rating to AA-, making us one of the most highly rated firms in the global financial services industry.

At Investor Day, we elaborated on the strategy to achieve our growth targets.

We remain confident that we have the right strategy, tools and talent to execute and with that, I will turn it over to Larry.

Good morning, everyone.

Thank you for joining the call.

Thanks, Gary.

The second quarter marked the sixth straight quarterly rise for the S&P 500 and rising equity markets across the globe.

This was driven by growing confidence in the United States and in Europe and in pockets of outperformance in the emerging economies.

The 10-year treasury is back to near 2.5%.

The Fed continues to ease their bond buying efforts and even in light of some of the recent volatility, the VIX is hovering near pre-crisis lows.

Markets have been complacent in the face of this risk with down days quickly followed by elevated buying trends.

Credit standards are loosening, cap rates are falling and correlations remain very high following the spring shakeup in the global momentum trade.

However, the positive environment and the market gains we've seen in the past several years have been driven primarily by accommodative policy decisions and coordinated central bank actions.

More of the same won't be enough to move market forward from here.

Corporate results and earnings growth will be needed to become larger drivers of valuation.

That is where our attention has been and in the past couple of days, we have seen second-quarter kickoffs with some bellwether names posting very strong results.

Investors are also going to have to focus more on economic growth to justify driving asset prices higher.

For that to happen, governments across the globe must take meaningful action beyond monetary policy.

The United States needs to address issues like immigration and infrastructure and leaders like Prime Minister Abe in Japan and Prime Minister Renzi in Italy must advance their reform agendas to produce tangible economic results.

Around the world, infrastructure is a key area where governments and private capital providers can partner to drive long-term economic growth and job creation.

At BlackRock, we remain highly focused on building a deep understanding of markets and evaluating risk from all angles.

I believe that the accommodative policy we've seen over the past five years will ultimately lead to increased volatility as policy decisions diverge and investors become more focused on the performance of individual countries, individual industries and obviously individual companies.

It is our responsibility as a fiduciary to help our clients to prepare for this type of shift by building durable portfolios designed to perform over the long term.

We do this by providing our clients with a set of capabilities and a client experience that we don't believe anyone else in the industry can replicate.

We talked at our recent Investor Day about the key differentiators that set BlackRock apart and that will enable us to drive long-term results for our clients and importantly for our shareholders.

It starts with our people.

Talent and culture are critical to our success and I am pleased to say that the management changes we announced earlier this year have gone into effect as of June 1. Our team is working together in this new structure to execute against our key strategies to meet the needs of our clients.

I strongly believe that we have at this time the deepest, most talented team in the asset management industry and the strength of our next generation of leaders will drive BlackRock's future success.

BlackRock is the world's most global asset manager.

We manage money for clients in more than 100 countries around the world through the combination of our on-the-ground presence in more than 30 countries and our ability to provide clients with the industry's broadest set of global and local investment solutions.

That global investment and distribution infrastructure positions BlackRock to capitalize on the future growth and development of the world's capital markets that will be necessary to support global economic growth.

BlackRock's global platform generated $131 billion of long-term net flows over the last 12 months representing an organic growth rate of approximately 4%.

These results were driven by our diverse investment platform, another key element that sets BlackRock apart from our competitors.

We have expertise across asset classes and we can deliver that expertise across a variety of investment vehicles.

We have active and index on a single platform, which helps us position the firm to meet a holistic approach and needs of our clients.

The second quarter showcases BlackRock's product breadth with 12 funds across retail and iShares generating more than $1 billion in flows, tying a record number of $1 billion plus funds that we saw in the fourth quarter of 2013.

These funds are spread across developed and emerging markets, domestic and international clients, equities, fixed income and multi-asset class, active and index and short and long duration exposures together demonstrating BlackRock's ability to meet clients' needs across the investment platform and spectrum.

As I mentioned many times in the past, the diversity of our platform, our deep client relationships and our global footprint all positions BlackRock to deliver consistent financial results for our shareholders.

And that consistency enables our management team to look forward at the key trends impacting our business and invest aggressively where we see opportunities.

One of those key growth areas is outcome-oriented investing.

The investment landscape is shifting.

Investors are looking for outcomes that target their investment goals rather than benchmark-specific performance.

This outcome-oriented style of investing requires a combination of a diverse set of investment capabilities and a focus and a deep focus on client service.

Most asset managers specialize in one thing and so they look at every client problem through the lens of that one specialty whether it may be active investments or index investments or fixed income or equities.

