貝萊德 (BLK) 2015 Q3 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 third quarter 2015 earnings teleconference.

Our host 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.

Thank you.

Good morning, everyone.

I'm Chris Meade, the General Counsel of BlackRock.

Before we begin, let me remind you 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, 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 see today.

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

So with that, let's begin.

Thank you, Chris.

Good morning, everyone.

This is Gary Shedlin.

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

Before I turn it over to Larry to offer his comments, I'll review our quarterly financial performance and business results; and as usual, I will be focusing primarily on our as adjusted results.

Against a changing market back drop, BlackRock's third quarter results demonstrate the stability of our diverse global platform, highlighted by continued organic growth, stable operating margins and systematic capital return.

Third quarter revenue of $2.9 billion was 2% higher than a year ago, while operating income of $1.2 billion was up 1%.

Earnings per share of $5.00 were down 4% compared to a year ago, reflecting lower non-operating results and a higher tax rate in the current quarter.

Non-operating results for the quarter reflected $6 million of net investment gains, largely driven by gains on private equity and real estate investments, which offset market driven losses on certain hedge funds and unhedged or partially hedged multi-asset and fixed income seed investments.

Our as adjusted tax rate for the third quarter was 29.3%, compared to a 26.2% a year ago, reflecting several favorable non-recurring items.

We currently estimate that 30% remains a reasonably projected tax rate for the fourth quarter of 2015, and based on what we know today reflecting changes in our geographic business mix, estimate that 31% is a reasonable projected tax rate for 2016.

BlackRock generated $35 billion of quarterly long-term net flows, representing an annualized organic growth rate of 3%.

Flows were positive across investment styles and client types, reinforcing the value of our broad based, diversified business model.

In a volatile market characterized by double digit quarterly declines in a number of global equity indices and significant FX movement, clients continue to look to BlackRock for strong risk management and long-term investment solutions.

In total, market depreciation and FX impact reduced the value of our assets under management by approximately $265 billion during the quarter.

Over the last 12 months, BlackRock generated approximately $186 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 contributed to a favorable overall change in our base fee mix.

Third quarter base fees were approximately flat year-over-year, despite over $200 billion of negative FX impact to market depreciation over the last 12 months.

On a constant currency basis, we estimate that quarterly base fees grew approximately 3% year-over-year.

Sequentially, base fees were down 3%, due to lower quarterly average AUM, a seasonal decline in securities lending activity, and the impact of divergent beta on our fee rate, as emerging and commodities markets under performed developed markets.

Going forward, our forth quarter entry base fee level will be impacted, as we enter the quarter with lower spot AUM than our average AUM for the third quarter.

Performance fees of $208 million were up 56% from a year ago and, while broad based, benefited from a single European hedge fund that delivered exceptional full year performance and locked in the third quarter.

BlackRock Solutions' revenue of $167 million was up 1% year-over-year and 4% sequentially.

Aladdin revenue, which represented 81% of BRS revenue in the quarter, grew 11% year-over-year, driven by several sizeable client implementations and has now more than doubled since 2009.

Strong connectivity between our BRS and institutional client teams is facilitating improved dialogue with our most sophisticated clients, as we continue to see increased demand for global investment platform consolidation and multi-risk solutions.

Revenue in our Financial Markets Advisory business was down $11 million from a year ago, though flat sequentially, as revenue in the third quarter of 2014 reflected the impact of several large ECB AQR advisory assignments.

Despite lower levels of opportunistic revenue post financial crisis, FMA is benefiting from a more stable revenue profile, driven by an increased number of mandates and more repeat engagements in the current market environment.

Total expense rose $48 million year-over-year, or 3%, driven primarily by compensation expense which increased $52 million from a year ago, due to higher headcount, higher levels of performance fees and increased deferred compensation expense, partially offset by the impact of a stronger dollar.

G&A expense decreased $7 million from a year ago, due to lower levels of marketing spend offset by a lower benefit from the FX impact of remeasuring dollar exposures held overseas to their respective functional currency.

Recall that our GAAP G&A expense a year ago reflected an additional $50 million charge related to the reduction of an indemnification asset which has been excluded from our as adjusted results.

Sequentially, G&A expense increased $7 million, primarily due to higher levels of professional fees in the third quarter.

Our third quarter as adjusted operating margin of 43.9% reflected expense awareness in the current market environment.

Looking forward, we continue to be mindful of our discretionary level of spend as markets evolve, but currently anticipate a higher level of G&A spend during the fourth quarter driven by seasonal factors and transaction-related expense associated with recently consummated acquisitions.

As we stated in the past, we do not manage the business to a specific margin target.

We do remain keenly focused on delivering long-term value to our shareholders and will work to strike an appropriate balance between strategic investment needs and prudent discretionary expense management.

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 a consistent, systematic matter.

