貝萊德 (BLK) 2015 Q1 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 first-quarter 2015 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)

Thank you.

Mr. Mallow, you may begin your conference.

Thanks very much.

Good morning everyone.

I'm Matt Mallow, the General Counsel of BlackRock.

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

We call your attention to the fact that BlackRock's actual results may, and most likely will of course, differ from these statements.

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

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

So with that, let's begin the call.

Gary?

Thanks, Matt and good morning everyone.

It's my pleasure to be here to present results for the first quarter of 2015.

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

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

We are committed to generating strong organic growth, demonstrating operating leverage, and maintaining a consistent capital management policy as a framework for generating long-term shareholder value.

Our first quarter results once again highlight the value of the investments we've made to assemble the industry's broadest suite of active and indexed investment offerings, and to deliver differentiated customized investment solutions to our clients.

BlackRock delivered first quarter earnings per share of $4.89, up 10% compared to a year ago.

Revenue rose 2% to $2.7 billion despite the negative FX impact on our non-dollar denominated base fees and over $70 million of transaction related revenue in last year's first quarter.

Operating income was $1.1 billion, 1% higher on a year-over-year basis.

Nonoperating results for the quarter reflected $58 million of net investment gains, including a one-time gain of $40 million related to the fair value of our preexisting interest in BlackRock Kelso Capital Advisors.

Our 23.7% as adjusted tax rate for the first quarter benefited from $69 million of nonrecurring items.

We currently estimate that 30% remains a reasonable projected tax rate for the remainder of 2015.

BlackRock's first quarter results were driven by $70 billion of long-term net new flow as representing an annualized organic growth rate of 6.5%.

Flows were positive across all asset classes, investment styles, client types and regions, and organic revenue growth once again out-paced organic asset growth.

Over the last 12 months, despite an increasingly volatile macro environment, BlackRock generated over $250 billion in total net new business, representing a 5% long-term organic growth rate evidencing the stability of our highly diversified platform.

First quarter base fees rose 4% year-over-year as average AUM increased due to organic growth and market appreciation, despite almost $220 billion of negative FX impact associated with dollar appreciation against foreign currencies over the last 12 months.

On a constant currency basis we estimate that base fees grew approximately 8% year-over-year.

Base fees were roughly flat compared to the fourth quarter, primarily driven by a lower day count in the first quarter, entry rate headwinds, and the continued impact of divergent beta and FX.

Performance fees of $108 million were broad based, but nonetheless decreased $50 million from a year ago due to the impact of a large fee associated with the liquidation of an opportunistic mortgage fund.

BlackRock Solutions revenue of $147 million was down 5% year-over-year due primarily to declines in FMA transaction-related revenue, and 14% sequentially due primarily to the timing of completed advisory assignments.

Our Aladdin business, which represented 86% of BlackRock Solutions' revenue in the quarter, grew 13% year-over-year but was flat sequentially.

The year-over-year increase was driven by several sizable clients going live on the Aladdin platform in 2014.

While sequential results were impacted by the timing and recognition of certain revenues as well as FX movements, we continue to see strong market demand for global investment platform consolidation and multi-asset risk solutions.

The year-over-year revenue decline in our FMA business resulted from meaningful transaction-based disposition activity during 2014.

We continue to believe that our FMA business model is well positioned to benefit from partnering with sophisticated financial institutions and governmental entities to address their most complex balance sheet, risk, and governance challenges in the ever-changing political and regulatory climate.

Total expense rose $38 million year-over-year, or 2%, driven primarily by increased G&A, AUM related, and direct fund expense.

Employee compensation and benefit expense was roughly flat year-over-year, as the combination of a stronger dollar and a global employee base offset an increase in headcount.

As we had previously noted the first quarter adjusted compensation to revenue ratio generally runs higher than the full year due to the seasonality of payroll taxes.

G&A expense increased $26 million year-over-year, primarily reflecting higher marketing and promotional expense and the impact of a one-time real estate related benefit in last year's first quarter.

Sequentially G&A expense decreased $48 million primarily reflecting seasonally lower marketing and promotional expense, lower foreign exchange remeasurement expense, and closed end fund launch costs incurred in the fourth quarter of 2014.

Consistent with last year aggregate G&A expense in the first quarter benefited from a delay in the timing of certain expense items which will be incurred throughout the remainder of 2015.

We remain committed to using our cash flow to optimize shareholder value by first reinvesting in our business and then returning excess cash to shareholders.

In line with that commitment, on March 6 we acquired certain assets of BlackRock Kelso Capital Advisors, enhancing our credit platform through the addition of a middle market private credit capability.

We previously announced a 13% increase in our quarterly dividend to $2.18 per share of common stock, and also repurchased an additional $275 million worth of shares during the first quarter.

Based on what we know today, this increased level of quarterly share repurchases represents a reasonable run rate for the remainder of 2015.

Our consistent earnings growth and stable financial results reflect the benefits of our diverse platform, long term client partnerships, and commitment to investment performance.

First quarter long-term net inflows were nearly evenly split between our active and index franchises and were positive in each of our geographic regions.

