貝萊德 (BLK) 2019 Q2 法說會逐字稿

Good morning.

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

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

Second Quarter 2019 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)

Thank you.

Mr. Meade, you may begin your conference.

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 second quarter of 2019.

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 results, I will be focusing primarily on our as-adjusted results.

Global trade tensions once again escalated in the second quarter and market volatility followed.

U.S. equities climbed to record highs, though domestic equity markets moved down 7% in May only to increase 7% in June, emerging markets remain challenged and the 10-year treasury bond traded below 2%.

Clients accelerated rebalancing and de-risking activity, shifting out of equities and into fixed income and cash.

BlackRock's globally diverse investment platform, combined with industry-leading risk management and portfolio construction technology, was purposely designed to not only withstand today's market volatility but thrive in it.

Our strategic positioning fosters deeper partnerships with clients, enables us to meet their goals in a variety of market environments and drives more consistent and differentiated organic growth.

BlackRock generated a record $151 billion of total net inflows in the second quarter or 9% annualized organic asset growth as clients once again turned to BlackRock for solutions-oriented advice to meet their long-term investment needs.

Lower total organic base fee growth of 3% reflected mix change favoring lower-fee fixed income and cash assets and the impact of volatility-driven outflows from higher-fee iShares financial instruments and precision exposures during the month of May.

Second quarter revenue of $3.5 billion was 2% lower than a year ago driven in part by lower securities lending revenue and lower performance fees in the current quarter.

Including $61 million of cost associated with the successful launch of a closed-end fund, operating income of $1.3 billion was down 11% compared to a year ago.

Earnings per share of $6.41 was down 4% as lower operating income and a higher effective tax rate were partially offset by higher nonoperating income and a lower diluted share count in the current quarter.

Nonoperating results for the quarter reflected $79 million of net investment income, primarily driven by the revaluation of certain strategic minority investments and higher marks on unhedged fixed income seed capital investments, but also reflected additional interest expense associated with the mid-April issuance of debt to partially finance the acquisition of eFront.

Our as-adjusted tax rate for the second quarter was approximately 24%.

We continue to estimate that 24% is a reasonable projected tax run rate for the remainder of 2019, though the actual effective tax rate may differ as a consequence of nonrecurring or discrete items and issuance of additional guidance on tax legislation.

Second quarter base fees of $2.9 billion were down 1% year-over-year despite the positive impacts of organic growth and acquisitions, primarily driven by lower securities lending revenue, the negative impacts of divergent equity beta and foreign exchange movements on average AUM and strategic pricing investments.

Quarterly securities lending revenue declined $33 million or 18% compared to record levels a year ago due to reduced gross exposures partially linked to hedge fund deleveraging in the second half of 2018, lower demand for hard-to-borrow U.S. equities in the softer M&A environment and lower spreads.

In addition, the trend of reduced European seasonal demand continued from previous years.

Divergent equity beta and FX continued to impact year-over-year base fee growth.

While the S&P 500 was up 7% on average year-over-year, many markets linked to our higher-fee equity products, including Asia, emerging markets and global natural resources, were down 8% over the same time period, resulting in an overall decline of 2% in our revenue weighted equity composite index.

Dollar appreciation over the last year had a negative 1% impact on our year-over-year base fee growth.

Sequentially, base fees were up 3% as a result of higher average AUM and the effect of 1 additional day in the quarter.

On an equivalent day count basis, our overall fee rate declined 0.4 basis points in the second quarter, reflecting this divergent equity beta and the impact of mix shift towards lower-fee fixed income and cash assets.

Performance fees of $64 million decreased 30% from a year ago, reflecting lower revenue from long-only equity products.

However, we have seen improved performance in many of our single strategy hedge funds since year-end, better positioning us to generate performance fees in the second half of the year.

Quarterly technology services revenue increased 20% year-over-year, reflecting continued momentum in institutional Aladdin and the impact of the eFront acquisition which closed in May.

The combination of eFront with Aladdin sets a new standard in investment and risk management technology and reinforces Aladdin's value proposition as the most comprehensive investment operating system in the world.

As Larry will discuss in more detail, overall demand remained strong for our full range of technology solutions, and we are already seeing revenue synergies related to the combination of eFront and Aladdin.

Advisory and other revenue of $53 million was down $25 million year-over-year, primarily reflecting lower fee from advisory and transition management assignments.

Total expense was up 4% year-over-year driven by higher G&A expense which reflected fund launch costs and acquisition-related expense in the current quarter.

