貝萊德 (BLK) 2015 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the BlackRock Incorporated second-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, 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, and call your attention to the fact that BlackRock's actual results may of course differ from those statements.

As you know, BlackRock has filed, and will file, 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 BlackRock assumes no duty, and will not undertake, to update any forward-looking statement.

So with that, let's begin the call.

Gary?

Thank you, Matt and good morning, everyone.

It's my pleasure to be here to present the results for the second 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 our as-adjusted results.

Our second-quarter results again demonstrate the value of the investments we've made to assemble the industry's broadest and most global suite of active and investment index investment offerings and to deliver differentiated, customized investment solutions to our clients.

Our business model was purposely designed to deliver differentiated results in the current volatile market environment.

Second-quarter revenue of $2.9 billion was 5% higher than a year ago, while operating income of $1.2 billion was 10% higher on a year-over-year basis.

Earnings per share of $4.96 were up 1% compared to a year ago, reflecting lower nonoperating results and a higher normalized tax rate in the current quarter.

Nonoperating results for the quarter reflected $3 million of net investment losses, largely driven by net losses on unhedged or partially hedged multi-asset and fixed-income seed investments.

Recall that our first-quarter nonoperating results included a one-time gain of $40 million related to the fair value of our pre-existing interest in BlackRock Kelso Capital Advisors.

Our as-adjusted tax rate for the quarter was 30.1%, compared to an as-adjusted tax rate of 24.8% in last year's second quarter that benefited from several favorable nonrecurring items.

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

Second-quarter long-term net outflows of $7 billion reflected elevated market volatility, as $24 billion of net new business from active and iShares products was more than offset by $31 billion of low-fee institutional index outflows.

While this resulted in an organic asset growth rate significantly less than our target for the quarter, our annualized long-term organic base fee growth rate was in excess of 5% as each of our retail and iShares businesses, along with the active component of our institutional business, generated positive organic growth in the second quarter.

Over the last 12 months, notwithstanding the increasingly unsettled macro environment, BlackRock's highly diversified platform generated approximately $180 billion of long-term net new business, representing a 4% long-term organic AUM growth rate and a 6% organic base fee growth rate as faster growth in our higher-fee channels continues to contribute to a favorable overall change in our base fee mix.

We've previously discussed the importance of organic base fee growth rate to our business and we're always thinking about ways to improve our disclosure to help investors and analysts better understand our business.

As you will note on page 2 our of our earnings supplement, we have now expanded our financial disclosure to include organic base fee growth on a trailing 12-month basis to better reflect this positive mix change over time.

Second-quarter base fees rose 4% year-over-year, as average AUM increased due to organic growth and market appreciation, despite $191 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 quarterly base fees were approximately 8% year-over-year.

Sequentially, base fees were up 6%, reflecting organic base fee growth, the effect of one additional day in the quarter and seasonally higher securities lending fees.

Performance fees of $136 million were up 18% from a year ago, reflecting strong alpha generation in certain equity products that lock annually in the second quarter.

BlackRock's solutions revenue of $161 million was up 10%, both year-over-year and sequentially.

Our Aladdin business, which represented 80% of BRS revenue in the quarter, grew 14% year-over-year and 2% sequentially.

The year-over-year increase was driven by several sizable clients going live on the Aladdin platform over the last 12 months.

We continue to see strong market demand for global investment platform consolidation and multi-risk solutions.

Revenue in our financial markets advisory business was flat year-over-year, reflecting the positive impact of residual disposition activity in last year's second quarter, but up $11 million sequentially, driven by increased revenue from several advisory assignments associated with Fed CCAR diagnostics.

Other income declined $9 million from a year ago, reflecting lower 12b-1 fees and the impact of real estate related disposition fees a year ago.

Total expense rose $12 million year over year, or 1%, driven primarily by revenue-related items, including incentive compensation AUM-related expense, which were largely offset by a decline in G&A expense.

Compensation and benefits increased $65 million year over year, or 7%, due to higher headcount and incentive compensation, partially offset by the impact of a stronger dollar.

G&A expense decreased $65 million year over year as a result of lower levels of marketing spend in the current quarter and the impact of elevated legal and regulatory expense in last year's second quarter.

Sequentially, G&A expense decreased $27 million from the first quarter, driven by lower levels of marketing spend.

Second-quarter G&A expense also included a previously disclosed $4 million product placement fee associated with the recently announced ABR refunding.

Our second-quarter as-adjusted operating margin of 44.9% was positively impacted by the lower level of (technical difficulty) G&A expense.

Looking forward, we continue to anticipate a higher, more normalized level of G&A spend during the second half 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 June 12, BlackRock announced the acquisition of I Cuadrada, the leading independently managed infrastructure investment business in Mexico.

We expect to close this acquisition in the fourth quarter of this year.

