貝萊德 (BLK) 2014 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the BlackRock Incorporated third-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.

I am Matt Mallow, the General Counsel of BlackRock.

And before Larry and Gary make their remarks, as usual, let me remind you that during the course of this call we may make a number of forward-looking statements and we call your attention to the fact that BlackRock's actual results may, of course, differ from these statements.

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

And additionally, as is also usual, BlackRock assumes no duty and does not and will not undertake to update any such forward-looking statements.

So with that, let's let the call begin.

Thank you, Matt, and good morning, everyone.

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

Our roadmap for shareholder value creation is predicated on three main drivers: generating consistent organic growth, demonstrating the benefits of scale through operating leverage, and systematically returning excess cash flow to our shareholders.

We successfully navigated that roadmap again this quarter generating double-digit earnings growth.

More importantly, however, and as you will hear in much more detail from Larry in a moment, BlackRock has never been better positioned to meet the needs of our clients.

Our global reach, unique blend of active and index offerings, strong overall investment performance, risk management and analytics capabilities, and One BlackRock culture differentiate us today in the asset management industry.

BlackRock delivered third-quarter earnings per share of $5.21, up 34% compared to a year ago.

Revenue rose 15% to $2.8 billion and operating income was $1.2 billion, 24% higher on a year-over-year basis.

Non-operating results reflected a $43 million increase in the market value of our seed and co-investments, largely driven by mortgage, private equity, and credit-related investments.

Our GAAP tax rate for the quarter was 20.2%, reflecting discrete benefits primarily due to the resolution of certain outstanding tax matters related to the acquisition of BGI.

In connection with that transaction BlackRock recorded a $50 million indemnification asset for unrecognized tax benefits.

Given resolution of these matters, we recorded $50 million in G&A expense to reflect a reduction of the indemnification asset and an offsetting $50 million GAAP tax benefit.

Both the $50 million G&A expense and the $50 million tax benefit have been excluded from our as-adjusted results.

Our 26.2% as-adjusted tax rate for the third quarter also benefited from $34 million of discrete tax benefits.

We continue to estimate that 29% is a reasonable tax run rate for the fourth quarter and, based on what we know today, 30% is a reasonable projected tax rate for 2015.

BlackRock's third-quarter results were driven by $29 billion of long-term net new flows, representing an annualized organic growth rate of 3%.

Flows were positive across all client businesses and regions, and despite a more volatile market environment, we continue to demonstrate the stability of our highly diversified platform.

Over the last 12 months BlackRock generated $134 billion of long-term net new business, representing 4% organic asset growth, and an even faster rate of organic-based fee growth as we benefited from positive mix change associated with our faster growing, higher fee retail and iShares businesses.

Third-quarter year-over-year revenue growth of 15%, or $377 million, 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 $315 million, or 15%, from a year ago as average AUM increased due to organic growth, market appreciation, and the acquisition of the MGPA real estate business.

Base fees were up 1% compared to the second quarter due to higher average AUM levels and the impact of one additional revenue day, partially offset by the seasonal decline in securities lending activity we typically see in the third quarter.

However, we enter the fourth quarter with lower spot assets under management than our average AUM for the third quarter, which will impact our fourth-quarter entry rate base fee level.

This decline was primarily driven by the appreciation of the dollar against foreign currencies, which, given the global nature of our business, lead to an $89 billion decrease in total AUM during the quarter.

Performance fees for the third quarter increased $37 million, or 39%, from a year ago, driven by continued strong performance across our broad suite of single-strategy hedge funds, real estate, and hedge fund solutions offerings.

As a reminder, fourth-quarter performance fees in 2012 and 2013 were elevated due to similarly-sized one-time fees triggered by the wind down of opportunistic funds related to the financial crisis.

We do not anticipate any such fees during the fourth quarter of 2014.

BlackRock Solutions revenue of $165 million was up 6% year-over-year and 13% sequentially due to increases in both Aladdin and FMA revenue.

Our Aladdin business, which represented 72% of BlackRock Solutions revenue in the quarter, grew 6% year-over-year and 9% sequentially.

We continued to successfully execute on large global implementations associated with record new business wins in 2013.

Our financial markets advisory business had a very strong revenue quarter, driven by several large advisory assignments associated with ECB AQR diagnostics.

Notwithstanding a more institutionalized post financial crisis advisory model, future FMA results may be difficult to predict as a function of the transaction-based fee structure associated with the business.

Total expense for the third quarter rose $141 million year-over-year, driven primarily by revenue-related items including compensation and direct fund expense.

Compensation and benefits increased $112 million from a year ago, or 13%, reflecting higher headcount and higher incentive compensation driven by higher operating income.

While compensation as a percentage of revenue declined year-over-year, partly as a function of the timing of certain accruals, quarterly comparisons are less relevant as we manage compensation on a full-year basis and our overall compensation policies have not changed.

G&A expense decreased $8 million year-over-year, or 2%, driven primarily by beneficial, nonrecurring items including the positive FX impact of re-measuring dollar balances held overseas to their respective functional currencies.

Sequentially, G&A expense decreased $51 million, reflecting the previously mentioned impact of positive FX re-measurement and lower legal and regulatory expense in the current quarter.

Excluding the positive impact of these items and taking account of a planned seasonal uptick in year-end marketing and promotional spend, we expect to see higher G&A expense in the fourth quarter relative to the first three quarters of the year.

Overall, total expense increased 9% from a year ago compared to a 15% increase in revenue over the same period, resulting in an as-adjusted operating margin of 44.2%.