G&A expense was up $77 million year-over-year and $82 million sequentially, primarily due to $59 million of product launch cost associated with closed-end fund launches during the quarter.

We exclude the impact of these product launch costs when reporting our as-adjusted operating margin.

Quarterly G&A expense also included approximately $20 million in professional fees and contingent consideration fair value adjustments related to historical acquisition activities.

Intangible amortization expense was up $10 million sequentially, reflecting amortization of intangible assets acquired in the eFront acquisition.

Our second quarter as-adjusted operating margin of 43.1% was down 210 basis points from a year ago but up 120 basis points sequentially as U.S. equity markets returned to historic highs from a year ago.

Despite a more challenging overall revenue capture environment driven by current market volatility, we continue to see strong performance in future drivers of differentiated growth, including ETFs, alternatives, technology and portfolio construction, and remain deeply committed to investing responsibly for the long term.

Our capital management strategy has always been to first invest in our business and then return excess cash to shareholders through a combination of dividends and share repurchases.

In connection with the previously mentioned eFront acquisition which closed on May 10, we raised $1 billion in 10-year debt at a 75 basis points spread to treasuries.

This represented the tightest credit spread ever for a 10-year senior debt issuance by a public asset manager.

As a reminder, in the first quarter, we completed our targeted level of share repurchases for 2019, repurchasing $1.6 billion worth of common shares.

While we will be opportunistic in repurchasing additional shares during the remainder of the year, we did not repurchase any shares of common stock in the second quarter.

Quarterly net inflows of $151 billion were positive across asset classes, investment styles, regions and client types.

Flows benefited from particularly strong demand across our fixed income platform, reflecting changing client preferences and validate our unique ability to partner with clients globally to meet their long-term needs in a variety of market environments.

BlackRock's institutional franchise generated a record $87 billion of net inflows, representing 6% annualized organic base fee growth.

Flows were led by fixed income and reflected demand for our top-performing active strategies and liability-driven investment solutions.

Institutional active net inflows of $73 billion were driven by $59 billion of active fixed income flows which included 2 sizable client wins.

BlackRock's global insights and unique ability to offer holistic solutions are resulting in more significant strategic fundings than ever before.

Multi-asset net inflows reflect a continued growth in our LifePath target date franchise.

And Active Equity net inflows of $3 billion were primarily into quantitative strategies, where long-term performance remained strong.

IShares' net inflows of $36 billion, representing 8% annualized organic asset growth, reflected continued growth in core, fixed income, factor and sustainable ETFs.

As previously seen in periods of significant market volatility, similar to the dynamic we saw in 2018, we saw outflows from higher-fee financial instrument and precision exposure ETFs, which clients used to express real-time capital market sentiment and tactically allocate risk exposure.

Quarterly outflows from these products resulted in an iShares annualized organic base fee growth of 1% for the second quarter and had a dilutive impact on BlackRock's overall annualized organic base fee growth.

iShares crossed $2 trillion in AUM during the quarter and achieved the #1 share of industry flows globally in the U.S. and in Europe and in key product areas, including fixed income, factors and sustainable ETFs.

We continue to project a doubling of the global ETF market by the end of 2023, including significant growth in fixed income, factors and ESG as well as in Europe.

Retail net inflows of $2 billion reflected strength in BlackRock's municipal fixed income franchise and the event-driven liquid alternatives funds as well as the successful close of the $1.4 billion BlackRock Science and Technology Trust II, BlackRock's largest closed end fund launch in the last 7 years and the industry's largest from the last 5 years.

Momentum in our alternatives franchise continued with approximately $3 billion of retail and institutional net inflows in the second quarter.

In addition, we have approximately $24 billion of committed capital to deploy for institutional clients in a variety of alternative strategies, representing a significant source of future base and performance fees.

Finally, BlackRock's cash management platforms were $26 billion of net inflows as we continue to leverage scale for clients and deliver innovative digital distribution and risk management solutions.

In summary, our second quarter results highlight the value clients place in our investment platform and our ability to use technology and risk management to develop broad-based solutions across ETFs, alpha-seeking and alternative strategies.

While we can't control market volatility, the diversification and breadth of our business positions us to serve clients in a variety of environments, helping to drive consistent and differentiated organic growth through economic cycles.

We will continue to invest responsibly on behalf of clients and shareholders to execute our strategy for long-term growth.