During the second quarter we also repurchased an additional $275 million worth of shares and refinanced $750 million of debt, with a 10-year, EUR700 million euro-denominated note bearing a 1.25% coupon.

This represented our first euro-denominated debt issuance, better aligning our capital structure with our global business.

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

Second-quarter long-term net flows were impacted by over $30 billion of low-fee institutional index outflows, which masked almost $13 billion of active inflows, driven by our improving fundamental equity performance, top-tier fixed income performance and strength in our multi-asset and alternatives businesses.

BlackRock's global retail franchise saw long-term net inflows of $11 billion, representing 8% annualized organic growth for the quarter and 10% organic asset growth over the last 12 months.

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

International retail net inflows of more than $3 billion were paced by strong flows into global unconstrained fixed income and international equities.

For the quarter, our leading European equities franchise generated nearly $2 billion of net inflows, while our top quartile Asian equity franchise gathered more than $1 billion in new assets.

Leadership in these areas contributed to BlackRock maintaining its year-to-date number-one ranking in cross-border mutual fund flows and its market-leading position in the United Kingdom.

US retail inflows of more than $7 billion reflected strong fixed income flows (technical difficulty) broad-based, even in a period of rising rates.

Despite a challenging quarter for industry flows in US active mutual funds, the depth and breadth of our franchise positioned BlackRock to continue to grow market share as we ranked in the top five in US retail industry flows for the quarter and saw strong demand for iShares from US retail clients.

Global iShares generated $11 billion of net new flows, representing 4% annualized organic growth for the quarter and 11% organic growth over the last 12 months.

While the ETF industry experienced quarterly volatility amid uncertainty in global economic growth and central bank policies, year-to-date flows for both iShares and the ETF industry remain in record territory.

IShares retained its number-one global market share position for the first half of the year and remains well ahead of the competition in global fixed income flows.

IShares equity inflows of $9 billion were led by flows into non-US equity exposures, including our EFA and Japan funds.

We continue to see heightened investor focus on risk management as our currency hedge funds gathered nearly $4 billion and our minimum volatility funds raised more than $2 billion during the quarter.

IShares fixed income inflows of approximately $2 billion reflected flows into investment grade corporate and emerging markets bonds, offset by outflows from treasuries and high yield as investors repositioned portfolios amidst global rate movements.

Our institutional business experienced $29 billion in quarterly long-term net outflows, primarily driven by $35 billion of low-fee index equity outflows from several large clients looking to reallocate, re-balance or meet their cash needs.

As previously mentioned, these low-fee index outflows had a limited impact on organic base fee growth for the quarter.

Institutional active net inflows of more than $2 billion reflected BlackRock's strong multi-asset and alternatives capabilities, offset by outflows in active equities.

Multi-asset inflows of more than $4 billion were driven by solutions-based funding, particularly in the insurance outsourcing space and continued strong demand for our (technical difficulty) series.

Excluding return of capital of approximately $1 billion, net inflows of $2.3 billion into core institutional alternatives were broad-based, including alternative solutions, hedge funds, real asset and fund-to-fund offerings.

Fundraising momentum continued with an additional $1 billion of illiquid alternative commitments raised in the second quarter, bringing total unfunded commitments, a source of future net inflows, to approximately $11 billion.

Active equity outflows of nearly $2 billion resulted from a single subadvisory redemption.

Overall, BlackRock's second quarter reflected continued growth and stability in a more volatile environment and once again demonstrated the value of our highly differentiated and diversified platform.

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

Thank you, Gary, and good morning, everyone, and thank you for joining the call.

Our second-quarter results were driven by clients continued trust in BlackRock to help them navigate an increasingly unpredictable financial and economic landscape.

Uncertainty in anticipation of around the first Fed rate hike in nine years and concern related to the possible impact of a Greek euro-zone exit has led to persistent volatility in currencies and risk asset prices and global interest rates.

Turmoil in China's equities market has reached unprecedented levels and the impact of intervention is yet to be fully understood by our markets.

Falling commodity prices continue to put pressure on commodity exporting economies and both governments and corporations are being meaningful impacted by relative currency valuations.

Constrained liquidity conditions are further magnifying market stress and volatility and I believe this elevated volatility will be going forward and will be part of the market.

Both asset allocation to beta and alpha products in active management will be material drivers of returns for investors as they look to stay ahead of the changing market dynamics.

Each of those drivers impacted client behavior in the second quarter, as we saw a shift in flows from a range of high-performing active products in iShares precision exposures, while experiencing redemptions in low-fee broad market index accounts.

The investments we made in our platform over time once again has enabled BlackRock to create this highly differentiated investment solutions across asset classes, investment styles and geographies for our clients.

At BlackRock, we are focused on delivering our best thinking and resources to our clients and our portfolio management teams.

The BlackRock Investment Institute continues to lead that discussion, as evidenced by our recent client call on Greece, which was attended by nearly 3,000 clients.