BlackRock's global retail franchise saw long-term net inflows of $14 billion, representing an 11% annualized organic growth rate.

Flows were driven by continued strength in outcome oriented offerings, including unconstrained fixed income and multi-asset strategies.

Despite slower net flows in the US mutual fund industry during the quarter, the diversity of our franchise and strong performance in active fixed income positioned BlackRock to continue to enhance its market share position.

US retail flows of $7 billion reflected strong fixed income flows across a diverse set of products, including our top decile total return and high yield franchises and our flagship strategic income opportunities fund, which was again the industry leading unconstrained bond fund during the quarter.

International retail net inflows of $7 billion were paced by strong flows into our global unconstrained fixed income and multi-asset franchises.

In addition our leading European equities franchise benefited from a return to a risk on environment, and our top quartile Asian equity funds gathered more than $800 million in aggregate flows during the quarter.

Global iShares generated over $35 billion of net new business in the first quarter, representing 14% annualized organic growth.

iShares retained the number one market share position of flows globally, with strong flows in each of our product segments: core, precision exposures, including our minimum volatility factor and currency hedge suite, and financial instruments where we saw ongoing momentum in replacing swaps and futures with ETFs.

iShares' results were led by fixed income net inflows of $19 billion, and we again captured the number one global market share of the industry fixed income ETF flows.

Equity flows of $17 billion were driven by flows into the Core Series and demand for international developed market and European exposures.

iShares' flows were also diversified globally, with particularly strong growth in Europe where we are seeing broad based acceleration in ETF adoption across all segments and all asset classes.

European iShares flows of $15 billion in the quarter represented annualized organic growth of over 25%.

Our institutional business generated approximately $21 billion in long-term net inflows for the quarter, the highest institutional flows we've seen since the BGI acquisition.

Institutional index net inflows were led by strength in index equity, driven by defined contribution flows, offsetting outflows in our traditional defined benefit business.

Institutional active net inflows of $18 billion reflect BlackRock's strong multi-asset capabilities and top performing fixed income platform.

Multi-asset inflows reflected significant solutions-based fundings, particularly in the insurance outsourcing space and strong demand for our dynamic diversified growth strategy and our LifePath Target Date series.

During the quarter we also saw the funding of a $2 billion unconstrained fixed income separate account.

While institutional active equity flows were flat for the quarter, we saw inflows of nearly $2 billion into our scientific active equity business where 96% of assets are performing above benchmark over a five year period.

Barbelling continues to be a key theme as institutional clients pair cost effective data exposure with alternatives and other high conviction Alpha solutions to achieve uncorrelated returns.

Net of approximately $700 million of capital successful return to clients, institutional alternatives generated $1 billion of net new business led by infrastructure and hedge fund solutions.

In addition we had another strong fund raising quarter for illiquid alternatives, raising more than $2 billion in new commitments, and now have over $10 billion in committed capital to deploy for clients.

$800 million of net new flows from the recently announced ABR retransaction funded in April and are not included in first quarter results.

In connection with this funding, we will incur a product placement fee of approximately $5 million in the second quarter.

In summary, in a quarter marked by continued volatility and divergent macro trends, our diversified business continued to deliver stable financial results.

With that, I'll turn it over to Larry.

Thanks, Gary.

Good morning everyone and thank you for joining the call.

Our strong performance over the last quarter is a result of the significant investments we made in our firm over the last few years.

The investments we made in our people, investments we made in our process, and importantly the investments we made in our technology, all of which have been driven by our efforts to continually adapt to our changing market environments, the changing world environments, and to meet the needs of our clients.

BlackRock is focused on helping our clients navigate an increasingly difficult, unpredictable, and divergent financial and economic landscape.

Investors today are faced with volatility in currencies in commodity markets.

They're faced with sustained low and even negative interest rates and shifting long-term macro trends, including longevity and the significant impact on technology on jobs.

Divergent economic conditions and central bank actions have sent currency markets into one of the most volatile periods on record, affecting both developed economies such as Japan and the Eurozone, as well as the emerging markets.

The relative value of the US dollar and associated currency volatility is obviously having a rapid and material impact on large multinational companies.

But it's also affecting smaller US companies and consumers, who as a result of advancements in technology are increasingly buying and selling products in a virtual global economy.

Historic low rates have been having a tremendous impact on how investors save for the future.

The pool of funds in search of returns to meet future liabilities is growing larger every day.

This mix of growing assets, of shrinking supply, of low rates, is creating a dangerous imbalance and the increasingly desperate search for yield is now the greatest single source of prudential risk in the financial system.

At the same time we're seeing powerful changes in longevity and retirement and the advancements in technology, making the global economy and the way capital flow through it -- and this is having a major impact on how we and our clients are living, how our clients work, and how we invest.

At BlackRock we are constantly looking at the world and at ourselves to assess whether our platform, our services, our strategies can help our clients meet the challenges of the evolving investment landscape.

The need to anticipate changes and develop solutions is why we have deliberately equipped BlackRock's business model with such a wide range of capabilities, a capability that no other asset manager possesses.