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

Thanks, Gary.

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

For several quarters, I have spoken about the increasing depth and breadth of conversation BlackRock is having with clients, and this quarter's results demonstrates how those conversations are resonating, leading to significant strategic wins.

We generated $151 billion of total net inflows in the second quarter, representing 9% annualized organic growth.

Inflows were driven by our record activity in fixed income and cash and were positive across all client types, asset classes, regions and both active and index strategies as clients assessed the full breadth of BlackRock's platform in a more volatile environment.

The deliberate investments we have made in BlackRock's investment and technology platform are manifesting in the quality and quantity of our engagements with clients.

While our financial results were not immune to market volatility, as Gary described, we have -- we are having comprehensive conversations with more clients globally than ever before about outcomes and solutions, asset allocation, portfolio construction and investment in risk management technology.

The combination of these capabilities and expertise into a one BlackRock approach gives us a distinct and unique global perspective and gives us a distinct voice with so many clients around the world and is translating into a larger, deeper strategic mandates for BlackRock.

Following improved investor sentiment and global equity market rally to the start of the year, macro and geopolitical uncertainty once again returned.

The U.S.-China trade tensions flared, renewing concerns about a slowdown in global growth.

Emerging markets equities have been negatively impacted and are down for the quarter.

At the same time, U.S. equities have hit a record high.

In Europe, while uncertainties around Brexit continued to weigh on investor sentiment, a focus on interest rate policy has also led to an unusual situation, where a strong demand for safety has supported fixed income price appreciation while equities have been delivering income.

And after a period of rising rates, both the Federal Reserve and the ECB has shifted towards a more dovish stance.

The market now expects several Federal Reserve rate cuts by the end of 2020 and the ECB has highlighted a readiness to introduce new easing measures to address inflation shortfalls and hopefully to extend the economic expansion.

The combinations of these events on top of the melt up in U.S. equity markets has driven a shift in risk sentiment in financial markets globally.

Investors are de-risking and rebalancing out of equities into fixed income and cash in order to achieve their intended asset allocations in their portfolios.

As the investment landscape evolves, clients continue to turn to BlackRock.

Today, clients are looking for better, more resilient portfolios that can help them meet their goals.

They continue to demand transparency, value and convenience in addition to sustainable long-term returns and better long-term outcomes.

BlackRock's client-centric approach and scale positions us well to deliver on each of these client demands.

As our investments in asset allocation, our investments in portfolio construction, a spectrum of investment solutions and technology, along our ability to bring all of those capabilities together that are generating growth and long-term value for BlackRock shareholders.

Last month, BlackRock crossed the 10-year anniversary of our announcement to acquire Barclays Global Investors.

Our willingness to just disrupt ourselves and the industry by bringing active and indexed together is creating the foundation of what BlackRock is today.

More importantly, what makes that transaction and each of our subsequent acquisitions so successful was our desire and discipline to integrate the organizations into one: 1 platform, 1 unifying global culture and 1 technology.

While we face a different landscape and a set of challenges now, the culture and approach that drove us to that combination 10 years ago are just as relevant today: A willing to reimagine our business, to think comprehensively about our clients' portfolios and to innovate and to use technology in new ways, all to help meet our clients' needs.

BlackRock's global voice is translating into large client wins with insurance companies, pension and wealth distribution partners.

Our conversation with clients are about understanding their investment challenges and helping them shape and execute strategic portfolio construction decisions.

The strong organic asset growth that we saw in the second quarter reflects this approach and contributed to record institutional net inflows driven by a number of significant strategic client mandates.

As clients chose to de-risk and rebalance their portfolios, BlackRock saw significant demand for fixed income strategies.

We generated our second consecutive record quarter for fixed income with $110 billion of net inflows diversified across our active and indexed fixed income platforms.

Inflows were led by a $65 billion into active fixed income strategies where performance remained strong with 82% and 86% of the assets above the benchmark or peer [medium] for the third -- 3- and 5-year periods.

We also saw increased demand in our cash management business which generated net inflows of $26 billion, representing a 23% annualized organic asset growth.

Results benefited from client de-risking activity as well as a number of significant cash client wins.

In addition to the ability of our diverse investment platform to capture shifts in client preferences across asset classes, long-term growth for BlackRock will be driven by our strategic positioning and our competitive advantages.