This level of engagement by our clients is translating into increased partnership with BlackRock to meet their investment needs and more clients throughout the world are looking for BlackRock and BlackRock's ideas, which we believe over a long cycle will lead to more share of wallet with these clients.

Our internal culture of information sharing and a relentless focus on risk management and performance in our active businesses is also enhancing BlackRock's ability to generate alpha on behalf of our clients and has resulted in strength across our active platform in performance and in flows.

We've been very vocal about addressing the performance challenges in our active equity business.

More than three years ago, we began upgrading our portfolio management teams in our Asian and US fundamental active equity franchises.

While we knew these changes will result in a near-term outflows, and it would take our teams many years to build the performance track records, we have a conviction based on past successes in revamping our active fixed income business and we kept our focus on the long-term for our clients.

We brought a new portfolio manager who are currently responsible for more than $50 billion in assets and those managers are delivering on their objectives of generating high-quality risk-adjusted returns.

We not only hired new talent, we invested in technology.

We elevated young talent from organic growth internally and linked the global equity platform together to more effectively leverage the benefit to BlackRock.

Since their respective start dates, those managers have generated more than $2 billion in alpha for BlackRock clients.

As a global firm, our objective is constantly outperform across our fundamental active equity platform and we've seen top performance in a range of products and regions.

For the three-year period, in the United States our basic value fund is in the 11th percentile.

In Europe, our European value fund is in the fourth percentile.

And in Asia, our Asian Dragon fund is in the 16th percentile.

In the second quarter, BlackRock saw improvement in our overall fundamental active equity performance figures, with 78% and 61% of our AUM is above market or peer medium for the one- and three-year period.

And strong long-term track records for our European and Asian equity franchises, as Gary discussed, has translated into flows raising more than $3 billion collectively in the second quarter.

We still have work to do with our fundamental active team, but we remain highly confident in the enhancements we made with a team that we have on board and we are very encouraged by the direction the business is headed.

We also saw continued strength in generation of strong performance across our model, or scientific, active equity platform, with 85% and 95% of our assets above benchmark or peer medium for one- and three-year period.

In our active fixed income, performance remains a strong across the platform, with 89% of our assets above benchmark or peer medium for the three-year period, translating into continued momentum and flows.

Against a divergent and volatile backdrop and a challenged quarter for industry flows, BlackRock saw a total of net long-term outflows of $7 billion, as $24 billion of net inflows into active and iShares strategies was offset by a $31 billion net outflows in these low-fee institutional index strategies.

Importantly, from a regional perspective, we saw $18 billion of net inflows in the Americas, offset by a net outflows of $25 billion from international clients who were more directly exposed to all the macro challenges that I discussed.

As Gary discussed, focusing solely on organic asset flows misses a critical component of our story.

BlackRock generated long-term organic base fee growth of 5% in the second quarter, reflecting the effectiveness of our differentiated business model and the combination of active and index on a single platform, as higher fee active flows drove robust revenue growth, more than offsetting any revenue loss from our index outflows.

In the second quarter we saw sizable institutional index equity outflows driven by redemptions from international and official institutional clients, due to a variety of cash needs and asset allocation decisions.

A number of those outflows from institutional clients, however, have been offset by inflows by the same clients into BlackRock's active strategies.

This is a very important component that we all should be focusing on, because as we discuss how we are building hour unique business model, having the ability to have clients internally move assets around, whether it's from beta to active or active to beta, this allows us to continue to build deeper and more elongated relationships with our clients.

Year to date, a desire to reallocate or address cash needs drove 10 of our largest clients to redeem over $40 billion in institutional index assets.

However, those same clients reinvested across BlackRock's active equity and fixed income multi-asset and also alternative strategies, resulting in a positive net revenue impact for the Firm.

This demonstrates the value, as I said earlier, of a deep strategic relationship we remain with our clients and validates strongly the strength of our solution-oriented business model.

Second-quarter active net inflows of $13 billion was driven by fixed income, multi-asset and alternatives.

We remain bullish on the opportunities in active fixed income as investors stuck to a prolonged low rate environment, searching for both yield and capital preservation.

BlackRock generated $9 billion of active fixed income net flows across unconstrained high-yield and total return strategies.

The breadth and diversity of BlackRock's fixed income platform resonated in the second quarter, as clients repositioned assets to achieve their investment goals.

For example, our iShares high-yield range saw net outflows of $1.8 billion in the quarter.

The top performance we have in our active high-yield franchise positioned us to capture $2.4 billion of net inflows.

Alternatives was also a contributor to inflows and organic-based fee growth in the quarter, with $2 billion in net inflows.

Alternative flows were led by alternative solutions, where BlackRock is leveraging our differentiated model and our market position to construct outcome-oriented, multi-alternative portfolios for our clients.

BlackRock continues to build out our capabilities in infrastructure, which is an important asset class that provides long-term returns for our clients.