The issue impacting financial markets are beyond our ability to control, but what we can control at BlackRock is how we respond to these issues, how we build out our platform, how we execute our strategies we've set forth for our business, and how we deliver investment solutions to our clients.

BlackRock's first quarter results demonstrate that the investments we've made to differentiate our platform over time are driving value for our clients and most certainly are driving value for our shareholders.

In the first quarter BlackRock generated $70 billion of long-term net inflows, representing a 6.5% quarterly annualized organic growth rate and a 5.5% organic growth rate over the last 12 months.

Similar to our fourth quarter in 2014, we had a diverse composition of flows, something that was very, very important for me as I think about our business.

This composition of flows is positive across our client base, positive across asset classes, regions, and investment styles.

Particularly we're seeing a significant momentum in our active business where we experienced the highest total active flows we've seen since 2007 at $32 billion, representing a 9% annualized organic growth rate in the first quarter.

Roughly two-thirds of the assets BlackRock manages are related to retirement.

It's the core of what we do.

And particularly we are focused on helping investors shift their focus away from the nest egg and towards an annual income in retirement.

This is a difficult adjustment for many investors, but a critical one for helping our clients achieve their goals.

They face significant challenges in a narrow zero rate environment.

Core buying allocations alone are insufficient to meet the liability burdens of pension funds, to meet the needs of insurers, and to meet the needs of our individual investors.

The diversity and strength of BlackRock's fixed income business is helping investors in all types to navigate that environment and drove $36 billion of net inflows across our global platform.

We continue to benefit from strong performance across our fixed income business, where 91% of our active taxable fixed income AUM is above benchmark or peer medium for a three-year period.

SIO is in the 14th percentile, high yield bond is in the 10th percentile, and total return is in the first percentile over one year.

Clients also continue to adopt iShares fixed income ETFs as an efficient asset allocation and exposure tool.

And iShares remains a global leader in fixed income in the first quarter, capturing the number one market share of flows of 53% with $19 billion of net inflows.

Today investors are increasingly focused on outcome-oriented strategies that target specific goals, whether it's generating an income stream, preserving capital, or growing assets within a certain risk profile.

And they're moving beyond the bounds of traditional fixed income strategies into global, unconstrained, or multi-asset strategies to achieve those objectives.

BlackRock's multi-asset platform, the combination of our investment management expertise, a robust portfolio construction business, and superior risk management is all leveraging our unifying Aladdin platform, enabling us to provide investment strategies that will help our clients achieve the investment outcomes in line with their needs and their objectives.

To counter low yields retail investors are leveraging our multi-asset income fund, which casts a wide net across asset classes to tap into income opportunities both within and beyond bonds, and has a dynamic approach to balancing risk, return, and income while seeking to mitigate volatility.

Institutional investors are similarly turning to our dynamic diversified growth fund for diversification, for stable returns, and also managed volatility.

Our ability to have deep and robust dialogue with our clients and to work closely with them and to provide some thought leadership is what is allowing us to provide more tailored customized strategies.

And this is a very important component of what is transforming BlackRock with our clients; the breadth of products as I said earlier, our risk management capabilities, and you dove tail it all together, we have a more and deeper dialogue with more clients than we've ever had in our 27 year history.

We saw more than $9 billion of solution based funding for insurance clients in the quarter as they continue to search for holistic solutions to navigate a low yield environment.

These transformational partnerships were the culmination of a true one BlackRock effort, and the resulting mandates span the best of our firm.

From active to passive to alternatives, all powered by risk management and Aladdin capabilities, these custom solution assignments leveraged our complete platform, they built deeper and more robust relationships with our clients, and clients are finding out that no other firm in our industry has the capabilities to create this type of partnership and to replicate these type of capabilities.

One key area where we are continuing to build out those capabilities even further is in infrastructure.

Infrastructure investments help our clients access an alternative asset class that provides inflation protection, diversification, and the potential for capital appreciation and importantly for so many of our clients, a long duration return.

A key aspect of our work has been to promote improved public/private partnerships, which jointly increase opportunities for investors, and to help governments access much needed sources of capital to drive economic growth, to create countries to have a better economic future, to improve the quality of life of countries, and to create job creation.

This is a perfect marriage of building a base of clients and their capital with the needs of countries in building a better economic future.

And this is one of the strong reasons why we are emphasizing infrastructure over the next coming years as the major component of our positioning at BlackRock, our positioning with our client, and our positioning with the various countries of the world.

In March we teamed with Pemex, Mexico's national oil company, to finance two natural pipeline -- gas pipelines critical to Mexico's continued economic growth.

The partnership builds upon the well-established track record of our existing infrastructure business, and by expanding our infrastructure footprint in Mexico we'll offer BlackRock's local and international clients access to previously untapped investment opportunities.

Another area where we continue to invest is technology, which has always been central to our business model.

Our Aladdin platform, which we transformed from an internal risk and investment management system to a revenue generating business providing a unique competitive advantage for BlackRock.

