貝萊德 (BLK) 2016 Q3 法說會逐字稿

Good morning. My name is Carmen, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock, Incorporated, third-quarter 2016 earnings teleconference. Our hosts for today's call will be Chairman and Chief Executive Officer Laurence D. Fink; Chief Financial Officer Gary S. Shedlin; President Robert S. Kapito; and General Counsel Christopher 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 say today. BlackRock assumes no duty, and does not undertake, to update any forward-looking statements. With that, I'll turn it over to Gary.

Thanks, Chris, and good morning, everyone. It's my pleasure to present results for the third quarter of 2016. Before I turn it over to Larry to offer his comments, I'll review our quarterly financial performance and business results. While our earnings release discloses both GAAP and as-adjusted financial results, I will be focusing primarily on our as-adjusted results.

Our clients are facing significant challenges, driven by increased regulation, market volatility, record low interest rates, and disruptive technology. As a result, the asset management industry is changing rapidly. During these times, as we've done in the past, we re-examined our strategic priorities, and evolved our business model with a goal of better serving the needs of our clients and optimizing organic growth in the most efficient way possible for our shareholders.

Financial results for the third quarter of 2016 demonstrate the diversification and stability of our global investment and technology platform, and our commitment to investing for the future. We executed on each of the three components of our framework for shareholder value creation this quarter, delivering organic growth, demonstrating operating leverage, and systematically returning capital to our shareholders.

Third-quarter revenue of $2.8 billion was 3% lower than a year ago. However, on a constant-currency basis, we estimate that quarterly revenue was down approximately 1% year over year. Operating income of $1.2 billion declined 1%, while earnings per share of $5.14 increased 3% versus the prior-year quarter. Non-operating results for the quarter reflected $29 million of net investment gains, primarily attributable to net gains on unhedged or partially hedged multi-asset and fixed-income seed investments.

Our as-adjusted tax rate for the third quarter was 29.7%, reflecting the impact of several non-recurring items. We continue to estimate that 31% remains a reasonable projected tax run rate for the fourth quarter of 2016, though the actual effective tax rate may differ as a consequence of non-recurring items that could arise in the future.

BlackRock generated $55 billion of long-term net inflows in the third quarter, representing an annualized organic growth rate of 5%. Flows were positive in our active and indexed franchises, and across asset classes and regions, (inaudible) the value of our broad-based, diversified business model.

Third-quarter base fees of $2.5 billion were up 4% year over year, driven primarily by organic growth, positive beta, and higher securities lending revenue, which was positively impacted by widening asset spreads resulting from a rise in short-term interest rates. Sequentially, base fees were up 2%.

While we continue to deliver strong organic growth, base fee growth has recently lagged growth in average assets under management, as client risk appetite and portfolio construction decisions impact our business mix. In the current environment, client mix shift has favored index over active, fixed income and cash over equities, and government funds over prime funds in the money market space. While mix change amongst and within asset classes will impact our blended fee rate over time, we remain confident that our diverse business model is capable of generating differentiated organic growth in a variety of market environments, and our scale enables us to prudently manage expense and defend our operating margin.

Performance fees of $58 million declined 72% versus a year ago, driven by our single strategy hedge fund platform. Recall that performance fees in last year's third quarter benefited from a single European hedge fund that delivered exceptional full-year performance.

BlackRock Solutions revenue of $174 million increased 4% year over year, and 1% sequentially. Our Aladdin business, which represented 87% of BRS revenue in the quarter, up from 81% a year ago, grew 13% year over year, driven by new clients and several sizable clients going live on the Aladdin platform over the last year.

Strong market demand for Aladdin continues from institutional asset managers, as well as retail intermediaries who are seeking sophisticated risk analytics and portfolio construction tools to better serve their wealth management clients in the current regulatory environment. Other revenue was down $16 million year over year, primarily related to lower transition management activity in the current quarter.

Total expense decreased 4% year over year, and was flat sequentially, driven primarily by lower compensation expense. Employee compensation expense was down $56 million, or 6% year over year, reflecting lower incentive compensation, primarily driven by lower performance fees versus a year ago.

G&A expense decreased $7 million or 2% from a year ago, and $4 million or 1% sequentially, as we continue to exercise discipline over our discretionary spend in the current environment. At present, we anticipate fourth-quarter G&A spend to be moderately lower than last year's normalized levels, after adjusting for $23 million of quarterly deal-related costs incurred a year ago. Finally, distribution and servicing costs decreased 12% year over year, and 5% sequentially, primarily related to the acquisition of BofA Global Capital Management in April of this year.

Despite an overall decline in year-over-year revenues, driven by a reduction in performance fees, we have delivered 3.5% organic growth over the last 12 months, and expanded our as-adjusted operating margin versus a year ago, evidencing our continued commitment to strike an appropriate balance between investing for future growth and practical discretionary expense management. In line with that commitment, earlier this month we reduced prices on 15 US iShares core ETFs and several actively managed US bond funds.