In the second quarter, BlackRock announced the acquisition of Mexico's leading independent managed infrastructure investment firm.

This acquisition advanced BlackRock's growth strategy all throughout Latin America, obviously and including Mexico, and demonstrates our firm, strong commitment of being a leader in infrastructure investments.

This is a continuation of the expansion of our infrastructure footprint in Mexico following the partnership with Pemex we announced in March.

We also believe that building out our infrastructure platforms throughout the globe will make us a stronger and a more meaningful leading player in each local market.

And I believe it's very imperative to understand, infrastructure investing for BlackRock will lead us to have a stronger mutual fund footprint as we grow out our businesses worldwide.

As I've said repeatedly over years and years, we need to be a local firm in every country to build the trust and the strength as we become much more of a global platform firm.

Technology remains a key area of focus and investment for BlackRock across all aspects of our business to enhance our investment process, client service, operational efficiencies and our unifying Aladdin technology platform.

Aladdin generated 14% revenue growth year over year and Aladdin's growing value as a third-party platform positions BlackRock to invest a consistent and growing stream of revenues into improving our technology and expanding our offerings.

Indeed, more and more clients are looking for risk management platforms.

As more investors need to go more global, the need for a more robust capital market focused technology platform is more imperative today than any other time and BlackRock's solutions Aladdin is becoming the driving risk management platform that more and more clients are looking to take on.

The next step in the evolution of our business and ability to generate alpha is the further harnessing technology to create innovative investment strategies for our clients.

Over the last few years, we have become increasingly focused in becoming a data-driven company.

Available data is exploding for the financial services industry and the true winners will be the firms that can extract information and package it into innovative solutions that generate alpha and outcomes for our clients.

We recently hired Dr. Andrew Ang to be our head of our new factor-based strategy group.

Andrew joins us from Columbia Business school and is an innovator in factor-based investing and portfolio construction.

Technology is also going to become a more important part of our adopting to our evolving fixed income landscape.

Throughout the quarter, there have been elevated focus on the state of the fixed income markets.

There are a variety of dynamics at play, including extraordinary monetary policy, increased bond issuance and regulatory reform, which has contributed to reduce dealer inventories and lower turnover.

While media attention has only spiked in recent months, BlackRock has been focusing on the issues for several years, how to enhance our trading capabilities, how to enhance our portfolio construction and risk , as well as being a thought leader on the topic.

Going forward, it is important for all market participants to recognize that we can't turn back the clock.

We need to shift the dialogue to look forward and focus on solutions.

BlackRock hopes to play a constructive role in helping our clients meet the challenges of today's market environment.

We are also making recommendations on what the regulators and market participants can do to help improve the market ecosystem using a three-prong approach, including modernizing the market structure, addressing liquidity challenges at the product level and embracing product innovation like fixed income ETFs.

As our clients' investment challenges evolve, so does the nature of the solutions they require.

BlackRock's business model was deliberately built to deliver a multifaceted solution to our clients and I don't believe any other investment firm can provide this multifaceted solution.

BlackRock's ability to leverage these capabilities across a diverse global platform of active and index, equities, fixed income, multi-asset and alternative strategies, all backed by Aladdin analytics, risk management and advisory capabilities, leading investment performance and client service, big sentence here, continues to result in improved outcomes for our clients and our shareholders.

As always, I want to thank our employees for their continued dedication to working to create a better financial future for our clients.

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

(Operator Instructions)

Luke Montgomery, Bernstein.

I really appreciate the addition of the organic revenue growth disclosure in the supplement, so thanks for that.

I was hoping you might provide a little context, a little more context around the various drivers of revenue yield and base-fee growth between FX translation, AUM and flow mix shift and anything around the entry rates of AUM and revenue yield as you head into Q3?

That's a half-hour answer, though.

(laughter) Gary?

Well, Luke, we appreciate that you recognize that we are trying to add to a more appropriate disclosure for you guys.

I think, as we've talked about at length with you guys, the fee rates are constantly changing for us.

It's a function of not only the organic component, which I think we're now demonstrating to everybody, that is in our control and as we continue to see stronger growth in our higher fee retail and iShares businesses, which carry higher fee rates on an organic basis, if nothing else changes in the world we would expect the overall fee rate to be accretive for us.

In other words, obviously organic revenue growth in excess of organic AUM growth obviously helps that over time.

However, we can't control things like divergent beta and FX and obviously, as we've talked about, over time that will have an impact depending on where we go.

In this quarter it happened to help us, but in other quarters it has hurt us over time.

As you know, US equities rose about 5% over the last year.

In terms of US benchmark AUM, that's about 32% of our equity-based fees, but in fact is the lowest fee geography for us at around 13 basis points.

On an FX adjusted basis, year over year we saw EM in Europe down between 10% and 12% each, commodities down close to 30% and those buckets are about another third of our equity-based fees and have average fee rates significantly higher around 46 basis points.