Aladdin revenues grew 13% year-over-year and is increasing value as third parties' operating platforms positioned BlackRock to consistently invest a growing stream of revenues into improving our technology, into expanding our technological offerings, to powering a constant upgrade cycle for the Aladdin community, and driving a network effect benefits for our clients and for our shareholders.

Technology has not only shaped the way BlackRock serves clients through Aladdin and how we view risk management, it also drives the way we build investment solutions.

Technology and data science are enabling BlackRock to combine our fundamental investment expertise with the best of our scientific and index investing to create innovative investment strategies.

And we're investing in people with exceptional strong backgrounds in data technology to drive this effort.

Another area where we've been building out our capabilities is to meet the growing demand from investment offerings that have a measurable positive social impact.

I would put infrastructure as one of those capabilities.

In the first quarter we announced the launch of our new BlackRock Impact platform which will truly unify the firm's approach to impact investing where we currently manage more than $225 billion in assets.

As a fiduciary BlackRock takes seriously our responsibilities not only to provide the investment performance and the solutions our clients need, but we also are taking a leadership role in advocating for the best -- for our clients' best interest and those of the broader market and economy when it comes to long-term investments by the companies we invest on behalf of our clients.

These efforts are led by our corporate governance team which engages extensively with thousands of companies in order to help foster the best long-term outcomes for those companies, and by doing so increasing value for our clients.

Our corporate governance team is a gold standard for the industry and is another key differentiating factor for BlackRock and our responsibilities with all our clients.

As part of our engagement effort earlier this week I sent a letter to CEOs globally, including those of every company in the S&P 500, urging them to engage on key governance matters that in our experience supports long-term and sustainable financial performance.

We recognize that some of the market dynamics I described earlier present an overwhelming challenge for companies working to reset short-term pressures, but companies can help diminish these pressures and improve their own positioning by developing and articulating a clear, convincing, and creating a long-term strategy and long-term value.

These efforts will help them attract long-term stakeholders and lay the foundations for a stronger, a more sustainable, and more stable economic growth for our country and other countries around the world.

Once again in the first quarter we initiated some truly innovative and unique mandates that will drive our long-term value for our clients and our investors.

Our Pemex partnership is the first of its kind since Mexico passed its historical energy reforms in 2013.

We announced several highly customized solution mandates to help our global insurance clients navigate a historical challenging interest rate environment.

We partnered with Ace to launch a new vehicle that pairs the strength of their insurance businesses with our ability to provide Best-in-Class investment returns.

And in Asia we're expanding our relationships with some of the world's largest asset owners in new ways; in one big case using Aladdin to better understand risk and enhancing the quality of returns in a client's portfolio.

In a second case employing our transition management team to both implement a landmark asset allocation changes that a client is undertaking in an effort to stimulate their nation's economy.

Individually and collectively these mandates demonstrate the BlackRock creativity, BlackRock's innovation, and the breadth that BlackRock provides for solution oriented offerings.

And more importantly, through that process this creates and fosters deeper and more meaningful relationships with our clients which will then allow us to have and working with them a larger share of their wallet.

It is the strengthening of these relationships, our relentless focus on improving the firm that will drive our future growth, and will drive and create long-term value for our shareholders.

Once again I want to thank our employees for their continued unwavering dedication in creating a better financial future for our clients.

I want to thank the employees for being excellent students of the financial markets, to be prepared to answer questions for all our clients.

And with that I'd like to open it up for questions.

(Operator Instructions)

Our first question comes from the line of Glenn Schorr with Evercore ISI.

Pleases go ahead.

Hi, Glenn.

Hi.

Thanks very much.

I guess I'll focus on the retail side of the house.

You continue to make progress.

You made a lot of investments.

It's paying dividends; $14 billion this quarter, $11 billion last quarter, and you've changed some of the way that you comp your people there.

I consider BlackRock a big winner in some of the fiduciary changes the Department of Labor is suggesting, but I'm just curious how you think about it on both the iShares side of the house but also the traditional retail distribution, because it impacts you guys in a lot of ways.

The DOL proposal?

Correct.

First of all, there is a 75-day comment period and we have to recognize this is just a proposal and it may evolve and change.

I said all along we are a huge supporter of regulatory efforts in the protection of clients' interests.

I think as you just suggested if clients feel more secure in their investments and they believe that their investments will indeed produce the outcomes that they're looking for, no firm is a better winner on having more participation in financial markets than BlackRock.

So on a macro basis we are a huge supporter of making this a -- making the investment world somewhat better for the investors so the investors feel that they have an equal opportunity to win over the long run.

As proposed there is certainly going to be changes in how people navigate their interest.

As you suggested we are -- in some categories some people have said this is going to benefit indexing more than active.

We're not 100% certain there, but obviously we will be a big beneficiary of this.

We have benefited and are proven in retail and iShares has to do with as you said we have built a bigger and more robust team working with our client base.

We combined our retail and iShares sales force to provide what we call a client-centric approach.

We are agnostic about beta products versus alpha products.