We chose to use our scale and leadership position to invest on behalf of clients and financial advisors as they adapt to the DoL's new fiduciary rule. In isolation, these price reductions will result in an estimated $85 million annualized revenue reduction for BlackRock, representing less than 1% of our total base fees. However, over the mid- to long-term, we expect this investment to be accretive to organic growth and additive to overall shareholder value.

During the third quarter, we continued to return excess cash to shareholders, and repurchased an additional $275 million worth of BlackRock shares.

BlackRock generated $70 billion in total net inflows in the third quarter, including $55 billion of long-term net inflows, and $15 billion of cash management inflows. Cash management inflows demonstrate the breadth of our platform and strength of our client relationships in the lead-up to US money market reform.

Since the beginning of the year, our platform has experienced a remarkable shift from prime to government funds. BlackRock is now the second-largest 2a-7 money fund provider in the United States, and our diverse capabilities across (inaudible) accounts, collective trusts, and short-duration products position us well for continued future growth.

Global iShares generated $51 billion of net inflows during the quarter, representing 18% annualized organic growth. Over the last 12 months, iShares has now generated over $140 billion in net inflows, representing 15% organic growth. iShares equity inflows of $26 billion for the quarter were driven by flows into US and emerging markets, as investors once again turned to iShares' precision exposures as their preferred vehicle to re-risk following the Brexit vote.

Importantly, our ETF product segmentation strategy, which tailors products to different client segments, continues to perform well. As an example, large institutional clients who value liquidity and often use derivative strategies drove $6 billion of quarterly flows into EEM, our flagship iShares emerging markets financial instrument. Longer-term investors, who may be retail or institutional but are more price sensitive, added nearly $3 billion into IEMG, our iShares core emerging markets ETF.

Quarterly iShares fixed income inflows of $23 billion reflect an ongoing adoption of ETFs as a means of rapidly accessing and investing in fixed income markets worldwide. Demand was particularly acute in investment-grade corporates and emerging markets, as investors continue to search for sources of higher yield.

Our institutional client platform saw $6 billion of long-term net inflows during the quarter, driven by active net inflows of $8 billion, as clients increasingly look to partner with BlackRock to build customized solutions or generate yield to meet their investment objectives. Inflows into multi-asset and solutions-oriented strategies, including our LifePath target-date series and active fixed income, were partially offset by outflows from active equity.

In addition, we had another strong fundraising quarter for illiquid alternatives, raising $1 billion in new commitments. Illiquid alternatives remain a key area of growth for BlackRock, as our institutional clients increasingly search for additional sources of income and fund correlated returns.

BlackRock's global retail franchise saw $2 billion of long-term net outflows, primarily due to outflows from equity and multi-asset funds in another challenging quarter for the active mutual fund industry. Outflows were concentrated in European and US equities, and world allocation strategies.

Retail fixed income remained a pocket of strength, with diversified flows across our top-performing platform, including strong flows into emerging markets, high yield, municipals, and European and Asian fixed income. At September 30, 88% of [BlackRock's] taxable fixed income assets were at or above benchmark or peer median for the trailing five-year period. In particular, our flagship total return fund continues to generate best-in-class performance, and is performing in the top 5% of its peers for the trailing three- and five-year periods.

Overall, our third-quarter results reflect the benefits of the investments we have made to build a diversified, global business model. Diversification across investment style, distribution channel, product, and region enables us to deliver differentiated organic growth in a variety of market environments, while our scale allows us to make strategic investments which deliver value for our clients and shareholders. With that, I'll turn it over to Larry.

Thanks, Gary. Good morning, everyone, and thank you for joining the call. BlackRock's business model was built to thrive in all market environments. Clients continue to trust BlackRock in an environment characterized by macroeconomic and political uncertainties, slow global growth, and persistent low rates.

In the third quarter, even as industry-wide investor preferences continue to migrate from equities to fixed income and cash, and away from active strategies, the diversity of our platform drove nearly $70 billion of total net inflows. Our $55 billion of long-term net inflows was positive across both active and index strategies, and across every asset class and every region.

We are seeing ongoing divergence in global monetary policy. While the US signals a slow path to tightening, the UK, Japan, and other central banks continue with accommodative monetary policy, keeping yields at historical low levels and fueling widening asset liability gaps for both large institutions and also individual savers.

As monetary policy reaches its limits in many regions, expansionary fiscal policy, particularly in the form of infrastructure investments, will be necessary to ignite economic growth. The lack of clarity around the outcomes of several upcoming political events, including the path forward on Brexit, elections in the US, and the constitutional referendum in Italy, is contributing to growing tail risk and investor caution.