So in this case, year over year the overall fee rate was down about 0.6 points roughly to about 22 basis points due to that, but we benefited from some of that in the current quarter.

Also, we had better mix and we had an additional day, which basically helped the sequential fee rate up close to 0.9 basis points.

Luke, I would also add a little more color to what Gary just said.

Three, four years ago, if we saw outflows in index funds, we may not have seen the active flows.

What I think is really illustrative of all the hard work we've done in the last few years is we are now part of that dialogue, and more and more clients that we are able to do this.

As we suggested, a lot of the money that was, in terms of the outflows, was more cash-need driven by our clients for rainy day issues, and it's raining in some of the commodity-based economies, and so they're utilizing some of that.

I think one of the things that is important to understand, I don't think the market understood how much flows that were generated by these large institutions internationally into the equity markets and in some cases, it's turned because they have needs for domestic needs.

But we are seeing, we have more increased dialogue on multi-assets in European equities, Asian equities, alternatives than we've ever had in the history of the Firm, so the dialogue is more robust and certainly a lot more complete and I think that's a component of the story.

As Gary, said we can't control FX.

We can't control divergent beta.

As Gary suggested, there has been quite a bit of divergent beta in the commodity-based stuff.

Even in the last few weeks of June and the first few weeks of July, we've seen more divergent beta again.

We can't control that, but we certainly have, and probably the key issue we can control, deeper, more robust conversation with more clients worldwide.

Okay.

Thanks.

And then separately, now that IOSCO has filed the FSOC impact off the approach of identifying specific asset managers as SIFIs in favor of focus more on products and activities, do think that changes the odds of how the FSB will ultimately approach regulation of the industry and have we reached a favorable tipping point or it's not time to relax yet?

I would not relax.

I don't think we should ever relax.

Obviously -- let me just step back and say A, if the market is a safer, stronger market that more people believe that the market is a great place, if regulation does add greater safety and soundness in the minds of more and more investors, we'll be the biggest beneficiary.

So our whole approach to regulatory conversation is somewhat different than with some of the other leaders in the industry.

We have traditionally, and I continue to believe we will continue in that tradition, of having a deep dialogue with regulators, using our international knowledge of what's going on and helping them trying to understand what would be the best way to make a safer and sounder dialogue?

I don't want to say the conversation is going to be more relaxed in the future, because we need to still work with the regulators, understanding what are the potential issues?

As the world becomes more dependent on capital markets, and that's happening now, as the ecosystem changed with higher capital standards with banks and more and more enterprises, whether it's companies or individuals are using capital markets for raising capital, both debt and equity, we need a safe and sound ecosystem.

And if it means that having more supervision in some of the activities, we may be in favor of that.

So we are going to work towards building a safer and sounder capital markets.

We have enjoyed deep relationships with the regulators and obviously, they don't have to listen to us.

They are our regulators and -- but by having what I would call a constructive dialogue, I believe it allows us to be part of the conversation and hopefully, this will lead to a better outcome.

Alex Blostein, Goldman Sachs.

Larry, first question on fixed income markets for you guys.

Obviously, we saw a pretty big move in the 10-year and the quarter.

BlackRock's overall fixed income franchise did a pretty good job, obviously, handling this move.

When you look out, with respect to clients' response to prospect of higher rates announcing the move we've seen so far, what are you hearing with respect to the overall allocations and the remix?

I find this a humorous narrative.

There was a big article a couple days ago, I think in Barrons had a big article about what's going to happen in fixed income?

Higher rates will lead to more players in fixed income, not less.

I'll get into that in a minute.

Secondarily, 70% of our fixed income investors are pension and insurance companies.

They're not influenced by market moves.

They're trying to match a liability.

And that's the problem with the narrative.

They're not the players who are going to whip around the interest rates.

But the true component is, so many pension funds and insurance companies were so harmed by lower interest rates.

In some cases, we know many insurance companies have actually a wide gap.

Their liabilities are longer than their assets.

So if we actually saw a rising rate environment, this is actually quite additive to the balance sheets of insurance companies.

If we saw a rise in interest rates, especially in the short end, the pension funds' liabilities will look less onerous, because it's all based on their funding rate and the capital rate they use for their short-term rates.

In fact, many pension funds, if we saw a real spike in interest rates, would defease a lot of their pension liability.

So higher rates actually is good for most long-term investors and they're not particularly concerned about rising rates and they're going to have money because the liability they bought these fixed interest items against certain fixed-based liabilities, and so they're not going to be that harmed on that.

They may have some accounting treatment differentials, but it's not going to be a big issue.

And for those who believe they want to navigate around the potentiality of higher rates, they're going to navigate from a long dated asset -- longer duration fixed income product to a shorter duration one.