We are trying to help and achieve outcomes, and I don't think we are harmed in any way related to whatever is proposed in the DOL.

But what DOL is doing is actually playing into our approach of how we are trying to navigate beta products and alpha products, mutual fund products with index, and ETF products.

So we're well positioned for that.

But I do believe we're well positioned because how we organize ourselves for us will lead to the client-centric approach.

Fair enough.

I guess the only follow-up I have is at the highest level couldn't agree with you more, $70 billion of flows, very broad based.

It underscores all the points you made.

At the end of the day when I look at it and I see flat operating leverage and flat margins, albeit at very high levels, it just took me back a drop and I just don't know if there's just a bunch of moving parts with some of the year-on-year stuff and the FX impact.

So wonder if you could --

I'm going to let Gary talk about it.

I think Gary can give you a little more color on the FX.

Thanks.

I think your question is specific to the operating leverage and margin point.

So I would say the following, Glenn.

I think first of all, let's break it down.

If we look at the revenue side, obviously the revenue was impacted as we said by about $70 million in the year-ago quarter that we would deem more opportunistic.

So obviously a big chunk of that came from the performance fee, and then we had some significant transaction-related revenue in our FMA business.

Obviously then we've got the FX impact.

We noted that on a constant currency basis we think that base fees alone would have been probably up closer to 8% year over year.

Then we look at the expense side.

And I think on the expense side we're obviously benefiting to a certain extent from significant non-dollar expense that we have.

We have about 5,800 employees that sit outside of the Americas.

That represents close to I think 47% or 48% of our total employee base.

But obviously notwithstanding that, there's still margin associated with our non-dollar sources of profitability.

So I think what I would suggest to you, I hate to start to get into so-called normalization because who knows what the definition of normalization is and that's a difficult concept, but I would say that on a more recurring basis if we thought about both our revenues and expenses, there's obviously been some timing differences that we also noted on the expense side versus last year in terms of the real estate credit.

And taking into account FX more broadly, we look at our own business on a more normalized basis and would suggest that we see positive year-over-year margin improvement and operating leverage.

Okay.

Appreciate that, guys.

Your next question comes from the line of Bill Katz with Citi.

Please go ahead.

Hi, Bill.

Good morning, guys.

Thanks so much for the update.

First question I have is maybe we stay on the expense side for a second; Gary, you mentioned that you expect to see a bit of a seasonal pickup in G&A as you go forward.

Just wondering where the growth might be and how we might be able to frame it out in absolute dollars?

I'm sorry, Bill, you're talking about expense more broadly or -- ?

I think you mentioned G&A was seasonally low, timing was a little bit delayed for some of the initiatives.

I was curious where you're focused on in terms of the initiatives, and then on absolute dollar size what kind of rate of increase are we talking about?

We obviously try not to give a whole lot of guidance on that, but I do think that we tend to see a little bit of a lower ramp-up in our G&A spend at the beginning of any part of the year.

And I think as we mentioned on a sequential basis versus the fourth quarter we obviously had -- we basically benefited from the fact that we didn't have a closed end funds launch in this quarter, though we did mention that we'll be having about $5 million of product placement fees associated with ABR Re.

There's obviously some FX remeasurement stuff that also goes on that creates some noise quarter to quarter.

But I think generally speaking we haven't really changed our estimate for run rate G&A over the course of the year.

It just means that a lot of it's going to be pushed into the latter part of the year as it was last year.

Okay.

And then follow-up question, maybe for Larry or yourself.

Scientific turned around a little bit this quarter.

You had great performance.

How much of that is market share gain versus sort of a step-up of demand?

And the broader question is you mentioned both passive and alternatives or high concentration alpha.

Where is the market in terms of more generic, long only relative value mandate these days?

We are seeing increased flows as you suggested in our scientific equity offerings.

We are seeing more -- we have more dialogue on our model-based, factor-based products than we have had now in five years.

I was frustrated as you know in other calls over the years that we have not seen as much flows in that area.

I think as some fundamental products have underperformed and people are starting to recognize that 96% of our SAE products are above our peer medium over five years, and I think there is more interest today than we've seen in over five years for some type of model-based, factor-based investment strategies.

You're seeing more and more even in the mutual fund, even in some cases ETFs more smart beta type of products.

And I believe this is going to finally begin a period of substantial momentum in these areas.

And so I do believe you're going to see shifts.

You're going to see shifts in that area as an industry more towards smart beta, factor-based investing.

And I'm not suggesting fundamental is going away.

It's not.

And so -- but I believe we're positioned at BlackRock to benefit from that relooking at the scientific or model-based equity.

We intend to be announcing some very substantial hires in this area.

I talked about data management.

We believe other sources of information like big data is going to be an important component to how one looks at investing, and so we're investing in these areas for the fundamental and our scientific side.

And this is probably one of the -- this is going to be one of our more exciting offerings in the coming years.

And this is an area that I believe is going to finally start seeing accelerated growth.

So it's not a matter of share, Bill, as you asked.

It's a function of -- the world is refocusing on this, on these products, both on the retail side and the institutional side.

