貝萊德 (BLK) 2016 Q1 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 first-quarter 2016 earnings teleconference.

Our host for today's call will be Chairman and Chief Executive Officer, Lawrence D. Fink; Chief Financial Officer, Gary S. Shedlin; President, Robert Kapito; and General Counsel, Christopher J. Meade.

(Operator Instructions)

Thank you.

Mr. Meade, you may begin your conference.

Thank you.

Good morning, everyone.

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

Before we begin, I'd like to remind you that during the course of this call, we may make a number of forward-looking statements.

We call your attention to the fact that BlackRock's actual results may, 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.

Thanks, Chris, and good morning, everyone.

It's my pleasure to present results for the first quarter of 2016.

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

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

In the context of continued market challenges over the last 12 months, including global equity markets down high single-digits, emerging markets and natural resources each down over 20%, and the continuation of a low, and in many cases negative rate environment, the differentiation and strength of BlackRock's broad global investment platform enabled us to deliver another quarter of positive organic asset growth.

While we are not immune to market headwinds, consistent organic growth and prudent expense discipline allowed us to deliver relatively stable base fees, and increase margins from a year ago, and continue to consistently return capital to shareholders.

Our first quarter results highlight the value of the investments we've made to assemble the industry's broadest offering of active and index investment products, and to deliver differentiated customized investment solutions to our clients.

The diversity of our platform positions us to serve our clients needs in a variety of market environments, helping to drive consistent and differentiated organic growth.

As we stated last quarter, we remain committed to investing in a number of strategic initiatives that will further enhance our client value proposition, and generate long-term value for share holders.

Doing so requires us to make smarter -- to be smarter about reallocating resources in challenging markets.

With that in mind, this quarter we undertook a restructuring to streamline and simplify the organization, with a goal of efficiently optimizing growth.

It will also create new opportunities for our strongest people.

This resulted in a restructuring charge of $76 million during the quarter, primarily comprised of severance and accelerated amortization expense of previously granted deferred compensation awards for approximately 400 impacted employees.

This charge appears as a single line expense item on our GAAP income statement, and has been excluded from our as adjusted results.

First quarter revenue of $2.6 billion was 4% lower than a year ago, while operating income of $1 billion was down 3%.

Earnings per share of $4.25 declined more significantly versus the prior year quarter, driven by a one-time non-operating gain and a lower effective tax rate a year ago.

Non-operating results for the quarter reflected $8 million of net investment gains, and decreased from the first quarter of 2015 due to lower marks in the current quarter, and a $40 million one-time non-cash gain related to the acquisition of BlackRock Kelso Capital Advisors in last year's first quarter.

Our as adjusted tax rate for the quarter was 29.6%, compared to 23.7% a year ago reflecting several favorable non-recurring items.

We continue to estimate that 31% remains a reasonable projected tax rate for the remainder of 2016, though the effective actual tax rate may differ as a consequence of non-recurring items that could arise during the year.

BlackRock's first quarter results reflected $36 billion of long-term net inflows, representing an annualized organic growth rate of 3%, and demonstrated the continued resilience of BlackRock's differentiated business model.

Flows were positive across both active and index and across regions, as positive momentum in March more than offset a slow start to the year.

While organic base fee growth for the quarter was 2% lagging organic asset growth, as strong fixed income flows were offset by outflows from higher fee equity products, over the last 12 months BlackRock's organic base fee growth still remains above our long-term organic AUM growth.

First quarter base fees were down 1% year-over-year as organic AUM growth of $118 billion over the last 12 months partially offset the impact of $148 billion of negative market and FX movement.

Sequentially, base fees were down 4%, despite positive organic growth in the quarter, as first quarter average AUM declined from fourth quarter levels due to significant market declines in January and early February.

Market improvements that occurred at the end of the quarter had a limited impact on first quarter base fees, but should act as a tail wind as we move into the second quarter.

In a difficult period for the hedge fund industry with the HFRX index down 2% in the quarter, performance fees of $34 million decreased significantly from a year ago, driven by declines in the fees associated with single strategy hedge funds, fund of hedge funds, and certain long-only equity products.

Underperformance during the first quarter may have a negative impact on performance fees for the full year, as certain quarterly [locked in] funds are below high watermarks, while others locked based on trailing 12 month performance periods.

BlackRock Solutions revenue of $171 million was up 16% year-over-year and flat sequentially.

Our Aladdin business which represented 82% of BRS revenue in the quarter grew 12% year-over-year, driven by several sizeable clients going live on the Aladdin platform in 2015.

We continue to see strong market demand from institutional asset managers and owners, as they look to consolidate global investment platforms, and understand risk across multi-asset class portfolios.

