BlackRock Finance Inc (BLK) — Q2 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 list 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 second quarter of 2016. Before I turn it over to Larry to offer his comments, I'll review our quarterly financial performance and business results. While our earnings release discloses both GAAP and as adjusted financial results, I will be focusing primarily on our as adjusted results. Clients are struggling to navigate an incredibly difficult investment landscape. Notwithstanding the recent market rally over the last 12 months, many global equity markets were down double-digits and interest rates touched historic lows worldwide. The current macro environment, including negative yields in many jurisdictions, Brexit, and U.S. election uncertainty is causing clients to defer investment decisions resulting in significant increases in global cash balances, lower active flows, and a shift from equity to fixed income assets. This environment is also resulting in lower revenue capture across the asset management industry. In times like this, growing and evolving our business are critically important, as client needs for our investment advice and risk management capabilities are greater than ever. BlackRock is having richer dialogues with clients than at any time in our history, and we are well-positioned for growth when client activity accelerates. Last month, at our 2016 Investor Day, we described how BlackRock is built for change. Our strong foundation drives consistent financial results and stable cash flows, enabling us to fund innovation and invest in new growth areas. This is critical to clients, especially during volatile times when other investment managers may be forced to pull back, and to shareholders, as we have an opportunity to win market share. During the second quarter, strength in our global investment platform and Aladdin risk management business, coupled with continued expense discipline enabled us to continue investing in our business despite market headwinds that impacted both base fees and performance fees on a year-over-year basis. Second quarter revenue of $2.8 billion was 3% lower than a year ago, while operating income of $1.2 billion was down 6%. Earnings per share of $4.78, was down 4% versus the prior year quarter. Non-operating results for the quarter reflected $14 million of net investment gains, primarily attributable to net gains on private equity and hedge fund-related investments. Our as adjusted tax rate for the second quarter was 30.6%, compared to 30.1% a year ago. We continue to estimate that 31% remains a reasonable projected tax rate for the remainder of 2016, though the effective – the actual effective tax rate may differ as a consequence of non-recurring items that could arise during the year. Second quarter long-term net inflows of $2 billion reflected $16 billion of net new business from iShares, offset by outflows in active strategies and institutional index mandates. Over the last 12 months, BlackRock delivered long-term net inflows of $126 billion representing 3% organic growth. Second quarter base fees were down 2% year-over-year despite generally flat average AUM, reflecting more than $250 billion in AUM mix change favoring lower fee fixed income and cash assets, including the impact of diversion equity beta. While the S&P 500 was down only 1% on average year-over-year, many markets linked to our higher fee equity products including emerging markets, Europe, Asia, natural resources, and commodities experienced double-digit declines. Sequentially, base fees increased 6%, driven by higher average AUM following the market rally in March. More recent market volatility associated with Brexit had a minimal impact on second quarter base fees. While the operational implications of Brexit will evolve over the coming quarters, we are well-positioned versus the industry as a function of our globally diversified manufacturing, distribution, and operating platform. Performance fees of $74 million decreased 46% versus a year ago, reflecting continuing performance challenges in the hedge fund industry generally, and the impact of high watermarks on certain funds specifically. The year-over-year decline was driven primarily by fees associated with hedge fund-related and certain long-only equity products. BlackRock solutions revenue of $172 million was up 7% year-over-year and flat sequentially. Our Aladdin business, which represented 85% of BRS revenue in the quarter, grew 13% year-over-year, driven by several sizeable clients going live on the Aladdin platform during the last year. We continue to see strong market demand from institutional asset managers, evidenced by the recent signing of one of our largest clients to date, which will be implemented over the next 18 to 24 months. As discussed at Investor Day, the rapidly changing regulatory and financial landscape is also driving accelerated conversations with retail intermediaries about leveraging Aladdin's value proposition in the wealth management space. Aladdin remains a key differentiator and a competitive advantage for BlackRock, enabling us to communicate more effectively and to serve clients more holistically and efficiently. Total expense decreased 2% year-over-year, driven primarily by lower compensation expense. Sequentially, total expense increased 3% driven primarily by higher compensation and AUM-related expense. Employee compensation and benefit expense was down $31 million or 