BlackRock has the most diverse investment platform by investment style, from index and ETFs to alpha-seeking and to illiquid alternatives, which enables us to be the leader in the industry and to do more towards portfolio construction, to have global scale, and are increasingly establishing a local identity which positions us to capture growth in high-potential markets around the world.

And we have leading risk management and technology capability to serve the entire asset management value chain.

These differentiators align with areas of highest client demand and are fueling BlackRock's ability to grow faster than the industry average.

iShares is one of those areas of highest client demand and generated $36 billion of net inflows in the second quarter.

iShares captured the #1 market share of ETF flows globally, in Europe, in the United States and in a diversified mix of high-growth category, including fixed income, factors and sustainable ETFs as well as the core area of our ETF platform.

Flows were led by fixed income in core and included $9 billion of net inflows into factor and sustainable ETFs.

We also saw our clients use certain financial instruments and precision exposure ETFs to express risk-off views in tactical asset allocation decisions.

It is the high secondary market liquidity and the unique options and lending markets around these ETFs that make them so valuable to institutional investors.

As Gary mentioned, risk-off and volatility-driven outflows from these higher-fee ETFs masks organic fee growth across other iShares category, all of which are longer term in nature.

iShares crossed an important milestone in the quarter, reaching $2 trillion in AUM.

This is just 5 years after [reading] $1 trillion and 10 years since we acquired the $385 billion franchise.

Importantly, 80% of growth over the last 5 years has been driven by client inflows, and we remain confident in the long-term secular growth opportunities for ETFs and we expect the industry could double in the next 5 years, with iShares maintaining its market leadership.

We are investing in our platform to deliver high-quality exposures to clients globally and to increase the adoption of ETFs with new clients and for new use cases.

For example, we are seeing more investors use fixed income ETFs, which recently crossed the $1 trillion in industry assets.

In an increasing number of ways, since BlackRock launched the first fixed income ETF in 2002, these products have made it more convenient for all investors to access a diverse range of exposures.

Institutions are adopting them as replacement for their individual bond holdings to enhance efficiencies on their portfolio management process.

Individuals are using them to help generate predictable income or as a part of a broader portfolio.

iShares fixed income ETFs have also repeatedly demonstrated they offer the clients an additional source of liquidity and transparency during the times of market stress.

The combination of BlackRock's history as a bond manager, our expertise in ETFs and industry-leading technology and data capabilities, create significant differentiation for iShares in this space and we believe this is just the beginning.

It took 17 years for fixed income ETFs to reach $1 trillion in AUM and they still represent less than 1% of the $105 trillion global bond market.

We believe they are well positioned to double to $2 trillion globally within 5 years, especially as secular forces like bond market modernization, regulation and a move towards portfolios will take effect and create that type of systematic demand.

Sustainable ETFs represent another strategic growth area for iShares as clients increasingly look for strategies that target a measurable ESG impact and financial returns.

We launched the iShares ESG Leaders Fund in the second quarter, which generated over $1 billion of net inflows, representing the best asset gathering in an equity ETF launch in 15 years.

Since launching our iShares sustainable core ETFs in October, we have doubled assets to $13 billion and our clients' discussions suggest increasingly more client demand.

Beyond ETFs and across our investment platform, we're seeing greater demand for ESG or sustainable investments.

BlackRock has invested to develop significant expertise in this space.

We are leveraging our insights and technology to analyze sustainability-related risk and opportunities across asset classes so we can better deliver long-term results and opportunities for clients across index, active and alternative investment strategies.

Demand for illiquid alternative also remained strong as investors search for yield and attractive risk-adjusted returns in a sustained low rate environment.

We generated $3 billion of net inflows and commitments across our illiquid alternatives business in the second quarter, led by credit, infrastructure and private equity solutions.

Our teams consistently deploying capital on behalf of our clients with another $1 billion of committed capital deployed in the quarter.

As clients increase our exposure to private markets, they went more than individual alternative products.

Increasingly, clients are looking for alternative solutions that sit in the context of their whole portfolios as well as technology to better understand risk and comprehensively manage portfolios across public and private markets.

BlackRock can offer clients both alternative investment solutions and investment and risk management technology.

Our acquisition of eFront which closed this quarter further strengthens our positioning and ongoing growth in our illiquid alternative business and will be supported and enhanced by our -- eFront over time.

BlackRock's leading technology capabilities continues to support and enhance the strong results we are seeing across our entire platform.

Technology service revenues grew 20% year-over-year, including the impact of eFront acquisition that closed in May.

