BlackRock Finance Inc (BLK) — Q1 2016 Earnings Call Transcript

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 see today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So, with that, let’s begin.

Thanks, Chris, and good morning everyone. It’s my pleasure to present results for the first quarter of 2016. Before I turn it over to Larry to offer his comments, I’ll review our quarterly financial performance and business results. As usual, I will be focusing primarily on as adjusted results. In the context of continued market challenges over the last 12 months including global equity markets down high single-digits, emerging markets and natural resources each down over 20%, and a continuation of a low and, in many cases, negative rate environment. The differentiation in strength of BlackRock’s broad global investment platform enabled us to deliver another quarter of positive organic asset growth. While we are not immune to market headwinds, consistent organic growth and prudent expense management allowed us to deliver relatively stable base fees and increase margins from a year ago and continue to consistently return capital to shareholders. Our first quarter results highlight the value of the investments we’ve made to assemble the industry’s broadest offering of active and indexed investment products, and to deliver differentiated customized investment solutions for our clients. The diversity of our platform positions us to serve our clients’ needs in a variety of market environments, helping to drive consistent and differentiated organic growth. As we stated last quarter, we remain committed to investing in a number of strategic initiatives that will further enhance our client value proposition and generate long-term value for shareholders. Doing so requires us to be smarter at reallocating resources in challenging markets. With that in mind, this quarter we undertook restructuring to streamline and simplify the organization. The goal is to efficiently optimize growth and create new opportunities for our strongest people. This resulted in a restructuring charge of $76 million during the quarter, primarily comprised of severance and accelerated amortization expense of previously granted deferred compensation awards for approximately 400 impacted employees. This charge appears as a single line expense item on our GAAP income statement and has been excluded from our as adjusted results. First quarter revenue of $2.6 billion was 4% lower than a year ago. While operating income of $1 billion was down 3%. Earnings per share of $4.25 declined more significantly versus the prior year quarter driven by a one-time non-operating gain in a lower effective tax rate a year ago. Non-operating results for the quarter reflected $8 million of net investment gains and decreased from the first quarter of 2015 due to lower marks in the current quarter and a $40 million one-time non-cash gain related to the acquisition of BlackRock Kelso Capital Advisors in last year’s first quarter. Our as-adjusted tax rate for the quarter was 29.6% compared to 23.7% a year ago, reflecting several favorable non-recurring items. We continue to estimate that 31% remains a reasonable projected tax rate for the remainder of 2016, though the effect of the actual tax rate may differ as a consequence of non-recurring items that could arise during the year. BlackRock’s first quarter results reflected $36 billion long-term net inflows, representing an annualized organic growth rate of 3% and demonstrated the continued resilience of BlackRock’s differentiated business model. Flows were positive across both active and indexed and across regions as positive momentum in March more than offset a slow start to the year. While organic based fee growth for the quarter was 2%, lagging organic asset growth of strong fixed income flows were offset by outflows from higher fee equity products. Over the last 12 months, BlackRock’s organic based fee growth still remains above our long-term organic AUM growth. First quarter base fees were down 1% year-over-year, as organic AUM growth of $118 billion over the last 12 months partially offset the impact of $148 billion of negative market and FX movement. Sequentially, base fees were down 4% despite positive organic growth over the quarter as first quarter average AUM declined from fourth quarter levels due to significant market declines in January and early February. Market improvements that occurred at the end of the quarter had a limited impact on first quarter base fees but should act as a tailwind as we move into the second quarter. In a difficult period for the Hedge fund industry, with the HFRF index down 2% in the quarter, performance fees of $34 million decreased significantly from a year ago, driven by declines in fees associated with single strategy hedge funds, funded hedge funds, and certain long-only equity products. Underperformance during the first quarter may have a negative impact on performance fees for the full year as certain quarterly locking funds are below high watermarks, while others lock based on trailing 12 months performance periods. BlackRock’s solutions revenue of $171 million was up 16% year-over-year and flat sequentially. Our Aladdin business, which represented 82% of BRS revenue in the quarter, grew 12% year-over-year driven by several sizable clients going live on the Aladdin platform in 2015. We continue to see strong market demand from institutional asset management and owners, as they look to consolidate global investment platforms and invest across multi-asset class portfolios. Additionally, a rapidly changing regulatory and technology environment is driving accelerated conversations with retail intermediaries about leveraging both Aladdin and the FutureAdvisor capabilities in the wealth management space. Non-Aladdin BRS revenue was up $9 million year-over-year, although down $3 million sequentially due to the completion of a number of assignments in last year's fourth quarter. Our Financial Markets Advisory business continues to reflect a more stable revenue profile driven by a higher level of repeat engagements and is well-positioned to benefit from changes in the regulatory landscape affecting financial institutions and official sector clients worldwide. Other revenue was down $12 million year-over-year, primarily due to lower earnings from equity method investments. Total expenses decreased 