Additionally, a rapidly changing regulatory and technology environment is driving accelerated conversations with retail intermediaries about leveraging both Aladdin and FutureAdvisor capabilities in the wealth management space.

Non-Aladdin BRS revenue was up $9 million year-over-year, though down $3 million sequentially due to completion of a number of assignments in last year's fourth quarter.

Our Financial Markets Advisory business continues to reflect a more stable revenue profile, driven by a higher level of repeat engagements, and is well-positioned to benefit from changes in the regulatory landscape affecting financial institutions and official sector clients worldwide.

Other revenue was down $12 million year-over-year, primarily due to lower earnings from equity method investments.

Total expense decreased 4% year-over-year and 8% sequentially, driven primarily by lower compensation and G&A expense.

Employee compensation and benefit expense was down $32 million or 3% year-over-year, reflecting lower incentive compensation, driven primarily by lower performance fees, partially offset by a higher headcount.

Sequentially, compensation and benefit expense was down 4%, reflecting lower incentive compensation, partially offset by higher seasonal payroll taxes, and an increase in stock-based compensation expense related to grants of prior year awards.

Looking forward, despite the first quarter restructuring and assuming stable markets, we currently anticipate ending the year with a higher total headcount than we have today, but with a compensation to revenue ratio modestly lower than 2015.

G&A expense was down 6% year-over-year, primarily reflecting lower discretionary marketing and promotional spend, and an increased benefit from the impact of foreign exchange remeasurement.

Sequentially, G&A expense decreased $92 million, primarily reflecting the seasonal and discretionary impact of lower marketing and promotional expense, reduced foreign exchange remeasurement expense, and $23 million of deal-related expense associated with strategic transactions executed in last year's fourth quarter.

As discussed last quarter, we remain extremely expense-aware in the current market environment, and we'll continue to be prudent with our discretionary G&A spend.

At present, and again assuming stable markets, we currently anticipate full year 2016 G&A expense to be approximately in line with 2015 levels.

Our first quarter as adjusted operating margin of 41.6% was up 40 basis points year-over-year and flat sequentially.

BlackRock's ability to generate positive year-over-year operating leverage in a negative data environment highlights our commitment to prudently managing expense, while continuing to invest for future growth.

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, we anticipate closing the Bank of America Global Capital Management transaction later this month, assuming investment management responsibilities for approximately $87 billion of related cash and liquidity AUM.

We've previously announced a 5% increase in our quarterly dividend to $2.29 per share of common stock, and also repurchased an additional $300 million worth of shares in the first quarter.

We saw an opportunity to modestly increase our level of share repurchases during the quarter, as sizeable market moves and changes in the relative valuation of our stock in January and February created an attractive buying opportunity.

We stand by the guidance we've previously provided in last year's fourth quarter, as it relates to share repurchases for the remainder of the year.

First quarter long-term net inflows of $36 billion reflected the diversity of our platform.

Flows were positive for both active and index, and across all regions.

BlackRock's global retail franchise saw minor long-term net outflows, as positive flows in the United States were broadly offset by international outflows.

BlackRock's US retail business generated long-term net inflows of $1 billion, demonstrating resilience from what was a challenging quarter for the domestic fund industry, with US active mutual funds experiencing negative flows during a first quarter for the first time since the financial crisis.

BlackRock's flows were driven by strong long-term investment performance across our fixed income platform, including flows into our total return, high yield, and strategic municipal opportunities funds, all of which are performing in the top quartile for the trailing five year period.

International retail net outflows of $1 billion were primarily related to outflows in international equities and multi-asset funds, amid market uncertainty and industry-wide derisking.

These flows were partially offset by inflows into our natural resources franchise, which benefited from commodities re-risking during the quarter.

Global iShares generated over $24 billion of net new business in the first quarter, representing 9% annualized organic growth with a record fixed income net inflows of $27 billion, partially offset by outflows from developed market equities.

Our institutional business generated $12 billion of long-term net inflows in the first quarter, driven by higher fee active offerings.

Institutional active net inflows of $11 billion represented the eighth consecutive quarter of positive active flows for the business, and reflected BlackRock's strong multi-asset capabilities and top-performing fixed income platforms.

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

Fixed income net inflows were lead by flows into investment grade strategies.

Institutional active equity outflows of $2 billion reflected outflows in our fundamental equities business, partially offset by inflows into our Scientific Active equity business where 98% of assets are continuing to perform above benchmark on a trailing five year period.

In addition, we had another strong fund raising quarter for illiquid alternatives, raising more than $1.5 billion in new commitments, and now have $12 billion in committed capital to deploy for clients.