We are excited to share that we have already received our first combined client win notification for eFront contract alongside an Aladdin contract extension.

This early success is a reflection of the immediate collaboration and teamwork across Aladdin and eFront and reinforces our value proposition as the most comprehensive investment operating system in the world.

With Aladdin Wealth, BlackRock is enabling our wealth management partners to offer transparency and convenience to their own clients.

Aladdin Wealth is giving advisers better capabilities to connect with their own clients and providing wealth managers with the better risk management portfolio construction tools.

Our goal is to make Aladdin Wealth the leading technology platform for wealth managers and deep in our value proposition with our partners and our financial advisers.

We see strong momentum going forward as industry consolidation, shifting product usage and regulatory requirements are creating the need for more holistic, more flexible technology-driven solutions at both institutions and wealth managers.

BlackRock is well positioned to capitalize on these trends and is committed to enhancing our technology capabilities to continually meet our clients' needs.

Over the course of BlackRock's 30-year history and in the 10 years since the financial crisis and our acquisition of BGI, markets have experienced various periods of volatility and uncertainty.

I firmly believe that in markets like these, clients put an even greater premium on the differentiating value proposition that BlackRock can offer.

We remain focused on what we can control, bringing together the entire firm to serve clients, strategically investing in our competitive advantages and leveraging our global scale to be more disciplined in how we invest.

We are deepening our strength by adapting our businesses to meet challenging client needs, being a leader in the highest future growth areas of our industry and serving our clients more broadly than any firm in our industry.

By continuing to keep clients' needs at the forefront of our priorities, we will continue to be driving differentiated growth for our shareholders and I'm confident we're very well positioned for business for the future.

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

(Operator Instructions) Your first question comes from the line of Ken Worthington from JPMorgan.

So really going after cash management and fixed income sales, I'm hoping you could talk about the pipeline for both.

So clearly, 2Q was huge.

There was sort of a change in the rate outlook, lots of repositioning.

What portion of that repositioning might be left as we look forward there?

And then it seems like BlackRock was a disproportional winner in both fixed income and cash strategies.

You did mention some of the drivers in your prepared remarks, but if you could just maybe highlight the factors that you see which may have driven not only just good sales, but market share wins here as well.

Thank you, Ken.

So I would say what we are seeing more than ever before, clients are finding the management of fixed income more difficult if they in-house manage it.

They're looking for deeper relationships to have either windows to the market by employing firms like BlackRock to manage a core part of their portfolios in fixed income.

And in some cases now, they're looking to outsource the entire platform of fixed income, and they're looking for more of a technology solution as a component of that.

And it just leads to what I've been saying each quarter, Ken, that having this holistic outcome orientation with our clients is leading to these type of broad conversations.

We are -- we have many deep, broad conversations ongoing now, and we don't see that type of behavior dissipating in terms of these types of big types of opportunities.

But a part of that also is just a systematic approach to fixed income, where we're able to provide both index or ETF solutions alongside active solutions.

And I do believe they co-exist together.

We're going to -- we are seeing more clients who are employing ETF solutions for fixed income alongside active solutions.

And so having that comprehensive conversation, having the ability to source more product, and that's obviously in this environment now, smaller organizations are having a harder time sourcing, whether it's in the private credit markets or even in the public credit markets.

And so this is where scale is becoming even more important and also having that global footprint in terms of relationships is building these types of flows.

I'll let Rob talk about the cash aside, but we have been saying this as a huge competitive opportunity for us and we think much of it has started to manifest in this quarter and we believe in the quarter's to come.

So let me just accent Larry's comments.

So the depth and the breadth of the conversations that we are having with clients is really resonating now and leading to these large strategic wins because clients are looking for a long-term strategic partner.

So these conversations are about understanding the investment challenges they have and helping them execute strategic portfolio construction decisions.

And we have now the unique ability to offer holistic solutions, and this has to include technology, portfolio construction, modeling capabilities, have various asset allocation strategies that involve both passive and active strategies.

It includes trading, it includes analyzing credits and it also includes balance sheet management.

So all of these things have been more significant to get the strategic fundings than ever before, and I think the result you saw in this quarter really reflect this.

And the clients are putting an even greater premium on this differentiated value proposition that we offer.

Part of this is also cash.

We saw $26 billion of cash management net inflows in the second quarter and we are now #3 globally as a money market provider.

And these flows come from both large separate account wins and strong flows into our institutional money market funds as we continue to innovate, leverage scale and deliver digital distribution and risk management solutions.