Despite underlying uncertainty, market volatility reached lows not seen since 1995. Equity markets rose in the quarter, posting record highs in the United States and the United Kingdom.

Many clients are turning to BlackRock to help them understand the risk at the intersection of policy, markets and economics, as governments' actions continue to drive our markets. Both institutional and retail clients are increasingly utilizing Aladdin risk management technology and portfolio construction tools, as well as turning to BlackRock for our insights as a thought leader. In the third quarter, the BlackRock Investment Institute hosted a call on the potential impact on financial markets of the upcoming US election, which had more than 1,000 participants.

These differentiators, and combined with our global active and indexed investment platform that BlackRock has built over time, enables us to have a deeper and more meaningful conversation with our clients. More than ever before, clients value BlackRock's diverse global business model.

As Gary mentioned, BlackRock generated $55 billion of long-term net inflows in the third quarter, representing a 5% organic asset growth and 5% organic base fee growth. The composition of our flows this quarter is representative of global market conditions and investor sentiment.

Across client segments, inflows were led by US and emerging markets' equities and debt, as investors view the US as a relatively safe haven, and emerging markets have gained momentum as commodity prices stabilize. Meanwhile, we saw outflows from European equities amid political and policy uncertainty, both from the continent and the United Kingdom.

Institutional investors are slowly regaining confidence, and the third quarter was characterized by consistent, diverse client flows, rather than any one concentrated activity. Our institutional business saw $8 billion of active net inflows in the quarter, driven by strong fixed income and multi-asset flows, primarily from defined contributions and insurance clients.

Insurance clients face complex challenges, as traditional asset allocation strategies are failing to support their business models. With expertise in understanding the specific needs of insurance clients, BlackRock's financial institution group is putting the differentiated technology advantages on our Aladdin platform to work, constructing and delivering highly customized investment solutions which incorporate both traditional and alternative asset classes across active and index strategies.

Insurance companies are also increasingly employing fixed-income ETFs in a broad range of applications. A recent study from Greenwich Associates found that ETF demand from insurers is likely to increase. Of insurance in the study, insurers in the study, 52% of these companies expect to increase their use of fixed-income ETFs in the next year. BlackRock is well positioned to work with large insurers as their investment strategies and techniques evolve.

Active fixed-income flows from retail investors remained strong in the quarter at $5 billion, driven by flows into high yield, emerging market debt, and Asia fixed income, again, reflecting investors moving out of the risk curve in search of income as they struggle with historical low rates. At the same time, retail investors continue to pull back from active equity investments, driven by a combination of challenging long-term performance track records, and also accelerating regulatory changes.

2016 US active equity mutual funds has experienced more than $240 billion of year-to-date outflows, its worst year on record, with more than $110 billion of outflows in the third quarter alone. At the same time, we have seen strong flows from this client segment across our iShares equity ETFs, which I'll speak about in a moment.

Regulatory change is having a material impact on the retail ecosystem. The Department of Labor fiduciary rule, RDR, and MiFID are all impacting the way wealth managers serve their clients. We are likely to see a historical shift on how assets are being managed and invested, as our distribution partners are changing both their product preferences and their use of technology to adapt to these rule changes. We have been working closely with our distribution partners in the US in advance of the Department of Labor rule implementation.

Aladdin for Wealth, our technology and risk management system designed specifically for wealth managers, will be a key differentiator for BlackRock in helping our clients adapt, as financial advisors sharpen their focus on the quality and cost efficiencies of funds. We also expect that they will use ETFs more and more at the center of their portfolios. Advisors are using ETFs alongside high-conviction active funds, and also they're using ETFs as an active tool to manage their client assets.

Throughout BlackRock's history, we have anticipated a series of changes in the ecosystem, and have taken strategic actions to adapt. This has included combining our active and index strategies on one platform through the BGI acquisition in 2009; continuously enhancing our Aladdin risk and investment management technology; launching the iShares core series in 2012, which exceeded our expectations by growing at an average organic asset growth rate of 24% since inception; and most recently, acquiring FutureAdvisor. Each of these strategic actions represent an investment to better serve our clients and to drive growth in our Business.

As our ecosystem evolves further, asset managers can no longer rely on beta to subsidize investment spending. BlackRock's diversified business and history of successful execution allows us to continue to invest when other firms may not be able to. Whether using our balance sheet to seed new products, streamlining the Organization to reallocate investments to strategic initiatives, making tactical technology or product acquisitions, or leveraging our scale to re-price product for our clients, we are committed to seeking out the most efficient ways to growing our Business.

Earlier this month we made a strategic investment in our US iShare core ETFs, reducing prices to meet our clients' needs for high-quality, long-term holdings. In doing so, we are taking steps to be the leader in the core segment by providing clients with the best quality and value of any ETF sponsor, and making iShares a clear ETF choice for financial advisors, building portfolios under the new fiduciary standard.

