貝萊德 (BLK) 2018 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the BlackRock, Inc.

Third Quarter 2018 Earnings Teleconference.

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

(Operator Instructions)

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 lists 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.

So 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 2018.

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

While our earnings release discloses both GAAP and as-adjusted financial information, I will be focusing primarily on as-adjusted results.

As a reminder, all year-over-year financial comparisons referenced on this call will relate current quarter results to recast financials reflecting the adoption of FASB's revenue recognition accounting standard, which became effective on January 1.

During our second quarter earnings call, we noted the clients were deferring investment decisions in the face of an uncertain and evolving investment landscape.

While we saw a modest pickup in industry flows during the third quarter, primarily attributable to ETFs, we also saw accelerated derisking by many clients in an environment marked by continuing trade tensions, a further slowdown in emerging markets and the steepening yield curve.

Against this backdrop, more clients are looking to BlackRock for investment guidance and technology solutions than ever before.

Despite current headwinds impacting the asset management industry, our globally diversified business model enables us to stay committed to and continually invest in our highest growth businesses, such as iShares, multi-asset solutions, illiquid alternatives and Aladdin.

These investments will enable us to deliver differentiated organic growth for the future.

BlackRock generated $11 billion of long-term net inflows in the third quarter, despite over $30 billion of institutional index equity outflows.

Quarterly net inflows were positive across our iShares and active fixed income, multi-asset and alternatives platforms.

Third quarter revenue of $3.6 billion increased 2% year-over-year while operating income of $1.4 billion rose by 1%.

Earnings per share of $7.52 were up 27% compared to a year ago, driven primarily by higher nonoperating income and a lower effective tax rate in the current quarter.

Non-operating results for the quarter reflected $63 million of net investment income, driven in large part by gains related to the sale of our minority interest in DSP Group and the revaluation of a strategic minority investment.

Our as-adjusted tax rate for the third quarter was approximately 16% and included $90 million of discrete benefits, primarily related to changes in our organizational tax structure.

We continue to estimate that 23% is a reasonable projected tax run rate for the remainder of 2018.

However, the actual effect of tax rate may differ as a consequence of nonrecurring or discrete items and issuance of additional guidance on or changes to our analysis of last year's tax reform legislation.

Third quarter base fees of $2.9 billion were up 4% year-over-year, driven primarily by market appreciation and organic base fee growth, offset by previously announced pricing investments in iShares.

Sequentially, base fees were down 2% compared to the second quarter, reflecting seasonally lower securities lending revenue, the negative impact of foreign exchange movements and our recent iShares pricing investments, partially offset by higher day count in the third quarter.

Our overall fee rate declined by about 0.6 basis points sequentially as base fee growth lagged overall growth in average AUM, primarily reflecting seasonally lower securities lending revenue and the impact of divergent beta as emerging markets and commodities continued to underperform developed markets.

While the S&P 500, which generally tracks products with lower fee rates, was up approximately 10% over the 6 months ended September 30, higher fee emerging market exposures were down 10% on a dollar basis over that same time period.

As a consequence of beta divergence intensifying toward the end of the quarter, our fourth quarter base fee entry rate will be lower than overall third quarter base fees.

Performance fees of $151 million decreased $40 million year-over-year, reflecting lower fees from liquid alternative and long-only funds in a challenging environment for the hedge fund industry.

Sequentially, performance fees increased as a result of a single European hedge fund that, once again, delivered exceptional full year performance and locks annually in the third quarter.

Continued momentum in institutional Aladdin and the expansion of our digital wealth and distribution technologies resulted in 18% year-over-year growth in quarterly technology services revenue.

While overall demand remains strong for our full range of technology solutions, 2018 has, thus far, been a particularly strong year for Aladdin, reflecting an outsized number of new clients sourced during the prior year and successfully implemented during the last 9 months.

We continue to target low- to mid-teens growth for our technology business over the long term.

Total expense increased 3% year-over-year, driven primarily by higher G&A and volume-related expense.

Quarterly, G&A expense of $413 million reflected higher technology spend and included $13 million of deal-related expense related to strategic transactions during the quarter and $29 million of contingent consideration fair value adjustments related to prior acquisitions.

At present, we would anticipate fourth quarter G&A to include normal, seasonally higher levels of marketing and promotional spend.

Direct fund expense was up $18 million or 8% year-over-year, primarily reflecting higher average AUM as a result of significant growth in our iShares franchise.

Our third quarter as-adjusted operating margin of 44.2% was down 90 basis points year-over-year, primarily reflecting lower performance fees and the $42 million of transaction-related expenses in the current quarter.