Illiquid alternatives remain a key area of growth for BlackRock, as our institutional clients increasingly search for additional sources of income and uncorrelated returns.

Institutional index saw $1 billion of net inflows, as strong inflows into LDI strategies were partially offset by outflows from index equities.

Overall, our first quarter results reflect the benefits of the investments we've made to build a differentiated global business model, and our ability to effectively navigate expenses in a challenging data environment.

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

We will continue to be mindful of the tradeoff between growth in margin, looking to strike the right balance between investing in key strategic initiatives, and optimizing expenses.

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

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

Thank you, Gary.

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

Our first quarter results demonstrates that BlackRock continues to earn our client's trust in an uncertain market environments, as we manage risk and deliver investment solutions to achieve our client's long-term investment goals.

Economic, social, and geopolitical instability drove dramatic market swings in the first quarter.

Fears of global recession and the risk of Chinese currency devaluation drove stocks lower to start the year.

Investors continued to struggle to digest lower energy prices, negative rate spreads in Europe and Japan.

And uncertainty grew from political developments in country, including the United States, Germany, Spain, Brazil, and the pending vote in the UK on whether to leave the European Union, pushing global markets down more than double-digit percentages in the opening weeks of the year.

In February, stabilizing commodity prices and more dovish commentary from the Federal Reserve helped sparked a risk on rotation, despite continued policy uncertainties, and questions surrounding global growth.

As Gary mentioned, given the fact that we earned fees on average AUM, we did not realize much of the financial benefit of the market upswing in the first quarter, but we are positioned to benefit from the tail winds going into the second quarter.

It is especially in times like this, marked by volatility and investor uncertainty that more clients are looking to BlackRock for their investment guidance.

Our goal is not to just sell them individual products, but rather to understand their client's objectives, their needs, and to fashion a cohesive solution that helps achieve those goals.

While many firms claim to do the same, no other asset manager draws on the same breadth of active, index, and alternative strategies, investment styles across asset classes and regions, risk management and technology, and focus on long-term solutions.

These capabilities, combined with the talent and fiduciary culture of a BlackRock team enables us to have a deeper conversation with our clients, as they make important decisions around portfolio construction and asset allocation.

This heightened level of client engagement is translating into consistent growth, with $36 billion of long-term net new flows in the quarter representing 3% organic growth, driven by our strength in iShares and institutional actives.

The fact that we are again seeing such diverse inflows in this very volatile market speaks to the power of our platform we've built over time.

We consistently invested in capabilities to meet the evolving needs of our clients, and we will continue to invest to helping our clients, so we could show future growth in the quarters to come.

As clients increasingly look to ETFs as alternatives to individual stocks and bonds, derivatives, and mutual funds, we continued to grow our iShare business to meet their needs.

Investors turned to iShares in the first quarter as they navigated heightened volatility, and our ETF business saw $24 billion of net flows.

As was the case for the full year in 2015, BlackRock captured the number one market share of net new business globally in the United States and in Europe, and the number one market share in fixed income.

Two global iShare priorities drove our inflows.

First, was fixed income.

BlackRock has been building our fixed income ETF capabilities for several years.

We now manage more than $290 billion in fixed income iShares, which as a standalone franchise would represent the fourth largest ETF player in the industry.

After seeing $50 billion in fixed income inflows for the full year of 2015, this quarter we generated record quarterly net inflows of $27 billion.

Risk-off sentiment initially drove demand for US Treasuries, and as the market conditions improved, clients added to their US European credit exposures.

We see significant growth ahead for fixed income iShares.

A widening range of clients are adopting fixed income iShares as diversified, efficient investment tools, and as substitutes for cash and derivatives as bank balance sheets continue to be shrunk.

Despite rapid growth, fixed income ETFs currently only have 1/10 of the share of global bond market assets that equity ETFs have in the global equity markets, offering a significant opportunity to increase the penetration in the $100 trillion global fixed income market.

The second priority is Smart beta.

BlackRock is investing in factors and factor products that we believe will become increasingly important, as asset allocation tools and alternatives, traditional beta or lower alpha capture active strategies, and BlackRock now manages more than $125 billion across a range of factor-based solutions.

Our iShares minimum volatility products raised nearly $7 billion globally in the quarter, leading the ETF industry Smart beta category, and increasing our Smart beta ETF AUM to $67 billion.

Additionally, our newer single factor products have started to achieve scale at $5 billion, and we are now bringing multi-factor iShares to market to complete our offering.

In our institutional business, first quarter net inflows of $12 billion were driven by strong active fixed income and multi-asset flows, as the investments we made to diversify our institutional platform are generating results.