4% year-over-year and 8% sequentially, driven primarily by lower compensation and G&A expense. Employee compensation expense was down $32 million or 3% year-over-year, reflecting lower incentive compensation driven primarily by lower performance fees, partially offset by a higher headcount. Sequentially, compensation and benefit expense was down 4%, reflecting lower incentive compensation, partially offset by higher employee payroll taxes and an increase in stock-based compensation expense related to grants of prior year awards. Looking forward, despite the first quarter restructuring and assuming stable markets, we currently anticipate ending the year with higher total headcount than we have today, but with a compensation to revenue ratio modestly lower than 2015. G&A expense was down 6% year-over-year, primarily reflecting lower discretionary marketing and promotional spend and an increased benefit from the impact of foreign exchange re-measurement. Sequentially, G&A expense decreased $92 million, primarily reflecting the seasonal and discretionary impact of lower marketing and promotional expenses, reduced foreign exchange re-measurement expense, and $23 million of deal-related expense associated with strategic transactions executed in last year's fourth quarter. As discussed last quarter, we remain extremely expense aware in the current market environment, and we will continue to be prudent with our discretionary G&A spend. At present, and again assuming stable markets, we currently anticipate full-year 2016 G&A expense to be approximately in line with 2015 results. Our first quarter as-adjusted operating margin of 41.6% was up 40 basis points year-over-year and flat sequentially. BlackRock’s ability to generate positive year-over-year operating leverage in a negative beta environment highlights our commitment to prudently managing expense while continuing to invest for future growth. We remain committed to using our cash flows to optimize shareholder value by first investing in our business and then returning excess cash to shareholders. In line with that commitment, we anticipate closing the Bank of America Global Capital Management transaction later this month, assuming investment management responsibilities for approximately $87 billion of related cash and liquidity AUM. We previously announced a 5% increase in our quarterly dividend to $2.29 per share of common stock and also repurchased an additional $300 million worth of shares in the first quarter. We saw an opportunity to modestly increase our level of share repurchases during the quarter as sizable market moves and changes in the valid valuation of our stock in January and February created an attractive buying opportunity. We stand by the guidance we previously provided in last year’s fourth quarter as it relates to share repurchases for the remainder of the year. First quarter long-term net inflows of $36 billion reflected the diversity of our platform, those were positive in active and indexed and across all regions. BlackRock’s global retail franchise experienced minor long-term net outflows as positive flows in the United States were broadly offset by international outflows. BlackRock’s U.S. retail business generated long-term net inflows of $1 billion, demonstrating resilience to what was a challenging quarter for the domestic fund industry, with U.S. actively mutual funds experiencing negative flows during the first quarter for the first time since the financial crisis. BlackRock’s flows were driven by strong long-term investment performance across our fixed income platform, including flows into our total return, high yield and strategic municipal opportunities funds, all of which are performing in the top quartile for the trailing five-year period. International retail net outflows of $1 billion were primarily related to outflows in international equities and multi-asset funds amid market uncertainty and industry-wide de-risking. These flows were partially offset by inflows into our natural resources franchise which benefited from commodities re-risking during the quarter. Global iShares generated over $24 billion of net inflows in the business from the first quarter, representing 9% annualized organic growth with a record fixed income net inflow of $27 billion, partially offset by outflows from developed market equities. Our institutional business generated $12 billion from long-term net inflows in the first quarter, driven by higher fee active offerings. Institutional active net inflows of $11 billion represent the eighth consecutive quarter of positive active flows for the business and reflected BlackRock’s strong multi-asset capabilities and top-performing fixed income platforms. Multi-asset inflows reflected solutions-based findings, particularly in the insurance outsourcing space and demand for our LifePath Target Date Funds. Fixed income net inflows were led by flows into investment grade strategies. Institutional active equity outflows of $2 billion reflected outflows in our fundamental equities business, partially offset by inflows into our scientific active equity business where 98% of assets are continuing to perform above benchmark on a trailing five-year period. In addition, we had another strong fundraising quarter for illiquid alternatives, raising more than $1.5 billion in commitments and now have $12 billion in committed capital to deploy for clients. Illiquid alternatives remain a key area of growth for BlackRock as our institutional clients increasingly search for additional sources of income and uncorrelated returns. Institutional index of $1 billion had net flows with strong inflows into LDI strategies, partially offset by outflows from index equities. Overall, our first quarter results reflect the benefits of the investments we’ve made to build a differentiated global business model and our ability to effectively navigate expenses in a challenged beta environment. Diversification across investment style, distribution channel, products, and geographies enables us to serve clients irrespective of the market environment or investment performance. We will continue to be mindful of the trade-off between growth and margin, looking to strike the right balance between investing in key strategic initiatives and optimizing expenses. Our goal remains to deliver consistent and differentiated organic AUM growth over time. With that, I'll turn it over to Larry.