3% year-over-year reflecting lower incentive compensation. Sequentially, compensation and benefit expense increased $32 million or 3%, reflecting higher incentive compensation, driven by higher operating income and performance fees relative to the first quarter, partially offset by lower seasonal employer payroll taxes in the current quarter. Distribution and servicing costs increased 12% sequentially due to the acquisition of BofA Global Capital Management, and reduced money market fund fee waivers which have historically been shared by our distribution partners. G&A expense was essentially flat year-over-year and sequentially, reflecting continued expense discipline despite the impact of recent acquisitions on our run rate. As we mentioned last quarter and assuming stable markets, we still anticipate full-year 2016 G&A expense to be roughly in line with 2015 levels. Our second quarter as adjusted operating margin of 43.9% was down 100 basis points year-over-year, but up 230 basis points sequentially primarily reflecting marginal impact of changes in base and performance fees and their respective time periods, coupled with G&A expense discipline. As we've stated in the past, we do not manage the business to a specific margin target. We do remain keenly focused on delivering long-term value to our shareholders and will continue working to strike an appropriate balance between organically investing for future growth and practical discretionary expense management. 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, in the second quarter, we closed the acquisition of BofA Global Capital Management, assuming investment management responsibilities for approximately $81 billion of related cash and liquidity AUM, and leveraging the scale of our cash management franchise. During the second quarter, we also repurchased an additional $275 million worth of shares. Second quarter long-term net inflows of $2 billion were driven by the diversity of our platform. Importantly, we saw strength in strategic focus areas including fixed income ETFs, smart beta and factor products, and infrastructure offerings. Global iShares generated $16 billion of net new business in the second quarter, led by fixed income inflows of $10 billion. We continued to see investor appetite for risk-aware smart beta products, with our minimum volatility funds raising more than $6 billion during the quarter and maintaining the number one market share position in the product category. We also continue to see strong results in the Core Series, which is less sensitive to the macro environment raising $12 billion in net flows during the quarter. Throughout the quarter, investors once again used iShares as their preferred vehicle to navigate market volatility and express rapidly changing investment views. Since the UK's decision to exit the EU, we have seen particular strength in our European iShares range across asset classes, capturing over 70% market share over the past several weeks, as clients leverage our industry-leading product breadth and liquidity. BlackRock's global retail franchise saw $6 billion of long-term net outflows in another challenging quarter for the industry, as both domestic and cross-border fund flows suffered in light of political and macroeconomic events. The global retail market is changing dramatically. DOL, RDR, and MiFID are impacting the way wealth managers are serving clients. Digital and technology offerings are proliferating, and efficient beta products continue to take share from active products. While year-to-date industry, domestic, and cross-border active gross sales have slowed significantly due to macro uncertainty and continued poor performance, we are confident that the breadth of our retail platform including active and passive investment products, solutions, and portfolio construction tools, and digital and risk management capabilities collectively position BlackRock to be a market leader in this new environment. Our institutional business saw $8 billion of long-term net outflows, primarily due to active fixed income net outflows of $7 billion, driven largely by client reallocation activity. Despite volatility in EMEA, BlackRock continued to expand our presence with institutional clients in Continental Europe generating $8 billion in net inflows during the quarter, illustrating that while many clients are taking a wait-and-see approach, BlackRock remains the partner of choice when they are prepared to invest. In the United States, our defined contribution business generated net inflows of approximately $4 billion, driven by LifePath and other target-date inflows, and now accounts for over $650 billion of assets under management. Finally, we saw positive flows in institutional illiquid alternatives driven by continued momentum in infrastructure. Illiquid alternatives remain a key area of growth for BlackRock as institutional clients increasingly search for additional sources of income and uncorrelated returns. We now have more than $10 billion in committed but uninvested capital to deploy for clients. As we communicated at Investor Day, we are intensely focused on adapting ahead of change. While the current market environment is putting pressure on asset management companies and challenging historic business models, BlackRock has built the industry's broadest global product and distribution platform to meet the changing needs of our clients and drive long-term value for our shareholders. With that, I'll turn it over to Larry.