As we strengthened the diversity of our institutional platform over time, we are deepening our existing client relationships, and more than 50% of BlackRock's largest institutional clients now have five or more products managed by BlackRock.

For those who have been our investors since 2009 when we did the BGI merger, we've talked about this in great detail as one of the merits of why we thought the merger would work.

At that time, we had less than 20% of our clients having more than one product.

And so, one of the great results, and why I truly believe our positioning, our penetration with our clients, is through this metrics of how many products we have, in terms of positioning ourselves with our clients.

And once again, I'll repeat it again because I am very proud of it, and that's more than 50% of our largest institutional clients have more than five or more products managed by BlackRock.

We saw institutional active fixed income net inflows of nearly $11 billion driven by flows from financial institutional clients, as we further expand our relationships with these clients through our solution orient approach.

BlackRock's financial institution team continues to deliver differentiated investment strategies for these financial institutions, especially in this extended low and negative rate environment.

In alternatives where we've invested to strengthen the diversity and quality of our platform, we generated more than $1.5 billion of additional illiquid commitments.

In the last several years, we have expanded our capabilities in our real estate platform including infrastructure and real estate.

Real estate, real assets especially infrastructure, provide clients with the ability to achieve long-term financial goals, while helping to create a more fertile long-term investment environment, hopefully by generating jobs and aligning the longer term, time horizons afforded by greater longevity.

BlackRock currently manages more than $30 billion in real assets across our global multi-product platform.

BlackRock Solutions revenues grew 16% year-over-year, led by Aladdin, our unifying technology platform.

We are seeing growing demand from clients, as asset owners and managers are focusing on risk management, and they are now learning to utilize more risk management as they adapt to the regulatory changes.

As the retail marketplace evolves, we are also seeing increasingly opportunities to provide our distribution partners with institutional quality asset allocation, risk management and digital advice capabilities.

BlackRock is also intensifying our efforts to leverage the industry's most advanced technologies to enhance client service, to build better investment products and portfolios, and importantly, to identify new and better sources of alpha.

On the distribution side, FutureAdvisor, which operates within BlackRock Solutions allows us to strengthen relationships with our distribution partners by offering their clients high quality technology-enabled advice backed by BlackRock's broad investment platform, our Aladdin risk analytics, our proprietary retirement technology, and our longstanding experience as an enterprise technology partner to other financial institutions.

We're seeing growing demand from our intermediary partners for BlackRock FutureAdvisors solution, including our latest partnership we announced yesterday.

On the investment side, BlackRock's investment team including our active equity, our model-based fixed income and our multi-asset strategy teams continue to expand their use of technology-based tools and research methodologies to produce investment insights that contribute to sustainable, consistent alpha generation.

These tools include things such as machine learning, natural language processing, and scientific data visualization.

In these challenging beta environments, our clients look to us more than ever to deliver the investment performance they need to meet their liabilities and their financial goals.

We maintain a constant focus on enhancing alpha generation across our platforms, ended with a quarter with 89% of our fixed income, 97% of our scientific active equity, and 52% of our fundamental active equity products above market or peer median for the five year period.

The investments that we're making to leverage technology across our platform are part of BlackRock's focus on continuously solving our client's long-term challenges.

As I discussed in my annual letter to shareholders earlier this week, in a letter I sent in January to CEO's of companies we invest in on behalf of our clients, it is critical that companies focus their strategy on the long-term, and clearly articulate their plans for long-term growth, and in the context of the environment, and the ecosystem in which they operate.

Just as we continued to invest for the long run, we are constantly evaluating our ecosystem in which we operate, including the markets, regulatory environment, the competitive landscape to identify the changes that might require us to pivot our strategy.

Last week, the Department of Labor published their fiduciary rule, which has implications for both our clients and our own business.

While we are currently reviewing the final rule to thoroughly assess its implications, we are likely to see changes in our distribution partners accounts and fee structures, their product preferences, and importantly their use of technology, to both build portfolios for clients, and to manage their increased risk, and most importantly, their compliance needs.

BlackRock believes in the importance of always acting as a fiduciary to our clients, and doing so is one of the core principles that we founded our Firm upon.

BlackRock has also extensive experience with adapting and helping our clients adapt to change in the regulatory environment.

Most recently through RDR, MiFID in Europe, we're leveraging this experience directly with our distribution partners in the US, as we listen to and work with them to address the challenges and the opportunities that the DOL rule presents.

This is another example where the combination of the breadth and depth of BlackRock's investment platform, our global footprint and experience, our focus on technology and risk management solutions, and our strong fiduciary culture differentiates the value proposition that we can deliver to our clients.

We have always embraced change, and we will always be looking for ways to better serve our clients, to operate more efficiently, to focus resources on strategic priorities, and to create new opportunities for our strongest employees.