We are maximizing the benefit of our scale to drive the maximum value for our clients and our shareholders, and we expect to see increased organic asset and revenue growth in the iShares core series over time. We also expect this investment to drive growth across our broader range of iShares precision exposures, where clients place significant value on characteristics like liquidity and tax efficiency. Finally, we expect this investment to drive growth across our active business, as we deepen our relationships with all our distribution partners.

Our early results have been strong. Since the re-pricing actions just last week, our US core market share of net flows have grown by 25 points to 59%, and our iShares outside the core have also been logging strong flows. iShare saw $51 billion of net inflows in the third quarter, and year to date -- I'm speaking as of yesterday -- close to $100 billion of inflows in 2016.

Fixed-income iShares continues to be a substantial growth opportunity for BlackRock, and we achieved a significant milestone in the quarter by reaching $100 billion in our European fixed-income ETF AUM. iShares is a world-leading ETF provider, holding the number one share of US, European, and global equity and fixed-income ETF flows year to date. Going forward in a lower beta environment, alpha generation has the opportunity to drive greater percentage of overall investor returns.

BlackRock saw positive active net inflows of $4 billion in the third quarter. Active flows were driven by our leading global fixed-income platform, where we have scale, product diversity, and strong long-term performance, with 88% of our assets above benchmark or peer median for the five-year period. The combination of active and indexed strategies will continue to play an important role in our clients' portfolio. BlackRock has all the components, unlike our peers, as well as portfolio construction capabilities, risk technology, and better portfolios.

I have emphasized the importance of technology many times today. Technology is an essential component of adapting to our regulatory changes, and more broadly, a changing investor landscape. As advisors take on greater portfolio construction responsibilities in a fee-based account, they are increasingly using BlackRock solutions' sophisticated tools and risk analytics to build better portfolios. As a result, we are seeing strong interest for our Aladdin for Wealth, our iRetire platform, and our FutureAdvisor offerings.

Institutional clients facing persistent low rates and searching for yield require a deeper look into their entire portfolio, and BlackRock's technology can help them see clearer and allocate more effectively. Aladdin continues to build momentum with institutional clients, and revenues grew over 13% year over year.

We are committed to constantly innovating on our existing platform, as well as thinking of new ways that we can serve our clients' needs with technology. This remains a key differentiator for BlackRock relative to any other firm in the asset management industry.

In a time of significant change for the asset management industry, I believe BlackRock is better positioned than in any time in our history, and we have never had more opportunity working with the clients than we do today. We are at a pivotal point, with uncertainty in politics, regulation, and market likely to play out over the coming months. Our clients are apprehensive, but they are coming to BlackRock for advice, and our priorities remain helping them to meet their investment goals in all environments.

We have a unique ability to use our scale, our breadth of active and indexed products, our global reach, and our portfolio construction, our risk management expertise and technology advantages to meet our clients' needs, their evolving needs, to drive their future growth and our future growth as a Firm, and future growth for our shareholders. Now let's open it up for questions.

(Operator Instructions)

Your first question is from the line of Alex Blostein with Goldman Sachs.

Great, good morning, everybody. Hi, good morning. First, maybe we'll just start off with a DOL question. It's been a couple of quarters, and I guess the distribution networks and the platforms had a chance to digest the rules. Larry, you alluded to you guys are working closely with your distribution partners on helping them adapt to these changes.

Maybe a little bit more color from the perspective of what kind of changes are you anticipating? Obviously, we saw the announcement from Merrill and Edward Jones a couple months ago. More specifically, I guess with respect to number of products, fee structures? Any more granularity I think would be very helpful.

I don't know that much more than what you just said. We witnessed the changes from Merrill Lynch and Edward Jones. It is very clear, though, that the fiduciary rule is changing how our distribution partners manage their clients' accounts. As you suggested and what was stated by these public announcements, it's moving more to a fee-based relationship, less commission-based relationship.

We also believe it's going to move more to a model-based relationships too, where you're going to see the CIO offices of the various distribution platforms coming up with asset allocation strategies. We certainly believe that in the DOL rules it's going to mean fees are going to be very important. That's obviously one thing we can say with certainty; we don't know how that's going to play out.

We do believe as it moves more toward managed portfolios, utilizing more of a centralization of models and corporate and asset allocation, it's going to move quite a bit of money more towards passive strategies, utilization of ETFs. We do believe it will systematically move assets away from active. We're trying to get prepared.

One thing we can say with certain in our conversations, though, it leads to greater need of risk management tools. This is one of the reasons why we have adapted Aladdin, which historically was an enterprise system for large institutional investment organizations, where we now have now adapted Aladdin for Wealth, and we could go down to individual accounts, and allowing the advisor and the organization to look at every relationship they have through the lens of risk management.