We remain margin-aware, especially in the current environment, but will continue to thoughtfully invest in our higher-growth businesses to ensure we meet the needs of clients in this rapidly changing ecosystem.

In alignment of that commitment, we closed several strategic transactions during the quarter that added a net $28 billion to our AUM and will accelerate our growth.

We closed the acquisitions of Citibanamex asset management, furthering our goal to be a full solutions provider of Mexico, and Tennenbaum Capital Partners, enhancing our private credit capabilities.

In addition, we completed the transfer of our U.K.-defined contribution administration business to Aegon and the sale of our minority interest in DSP.

We also repurchased $500 million worth of common shares during the third quarter, $200 million greater than our planned quarterly run rate as we saw attractive relative valuation opportunities in our stock during this time.

Quarterly long-term net inflows of $11 billion were led by flows into strategic focus areas, including iShares, multi-asset strategies and illiquid alternatives, offset by outflows from lower fee institutional index equity products.

Global iShares generated quarterly net inflows of $34 billion, driven by continued strong demand from long-term investors in our core franchise.

iShares' flows beyond the quarter rebounded after a challenging second quarter, delivering net inflows of $13 billion driven by fixed income.

Flows were well diversified across long-duration treasuries, corporate bond, high yield and emerging market debt ETFs.

Fidelity's decision to reduce overall barriers to investing and triple the number of commission-free iShares available on their direct and adviser platforms resulted in the strongest August iShares inflows in the 5-year history of our strategic relationship.

We believe that actions by direct platforms to reduce transaction costs will accelerate ETF industry growth, especially as more iShares are now available commission-free than ever before.

Retail net inflows of $2 billion reflected strength in active fixed income, led by municipals, unconstrained in high yield strategies, and event-driven illiquid alternatives funds, partially offset by outflows from non-U.

S. equities.

In the United States, our active strategies continue to see positive organic growth and gain market share even as the domestic retail industry continues to see outflows.

Institutional net outflows of $25 billion resulted primarily from over $30 billion of index equity outflows as clients continue to derisk, rebalance or seek liquidity in the current environment.

Despite overall institutional net outflows, we saw continued demand for multi-asset solutions, OCIO, LDI fixed income and illiquid alternatives.

Momentum in our illiquid alternatives franchise continues.

The third quarter represented our most successful fundraising quarter ever, as BlackRock generated approximately $2 billion in net client flows and raised an additional $4 billion in commitments across the platform, highlighted by the $1.5 billion first close of Global Energy & Power Infrastructure Fund III.

BlackRock's illiquid alternatives franchise now has approximately $22 billion of committed capital to deploy for institutional clients in a variety of strategies, representing almost $160 million in incremental base fees and the opportunity for significant performance fees over time.

Finally, BlackRock's cash management business experienced net outflows of $15 billion, driven by the planned redemption of a single escrow mandate.

Excluding this redemption, our cash platform saw $9 billion of net inflows and continues to leverage scale and Cachematrix technology to better serve clients.

We are now the second largest money market manager globally and have steadily increased market share by more than 250 basis points over the last 3 years.

BlackRock's scale, global investment and technology platform was purposely built to weather the cyclical and secular headwinds impacting today's asset management business.

We have shown an ability to grow and maintain margin in difficult markets before.

Our diverse platform is as well positioned as it's ever been to meet the evolving needs of client, and we remain focused on playing offense by striking an appropriate balance between organically investing for future growth and practical, discretionary expense management.

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

Good morning, everyone, and thanks, Gary.

And thank you for joining the call.

BlackRock's third quarter results demonstrates the resilience of our differentiated platform as we, once again, delivered organic growth even in the face of industry headwinds.

And we've been through these tough markets, tough market environments before, and BlackRock has consistently delivered growth though asset management flow -- through asset management flows and technology revenues while exercising expense discipline and investing for our future.

We built our platform around a holistic, client-centric approach.

And today, we are delivering a broader spectrum of investment strategies and technology capabilities to more clients than at any time in our history.

However, as Gary mentioned, many of the challenges facing our clients continued in the third quarter and have accelerated with recent marketing volatility.

Divergence in monetary policy and macro and geopolitical uncertainty continues to impact investor sentiment and our financial markets, leading many clients to reduce risk in their portfolios.

After a decade-long rise of multilateralism, protectionist agendas are pushing forward around the world.

Concerns over trade tensions in particular are weighing on investor sentiments.