The year-over-year margin improvement of 300 basis points was positively impacted by the previously-discussed lower level of G&A and compensation accruals in the quarter.

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

During the third quarter we repurchased an additional $250 million of stock and view that as a good planning rate for the remainder of the year.

As you are all aware, we traditionally review our capital management strategy with our board each December for implementation in January of the following year.

Our consistent earnings growth and stable financial results reflect the benefits of our diverse platform, long-term client relationships, and commitment to alpha generation.

Quarterly net flows were positive in both our active and index franchises, as well in each of our geographic regions, with $11 billion from the Americas, $7 billion from EMEA, and $11 billion from APAC.

In global retail we saw long-term net inflows of $5 billion during the third quarter bringing year-to-date inflows to $32 billion, or 9% annualized organic growth.

Retail flows were positive in both the US and internationally, but were limited by macro-headwinds during the quarter that impacted our high-yield and European equities franchises.

BlackRock's diverse platform was well positioned to weather this market volatility as we nonetheless delivered overall positive flows with strength in outcome-oriented offerings, including unconstrained fixed income, multi-asset, and alternatives products.

US retail flows of $2.8 billion were driven by strengthen in our outcome-oriented fixed income suite, including our Strategic Income Opportunities Fund, or SIO, our strategic municipals opportunities and global long/short credit funds.

During the quarter SIO raised $2.9 billion in net new flows from a combination of retail and institutional clients and remains the number two best-selling active mutual fund in 2014.

Retail fixed income results were dampened by outflows from our high-yield franchise which was impacted by investor rotation out of the sector in July.

Though our high-yield bond fund has top decile performance, the fund experienced quarterly net outflows of $1.6 billion.

Our 40 Act alternatives funds raised nearly $600 million of net flows during the quarter and we continue to see significant opportunity associated with delivering institutional-quality alternative solutions to the retail marketplace.

We've recently expanded our retail liquid alternatives suite with the launch of the Multi-Manager Alternative Strategies Fund which allocates assets to a variety of affiliated and unaffiliated alternative investment managers and leverages the success of our hedge fund solutions platform, BlackRock Alternative Advisors.

International retail net inflows of $2.1 billion were driven by our fixed income, multi-asset, and index capabilities, but were impacted by deteriorating market sentiment in Europe, contributing to $3.8 billion in outflows from our European Equities franchise.

Within fixed income we saw $1.2 billion of flows into our Fixed Income Global Opportunities Fund, which is the cross-border version of SIO, and $680 million of flows into our BGF Euro Short Duration Bond Fund.

International multi-asset net inflows of $1.9 billion reflected demand for our BGF Global Allocation Fund as well as growing traction for the cross-border version of our flagship Multi-Asset Income Fund.

We also took advantage of strong three-year performance track records in Asian equities to capitalize on increasing demand with our top quartile BGF Asian Dragon and BGF Asia-Pacific Equity Income Funds and our top decile BGF China Fund generating more than $500 million in aggregate flows during the quarter.

Global iShares generated $18.2 billion of net new business in the quarter, representing annualized organic growth of 7% driven by strong equity flows.

Equity flows of $13.8 billion were driven by flows into the core series as well as demand for emerging markets [and] Asian equity exposures, which offset outflows in European equities.

The buy-and-hold segment remains an important growth channel for iShares.

During the quarter we generated $7.3 billion of flows into the US Core Series, representing annualized organic growth of 23% and gathered $2.5 billion of flows into the recently launched European Core Series, representing annualized organic growth of 26%.

We continue to aggressively target growth in the fixed income ETF market.

iShares saw fixed income flows of $3.7 billion paced by $1.3 billion of flows into our core bond product, AGG, as investors looked for options to maintain exposure to the broad fixed income market in the current environment.

Year-to-date iShares ranks number one in market share of fixed income net flows globally.

Our institutional business generated $5.6 billion in long-term net inflows for the quarter, primarily reflecting indexed net inflows.

We continued to see sizable asset allocation-driven flows both into and out of institutional index products as barbelling continued to be a key theme among institutional clients with cost-effective beta exposure being paired with alternative solutions to achieve uncorrelated returns.

Index fixed income inflows of $5.5 billion were driven by LDI activity, including extensions of hedging or liability matching services.

Institutional active net inflows included $5.2 billion of net inflows into multi-asset class products, driven by continued demand for our LifePath Target Date suite and over $1 billion of flows into our dynamic diversified growth strategy or DDG.

DDG is an unconstrained multi-asset strategy that seeks to generate positive, consistent returns in a range of market environments with significantly lower volatility than an equity portfolio.

Multi-asset and scientific active equity inflows were offset by outflows from active fixed income and fundamental equities.

Despite strong performance across our active fixed income platform, our institutional net flows were impacted by several client-specific outflows driven by rebalancing and asset allocation decisions, partially offset by continued strength in unconstrained fixed income strategies.

As you are going to hear from Larry shortly, our broad fixed income platform and performance track record continue to position BlackRock extremely well to capture opportunities in the current environment.

In institutional core alternatives inflows into hedge fund solutions were offset by outflows from several single-strategy hedge funds and return of capital.

However, we had another strong quarter of fundraising and illiquid alternatives with nearly $1 billion in commitments, reflecting ongoing momentum in hedge fund and private equity solutions and infrastructure.

As a result of strong fundraising and illiquid alternatives over the last two years that has brought in over $9 billion, we still have approximately $7 billion of committed capital to deploy for clients.

While return of capital and (technical difficulty) immediately, committed capital only translates into flows and assets under management as those dollars are invested.