In line with that commitment, we closed the acquisitions of I Cuadrada, the leading independently managed infrastructure investment business in Mexico, and Future Advisor, a leader in digital wealth management, earlier think month.

We do not expect these transactions to have a material impact on BlackRock's consolidated financial results.

During the third quarter, we also repurchased an additional $275 million worth of shares and view that as a good planning rate for the remainder of the year.

In a quarter where our clients faced significant market volatility, BlackRock generated $50 billion of total net flows, including $35 billion of long-term net inflows, reflecting benefits of a diverse investment and distribution platform and a commitment to alpha generation.

BlackRock's global retail franchise saw long-term net inflows of $7 billion, positive across all asset classes, representing 5% annualized organic growth for the quarter and 10% organic growth over the last 12 months.

International retail net flows of $5 billion were paced by strong flows into international equities and on constrained fixed income, highlighting the global nature of our platform.

BlackRock's US retail business generated long-term inflows of $2 billion, demonstrating resilience in what was a challenging quarter for the US mutual fund industry.

BlackRock's flows were led by broad based fixed income activity, where strong and consistent performance across the platform continues to differentiate us despite industry outflows in a number of product categories, including unconstrained fixed income and high yield.

Global iShares generated $23 billion of net new flows, representing 9% annualized organic growth for the quarter and 12% organic growth over the last 12 months.

IShares' value proposition, especially with respect to liquidity and transparency, was extremely evident in a market characterized by heightened volatility and year-to-date flows remained in record territory.

IShares fixed income inflows of $18 billion reflected ongoing adoption of ETFs as a means of rapidly accessing and investing in fixed income markets.

IShares equity inflows of $5 billion were led by flows into developed market exposures, including our Japan and Euro zone funds.

We saw increased investor focus on risk aware smart beta products, with our Minimum Volatility funds raising more than $2 billion during the quarter and gaining the number one ranking within the domestic product category.

Our institutional client business saw over $5 billion in quarterly long-term net inflows, driven by higher fee active offerings as clients increasingly partner with BlackRock to generate alpha across active solutions and alternative mandates.

Institutional active net inflows of $6 billion reflected over $4 billion across fixed income strategies and nearly $2 billion into core alternatives and marked our sixth consecutive quarter of active institutional inflows.

Alternatives flows were broad based, including infrastructure, private equity, real estate, fund-to-fund and alternative solutions offerings.

In addition, strong fundraising momentum continued, with an additional $1 billion of illiquid alternative commitments raised in the third quarter, bringing total unfunded commitments, a source of future inflows, to approximately $11 billion.

Overall, our third quarter results reflect the benefits of the investments we've made to build a differentiated global business model.

Diversification across investment styles, distribution channels, products and geographies enables us to serve clients irrespective of market environment or investment preference.

Our goal remains to deliver consistent and differentiated growth over time.

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

Thanks, Gary.

Good morning, everyone.

Thank you for joining the call.

Our third quarter results were driven by clients' continued trust in BlackRock's ability to manage risk and deliver holistic investment solutions, as they look to achieve long-term goals and navigate uncertainty in an increasingly volatile economic environment.

A slowing economy in China, persistent weakness in commodity prices, uncertainty around the Fed's decision on rates, and continued fluctuation in currency valuations has contributed to a significant declines in global markets.

Emerging market equities were down 19%, natural resources stocks were down 23%, and European and US indexes fell 9% and 7%, respectively, in just the last quarter.

Government actions continue to influence markets, as central banks' policies have caused imbalances in interest rates and currencies.

Emerging market currencies have experienced significant volatility, falling nearly 9% in the third quarter before rallying over the past several days.

More than ever, our clients value the model we've built at BlackRock.

BlackRock's global multi-product platform, our market-leading risk management capabilities through Aladdin, and our focus on long-term solutions enable us to have a more robust conversation with more clients as they address portfolio composition and asset allocation.

These conversations are not just focused on what products BlackRock can sell.

They are focused on outcomes our clients are looking for and how we could bring together capabilities across our global platform to help our clients achieve their goals.

This approach has resulted in a stronger, longer lasting relationship with our clients than ever before, which truly contributed to more than the $50 billion of net inflows this quarter.

Clients not only turn to BlackRock to manage assets, but to help them to understand the longer term impact on developments in the financial landscape.

The BlackRock Investment Institute continues to lead that discussion and hosted several client calls in the third quarter to address market volatility, with BII's most widely attended call reaching more than 4,000 client participants.

This heightened level of client engagement is translating into consistent growth and BlackRock saw $35 billion of long-term net flows in the quarter, positive across, as Gary suggested, in investment styles and client types.

The fact that we are seeing such diverse inflows in a volatile market speaks to the power of our platform that we've built over time at BlackRock and the differentiated experience we provide to our clients.

We continue to grow our global distribution footprint and product set to serve a diverse set of clients with a holistic range of outcome oriented solutions, as clients are looking for income and uncorrelated returns in the current investment environment.