Meanwhile, a strong U.S. economy is adding to investor concerns about overheating and the potential for greater than previously anticipated Federal Reserve rate hikes.

Political instability in certain markets is increasing.

In Italy, for example, the government significantly widened its budget deficit for 2019, driving Italian bond yields to their highest levels since 2014.

And in Brazil, the presidential election is intensifying political polarization.

These developments are all heightening worldwide investors’ concerns.

As a result, financial market performance continues to diverge in 2018.

While U.S. equities reached record highs in the third quarter driven by strong corporate earnings growth, European markets are trading below where they were a year ago, and emerging markets and commodities remain under pressure.

Investors worldwide are taking a defensive posture, highlighted by the market volatility we saw last week.

Short-term government bond funds are seeing their highest inflows since 2010.

Cash balances have grown to $80 trillion globally even as companies execute record amount of share repurchases and M&A accelerates globally.

Asset management industry flows overall has slowed considerably.

At the same time in this environment, even more clients are turning to BlackRock for investment and technology solutions to navigate their portfolios.

Throughout the quarter and in recent weeks, we announced a number of significant, significant partnerships with a large -- with large long-term clients, all of which highlights BlackRock's differentiating value proposition.

We generated $11 billion of long-term net inflows in the third quarter, despite more than $30 billion of non-ETF index equity outflows, much of which are connected with clients who are derisking.

And as Gary said, our technology services grew by 18% year-over-year.

BlackRock's platform is strategically positioned to capture long-term growth in key areas of our business.

We remain focused on further strengthening investment performance, enhancing our presence in local markets around the world, expanding our digital capabilities and using scale and technology to better serve clients and deliver shareholder value.

One of our most differentiating areas of growth is our iShares ETF platform.

We expect the ETF platform could double to more than $12 trillion in the next 5 years, driven by long-term secular trends.

In the third quarter, iShares generated $34 billion in net inflows, and BlackRock, once again, captured the #1 share of global ETF flows for the quarter and year-to-date.

iShares' core products generated $20 billion of net inflows in the quarter.

Long-term investors who are less reactive to the current market environment continue to invest in core, broad market exposures, often through model portfolios.

In addition, we saw flows of $11 billion in the fixed income as wealth managers and institutional investors are adopting fixed income ETFs.

Fixed income is one of the areas within iShares where broad ecosystem innovation is driving strong growth.

This category has seen an excess of 20% annual organic growth in each of the last 4 years, and we expect strong secular growth to continue.

Fixed income ETFs provide investors with liquid vehicles for core and tactical bond allocations and reduce complexities in management of these bond portfolios.

Demand has risen as investors gain more confidence in their benefits and simplicity and as clients search for liquidity in global bond markets in an environment where increased bank capital requirements have diminished supply.

This quarter, BlackRock, in partnership with the CBOE, launched the first iShares high-yield corporate bond index future.

We also partnered with the Intercontinental Exchange to establish an industry-wide open architecture primary market platform for ETFs that will improve the trading ecosystem to help support continued growth.

In addition to the ETFs, clients are choosing BlackRock's other active index fixed income strategies as they look for solutions across the risk spectrum.

We continue to see strong performance across our active fixed income platform where 84% of our fundamental fixed income assets are above benchmarks or peer median for the 5-year period.

We generated $2 billion of inflows in active fixed income mutual funds in the quarter, led by our municipal bonds and our flagship unconstrained SIO product.

We also generated $7 billion of institutional fixed income inflows, led by liability-driven investment strategies in the U.S.

With rising interest rates, U.S. equity markets hitting all-time high and U.S. pension funding ratios improving, client demand to derisk and immunize portfolios is increasing.

The long-term opportunity for our LDI platform is strong, and we have more closely integrated LDI with our global fixed income platform, so we could provide clients with a broader fixed income and cash flow solution.

Our Active Equity platform has made progress as we bring our fundamental and systematic teams closer together to better leverage the power of increased connectivity and data science.

80% of our fundamental Active Equity's up 11% from last year, and 92% of our systematic Active Equity assets were above benchmark or peer median for the 5-year period.

In alternatives, the investments we have made to position BlackRock as an industry-leading manager for our clients are showing up in our results.

Through a combination of organic and inorganic growth, our group alternative platform is now $109 billion, including $57 billion in illiquid alternatives.

BlackRock generated $2 billion in core alternative flows and raised an additional $4 billion in commitments in the third quarter.

We are well positioned to grow this business through strong investment performance and scaled asset-raising and sourcing.