In summary, in a quarter marked by increased volatility, our diversified business model delivered solid financial results and we are well-positioned to take advantage of the numerous opportunities that lay ahead of us.

With that I will turn it over to Larry.

Thank you, Gary.

Good morning, everyone, and thank you for joining the call.

We have seen some meaningful shifts in market dynamics since we spoke last quarter.

Divergent monetary policy, changes in global economic growth expectations, and heightened geopolitical unrest all impacted the investment landscape and resulted in higher volatility in both asset prices and currencies in the past few weeks.

And that volatility is likely to continue as conflicting central bank policies and questions about the timing and magnitude of US interest rate hikes led to an ongoing market uncertainty.

Investors are also questioning whether the ECB's recent efforts will be enough to reinvigorate the economy and stave off deflation.

I believe it is going to take longer to stabilize Europe than many think and we are likely to see aggressive ECB behavior for a long time.

It is in these times of volatility and uncertainty that clients turn to BlackRock for answers.

We are having more conversations with our clients.

They are deeper, more meaningful conversations than ever before.

Clients are coming to BlackRock because of our platform that we built over the past 26 years as a result of a comprehensive and deliberate process focused on culture, technology, and talent.

Our platform is built on the foundation of our One BlackRock culture, a belief in putting our clients first in all that we do, and managing risk better and more thoroughly than any other asset manager in the world.

We built Aladdin with this in mind, to create a premier risk management and technology platform that allows everyone at BlackRock to speak a common language.

Aladdin doesn't eliminate risk, but it helps us to create an environment where our team is constantly aware of risk and we are connected across the firm worldwide to optimize results.

Increased connectivity through Aladdin and other sources leads to improved communication.

And in the BlackRock Investment Institute we have a forum for investment teams to share knowledge, to share insight with the idea that this will enhance alpha generation across the firm.

This team-based approach is a critical differentiator for BlackRock.

We do not and never had a centralized CIO.

We don't have a house view where any one person is setting a single investment strategy for our platform.

Our process enables our teams to make independent portfolio construction decisions to meet client objectives.

That may result in differing performance for our clients at times, but it means we don't have an overwhelming bias towards one strategy or another and we minimize the risk that that entails.

We also believe that having a deliberate process to develop our people is critical for BlackRock's success and our connectivity with our clients.

At our most recent Board meeting in September we spent two days reviewing 320 individuals at BlackRock across the entire firm to identify BlackRock's best talent.

This is an annual exercise and includes a process to develop each of those individuals as global leaders, as global investors, and as global citizens.

This might mean moving into a new region of the world or into a new business, and it helps to develop a team that will be deeper with broader and global experience, which will enable us to have better investors and better leaders in the future.

The leadership changes we announced in the second quarter are an example of how we do this.

The move involved new roles for 10 senior leaders across the firm and those leaders are now in their new seats driving growth, enhancing our value proposition for our clients.

Finally, BlackRock's global diversified platform is a critical component of our strategy.

BlackRock is the only asset manager to offer active and indexed capabilities globally across all asset classes on one platform and we are constantly looking to innovate to find new ways of meeting our clients' needs.

When we combine our people, our technology, and risk management investment platform and wrap it all in the One BlackRock culture, the totality of the firm comes together to serve our clients' needs.

Nothing here is accidental.

BlackRock was built to highlight these strengths and to minimize the risk of getting it wrong.

And while we will never compromise on our philosophy of building our culture, sometimes we do get it wrong and when we do we will do what is necessary to rebuild.

We rebuilt our scientific active equity platform which now has 96% of its assets above benchmark or peer mediums for the last three years.

And while flows have not improved as quickly as we might have expected, given the strength of the performance, this quarter we saw inflows in scientific active equity for the first time since we did the merger with BGI.

We made changes in our Asian equity business several years ago and Andrew Swan today has a top quartile three-year track record.

And as you know, we are now in the process of rebuilding our US fundamental equities.

We are excited about the progress that we are seeing from our new teams and remain committed to that effort.

Our confidence in our ability to rebuild the US equity platform stems in part from the success we have seen elsewhere highlighted by the rebuilding process we started over six years ago in our fixed income business.

The investments we made in that business are clearly paying off.

BlackRock saw $11.1 billion of net inflows in fixed income in the third quarter and now we have seen in total $48 billion year-to-date in fixed income across both active and index, reflecting the stability, the breadth, and the strong performance of our fixed income franchise.

We have a deep bench of talented senior fixed income investors with more than 400 fixed income investment professionals, including 150 sector specialists.

They manage $1.3 trillion in AUM across a full range of high-performing active, indexed, and iShares strategies.

With 87% of BlackRock's active taxable fixed income assets above the benchmark or peer mediums for the three-year period, BlackRock's offerings are positioned to help clients achieve their desired investment outcomes regardless of their specific needs or macro expectations.

Our unconstrained fixed income strategies continue to be a core theme for clients and we saw nearly $5 billion in flows in the third quarter and nearly $20 billion in the last 12 months across our top quartile, unconstrained bond franchise, including SIO and Strategic Municipal Opportunities in the US, our Fixed Income Global Opportunities product in Europe, as well as our flagship retail alternative fund, Global Long/Short Credit.

We have seen continued momentum early in the fourth quarter, as well as heightened client interest, and we expect unconstrained strategies to remain a strong driver of growth for BlackRock going forward.

The breadth of BlackRock's fixed income franchise is further highlighted by our top decile Total Return and High Yield Bond Funds.

