BlackRock Finance Inc (BLK) — Q1 2015 Earnings Call Transcript

Thanks very much. Good morning everyone. I am Matt Mallow, the General Counsel of BlackRock and before Larry and Gary make their remarks, let me 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 and most likely will 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, and additionally, BlackRock assumes no duty and does not undertake to update any forward-looking statements. So with that, let’s begin the call. Gary?

Thanks, Matt and good morning everyone. It’s my pleasure to be here to present results for the first quarter of 2015. Before I turn it over to Larry to offer his comments, I will review our quarterly financial performance and business results. As usual I will be focusing primarily on as adjusted results. We are committed to generating strong organic growth, demonstrating operating leverage, and maintaining a consistent capital management policy as a framework for generating long-term shareholder value. Our first quarter results once again highlight the value of the investments we’ve made to assemble the industry’s broadest suite of active and index investment offerings and to deliver differentiated, customized investment solutions to our clients. BlackRock delivered first quarter earnings per share of $4.89, up 10% compared to a year ago. Revenue rose 2% to $2.7 billion despite the negative FX impacts on our non-dollar denominated base fees and over $70 million of transaction-related revenue in last year’s first quarter. Operating income was $1.1 billion, 1% higher on a year-over-year basis. Non-operating results for the quarter reflected $58 million of net investment gains including a one-time gain of $40 million related to the fair value of our pre-existing interest in BlackRock Kelso Capital Advisors. Our 23.7% as adjusted tax rate for the first quarter benefited from $69 million of non-recurring items. We currently estimate that 30% remains a reasonable projected tax rate for the remainder of 2015. BlackRock’s first quarter results were driven by $70 billion of long-term net new flows representing an annualized organic growth rate of 6.5%. Flows were positive across all asset classes, investment styles, client types and regions, and organic revenue growth once again outpaced organic asset growth. Over the last 12 months, despite an increasingly volatile macro environment, BlackRock generated over $250 billion in total net new business representing a 5% long-term organic growth rate evidencing the fidelity of our highly diversified platform. First quarter base fees rose 4% year-over-year as average AUM increased due to organic growth and market appreciation, despite almost $220 billion of negative FX impacts associated with dollar appreciation against foreign currencies over the last 12 months. On a constant currency basis, we estimate that base fees grew approximately 8% year-over-year. Base fees were roughly flat compared to the fourth quarter, primarily driven by a lower day count in the first quarter, entry rate headwinds, and the continued impact of divergent beta and FX. Performance fees of $108 million were broad-based, but nonetheless decreased by $50 million from a year ago, due to the impact of a large fee associated with the liquidation of an opportunistic mortgage fund. BlackRock Solutions revenue of $147 million was down 5% year-over-year due primarily to declines in FMA transaction-related revenue, and 14% sequentially due primarily to the timing of completed advisory assignments. Our Aladdin business, which represented 86% of the BlackRock Solutions revenue in the quarter, grew 13% year-over-year, but was flat sequentially. The year-over-year increase was driven by several sizable clients going live on the Aladdin platform in 2014, while sequential results were impacted by the timing and recognition of certain revenues, as well as FX movements. We continue to see strong market demand for global investment platform consolidation and multi-asset risk solutions. The year-over-year revenue decline in our FMA business resulted from meaningful transaction-based disposition activity during 2014. We continue to believe that our FMA business model is well-positioned to benefit from partnering with sophisticated financial institutions and governmental entities to address the most complex balance sheet, risk, and governance challenges in the ever-changing political and regulatory climate. Total expenses rose $38 million year-over-year or 2%, driven primarily by increased G&A, AUM-related, and direct fund expense. Employee compensation and benefit expense was roughly flat year-over-year as the combination of a stronger dollar and a global employee base offset an increase in headcount. As we have previously noted, the first quarter adjusted compensation-to-revenue ratio generally runs higher than the full year due to the seasonality of payroll taxes. G&A expense increased by $26 million year-over-year, primarily reflecting higher marketing and promotional expenses, and the impact of a one-time real estate-related benefit in last year’s first quarter. Sequentially, G&A expense decreased by $48 million, primarily reflecting seasonally lower marketing and promotional expenses, lower foreign exchange remeasurement expenses, and closed-end fund launch costs incurred in the fourth quarter of 2014. Consistent with last year, aggregate G&A expense in the first quarter benefited from a delay in the timing of certain expense items, which will be incurred in the remainder of 2015. We remain committed to using our cash flow to optimize shareholder value by first reinvesting in our business, and then returning excess cash to shareholders. In line with that commitment, on March 6, we acquired certain assets of BlackRock Kelso Capital Advisors, enhancing our credit platform with the addition of a middle-market private credit capability. We previously announced a 13% increase in our quarterly dividend to $2.18 per share of common stock and also repurchased an additional $275 million worth of shares during the first quarter. Based on what we know today, this increased level of quarterly share repurchases represents a reasonable run rate for the remainder of 2015. Our consistent earnings growth and stable financial results reflect the benefits of our diverse platform, long-term client partnerships, and commitment to investment performance. First quarter long-term net inflows were nearly evenly split between our active and index franchises and were positive in each of our geographic regions.