Across our illiquid platform, we have raised $16 billion in gross commitments over the last 12 months, and our market share of illiquid alternatives industry fundraising has more than doubled in the last 2 years.

We expect continued growth in investments in illiquid alternatives and expect this to be an ever-growing contributor to our financial results over time.

BlackRock continues to be both positioning ourselves as a leader and to drive change in anticipation of industry transformation and clients' future needs.

Our strategy is focused, first and foremost, on our clients and their evolving needs, from iShares to factors to illiquid alternatives, and our long-term aspirations include being a first mover and a leader in technology, a leader in retirement and ultimately, a leader in the Chinese asset management business.

As the asset and wealth management landscape evolve, clients are increasingly looking for strategic partners for a broad range of solutions.

In US Wealth, BlackRock has recently been designated a strategic partner by Edward Jones, reflecting the expansion of our long-term relationship.

17,000 Edward Jones advisers now have access to BlackRock's platform of investment strategies, our educational content and how we practice our management.

Additionally, as Gary mentioned, we expanded our strategic partnership with Fidelity in August.

They added 170 commission-free iShares ETFs to their platform for a total of 240 ETFs in an effort to increase accessibility to investing for more and more clients.

BlackRock has also been recently selected as a strategic partner to Scottish Widows and Lloyd Banks for a $40 billion index mandate and to collaborate on solutions across alternatives, our risk management platform and technology.

More than ever before, our clients are looking for asset management partners who can understand and provide investment solutions on their entire portfolio.

This concept is becoming the new definition of active management.

Earlier this year, we launched the Client Portfolio Solutions group, which brings together BlackRock's full platform, including our most comprehensive range of market cap-weighted, factor-based, alpha-seeking and illiquid alternatives strategies, with research, technology and portfolio construction expertise to deliver a holistic solution to our clients.

Sustainable investing for ESG is another area where an increasing demand from clients globally, coupled with BlackRock's investment in technology expertise is driving large-scale momentum.

Earlier this month, along with the governments of France and Germany and several nongovernmental organizations, we announced the formation of the climate finance partnership.

The group will explore the development of investment strategies that would be managed by BlackRock and invest in climate infrastructure in the emerging market world.

Last week, we also announced our partnership with Wespath on an investment strategy designed for the transition to a low-carbon economy.

BlackRock will manage the strategy for Wespath and offer it to other BlackRock clients who seek to achieve both sustainable investing and financial objectives.

Potentially, the greatest client need of our time, however, is the global retirement challenge.

It is likely to dramatically reshape our industry and our firm.

BlackRock has committed to helping drive the solution in this crisis and has made this challenge a strategic priority.

Last month, we announced the establishment of the new retirement solutions group, which will explore lack of access to retirement plans, the need for guaranteed income and innovation, innovative solutions to improve retirement investing.

BlackRock's Aladdin technology enables us to solve clients' most complex needs and also to address industry transformation.

Today, insurers and banks are facing consolidation in evolving regulatory requirements, creating the need for more holistic, flexible technology-driven solutions.

Asset and wealth managers are rethinking their business models and looking for ways to operate more efficiently and rigorously managing risk in more volatile market environments at times with this type of volatilities where we see more interest in our Aladdin business.

These trends are driving increased demand for BlackRock's broad-based technology services and digital tools, like institutional Aladdin or Aladdin for Wealth and Cachematrix technology services grew by 18% year-over-year, and we expect these trends to continue to drive low- to mid-teens growth on an annual basis going forward.

The impact of technology is extending beyond our direct technology business.

For example, we are transforming our cash management business, one of BlackRock's oldest businesses, by integrating technology into our business model.

We are delivering trading technology, powered by Cachematrix, to onboard cash clients who are looking for more than a simple cash product.

Cash management of BlackRock is now a technology business.

Whether it be index or active or ESG strategies or factors or alternatives and with technology, BlackRock is positioned to deliver solutions for clients.

We are leading the evolution of the industry and are better prepared today to meet our clients' needs than ever before.

This is reflected in the depth and the quality of the dialogue we're having with clients across the globe.

Indeed, we believe that, especially in markets like these, while clients may be slow in putting money to work, they are putting an even greater premium on the differentiating value proposition that BlackRock can offer.

With that, let's open it up to questions.

(Operator Instructions) Our first question comes from Dan Fannon with Jefferies.

I guess, Larry, could you elaborate on your broader comments about derisking?

It seems, based on your commentary, that we -- it should likely to continue here in the short term, and we're seeing it through your index products.