We began 2016 by enhancing our investment platform by increasing connectivity among our investors, by aligning with the evolving needs of our clients, and positioning talented investment leaders to drive our success, and these changes are working well.

Most recently, we initiated a restructuring to streamline and simplify the organization, driving efficiencies across our platform to better serve our clients, to deliver return for our shareholders.

It will also create opportunities for our strongest employees.

Over the last three years, we have grown our employee base by more than 20%.

We added 2,500 employees to support improvements in client service and technology and enhancing alpha generation.

We remain committed to investing in our business to leverage the opportunities ahead of us, to drive continued growth despite current market volatility.

Doing so requires making smart, and unfortunately difficult decisions about allocating resources, which we must always do.

While the uncertain environment we face is unsettling at times, it is also an opportunity to look out in the future, to capture new alpha generating opportunities, to use technology in innovating ways, and to build on our platform to serve our client's evolving needs, create a continued opportunity for our employees to deliver consistent returns for our shareholders.

Now let me open it up for questions.

(Operator Instructions)

Your first question comes from Dan Fannon with Jefferies.

Good morning, Dan.

Good morning.

I guess, Larry, if you could expand on your DOL comments, and maybe discuss in more detail what some of the changes or, and preferences that your distribution partners as you highlighted might be undertaking?

And maybe just characterize how well-prepared you think the industry is for these changes coming forth?

Well, let's start off with the whole -- the context for a second.

Well, probably most importantly, BlackRock has supported the changes to the financial ecosystem.

If we can enhance confidence with investors, I believe through that mechanism, it's going to increase and promote more investing, less savings in their bank accounts.

So the more investing, and the more money clients are putting to work with greater confidence, then it's a benefit actually for the entire industry.

And I think that's one of the [main] points that have not been part of the dialogue, and I think that's an important, a really important point.

We need to have more investor confidence.

I think one of the great problems we have with longevity, we have in the human [ages] process and importantly, with the inability of so many people investing what I would call properly, too much cash, probably an over-emphasis in bonds, if they believe the DOL rules will give them better transparency, better certainty that they're being treated right, and they invest more money for the long run, it's better for the country is, it's better for their financial future, and it's really very good for the entire industry.

And I think that message is totally lost in the conversation.

Directly to the issue around, how this is going to play out, first of all, it's a very lengthy rule.

It's going to take quite some time for everyone to determine how it meets their business model.

But I would say, the position of BlackRock, given the breadth of our product platform in both active and index, and the investments we've made in technology -- and I really want to underscore technology and risk management, we're having really deep conversation with more of our distribution partners, in helping them work on solutions for them and their clients.

It's still too early to determine the outcome for the DOL rule more broadly, but I think we're as better positioned than any organization.

I do believe it's going to require much greater compliance and risk management, so it's very powerful for our Aladdin platform.

We believe it's going to be very powerful for our entire BlackRock Solutions product suite, including FutureAdvisor and I think, if it means more business in passive, we'll be benefited.

If it means more business in active, we're going to be benefiting too.

So I'll just leave it at that.

And I actually have a happy general counsel with that answer.

(laughter)

Sorry, Chris.

Your next question comes from Ken Worthington with JPMorgan.

Good morning.

Good morning, Ken.

So BlackRock has been in the press with the layoffs indicated, and also some of the hiring that you're pursuing.

And you mentioned in the prepared remarks, asset or resource allocation changes.

From a higher level perspective, can you give us a sense of maybe, what's getting less and what's getting more in terms of resources?

And in particular, I'm interested in the resource increases you're making to technology, which I think you highlighted in your letter to shareholders.

So both as it relates to how Aladdin is going to evolve, as well as how you're thinking about expanding other technology-related services to clients?

Let me allow Gary to answer that, and then I will give a little color after that.

Great, Ken.

Thanks so much.

So Ken, as I think you started out, as we stated last quarter, we are really -- we're maintaining our commitment to investing in a variety of strategic initiatives that will further enhance our client value proposition, and generate long-term value for shareholders.

And obviously, we're all mindful of the new challenging markets, as Larry and both I said, that we need to make tougher and smarter decisions, especially when it comes to reallocating those investment dollars.

One thing I want to make very clear, is this restructuring was not about cost cutting.

It was about streamlining and simplifying the organization, so that we could use those savings to reinvest more efficiently in those strategic growth areas.

And as mentioned also, to create new stretch opportunities for our strongest people.

It's important to understand that we really aren't de-emphasizing any particular business.

Rather I'd say, we're looking to ensure that the foundation of our businesses are really running as efficiently as possible, so we can take those reallocated resources, and maximize our investment in the higher growth areas that you mentioned.