Thank you, Gary. Good morning everyone and thank you for joining the call. Our first quarter results demonstrate that BlackRock continues to earn our clients’ trust in uncertain market environments, as we manage risk and deliver investment solutions to achieve our clients’ long-term investment goals. Economic, social, and geopolitical instability drove dramatic market swings in the first quarter. Risks of a global recession and the risk of Chinese currency devaluation drove stocks lower to start the year. Investors continued to struggle to digest lower energy prices, negative rate spreads in Europe and Japan, and uncertainty grew from political developments in countries including the United States, Germany, Spain, Brazil, and the pending vote in the UK on whether to leave the European Union. Cushing global markets down more than double-digit percentages in the opening weeks of the year. In February, stabilizing commodity prices and a more dovish commentary from the Federal Reserve helped spark a risk-on rotation. Despite continued policy uncertainties and questions surrounding global growth, as Gary mentioned, given the fact that we earned fees on average AUM, we did not realize much of the financial benefit of the market upswing in the first quarter, while we’re positioned to benefit from the tailwinds going into the second quarter. It is especially in times like this marked by volatility and investor uncertainty that more clients are looking to BlackRock for their investment guidance. Our goal is not to just sell them individual products, but rather to understand the client’s objectives, their needs, and to fashion a cohesive solution that helps achieve those goals. While many firms claim to do the same, no other asset manager draws on the same breadth of active, indexed, and alternative strategies, investment styles across asset classes and regions, risk management, and technology with a focus on long-term solutions. These capabilities combined with the talent and fiduciary culture of the BlackRock team enables us to have a deeper conversation with clients as they make important decisions around portfolio construction and asset allocation. This heightened level of client engagement is translating into consistent growth with $36 billion of long-term net new flows in the quarter, representing 3% organic growth, driven by our strength in iShares and institutional active. The fact that we are again seeing such diverse inflows in this very volatile market speaks to the power of the platform we’ve built over time. We consistently invested in the capabilities to meet the evolving needs of our clients and we will continue to invest in helping our clients, so we can show future growth in the quarters to come. As clients increasingly look to ETFs as alternatives to individual stocks and bonds, derivatives, and mutual funds, we continue to grow our iShares business to meet their needs. Investors turned to iShares in the first quarter as they navigated tight volatility and our ETF business saw $24 billion of net flows. As was the case for the full year in 2015, BlackRock captured the number one market share of net new business globally in the United States and in Europe, and the number one market share in fixed income. Two global iShare priorities drove our inflows, first was fixed income. BlackRock has been building our fixed income ETF capabilities for several years. We now manage more than $290 billion in fixed income iShares, which as a standalone franchise would represent the fourth largest ETF business in the industry. After seeing $50 billion in fixed income inflows for the full year of 2015, this quarter we generated record quarterly net inflows of $27 billion. Risk-off sentiment initially drove demand for U.S. treasuries, and as market conditions improved, clients added to their U.S. and European credit exposures. We see significant growth ahead for fixed income iShares, as a widening range of clients are adopting fixed income iShares as diversified, efficient investment tools and as substitutes for cash and derivatives as bank balance sheets continue to shrink. The second priority is smart beta. BlackRock is investing in factors and factor products that we believe will become increasingly important as asset allocation tools and alternatives through traditional beta or lower outlook capture active strategies. BlackRock now manages more than $125 billion across a range of factor-based solutions. Our iShares minimum volatility products raised nearly $7 billion globally in the quarter, leading the ETF industry’s smart beta category and increasing our smart beta ETF AUM to $67 billion. Additionally, our newer single-factor products have started to achieve scale at 5 billion and we are now bringing multi-factor iShares to market to complete our offering. In our institutional business, first quarter net inflows of $12 billion were driven by strong active fixed income and multi-asset flows, as the investments we made to diversify our institutional platform are generating results. As we strengthen the diversity of our institutional platform over time, they are deepening our existing client relationships, and more than 50% of BlackRock’s largest institutional clients now have five or more products managed by BlackRock. For those who have been our investors since 2009 when we did the BGI merger, we have talked about this in great detail as one of the merits of why we thought the merger would work. At that time, we had less than 20% of our clients having more than one product. The recent results demonstrate why I truly believe our positioning, our penetration with our clients is measured by the number of products we have with our clients. More than 50% of our largest institutional clients have five or more products managed by BlackRock. We saw institutional active fixed income net inflows of nearly $11 billion driven by flows from financial institutions. As we further expand our relationships with these clients through our solutions-oriented approach, BlackRock’s financial institutions team continues to deliver differentiated investment strategies for these financial institutions, especially in this extended low and negative rate environment. In alternatives, where we invested to strengthen the diversity and quality of our