In Total Return we have seen a significant recent increase in flows and client interest and see a meaningful long-term growth opportunity.

In High Yield, while we experienced some market headwinds in the quarter, our performance continues to position us to win in this asset class.

As a result of BlackRock's strong active fixed income performance track record, we are increasingly being rewarded by retail and institutional gatekeepers with improved positioning on platforms and buy lists.

We see a sizable opportunity in fixed income in the coming quarters and we believe BlackRock is the best positioned firm in the industry to capitalize on that opportunity, both in active and in indexed.

On the indexed side, more and more investors are recognizing iShares as an efficient tool for investors to manage market exposure, to generate alpha through asset allocation.

Investors increasingly have been turning to iShares as a core component of their fixed income portfolios.

In the first few weeks of October we see more than $7 billion of net new flows into fixed income iShares, including our Barclays aggregate ETF AGG.

We have seen a substantial uptick in secondary market trading volume as well, exhibiting iShares ability to provide liquidity for our clients.

BlackRock believes fixed income ETFs represent a substantial growth opportunity, given they only represent about 4/10 of 1% of the global fixed income markets, a fraction of the ETF penetration compared to the equity market where ETFs represent about 3% of the global markets.

We believe iShares can offer an attractive solution to the needs for fixed income liquidity.

With nearly $200 billion of AUM across 189 fixed income ETFs, BlackRock's product breadth and depth are key differentiators.

I need to reflect for a moment, because when BlackRock acquired BGI five years ago BlackRock's global iShares assets under management were $385 billion.

I am proud to say that BlackRock's iShares closed the third quarter with nearly $1 trillion of assets under management.

We continue to drive global expansion and grow our iShares market share by pursuing several areas of client ETF usage including core investment, precision exposures, and financial instruments.

BlackRock's ability to combine active and indexed strategies and deliver the entire full firm to clients is critical as client demand for investment outcomes and solutions increase.

One of the most common outcomes that investors are targeting is to sustain a certain level of income leading up to and through retirement.

Just this month we launched an income campaign in Europe and the Middle East targeting advisors and consumers with the dual objective of raising brand awareness for BlackRock as well as educating clients on the importance of income investments as part of their portfolios.

Outcome-oriented, income-focused products have been a significant driver of retail flows and products like SIO and multi-asset income, or MAI, were significant contributors to our results in the third quarter.

Our global basis for our multi-asset income franchise crossed over $10 billion in AUM and has seen $4.5 billion of net inflows so far in 2014.

BlackRock's multi-asset franchise is a key differentiator and our team-based culture enables our multi-asset managers to benefit from the best alpha engines and risk management capabilities BlackRock has to offer.

I would like to turn to a business through which we serve as a trusted advisor to some of the most sophisticated financial institutions in the world.

This is our financial markets advisory business, or FMA business, within BlackRock Solutions.

Since BlackRock started FMA business into 2008, we have completed now more than 330 assignments for 185 clients in 30 countries, generating more than $1 billion of revenues in BlackRock Solutions.

In the third quarter we reached a significant milestone for the team and the firm with the substantial completion of FMA's crisis era liquidation assignments.

FMA's track record includes the risk control liquidations of long-term wind down vehicles totaling more than $110 billion, which resulted in strong performance for our clients.

That track record also includes supporting clients with execution advice and strategic transactions totaling more than $660 billion.

As a result of this track record of proven success and in a more stable environment marked by heightened financial regulation, we are now helping clients position their balance sheets to maximize value and thoroughly managing risk, including numerous assignments as part of the Dodd-Frank stress test in the United States, CCAR planning initiatives, the ECB AQR, and most recently in August the FMA business of BlackRock was selected to provide consultancy services to the European Central Bank on the design and the implementation of their ABS purchase program.

This marks a real transition for the FMA business from a crisis-oriented work to differentiated advisory and consulting services.

In all our businesses BlackRock strives to be a trusted advisor to our clients, from institutions to end consumers.

As a trusted advisor to our clients, we also believe we have a responsibility to engage with regulators to promote a safe and sound financial system.

We know there is a growing concern for many around about liquidity and markets.

We believe our success at BlackRock depends on investors' continued confidence in the markets and so we have a shared interest in working with regulators on these issues.

In closing, I want to share with you the reaction to BlackRock I witnessed during the last four days where I spent at the IMF annual meetings in Washington DC last week.

During that time I met with more than 30 clients -- in total BlackRock met with 141 clients -- who were among the world's leading financial institutions.

And I was struck by how BlackRock's reputation and position in the financial marketplace came through in each and every meeting.

Investors are turning to BlackRock for advice and for investment solutions.

And it was a very gratifying time for us to be a part of these exceptional discussions and to see the actions clients are looking to give to BlackRock to be a thought leader and to help them to provide them with better financial futures.

I believe BlackRock has never been better positioned to meet the needs of our clients around the world.

We remain focused on performance.

We remain focused on strengthening our leadership team.

We remain focused on developing our talent.

We remain focused on enhancing our differentiating platform to unlock value for our clients and, of course, to our shareholders.

With that I want to thank our leadership team and all of our employees for delivering a strong quarter and continuing to work towards building better financial futures for our clients.

Before we take up your questions, I wanted to mention that in addition to Gary, Matt, and myself here in New York, we have Rob Kapito joining us on the line from Hong Kong where he and the BlackRock team there are hosting BlackRock's Second Annual Asia Wealth Symposium, bringing together our clients across the region.

Rob is also leading our fourth Knowing BlackRock event, a series of internal events around the world that are part of an ongoing effort to foster a One BlackRock culture, to foster driving better leadership, and to foster driving better performance and better execution.