In the US, we anticipate client demand for income focused products; and since they were launched, our Strategic Income Opportunity and Multi-Asset Income funds have garnered more flows through the third quarter than any fund in these categories, with more than $35 billion of total inflows.

Building upon the strength of these funds in the US, our global versions of BlackRock Unconstrained Fixed Income and Multi-Asset Income funds are gaining momentum with clients internationally.

Year-to-date, FIGO, our global unconstrained offering, saw net inflows of $3.8 billion, and our Global Multi-Asset Income Fund saw net inflows of more than $1.4 billion.

On the institutional side, client demand for active fixed income and alternative strategies continues to drive positive organic base fee growth.

For example, while official institutional clients have generally been environmentally driven net sellers in low fee index equity exposures, we have seen enhanced demand from the same clients for our active and alternative products and solutions, which have driven positive overall revenue growth among these clients this year.

And this is from focus that we've talked about over years, having clients navigate from index into active and back and forth.

And the biggest differentiating feature of BlackRock today versus a few years ago, we have both active and passive products.

BlackRock recognizes that even the most comprehensive and global set of solutions will be insufficient without strong investment performance.

As a global firm, our objective is to outperform consistently throughout our entire investment platform.

We remain focused on embracing a team-oriented approach, leveraging our connectivity, our knowledge sharing forums, and translating all this information into insights from technology and big data to drive top tier performance across all asset categories and investment strategies.

We've seen consistency in areas where we were strong and improvement in areas where we've been reinvesting in talent.

In our Scientific Active Equity business, 97% of the AUM performed above benchmark, our peer medium, for the three-year period.

And in our active taxable fixed income business, 90% of assets performed above benchmark, or peer medium, for three-year period.

Over the last few years, we've invested in our fundamental equity business in hiring new talent in technology and in unifying this global equity platform to be more effective to tap the resources entirely throughout BlackRock.

We're seeing the benefit of this investment and in our fundamental active equity business 80% and 58% of our AUM is now above benchmark, our peer medium, for the one-year and three-year, respectively.

And importantly, our global platform continues to deliver results.

BlackRock's European and BlackRock's Asian Fundamental Equities platform have 99% and 91% of their assets, respectively, above benchmarks, or peer medium for the three-year period.

Investors continue to turn to iShares amidst the heightened volatility to gain market exposure and enhanced portfolio construction; and iShares saw, as Gary discussed, $23 billion in net total inflows.

IShares captured the number one market share of the net new business globally in the US and in Europe and in the third quarter year-to-date.

IShares flows were driven by fixed income, as investors utilized fixed income ETFs as an effective tool for diversification and liquidity.

Equity flows were driven by $5 billion into European listed iShares, and we saw positive inflows in Canada and Asia Pacific, as well.

Extreme market volatility resulted in a disjointed market open on August 24.

Lack of pricing clarity, widespread delayed in stock openings, and an unprecedented number of trading halts impacted a large number of both US-listed single name stocks and equity ETFs.

We have spoken with many different market participants and, based on our own experience and these conversations, we have made several recommendations with respect to US equity market structure in a viewpoint article titled "US Equity Market Structure Lessons from August 24", which we published on our website last week.

Demand for iShares has remained strong and net iShares flows following August 24 has been robust, at nearly $25 billion through yesterday.

Despite near-term market fluctuations, we continue to focus on the long run by investing in areas that we believe will result in a more complete offering for our clients and delivering value for our shareholders.

Over the last two years, our institutional clients rebalancing survey indicated that institutions plan to increase allocations to real assets.

We continue to expand our real asset offerings, including BlackRock's Infrastructure platform, which provides clients with current income, diversification, income protection, and potential for capital appreciation, while helping to drive economic growth and job creation.

As Gary mentioned, earlier this month we closed on the acquisition of I Cuadrada, Mexico's leading infrastructure investment firm, and BlackRock now manages nearly $7 billion in infrastructure investments on behalf of clients worldwide.

Technology is another area where we've built on our existing strength through recent investments to enhance the way we serve our clients.

We continue to enhance our Aladdin platform by building out our multi-asset capabilities, driving 11% revenue growth year-over-year; and we're seeing growing demand, as investors become more focused on risk management in the evolving financial and regulatory landscape.

Earlier this month, we completed the acquisition of Future Advisor, a leading digital wealth management platform.

As consumers increasingly engage with technology to invest, BlackRock and Future Advisor are positioned to empower our distribution partners to better serve their clients by combining Future Advisors' high quality, technology-enabled advice with BlackRock's multi-asset investment capabilities, our proprietary technology and most importantly, our risk analytics.

We've built and continue to invest in our platform and our people so that we could have a deeper dialogue with our clients and deliver consistent results for our shareholders, especially through times of heightened uncertainty.

On a very personal note, as many of you know, Charlie Hallac, who was named our Co-President last year, passed away in September following a lengthy battle against cancer.