Thanks, Gary. Good morning everyone and thank you for joining the call. Our strong performance over the last quarter is the result of the significant investments we made in our firm over the last few years. The investments we made in our people, the investments we made in our process and importantly, the investments we made in our technology, all of which have been driven by our efforts to continually adapt to our changing market environments, the changing world environments, and to meet the needs of our clients. BlackRock is focused on helping our clients navigate an increasingly difficult, unpredictable, and divergent financial and economic landscape. Investors today are faced with volatility in currencies and commodity markets; they are faced with sustained low and even negative interest rates and shifting long-term macro trends including longevity, and the significant impact on technology on jobs. Divergent economic conditions and Central Bank actions have sent currency markets into one of the most volatile periods on record affecting both developed economies such as Japan and the Eurozone, as well as the emerging markets. The relative value of the US dollar and associated currency volatility is obviously having a rapid and material impact on large multinational companies. But it’s also affecting smaller US companies and consumers, whereas as a result of advancements in technology, they are increasingly buying and selling products in a virtual global economy. Historic low rates have been having a tremendous impact on how investors save for the future. The flow of funds in search of returns to meet future liabilities is growing larger every day. This mix of growing assets and shrinking supply of low rates is creating a dangerous imbalance and the increasingly desperate search for yields is now the greatest single source of prudential risk in the financial system. At the same time we are seeing powerful changes in longevity and retirements and the investments in technology, making the global economy and the way capital flows through it and this is having a major impact on how we and our clients are living, how our clients work, and how we invest. At BlackRock we are constantly looking at the world and at ourselves to assess whether our platform, our services, our strategies can help our clients meet the challenges of an evolving investment landscape. The need to anticipate changes and develop solutions is why we have deliberately equipped BlackRock’s business model with such a wide range of capabilities, a capability that no other asset manager possesses. The issues impacting financial markets are beyond our ability to control, but what we can control at BlackRock is how we respond to these issues, how we build out our platform, how we execute the strategies we’ve set forth for our business, and how we deliver investment solutions to our clients. BlackRock’s first quarter results demonstrate that the investments we have made to differentiate our platform over time are driving value for our clients and most certainly are driving value for our shareholders. In the first quarter, BlackRock generated $70 billion of long-term net inflows representing a 6.5% quarterly annualized organic growth rate and a 5.5% organic growth rate over the last 12 months. Similar to our fourth quarter in 2014, we had a diverse composition of flows, something that was very, very important for me as I think about our business. This composition of flows is positive across our client base, positive across asset classes, regions, and investment styles. Particularly, we are seeing significant momentum in our active business where we experienced the highest total active flows we’ve seen since 2007 at $32 billion representing a 9% annualized organic growth rate in the first quarter. Roughly, two-thirds of the assets BlackRock manages are related to retirement. So core of what we do? And particularly we are focused on helping investors shift their focus away from the next day towards an annual income and retirement. This is a difficult adjustment for many investors but a critical one for helping our clients achieve their goals. They face significant challenges in a narrow zero-rate environment where allocations of loans are insufficient to meet the liability burdens of pension funds, the needs of insurers, and the needs of our individual investors. The diversity and strength of BlackRock’s fixed income business is helping investors of all types navigate that environment and drove $36 billion of net inflows across our global platforms. We continue to benefit from strong performance across our fixed income business, where 91% of our active taxable fixed income AUM is above the benchmark for a three-year period. SIO is in the 14th percentile. High yield bond is in the 10th percentile and total return is in the second percentile and the first percentile over one year. Clients also continue to adopt iShares’ fixed income ETFs as an efficient asset allocation and exposure tool. And iShares remains the global leader in fixed income in the first quarter, capturing the number one market share of flows of 53% with $19 billion of net inflows. Today, investors are increasingly focused on outcome-oriented strategies that target specific goals while generating an income stream preserving capital or growing assets within a certain risk profile, and they are moving beyond traditional fixed income strategies into global, unconstrained, or multi-asset strategies to achieve those objectives. BlackRock’s multi-asset platform combines our investment management expertise, a robust portfolio construction business, and superior risk management, leveraging the Aladdin platform to enable us to provide investment strategies that will help our clients achieve their investment outcomes in line with their needs and their objectives. To counter low yields, retail investors are leveraging our multi-asset income fund which taps into income opportunities across asset classes with a dynamic approach to balancing risk, return, and income, while seeking to mitigate volatility. Institutional investors are similarly trained to our dynamic diversified growth fund for diversification for stable returns and to manage volatility. Our ability to have deep and robust dialogue with our clients and to work closely with them to provide thought leadership is what allows us to deliver more tailored, customized strategies. This is a very important component of what is transforming BlackRock and our relationships with clients. The breadth of products, our risk management capabilities, when combined, foster deeper and more robust relationships with our clients. Clients are finding that no other firm in our industry has the capabilities to create this type of partnership and replicate these types of capabilities. One key area where we are continuing to build out those capabilities is in infrastructure. Infrastructure investments help our clients access an alternative asset class that provides inflation protection, diversification, and the potential for capital appreciation and importantly for many of our clients, long-duration returns. A key aspect of our work has been to promote improved public-private partnerships, which jointly increase opportunities for investors and help governments access much-needed sources of capital to drive economic growth, create better economic futures, and improve livelihoods in countries. This is a perfect marriage of building a base of clients and their capital with the needs of countries and building a better economic future. Therefore, we are emphasizing infrastructure as a significant component of our positioning at BlackRock, our positioning with clients, and our positioning with various countries worldwide. In March, we teamed with PEMEX, Mexico’s national oil company, to finance two natural gas pipelines critical to Mexico’s economic growth. This partnership builds upon the well-established track record of our existing infrastructure business and by extending our infrastructure footprint in Mexico, we will offer BlackRock’s local and international clients access to previously untapped investment opportunities.