We believe under the DOL rules having that oversight is going to be imperative. This is one of the reasons why we developed this technology. We're in dialogues with many distribution partners already related to Aladdin for Wealth. We have signed up one institution already for Aladdin for Wealth. We're in dialogue with many more, utilizing the Aladdin system for the navigation of their clients' investment strategies.

We look at this as a huge opportunity for us. We're in great position to navigate. I should add, I don't think any other organization has those capabilities, and so it puts us in a great position. By having that position it allows us to have more dialogue, much more dialogue for passive strategies, but more dialogue in portfolio construction and models and active strategies. Having this opportunity to be working with these institutions on the navigation of risk management on behalf of all their individual clients gives us -- will give us a unique opportunity to be working with these institutions in a way that we never have been able to before.

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

Hi, Craig.

Hi, Larry. Good morning, everyone. Good morning, Gary.

Good morning.

I just want to follow up the last DOL question. I'm wondering, have you tried to size up the potential money that could be in motion in US retail? Are you seeing a lot of money in motion outside of US retirement, which was supposed to be the focus of the DOL rule -- so really in traditional brokerage?

Let me give Rob that answer.

We have found that there is such a significant amount of cash that's on the sidelines because rates are so low, and equities have not returned what people have expected, that the money that is potentially in motion is probably the largest (inaudible - background noise). We've done studies that show that globally there's $50 trillion-plus that's sitting in cash. I don't think anybody knows how big that can be relative to the size of the markets.

Depending upon changes in interest rates and changes in equity volatility, a lot of that money can come into motion. It's not only coming into areas of retirement, it's overall. The studies that we show range anywhere from 38% to 60% of clients' portfolios are now sitting in cash. We think that a lot of that money will start to move once people -- once we get through the election, and once we get through the next decision on where interest rates are going to be.

Your next question is from the line of Dan Fannon with Jefferies.

Thanks, good morning.

Good morning.

Just a follow-up on the pricing changes. Can you discuss the process of the product selection, and how we can think about your active product portfolio and potential pricing changes going forward to be more competitive, as you highlighted in the DOL world?

That's a very large question. First of all, on the ETF side, this is a strategic investment that we're making in the future growth of BlackRock. Where we focused and reduced our prices were in the US iShares core ETF, and that was to meet specific demand by (inaudible - background noise) wanted the high quality, their long-term holders, and a lot of them will be purchasing these either directly or through models, because of what you had just mentioned with Larry in the DOL opportunity.

We want to be a leader in this segment, in the core segment. We want to provide the clients with the best quality and value of any ETF sponsor, and making sure that iShares is the clear ETF choice for financial advisors that are looking to build their portfolios under the new fiduciary standard.

Now, when we talk about that in particular, 90% of our iShares we have not changed the price on. This is really targeted at this specific segment that is very fee sensitive. As Larry mentioned in his opening remarks, we know that people like the brand, and now price is becoming in that segment something that's very important to be included in the models and focus on. We responded directly to our clients in that specific segment.

When it comes to the mutual funds, we have a pretty large array of mutual funds. We have lowered the pricing in some of our bond fund platform. We have 23 funds there. We took a look, and we wanted to make sure that especially in this low interest rate environment, we are being responsive to our clients. Our adjustments were in 14 of those funds -- 8 taxable and 6 municipals, which is about $23 billion in assets. We want to make sure that we continue to be a top-quartile manager, but also top quartile as far as expenses. We're watching what clients need in this environment, and we're responding in the specific segments that they're requiring us to.

Your next question is from the line of Brian Bedell with Deutsche Bank.

Hi, Brian.

Hi, how are you doing?

Good.

Great. Just wanted to circle back on DOL, maybe sort of the tempo of the changes that we'll be seeing over the next couple of quarters with implementation happening largely before April. Do you sense advisors are ready to make these changes right now from mutual funds to ETFs, or do you think they're really still in preparation mode in terms of education and understanding allocation better? Maybe you can link that in with your Aladdin for Wealth, the traction with your distribution partners, and whether you think warehouses are going to develop their own robo-platform? Thanks.

I think everybody's still in a wait and see attitude, and yet behind the scenes they're doing incredible amount of preparation for this. I don't think any one firm wants to get ahead of this, because they don't want to have -- they have to make serious changes to the relationships with their FAs and their clients. They don't want to be at competitive disadvantage with their FAs, one from another.

I think you're going to see a lot of kabuki, in which a lot of people are going to be shadow dancing until they have to come up with a strategy. But I do -- behind the scenes, all of them are looking at many of the different possible outcomes, but it could be a slow transition to more what I would say managed portfolios, or it's going to be sudden.