For those who still need to be in more long duration -- but they're going to go into more the unconstrained products that we are the leading driver and flows.

I think people just forget, they're implying that everybody's a hedge fund when higher rates means everybody's going to be abandoning bond funds.

Now, some individuals were in fixed income because of safety and soundness.

They don't generally whip them around either.

They're going to hold them to maturity.

But another thing, Alex, that I think we're miscalculating too, more and more money is going in defined contribution plans.

More and more defined contribution plans are using target date types of structures and last I checked, we're living longer but more importantly, we're all aging.

At least I am.

And as you age, you're going to have a higher component of fixed income.

So I would tell you, fundamentally, demographically and all the things that we're structurally seeing the way people are positioned, higher rates is not a bad thing for the fixed income market for the core investors.

Got it.

All makes sense.

Just to follow up around the regulatory discussion, given what it looks like more of an increased focus on liquidity and risk management on a product base as opposed to hopefully a firm basis, can you talk a little bit about the opportunity set to monetize Aladdin's capabilities of your sales or licensing the product to other asset managers since it seems like that's going to be the area of focus for a lot of your peers?

We probably have increased dialogue for Aladdin than ever before.

Unquestionably, higher regulatory supervision for activities would lead to more need for risk management.

Aladdin is one of -- obviously one of the risk management participants in the marketplace.

Fiduciary standards are increasing.

People want to have better understanding of their risk embedded.

As more and more managers embark in a larger, more robust global portfolio, they need better risk analytics.

And so all this is leading to greater utilization for platforms like Aladdin.

Obviously, we have many great competitors, so I'm not trying to suggest we're the only player, but we are in a very good position to have deeper, longer and probably more numerous conversations.

Dan Fannon, Jefferies.

Can you discuss a little bit more detail about some of the rebalancing that is occurring in the index products?

Maybe the type of customers, are the kind of discussions something you anticipate ongoing?

It does seem -- I think you referenced most of it coming from the EMEA region.

A little more color there would be helpful.

I don't think I referenced what region.

It's international, what I said.

We've had times.

If you go back six or eight quarters we had big rebalancing then.

People use beta as a placeholder of a tactical allocation.

That's one thing that people still don't understand, how much beta products are being utilized now for alpha.

And there are many enterprises are tactically allocating, whether over weighting, under weighting, using beta products.

We see this more increasingly every day.

In some -- in the second quarter and part of the first quarter, we saw some of the big utilizers who had beta as an alpha component of their tactical allocation for -- in some cases, they were taking profits and then they, because of domestic issues, they are sitting with higher cash balances.

Some of them may have been a little more frightened of what's going on in some components of the world and are putting more and more money in cash.

But more importantly, I would say most of the tactical allocation was out of investment products, more into cash for domestic issues.

This was not a performance issue.

This was not moving money from BlackRock to another manager in most cases.

It was moving from BlackRock to another BlackRock product and in most cases, the money was used for domestic needs, or corporate needs.

Okay.

Thank you.

And then, Gary, a question on the G&A outlook.

It's been a volatile figure last few quarters.

Are we still expecting a ramp into the back half of the year and if you could help think about -- help us with some quantification around that?

Sure.

Look, I think as we look at the quarter, I think there's no question that our second-quarter margin benefited from a lower level of G&A spend.

If you recall last quarter, where many of you pointed out a year-over-year decline in our operating margin, we communicated to you that we felt our reported year-over-year margin comparison really understated the operating leverage in the business and I think this quarter, frankly, we had the opposite.

I think that our 250 basis points of year-over-year margin expansion is overstated by lower level of G&A spend that, frankly, is not likely sustainable.

Look, part of the lower level of G&A spend in the quarter is better financial discipline in the current environment, but part of it is, frankly, simply expenses that came in lower than we expected.

And I wouldn't -- I really wouldn't read too much into it on a trend basis.

It was simply a low G&A quarter relative to historical spend levels.

Looking forward, I think I would say we continue to anticipate a higher, more normalized level of G&A spend in the second half of the year and at this time, we're not intending to quote, pushed out, I think the words that you may have used, the reduced second-quarter spend into the back half of the year.

Brian Bedell, Deutsche Bank.

Question on ETF and maybe if you could dissect the flows between core series and what you're seeing in the institutional usage.

Maybe, Larry, if you can comment on --

I'll let Rob comment on that.

Sure.

Yes.

Just a comment on the traction that you're getting in the financial advisory community on the core series, and then also commentary on institutional usage, including hedging and maybe, as you mentioned, as a substitute for fixed income, both cash trading and derivatives, increasing the usage of ETF?

The exciting part of the ETF business is that as people become more aware of the benefits of ETFs, they are coming up with other uses for ETF.

It's become not only a way to express your view in the market, but you can express it in a much more precise way.

A lot of the flows that we're seeing are coming from this new usage.

One of the new usages, as you cite, is that ETFs became cheaper to use than futures.