Thanks, Gary. Good morning, everyone, and thank you for joining the call. As Gary mentioned, our clients are facing unprecedented challenges as they attempt to navigate the current investment environment, which I'll describe in more detail in a moment. While this has caused many of our clients to pause their investment activity for the moment, it has also led to a deeper conversation with our clients than ever before. They are seeking our advice; they are looking for our investment solutions and wanting the risk analytics and technology that BlackRock can uniquely offer. We are better positioned, I mean, we, BlackRock, are better positioned than we've ever been to deliver the solutions they need. Political and macroeconomic uncertainty including Brexit, the upcoming elections in France and the United States, historically low yields, and elevated market volatility, along with regulatory pressure including the DOL and Solvency II, these factors and others are leading clients of all types to pause as they assess their own needs and the investment options available for them. Our pension clients with 7%-plus return expectations are facing an ever-expanding liability gap. Our insurance clients with significant regulatory constraints cannot make their business models work in a zero-yield environment. Sovereign wealth funds have been forced to focus on liquidity and funding needs after years of rapid growth, and individual savers are wrestling with a choice between taking too much risk versus too little return as they face the prospects of their own underfunded retirement plans. Where can clients turn to address these challenges? Today, there's $10 trillion of sovereign bonds delivering negative returns, yet central banks continue to buy, and global derisking continues to bid up fixed income prices. Active equity managers as a group have underperformed over a multi-year period and are facing record outflows. The blanket beta strategy that worked so well post-crisis has led to more volatility and divergence. As Gary mentioned, many European and Asian equity indexes have fallen year-to-date, even as the S&P is at a record level. Today, this is the environment asset managers are operating in. Clients do not know what to do with their money. They are afraid and pulling back, as evidenced by more than $55 trillion in bank deposits sitting in the United States, China, and Japan alone. Even as markets have rallied recently, many clients have missed that upside and find themselves feeling even further behind. In difficult times, our clients need BlackRock more than ever. We believe that asset managers must evolve in anticipation of the fundamental shifts taking place in our industry driven by technology, demographics, and regulation, so that they are positioned to meet the clients' needs. And we, BlackRock, are doing that. As we highlighted at our recent Investor Day, BlackRock is constantly adapting. The differentiating platform we have built at BlackRock over the past 28 years is resonating with our clients, and the diversity of product offerings, the risk capabilities of Aladdin, and the market insights offered by the BlackRock Investment Institute will allow our clients to put their money to work. I can't predict when and how much, but when they do, I am confident that BlackRock has never been better positioned to capture those flows. Whether a client is looking for an illiquid alternative investment, an ETF, or an unconstrained fixed income strategy, or a smart beta or factor strategy, or a multi-asset income product, we can deliver that solution and many others. Most important is our ability to fashion solutions from the combination of these strategies to meet the unique needs of our clients, all backed by our unmatched risk analytics and technology. And that is what truly differentiates BlackRock, and that is what is now resonating with our clients. As Gary mentioned, we saw $2 billion of long-term net inflows in the quarter. Additionally, over the last 12 months, we have seen $126 billion of long-term net inflows across our platform. These flows are well-diversified, with $12 billion in active and $114 billion in index, including $96 billion from U.S. clients and $30 billion from international clients. We saw $39 billion and $85 billion in equity and fixed income net inflows, respectively, and we continue to generate strong client commitments in our rapidly growing illiquid alternative business. Since quarter end, after Brexit, we continue to see accelerated flows in our iShares franchise with approximately $18 billion of net inflows thus far in July, bringing our 2016 net inflows to more than $56 billion. iShares currently has the number one share of global and European ETFs and our fixed income ETF flows year-to-date are leading. Let me talk about our fixed income flows. The fixed income iShares continued to be a substantial growth opportunity for BlackRock, and we saw more than $67 billion in net inflows over the past 12 months. For some of you, you may remember more than five years ago, some of our skeptics were still questioning the overall ETF growth story and downplaying the fixed income opportunity. We were outspoken about our ability to innovate and build this market. Today, with a fixed income ETF industry reaching $600 billion in total AUM, and our own franchise being north of $300 billion, we are the proven leader in this space, and focused on continued penetration of the $100 trillion fixed income asset class. Just as we were five years ago, today we’re investing