platform, we generated more than $1.5 billion of additional illiquid commitments. In the last several years, we have expanded our capabilities in our real estate platform, including infrastructure and real estate. Real assets, especially infrastructure, provide clients with the ability to achieve long-term financial goals while helping to create a more fertile long-term investment environment. BlackRock currently manages more than $30 billion in real assets across our global multi-products platform. BlackRock’s solutions revenue grew 16% year-over-year, led by Aladdin, our unifying technology platform. We are seeing growing demand from clients as asset owners and managers are focusing on risk management. They are now learning to utilize more risk management as they adapt to the regulatory changes. As the retail marketplace evolves, we are also seeing increasingly opportunities to provide our distribution partners with institutional quality asset allocation, risk management, and digital advice capabilities. BlackRock is also intensifying our efforts to leverage the industry’s most advanced technologies to enhance client service to build better investment products and portfolios and, importantly, to identify new and better sources of alpha. On the distribution side, FutureAdvisor, which operates within BlackRock Solutions, allows us to strengthen relationships with our distribution partners by offering our clients high-quality technology-enabled advice backed by BlackRock’s broad investment platform, our Aladdin risk analytics, our proprietary retirement technology, and our longstanding experience as an enterprise technology partner to other financial institutions. We’re seeing growing demand from our intermediary partners for BlackRock FutureAdvisor solutions including our latest partnership we announced yesterday. On the investment side, BlackRock’s investment team including our active equity, our model-based fixed income, and our multi-asset strategy teams continue to expand their use of technology-based tools and research methodologies to produce investment insights that contribute to sustainable consistent alpha generation. These tools include things such as machine learning, natural language processing, and scientific data visualization. In these challenging beta environments, our clients look to us more than ever to deliver the investment performance they need to meet their liabilities and their financial goals. We maintain a constant focus on enhancing alpha generation across our platform ending the quarter with 89% of our fixed income, 97% of our scientific active equity, and 52% of our fundamental active equity products above market or peer median for the five-year period. The investments that we’re making to leverage technology across our platform are part of BlackRock’s focus on continuously solving our clients’ long-term challenges. As I discussed in my annual letter to shareholders earlier this week and in a letter I sent in January to CEOs of companies we invest in on behalf of our clients, it is critical that companies focus their strategy on the long term and clearly articulate their plans for long-term growth in the context of the environment and the ecosystem in which they operate. Just as we continue to invest for the long run, we are constantly evaluating our ecosystem, including the markets, regulatory environment, and competitive landscape to identify the changes that might require us to pivot our strategy. Last week the Department of Labor published their fiduciary rule which has implications for our clients and our own business. While we’re currently reviewing the final rule to thoroughly assess its implications, we are likely to see changes in our distribution partners’ accounts and fee structures, their product preferences, and importantly their use of technology to both build portfolios for clients and manage increased risk and compliance needs. BlackRock believes in the importance of always acting as a fiduciary to our clients and doing so is one of the core principles upon which we founded our firm. BlackRock has extensive experience with adapting and helping our clients adapt to changes in the regulatory environment, especially through the RDR model in Europe, leveraging this experience directly with our distribution partners. In the U.S., we listen to and work with them to address the challenges and opportunities presented by the DOL rule. This is another example where the combination of the breadth and depth of BlackRock's investment platform, our global footprint and experience, our focus on technology and risk management solutions, and our strong fiduciary culture differentiate the value proposition that we can deliver to our clients. They have always embraced change and we will always be looking for ways to better serve our clients, operate work efficiently, focus resources on strategic priorities, and create new opportunities for our strongest employees. We began 2016 by enhancing our investment platform, increasing connectivity among our investors, aligning with the evolving needs of our clients, and positioning talented investment leaders to drive our success, and these changes are working well. Most recently, we initiated restructuring to streamline and simplify the organization, driving efficiencies across our platform to better serve our clients, to deliver returns for our shareholders. It will also create opportunities for our strongest employees. Over the last three years, we have grown our employee base by more than 20%. We added 2,500 employees to support improvements in client service and technology and enhance alpha generation. We remain committed to investing in our business to leverage the opportunities ahead of us to drive continued growth despite current market volatility, doing so requires making smart and, unfortunately, difficult decisions about allocating resources which we must always do. While the uncertain environment we face is unsettling at times, it is also an opportunity to look forward to the future, to capture new alpha generating opportunities, to use technology in innovative ways, and to build on our platform to serve our clients’ evolving needs, creating continued opportunities for our employees to deliver consistent returns for our shareholders.