So I guess are there other kind of asset classes we -- that you're seeing that in?

And then also, is there a capture rate where you're seeing flows going into other categories that are obviously less risky?

I'm going to let Rob talk about it, and then I'll add.

So I think Larry mentioned increased trade tensions, emerging markets volatility and certainly, the fear of continued interest rate rises across the globe.

So what happens, especially during that type of volatility period, is clients derisk.

So depending upon the next couple of weeks and some of the political issues as well and the volatility that's out there, clients may continue to derisk.

Certainly, we have seen the hedge funds derisk from a period of time where I think across the board, most of them are already down 2% to 4%.

So getting below that is difficult for many hedge funds, so they've derisked.

And we also, depending upon the guidelines of clients and what we think about the markets, we encourage either derisking or risking depending upon what their objectives are.

The goal for us is, even in that derisking, to capture those assets because whatever they're selling and going into, we have that product.

So whether clients move from equity to fixed, we can accomplish that.

Whether they're going from value to growth, long duration to short duration, out of emerging markets into emerged markets, our goal is to offer a holistic solution so that they can derisk and then be ready to put the risk on with us as well.

And that also moves from product to product, whether they do it in iShares, and typically, they'll do that in the noncore iShares that have the most liquidity.

Clients in the core iShares do that less because they are more buy and hold.

So we see that more in the active products.

And I think that really describes a lot of the flows this quarter.

Let me just add a little more.

I think the market movements post third quarter was, as Rob said, more hedge funds derisking.

We did not see any accelerated outflows in the first few weeks.

I think, Dan, when you think about some of these big large strategic partnerships we announced, none of those was asset flows this quarter.

All of this is going to be huge asset flows probably in 2019.

And this is why we are spending so much time trying to develop these deeper relationships.

We're not going to be able to predict or strive for any one quarter, but I do -- we're very excited about the opportunities of building these deeper relationships that over time are going to really push us towards a much higher growth rate.

That being said, if the markets remain to be uncertain, if political risk remains large, you will continue to see clients pause.

We've seen this in the past.

Generally, in the fourth quarter, we see clients adding risk.

That is typically what happens especially November, December.

And so I'm not here to tell you I know how this will all play out, but we are continuing to see a large interest from our clients in our technology businesses.

We're continuing to see large interest from clients in our alternatives space.

And let me also talk about the breadth of our active business for a second.

We had positive active flows in fixed, in multi-asset and alts.

The only area where we had outflows that were significant was in low fee index products.

And that's -- I think Rob Kapito has talked about this for years.

That's where we see how people navigate money.

They go in and out of index funds in large scale as an indicator of their market beliefs.

So -- and I would also say, unlike most organizations in the industry, we have positive flows in US Wealth in our retail side.

I don't know the outcome of this quarter or political uncertainty, but all I can say is we have very strong conversations going on right now with really important clients.

And we'll see how that plays out.

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

So it was nice to see another quarter here of larger buybacks.

Can you remind us how much capacity via excess capital and debt capacity BlackRock has now?

And how we should forecast capital management over the next few quarters just given your very systematic approach over the last few years?

Gary?

Craig, so our capital management policies have not changed.

I think it's -- we remain committed to, obviously, first investing in our business and then returning excess cash flow to shareholders.

That will continue.

Obviously, it's not necessarily tied to any 12-month period of time.

We look at cash over a broader period of time than that because we try not to be that specific.

But we are committed to a 40% to 50% dividend payout ratio and then paying the incremental back.

As we have said many times, our total payout ratio is really an output as opposed to an input of our planning, and we will take into account all the various opportunities for investment in the business, whether through our P&L, through our seed capital, through taxable inorganic opportunities.

We've been pretty clear that our run rate going into the year was about $1.2 billion or $300 million a quarter.

We did slightly more than that earlier in the year.

We saw opportunities to accelerate that this past quarter where we did $500 million.

And we will continue to plan assuming our run rate is current and then looking at opportunities to more aggressively allocate liquidity to the stock price where we think it's a good investment for our shareholders.

As it relates to how much liquidity we have, obviously, as you know, we've never been capital-constrained, either from a cash flow or P&L investment point of view.

We have about $5 billion of long-term debt on our balance sheet.

We're levered at less than 1x, so we obviously have significant liquidity capacity if we so choose to use it for a variety of strategic opportunities.

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

Just on the commission-free ETFs, which you defined as an opportunity to lead to growth in ETFs.

Just curious if there's any color you could share in terms of the number of [top loans] that you're on today in commission-free ETFs and how much more penetration you could see.