BlackRock's diverse platform allows us to instead to focus holistically on our clients' needs and draw upon and across the entire firm to meet our clients' needs.

The investments we've made to build a combination of active and index across asset classes and regions and our technology and risk management capabilities differentiate BlackRock in the outcomes and solutions space and BlackRock's offerings of packaged outcomes continue to drive growth in the second quarter, particularly in our retail businesses.

Our five-star multi-asset income fund, MAI, led by Michael Fredericks, is one of our flagship package outcomes, an example of a fund that targets a critical challenge for our clients, generating reasonable income in a low yield environment by tactically balancing income across equities, fixed income and non-traditional sources of income.

MAI has raised over $1 billion in the quarter and crossed the $7 billion mark in total assets.

This fund has doubled in size organically over the last 12 months.

Similarly, in the unconstrained fixed income area, SIO has raised $3 billion in flows in the quarter, stands at over $16 billion in AUM and is the second most active mutual fund in the US in terms of year-to-date net new flows.

The interest in outcome-oriented investing is especially strong among our institutional clients.

They are increasingly looking for investment partners that provide analytical insight, thought leadership and breadth and depth of investment capabilities, all which play strongly to BlackRock's strengths.

At BlackRock, we take a consultative approach with our institutional clients, focused on understanding their specific needs and leveraging Aladdin's capabilities to deliver investment solutions, a capability that is differentiated from other asset managers.

Our relentless approach to risk management and technology positions BlackRock to offer a complete advice to our clients, to help them not only achieve their return targets, but to do so with a comprehensive understanding of their individualized risk and making sure they understand the risks that they are taking.

The combination of Aladdin, our global platform, and our investment expertise across broad ranges of strategies positions BlackRock to deliver highly customized solutions to all our institutional clients worldwide.

For example, in the first half of 2014, we closed more than $1.6 billion in custom alternative commitments and we saw strong flows in our fiduciary business, especially in EMEA and demand for our LifePath target-date suite in the United States.

Our iShares business is also positioned to provide outcomes and solutions to a wide range of clients with differing investment preferences and differing objectives.

iShares continues to be a major growth driver for the firm, delivering $77.5 billion of net flows in the last 12 months and $30.4 billion of net flows in the second quarter across a variety of products and client segments.

As Mark Wiedman discussed at Investor Day, there are three ways our clients are looking at ETFs and iShares specifically.

One is core investments or building blocks to construct the basis of buy-and-hold portfolios.

Two, precision exposures to express a specific, a targeted investment viewpoint.

And three, as a financial instrument to efficiently add beta exposure to a variety of equity and/or fixed income markets, in some case replacing futures with ETFs and iShares.

Each of these key product segments globally contributes to iShares' growth in the quarter, delivering the number one ETF flow marketshare position for both the quarter and now year to date.

Regardless of our strengths for growth, we cannot be successful unless we produce superior investment performance.

Nothing is more important than delivering performance for our clients.

After the financial crisis, we restructured much of our active fixed income business.

Our focused execution has paid off and we have strong performance across fixed income with 90% of our active taxable and 70% of our active tax-exempt fixed income AUM is above our benchmark for peer medium for a three-year period of time.

As of the end of June, we've seen strong performance in our fixed income total return fund, which is in the top decile for the one, for the three and a five-year period.

Our low-duration bond fund is in the top decile for one and three years and our newly launched Strategic Municipal Opportunities fund or SMO is in the 6th percentile for a one-year period of time.

We also continue to see strong performance in our scientific active equities with 93% of our products above benchmark or peer medium for a three-year period and from our index offerings, where we have 98% of our assets, we are within or above the tolerant level, risk level for over a three-year period of time.

I have spoken at length about the steps we are taking in our fundamental equity business to improve performance.

We streamlined our investment process and recruited top quality managers to add to our existing talent base.

Most recently, Chris Jones has joined BlackRock as our Co-Head of Global Fundamental Equities and is our new CIO of America Equity Teams.

And [Tony Despirito] joined us or will be joining us in our Equity Dividend Team later this year, working very closely with Bob Shearer.

In the second quarter, several of our fundamental equity managers who had put up strong performance in recent months suffered a setback in a variety of global momentum-aided strategies and had produced strong alpha reversals.

We recognize that we remain in a rebuilding phase in this business and though we never like to see performance setbacks, we remain confident today in our capabilities of our teams and all their [processes].