Charlie is missed by many of his friends across BlackRock.

Our greatest tribute to him will be to carry forward his life work by continuing to deliver excellence to our clients, to constantly innovate and, more importantly, to look relentlessly for ways to evolve, as Charlie always did.

Finally, I want to thank our employees for the continued focus and dedication in creating better financial futures for our clients.

So let's now open it up for questions.

(Operator Instructions)

Your first question comes from Robert Lee with KBW.

Thanks.

Good morning, guys.

Hello, Robert.

How are you?

Great, thanks.

Just maybe a question starting with the iShares business.

And clearly, flows there have been strong across a variety of products.

One of the things it feels like you're seeing, or starting to see, is a surge of firms crowding into, I guess, what I'll call the smart data space.

Just curious if you're seeing any impact from this in terms of price competition or your thoughts about how that may or may not evolve, particularly as it relates to price competition?

Let me allow Rob Kapito to answer that.

So most recently, we haven't seen the price pressure that we had seen in the past.

That has settled down.

Certainly, comers in the market may look to use price as one of the ways to enter the market.

But I haven't seen that, really, in the last quarter.

Going forward, I think smart beta is one of the areas that's going to continue to be a successful product and a necessary product.

We currently have about $125 billion in client assets across a variety of factor-based products and smart beta products.

We actually recently hired Dr. Andrew [Hang], and he is going to lead our factor-based strategies group so that we can lead in the factor-based investing and portfolio construction.

And we're going to combine our skill set and his systematic investment skill set, along with Aladdin, to focus on the factor and the smart beta area.

So I think you are astute in seeing that's something that clients are going to look for.

We already have a number of these.

One is our minimum volatility fund.

We've raised about $2 billion.

And we are the leader in US ETFs in the smart beta area.

But just to step back on the price, please keep in mind that price is only one reason why people buy ETFs.

They're looking for precision or, in what you're discussing, a new approach, using smart beta or factor investing.

They're certainly looking for liquidity, which means you have to have a fund that has some sort of size.

And depending upon the type investor, they could be a core investor, which we call a buy and hold, or they're looking to be more active.

So price is important, but it's only one aspect.

And I just haven't seen the price pressure that we've seen a year ago and up to the first half of this year.

All right.

Great.

And maybe as a follow-up, just looking at the multi-asset class products.

That actually had a little bit of outflow, wasn't too much, but a little bit.

But that's a category that for years now has been pretty consistent solid inflows quarter after quarter.

So I'm just curious, was there anything unusual that quarter that may have driven that or anything we should be looking at in that product line, product set?

I don't think there's anything unusual.

The multi-asset product segment is a segment that clients have felt very comfortable on the long-term performance of that, and they sometimes use those products as a cash alternative.

And so when there are movements in and out of the markets, risk on, risk off, they use that particular product.

And in the last quarter, we've seen a lot of risk off trades, and that product has been used for that.

But there's nothing out of the ordinary.

We're seeing flows now in that area.

The performance is good.

So it's really just an aberration over the quarter.

And I would say one other thing, Robert, specifically in the third quarter, we had one client move from multi-asset into an alpha product.

So as Rob said, people are utilizing that, but one client actually had greater conviction and went into a totally oriented market exposure alpha product.

Your next question comes from Bill Katz with Citigroup.

Hello, Bill.

Good morning, everyone.

Thank you very much for taking my questions.

Obviously, a very good flow story for the quarter.

Maybe to pick on one of the areas that was a bit weak, just to get your perspective on what might be going on underneath that, could you talk a little bit about Asia-Pac?

Is this just risk on, risk off for the market, and what do you think might reverse some of that recent attrition?

Well, there are some very large -- without getting into client details or any client -- there are some very large movements from some clients that are actively moving out of government securities into more risk-oriented securities.

That's pretty well advertised without me going into the specifics of that.

We have seen some clients, because of cash needs have been selling products.

So I think Asia-Pac has been dominated more by three or four large institutions moving around.

I think I'm talking about the whole ecosystem of the markets.

And then what we saw, as we saw more consistent flows in Asia-Pac iShares.

We are seeing actually more utilization of dollar assets today related to our institutional clients.

And I would say in some parts of Asia, as Rob suggested, in the fourth quarter, there's more and more movement toward multi-assets.

So I don't see any major change in the specifics of BlackRock in the third quarter.

We did have index outflows in APAC; however, as they suggested in my formal speech, some of these clients moved into more active products, and so we had actually a positive overall revenue growth in that region.

So I would say nothing that was extraordinary, just some large actions.

And I think you're going to see a consistent growth out of Asia-Pac overall, as some of the major clients are looking to invest in more global products away from their host products or host country products.

So we feel good about Asia Pacific and Australia right now.

That's helpful.

And then just a follow-up.

And this might be a little too early, but I'm sort of curious.