And how you see the duration profile of the iShares changing, if at all, with more commission-free ETFs?

In other words, do we see more flows but maybe more volatility within the flows as it becomes more commission-free?

Just curious how you're thinking about that.

So the whole commission-free situation was actually a very large benefit to BlackRock.

And I don't know if that story really got out that well.

Because especially at Fidelity, what was not -- what was hidden, I think, in the communication was they actually added over 170 new ETFs to their platform commission-free.

So if that's the case, we obviously have many more on a very strong platform.

And it attracts many more investors because there's no trading cost.

So I don't know if it's going to really change the profile.

I would imagine since most of the people on those platforms are more equity than fixed income long-term investors, it may push them towards more equities.

We haven't really been able to see a true trend yet, except that there are more buyers.

And that's been positive to us so our growth on that platform continues.

Obviously, that will be the same on other platforms that begin to offer commission-free ETFs.

So this was a very big positive to us to continue.

As you know, we have the #1 market share globally of ETFs.

So if we really have more people on it, it will give us more opportunity to distribute.

But I haven't seen a trend yet, Michael, to tell you that there'll be more of any one particular one.

What I'm hoping for is that we get to see some of the smart beta, which we have over 100 different smart betas.

We have a lot of big ESG ETFs coming onto the platform.

So I think there's a big opportunity there.

And I hope that we're finding out that a lot of investors are interested in ESG.

So hopefully, they'll express that through our iShares.

But on the particular Fidelity platform, and they've been great partners.

We've had the best August we ever had since the pricing moved, even in what was considered a very tough market.

So very optimistic as new buyers can enter the market commission-free.

Let me add one more -- two more things.

I believe more and more of the market for ETFs will be commission-free.

I think it's incredibly important.

So for the retail investor, commissions, the trading commissions can be larger than the commissions or the fees of the asset manager.

So when you're trying to save for retirement and you're only investing, let's say, $1,000 at a time, the commissions were eating up quite a bit of return.

And so we actually believe commission-free ETFs is going to lead to better outcomes for retirement, it's going to lead more investors to invest in ETFs for retirement.

And I believe this is a really important trend in all the ETF industry, and I also believe it's a very important trend for the advancement of pools of money for retirement.

So we look at this as it's not just important for the ETF industry, we believe it's an important contributor to the strategies of the wealth management platforms as they try to help clients navigate the whole cumbersome component of retirement.

And we believe a commission-free environment for ETFs is going to lead to far better outcomes of investing for retirement.

Your next question comes from Ken Worthington with JPMorgan.

This sort of follows up on Michael's question.

So price has been a key differentiator in core ETFs, the majority of your ETFs are noncore.

What are the longer-term success factors in noncore?

So you have mentioned liquidity as a factor, maybe a key factor in the past.

Does liquidity remain a key driver for the noncore ETF sales?

Or does that become less differentiated as the ETF market grows?

To Michael's question, you mentioned commission-free trading and distribution relationships are important.

You alluded to product development in ESG.

But what is most important for noncore ETF growth over time?

And what does that say about the pricing that you think you could get for noncore?

Will it hold up?

Or does it sort of eventually mirror the core side?

So I think the 2 most important things are brand and liquidity.

So this is what those people that are more active and they participate in their noncore want in purchasing their ETFs.

And I think that what hasn't been talked about is this last move in volatility.

We haven't seen any stories of any issues in the liquidity of ETFs.

All of a sudden, that is off the front page.

They actually work.

So the large and liquid with brand has actually provided more liquidity in the marketplace.

The more situations we have like that, the more large investors will come in and have confidence in the market.

So I think we saw that.

So in essence, I would say brand is still very important.

Liquidity, and that's due to the scale and size of the products that we actually have are the most important going forward.

And I do think that's going to translate as more and more people get focused on either the smart beta in which they're using this to really focus on what are the factors in the market that they think will drive it going forward.

And the second thing will be the ESG, where as large plans have the responsibility now to be asked by their boards to express that in their portfolios, I think they're going to want to express it in ETFs that have that brand that also have the liquidity in it.

Let me add a little more to that, Ken.

I think retail has always been more a buy-and-hold strategy.

I think retail continues to be focused on more core-oriented strategies for their, I would say, their large component of their investment strategies.

But as ETFs expand, whether it is ESG that Rob was talking about or factor-based or emerging markets in other areas, we still believe that, as Rob said, brand and liquidity are major components.

And I don't believe those 2 components lead to each other.