To give you a few examples of the strength of some of our new managers, Andrew Swan, who manages our Asian equities and Bart Geer, who manages our basic value, are in the 14th and 5th percentile respectively since they joined BlackRock and that performance is starting to begin to pay dividends with flows.

We believe that over time fundamental equities will be a growth area for BlackRock.

We believe the combination of investing in our talent and our global footprint, our access to information and idea-sharing and our risk management capabilities positions BlackRock to deliver sustained superior investment performance to our clients.

We know this is a multi-year effort and we are committed to seeing it through.

These investments in our fundamental equity business will further enhance the depth and breadth of our global business that we build over time throughout BlackRock.

As I said at the beginning, we believe that BlackRock is a truly differentiated firm from any other firm in the world.

We are seeing a consistent result that this model can deliver quarter after quarter.

If you look at our growth on a year-over-year basis as adjusted, you will see we grew assets under management by 19%.

We grew revenues by 12%.

We grew operating income by 15% and we grew earnings per share by 18%.

That double-digit growth demonstrates the benefits of our diverse platform and our ability to deliver strong financial results to our shareholders and I am confident that we not only have the platform, but we also have the right leadership team in place to continue to drive growth in the future even as the environment continues to evolve as we know it will.

Constantly adapting to the changing environment and improving our performance is something we are intensely focused on.

That is how we intend to continue to unlock value for our clients and then ultimately our shareholders.

Finally, I would like to thank our leadership team and all our employees for delivering a very strong quarter and helping our clients build better financial futures.

With that, operator, let's open it up for questions.

(Operator Instructions).

Glenn Schorr, ISI.

Hey, Glenn.

Hey, how are you?

Good.

So I guess the first question I have is the cost of leverage on the street is kind of rising as banks get their houses in order and that pushes out the cost of leverage to various products that companies like yours run.

So I'm just curious, it certainly didn't seem to affect your flows in the current period, but in things like long/short credit, multi-strat products that you have had success growing, does that factor in at all in terms of A, the growth and B, the profitability of those?

That's a good question.

There is no question you are seeing, as you [rephrased] it, cost of leverage.

I would just say the Basel III, Volcker Rule, Dodd-Frank has forced many sell side organizations to reduce their overall capital committing in the marketplace.

And two, you are seeing obviously liquidity issues in some asset categories.

Glenn, to date, we have not seen a dramatic change in our ability to buy or sell for our hedge fund strategy, but we are mindful of that and indeed, you are correct.

If we see a continuing amount of inability to navigate our trades and we are seeing larger bid/ask spreads, there is no question that can minimize the opportunities that our alternative products have.

I should say though one of the ways that investors are utilizing or trying to change their behaviors, and this is a growth engine for us, we are seeing hedge funds utilizing ETFs -- instead of futures or single-stock or single-bond strategies, they are using ETFs as a mechanism to express a long or short type of exposure.

So in some respects, if there is more liquidity in different products such as an ETF, you may see that and so I think, in some respects, the changes in the world related to dealer behaviors is a benefit for the ETF market in itself and we are benefiting from that and I tried to express one of the avenues in which people use ETFs.

But one of the big things we have seen is the utilization and the cost of using futures, margins and all that has elevated and people are using ETFs as another example.

But you are absolutely correct that we have to be mindful of liquidity by market in terms of the exposures we have in some of the long/short products.

Okay.

And maybe just a follow-up, I appreciate that, related to alternatives, and I don't know if it is a technical question, but the platform across the board seems great.

Your retail penetration is clearly growing and yet the net flows into the alternatives bucket is pretty modest, less than $300 million this quarter.

Now I don't know if that is some are growing, some are shrinking thing.

The technical part of the question is, if you raised a lot, but have not deployed the capital, does it show up as a flow or does it show up as a flow when you get -- my question is commitment versus funding.

We do not put commitment in our AUM bucket.

Some firms do.

So as Gary said in his speech, we did raise a little over $1.3 billion in commitments.

Over the course of a year, we raise about $8.5 billion in commitments and we've funded approximately $1.8 million of it.

That is a big change.

We also -- and we mentioned this in the first quarter and we are still doing it.

We are actually monetizing some of our alternative products.

So you are seeing our commitments grow, but we are not -- we haven't invested in that and yet you are seeing on the same time we are monetizing some of our alternatives because of the success of the strategies and we are giving back the capital.

So Glenn, it's Gary.

I would say one way to think about it is the return of capital hits the flows immediately and this quarter that was roughly $925 million, thereabouts.

And we were basically able to raise new commitments of $1 billion.