Our technology has always been central to our business model. Our Aladdin platform, which we transformed from an internal risk and investment management system to a revenue-generating business, provides a unique competitive advantage for BlackRock. Aladdin revenues grew 13% year-over-year, increasing value as third parties operate platforms that position BlackRock to consistently invest a growing stream of revenues into improving our technology, expanding our technological offerings, and powering a constant upgrade cycle for the Aladdin community, driving network effect benefits for our clients and shareholders. Technology has not only shaped the way BlackRock serves clients through Aladdin and how we view risk management, but it also drives the way we build investment solutions. Technology and data science enable BlackRock to blend our fundamental investment expertise with the best of our scientific and index investing to create innovative investment strategies. We are investing in people with strong backgrounds in data technology to drive this effort. Another area where we are building capabilities is to meet the growing demand for investment offerings that have a measurable positive social impact; in particular, infrastructure as one of those capabilities. In the first quarter, we announced the launch of our new BlackRock impact platform which will unify the firm’s approach to impact investing where we currently manage more than $225 billion in assets. As a fiduciary, BlackRock takes our responsibilities seriously not only to provide the investment performance and solutions our clients need, but we also take a leadership role in advocating for our clients’ best interests and those of the broader market and economy when it comes to long-term investment by the companies we invest on behalf of our clients. These efforts are led by our corporate governance team which engages extensively with thousands of companies in order to help foster the best long-term outcomes for those companies and by doing so, increasing value for our clients. Our corporate governance team is the gold standard for the industry and is another key differentiating factor for BlackRock in our responsibilities with all our clients.