Let me open it up for questions.

(Operator Instructions) Robert Lee, KBW.

Good morning.

Wanted to ask a question on the alternatives business.

I think, Gary, you mentioned in your comments that obviously you had some realizations and returns of some capital and also had maybe some outflows from discrete hedge funds.

But I mean, if you look at that business, it is pretty sizable, $100-odd-billion and that is one place that despite the success you have had across the firm where flows have continued to be kind of breakeven-ish despite the size.

Can you maybe give us a little more color on underneath the business, kind of maybe which strategies are having the flow issues or some of the puts and takes, if you will, that are going on behind it?

Robert, I'm going to open it up and then I will let Gary to really get into some of the details.

We are very excited about our flows and the situation we have in alternatives.

We have returned some large pools of money back to our investors.

We had a huge amount of mortgage strategies that we liquidated in July that were quite successful to our investors.

At the same -- and so that is a decline in our assets.

But, in our illiquid strategies, we do not put those assets under AUM until those monies are invested.

So we have a firm commitment for those monies and that is now totaling $7 billion of flows over the last few years.

They continue to grow and we put those monies to work over the course of the next several years.

And so, in reality, we are recycling our alternative strategy quite successfully and I believe the momentum is accelerating towards more opportunities for BlackRock in the hedge fund arena.

I will let Gary go into some specifics, but the macro number masks the successes we have been having.

So, Rob, no one would like this to be a little cleaner and simpler to understand than I would and we've spent a lot of time on it.

But we have got of about $113 million of total alts of which we classify $88 billion of those effectively as core and we strip out currency and commodities from that when we think about the core business.

I think, obviously, as Larry mentioned, return on capital does complicate the matters a little bit.

Obviously this quarter alone we had return on capital of a little over $1 billion, which effectively matched about a little less than $1 billion of new commitments that we raised in the current quarter.

Year-to-date that return of capital is about $2.8 billion.

That was again versus last year where it was close to $3 billion.

It is clear that over the last two years, I guess since the beginning of 2013, Larry mentioned we have raised about $9 billion in commitments.

And I think, candidly, we are looking for the right opportunities.

In a perfect world perhaps we would have invested some of that money a little quicker to basically match the timing better, but obviously we are not going to put client interests ahead of -- client interests behind what happens in our core flows in terms of return on capital versus putting the assets in the ground.

It also is impacted by lots of ins and outs, which, frankly, is the same phenomenon that impacts some of our institutional index business.

But we basically look excluding the return on capital -- and I know this is a little unfair.

But if we effectively exclude one larger hedge funds that has, frankly, been a little more challenged in the last year or so, the way we look at the core health of the business that would have put up about $1.4 billion of core alts flows in the quarter with retail flows, retail alts being about $400 million of that and institutional being about $1 billion.

On the retail side, that is really again being driven by Larry has mentioned our flagship Global Long/Short Credit, but we are also now having good flows from Global Long/Short Equity.

I mentioned we recently launched the new Multi-Manager Fund, which basically pulled in about $100 million this quarter already, so that is off to a good start.

And on the institutional side, again excluding return on capital, return of capital and this one challenged hedge fund, we saw strong flows into BAA of close to $350 million.

Our fund to private equity business invested close to $275 million in the quarter.

Real estate had about $200 million in the quarter.

Our alternative solutions, which is a key growth area, was close to $150 million.

So there are actually very strong pockets of momentum around it.

However, it takes a little bit of commitment from you and us to make sure you can see all of that happen.

Great.

If I could maybe ask one follow-up which I'm sure is on a lot of people's minds of the turmoil from one of your competitors and the assets that may be kind of in play or in motion as a result of that.

I guess I am particularly interested in your thoughts as it relates to the DC world where certainly the Total Return Fund has been pretty well trenched and there are usually not a lot of fixed income options out there.

But how do you feel about, if you look at the opportunity set, do you feel that that's -- how do you feel about your ability to start capturing some share there?

And at the same time are you starting to see more DC plans, think about a broader range of options within their fixed income selections?

So, Rob, I think you have identified a great growth opportunity for us.

A) on the DC land, managers are entrenched until they are not.

We have had historically a very strong presence in the DC side in the equity -- indexed equity and target date products.

And so we have great relationships, not because of our strong performance and breadth in our fixed income.

We have an incredible chance now to leverage those relationships and indeed we are indeed winning more wins on the DC side.

And we do believe this is going to be a great opportunity.

In addition, as people think about fixed income, especially on the DC side, we are seeing some evidence of people moving out of a total return type of product into more unconstrained strategies too.

So this is going to be an opportunity for us in the coming years.

Ken Worthington, JPMorgan.

Good morning.

Topic du jour; a lot of intermediate term investment dollars in motion.

So, first, to what extent do certain categories of institutional investors already have so much money managed by BlackRock that it is hard for them to invest more with you?

Like following up with Rob in DC, you are doing so well in iShares in the DC channel, does that somehow constrain you on the fixed income side, for example, or are there other categories of constraint?

Ken, we have not seen one example where our scale is and our presence with our clients are being impacted.

We actually won some business from one client already in the DC side where when we did the BGI merger they were concerned about our large presence within their plans.

Over the course of the years they have become accustomed to our large presence and they have indeed since then have awarded us more business.

Well, we have been awarded more business again from them.

So we are not seeing any evidence of that the moment.

I think importantly more and more clients are separating the amount of business we have in beta products versus alpha products.