That's helpful.

Thanks so much.

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Please go ahead.

Hi, Craig.

Hey, thanks.

Good morning everyone.

With many large prime money market funds converting to government funds now, and now the LCR also requiring banks to hold more short-term government paper, how do you think the demand/supply dynamic will impact T-bill yields and accordingly the yields for government money market funds here?

I'm going to let Rob talk about that.

Obviously of course the regulatory changes and where rates are going to go over the next year are going to have a pretty big impact on where we're going to see flows in the money market arena.

Right now we're seeing more flows internationally than domestic.

We're seeing more prime than in government, and if rates change that will reverse.

So we're taking an approach where we have gone out to our clients and are talking to them about the future regulation and preparing products for them that will make sense depending upon where rates are.

Some of those would be for example we're going to be ready with constant net asset value government money market funds, and those will be without redemption gates or liquidity fees.

We have the floating net asset value institutional prime money market fund, and we plan to maintain our largest product fund, which we have about $66.5 billion and that's the temp fund.

That will be our prime institutional fund.

And then we have others that we're preparing a floating rate short maturity institutional prime money market fund and a constant NAV government money market fund, and short maturity national state specific muni funds.

We're also prepared to do separate accounts.

So it really is going to depend upon where the regulation ends.

Of course you know that the implementation date of all of these new products are around October of 2016.

So I think working together with our clients to make sure that we're prepared no matter where rates go is important for us.

And year-over-year we have about $39 billion that's been added into the cash funds, and that's about a 15% year-over-year growth.

So there is still a lot of demand for money market type product, and it will just change some of the nuances to be able to apply with the regulatory issues.

But this is a big business for us, and we also see some of the smaller money market groups approaching us as well.

Because scale and size is also going to be very important to be able to satisfy our clients' needs.

Thanks, Rob.

Just as my follow-up here, I was wondering if you guys can provide some background on the flow trends between the retail focused Core Series and also your higher fee generating equity EPS?

While it's positive to see growth, it seems like there may be a little bit of a mix shift undergoing in the equity business.

So maybe you can just provide some color here?

So certainly there's a big change in mix depending upon performance and also depending upon what areas clients are focused on.

So there's two parts to that question.

One is people looking on an institutional basis for precision exposures in particular areas, like emerging markets, which would have a higher fee, versus buy and hold segments that are looking to supplement what they own with ETFs and what they call the Core Series.

Now there is a difference in fee between the precision instruments like in the emerging markets and the Core Series, which is more of a buy and hold segment.

So quite frankly we're seeing growth in both of those right now, but this is an area that is starting to gain attention.

It's starting to mature, and what we're trying to do is develop a core set of products that is going to be for the buy and hold segment.

We continue to round that out.

We've had over $12 billion that's going into that core segment.

In the quarter we've had about 25% organic growth in this global core segment versus just a 14% overall market share in the iShares business.

But the point here is that there is somewhat of a fee shift, but it's not that dramatic and it's not the overriding factor in people buying these iShares.

It's segmentation.

It's filling out their portfolios and what they want, and then of course you have to be competitive in what they're buying.

But we don't see an overall dramatic change in the pricing of this or moving from high fee to lower fee, particularly in each segment.

Craig, I would also add in terms of the fees and fee mix, as I emphasized we saw strong flows in fixed income.

And so some of that you're just seeing it -- the fee mix change because of great flows into fixed income ETFs.

As Rob discussed it's not necessarily moving from one product in equities to another.

So I would tell you there's a constant amount of pressure to making sure we're competitive related to fees.

We're going to continue to have that pressure and we want to be a leader in that.

And so we are very comfortable with the mix of business and how business is evolving.

We are winning new clients that we did not have or more buy and hold where this was not where BlackRock had great market share, and as we penetrate more and more of the independent advisors that historically was more the landscape of a Vanguard, we're starting to see increased flows in our Core Series.

It's not that we're seeing a substitution with some of our clients.

We're penetrating more in different clients.

As Rob said we're penetrating more buy and hold clients too.

We look at this as our broadening of our platform, not necessarily an outright fee mix change.

Thanks, Larry.

Your next question comes from the line of Robert Lee with KBW.

Please go ahead.

Hi, Robert.

Thanks.

Hey, guys, good morning.

Just have a question really on one or two on the DC business.

I guess first question is I mean you certainly have had very strong fixed income flows, but just curious in your perspective if you've seen the replacement activity in the 401-K market that has been talked about for a while?

I think you guys expected it, and kind of maybe how do you feel like if that's happening, if you're kind of getting your fair share of that activity?

We grew in the first quarter defined contribution business by $20 billion.

So I'm not sure if that's our fair share.

I believe it is.

I think we had a very good quarter in defined contribution.

We're investing quite a bit, which that represents about 14% organic growth.

So we're well positioned in it.

We are increasingly working on work trends that are impacting in a favorable way for us.

So keep in mind, what are the trends in DC?

There's a greater trend towards open architecture.

Really good for us and BlackRock.

I mean, historically we were harmed by closed architecture, more open architecture allows us to provide our products.