So as a reminder, more than 95% of BlackRock's cash assets under management is institutional, where we are differentiated with our scale, risk management and technology.

So we believe this differentiated set of cash offerings, including money market funds, separate accounts, CTFs, ETFs and other short-duration strategies, help us to serve our clients.

And lastly, I would say in cash, we are transforming our cash management business by delivering distribution and risk management technology through a portal that we have called Cachematrix and also through Aladdin.

So we are creating a technology-first distribution strategy, and this is driving our success in cash, as well as holistic approaches to get these large strategic wins.

Your next question comes from the line of Bill Katz from Citi.

So Larry, just want to step back a little bit and I was wondering if you could sort of help sort of frame out what gets the Active Equity market going again.

And within that -- at least from the flow perspective.

And from within that, how does products like Precidian with active shares play into that?

And what might be risk to the passive business, if any?

Let me talk about Active Equities and let Gary talk about Precidian, but I wanted say one comment about what does it do to the passive ETFs.

We had active positive flows in our equity business last year -- last quarter.

It was in the form of a closed-end fund where we raised $1.6 billion, and we saw good inflows in our scientific Active Equity team, where we had great performance.

So where you see with other asset managers, where they have flows, it's all performance-based.

You have to prove, over time, value for their money.

This is one of the big things we've always been talking about.

If you cannot show the value or the fees for their returns, you're going to continue to see inflows in other types of products, you're going to continue to see more flows into alternatives because of the inability of getting active alpha in equities.

And so when you think about a holistic approach, pension funds or insurance companies do, they allocate their active risk across a whole spectrum of investments.

If they don't believe they could get the value for their money in Active Equities, they're going to move that where they could get active alpha into more illiquid, and that's the trend you're seeing.

And so you're seeing more of a transformation in the alternative space where they're getting more active alpha and you're seeing that's being barbelled by a predominance in ETFs.

So if more and more managers can provide value for their money in terms of active alpha returns after fees, then we're going to see systematic more flows back into active in the equities side.

And so I'm not here to project that the whole industry's going to have active returns.

I think it's harder and harder, as I've been commenting over the years, about active managers producing active alpha.

With all the democratization of information, it's becoming much harder to differentiate yourself, and that's what we've seen.

And so we have systematically been shifting our equity teams into more thematics; into more model-based and scientific; into, I would say, more specific portfolios with fewer shares, stock holdings.

And so we believe that's where Active Equities is going to be migrating, and we've been doing that over the last 2 years and now we're starting to see some of that success.

On the rise of active ETFs, which I'll let Gary talk about, that has -- that will have no impact, [and] no impact on index-based strategy.

People are using index-based strategies for a purpose, and that is really getting back to my conversation about alpha allocation.

So when you think holistically about your alpha allocation, where are you going to get your active alpha?

And so that's the bigger issue more than anything.

And I do believe when people go into index-based strategies across factors or across sustainable types of products, those are more precision instruments, those are instruments to give them those type of reference, that's not going to change.

And so we -- and I'll let Gary talk about Precidian, but if active investing becomes a larger component, then there could be an increased role of active ETFs.

But let me have Gary now talk about that.

So Bill, I'll say just 2 things and then we'll move on.

One is obviously BlackRock is a strong proponent of industry innovation.

And anything that basically enhances investor access to the markets, we're all for that.

And secondly, I would say that our goal for the future is to be wrapper-agnostic.

So to the point Larry makes, if an investor wants a passive product, retail investor, they can choose between an indexed mutual fund or an ETF, if it's an institutional account, whether it's a co-mingled trust fund our a separate account.

And I think similarly, to the extent an investor chooses they want an active product, we similarly think, if the future holds, that they can choose between a traditional mutual fund or an ETF, and that's good for investors, then we'll obviously make sure that we position ourselves to be part of that industry growth.

Early signs I think are still out.

I mean there are some benefits versus a traditional mutual fund for an active ETF in the concept that there's maybe more tax efficiency and less cash drag, but obviously there are still some complications as it relates to transparency, the implications that transparency has for creates and redeems in bid/ask spreads and how that instrument is going to trade.

And so I think it's early days.

We're going to continue to watch the development of the product itself and how it relates to the ecosystem around it, and we will only make the best decision for investors going forward.

Your next question comes from the line of Patrick Davitt from Autonomous.