There's been some recent rule changes promulgated by the SEC around mutual fund liquidity.

Can you talk about how you see that playing out?

Obviously, nothing is in written form quite yet in terms of where the industry has to go.

But might some of the pros and cons of that regulatory change might be for the business?

So obviously, this is a proposed -- it's up for comment to the proposed liquidity risk management role.

And also, they're focusing on stress testing funds.

I think it's very important that we have better disclosure on liquidity for all funds, we have better disclosures on stressing funds.

There is certainly more and more dialogue about one directional trades worldwide from the regulators.

And so I actually believe the SEC is leading this effort in trying to come up with the appropriate analysis to help guide investors understand the embedded issues, risk or opportunities, in mutual funds.

So we look at this as a net positive and we are always in favor of better disclosure.

The one cautionary thing we would say to any regulator, let's not make retail products less competitive than institutional products.

So for instance, if they suggested that a mutual fund product should have a higher cash buffer, and that would probably mean most institutional clients would move to a separate account, we may not achieve what we're trying to achieve.

So we are in favor of better disclosures.

I think through better disclosures, you're going to have better processes, possibly stress testing a fund, depending on the methodologies, that may work, too.

So we have an open mind.

And I don't know, Bill, exactly where it's going, but we want to play a constructive role globally on these issues.

Because if I would say, as we talked about over the last few years, regulators worldwide have gone from analysis of firms related to SIFI designation to activities.

And we were a big supporter of that as a firm.

And these are the type of activities that most certainly the regulators are going to be focusing on.

And as I said, we have constructive, positive dialogue with the regulators throughout the world on this.

So we'll wait and see.

Okay.

Thanks for taking my questions.

Your next question is from Ken Worthington with JPMorgan.

Hello, Ken.

Hello.

Good morning.

First on iShares, you highlighted about a year ago the opportunities for ETFs in Europe, given changing regulations.

Today you highlighted European iShares as one of the reasons that equity iShares sales were so strong.

So are things coming together with regulation in European ETFs, and is this really the beginning of the beginning for European ETFs?

I'm going to let Rob answer it.

And let me just start off in saying, and then Rob will -- because he has much more texture on it.

Regulation has evolved in Europe.

Regulation in terms of the inability to pass on fees have led to, obviously, more opportunities with ETFs, and we are beginning to see that.

I would also say specifically about European ETFs and the equities, we are seeing more interested investors in equity exposures in Europe.

So I think that is a single -- that's a trend as a market exposure trend, but I think distribution trends are going to lead to a much greater reliance by distribution platform utilizing ETFs.

We actually have also, you saw, Ken, that we had positive inflows in our mutual fund platform.

And we had consistent mutual fund flows in our EMEA operation.

So I think the third point that I would make -- and I'll let Rob go into the specifics -- I think our positioning in Europe is just getting stronger in both mutual funds and ETFs.

Rob?

So I would just say there's two movements, one in Europe, certainly with the RDR rules.

People are moving more towards advice and asset allocation.

And when you look at that, the best product to achieve that is iShares, or ETFs.

And so we're seeing continued demand because of those rules being so important.

But we're also seeing the same thing in the US, where clients are using iShares for asset allocation purposes.

And that should bode very well for ETFs going forward.

And the last trend is the products are trending to be more global products, rather than just US and just European.

The global products are also seeing some demand.

So some of it's from changes in regulation, but a lot of it is due to education and people having knowledge that iShares can actually play a big role in achieving the results that people want in their portfolios.

Great.

Thank you.

And then sovereign wealth funds have been in the media again.

Maybe discuss how diversified BlackRock's exposure is between commodity-related sovereign wealth funds and maybe non-commodity related funds.

And is exposure of BlackRock weighted to any particular size or asset class?

I was thinking active versus passive and/or fixed income versus equity.

Thanks.

Ken, that's a great question, and is a question that I'm not going to answer, because I don't talk about my clients.

It's just something -- we have never made even any reference to any specific sovereign wealth fund or anything.

So I'm going to leave it at that.

Worth a try.

Thank you.

(Laughter)

Your next question comes from Craig Siegenthaler with Credit Suisse.

Hello, Craig.

How are you?

Good morning.

So maybe first, you just hit on fixed income here.

Very good results across all three of your fixed income bases.

And it looks like [low interest rate] was a large driver for retail.

But are there any underlying themes that really surprised you in fixed income in this quarter?

Well, I think the narrative about high rates and what does it mean for fixed income flows is just an entirely incorrect viewpoint.

And this is one of the key elements of what I think is differentiating BlackRock.

We're focusing on helping clients meet the needs of their liabilities.

Many clients have liabilities that are very long dated.

Many clients have under invested, and so they actually have a gap between their length of the duration of their liability versus the duration of their bonds.

As interest rates rise -- if they rise, and I think they will rise one day -- we are actually going to see an accelerated movement towards clients buying longer duration assets.