As part of our engagement effort, earlier this week I sent a letter to CEOs globally, including those of every company in the S&P 500, urging them to engage on key governance matters that, in our experience, support long-term and sustainable financial performance. We recognize that some of the market dynamics that I described earlier present overwhelming challenges for companies working to reset short-term pressures. However, companies can help diminish these pressures and improve their positioning by developing and articulating a clear, convincing, and creative long-term strategy and long-term value. These efforts will help them attract long-term stakeholders and lay the foundation for stronger, more sustainable, and stable economic growth for our country and other countries around the world. Once again, in the first quarter we initiated some truly innovative and unique mandates that will drive long-term value for our clients and our investors. Our PEMEX partnership is the first of its kind since Mexico passed its historical energy reform in 2013. We announced several highly customized solution mandates to help our global insurance clients navigate a historically challenging interest rate environment. We partnered with Ace to launch a new vehicle that pairs the strength of their insurance businesses with our ability to provide best-in-class investment returns. In Asia, we are expanding our relationships with some of the world’s largest asset owners in new ways, in one case using Aladdin to better understand risk and enhance the quality of returns for clients' portfolios, and in another case, employing our transition management team to implement significant asset allocation changes a client is undertaking to stimulate their nation’s economy. Individually and collectively, these mandates demonstrate BlackRock’s creativity, innovation, and the breadth of solution-oriented offerings. More importantly, through that process, this creates and fosters deeper and more meaningful relationships with our clients, allowing us to capture a larger share of their wallets. The strengthening of these relationships and our relentless focus on improving the firm will drive our future growth and create long-term value for our shareholders. Once again, I want to thank our employees for their continued unwavering dedication to creating a better financial future for our clients. I want to thank the employees for being excellent students of the financial market, being prepared to answer questions for all our clients, and with that, I’d like to open it up for questions.

Hi Glenn.

Hi, thanks very much. I guess, I’ll focus on the retail side of the house. You continue to make progress; you made a lot of investments, it’s paying dividends, $14 billion in this quarter, $11 billion last quarter and you’ve changed some of the way that you compensate your people there. So, I consider BlackRock a big winner in some of the fiduciary changes the Department of Labor is suggesting, but I am just curious how you think about it on both the iShares side of the house but also the traditional retail distribution because it impacts you guys in a lot of ways.

The DOL proposal?

Correct, correct.

First of all, there is a 75-day comment period and we have to recognize this is just a proposal and it may evolve and change. I said all along, we are a huge supporter of regulatory efforts in the protection of clients’ interests. I think as you just suggested, if clients feel more secure in their investments and they believe that their investments will indeed produce the outcomes they are looking for, no firm benefits more from having more participation in financial markets than BlackRock. So, on a macro basis, we are a huge supporter of making the investment world somewhat better for investors, so they feel they have an equal opportunity to win over the long run. As proposed, there are certainly going to be changes in how people navigate their interest. As you suggested, we are – in some categories, some people have said this is going to benefit indexing more than active. We are not 100% certain there, but obviously, we will be a big beneficiary of this. We have proven our strength in retail and iShares is benefiting from the bigger and more robust team working with our client base. We combined our retail and iShares sales force to provide what we call a client-centric approach. We are agnostic about beta products versus alpha products. We are trying to help achieve outcomes and I don’t think we are harmed in any way related to whatever that’s proposed in the DOL. What the DOL is doing is actually playing into our approach of how we are trying to navigate their beta and alpha products, mutual fund products with index and ETF products. So, we are well positioned for that, but I do believe we are well positioned because of how we have organized ourselves toward a client-centric approach.