So over the long term, the new $1 billion that we've raised will obviously replace the $900 million that we just paid out, but unfortunately it takes some time to basically invest the money over the --.

Well, we take the more conservative approach the way we identify the asset raise.

So Larry's point is that of the $8 billion plus that we've raised since 2013, about $1.5 billion of that has effectively hit flows.

Meaning it has been invested and the dry powder or the $6.5 billion or $6.7 million will hit flows over time as it is invested.

But we are probably in more dialogue with more clients on our alternatives space than we have ever have been in the history of the firm.

So we like where we are positioned, but we also like the fact that we can monetize good successful strategies for our clients.

Marc Irizarry, Goldman Sachs.

Hey, Marc.

Hey, Larry.

Just following on the alternatives question.

The performance fee is always tough to get our arms around, the alternatives performance.

But can you give us some sense maybe of what kind of embedded gains you have in some of the portfolios that you are harvesting and maybe what that means for the outlook?

And then I guess just broadly across the alternatives platform, how is performance holding up there?

Thanks.

I will let Gary answer that.

So Marc, as you know, we obviously don't take the approach to economic net income that some of the pure play alternative managers do.

So as we effectively see gains building up, which trigger accruals of, if you will, embedded performance fees, we fully reserve for that going forward until they become permanent and no longer subject (multiple speakers).

We don't report them.

So that is not in our P&L and frankly, we don't really disclose those as a matter of course.

I think obviously you saw performance fees were up 29% year over year.

I think the important thing to note for us is it's very broad-based.

So it is not a single fund that is basically driving that; it is very deep.

The breadth of the platform is evident in the fact that when you see the results, it is lots and lots and lots of different funds.

Though it was clear that this particular quarter we had a number of annual locks, meaning that they lock annually as opposed to quarterly and we benefited from a much stronger performance in this 12-month lock period than we did in the prior year.

But broadly speaking, I think we are feeling very happy with the performance of the alternatives platform and the performance fees are coming through.

And as I said, Marc, great opportunities we have, I mentioned in the speech, in the infrastructure space where we think this is going to be a great driver in the future for us and our clients.

And so we have great opportunities in front of us across the alternatives space.

Rob Kapito and team and Charlie have spent a lot of time in quietly rebooting our whole alternative platform under Matt Botein and Andy Stewart and it has been -- in the short term, we are starting to see real tangible results.

Okay.

And then, Larry, just one follow-on.

Can you give us an update, if possible, on any of the asset management regulation and maybe specifically any update around maybe the discourse on systemic importance for asset managers?

I wish I had something to tell you that is factual.

I don't.

We don't know anything more than what you have been reading in the newspapers.

Under Dodd-Frank, banks -- anybody related to Dodd-Frank, whether it is SIFI or anything else, we are not allowed to have a dialogue.

It is called lobbying and it has to be publicly revealed that we are lobbying.

So there is not -- you don't have the transparency of the process at all.

This is very unusual.

Any other type of [rule] creation in Washington, there is always a process of dialogue and this was explicitly prohibited in the law of Dodd-Frank.

And so we don't know anything more than what we read and unfortunately what we read -- sometimes we believe there are leaks.

And so it is a pretty inappropriate process from our perspective.

But our job is to be a constructive participant in this.

We have been occasionally asked to provide information to various different regulators worldwide on different things that they may be studying.

It is a one-directional approach.

We provide information and we get very little back and that is obviously what the laws say.

So I don't know anything more, but what I would like to do is give you some of how we think about asset managers and regulatory oversight.

We calculate at BlackRock there is $225 trillion in global financial assets.

Assets that are being managed by investment firms manage $62 trillion of the $225 trillion.

So over 70% of the financial assets are owned and managed directly by the owners.

And the other thing I would just like to say, as you know, these are not our assets across the board.

We have a contract in what we invest in and how we invest with every client.

As you know, at BlackRock, we have hundreds of portfolio managers making decisions.

We don't have one CIO managing all the assets across all the spectrums going left to right or forward.

So this is -- we don't take principal risk.

And the last thing I would just say related to BlackRock.

If you dissect our platform, 62% of our assets or $2.8 trillion of our assets are index products.

And then we manage about 32% of our assets are in active, and another 6% in cash and advisory.

So you think about the makeup of even as large as we look upon, much of our activities are very different than a lot of other asset managers in itself.

So we believe that narrative that I just expressed is beginning to be more understood.

And there was a proposal in Congress yesterday to allow for greater transparency in the process, deeper dialogues in the process, and we welcome that type of activity.