So we're not seeing any indication, any issues related to a worsening of prices related to the noncore.

But core is -- growth is being driven by essentially by retail individuals, and that continues to be a major component of it.

And those core products just don't have the liquidity that some of the noncore strategies have.

They don't have -- and some of the noncore strategies now have options against it, and they have a much more derivative-based market around that, too.

And so they're almost 2 different ecosystems both serving their clients, and this is what's great about it, in their specific needs.

Some clients have a long-term need to invest for retirement, and that's a buy-and-hold.

And that's why we so much -- why we adopted that core strategy.

And we have a large component of our institutional clients worldwide are using it for asset allocation.

They're using it for its closures.

And branded liquidity is very important and remains to be important.

I don't think you'll see pricing pressure as much because of the demand.

And it's only the large and liquid and ones with the brand that can offer the futures, the options and the derivatives.

So I think this is, as Larry said, a separate market.

And I think because of that, we can command a higher price.

Your next question is from Alex Blostein with Goldman Sachs.

So I wanted to build, especially on Larry's points, around the strategic partnership with wealth managers.

You hit on the Fidelity and the kind of the commission-free model.

But looking at the wirehouses and other brokerage firm networks, can you expand a little bit on how these partnerships are structured?

What's sort of the spectrum of products this creates for you guys, both in the technology and asset management side of things?

And I guess, looking out into 2018 maybe a little more color, Larry, from you why you think these will yield stronger flows for you?

Well, I mean, our first indication from Fidelity, we are seeing stronger flows immediately after one month.

So we did begin to see that, and we continue to believe that will continue to yield more flows.

In terms of the wires, I mean, one of the great success stories so far that's just been implemented and one just was launched in its existence is Aladdin for Wealth.

So UBS and Morgan Stanley both use Aladdin for Wealth.

We have other organizations that we're working on.

We have actually other organizations worldwide that are adopting Aladdin for Wealth.

And so it is through technology that is advancing our positioning with our wires.

It is trying to work with them on ETF strategies.

But I actually believe the relationships that we have with the wires now are more comprehensive, more holistic than any time ever.

And we believe, like we just said -- as I said, this -- last week was when we went live with Morgan Stanley, we believe through those processes, we're going to start seeing in maybe the fourth quarter in 2019, increased flows through our holistic relationships with our wires of all our strategic partners.

The other area where you're seeing, especially from the wires, which is starting to become a bigger driver of their business, and one of the reasons why we believe over the next 5 years, ETFs will double in size, is how more and more wires as they move more towards away from brokerage and more to a consultive relationship or advice, they're using more models.

And in the models are heavily populated by different BlackRock and iShares products.

And so we believe over time, we're getting ourselves better positioned to have deeper, more holistic relationships, and we continue to believe that is what's going to be driving our future growth.

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

Maybe switching gears a little bit on pension plan rebalancing.

Larry, maybe just your view of how that might increase the rebalancing from equities to fixed income might increase.

What kind of maybe yield thresholds do you think that will be a catalyst for that?

And obviously, you guys are positioned to capture that on the fixed income side.

Do you see that from your perspective dealing mostly in LDI?

Or do you think your active fixed income products can take a large share of that?

And then maybe just a little bit more color on the Lloyds arrangement with the $40 billion.

Is that just a part that's coming more quickly?

And I think you're in a strategic partnership with them for a potential of a few -- GBP 100 million.

So on year-end rebalancing, but before the market setback, I would have said there would be a lot of rebalancing out of equities into more of fixed income.

Now that the market's resetting itself, I think that rebalancing out of equities is going to be diminished quite a bit.

Obviously, we still have a full quarter to see.

Higher rates is good for more and more pension funds.

They reset their liabilities, and higher interest rates is a reset.

Keep in mind, it's based off the tenure, not the short end.

So the tenure has only moved, I don't know, on the year, 30 basis points, so it's not a significant move.

But net-net, you're going to see more and more pension funds using, as you raised, LDI.

We're seeing more and more clients looking to use BlackRock services on LDIs.

It's one of our growth areas in the last quarter, and it continues to be an opportunity for us.

I don't know how significant that will be.

We'll see where markets are and rates are over the course of the balance of this year.

But we do believe the trend will be over the long term for pension funds to reduce their exposures in their defined benefit plans as more and more money is now moving into high contribution, so it is -- we do have that dynamics.

Just real quickly on Lloyds, we don't describe what the client is doing.

The client came out with a press release.

I don't believe I could talk about more than what the client released in their press release.

We have a strong, deep relationship with them.