Two, in DC there's a greater demand for indexation.

That obviously plays into our strength.

Three, as an innovator and target date, we're benefiting from that.

So you add those three combinations plus we have witnessed a lot of the $20 billion of flows because our strong, active fixed income performance we're seeing accelerated flows in those DC plans that are consistent and staying with the active strategies.

So across the board, I would tell you we have probably as large of opportunities in DC than we've had in years and years and years.

And much of it has to do as I discussed earlier our positioning, our strength and performance in fixed income, our strength in designing target date products, and moving towards indexation.

And much of this has to do with DC markets not growing as a whole.

In fact there's a belief that DC can slowly start decreasing as the men and women who are getting closer to retirement are spending what they accrued.

But I believe BlackRock has a great opportunity in front of us to gain market share, and we're very well positioned in product and we're well positioned to be -- to take advantage of this because our positioning index and in active fixed income.

Great.

Thanks.

And then maybe just one follow-up on the ETF business.

Obviously business is going gang busters in the US, outside the US.

And I'm just curious, you guys have come up with different ETF product structures.

I'm thinking of particularly of kind of some of the term date fixed income strategies you've come up with, developed, and it doesn't feel like those particularly have taken off.

I'm just kind of curious to know your thoughts on that?

Just it would seem to be a kind of ideal structure for this low rate environment, if investors are nervous about higher rates to kind of turn things out.

Just kind of your thoughts on why maybe that hasn't taken hold as much as you would have maybe should have, would have expected.

So your guess is as good as ours.

We try to have different products in the pipeline to satisfy what we think our clients should be looking at.

But there's a whole product process here of awareness, going out and talking to clients.

It takes them a while to understand what the product is.

They like to see it perform a bit before they invest in it.

So I can't tell you exactly why we think that it makes sense as you do.

But we like to have different products in the pipeline and actually we have pretty high aspirations for these.

One of the ones that I'm a little disappointed in is the I Bonds that we have because it really fits a client's portfolio so much better than buying individual bonds and taking the risk of the bid offer spread and having more liquidity and pricing, diversification and look through treatment.

So I'm a little disappointed.

But if I act on that and not propose the fund, I could tell you it took about 10 years to get our emerging markets fund off the ground and see real money come into it.

So we're just going to go out there.

If we think it's a good product, talk to our clients, make sure we have the awareness, show them the positives of it, be able to evaluate the performance and then I hope that it catches on.

This is very different than some others.

You tell me why they caught on.

We have our mid-vol strategy, the currency hedged.

It also is a matter of when you produce the product and what's happening in the market at that particular time.

So I think for us, our growth strategy is to continue to come out with innovative ideas, have a pipeline of these, make sure we're in the market, and then over time depending upon those environmental factors and awareness, that they'll grow.

Great.

Thanks for taking my questions, guys.

Your next question comes from the line of Ken Worthington with JPMorgan.

Please go ahead.

Hi, Ken.

Hi, good morning.

Just one question on the regulatory front from me.

Really looking at F stock and SIFIs.

So how is the conversation evolving with regulators on systemic risk today?

I guess to what extent is the conversation still moving from more of the corporate risk to the product risk?

And then how effectively do you think the asset management industry is at kind of regulator education, and is it really effectively making its case?

I think the dialogue at the F stock in the United States is principally activity based.

In Europe it was going towards activity based.

It has migrated a little bit to more corporate based and activity based.

It is a commentary that we are sending comments to the FSB related to that.

I think there's going be a long dialogue.

There was a meeting earlier this week, I think I saw reports related to it, related to the FSB meetings in New York with large investment management companies.

I would say from BlackRock's perspective a year ago, year and-a-half ago was pretty lonely for us because we were one of the few firms having those meetings and educating regulators related to the risk associated with asset managers.

We always note importantly that the asset management industry represents less than 20% of the capital markets.

Asset owners are principally the largest players.

They manage their own money and they play a significant role too.

So if you want to affect the ecosystem and making sure the ecosystem is safe and protected for society and for investors, as we said publicly and we continue to try to educate, it has to be activity based.

And today now, because of the efforts of the FSB, tens of asset managers are now working alongside us.

Industry groups are working alongside with us.

I'm actually pretty thrilled that there is more Company, more people helping, spending time, educating.

I don't know what the solution or the outcome will be, but we look at this as a long-based process.

We want to be constructive.

That is our number one responsibility in making sure that in the end it leads to a better, sounder financial system.

If we have that as I talked about other issues related to long-termism, I think BlackRock's the biggest beneficiary of more participation by more people because they believe it's a safer environment to invest.

We'll be all -- I'm all in favor of it.

However, there are differences of opinions and we are trying to push our opinions, but it's going to be a long process.

It's going to be very public about how the process plays out.

I don't feel any -- I actually believe the process is more robust now with more conversation than we've had in a long time and we'll see how this all plays out, Ken.

I can't give you any degree of where this is moving internationally.

It will be kind of odd as the F stock is moving towards outcome activities that the FSB comes with a different way.