And we want to be a constructive participant in this dialogue.

Luke Montgomery, Sanford Bernstein.

Good morning, thanks, guys.

So a couple of questions on retail distribution.

You entered 2013, I think, with a range of new strategic initiatives.

And the results over the last year or so have been pretty impressive as indicated by net flows.

But aside from some of the key products that drove that growth -- you have touched on them, Multi-asset in the Core ETF series.

Could you give us a sense of how successful you have been with the goal of really broadening that penetration with the wirehouses outside of that relationship you have had historically with Merrill Lynch?

Well, I am going to let Rob answer that.

Rob, why don't you --.

Yes, so we have grown significantly from being Merrill Lynch-centric on retail, and in fact broadened the distribution to several others in a very significant way.

In fact, our marketshare at some of the larger wirehouses beyond Merrill Lynch has more than doubled over the last two years.

So we continue to penetrate because we are bringing products that a lot of them do not offer, and especially in the ETF side we have seen a lot of growth in that particular area.

There is other channels that have also been developed beyond just a typical wirehouse, which is the RIA channel, of which a lot of financial advisors have moved from the large broker-dealers into smaller channels and we have pretty significant penetration in the RIA channel.

We also, as you know, have read about our joint venture with Fidelity and that has been more successful than we had originally planned.

So that broadens out our effort.

And one of the things that has really been successful for us is that rather than going out with individual salesforces for our ETF channel and for our mutual fund channel, over the last year, we have combined our salesforce to have the largest salesforce going out and talking to broaden the distribution and treating the FAs more holistically because they own in their portfolios both mutual funds, active, index and ETF.

So we can talk to them about a more holistic solution and I don't think that many of our competitors can claim to be able to do that.

The last thing that has also helped to broaden out the channels is that we announced a core series and are specifically developing in the ETF channel specific ETFs for the buy-and-hold retail segment.

Again, that is something that has also broadened out our retail network and has been very successful.

So many things are going from years ago when we were more Merrill Lynch-centric.

Now we have a much broader and deeper retail penetration in our products.

Let me add one other thing, Luke, which I think is not fully understood by the investment community and that is the substantial growth in mutual fund sales in Europe.

As you know, banks continue to deleverage, more and more activities are going onto the capital markets, greater confidence in Europe and Europe's future with a huge amount of savings in Europe and so we are seeing much greater penetration across the board in European retail.

So there are two other macro trends that are going on in Europe.

One, domestic managers are losing out to the global international managers.

And so across the board, you are seeing the international investment managers picking up marketshare in Europe.

And the last thing I would say, you are seeing a real consolidation in flows.

The top 10 managers in Europe are driving almost 90% plus, maybe 110%, I don't have the actual number in front of me, of all the flows because the smaller managers are actually having net outflows.

But if you look at the substantial growth of $9 billion in international retail this year to date, that is a high component of our growth and I should say international retail means Asia, it means Europe, it means Latin America.

So this gets back to my comments earlier about being in 30 countries, being local in 30 different countries.

We are benefiting from that and we believe as the world begins to look for other alternatives away from bank deposits looking for strategies for their retirement, if you link longevity and longevity issues, investors worldwide are looking for global advice and we are very well-positioned across that.

Okay, thanks.

And so my follow-up, and I apologize, Larry, because I know you chafe at the comparison of your firm to Vanguard's, but a question on the distribution strategy in retail ETFs and index markets.

I think over the years --.

I (inaudible) say I chafe.

Maybe I missed characterized that, but I have heard some wirehouse distribution executives over the years lament that Vanguard products basically free ride on the wirehouse distributors who have to [custody] their products as a courtesy to FAs and clients.

So I wonder do you see any specific opportunity based on your willingness to partner more directly with those firms to pay channel access fees, etc.?

Does that give you an opportunity to supplant some of the marketshare they have acquired (multiple speakers)?

I will let Rob answer that.

Rob, do you chafe?

I don't chafe at all.

I view our strategies as quite different.

We are using -- we are going to expand by education the use of how ETFs are going to benefit clients' portfolios, both institutional and retail.

And I think in a product lifecycle, this is very typical that you have people come in at first and want to just get involved and then you have all the other uses of this product.

Larry mentioned one for example where we have noticed that ETFs are cheaper to use than futures.

There is nobody better to go out into the marketplace and educate the community on a change like that than BlackRock is.

This is something that many of the other issuers of ETFs really don't think about.