Fair enough. I guess, the only follow-up I had is, at the highest level, couldn’t agree with you more, $70 billion of flows, very broad-based. It underscores all the points you made. At the end of the day, when I look at it and I see flat operating leverage and flat margins albeit at very high levels, it just took me back a drop and I just don’t know if there are a bunch of moving parts with some of the year-on-year stuff and the FX impacts. So, I wonder if you could...

I am going to let Gary talk about it. I think Gary could give you a little more color on the FX.

I appreciate that. Thanks.

Well, I think your question is specific to the operating leverage and margin point. So, I would say the following, Glenn. First of all, let’s break it down. If we look at the revenue side, obviously, the revenue was impacted, as we said, by about $70 million in the year-ago quarter, which we would deem more opportunistic. So, obviously, a big chunk of that came from the performance fee. We also had some significant transaction-related revenue in our FMA business. Obviously, we also had the FX impact, and we noted that on a constant currency basis, base fees alone would have probably been up closer to 8% year-over-year. Then we look at the expense side, and I think on the expense side, we are benefiting from significant non-dollar expense that we have. We have about 5,800 employees that sit outside of the Americas, representing close to 47% or 48% of our total employee base. However, nevertheless, there is still margin associated with our non-dollar sources of profitability. Therefore, I think, what I would suggest to you, I’d hate to start to get into a so-called normalization, because who knows what the definition of normalization is and that’s a difficult concept. But I would say that on a more recurring basis if we thought about our revenue and expenses, there have obviously been some timing differences that we noted on the expense side versus last year in terms of real estate credit. Considering FX more broadly, when we look at our own business on a more normalized basis, we’d suggest that we see positive year-over-year margin improvement and operating leverage.

Okay. I appreciate that, guys.

Hi, Bill.

Hey, good morning guys. Thanks so much for the update. First question I have is maybe we stand the expense side for a second, Gary, you mentioned you expect to see a bit of a seasonal pickup in G&A as you go forward. Just sort of wondering where the growth might be and how we might be able to frame it out in absolute dollars?

I’m sorry, Bill, are you talking about expense more broadly, or?

Well, I think you mentioned G&A was seasonally low; timing was a little bit delayed for some of the initiatives. So I was curious to know where you focus on in terms of the initiatives and then absolute dollar size, what kind of rate of increase are we talking about?

Yes, I mean, we obviously try not to give a whole lot of guidance on that. But I do think we tend to see a little bit of a lower ramp-up in our G&A spend at the beginning of any part of the year. As we mentioned, on a sequential basis versus the fourth quarter, we obviously benefited from the fact that we didn’t have a closed-in funds launch in this quarter that we did mention that we’ll be having about $5 million of product placement fees associated with the AVR RE. There is obviously some FX re-measurement stuff that also goes on that creates some noise quarter-to-quarter. But generally speaking, we haven’t changed our estimate for run rate G&A over the course of the year. It just means that a lot of it’s going to be pushed into the latter part of the year as it was last year.

Okay, and as a follow-up question, I may have Larry or yourself. Scientific has turned around a little bit this quarter; you have great performance. How much of that is market share gain versus a step-up of demand and the broader question is you mentioned both passive and alternatives or high-concentration alpha, where is the market in terms of more generic long-only relative value mandates these days?