Now let me open it up for questions.

I guess Larry, you could expand on your DOL comments and maybe discuss in more detail what some of the changes or preferences that your distribution partners, as you highlighted, might be undertaking and maybe just characterize how well prepared you think the industry is for these changes coming forth?

Well let's start with the context for a second. Probably most importantly, BlackRock has supported the changes to the financial ecosystem. If we can enhance confidence with investors, I believe through that mechanism it's going to increase and promote more investing and less savings in their bank accounts. So the more investing and the more money clients are putting to work with greater confidence, the better it is for the entire industry. I think that’s one of the big points that hasn't been part of the dialogue and I think that’s a really important point. We need to have more investor confidence. I think one of the great problems we face with longevity and human aging is the inability of so many people to invest properly, often too much cash by their overemphasis on bonds. If they believe the DOL rules will give them better transparency and certainty and they invest more money for the long run, it's better for the country, better for their financial future, and it's good for the entire industry. I think that message is totally lost in the conversation. Directly to the issue around how this is going to play out, first of all, it's a very lengthy rule, so it’s going to take quite some time for everyone to determine how it meets their business model. I would say BlackRock is well-positioned given the breadth of our product platform in both active and index, as well as the investments we've made in technology— and I really want to underscore technology and risk management. We are having really deep conversations with more of our distribution partners and helping them work on solutions for their clients. It's still too early to determine the outcome for the DOL rule more broadly, but I think we are better positioned than any organization. I do believe it's going to require much greater compliance and risk management, so it is very powerful for our Aladdin platform. We believe it can be very powerful for our entire BlackRock solutions product suite, including FutureAdvisor, and I think if it means more business in passive we will benefit, and if it means more business in active we will benefit too. So I will just leave it at that and I actually have a happy general counsel with that answer. Sorry Chris.