to develop the solutions that will meet our clients needs in the future, including infrastructure, sustainable investing, big data, machine learning, factors, smart beta, and critically in technology—from our Aladdin franchise to our presence in digital wealth management with FutureAdvisor. Monetary policy has driven yields to record low levels while failing to stimulate economic growth, and there is a significant need for global fiscal policy responses. Infrastructure investing is a critical component of that solution, creating jobs, driving growth, and providing investors with long-term opportunities for yield. We are well-positioned to participate in that activity. Following another strong quarter of capital raising, BlackRock now manages more than $8 billion in invested and committed capital across our infrastructure platform. Whether in alternatives or across our active platform to continue to deliver alpha in the new market paradigm, you have to be connected. You need scale. You have to leverage technology, and of course, you have to be smart and nimble. BlackRock’s Aladdin technology connects our global investor community on a common platform. The scale of our trading and liquidity platform enables us to access market liquidity that few firms can, and we further enhance that scale through the Bank of America Global Capital Management acquisition in the quarter. Our data expertise allows us to turn large, unstructured data sets into meaningful investment insights, and our risk and quantitative analysis teams provide independent oversight to help identify both risk and opportunities. The platform we built is also a powerful means to recruit and retain the industry’s top talent. Most importantly, we announced that we hired Mark Wiseman to lead our unified active equity franchise. In the quarter, performance across our active platform remains stable or improved, with 80% in fixed income, 67% in fundamental equity, and 82% in scientific active equity above their benchmark for the peer medium for the last three-year period. We’re making significant investments in big data, artificial intelligence, and machine learning, and we saw more than $1 billion in scientific active equity inflows in the quarter. Factor-based investment strategies help us bridge the gap between traditional active and index, and further fill out our offerings as clients increasingly look to achieve access to broad, persistent drivers of return through low-cost, efficient vehicles. During the quarter, our global iShares minimum volatility fund raised more than $6 billion, leading the ETF industry smart beta category, and BlackRock now manages more than $140 billion in AUM across a range of factor-based strategies. Technology has always been a core component of our value proposition, and a significant differentiator for BlackRock. As the investment landscape evolves, technology is transitioning from a competitive advantage to a competitive requirement. Those that do not invest in technology will not be able to meet their clients’ long-term needs. Technology remains a key area of focus and investment for BlackRock across all aspects of our business, to enhance our investment process, client service, and create operational efficiencies, including our unifying BlackRock Aladdin technology platform. Aladdin revenues grew 13% year-over-year, and during the quarter, we signed one of the largest clients to date. We expect Aladdin to continue to grow as we enhance capabilities to meet clients’ current and future needs. As we expand Aladdin to serve additional clients across the financial ecosystem, we are breaking down legacy systems to connect asset managers to asset servicers through provider Aladdin, and providing wealth management organizations with institutional quality risk oversight and analytics through our Aladdin for wealth platform. We also believe that the evolving technology and regulatory landscape including the new DOL rule in the U.S. will play an integral role in increasing access and transparency for investors. And we continue to see strong client interest in our FutureAdvisor platform as clients look to new and innovative wealth management solutions. Clients not only turn to BlackRock to manage their assets but also to help them understand the broader impact of global events. The BlackRock Investment Institute leads that discussion. To help clients understand the immediate results of the Brexit vote, the BII hosted two client calls the morning after the vote, with more than 10,000 participants worldwide. This level of engagement and participation highlights BlackRock’s position in the industry, not only as an asset manager but as a thought leader, enhancing our role as a trusted advisor. Going forward, we will continue to see changes—changes in markets, changes in technology, changes in demographics and regulation. This is all driving the changing needs of our clients, and we will continue to adapt our business to serve those needs in that ever-changing world. We are in a difficult environment for our clients and our industry, but challenging environments have always been when BlackRock has been able to make significant leaps forward. Today, many of our clients are apprehensive, and they are coming to us for advice. As I’ve said, our client dialogues have never been better, and we have never been in a better position to serve our clients' needs. That is why I have never seen in our 28-year history, more opportunity for BlackRock than I do today. Now, let’s open it up for questions.