I think last quarter, you mentioned the 9 clients ramping up on Aladdin for Wealth and that it was still kind of early days in terms of seeing meaningful identifiable incremental organic growth from that.

Could you update at on that number?

And maybe to what extent you seeing more line of sight to increased adoption of BlackRock product through that ramp up process?

So the biggest opportunity for Aladdin is to make it the language of portfolio of construction for wealth managers, for financial advisers and also for individual investors.

So Aladdin is currently live with 11 clients globally.

This is Aladdin for Wealth.

We continue to see very strong client interest.

I would caution you to say that when we get an Aladdin assignment, there is sometimes 3, this could be as long as 6-month implementation part of that before they come alive.

And there's also of course ramp up piece that we have until they get large and they start to grow.

So we are seeing more and more demand.

And quite frankly, for every one client that takes on Aladdin or Aladdin for Wealth, it creates demand to become the standard in how people are going to look at technology.

And what this does is simply brings risk transparency and portfolio construction capabilities both in the institutional market and in the wealth market.

And also, when we're having conversations about our risk technology, it also piques their interest in what we can do with their portfolios and balance sheets and adds on to other business that we might do with them, and quite frankly, vice versa.

So when it comes to Aladdin for Wealth, there is a whole education process for advisers to use the technology.

And you can have any app you want, but you actually have to use it.

And we're finding the increased interest is not only because of the risk technology it provides, it's becoming an asset-gathering tool for these advisers.

So our expectation is it's going to grow.

We have more client interest in it, and it's, I think, going to continue to grow as it's been growing in the past for us.

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

If we could just dive into the nature of the active fixed income institutional mandates.

I know you touched a lot about on this, Larry.

But if you can talk about maybe what do you think has changed for BlackRock in offering holistic solutions?

Obviously, you guys have been well positioned for that for quite some time, but you seem more optimistic on those types of mandates going forward.

So is it the technology that's linking in that's actually generating this growth?

Or is it something else?

And then just added to that is the fixed income iShare usage as substitutes for bonds.

Are you seeing that as a fairly permanent secular trend that should help the fixed income growth quarter in, quarter out?

Thanks, Brian.

Let me -- I'm going to let Rob answer most of it.

But this really is just a very vivid example of our positioning as an organization globally, frankly where our scale is bringing our -- the ability to source assets, our consistency in performance, our agnostic ability to provide passive and active in fixed income.

And so it's really manifesting now into deeper product conversation.

But Rob, why don't you?

Yes, I think the quick and dirty answer is just that they need a strategic partner.

It's not about just filling or checking a box with one particular product.

So when you can go and you can provide the technology to them, you can provide opportunities for modeling portfolios, portfolio construction; when you can give that answer and have the products in-house to give them the appropriate asset allocation; whether it be passive and active; whether you can actually trade; get the allocations to provide them the products that they need; whether you can do the credit work on their current portfolio and improve it, then whether you can actually look holistically; depending upon what type of client is and help them with balance sheet management because in a period of low interest rates, every basis points counts; and that's were also cash comes in, to be able to provide the appropriate allocations in that balance sheet to improve it or the portfolio itself, really makes a difference in a low interest environment.

So that's where we're seeing the interest in having more dialogue with us because I think this approach is unique in our industry.

The second part is really what's driving fixed income to go more and more into an ETF structure.

And you're going to hear a lot from BlackRock about this because there's really 4 or 5 different reasons.

One is there is an evolution in portfolio construction and millions of people are actively using fixed income ETFs in new and innovative ways to achieve a variety of outcomes.

So keep in mind, it is still a great way to de-risk your portfolios.

It is a good way to have more liquidity, more transparency, more diversification and better tax.

It's just a better wrapper.

There's going adoption now by institutional investors.

So institutions like pension funds, asset managers and insurance companies rely on fixed income ETFs for a very quick, efficient market access.

As the bond market now starts to modernize, electronification of bond markets are going to support the growth of fixed income ETFs as well as in [trench] bond ETFs as part of a vibrant fixed income marketplace.

So technology is also helping this market to grow.

And then as the previous question alerted us to, there's constant ETF innovation.

This is the development of new bond ETF exposures.

And what it's adding is the most important part of this, which is convenience of investors to access the fixed income market with better liquidity at a better price.

And we are constantly now coming up with new tools to customize portfolios and drive future bond ETF adoption.

It is right now a very small portion of the fixed income market.

We are very optimistic about the future growth.

As Larry mentioned, global fixed income ETF assets under management crossed $1 trillion in June.