We've seen a lot of institutions now as they become aware of that and we go out and talk about it, they are coming to us and asking us how they can use ETFs to better express their views in the marketplace.

So we're seeing flows coming in from that as well as just the generic core.

As you know, the two segments are, certainly, the buy and hold segment, and we have introduced a core ETFs for that and we're seeing growth in that to the tune of about $3.8 billion, which is a 7% organic growth in the quarter, so we're very excited as that continues to grow.

But at the same time, we're seeing those who are utilizing those for trading activities to express their views continue to grow as well.

A lot of that is in the high yield area, where they're expressing their views positive or negative, so you see flows in that.

And then you just see people that are actually looking at ETFs as a replacement also for their mutual fund business as well.

So I think there is lots of opportunities in this.

We're just beginning to scratch the surface in new uses for this.

We continue to think that it's going to continue to grow going forward, and we want to be the innovator using ETFs to innovate and to solve people's issues in their portfolios.

Great.

In the quarter, the lower flows on the institutional side is more of a beta issue than anything structural that you're seeing?

We actually had good flows in the active side and obviously institutional side was all related to those beta stories that I discussed previously.

Great.

Just to follow up, Larry, maybe on the Department of Labor proposed rules on how you think that might impact allocations in the 401(k) plans longer term and what it might mean for your target date business, if that's another catalyst for that business?

A, we share the Department of Labor's goals in promoting better retirement and security.

This is one of the big issues that we've been stressing.

I do believe our retirement -- our inadequacy in retirement is going to be the big story in the coming years.

I do believe the elevated savings rates that we're just seeing so far in the first six months possibly could be related to people starting to become more aware that they have an inadequate retirement plan, so we will be vigilant and outspoken on retirement issues.

Look, related specifically to your question, the need of investors are going to be differing.

We all want good investment outcomes and we need to make sure that we as an industry provide client choice, hopefully client choice with low cost.

Cost is -- can't be primary, because we have to be outcome focused.

Obviously, outcome focused with cost is the emphasis, not the other way around.

So the DOL's indicated interest for our comments, we submitted the commentary.

We're going to have to see, wait and see how this all plays out.

I think I don't believe we understand or have enough information I know on how this will all play out.

I think this will be evolving.

We are working constructively with the DOL and whatever they determine, I'll be able to tell you in the coming quarters how that will play out for BlackRock and the impact.

On the surface, it's going to have -- it has impact on BlackRock if it is as it is today, because it has impact on some of our distribution platforms, but we'll be able to navigate that.

Chris Harris, Wells Fargo.

Quick question on your retail business.

Clearly, it's been a great performer for you guys for quite a long while now, your top five.

Just wondering, at this point what additional opportunities do you see for that part of your business.

Really, I'm wondering, due to the fact that your share has seemingly gone up quite a lot, just wondering if incremental gains at this point might be a little bit harder to come by?

A, three years ago, four years ago, we started talking about our building out of retail.

Three and four years ago, we started talking about building a stronger brand in the retail.

Two years ago, we integrated our retail and our iShares teams to be -- to offer more outcome-oriented solutions instead of just product pushing.

And I think this has all created a more elevated position with our distribution platform.

I believe we have much more to go.

We are still way behind other firms related to the RIAs.

We still have deeper penetration to go with some of the big distribution platforms.

And importantly, I believe because of our technology, because of Aladdin, I think we can provide better models to assisting our distribution partners in creating better models, better advice, and if we can continue to help our distribution platforms be better at what they do, combination of beta products and alpha products, maybe with liquid alts, we should enjoy higher penetration of wallet.

And I believe we're just beginning on that path.

Great.

Thank you.

Craig Siegenthaler, Credit Suisse.

First, just on active ETFs, I'm wondering, do you guys have plans to launch some of your active products into a transparent ETF structure?

Also, do you think your competition will more aggressively pursue this option just given the lack of non-transparent ETF options today?

We looked at this.

We continue to look at this and right now, collectively, we're not sure that this is going to be a big opportunity in the marketplace.

One of the benefits of ETFs is the transparency, the diversification, and that enhances the trading and the liquidity of these.

We're not sure that this is an opportunity we're going to pursue.

We're thinking about it and we'll just see how the market continues to evolve.

We're not ruling it out, but right now, we're not looking at that.

We view that as something that will compete more directly with mutual funds than it will with the normal ETFs.

I would -- once again, I think I've said this in the past, I think there's way too much emphasis on this product.

We have said that we believe the ETF industry is going to go from a $3 trillion to $6 trillion industry.

Active ETFs will be a component of it but it will be dwarfed by the industry's growth in traditional beta products.

Where you may see ETFs grow is really more based on model or smart beta products where you're going to have tilts, but I still don't see active ETF playing a large role in the totality of the market.

I agree with Rob.

If there is growth and it's going to be growth that's going to be taking away more growth from traditional mutual funds.