Hi, Michael.

Hi, Larry, how are you doing?

Good.

Larry, just a first question, I think everyone – when you look at BlackRock, and you look at all of the products that you provide and you’ve proven it over time, in terms of the organic growth that you’re able to generate. So this quarter, it’s a bit surprising, but the backdrop has been anything but normal. But when you think about some of the comments that you made, particularly on the institutional side in terms of flows, you look at all of the cash on the sidelines, yet you look at where equity valuations are, where yields are, when you are talking to clients, is there a risk for the industry that we see a lot of money remaining on the sidelines for a period of time, just given the lack of opportunities? Or do you think that there’s still enough – I don’t know conversations or drive to allocate some of this cash into other solutions that can still generate some attractive returns?

Sure. Well, first and foremost, clients want to put money to work. They’re pausing, that’s certainly true. I think we’re seeing an anomaly right now. We’re seeing – if you look at our ETF flows since Brexit, I would say the majority of those inflows are probably institutional. Because at the same time, I’m sure you’re looking at the data, there are still outflows in mutual funds, which tells you retail are still selling, but that the divergence is quite stark, and shocking to see that type of differential. The dialogues we’re having with clients are as robust as possible. Some clients are looking to put money to work. The issue is that some clients who have regulatory issues for capital, investing in bond yields at this time becomes more difficult. Some of them are looking to invest in dividend stocks. Therefore, I believe we’re going to see more unlocking of money over the course of the next 12 months. I can’t predict whether it’s in the third quarter, but I’m particularly surprised at the sheer volume of inflows in iShares in the first 14 days of the month, which is public, so I can talk about it. The dialogue we’re having institutional supports good flows and awards in alternatives already this quarter. So it is not as – I wouldn’t call it to be systematic and easy. It is more periodic and idiosyncratic depending on the clients' needs. But this is a time for us to be in front of our clients more than ever before, as they are questioning their asset allocation, where should they put money, and how should they think about it? And so, Michael, I can’t predict one quarter over another. What I can say, over a long period of time, there is huge pent-up demand, and I believe we will be more involved than ever before. I can’t say that about the industry though.

All right, Craig.

Hey, good morning, Larry. With rates now at zero, and actually more like negative across a decent portion of the spectrum, I’d imagine there’s a lot of pent-up demand for alternatives, infrastructure, etc. What’s your thought on that? When are we going to see some more of this money move, and how is BlackRock positioned for that?

Well, I think we’ve been consistent in saying we’re continuing to grow our illiquid alts business. I said, just from the last question, we have been awarded one or two mandates already this quarter in the alt space. I think across the board, we’re well-positioned. It really depends on what category. You mentioned infrastructure. We have a huge emphasis in this area. We are continuing to hire people there. We are in dialogue with many different parts of the world related to infrastructure investing. As we find those investments, it’s very easy to find the capital. So as you know, we have a $30 billion real assets platform and $15 billion in fund of funds of private equity. We continue to see growth in private credit, and we’re well-positioned in some of these products. In other products, we are not as well positioned as others. Importantly, I can say with absolute confidence, the positioning we have in the alt space with our clients has never been more robust. And obviously, we are not as – in some of the platforms we’re not as strong, because it was not one of our core competencies 15 years ago and we’ve been building it. We conducted an institutional client survey, which showed that 53% of our clients plan to reallocate more into alts and real assets. So I think that feeds into what you just asked. Thus, we believe we’re in a very good position in this market. I would argue though that some asset classes, the reason why they have done poorly in the alternative space is that there’s so much money chasing these, and only a few investments.

Craig, just recall that when you look at the numbers that you see, it’s a little complicated because we’ve got commitments coming in that don’t impact net new business for the quarter. However, we have return of capital going out that does impact our net new business for the quarter. So if we kind of normalize for that, in terms of the institutional business for the quarter, we did see NNB—net new business—as approximately $825 million. Let’s call it $825 million again in infrastructure and opportunistic credit, as Larry mentioned. We also saw institutional commitments of another $700 million in the quarter. Again, infrastructure and opportunistic credit. Our total today is about $10 billion of uninvested but committed capital. As you know, we’ll hit NNB as the assets go in the ground.

Hey, Alex.

Thanks. Hey, Larry. Good morning. So I was hoping to zone in a little bit more on the active fixed income business for you guys. I guess, A, just a little bit of color around the reallocation you highlighted in the second quarter, where there was a kind of one-off event. And then, just broadly given the negative yield dynamic that you mentioned earlier, I was hoping you could comment on your unconstrained bond platform? It sounds like that’s the product that could solve some of the issues, and the uptick has been good, but perhaps a little bit slower the last couple of quarters. So maybe you can comment on that as well? Thanks.

Rob, why don’t you take that?