Well, we are seeing increased flows, as you suggested, in our scientific equity offerings. We are seeing more – we have more dialogue on our model-based, factor-based products than ever in five years. I was frustrated, as you know, in other calls over the years that we have not seen as much flows in that area. I think as some fundamental products have underperformed, people are starting to recognize that 96% of our SAE products are above our peer median over five years. There is more interest today than we’ve seen in over five years for some type of model-based, factor-based investment strategies. We are seeing more and more interest in mutual funds, even in some cases, ETFs with more smart beta type of products. I believe this is going to finally begin a period of substantial momentum in these areas. Therefore, I do believe you are going to see shifts in that area as an industry moving more towards smart beta factor-based investing. I am not suggesting fundamental is going away, it’s not. But I believe we at BlackRock are positioned to benefit from the re-evaluation of scientific or model-based equity. We intend to be announcing some very significant hires in this area. I talked about data management; we believe other sources of information like big data will be an important component of how one looks at investing, so we are investing in these areas for the fundamental and our scientific side. This is going to be one of our more exciting offerings in the coming years and I believe this will finally see accelerated growth. So, it’s not a matter of share, Bill, as you ask; it’s a function of the world re-focusing on these products, both on the retail and the institutional side.

Okay, it’s helpful. Thanks so much.

Hi, Craig.

Hey, thanks. Good morning everyone. With many large prime money market funds converting to government funds now, and the LCR also requiring banks to hold more short-term government paper, how do you think the demand-supply dynamic will impact T-bill yields and, accordingly, the yields for government money market funds here?

I will let Rob talk about that.

So, obviously, the changes and where rates are going to go over the next year will have a pretty big impact on where we are going to see flows in the money market arena. So right now, we are seeing more flows internationally than domestically. We are seeing more clients in government and if rates change that will reverse. We are taking an approach where we have reached out to our clients and talked about the future regulation, preparing products for them that will make sense depending upon where rates are. Some of these things will be for example, we are going to be introducing constant net asset value government money market funds that will be without redemption gates or liquidity fees. We have the floating net asset value of institutional prime money market funds and we plan to maintain our largest prime fund, which is about $66.5 billion, and that’s the temp fund and will be our private institutional fund. We also have others we are preparing for floating rate short maturity institutional prime money market funds and constant NAV government money market funds and short maturity national and state-specific municipal funds. We are also prepared to do separate accounts. So, it really is going to depend on where the regulation ends. Of course, the implementation date of all these new products will be around October of 2016. I think working together with our clients to make sure that we are prepared, no matter where rates go, is important for us and year-over-year, we have seen about $39 billion added into the cash fund, resulting in about a 15% year-over-year growth. So there is still a lot of demand for money market type products and it will just change some nuances to comply with regulatory issues. This is a significant business for us and we also see some smaller money market groups approaching us as well because scale and size are important for meeting our clients’ needs.

Thanks, Rob. Just as my follow-up here, I was wondering if you guys could provide some background on flow trends between the retail-focused core series and also your higher fee generating equity EPS. While it’s positive to see growth, it seems like there may be a little bit of a mix shift undergoing in the equity business.

Certainly, there is a big change in mix depending on performance and also on what areas clients are focusing on. There are two parts to that question. One is, people looking on an institutional basis for precision exposures in particular areas like emerging markets which would have a higher fee versus buy and hold segments that are looking to supplement what they own with ETFs and what they call a core series. Now, there is a difference in fee between the precision instruments like emerging markets and the core series which is more of a buy-and-hold segment. Quite frankly, we are seeing growth in both of those right now. But, this is an area that is starting to gain attention and maturing. We are trying to develop a core set of products that are going to be for the buy and hold segment. We had over $12 billion going into that core segment. In the quarter, we’ve had about a 25% organic growth in this global core segment versus just a 14% overall market share in the iShares business. But the point here is that there is somewhat of a fee shift, but it’s not that dramatic and it’s not the overriding factor in people buying these iShares. It’s about segmentation and what they want and of course you have to be competitive in what they are buying. But we don’t see an overall dramatic change in the pricing and this move from high fee to lower fee, particularly where necessary.