At the moment, we won a GBP 30 billion mandate for index products.

We also agreed on a partnership in terms of alternatives where we believe we're going to see systematic quarter-by-quarter flows in our alternative platform.

We are looking at -- they're looking at utilization of our Aladdin platform and other forms of technology.

So it's a comprehensive relationship.

It is deep and related to the other pool of assets.

We'll see -- I mean, we'll see about that outcome.

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

Gary, just one for you on the expenses.

You mentioned the $42 million in the transaction cost in the quarter, and then the typical seasonality that we see in G&A.

I guess I just want to level set that.

Should we be expecting the $42 million to come out and then build off of that in terms of the seasonality?

And then just given the seasonality, how does maybe the diverging beta or the headwinds that you guys are seeing on the revenue side kind of factor into that?

So the $42 million, there is a component of that.

And again, we've tried to give you a little bit more visibility through some better disclosure, both in the press release and the Q. But there's a portion of that, that is more professional fee-related, as I mentioned, about $13 million tied to closing a number of transactions that clearly will come out.

The contingent purchase price adjustments is going to be a part of our P&L for some period of time.

We have about 250-plus million dollars of contingent purchase price liability on our balance sheet.

We will have to fair value that every quarter.

The bad news is, when it goes up, it creates some noise in our G&A line.

The good news is, when it goes up, it means the deals we have done are doing better.

The most significant component this quarter was tied to the First Reserve transaction where the expectations for our ability to raise assets in coming quarters has gone up, which is why we are at fair value in that.

So we will do as best we can to call that out for you so that you can see some of that volatility in what we would consider kind of more nonrecurring core G&A expense.

In terms of expectations for the fourth quarter, I think you've got it right on.

I think the intent was to try and call out for you that component, that kind of is a little less recurring and to just highlight what has been the case for the last couple of years is that our marketing spend tends to go up in the fourth quarter.

And you obviously know what that was during the third quarter.

I think your broader question as it relates to the business model today in light of a more challenged revenue environment, look, I think for us, we have purposely built a very diverse business with both index, active, alternatives and cash to move away from any specific product but really to focus on delivering, as Larry mentioned, a holistic client-centric solution to our clients.

And we've seen typical markets before, but we think that our unique and scaled model enables us to kind of grow organically through those markets and to be able to manage our expenses appropriately in our display, whether they're cyclical or secular headwinds.

And our view at the moment is really to continue to invest through the cycle.

We see unique opportunities.

Frankly, we've done the best in these types of markets because others frankly with less diversified models are forced to pull back.

And candidly, it's a lot easier to cut cost than to invest for growth, and that's really the hard part.

But we think we've got a model advantage.

And so our intent is to continue to invest through the cycle on behalf of our clients and our shareholders.

Your last question comes from the line of Bill Katz with Citigroup.

So a lot of it has been answered, right, but maybe just sort of drilling in to the margin discussions a bit further today.

When I look at your distribution fees versus your distribution expenses, there seems to be a deeper reduction in the distribution fees than on the expenses.

How much of that is just either divergent beta or sort of mixed non-U.

S. versus U.S. versus maybe some of these wealth management victories you've been getting and some elevated maybe point-of-sale economics against the manufacturing complex?

We've seen on the distribution fees, obviously, as we've moved away from kind of 12b-1 fees over time, and that's been going on for a long time for us now, Bill.

And I think as obviously we're moving into a more fee-based environment with all of our distribution partners trying to basically do the best they can for their clients.

We've migrated away from traditional load products to products that don't have that.

So we've seen the decline in our distribution revenue.

By virtue of FASB, we've kind of grossed up everything.

I don't think there's that much of a breakdown beyond that other than just demand for different classes of funds are changing and driving traditional 12b-1 fees down.

But beyond that, I don't think that there's anything more to it than that from our perspective.

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

Mr. Fink, do you have any closing remarks?

Yes.

Thank you, everyone, for joining our call this morning and your continued interest with BlackRock.

Our third quarter results reflect the value of our diverse investment platform and technology capabilities we provide for our clients as they navigate through this very active investment landscape.

We have built and evolved our business by staying ahead of our clients' needs and industry transformation, and we are confident that our continued differentiation, our holistic client approach will enable us to deliver growth and scale advantages over the long term to our clients and to our shareholders.

And I do believe the third quarter really did show how building these strategic relations over the long run will produce future growth tomorrow.

Everyone, have a good fourth quarter.

And we'll be talking to you soon.

Thank you.

This concludes today's teleconference.

You may now disconnect.