I'd say there are probably four or five of those, and I'll let Larry and Rob, in particular chime in, and many of those have been mentioned in some of the remarks today.

Illiquid alternatives, in particular the real asset platform, which includes our infrastructure business.

Factor-based, Larry mentioned over $125 billion there across Smart beta and enhanced factor products.

Sustainable investing, where we have $200 [billion] across Exclusionary Screens, ESG factors, and Impact investments.

Obviously, continuing to invest in our iShares business, which we believe continues to have significant runway in growth, from both new users, and importantly fixed income which Larry also mentioned in his comments.

And then, you mentioned technology as well.

And I think before -- I'll let Larry comment, the issues there on technology is, it really impacts everything we do across the organization.

It impacts how we invest, in particular big data and the like, machine learning language and like that Larry mentioned which is importantly, critically important for improvements in our active platform, as well as technology to enhance serving our clients, whether it be through Aladdin, Aladdin for wealth FutureAdvisor and the others.

So I think, those are a number of the areas that we're really looking to make sure that we're continuing to feed, because we think there's incremental and differentiated growth available to us.

I would just add one more point, because I think Gary said it pretty clearly, and probably said it better than I could.

That is, I can't underscore enough how the ecosystem is changing, that's going to require more of capital market participants, whether they're insurance companies or asset managers, they're going to have -- the need for better risk management technology is only increasing.

The need for better interfacing with clients is only going to be more and more important.

And I do believe we have great solutions at BlackRock to help and assist these organizations, in terms for them to raise their bar to be a stronger fiduciary towards their clients.

And so, we believe our Aladdin system, our FutureAdvisors products are going to be -- we'll see even more accelerated growth, if we could handle the growth.

But importantly also, as we are -- we believe there's a great need to develop better information flows for better investment insights.

And so, these are the areas where we are really emphasizing where we're growing, alongside the areas that Gary discussed.

Your next question comes from Bill Katz with Citigroup.

Good morning, Bill.

Good morning, guys.

Thanks so much for taking the question.

You mentioned twice now, focus on Smart beta.

Can you just elaborate a little bit more on that, maybe take it down a level in terms of product geography and even pricing?

And then, just anecdotally we've been hearing that some distributors have been anticipating invoking a rev share for ETF.

So sort of wondering, if you could comment on what you might be seeing there as well?

Sure.

I'm going to let Rob talk about it, because he --

Well, when there are -- when we have this type of volatility, people are looking to add alpha in other ways, and the Smart beta category is one of these ways.

We have made some very substantial hires in this area.

We hired the person that wrote the book in this area, and this is Dr. Andrew Ang, and he is the head of our factor-based strategies group, and he is going to help us to grow our presence in this group and he has already had significant experience with some of our largest clients in the portfolio construction, using a very established model based investment skill.

And when we combine what he has done, with the analytical power that we have with Aladdin, we think that we're able to offer some of the best solutions to our clients.

So this is a way of breaking down the performance within an active category to areas that can provide that additional performance.

And we currently manage about $125 billion in these factor-based strategies, and within that about $115 billion is Smart beta.

So we think this is going to grow.

BlackRock's iShares Smart beta ETFs are leading the industry now, with about $8.5 billion of net inflows in the first quarter, including about $7 billion into iShares minimum volatility strategies.

So these are, in essence strategies that take advantage of various sectors and factors in the marketplace to add additional value.

So we're adding a lot of people in this category, adding a lot of technology, and we think that it's going to be a very good way, a successful way for our active managers to add additional alpha.

Bill, to add one more point, you asked about geography.

We've had dialogues in probably every region in the world.

The demand for information of connectivity and help related to this, is beyond our imagination.

It's from Asia, to all throughout Europe, Middle East, and all throughout the Americas.

It is so much on the minds with our investors, as a way of rethinking how they invest.

I think this will become a larger component of the landscape of investing, and investors are going to utilize this with separate accounts.

They're going to utilize these type of products through ETFs.

But the application, understanding the analysis is really shocking how much people are interested in studying this.

And hopefully, the enormity of our meetings is going to translate into future flows.

Your next question comes from Michael Cyprys with Morgan Stanley.

Good morning, Michael.

Could you talk a little bit how you see negative rates around the world impacting asset allocations?

And also touch upon how you're managing your bond funds and vehicles for negative rates, and the opportunity set for BlackRock here, in particular on the multi-asset front?

I did write quite a bit about it this week, in my annual letter, which is getting beyond what I thought would have -- in terms of commentary by many publications worldwide.