Craig, I would also add, in terms of the fees and fee mix, as I emphasize, we saw strong flows in fixed income and so some of what you are seeing is the fee mix change because of great flows into fixed income ETFs. So, as Rob discussed, it’s not necessarily a move from one product in equity to another. That said, I’d tell you there is a constant pressure to remain competitive related to fees. We are going to continue to have that pressure and we want to be a leader in that. Thus, we are very comfortable with the mix of business and how it is evolving. More importantly, we are winning new clients that we did not previously have or more buy and hold, seeing increased flows in our core series. Therefore, we look at this as broadening of our platform not an outright fee mix change.

Hi, Robert.

Hi, thanks. Hey guys, good morning. I have a question really on the DC business. I guess, first question is, you certainly have had very strong fixed income flows, but just curious from your perspective have you seen the replacement activity in the 401(k) market that has been talked about for a while? I think you guys expected and kind of maybe how do you feel like if that’s happening if you are kind of getting your fair share of that activity?

We grew, in the first quarter, the defined contribution business by $20 billion, so, I am not sure if that’s a fair share. I believe it is, I think we had a very good quarter of defined contribution. We are investing quite a bit which then represents about 14% organic growth. So, we are well-positioned in it. We are increasingly working on more trends that are impacting in a favorable way for us. So, keep in mind what the trends are in DC. There is a greater trend towards open architecture, which is really good for us in BlackRock. I mean, historically, we were harmed by closed architecture; more open architecture allows us to provide our products. Two, in DC, there is a greater demand for indexing, which obviously plays into our strength. Three, as an innovator in target dates, we are benefiting from that. So, if you add those three combinations plus, we have witnessed much of the $20 billion of flows due to our strong active fixed income performance, we are seeing accelerated flows in those DC plans that are consistent and staying with active strategies. Thus, across the board, I would tell you, we have perhaps as large of opportunities in DC than we’ve had in years and much of it has to do with our positioning, our strength in performance in fixed income, our strength in designing target date products, and moving towards indexing. In fact, there is a belief that DC can slowly start decreasing as the men and women near retirement start spending their accrued amounts. But I believe BlackRock has a great opportunity in front of us to gain market share; we are very well positioned with the right products.

Okay, great. Thanks. And then, maybe just one follow-up on the ETF business, I mean, obviously, the business is going gangbusters in the US and outside the US and I’m just curious; I mean you guys have come up with different ETF product structures, and I’m thinking particularly of the kind of term date fixed income strategies you’ve developed. It doesn’t feel like those have particularly taken off. I’m just curious to know your thoughts on that, it would seem to be an ideal structure for this low-rate environment if investors are nervous about higher rates. But just kind of your thoughts on why that hasn’t taken hold as much as you would have - maybe should have - expected?

So your guess is as good as ours. We try to have different products in the pipeline to satisfy what we think our clients should be looking at. But there is a whole product process here of awareness going on, so it may take some time for clients to understand what the product is. They tend to like to see its performance a bit before they invest. I can’t exactly tell you why we think that it makes sense as you do, but we like to have different products in the pipeline and actually have high aspirations for these. One of the ones that I am a little disappointed in is the iBonds we have, because they fit a client’s portfolio so much better than buying individual bonds and taking the risk of the bid-offer spread. This is very different from others and you can tell me why they have caught on. We have our mid-ball strategy and the currency hedge. It also matters when you produce the product and what’s happening in the market at that particular time. Thus, I believe for us, our growth strategy is to continue that, coming out with innovative ideas. We want to maintain a pipeline of these and ensure we are in the markets; over time, awareness, factors, and products will ground well.

Great. Thanks for taking my questions, guys.

Hi, Ken.

Hi, good morning. Just one question on the regulatory front for me, really looking at FSOC and SIFIs. How is the conversation evolving with regulators on systemic risk today? I guess, to what extent is the conversation still moving from corporate risk to product risk? And then how effectively do you think the asset management industry is at kind of regulator education and is it really effectively making its case?