And I'm not talking about the trading strategies, but clients that are pension fund oriented or long dated insurance type of products, they're going to use this as an opportunity to buy different long dated assets.

Clients who were more interested in any trade, obviously they're going to get out of the long duration and move into the low duration or something like our strategic income opportunity fund, where they are not going to be constrained to a duration.

It will be in an unconstrained product.

So what the third quarter saw, we saw lots of movement.

We saw some clients who were adding duration.

We saw some clients reducing duration.

We saw some clients taking advantage -- and this is one thing that I haven't seen in the narrative -- we have clients who are taking advantage of the rising high yield market, because high yield under performed in the third quarter, and we saw clients moving back into high yield because of the coupon and a risk-adjusted basis in the category are achieving their needs to match their liabilities.

So this is an important component of why I believe we have differentiated ourselves, because we are working with our clients trying to keep the narrative on what is their outcome that they're seeking.

It's not about trading in and out.

It is about how can they best achieve a composition of assets to meet their liabilities.

And by continuing to drive home this concept of long termism and outcomes instead of the noise of the moment has allowed us to have deeper dialogue.

And I think the flows in fixed income have shown the results of having deeper dialogues and focus on outcomes.

Got it.

And I just have a follow-up here on multi-asset.

Just given the softer results in 3Q in this one product set, could you give us an update on the three main funds here, Global All, LifePath, and also Multi-Asset Income?

Gary?

Absolutely, Craig.

So I think that there's been, as Rob talked about, and I think Larry has talked further on, we've seen some movements in the multi-asset category.

MAI -- and keep in mind, I think also, as just one other additional point, is that when we talked about multi-asset, that you're looking at, in the context of our reporting, we're really talking about the bundled outcome products that I think you're talking about.

There's lots of other multi-asset discussions and solutions that going on around the firm that, frankly, fit into lots of other categories.

But as you talk about bundled products, like LifePath and Global All, which obviously, two of our flagship products, they did see flattish flows in the quarter.

And I think while we would say that MAI's flows were not as strong as prior quarters, it still was positive to the tune of $500 million and it still remains a top selling, or the top selling, multi-asset income fund since its launch about three years ago.

Larry talked a lot about SIO as another similar product, which is a fixed income product.

And obviously that, and in addition to that, with LDI and some other things, we've seen very positive flows there.

But there's no question that as we saw some slowing flows, whether it was MAI, DDG, or even LifePath, we did see slowing of the flows.

I think it's early for us to figure out whether, in particular around target date, that is an industry phenomenon or not.

Obviously, we did see unprecedented volatility.

I think that if we actually look across a lot of those products with respect to the different dates, we definitely did see more flows in so-called near-term maturity dates as opposed to the long term, which may suggest that as people who are looking to basically approach retirement more quickly, they saw volatility and were deciding to eliminate some of the equity exposure in the near term.

But I think we'll be watching that very closely and see to what extent those change direction in the next few quarters.

Thanks, Gary.

Your next question comes from Michael Cyprys with Morgan Stanley.

Hello.

Good morning.

Thanks for taking the question.

Hello.

How are you?

Good, good.

Could you talk a little bit about the opportunity for ETFs being used as an alternative to futures contracts, and then also ETFs being used as a form of collateral?

How do you see those opportunity sets progressing today and how much, would you say, of your book is in that capacity right now?

And then just maybe if you could touch upon some of the longer term opportunity sets there.

Thanks.

So this is the beauty of ETFs that we constantly have been finding new uses for the product.

So as futures became more expensive to use than ETFs, it opened up a whole new world that we didn't even think about, because of the collateral cost behind future contracts.

So when we are going into the capital markets, and we are meeting lots of fixed income and equity clients and having these discussions and talking to them about uses, most of the time we walk away with some other ideas that we didn't think about that they have needs for.

So as you know, now ETFs are being used as a surrogate for futures across many institutional accounts.

And we think that's going to continue.

And how big can that be?

Just think about the size of the futures market.

And certainly, regulation is going to play a big role in that, as well.

So as capital costs are going up for a lot of institutions, ETFs are starting to play a bigger role.

So that's sort of where we're at.

And I would tell you in the fixed income side, fixed income really lagged the equity market when it came to new uses.

And we have added a bunch of people in our capital markets group for iShares to go out and to really work with different institutions in both education and also both learning what some of the needs are so that we can innovate those products for them.

Okay.

Thanks.

And then shifting to the institutional index side, could you talk about some of the opportunity sets they are converting some of the lower fee institutional index mandates to higher margin or higher fee oriented mandates, so basically increasing the share of wallet or moving upstream and shifting the share of wallet?

How big of an opportunity set is that, and is there any low hanging fruit left?

Any color around that would be helpful.

I think the opportunity remains to be quite large, as we saw in our investment survey that clients are looking to add more alternatives.

And this is worldwide, across the globe.