They are out selling product.

We are selling a solution and ETFs are a part of that solution.

When it comes to people that are looking for large credit portfolios, we are able to talk to them about a holistic solution where they can get diversification and liquidity and actually have a better structured portfolio by the use of iShares than just buying the individual assets themselves.

We have so many different ways that we are developing the uses of ETFs that the broker-dealer community and the institutional community looks to us to use ETFs as part of an overall solution.

So we are not out there just pushing one product versus another product because it is hot.

We are using this as a full part of a portfolio allocation.

I think that is very important.

So it is core investments, it is to get more precision exposures into the marketplace and we are treating this as a significant financial instrument, not just a product that we hope to garner more assets in.

It is a very different strategy than Vanguard is.

They are a good firm, so we are glad to compete with them.

Bill Katz, Citigroup.

Hi, Bill.

Good morning, everybody.

Thanks for taking my questions.

Larry, just coming back to the regulatory front for a second, maybe a two-part question.

One is what has been the sort of reaction from the institutional clients given the SEC discussion about possibly voting on a prime fund with a floating-rate NAV?

And then a separate part of the question is it's still early days, but it looks like MiFID out of Europe is coming up with some pretty onerous shifts of views on how they are treating research versus trading.

I was wondering how you might be thinking about that dynamic as it relates to your business.

So we have continuously been a constructive organization working side-by-side with our regulators related to money market funds, so we have been continuously engaged with the SEC throughout the process.

We have made a number of recommendations.

We have spoken to when asked about what we think about it.

We have had dialogues with many of the commissioners when asked and importantly, we are well-positioned regardless of where the SEC comes out on the proposal.

Money is moving around and we are going to see how this all plays out for our clients.

But when you think about where we are as a firm in terms of money markets, we have money market funds, we have separate accounts or money market accounts.

We have short duration bond funds.

We have ETF, you have other vehicles.

Money will be in motion, money will change if clients find whatever the outcome is as very restrictive, they will move money elsewhere.

We will also see -- but most importantly we are well-positioned and I do believe the SEC have been very open to conversation related to recommendations and all that.

We will see how this all plays out.

The one thing I can say -- can't comment on because we don't know what this means related to bank deposits.

In theory, bank deposits could be even a better alternative.

So obviously, money market funds are in some cases alternative to bank deposits and the flows of money market funds is a function of what bank rates are.

But a lot of people are very mindful of how much exposure they would have with any one single bank.

And so I think this is why money market funds are desired by clients and this is one thing that we try to express to regulators.

Clients like money market funds and we are well-positioned.

We have many government funds as a separate account.

So we will stand by and hear what the outcome will be from the SEC related to their decision.

We know as much as you do.

In theory, there is going to be some decision next week and we will find out.

Related to MiFID and RDR in terms of regulatory changes, you are going to see a consolidation with managers.

Our risk management tools is a huge benefit and I do believe our index ETF platform efficient exposures, I think you are going to see more movement towards ETFs as a result of the MiFID RDR type of regulatory changes.

So it may reduce some of our business in Europe, but it is going to enhance the other side of BlackRock's business.

This is another example where, by the diversity of our products, our positioning globally really differentiates us.

So we are working with regulators; we are mindful of this.

We are telling regulators what clients want, what they expect, but we are pretty well-positioned one way or another related to whatever the outcome is related to MiFID and RDR.

Ken Worthington, JPMorgan.

Hi, good morning.

Just one question from me.

I wanted to ask about the retirement business outside the US.

We've seen changes to the UK pension plan this year, which appears to benefit maybe asset managers over insurance companies.

The EU has been underway for pension reform for I think the last four years.

BlackRock has had some success in the US taking marketshare and driving growth in the US retirement business.

Maybe, Larry, you could discuss what is happening outside the US and maybe where the biggest opportunities lie for BlackRock.

Well, there is no question some of the rule changes in the UK is a big opening for firms like us, especially related to the UK pension reform.

As you suggested, it was really an insurance product and now it's migrating to much more opportunities.

So the defined contribution savers will have now an option.

They can take and withdraw beyond the 25% tax-free lump sum.

So we believe this is a big opportunity for us.

so especially in light of how we think about investment outcomes and solutions.

Retirement is something that we are spending a great deal of time trying to help savers and potential retirees in thinking about longevity and how their solutions are going to have to be more weighted towards equities, less annuitized products.

Historically, as you suggested, Ken, annuitized products were the prime driver of this and if you are going to be living a long time, earning 2% on an annuitized product or 3%, you are just going to have to be saving a lot more money to earn the necessary pool of money you want.