And even at $1 trillion, fixed income ETFs represent less than 1% of the $105 trillion global bond market.

So we have high expectations for growth and we think we're going to benefit from the growth in this market.

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

So I wanted to see which of your recent investments in digital tools are providing BlackRock the biggest competitive advantages now with clients.

And also, when you take a step back and look at your major competitors in financial services and firms that also have ETF businesses, like the Vanguards, Schwabs, JPMorgans, with digital direct-to-consumer distribution platforms, what are your thoughts in entering the wealth management space at some point?

Gary?

Well, I'll give you an update on our investments.

I think obviously we made a number of minority investments, Craig, which are definitely part of our capital management strategy.

I think we are looking to use our balance sheet and the stable cash flow that our business generates more aggressively to basically position us to effectively learn and partner with a number of very innovative companies without necessarily having to take full control day 1. I think it basically helps us add value to their business and ultimately de-risks our strategy of ultimately having the option to combine with those companies over time, where frankly, they may benefit from their unique culture and basically our broader reach.

So today, we basically got a number of them.

Obviously, iCapital and Scalable are most well known.

Again, I think scalable kind of expands our robo-adviser capabilities and what we've done with FutureAdvisor into Europe, which I think is being -- is very successful.

iCapital obviously is more on the front end of the alternative strategy and will at some point really, whether we own it or not, will basically pair very nicely with what we're doing on an eFront-Aladdin technology combination.

We've obviously done other things even more unique, and our minority investment into Envestnet, I think, has been incredibly beneficial, not only in terms of the fact that the stock has gone up significant since we bought it, but more importantly, it offers an opportunity to get Aladdin on the desktops of thousands and thousands of RIAs in a way that effectively helps them not only benefit their own practices, but helps distribution of our underlying asset capabilities.

And then there's a number of small issues -- smaller companies, whether it's Embark or Acorns, again, which gives us an opportunity to learn about the evolution of distribution in a more technological way and to basically help these companies drive more value.

As it relates to the issue of going direct, we have no intention of going direct.

We are an intermediated model.

We partner with lots of companies who distribute our products.

And frankly, all the investments that we're making are intended to basically be beneficial to our shareholders and to clients but frankly respecting the fact that we are an intermediated model going forward.

And I would just say one on a more holistic basis.

When I write my CEO letters, I focus on the societal changes.

And we are seeing new societal changes with more millennials and more Gen X, and they are much more adept in using technology and we need to be at the forefront of helping them.

I do believe the retirement crisis in America is a component of lack of financial literacy.

And so anybody -- it is all our respective jobs, is to use technology to improve financial literacy and improve better transparency for people who are investing.

We need to take the fear out of managing of money for most people.

And if we could reduce that fear of management of money, I think the outcome will be leading more people putting their money to work, and that's one of the structural problems we see in Europe and other parts of the world.

And so to me, it is only -- it's going to have to be through better and more unique technology, and that is what's driving us to try to provide leading technology, Aladdin for Wealth, to create more transparency.

When you think about the movement, especially on the adviser side with more and more movement towards illiquids by -- when you think about iCapital and then eFront, if we could provide better transparency and information on the illiquids side alongside Aladdin for Wealth, it will lead to better financial literacy towards investing in those illiquids, but it will probably lead to better outcome investing for everybody.

And so when you think about how we are trying to design our technology and our technology offerings, it is all -- the foundation in some of the things that I write about and how we can then take this and really build a unique position in all the societies we work in, in terms of trying to provide better financial literacy, better financial outcomes.

And so that's the entire foundation of what we're trying to do.

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

Mr. Fink, do you have any closing remarks?

Well, I thank everybody for joining us this morning and for the continued interest at BlackRock.

Our strong second quarter results is really linked to that -- really these deliberate investments we made over time, and what I've been continuously talking about, our deep partnerships we've built with clients globally, being footprinted globally but providing a deeper purpose in all the communities we operate.

We see meaningful opportunities to continue to leverage our differentiating scale.

BlackRock's purpose of trying to help people having and achieve better financial outcomes.

We're trying to use our leverage to invest in our investments and technology capabilities for the ultimate value creation for our clients, and through the value creation for our clients, is going to lead to longer-term deeper value for our shareholders going forward.

Everyone, have a good summer.

Hopefully, people will have some time to take off.

And we'll talk to you in the fall.

This concludes today's conference call.

You may now disconnect.