This is one of the big reasons why we are building out our infrastructure platform, continuing to build out our hedge fund platform, our real estate platform.

So as I said earlier, we are in deeper conversation with clients than we've ever been before.

Much of it has to do with the quality of our relationships, our focus on risk management, and our ability to deliver solutions.

That sounds like a lot of talk, but that positioning has now transformed us to have those dialogues.

Five years ago, in many relationships where we strictly had a beta relationship, we were not, we did not have the ability to provide the products or have the dialogue with many more clients.

I believe today, we have more dialogue, we have deeper dialogues with clients worldwide that is going to allow us, if the opportunity prevails, when a client is looking to reduce beta exposures to go into other forms of alpha exposures, whether it's just active equity management, active fixed income or alternatives, we have those dialogues.

And once again, I do believe the third quarter is starting to show that evidence that we're able to navigate.

Rob and I spend a great deal of time on the road.

We're constantly reminded that if we could provide this holistic solution to our clients and we can provide a deeper analysis of what the needs of our clients, we have seen consistently that we're able then to have a broader product range solution for our clients.

And as we continue to drive that and build these relationships, I think you're going to see that navigation in our flows and our business.

If you look specifically in the third quarter, we grew many different types of alternatives.

We had $2 billion in positive flows.

We had another $1 billion in forward commitments.

And the most positive thing I could tell you related to those flows, those flows principally came in six different products, which is another statement of the growing product breadth that we are developing for our clients.

Great.

Thanks.

Your next question comes from Alex Blostein with Goldman Sachs.

Hello, Alex.

Hello, Larry.

Good morning.

So sticking with the regulatory line of questions, we've gone through a bunch of comments from the industry on the DOL proposal, looks like we're getting a little bit closer to some sort of a final ruling, and looks like a lot of things will come through as they were written.

So maybe hoping to get your perspective on what risk and opportunities does that create for BlackRock (inaudible) about the rule set today?

You know, I don't know.

I don't know how the rules are going to be coming out.

On the surface, it will change the relationships with the distribution partners with their clients.

We have to adapt our business with our distribution partners on that business.

I think one thing is very clear how this all plays out is that it means greater emphasis in beta products and ETFs.

But until we see how this is rolled out -- and we've had comments on it that are very public about our opinions related to the DOL fiduciary role.

I would also say that if investors feel more confidence because of however the DOL rule plays out, that if investors feel more confident that they can invest fairly, securely, we're all benefited by that.

Now I'm not sure how that will play out.

But we've always believed if we could have a marketplace where our clients feel more secure that they have an opportunity to earn a fair return over a long cycle, everyone will be benefited by that, the clients, obviously, our distribution partners, and the investment management team.

So once again, we've tried to take a constructive approach to the SEC, mindful that some of the SEC fiduciary rules would change the relationships with our distribution partners, and we tried to work with the regulators in terms of finding a sensible solution that meets the challenges of our distribution partners, the asset manager, but importantly, giving the end client the trust that they need in terms of investing for the future.

Okay.

Thanks for that.

And then on the product side of things, was hoping to get a little bit more color on the active equity business.

Nice to see flows turning positive here.

I guess it's one of the better quarters we've seen in a little while.

So any granularity in terms of where the strength has been coming from, whether it's Scientific, I think you highlighted that in the press release, or the fundamental equities, where we're starting to see some turnaround.

So where we're starting to see the biggest turnaround is from the Fundamental Active Equity business.

We spent a lot of time and money, as you know, in trying to rebuild our effort there and the teams.

and I feel very good about this.

Certainly in Europe, our team there has been together longer.

Their record across-the-board is now very strong.

And now we're starting to see the same efforts in the US through our Capital Appreciation Fund, our Equity Dividend Fund.

So the performance is actually really good.

Now on top of that, the Scientific Active Equity group, the more quantitatively driven and model driven portfolios, the three-year record, which is what a lot of the consultants look at, 98% of the assets are above the benchmark, or peer median.

We had work to do domestically.

And today, the Fundamental Active Equity business, 81% of the assets are above the benchmark for the one-year period.

So as time goes on, the performance is really much better.

So when you see better performance, it translates directly into flows.

And we're starting to see those flows.

We're having much better dialogue with our consultants, who are now putting us in the mix for proposals.

And we're also internally very focused on building out the equity effort.

And you're going to hear a lot more from us, from our marketing teams and the rest of the teams across the firm, because we are going to be much bigger in the Active Equity space.

And we're very happy to have the performance to back that up.

So very important part.

We're still building, we're still adding people, but we're getting results and seeing good, positive feedback from our clients now.

Let me just add one more thing, as I said in my prepared remarks, the strength of our performance, 90th percentile for our Asian equities and European equities.

We are seeing flows in those categories.

And we continue to be differentiated.

And I truly believe, as the market settles down, we believe the category where many investors will be seeking market exposures, and that's going to be in Asian equities.