This is why we are rolling out -- we rolled out CoRI overseas in the UK.

We are going to continue to roll out our investment type of products to provide what I would say that solution-based strategy.

So we are encouraged.

We think we are well-positioned for these changes and as you've suggested, hopefully, we are in a good position to take share.

Craig Siegenthaler, Credit Suisse.

Hey, Craig.

Hey, Larry.

Good morning, guys.

First, just on target date, can you talk about how the longer-term themes of open architecture and the adoption of passives are really progressing really both in the target date funds in the US?

And I'm really thinking your perspective here from both your LifePath and your GlidePath products.

Rob, do you want to answer that?

Yes.

I mean, look, it is the same trend on retirement.

People have not saved enough for retirement and they have lived through too much volatility in both the equity and fixed income markets.

So they are looking for an alternative for someone to manage the asset allocation and the process throughout their lifetime.

So to us, the opportunity is to develop the tools to the technology and one that we have is called the CoRI index, cost of retirement index, of which we can manage through target date funds and LifePath funds, a better way to do the asset allocation as a person gets closer to retirement.

We think there is going to be incredible opportunities for us in this way because the advice and asset allocation is something that we specialize in.

The models that we have specifically target retirees and manage this process throughout their life and it is something where we see a lot of the sponsors are moving towards and, as Larry mentioned, a lot of DB and DC plans changing to have someone else manage this asset allocation throughout their life.

So we are the inventor of the target date and LifePath products.

People recognize us for that innovation and we are seeing a lot of demand across the board for that as a big opportunity for us in the future.

Dan Fannon, Jefferies.

Hey, Dan.

Hi, I just want to talk about fixed income.

Can you talk about the momentum you are seeing particularly on the institutional side?

Performance was flagged as improving.

I just want to talk about just client dialogue, outlook for growth and how that compares to recent periods.

Well, having 90% of our fixed income products above their benchmarks for three years, having a lot of products that are in the top decile, if there is a conversation to be had, firms are going to be talking to us as one of the possibilities.

That puts us in a very good position.

We are seeing very mixed types of conversations across the board.

We are seeing -- we continue to see large-scale pension funds derisking as they have taken profits.

In equities, we are seeing a lot of pension funds looking now towards some form of immunization as they get closer to their liability or even in some cases above their liability, they are using bonds as a vehicle.

But probably the most important key for us is our fixed income platform is more than just one product.

It is across the board where we are seeing increased activities.

We are in more dialogue today than we ever have been in fixed income in terms of new flows.

In the unconstrained area, we are just beginning to see public pension plans migrate out of index-based products into unconstrained products.

So we are in some very large dialogues at this moment.

We do believe one or two of the conversations are going to constitute some large wins in the third quarter.

We continue to be in deep dialogue with many clients related to credit and high yield and whether it is an insurance company who is looking and in need of some form of income to offset their annuity liabilities and we are still seeing large-scale international investors are looking to continue to invest in dollar-based assets and expressing those investments in the form of fixed income.

And so across the board, we are seeing heightened interest in fixed income, even in the low interest rate environment.

As I said, some of it is because they are derisking in equities, but some of it is because they are seeing increased activity in their own business like an insurance company.

But I would say overall -- probably the overall theme I can say related to BlackRock's future and future activities in fixed income, having the performance that we have across our platform for five years, for three years, for one year is giving us a position where we are in dialogue with many clients worldwide.

Brennan Hawken, UBS.

Good morning.

Good morning.

So just you referenced the JV with Fidelity before.

I was just curious about how much of the core ETF growth you've seen, which I believe you laid out as nearly 20% at the Investor Day.

How much of that comes from the sale of your partnership or maybe if you could give some color on how that has helped to drive some of that really extraordinary growth?

Rob.

I don't know if we are willing to break down what is coming from one place for another, but I can also tell you that the growth that we expected is probably twice what we had anticipated --

For a core series.

-- for a core series and we have high aspirations for this because there is a segment of the market that is really not looking for the liquidity.

They are looking for the buy-and-hold and this is a particular segment that Fidelity actually addresses.

So we have expectations of future growth for that, but we don't rely especially in that just upon one distribution segment.

There are other distribution segments that also cater to the buy-and-hold segment.

That being said, there is another -- the other segment, which is the institutional or the trading segment, they are looking more at the liquidity of this and the access for asset allocation in their portfolios.