If I can squeeze one follow-up here.

I heard your comments there on the IRA market and how you'd like to increase market share there, but as demographics increasingly become difficult for 401(k) plans, what is your plan to increase your market share in the IRA segment?

I said the there were independents.

Not the IRA -- not IRAs, but I was talking about the independent advisor.

So Craig, I'm not sure.

I did not make a statement related to defined contribution on IRAs.

But RIAs, we had very weak penetration three, four years ago.

We had very little disability visibility with many of the RIAs.

These are -- we have to become a trusted partner.

There are some other firms that have had a long-standing trusted relationship with these independent channels.

We are very pleased with the growth that we have in the RIA channel in 2015 and I expect, as I said earlier, that we're going to build more share because I do believe we can become another trusted advisor to their channels.

Ken Hill, Barclays.

I wanted to follow up on one of the earlier questions.

You guys have a really nice story to tell on the fixed income market as ETFs play a greater role in supplying liquidity in what has otherwise been a pretty illiquid corporate bond market.

When you think about the dynamics of ETFs playing a longer role longer term, is there anything in there that you're particularly concerned about as these passive products grow as a percentage of the market?

Do you think that really increases your regulatory bull's-eye here?

And while it still a relatively small piece of the market now, do you think there's a natural cap on how much of the market ETF can make up?

Our view of ETFs is a bit different.

We think it actually enhances the liquidity of the markets because of the transparency, so you know what the underlying securities are.

There's a market in those and then there's a market of those as a whole.

And in periods of volatility, we've actually seen very little creation or redemption of any of those assets.

We've actually seen the ETF trades themselves.

We think it enhances the liquidity and therefore we think this market could continue to grow.

We don't really -- I wouldn't agree with you on the illiquidity in the corporate bond market.

It's just that it's been more one-sided because there's more demand right now, so there really isn't the large secondary market.

I don't call that illiquid.

I call that over demand for yield securities because of the environment.

So if interest rates rise, that will change a bit, but we think that this has been providing good opportunity in the marketplace.

Just think of how large the fixed income market is and when you take a look at that, any percentage, any small percentage increase in ETFs of the fixed income market is going to be very substantial and very large.

So we're very bullish on the future of ETFs and how large they can grow relative to the fixed income market.

But let's talk about market dynamics a little bit.

ETFs are far more liquid and constructive versus a mutual fund.

And ETF throughout the day has a buyer that matches with a seller, so every time you have a buyer matching a seller during the time, the underlying assets are not traded.

And so this is one of -- people don't understand -- when talk about this, they're just not talking about the market dynamics.

So for every buyer there's a seller.

You're not creating or redeeming the underlying assets.

So for during the market opening, the ETF is providing more liquidity.

When you think about a mutual fund, a mutual fund in bonds is accumulating buys and sells throughout the day and at final end of the day, they find out if they have to sell the underlying stocks -- or excuse me, bonds at the end of the day or the next morning to get the cash.

So the ETF actually is, as Rob suggested, a provider of liquidity.

It also creates a transparency of where the markets are, and this is another surprise to me on the narrative, the narrative that you are able to transact bond sales and purchases en masse by utilizing one stock.

You're able to reduce the underlying assets and the need for a lot of sales of bonds, or lot of purchases bonds, inter-day.

That's a major component of why ETFs are additive to the liquidity and more importantly, they create transparency.

We've been telling the story for years.

We witnessed it.

The Federal Reserve actually came out with a research report -- this is more related to emerging market equities, on the same construct that it provided liquidity.

So we're still dismayed at the narrative.

I'm sorry.

I wasn't trying to imply that ETFs were part of the problem.

I was just talking about dealer inventory levels in a relatively illiquid corporate bond market.

Well keep in mind, I don't know how dealers report because this is a stock.

More and more dealers are big market makers in ETFs and if it's under the equity desk, a bond ETF, because of an equity, that's a major component of the business today.

Okay.

I appreciate all the color there.

Thanks very much.

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

Mr. Fink, do you have any closing remarks?

I just want to thank everyone for joining us this morning and for your continued interest at BlackRock.

Once again, our second-quarter highlighted the investments we've made over many years to enhance the differentiated platform that we have, a platform that's diverse, a platform that's global, a platform that can work in both alpha and beta products.

I believe the second quarter was a good testimony to all that build out.

We continue to take a long-term view and hopefully we're staying ahead of our clients' needs and most importantly, as I suggested, when we have 3,000 clients calling into a BlackRock Institute call, we are winning more and more hearts and minds of our clients, which in my deepest hope, that leads to larger share of their wallet.

If we continue to do that, we'll continue to drive performance for our shareholders in a landscape that is obviously very volatile.

Everyone, have a good quarter and we'll talk to you next quarter.

Thank you.

This concludes today's teleconference.

You may now disconnect.