And with our performance, I would think over the next few years, we're going to see accelerated flows there.

And just to drill down, as you asked, just a couple notes for you.

Our Equity Dividend product is now in the 37th percentile.

Our Basic Value has come from the 51st percentile to the 20th percentile.

And our Large Cap Core has risen from 76th to the 29th percentile.

Those are big moves, and I believe those are sustainable.

And it's just the beginning of what we can do when we combine the knowledge and the communication across the platform.

Got it.

Thanks for all the color there.

Appreciate it.

Your next question comes from Brian Bedell with Deutsche Bank.

Hello, Brian.

Good morning, folks.

Just to go back on the SEC liquidity rule proposals.

First of all, I know that it's very early, but as they are proposed, do you think it's generally workable for investments in less liquid areas, in high yields and small cap emerging markets?

Absolutely.

I'm sorry?

I'm sorry.

Go on, yes.

And then on the counter side of that, how do you think Aladdin can play a role in this for fund companies, if at all?

So different products have different liquidity sets.

This is one of the reasons why I think liquidity disclosure is a good thing.

You mentioned high yield.

High yield has somewhat less liquidity than an investment grade product.

A Treasury fund has more liquidity than an investment grade corporate product.

You are paid a higher income for those types of returns.

And I do believe having a measurement -- hopefully, it's a dynamic measurement -- will allow investors -- and we're talking mostly retail investors -- having a better understanding.

And so if we can come up with the metrics that is dynamic, that is informative about the liquidity of any one product, and differentiating that liquidity amongst different funds, because some funds, some mutual funds, have systematically always, even in the asset categories of, let's say, high yield have consistently invested in the lower grade high yield with less liquidity, and some mutual funds have invested in the higher grade high yield that had more liquidity.

And so some form of dynamic measurement is probably good.

I actually believe, once again, as investors are becoming more informed and they better understand the risks and the returns, I actually believe it will lead to greater investments in different asset categories.

This is something we should all embrace.

So I don't -- as I said, I look at this as a positive.

It's a constructive way of analyzing.

We just need to make sure that we don't cause so much problems that all institutions run out of mutual funds and go to separate accounts, and we may not be achieving everything that is necessary.

But we want smart investors.

Smart investors is better for the entire asset management industry.

We should not run away from markets that are opaque.

We should always be trying to find ways of making more transparency, in terms of risk.

In terms of Aladdin, greater risk analytics, whether it's liquidity analytics or stress test analytics, is a very large positive for the future direction and needs of clients utilizing Aladdin.

As I said in my prepared remarks, Aladdin is growing 11% a year.

We are in deep dialogue with many clients right now and I feel very good about how Aladdin is the risk management platform of choice by so many investors worldwide.

Great.

Thanks.

And just a follow-up on the retail distribution strategy, especially as it relates to ETFs.

Can you talk about the role of Future Advisor as you -- I guess the stages of planning that out and integrating with your RIA efforts, and also your plans for sales force build to better penetrate the RIA segment?

So we are very excited about what Future Advisor will bring for us.

We believe having better technology to interface with our distribution partners will give us a real opportunity.

It is too early for me to really go into detail how we're navigating it.

But in the early weeks, we've had a refreshingly large amount of interest with our distribution partners and the utilization of this technology.

Once again, through this technology, if we could increase the knowledge base of products, increase the knowledge base of information through this technology, we will have deeper and more robust conversations.

If we can't, our hope is to, and our intentions is to link our Future Advisor technology with our Aladdin technology to help our distribution partners to have both better risk analytics and better client interface information so they can be providing better guidance to their clients.

This is a long-term investment for us.

We're more excited about the investment today than we were as we thought about making the investment.

And as I said earlier, we are thrilled with the response by our distribution partners to have more engagement utilizing this technology.

So it's too early to really get into any details.

But our management team of Future Advisors are running around the country right now having many dialogues and conversations alongside our BlackRock Solution team.

So it is very important to note, because we never really talked about it, putting Future Advisor into our BlackRock Solutions platform really gives us this ability to really create a third-party platform to provide independent information for our clients that was very similar to what BlackRock Aladdin does for our clients, independent risk management.

So we look at this as a great stepping stone for a deeper connection with our RIAs and all our distribution platforms.

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

Mr. Fink, do you have any closing remarks?

Once again, thank all of you for joining this morning and your interest in BlackRock.

Our third quarter results once again highlighted the investments we've made to enhance a differentiated platform, a more diverse platform, a global platform, a risk management platform.

We continue to differentiate ourself by taking a consistent long-term view while staying ahead and navigating the near-term developments in the financial markets.

I think we help our clients by having this diverse, multi-product platform to help them navigate.

And I think the third quarter results speak loudly with those results.

Have a good quarter and we'll talk to you in the New Year.

This concludes today's teleconference.

You may now disconnect.