So what we are trying to do is have products to appeal to the right segments and we'll price those appropriately and make sure the performance of those is appropriate for those particular targets.

I would just say also we are benefiting tremendously this year from the, and Rob said it earlier, from the integration of our two salesforces.

And so you asked the question related to Fidelity, but we are seeing it in large activities across all the independent channels, from all the major distributors.

And so I would say it is pretty broad-based, but our relationship with Fidelity is strong, growing and it is a very good partnership.

Michael Carrier, Bank of America.

Hi, Michael.

Hi, Larry.

Larry, just a question.

If I look at the growth that you guys have generated in iShares and on the retail side, it has been fairly consistent on retail.

Big improvement over the past couple years.

On the institutional side, I feel like you guys have the relationships.

When I look at the solution products, the alternatives, it seems like the product offering is there, but the flows just aren't as strong on the other channel.

So is it an allocation problem?

I know you mentioned some on the performance side, whether it is active equity or the (inaudible) is just not there.

But just from an outlook standpoint, do you guys feel like things are in place so over the next two years that we kind of see the same trend that we saw on the retail side or is there something else that is somewhat of a hindrance there?

You are right in suggesting -- in terms of iShares, our rolling 12 months were growing around 10%.

In retail, our rolling 12 months is about 13% growth.

And our rolling 12 months in institutional is flat.

And so those are actual facts.

What we are witnessing in institutional though, and if you look at our revenues are growing faster than our AUM, we are seeing a mix change.

We are growing more in alts, which is lower AUM, higher fees.

But importantly we have seen some large-scale clients derisking in equities, going into cash.

A lot of that was international and so the net result is a flat type of growth rate over the last 12 months.

I will be bold enough to say we believe we are well-positioned in institutional in that we are going to see opportunity for growth in institutional.

Whether it is in fixed income, as I said earlier about all the unconstrained conversations we are having with large pension plans in the fixed income space, we continue to be driving more opportunities in alternatives and I hope I can comment in the future that we are going to start seeing opportunities in our model-based equity business because we have had exceptional return.

But we also have opportunities in the official institution business and in the DC plans and in the financial institution group.

So among those different areas, we are in more dialogue today than we have been.

But I am disappointed in the net results of AUM, but I am not upset at the revenue growth that we are seeing in the institutional side.

Chris Harris, Wells Fargo.

Thanks.

Hey, guys.

So just a quick follow-up on fixed income.

You guys and others in the industry clearly benefiting from growth in unconstrained and you've highlighted that.

I am kind of curious if you guys think investors understand or fully understand the risks of these funds and then maybe how sticky do you think these assets will be if things get a little bit more volatile in the market?

Well, as things get more volatile -- in other words, if you have more volatility, which probably means higher interest rates, you are going to be happier in an unconstrained product versus an intermediate duration target like a core product.

So that is what clients are looking for so they don't have a tethering to a benchmark that has no connection to their liability.

That is one of the big issues that is confronting a lot of investors.

Investors are worried about those who are in fixed income -- if they are not in fixed income for immunization purposes, they are worried about the eventuality of higher rates.

We are seeing growth in our global long/short credit products, which have zero duration.

So do I think clients understand what they are getting into?

100%.

Clients who are looking to immunize, they are looking for as long a duration as they possibly can have.

So we should be clear.

We are seeing movement across fixed income.

We are seeing some people who are worried about being tethered to a benchmark that has no connection to their liability.

They are either looking more towards liability matching in fixed income or they are seeing a movement towards unconstrained.

We are seeing some clients who remain steadfast in credit and are looking to add to credit whether it is in the form of a CLO or in the form of high yield.

There is not one single behavior, but you asked me specifically related to unconstrained.

I believe our investors are investing in unconstrained for a reason, for a purpose and the dialogues that we have had with clients year to date validate my view that they understand what they are doing related to the associated risk and the volatility that you discussed I think would be attached to higher rates and that is one of the reasons why people are looking to unconstrain.

Now obviously they have to perform in that environment and they are going to have to perform much better than a tethered core product that is tethered to a four or five-year duration..

Ladies and gentlemen, we have reached the allotted time for questions.

Mr. Fink do you have any closing remarks?

No, I hope everyone has a decent summer.

Hopefully, the volatility doesn't begin this summer so we can take a summer.

I just want to thank all our shareholders for your interest in our Company and I would like to thank the employees of BlackRock for a good quarter.

Have a good quarter.

Thanks, everyone.

This concludes today's teleconference.

You may now disconnect.