So BlackRock has been in the press with the layoffs indicated and also some of the hiring that you’re pursuing and you mentioned in the prepared remarks resource allocation changes. From a higher level perspective can you give us a sense of maybe what's getting less and what's getting more in terms of resources? In particular, I’m interested in the resource increases you’re making to technology, what I think you highlighted in your letter to shareholders, both as it relates to how Aladdin is going to evolve, as well as how you’re thinking about expanding other technology-related services to clients?

Yes, let me allow Gary to answer that and then I’ll give a little color after that.

Great, Ken, thanks so much. As we stated last quarter, we’re really maintaining our commitment to investing in a variety of strategic initiatives that will further enhance our client value proposition and generate long-term value for shareholders. Obviously, we’re all mindful that in challenging markets, as Larry and I both have said, we need to make tougher and smarter decisions, especially when it comes to reallocating those investment dollars. One thing I want to make very clear is this restructuring was not about cost-cutting; it was about streamlining and simplifying the organization so that we can use those savings to reinvest more efficiently in those strategic growth areas and, as mentioned, also to create new stretch opportunities for our strongest people. It’s important to understand that we’re not deemphasizing any particular business; rather, I would say we’re looking to ensure that the foundation of our businesses are running as efficiently as possible so we can take those reallocated resources and maximize our investment in higher growth areas. I’d say there are probably four or five of those, and I will let Larry and Rob in particular to chime in on any of those that have been mentioned in some of the remarks today: illiquid alternatives in particular; the real asset platform, which includes our infrastructure business; factor-based investment; which Larry mentioned, with over $125 billion across smart beta and enhanced factor products; sustainable investing where we have $200 billion across exclusionary screens, ESG factors, and impact; and obviously continuing to invest in our iShares business, which we believe continues to have significant runway in growth from both new users and, importantly, fixed income, which Larry also mentioned in his comments. The technology, as well, is important; it impacts everything we do across the organization. It affects how we invest, in particular big data, analytics, machine learning, language, and more— this combination that Larry mentioned is critically important for improvements in our active platform, as well as technology to enhance service delivery to clients, whether it be through wealth management, FutureAdvisor, or others. So I think those are several of the areas where we’re really looking to maintain growth because we think there is incremental and differentiated growth available to us.

I would just add one more point because I think Gary said it pretty clearly, probably said it better than I could. That is, I can’t underscore enough how the ecosystem is changing. That’s going to require more from capital market participants, whether you're an insurance company or an asset manager. There’s going to be a need for better risk management technology that is only going to increase. The need for better interfacing with clients is going to become more and more important. I do believe we have great solutions at BlackRock to help and assist these organizations in raising their bar to be stronger fiduciaries towards our clients. Our Aladdin system, our FutureAdvisor product, we will see even more accelerated growth as we handle that growth, and importantly we believe there is a significant need to develop better information flows for better investment insights, and so these are the areas where we are really emphasizing and where we are growing alongside the areas that Gary discussed.

You mentioned twice now the focus on smart beta. Can you just elaborate a little bit more on that? Maybe take us down a level in terms of product geography and even pricing. And then just anecdotally we have been hearing that some distributors have been anticipating invoking a revenue share for ETFs, so we are wondering if you might comment on what you might be seeing there as well?

Sure, I’m going to let Rob talk about it.

Well when we have this type of volatility, people are looking to add alpha in other ways. The smart beta category is one of these ways. We have made some very substantial hires in this area. We have hired the person who wrote the book in this area, Dr. Andrew Ang, and he is the Head of our factor-based strategies group. He is going to help us grow our presence in this group and has already had significant experience with some of our largest clients in portfolio construction using a very established model-based investment skill. When we combine what he has done with the analytical power that we have with Aladdin, we think that we’re able to offer some of the best solutions to our clients. This is a way of breaking down performance within an active category to areas that can provide additional performance. Now we currently manage about $125 billion in these factor-based strategies; within that, about $150 billion is smart beta. So we believe this is going to grow, BlackRock’s iShares smart beta ETFs are leading the industry now with about $8.5 billion of net inflows in the first quarter, including about $7 billion into the iShares minimum volatility strategies. So these are asset strategies that take advantage of various sectors and factors in the marketplace and provide additional value. We’re adding a lot of people in this category, and we believe it’s going to be a very successful way for our active managers to add additional alpha.