I'm under the view that the changes are going to be more rapid. I think most of my team believes these changes are going to be more evolutionary. I think there is even a debate here at BlackRock related to how these changes are going to be; but I do believe the legal responsibilities of each firm has under the DOL is going to probably move towards these changes.

But let me be clear. These are not our decisions. These are our distribution partners' decisions. Each firm has to do whatever is the right strategy for them under the new rules, the new laws on behalf of their clients. I'm sure they're all going to be working on behalf of their clients. I'm not trying to suggest they're focusing on their own specific needs.

What we're trying to do with our scale and our platform and the ability to have a dialogue using our active and passive strategy, but more importantly introducing Aladdin for Wealth, we're helping our distribution platforms to focus on what should they be doing toward their implementation in the new DOL rule. I do believe one thing is going to be constant, though. The need for more risk tools is going to be imperative to making sure that there's better oversight to protecting the firm, making sure they're living under the new DOL rules.

I do believe you're going to see, as you saw Merrill and Edward Jones, more managed accounts. The key questions that you asked, Brian, in the composition of the managed account, how will those portfolio allocations be? Quite frankly, we've heard a whole array of that. I do believe over a cycle is going to be a much greater utilization of passive strategies and ETFs than active strategies. I think that's where it's going.

We believe because of our positioning of Aladdin for Wealth, and because of our ability to work with our distribution platforms in the utilization of beta and active strategies, we're in a very good position. That's how we are trying to position it.

I want to be clear, these are not our decisions. We're responding to the ecosystem changes of our distribution partners, and we're trying to be additive. We have to be a partner with them. What I can say is at this time we are in extensive dialogue with these institutions in terms of how they navigate it. I believe we'll be able to play a role in their ultimate outcomes.

Your next question is from the line of Glenn Schorr with Evercore ISI.

Hi, there.

Good morning.

Good morning. Maybe a quick follow-up. On this front, I agree with you. I don't think anyone's done more or has more to offer the distributors than BlackRock, but at its core, the offshoot of all this I think is distribution's harder to come by, there's tighter rules around it and distributors lose some revenues along the way. The likely reaction is to ask for more from their asset management partners, whether it be commissions, revenue share, marking support payments. I'm curious if you agree with that comment that asset managers in general will need to pay more to access the key distribution channels?

Yes, I think that's going to be pretty obvious going forward. When you have periods like this, everybody goes to their vendors, their distributors, and asks for some sort of fee concessions. With the DOL rule, certainly there's going to be pressure on all of the vendors and all of the expenses that people have. For us, I don't think it means less distribution, I just think it means more efficient distribution, and that pricing is going to be an issue. I expect that we as a firm are going to go to our vendors, as well, and expect some fee concessions.

Also as a Company we have to watch our own expenses. I think you've seen that over the last couple quarters, that we're making sure that we're much more efficient. I feel very confident for our future, and this is because of our technology. We can be much more efficient than many of the asset managers out there.

I think you're right on the mark. This is going to be very good for the clients. We have found in the history of BlackRock when it's good for the clients, it's also good for us.

Let me just echo that. I think it's very important. If clients believe they have a fair opportunity to be in the market, to build a better financial future for themselves, if they believe the Department of Labor rules gives them that security that people are working on their behalf, and they put more money to work, and keep getting moving money out of all this cash and bank deposits into the financial markets, we will be the best positioned firm for that. We welcome these changes. We welcome better -- a better environment to allow our clients to feel just and fair, and being involved in the global capital markets that help their financial future.

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

Good morning, Bill. I think we lost Bill.

Bill, your line is open. Please go ahead with your question.

I was just wondering if we could talk on the cash management side for a moment. In terms of now that we have new rules in place, there's a lot of money in motion coming into that. Could you talk a little bit about where you think the products ultimately land, and the kind of pricing associated with that?

Well, Bill, we saw leading up to the October ruling about $1 trillion of money moving. I think this has been under-reported, but $1 trillion of money has moved from prime funds to government funds. This is an incredible amount of money by one government change.

This is one of the great examples where government actions can truly change an ecosystem. We saw this huge movement out of prime funds to government funds. We were very well positioned to accommodate our clients on that. We saw about $60 billion in our own prime funds going into government funds, but the key thing for us was we actually picked up little more than 1% market share in these events, and we had $15 billion in net in-flows.

We look at the money market fund industry as a great business. Obviously we are earning lower fees in government funds than we did in the prime funds. I think that's obviously a circumstance that everybody's going to be facing.

I do believe as clients feel more comfortable, and as they navigate with their risk committees the whole idea of what is a prime fund, I think you will see money eventually move back into prime -- not the same, not the whole $1 trillion. But I think as clients understand what prime funds are, and that they can pick up more return with quite a bit less risk than they ever would have had in a prime fund. Prime funds rules have changed quite considerably, too -- how we report our NAV, how we report our positioning, our positions. They're far less risky than they were in the 2007 and 2008 environment.