So I think we are in a very good position now to take on a larger share of wallet with more clients.

Okay, perfect.

Then money in motion again.

It seems to be going into cash, short-term bond, intermediate-term bond currently.

What asset categories do you think are best positioned over the next year?

For example, when capital had its issues you had money go out of equities and actually go into PIMCO into fixed income, so there was a big switch.

Do you think there is -- not to lead you, what categories do you think are best positioned over the next year or plus?

Where are you identifying the flows?

Are you are doing it in the mutual area?

What people can't see, what is going on in the institutional side and let me just highlight the institutional side first.

On the institutional side, generally they have consultants.

Generally consultants determine how different managers are perceived and if there are changes in perception there is money in motion.

That is a slow process.

In some cases it's going to take quarters, maybe even a year.

But we have had more buy recommendations added to BlackRock in the last few months, mainly because of our five-year success in performance.

So much of it had to do with the timing of our success.

I don't want to -- there is not a single event that is stimulating some of this.

It is just because the consistency of our positioning in fixed income and obviously, because the events that you are alluding to, there has been more change.

We are seeing more opportunities over the next, over the next quarters and years of money in motion into various fixed income strategies.

What we are seeing more and more clients looking at, they are looking for outcomes.

They are looking for solutions.

They are not moving money across asset categories, so most of the money, if it is being moved, it is being moved from one fixed income to another fixed income player.

And then you are seeing biases moving.

But one area where we have just been awarded a big assignment, this is a big institution that would have been awarding us something maybe in the total return side of fixed income and they determined to award us a large assignment in the unconstrained fixed income.

So that is where we are seeing the biases change.

But there is a lot of money in motion going from total return from one shop to another shop, and I believe there is quite a bit of movement today in the institutional side that should show up worldwide in the next few quarters.

Craig Siegenthaler, Credit Suisse.

Good morning, everyone.

First, just to hit on the margin.

The adjusted result of 44.2 looked very strong.

I am just wondering if you can provide some color on the sustainability of this level.

And it also looks like G&A expenses were a little light, driven by FX.

There is always the seasonal G&A trend in 4Q which tends to be a little higher, so maybe just provide us a little color there.

And maybe you can help us in terms of what kind of a good go-forward range is.

Thanks, Craig.

No doubt a good question.

So a couple things on margins.

Obviously in the context of year-over-year comparisons you obviously have to look at the relevant quarters that you are comparing.

And so I think from Q3 to Q3, if you will, there are a couple of things going on.

Obviously we had strong beta from that Q3-to-Q3 period, which obviously helps drive revenue growth.

And you saw it not only -- in addition to our organic growth, we actually put up 15% year-over-year revenue growth, which is a pretty good number.

And on the expense side really two things, as you've mentioned.

One is our G&A clearly was low in the quarter.

I think we highlighted sequentially that there was about a $51 million gap, which was primarily attributable to the FX re-measurement and lower legal fees and expenses relative to the last quarter where we called them out as being somewhat high.

So beta driving one direction, expense driving the other direction, and then obviously, as we have mentioned both this quarter and last quarter, some changes in comp accruals that make the quarter-over-quarter comparisons a little less relevant, but mentioning that we really haven't changed comp philosophies.

And so as you look at the full-year accruals I think that is a better indicator.

Then of course you take all of that and you go into the fourth quarter, and I think there is no question that beta comparisons year-over-year will look much less muted.

It was a strong fourth quarter in beta last year.

It is not looking like a very strong fourth quarter this year, so that will impact obviously year-over-year comparisons.

We mentioned the FX impacts of going in with lower spot AUM into the quarter than our average.

And as you correctly mentioned, in addition to the seasonal uptick in our M& P spend, which is actually also planned, we have got some rougher comparisons on the performance fee because of the opportunistic fees we booked last year.

So I think if you take all of that into consideration I would suggest that the 44.2% in the quarter is probably not something we would be looking to repeat in the fourth quarter.

And I think as it relates to margin guidance, I think our margin guidance hasn't changed as it relates to the overall business.

Great.

Thanks, Gary.

And just a follow-up on the management turnover at one of your competitors.

We only have three business days in the third-quarter results and we only have mutual fund data there.

But if you could size up the potential opportunity, given your good performance, wide product menu across 401(k), retail, and then institutional, which one are you more excited about in terms of growth in your active bond business?

It is still too early to determine how much is growing.

It is fair to say there is a sizable opportunity.

It is in the tens of billions of dollars.

We have seen recent strong momentum, but it is going to play out over quarters, maybe a year.

As I said, it is going to be -- in the core fixed income strategies it is going to be in that constrained fixed income strategies.

You may see people, and I think there is evidence of that, you are seeing some people moving into ETFs and maybe this is as a holding pattern.

But I just want to underscore, we are seeing this type of flows because of our five years of performance.

I just want to remind everybody we had $48 million in flows in the first nine months and so we continue to think it is all about performance.

It is all about positioning.

It is also because of our strength in beta and alpha products and fixed income.

So it is our platform that is also differentiated and our global positioning.

But as I said, this is a sizable opportunity and there is increased momentum.

Luke Montgomery, Sanford Bernstein.

So kind of a big picture question here.

You have got institutional index strategies contributing just 10% of your revenues, but I think those AUM receive about a 40% weight in the conventional calculation for organic growth.

So if you exclude those assets, I think your organic growth on what we might call our revenue critical AUM has been ranging between 5% and 7% on a trailing-year basis.

I don't know many asset managers of any size that are flowing at that rate, and perhaps I'm wrong, but it really doesn't seem like that is reflected in your multiple today.