The question is this a Europe versus US phenomenon.

It's interesting to know what Europe is doing with Google and other issues and technology, attacking US technology companies.

So we're participating in this.

We're going to be good corporate citizens and we're trying to do our best in education.

Great.

That was very helpful.

Thank you very much.

Our final question will come from the line of Michael Carrier with Bank of America-Merrill Lynch.

Please go ahead.

Thanks, guys.

Hi.

Gary, maybe just a follow-up on the margins.

I understand a year ago like the elevated BRS and performance fees.

If I just take the second quarter going forward and thinking about the year-over-year trends, organic growth coming in above 5%, markets up and obviously you've got the FX hurdle.

As we start looking at second quarter, third quarter going forward, assuming these trends are similar should we still see that year-over-year ability to generate operating leverage, or is there something changing on the expense front?

And I know there's a lot of moving parts, but just wanted to get a sense relative to the first quarter year-over-year trend.

Michael, I'm going to go back to something Larry said in his comments.

It's about what we can control and what we can't control.

So I think we feel incredibly comfortable with our ability to grow organically and we feel incredibly comfortable with the ability to manage our expenses as we have over the last four plus years, and as you know notwithstanding reinvesting over $1 billion back into the business through the P&L.

We've expanded the margin over 350 basis points during that time.

But there's certain things we can't control, which obviously is beta and FX.

And notwithstanding all of those things, which clearly is impacting our fee rates year over year, we still think if we have kind of stable markets we're very much committed to the original margin guidance we've always given people, which is that we think that our business has obviously benefits from scale in a bunch of areas and we see no reason that we won't be able to continue to evidence margin improvement much as we have over the last three plus years.

Okay.

That's helpful.

Just a quick follow-up.

This is two quarters I think in a row that you guys have come in above like a 6% organic growth rate.

And Larry, I think when you talk about all the trends in the products that you offer, what you guys are doing on the distribution front, it makes sense that clients are gravitating towards a lot of the offerings.

I guess when you guys look at your investments being made currently for the outlook, like what inning do you feel like you're in, in terms of still being able to either launch new products or gain additional share in certain distribution channels, to be able to be in this, whether it's a 5% organic growth rate but obviously it's been higher than what we've been used to.

Sure.

So I think we're now starting to witness the impact of having better performance in our active products, especially fixed income.

Two, our expansion in the RIA channels and the buy and hold channel is now being exhibited in our mutual funds.

It's being exhibited in our Core Series ETF products.

I can't underscore enough how we are building out and expanding our global platform, and I am using infrastructure also as a mechanism to get stronger within these various countries, side-by-side building our brand in those countries, building our opportunities in those countries.

Obviously that's a long-term strategy, Michael.

That's not something that we're going to witness and see significant changes.

That's a good example of a five-, seven-year investment where we see on behalf of our clients.

But it also has a very significant impact on our positioning in these various countries as a leader in the investment business.

You think about those investments.

I think we're going to continue to build market share in retail.

We witnessed that for four straight years.

Two, I think it's fair to say that ETFs are in a secular growth period that is not over yet.

We are the biggest beneficiary of that secular growth.

And then three, which I said for many years, if we can begin to build a stronger relationship institutionally with more clients and building not a product based relationship but cross-selling and solutions we're going to start benefiting on the institutional side.

So you add those together, it does allow us to have above industry -- and I want to underscore above industry organic growth trends.

And then if you add the amount of investments we're making, not just in infrastructure but across the board in alternatives where it's not really being shown up in the organic growth area because as I said we want $10 billion commitments, we don't unlike a lot of the private equity firms, we don't show that in our AUM but we identify the unfunded commitments.

That's another good example of the power and the growth of the opportunity.

So you tie this together, cross-selling products with institutions with better performance, by providing solutions, by having even more market share opportunities in our Aladdin business, our iShares secular growth and our positioning in retail worldwide, plus better positioning country by country, I think we're in a very good position to be leading above industry trend market share.

Ladies and gentlemen --

And market growth.

And market growth.

I'm sorry, operator.

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

Mr. Fink, do you have any closing remarks?

I think just some of that first of all thank you for taking your time.

I know there are a lot of other institutions that you're going to have to run to because of all the first quarter results today.

Let me just reiterate, we believe that our first quarter results really highlight the diversity of our product platform, the global nature of our platform, that truly differentiates us versus almost every player in the world.

As I said just earlier, we are seeing that impact of those investments.

We're seeing continued positioning.

I truly believe as a firm if we continue to talk about long-term issues, try to be helpful in the narrative in the world of investing, a more balanced long-term approach, and if we continue to execute those strategies on behalf of our clients and our clients' needs, we will be positioned quite well for our clients worldwide, our institutional clients, our retail clients.

And I would just underscore these are very exciting times for BlackRock and all the citizens of BlackRock.

And so I feel very good about where we are, where we're going, and the opportunities in front of us.

With that I'd like to just thank everybody for joining us this morning and your continued interest in our organization.

Have a good quarter.

This concludes today's teleconference.

You may now disconnect.