I do believe it's going to take some time, as clients become a little more circumspect about the difference of the two funds. In many cases they're going to have to go to their risk committees to get a change, because the fact there is no certainty about a dollar NAV, some clients just can't do it unless they change their rules.

We're working with many clients right now on that, helping clients understand the trade-offs, but the knee-jerk reaction was very clear. People did not have time to focus on how to work with their risk committee in terms of getting these changes, but I do believe over time clients will do that. We are working -- once again, this is one of the great characteristics of BlackRock. We are working with our clients and helping them assess those types of risks and the opportunities.

Clearly from our opinion, when you start seeing changes of central bank behavior, when you start seeing widening credit spreads, the advantage of a prime fund versus a government fund may be quite large enough, which will accelerate more people seeking the differences and getting the changes from their boards, risk committee boards, and being able to invest their liquidity in a prime fund, even without the constant dollar NAV.

Your next question is from the line of Brennan Hawken with UBS.

Good morning. Thanks for taking the question. First, just a follow-up on Gary's point on the price cuts in the core ETFs being long-term accretive. Maybe is there a time line or AUM threshold that allows you to cross into that accretion level?

Then more broadly speaking, could you help us think about the profitability trade-off within BlackRock, right? Generally, most folks agree that you'll gain share in your iShares and likely fixed income business, but see pressure in active equity. Is there a growth ratio in the AUM in between that iShares business and the active equity business that we could think about that represents a DMZ or a break-even line, because I'm sure it's not just about revenue growth. It seems more complicated than that. Thanks a lot.

Sure, Brennan. It's -- I would think there's a lot going on. We've literally spent the last five of the first six questions were on change that's basically being driven by regulatory change and a whole host of other things in terms of the current environment. I think that we look at the business in its totality more broadly. We're not really looking at a product-by-product analysis and a break-even on a product by product analysis. It's really about the diversification and breadth of the entire platform, and how all of the products fits together at the end of the day, into a set of solutions for the clients.

We're constantly making decisions in the best interest of the clients, and we're trying to basically bring forth the benefits of the platform, whether it's in its breadth, its globality, or its scale, to basically drive better outcomes for clients, and at the end of the day better outcomes for our shareholders.

While we're mindful and we talk about theoretical break-evens, which look, you can calculate those as well. You know what the change of the fees are and can basically do the math to see how quickly we can capture the incremental revenue.

It's really much more importantly about balancing everything that the firm has to offer a top-10 manager in active, a top-10 manager in passive, a top-10 manager in alts, all wrapped up with the differentiation of Aladdin and the technology platform really to drive a much more comprehensive set of solutions ultimately for the clients, and to leverage the scale not only on behalf of those clients but also on the behalf of our shareholders at the end of the day.

Your next question is from the line of Michael Cyprys with Morgan Stanley.

Good morning, Michael.

Hi, good morning. Thanks for taking the question. Just wanted to shift gears a little bit, if you could talk a little about feed capital, how you're deploying that today, versus say one to two years ago? Given some of the limited resources that you and the industry have on seed capital, just curious how you're thinking about maximizing that value, and what are you prioritizing today?

Our seed capital portfolio today is in excess of $1 billion. We continue to grow that as we think about our commitment to invest in the business first. That's a significant part of our story, leveraging our scale, the stability of our cash flow to invest in products that we think are going to drive, again, better outcomes for our clients and growth in the future.

I would say that we do believe that if you look at where we're seeding money, it's basically again today significantly more in multi-asset, significantly more in fixed income, trying to be smarter around cash solutions that may basically change in the future -- obviously our illiquid business, which takes the form of co-invest as opposed to what we call seed. We're really trying to basically think two, three years down the road to try and figure out where the new blockbuster opportunities are, in a way that can really differentiate the strengths that we have. Obviously factors, smart beta, in terms of our style advantage products and the like are also getting a lot of seed capital.

We really want to try and leverage again back to scale and stability. We think we can seed in significantly larger amounts than potentially our competitors as a function of our very stable cash flow, which is in excess of $3.5 billion a year. We think our ability to seed more frequently and in larger scale allows us to show greater commitment to the product, and reduce time to market in a way that allows us to leverage market opportunity significantly quicker.

Your next question is from the line of Michael Carrier with Bank of America.

Good morning, Michael.

Hi, good morning. Thanks, guys. Larry, we spent a decent amount of time on DOL. I just wanted to shift over to some of the FTC proposals. We got the liquidity rule, and then also in Europe, MiFID 2. I just wanted to get your updated thoughts on any hurdles that you see for BlackRock in the industry. I know some ETFs got exemptions on the liquidity rule, but just your thoughts on the liquidity rule and then also on where MiFID 2 is headed?