So the question is sort of, in terms of messaging, what is it going to take to change how investors view your organic growth rate?

And do you think it might be (multiple speakers)?

Hopefully you tell everybody, Luke.

Well, a suggestion is that (multiple speakers).

Look, it is a great point.

It is one that we have been trying to tell a little bit differently than the way you just stated it both at investor day and even today.

We are trying to basically point to a concept of organic base fee growth being in excess of organic asset growth, which is by virtue of stronger growth in our retail and our iShares business, or obviously relative to the institutional business and particularly institutional index business.

I would say that we do give you ways to get there in terms of the disclosure.

There are ways to back that out, but I am mindful that it is always easier if we do that for you.

And I think it is fair that we are thinking -- we are always thinking about ways to improve our disclosure and to help investors and analysts better understand our business.

And we are actively considering whether or not we should make some changes going into next year.

We do breakout on the AUM tables exactly that component of flows and obviously the beginning balance of our institutional index business, so you can actually go ahead and do that.

And I don't want to suggest that the institutional index business is not a very important component of the firm, but you are right to suggest it has lower revenue characteristics than some of our other businesses and that, in markets such as this, the velocity of those assets tends to be a little bit greater.

So even though you are seeing $5 billion of net flows, there is basically significantly more inflows and outflows that happen every quarter to get to that that number.

So we take your point.

We appreciate it and we are going to give it a lot more thought as we go into the end of the year.

I think the fee versus AUM basis for presenting organic growth is interesting, but maybe it is just as simple as showing an organic growth figure, excluding institutional indexing, in our press release.

That is what I might suggest.

And I think that is one way to do it, though again that data is there for people who want to figure it out.

I would just also say -- I don't want to dismiss the institutional index business; A) we love it.

We think it is a growth area.

We think it is a very important connector with our clients as I discussed earlier, especially even on the DC side which is really an institutional component.

And it is a connector to so many of our other businesses.

That is the opportunity of it.

Obviously, Gary and team will look at it how we better account so you have a better understanding of our growth rates and our revenues, but we don't want to dismiss a great component of our business.

Mark Irizarry, Goldman Sachs.

Just following up on the organic growth, you are out there I guess with a forecast for 5% organic growth and I just want to get a sense of two things.

You have constructed that view that you can get to that organic growth rate at some point in time and I think you have given us some of the building blocks.

Maybe you can just review that.

But also what kind of assumptions are embedded in a forecast like that in terms of manager replacement?

Obviously there is a lot of money in motion, some of which you would have expected to be on the fixed income side.

But I am curious also, manager replacement and volatility how that sort of plays into that forecast and what we should expect?

So, Mark, again great question.

Look, 5% when we laid it out was viewed as a target.

It is an aspirational target.

We are very serious about making sure we have strategies, business strategies and appropriate talent, and making sure that we provide resources to those businesses to get there.

We very much still believe the fact that that is a number that we can achieve.

We are very much still focused on the three components of that growth with iShares being low double-digit growth, retail being high single-digit growth, and our institutional business being low single-digit growth, obviously with faster growing parts of that business offsetting some of the headwinds we face in DB.

So we are continuing to prosecute the strategy and we still feel incredibly comfortable about that.

I would say that it is not a quarter-to-quarter number for us.

It is basically getting there on a more long-term, stable basis.

We obviously -- I will come back to the discussion that we just had with Luke, which is actually if you strip out some of the more lower fee components which have been a little bit more volatile in recent quarters, one might suggest that we are already there on a trailing 12 basis for some of those business, but I am mindful that is changing the goal posts a little bit.

And I think in the context -- and Rob is on the phone; he may want to chime in.

Obviously there are significant amounts of cash yet on the sidelines that when that gets deployed that will obviously have an important element to our ability to attract some of those assets.

Look, we are still moving forward and we are holding people accountable to get there.

Our sincere hope is that we will be able to, in the near term, be able to talk about getting there very consistently.

Bill Katz, Citi.

Good morning, everyone.

Thank you for taking my questions.

Just coming back to the whole money in motion discussion; it certainly is very topical.

Larry, you highlighted sort of five-year track record as being a key differentiating factor for you.

How important -- just coming at scale the other way, how important is scale and capacity as well as a consideration for all the consultants as they think about incremental opportunities maybe perhaps from PIMCO?

I don't think it's -- as I said earlier, Bill, I don't think scale is a negative.

I think scale has proven to be a positive for us.

And we have plenty of growth opportunities in our unconstrained area.

That is going to be the area where we will ultimately have capacity issues, but we have measured that and we have a lot of bandwidth to continue to grow in our unconstrained strategies.

This is something we look at with our strategic product management group.

This is the group that is trying to design new products.

They try to eliminate the products that are underwhelming and I think that is another reason why we are winning so much business in so many different fixed income strategies.

I think the highlight is it is not just the active fix.

We actually won an active fixed and an unconstrained fixed and iShares fixed income.

We are seeing inquiry in our model-based fixed.

It is the scale and breadth of our fixed income platform across the globe is the reason why we are having so much dialogue with the consultants worldwide.

It is allowing us to be well positioned for that money that is moving.

Michael Carrier, Bank of America Merrill Lynch.

Thanks, guys.

Larry, you guys put a white paper out I think a few weeks back just on some of the issues in the fixed income markets and some of a longer-term solutions.

Just given the recent volatility we have seen, I don't if you want to call it hiccups, but some issues in terms of liquidity.

Just wanted to get your view.