Well, negative -- if you think about 70% of our clients or more are pension funds, IRAs, some form of retirement and insurance companies, we hear worldwide how negative interest rates or low interest rates have been impactful, and how they are actually harming their objectives of attaining an asset base to meet their liability needs.

In fact, last week, we were with one of the largest New York State funds -- US state funds, not New York state funds -- one of the largest US state funds that happened to be in New York City.

After our meeting we had, and they were in the top deciles of performance last year, and because of the low and negative interest rates, then their discounting rate, they actually deteriorated their asset and liability gap.

We're hearing this worldwide.

We're hearing from savers worldwide, they're not going to meet the needs of building their pool of savings to meet the needs of retirement.

We're hearing from insurance companies, that they are going to have a really hard time meeting their liabilities.

And so, what is -- so they are looking for more advice.

Importantly, what we saw -- especially in the first six weeks of the year when you had major selling pressure in many components of the world, we saw huge insurance company interest in buying.

We saw widening of spreads.

We talk about infrastructure.

If we could find large opportunities for infrastructure globally, we have the demand.

So clients are looking for more opportunities, more opportunities.

They are looking to invest in different types of products.

I believe our platform is giving us more connectivity with our clients.

And I do believe, as my shareholder letter stated, I believe a low and negative interest rates have served a great purpose in the short run, but I don't believe low and negative interest rates was supposed to be a permanent feature of the investment landscape.

We are now entering the eighth year.

And I believe if we are going to have a stronger, more robust economy -- and the IMF just lowered their forecast even more, for like I think the fifth time in a row -- we're going to need a policy responses by governments.

And I think the dependency on central bank behavior is one of the problems that we have in the world, and we need policy response by governments related to fiscal policy.

Your next question comes from Brennan Hawken with UBS.

Good morning.

Thanks for taking the question.

You're welcome.

So just wanted to touch base quickly, on how much momentum you guys are seeing in some of the structural changes that you all have spoken in the past about, as far as bond ETFs, and allowing owners to treat them, not just as equity, but rather as fixed income.

Are you guys seeing momentum there?

Are you getting inroads, not only from the customer base, but potential regulatory -- getting over potential regulatory hurdles?

What's the outlook there?

So this is probably the largest growth area that we are experiencing right now, and what we expect to experience going forward.

It's actually quite incredible, the amount of cash that's sitting in banks today earning zero, and that money has typically been in the fixed income market.

And in order to have access to fixed income, our clients are using more and more ETFs, because of all of the features that they see, which is the liquidity, the low cost, tax efficiency.

And it's just easier access, and this is where the money is going to flow first.

And most people have more of their money in fixed income, than they do in equities anyway.

So this has been the growth in the first quarter.

We are set by having a wide variety of types of fixed income ETFs that they can invest in, and we do see a lot more secondary trading that's going on in these.

But we're seeing investment grade and high yield corporate bond ETF assets under management grow from about $5 billion to $165 billion and that's from 2007 to 2015, and this is going to be a very strategic growth area for us.

And as Larry cited in his opening, we saw a record $27 billion of net inflows into the fixed income ETFs in the first quarter.

So this is really, I think, the big growth area.

We have a very long-term history at BlackRock in fixed income, and we are using that historical background, the technology that we built to even enhance our reputation more in this business.

I would just add one more thing.

As the ecosystem of bond and secondary bond liquidity continues to be changing, and we're seeing periods of more illiquidity, the utilization of ETFs as a mechanism to find liquidity, and to have the ability to navigate the factors that impact the valuations of fixed income, whether that's duration or convexity or credit, the navigation with the utilization of ETFs is going to -- it enhances the opportunities for returns.

And so, we believe as I said in my prepared remarks, the utilization, the implementation of fixed income as a -- fixed income ETFs as a component of the fixed income strategies that clients are employing, are going to be larger and larger in the coming years.

Your next question is from Craig Siegenthaler with Credit Suisse.

Good morning, Craig.

Good morning, Larry.

So just on the back of the BRS FutureAdvisor win this week, I'm just wondering if you can help us think about the underlying economics for the business-to-business robo-advisor platform?

And then, also think about, what type of products they will be using in this platform?

I'll let Gary answer that, then I'll be the color coordinator.

So there's a variety of different drivers of momentum behind this, Craig.

We talked about technology having an increasingly significant impact on retail space, and obviously we're enhancing our technology for our retail clients.

FutureAdvisor is just one.

We're seeing the digital, this side of the digital end, but we're also using and leveraging Aladdin to bring portfolio construction and risk analytics tools to financial advisors, as well as private bankers.

And we're doing that with a number of different areas of growth, whether it be Aladdin portfolio builder, or portfolio construction services, or Aladdin for wealth importantly.