This is consistent -- my answer is going to be consistent with everything else we see with some of the regulatory changes. The regulatory changes have enhanced clients' willingness to invest. We're a big beneficiary of it.

We've been very supportive of the rules to enhance this investor protection. We had circumstances earlier the past few years related to liquidity and the impact of some of the mutual funds where they had to be frozen. Obviously it hurts the whole industry. It raises questions of uncertainty.

The SEC tried to find a solution. I think they found a pretty good solution under the circumstances. I also do believe we welcome the SEC's role in this. We think the SEC needs to play a larger role in helping ensure the sanctity of the capital markets. As more and more money moves to the capital markets, the need for safety in the capital markets only has increased.

We worked very closely with all the regulators in Europe related to MiFID and MiFID 2. We worked very closely -- let me restate it. We provided comment letters. I can't say we worked closely. That's probably the wrong way of putting it. We provided our input in helping the regulatory agencies to come up with a solution.

We believe MiFID 2 liquidity rules -- the SEC, as I said earlier, is going to lead for greater needs for risk management tools. Clearly, if we have rules like liquidity rule, as I said, it increases the need for risk management, which is playing up to BlackRock's strength. We built this organization technology with all these things in mind, making sure that we focus on the protection of our clients.

I don't think it changes that much in terms of investment management behaviors, in terms of making -- in terms of how we invest. We have never been on the edge of investing in illiquid products in our 40 products, or our [USID] products. It doesn't change our behaviors at BlackRock at all. It may change some investors' behaviors, obviously some who are emphasizing very illiquid buckets in their platform.

But both -- where MiFID 2 is going, where the liquidity risk rules are going with the SEC, these are just a work in progress. I believe we are going to see more and more regulatory oversight of our capital markets, ensuring that we have the proper safeguard for investors to invest, and that's critical. I can't say enough about the need to making sure we have the proper safeguards. If we have the proper safeguards, all the money that Rob Kapito was talking about sitting in the sidelines would be implemented.

I don't believe people are sitting there because they're just worried about the next event. A lot of people just don't feel like investing has been that fair to them, and by putting these rules in place, it allows more retail investors to feel that they are protected, they have more safety, and through that safety they probably will have a little more security, which probably will lead to greater investing into the capital markets, and we'll all be benefited by it.

The details related to the SEC liquidity rules, obviously it's a 1,000-page rule. It's going to take our lawyers and every lawyer a long time at making sure that we understand all the intricacies of how we are going to implement it, and how we're going to manage it. It is very clear in our brief reading it means a lot more risk management needs, making sure that you can live under these new liquidity rules day to day, and abide by them. It requires greater risk tools, which we have. Even about a year ago we added a lot of liquidity components to the Aladdin risk models, helping our portfolio managers navigate this.

Then in terms of MiFID, this is going to take time working with the European regulators. This is scheduled for 2018. We do have some time before it's implemented. Hopefully, we'll have better clarity on making sure that we're living under these new rules. As I think I said earlier, all of this will lead for the asset management industry probably a greater need for reliance on risk tools, which will lead for some of the asset managers greater expenses to build those tools.

I think I'm losing my voice now, so I'll end it there.

Ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, do you have any closing remarks?

Yes, please. I think our third-quarter results once again highlights the benefits of our scale. It certainly benefits why you need diversity of product. Also, I think it also speaks quite loudly why you need a global platform. I think BlackRock has that platform of scale, diversity of products, and global nature.

I would say probably the biggest theme that I could think about in terms of the third quarter was we're seeing an impact on the strategic investments we made in our platform over the last few years. I think it is because of those investments we made, the investments we made from BGI acquisition, the investments we made in the core series in 2012, the investments we made in our infrastructure products, our ESG products, our investments now in big data and factors, our investment now in technology related to Aladdin, Aladdin for Wealth, our investment in FutureAdvisor.

I believe it all speaks loudly that we are staying ahead of the needs of our clients, trying to anticipate the needs. I do believe the third quarter, when you think about how we handled this adversity of the markets, that we've been able to position ourself quite well in this environment.

I can certainly say, again, these investments we made, the investments we're going to continue to make, is allowing us to have a deeper, broader relationship with our clients in retail, and a deeper and broader relationship with our clients institutionally. We need to continue to stay ahead of our clients' needs, or we're not going to provide the service to our clients.

That's the paranoia that BlackRock possesses, staying in front of our clients' needs and trying to respond to our clients' needs. I think that is the key characteristic and the key differentiator that has positioned BlackRock so well in the past, and why I think it's going to be a key characteristic why we're so well positioned for our future.

With that, I want to thank everybody for joining us this morning, and your continued interest in BlackRock.

Thank you. This does conclude today's teleconference. You may now disconnect.