I think a lot of the things that you guys discuss in terms of the long-term fixed just make a lot of sense.

Some of those things are just a lot tougher to do in the near term when we may face increased volatility.

And given the amount of assets that have gone into fixed income and the reduced inventory on broker or dealer balance sheets, just wanted to get your sense.

What are you guys doing or what can you do to try to protect investment returns and some of the lack of liquidity in the market which can impact the returns for investors?

I would say overall the markets are performing quite well.

There only have been a few circumstances where you have seen really aberrant type of trading behaviors in the last few months.

Any one single day or single week you may have seen some spreads widening, but over a course of a two- to three-month period of time they narrow back.

I think there has been some great consistency across the fixed income market.

That saying, we are worried about the liquidity in the fixed income markets, especially in the corporate bond area, where there is just so many different CUSIPs and so many different issuers and there is no consistency.

And, importantly, this is the big role that the investment bankers and Wall Street played in terms of providing balance sheet and navigating your positioning within the fixed income universe.

And that balance sheet has been reviewed significantly.

So it does, at times, present liquidity issues.

This is why we have been so loud in stating that we need a more expedient adoption of electronic protocols and markets.

I do believe this is one of the areas where regulators need to focus.

I spoke about this at an IMS session this past weekend that I think it is imperative that we focus on this.

As the regulators have put more capital demands on banks, by definition, the capital markets are playing a larger and larger role in terms of financing corporations and financing different organizations.

With that in mind now, we need to be focusing on how to improve the capital markets and making sure they provide a stable mechanism for buying and selling securities.

We are in this transition phase right now and the faster and sooner we have this adaptation of electronic trading, the sooner we have standardization of some form of corporate bond issuance.

And then, importantly, we need behavioral changes across the board.

This is going to take time and so the worry we have is do we have enough time before there is a true liquidity event that really destabilizes the market.

And this is why I said in my prepared statement we need to be working with regulators to make sure we have a more stable trading environment.

We are the biggest beneficiaries in the world as the largest asset manager.

We benefit when there is greater liquidity.

We need to make sure that our clients believe that investing is safe for them, too, so this is key.

Now in saying that though, because we are a large client of all the different firms worldwide, if there is balance sheet that is off or just because of our relationships, we have an advantage.

But that is not a lasting type of thing and this is why we are so much in front, whether it is writing or working with regulators, working with the Street to build a more robust electronic market.

Glenn Schorr, ISI.

Thanks very much.

Just a follow-up question.

You mentioned a couple of things on impacting on the retail side, but last 12 months your organic growth rate in like 11%.

This quarter it was 4%.

Curious how much you think of that as more environmental versus maybe talk about some of the successes you are pushing through on your distribution strategies.

Sure.

As Gary suggested, we had outflows in high yield, that was environmental.

We had outflows in European equities, that was environmental.

On the positive side, we had inflows in other products.

So I don't -- I think it speaks very loudly to our platform.

I believe -- obviously, we want to be beneficiaries of all the areas where there is going to be inflows, but there are going to be period of times where our client interests are going to be navigating out of those platforms.

We also saw -- even in iShares in the last few weeks of September, we saw large movement out of some of the European iShares products, European equity iShares products.

So this is all environmental.

We truly believe we are creating more distribution channels, more RIA channels, a broader distribution channel in Europe than ever before, and so I think we are in a very good position for -- whatever is money in motion in the retail channels, we are going to continue to see some elevated growth.

We are strengthening our positions across the world.

As I talk about our strategic product group, we are evolving our product set so we are responding to the needs of clients.

And so I feel very good about how we are positioned in retail and iShares.

Importantly, we are going to continue to build our brand and I think we have done a very good job at building brand awareness.

Now we need to continue to do that and be successful in that.

Gary, do you have anything more to add?

Glenn, just to put some of the numbers in perspective in terms of European equities, it happens.

Again, good -- maintaining still good three-, five-year performance there.

That cost us close to $4 billion in the quarter in retail in outflows and then high yield, again, top decile performance rotation there cost us about $1.7 billion, $1.8 billion for the quarter.

So if you just think about the magnitude of those two products still with decent performance impacts, some exceptional performance in some cases, that halved the growth rate just in the quarter alone in those two areas.

The good news is, as Larry said, we had continued strength in EMEA Index.

We had continued strength in fixed income, continued strength in multi-asset and alts that I think without that obviously there would be a very different story.

And that is part of the diversification and stability story we are trying to tell.

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

Mr. Fink, do you have any closing remarks?

Yes, operator, thank you.

Gary -- the last comments that Gary just said I think is really key as you think about BlackRock.

I think we have a unique business model, a unique culture that is differentiating us and once again allowing us to deliver a strong third quarter.

We have never been as well positioned to meet the needs of our clients worldwide and I think clients are turning to us more than ever before because of the consistency over 26 years of a comprehensive and deliberate process of focusing on our culture, our team, our technology, and our talent.

And I think this is very critical.

As I said earlier in my prepared remarks, when we combine our people and our technology and our risk management on top of our investment platform and wrap it up with one common BlackRock culture, the totality of the firm comes together and it serves our clients well.

I can say in the fourth quarter and going forward we are going to be just as intently focused on achieving our performance, on strengthening our leadership relationships with our clients, continuation of developing our talent.

And, as Gary said it really well, our highly-diversified platform allows our investors to have a greater stability with more consistent growth than any other asset manager.

And I will leave it at that.

Thanks, everyone.

Talk to you at the end of the fourth quarter.

This concludes today's teleconference.

You may now disconnect.