Yes, so let me give you a little bit of a deeper dive on the fixed income results for the quarter. Clients continue to search for yield in a low-rate environment. In the quarter, we saw significant equity market volatility. Thus, fixed income has remained a critical component of most clients' portfolios. We continue to have very strong performance across our fixed income franchise, with 80% of assets above the benchmark or peer median for the last three-year period. iShares had $10 billion of fixed income net inflows, driven by strong flows into investment-grade corporates, broad U.S. or EM debt, and TIPS. The fixed income ETF industry recently reached $600 billion in total AUM. That’s doubled over the past four years, and our own franchise is north of $300 billion. We see significant opportunity to increase penetration in the $100 trillion global fixed income market. Now to drill deeper, just on July 7, to give you an example, our corporate bond fund, LQD, took in $1.1 billion of net inflows. That was a record daily inflow for a corporate bond ETF. So on the retail side, the fixed income business continues to be strong, driven by total return, and our strategic municipal offering. We saw $2 billion of net inflows into retail active fixed income. On the institutional side, the active fixed income net outflows of $7 billion were driven primarily by client reallocation activity in Asia-Pac and the U.S. Clients continue to come in and ask for presentations on strategic income opportunities. The reason being is that it gives the portfolio manager more tools and more ability to find different types of fixed income securities with lower risk but higher returns in a low interest rate environment. Therefore, we believe that area of the market will continue to grow, as will the iShares fixed income side.

Good morning, everyone. Thanks for taking my question. Just to switch gears a little bit. Big picture, Larry, I guess there’s been some talk coming out of D.C. about building liquidity constraints or requirements for mutual funds. I was wondering what you could share with us, or maybe what you’re hearing, and what the implications might be across the business, if any?

Well, I don't know much more. As we said in the last quarter, we are supportive of rules that enhance investor protection. We are highly enthusiastic about regulations that provide more confidence to investors, creating a level playing field so they can invest. If we can see that confidence build and unlock some of this huge cash holding, we're in a very good position. So I want to put that into the context of what is being proposed. We certainly don't know the end results of how liquidity is going to be addressed, the disclosures related to liquidity. We know in the proposed document that the SEC is looking at different buckets and how they analyze risks. They are going to set limits on the illiquid bucket of 15%. Overall, we have been very supportive of these rules, and we believe there is a need for better disclosure related to the composition of all portfolios. As you know, we have been founded on a culture of understanding and managing risks importantly. It is rules like the liquidity rule or even the DOL rule that are foundational reasons why we see accelerated interest in having dialogue with us in our risk platform or risk technology for Aladdin. Therefore, I don't know much more than that, Bill, but we are a constructive participant in the dialogue with the SEC and we hope that we have that transparency in all the funds and understanding so that investors can comprehend what are the embedded liquidity risks in these funds. We don’t know how they would respond in differentiating between a mutual fund and ETF, or how they would look at them differently. So we don’t know enough and we will wait and see when they come out with a final comment period and final proposal.

Hi, Eric.

Thanks so much. Good morning. Given that there has been a decline in the quarter or a decline in the retail business, but the iShare business in terms of your last 12 months organic growth remains as strong as ever. Is it possible here that what we're seeing is less a slowdown in investor interest and more just a continued shifting of investor interest—not a slowdown in retail investor interest, but just a continued shift of investor preference from active to iShares?

Well, I think that is a trend, but I think it's more than that. I think it is, as I said, some of the great growth in the fixed income ETF platform is related to the illiquidity in some of the marketplaces. If people are looking for exposures, they can go buy an ETF for that type of exposure. But we believe the marketplace—like we do agree with the notion of what BWC has suggested—that ETFs are going to continue to grow and may double in size. I think the bigger issue is a redefinement of active. As you heard, we're making our investments—our investments in our smart beta, which is a form of active. It's not—We call it tethered active, but it is a form of active. We are talking about using factors as analysis, and our minimum volatility ETF is a great way of getting active—some form of active returns through an ETF platform. So I think its technology is using different instruments like ETFs. More importantly, I think preferences are changing so the old way of investing—maybe just categories of market capitalization—are certainly changing. I think it’s more than just a preference out of active into passive. I am a big believer that active will play a role in the future, so let’s be clear about it. We believe whether it’s alternatives or active products, we are big believers that in certain categories like Asian equities and components and European equities and in some areas of the U.S. equity market, active returns can and shall outperform indexes. What you're seeing is a trend that iShares are taking some share away from people buying individual stocks. That’s one thing that I think. iShares may be taking away from buying individual bonds. This is the dynamic changes we’re seeing. We're seeing more investors talk about asset allocation instead of individual stocks, and I think probably more than alluding to some really accelerated outflows we’ve seen in the last four months—we, the industry—in active equities, I would not write it off over a long cycle. I would just give you a better perspective on BlackRock. We had eight quarters in a row of positive flows. Therefore, I’m not saying that this is the beginning of a trend, but I think we all should pay attention. I believe the technology of ETFs, the simplicity of ETFs, and the quick, easy way of getting exposures are driving more demand for those products. We believe they will continue to drive demand. As I said, we do believe the ETF business will double in size in the next five years.