I think the dialogue at the FSOC in the United States is principally activity-based. In Europe, it was moving towards activity-based, but has migrated a little bit to more corporate-based. It is in a comment period that we are sending comments to the FSB related to this matter. I think there will be a long dialogue. There was a meeting earlier this week at the FSB meetings in New York with large investment management companies. From BlackRock’s perspective, a year ago, it was pretty lonely for us as we were one of the few firms having those meetings and educating regulators related to the risk associated with asset managers. We always note that the asset management industry represents less than 20% of capital markets. Asset owners are the largest players, managing their own money, and playing a significant role. Therefore, if we want to effect the ecosystem and make sure the financial system is safe and protected, it has to be activity-based. Now, there are more asset managers participating in the dialogue alongside us, and industry groups are working with us. I feel that the process is more robust now with more conversations than we’ve had in a long time. We’ll see how this all plays out; I can’t predict the outcome. However, I think the FSOC is moving towards an outcome of activities. It is interesting to note what Europe is doing with technology companies.

Great, that was very helpful. Thank you very much.

Hi, Mike.

Thanks guys. Hi. Hey, Gary, maybe just a follow-up on the margins. I understand a year ago the elevated BRS and performance fees; if I just take the second quarter going forward and think about the year-over-year trends, organic growth coming in above 5%, markets up, and obviously you’ve got the FX hurdle. As we start looking at second quarter, third quarter going forward, assuming these trends are similar, should we still see that year-over-year ability to generate operating leverage or is there something changing on the expense front? I know there are a lot of moving parts, but just wanted to get a sense of the first quarter year-over-year trend.

Michael, I am going to go back to something Larry said in his comments. It’s about what we can control and what we can’t control. So, I think we feel incredibly comfortable with our ability to grow organically and manage our expenses as we have over the last four-plus years. Notably, notwithstanding reinvesting over $1 billion back into the business through the P&L, we have expanded the margin over 350 basis points during that time. However, there are things we can’t control such as beta and FX. Notwithstanding those influences, which are impacting our fee rates, we still believe that if we have stable markets, we are committed to our original margin guidance. Our business has benefited from scale in many areas, and we see no reason why we can’t continue demonstrating margin improvement just like we have over the last three-plus years.

Okay, that’s helpful. And then just a quick follow-up, this is two quarters in a row where you guys have commented above like a 6% organic growth rate. When you talk about the trends and the products you offer, what you guys are doing on the distribution front. It makes sense that new clients are gravitating towards a lot of the offerings. When you look at investments being made currently for the outlook, do you feel you are at a stage where you can either launch new products or gain additional share in certain distribution channels to maintain a steady 5% organic growth rate? You've indicated that you’re exceeding expectations.

Sure. We are now starting to witness the impact of having better performance in our active products, especially in fixed income. Our expansion in the RIA channels and the buy and hold channels is being reflected in our mutual funds. We are expanding our global platform, including infrastructure investment as a long-term strategy. Therefore, I believe we will continue to build market share in retail; we have witnessed that for four straight years. Moreover, it's fair to say that ETFs are still in a secular growth phase that's not over yet, and we are the biggest beneficiary of that growth. Lastly, we are also establishing stronger relationships institutionally, focusing on cross-selling end solutions. Combining these factors suggests that we are well positioned for above-industry growth trends. Additionally, the investments we are making, including alternatives, are not showing up directly in organic growth metrics since they reflect commitments rather than AUM, but these opportunities are significant.

First of all, thank you for taking your time. I know there are a lot of other people and institutions you may be rushing to today due to all the first quarter results being released. Let me just reiterate, we believe that our first quarter results really highlight the diversity of our product platform, the global nature of our platform that truly differentiates us from every player in the world. We are seeing that impact of investments, positioning, and I truly believe as a firm, if we continue to address long-term issues, try to be helpful in the investment narrative, and execute strategies on behalf of our clients, we will be positioned well for them, both our institutional and retail clients. These are exciting times for BlackRock and all its associates. I feel good about where we are going and the opportunities in front of us. With that, I’d like to thank everyone for joining us this morning and for your continued interest in our organization. Have a good quarter.