And we are streamlining our sales processes, with technology to enhance yielding greater efficiency and effectiveness through doing that.

FutureAdvisor in particular, which as you know operates within BlackRock Solutions, allows us to strengthen relationships with our distribution partners by offering their clients high quality technology-enabled advice.

And most importantly, backed by BlackRock's broad investment platform, our Aladdin risk analytics, our proprietary retirement technology, and obviously, our longstanding experience as enterprise technology partners to other financial institutions.

I think that is probably the key differentiating factor for us at the moment, because what we're noticing whether it's the commercial arrangement announced this week or some others that frankly we have signed, but haven't publicly announced, this looks like a very long-term and complicated implementation, that frankly is exactly what we've been doing with Aladdin over the last couple of decades.

And so, while there are certain competitors I think who are trying to mimic or follow, or in many cases replicate the type of strategy that we're doing here, the real difference is we've been involved in client implementations, very complex client implementations for a significant period of time.

And I think that is really going to be the differentiating factor.

As it relates to the economics, the economics on these things are frankly, very much customized in some respects.

There are platform fees.

There are implementation fees.

In some cases, there are minimum fees.

There will be underlying management fees.

To the extent that the client chooses to either use our own models, or populate those models with iShares, but importantly we're looking to customize as much as we can, to meet our intermediary partner's objectives.

So we've signed -- which we haven't announced all of them -- we signed four contracts already.

But we are in dialogue with many more, without citing the number, many more institutions are interested.

I think Gary, Craig, said it very clearly, think of this as an Aladdin implementation.

Margins are quite low, for the first, during the implementation stage.

In some cases, there's more expenses than revenues than in the early years, early year.

And as it's being implemented then, and the utilization and we have all of the other service fees, it starts throwing off and generating depending on the utilization, we hope large fee increases.

But more importantly, we also believe having this linkage creates a deeper connection with our clients and our distribution partners.

So it's not just the singularity of having more products through these types of channels, but it is also deeper, more consistent connection with these clients.

And so, this is one of the reasons why we saw earlier than anyone related to the connectivity, that digital advice can give for us with their distribution partners.

And so, we are very excited about it.

I would also say that the desire, the demand, the interest, the request for presentations is far greater than we ever imagined.

Your last question comes from Brian Bedell with Deutsche Bank.

Great.

Thanks for taking my question.

Larry, just maybe if you can zero in on the defined contribution business.

You have, I think about a 9%-plus market share of that, and the organic growth was very strong for you last year, with the 6% pace.

Maybe if you can elaborate on whether you think the Department of Labor rules longer term will accelerate the shift to DCIO?

And how you think behaviors will change among plan sponsors, and how you're positioned in attacking that?

Well, first of all, we're just interpreting what the DOL says related to DC, and I'm going to let Rob answer it.

But more importantly, it looks to us that you are not going to see rollovers as fast, that people are going to stay within their defined contribution plan longer -- so this is an initial view.

We're studying this more and more.

But obviously, as you suggested, DCs are very important component of where we are, and we believe we're well-positioned.

I'm going to let Rob -- Rob?

Yes, I think Larry said it there.

I mean, the big issue with DC, and you know that we're the number one DCIO player in the industry.

We have about $639 billion in assets under management.

And what we're seeing is the increasing need for open architecture, and we're seeing an increasing need for Index Target Date, and also high performing active strategies.

And these are really the key trends that are driving the market share changes in the DC space.

And that's why we've been building that infrastructure to try to meet this.

And now, once we get a better view of the changes that are going to happen with the DOL and interpret these, I think that it really plays into those -- that infrastructure very, very well.

But how soon the movement of assets takes place is something that we're still trying to figure out (inaudible).

So let me, thank all of you for joining us this morning, and for your continued interest in BlackRock.

I think our first quarter results once again, highlights the investments we made to enhance and differentiate BlackRock's diverse global platform.

We're continuing to take a long-term view.

We're trying to stay ahead of our client's needs.

We're trying to stay ahead of our competition.

We're trying to navigate these near-term developments in the financial economic landscape.

But we're doing this on behalf of our clients, to making sure that we are providing them with the service that they require from us.

A more volatile world is -- it plays to our advantage that clients are looking to BlackRock by providing more information, by helping them navigate the complexities that we're living in a world of low and negative interest rates.

And we're trying to help them navigate the balance between investing in more illiquid products to achieve the yields and the returns that they need, and the balance of how to build a better financial future for all our clients.

I think we have done that in the first quarter, and we're doing that again in the second quarter.

And I look forward to seeing and hearing from all of you at the end of the second quarter.

Have a good April, May, June.

Thank you for your participation.

This does conclude today's conference call, and you may now disconnect.