Bill, to add one more point, you asked about geography. We’ve had dialogues in probably every region in the world. The demand for information connectivity and health related to this is beyond our imagination. It’s across Asia, Europe, the Middle East, and the Americas. It is on the minds of our investors as a way of rethinking how they invest. I think this will become a larger component of the landscape of investing, and investors are going to utilize us with separate accounts; they're going to utilize these types of products through ETFs. However, the application and understanding of the analysis is really astonishing in how much people are interested in studying this, and hopefully the enormity of our meetings will translate into future flows.

Could you talk a little bit about how you see negative rates around the world impacting asset allocations? Also, touch upon how you’re managing your bond funds and vehicles for negative rates and the opportunity set for BlackRock here, particularly on the multi-asset front?

Well I did write quite a bit about it this week in my annual letter, which is getting beyond what I thought sort of commentary by any publications worldwide. Negative rates, if you think about 70% of our clients, more are pension funds, I was some form of retirement and insurance companies. We hear worldwide how negative interest rates or low-interest rates have been impactful in how they are actually harming their objectives of attaining an asset base to meet their liability needs. In fact, last week we were with one of the largest U.S. State Funds after our meeting, and they were in the top deciles of performance last year; because of lower negative interest rates and their discount rate, they are actually deteriorating their asset and liability gap. We’re hearing this worldwide. We’re hearing from savers worldwide—they’re not going to meet their needs for retirement. We’re hearing some insurance companies that they’re going to have a really hard time meeting their liabilities. As they are looking for more advice, we saw huge interest from insurance companies in buying during moments of wide spreads. Furthermore, we talk about infrastructure; if we could find large opportunities for infrastructure globally, we have demand, so clients are looking for more opportunities; they’re looking to invest in different types of products. I believe our platform is giving us more connectivity with our clients. I believe that by shareholder decision, I think lower negative interest rates have served a great purpose in the short run. Still, I don’t believe lower negative interest rates were supposed to be permitted features of the investment landscape. We are now entering the eighth year, and we need a policy response from governments. I think the dependency on Central Bank behavior is one of the problems we have and we need a policy response related to fiscal policy.

So just wanted to touch base quickly on how much momentum you guys are seeing in some of the structural changes that you have spoken in the past about as far as bond ETFs, allowing owners to treat them not just as equity but rather as fixed income? Are you guys seeing any momentum there? Are you getting in-roads not only from the customer base but potential regulatory hurdles? What's the outlook there?

This is probably the largest growth area that we are experiencing right now and what we expect to experience going forward. I think it's actually quite incredible, the amount of cash that’s sitting in banks today earning zero. That money has typically vanished from the fixed income market, and in order to have access to fixed income, our clients are using more and more ETFs because of all the features that they see, which include liquidity, low cost, tax efficiency, and ease of access, and this is where money is going to flow first. Most people have more money in fixed income than they do in equities anyway. This has been the growth in the first quarter; we are set by having a wide variety of types of fixed income ETFs that they can invest in, and we do see a lot more secondary trading that is going on in these. We are seeing investment-grade and high-yield bond ETF assets under management grow from about $5 billion to $165 billion from 2007 to 2015. This is going to be a very strategic growth area for us, and as Larry cited in his opening, we saw a record $27 billion of net inflows into fixed income ETFs in the first quarter. So this is really, I think, the big growth area. We have a very long-term history at BlackRock in fixed income, and we are using that historical background and the technology we build to enhance our reputation in this business.

I would just like to add one more thing. As the ecosystem of bonds and secondary bonds and liquidity continues to change and we are seeing phases of more illiquidity, the utilization of ETFs as a mechanism to find liquidity and to have the ability to navigate the factors that impact valuations of fixed income—whether that’s duration, subsidy, or credit—navigating with the utilization of ETFs enhances opportunities for returns. We believe, as I said in my prepared remarks, that the utilization and implementation of fixed income ETFs as a component of the fixed income strategy clients are employing will grow larger in the coming years.

So just on the back of the BRS FutureAdvisor win this week, I am just wondering if you can help us think about the underlying economics for the business-to-business global advisor platform, and then also think about what type of products they will be using in this platform?

I will let Gary answer that, and then I will provide some color for it later.

There are a variety of different drivers of momentum behind this, Craig. We talked about technology having an increasingly significant impact on the retail space and obviously we are enhancing our technology for our retail clients. FutureAdvisor is just one channel where we are seeing this digital end; we are also using and leveraging Aladdin to bring portfolio construction and risk analytics tools to financial advisors as well as private bankers. We are streamlining our sales processes as well, using technology to yield greater efficiency and effectiveness. FutureAdvisor, in particular, which operates within BlackRock Solutions, allows us to strengthen relationships with our distribution partners by offering their clients high-quality, technology-enabled advice. Importantly, this is all backed by BlackRock’s broad investment platform, our Aladdin risk analytics, our proprietary retirement technology, and our longstanding experience as an enterprise technology partner to other financial institutions. I think that is probably the key differentiating factor for us at the moment because we are noticing whether it’s the commercial arrangement we announced this week or some others that frankly we have signed but haven’t publicly announced. This looks like a very long-term, complicated implementation that is exactly what we have been doing with Aladdin over the last couple of decades. While certain competitors are trying to replicate the strategies that we are doing here, the real difference is that we have been involved in complex client implementations for a significant period of time, and I think that is really going to be a differentiating factor. As it relates to the economics, the economics on these things are frankly very customized in some aspects. There are platform fees, implementation fees, and in some cases, minimum fees. There will be underlying management fees to the extent that the client chooses to either use our own model or populate those models with iShares. Importantly, we are looking to customize it as much as we can to meet our intermediary partners’ objectives, so we have signed contracts which we haven’t announced yet, but we are in dialogue with many more institutions interested. I think Gary, Craig said it very clearly: think of this as an Aladdin implementation. Margins were quite low during the initial implementation stage for the first deal. In some cases, as you know, there were more expenses than revenues in the initial years. However, as it’s being implemented, utilization will increase and the other service fees will contribute to significant revenue. Importantly, we also believe having this linkage creates a deeper connection with our clients and our distribution partners. This is not just singular product offerings through these channels, but it’s a deeper, more consistent connection with these clients. This is one of the reasons we are seeing earlier than anticipated demand for connectivity that digital advice can provide with our distribution partners.

Larry, just maybe if you can draw in on the define contribution business. You have, I think, about a 9% market share of that in organic growth, which is very strong for you, and last year it was at a 6% pace. Maybe if you can elaborate on whether you think the Department of Labor rules longer term will accelerate the shift to DCIO and how you think behaviors might shift among plan sponsors and how you are positioning in the second half?

Well, first of all, we are just interpreting what the DOL has said related to DC, and I am going to let Rob answer it. But more importantly, it looks to us that you are not going to see rollovers as fast, and people are going to remain within their defined contribution plan longer. So, this is an initial view; we are studying this more and more but obviously as you suggested DC is a very important component where we are and we believe we are well-positioned. I am going to let Rob discuss.

Yes, I think Larry said it right. The big issue with DC is that with a number one DCI, we have about $639 billion of assets under management. We are witnessing the increased need for open architecture. As a result, we are seeing the increasing need for indexed target date and also high-performing active strategies; these are really trends driving the market share changes in the DC space. That’s why we have been building our infrastructure to meet that. Now once we get a better view of the DOL changes, we believe that the infrastructure is very well-positioned, but how soon the movement of assets takes place is something we are still trying to figure out.

So let me thank all of you for joining us this morning and for your continued interest in BlackRock. I think our first quarter results once again highlight the investments we made to enhance and differentiate BlackRock’s diverse global platform. We’re continuing to take a long-term view. We’re trying to stay ahead of our clients’ needs. We’re trying to stay ahead of our competition. We’re trying to navigate these near-term developments in the financial economic landscape, but we’re doing this on behalf of our clients to ensure that we are providing them with the service they require from us. In a more volatile world, we must play to our advantage; clients who are looking for BlackRock are increasingly looking for more information and support to navigate the complexities we face in a world of low and negative interest rates. We aim to help them build a better financial future. I believe we have done that in the first quarter, and we’re positioned to do so again in the second quarter. I look forward to seeing and hearing from all of you at the end of the second quarter. Have a good April, May, and June.