Thanks. Good morning, Larry.

Hey, how are you? Good morning.

Thanks for taking my question. I just wanted to talk a little bit about the DOL rule and a couple of things around that. I guess the first thing is, I mean it is – even though it's just announced, it is a relatively short implementation period or goes effective in next April which means I guess distributors have to decide soon how they're going to deal with it, and what that means for you and your peers. Do you have any better sense of the not just iShares demand but maybe from a cost or expense perspective, how you think this may flow back into BlackRock and your peers, in particular? How do distributors continue to demand kind of payment for access in a DOL world? And then, maybe related to that, you did develop the Aladdin for Wealth platform—can you provide any updates on how you’re seeing the uptake on that platform in the wealth management market?

Really good question. I don't have much better insight than probably you do at the moment. We are having constant conversations with all our distribution partners. There are some partners who believe the DOL will be revolutionary for their business and there are some of our distribution partners who believe it is evolutionary. It does mean change for the business, and I think we're very well positioned for those changes. As I said in our first quarter results, once again, if there is a better understanding and outcome for the ultimate investor which leads to more investable assets out of cash, that's all good for the ecosystem of our distribution partners and really good for the asset management industry. Secondly, I think it’s certain that the DOL and the responsibilities it entails are going to create a much tighter risk management oversight culture with all the clients. We are having robust dialogues with everybody on the uptake of Aladdin for Wealth and we’ll see how that plays out. I don't have anything tangible yet to say but I will say that we are having deep dialogues, and I am very optimistic that there will be uptake for Aladdin for Wealth. I believe the DOL puts more responsibility on the firm and the financial adviser to act in a fiduciary way. There is a big dialogue—while we know the DOL is only about retirement assets, the big dialogue is whether that forces an upgrade of fiduciary standards across all the businesses that could be debated among different people. So I don't know what it means as an outcome. I think the positive side—so I’m taking this the long run—is a net positive for most distribution partners. They will have to have much more oversight and understanding of the client asset as a fiduciary. I do believe they will have more centralization. I think they will have a model closer to the European model where you have CIOs determining which mutual funds or what platform. It’s a model that we talked about in the European experience for at least eight years, and one of our strong positions in Europe with that CIO model is I believe the DOL ruling will move the U.S. towards a CIO model. Obviously, we know it’s going to shift appropriate work towards an advisory model instead of a commission-based model. For those clients that have that advisory relationship, it builds a deeper relationship between the client and the distribution partner. Given our scale and positioning, we will be a huge beneficiary of that positioning.

Hey, Larry. I want to come back to the interest rate discussion for a second. We know money-market funds have been waiving fees for some time now just because rates are so low. If medium- to long-term interest rates continue to decline, might bond funds have to start doing similar things? If they might have to, are we getting close to having to worry about this risk?

If anything, we've had a 25 basis point increase in the United States, so actually money-market funds in many cases are in a better position today than they were a year ago. You're seeing, as you suggested, a flattening of the yield curve. I do not believe—we saw the 10-year go down to as low as what, 1.35%?—and we're at 1.47% right now at last check. The two-year note is still trading at about 66 basis points. Should the U.S. go down that path, and reverse that increase, and indeed the Federal Reserve needs to ease, that is a whole different issue. I don't see that as an outcome at this moment. I believe the U.S. economy is growing—not as well as we want it to be, but I think we will see a 2% economy this year, which suggests—and we still have a 5% unemployment rate in this country. Despite all of the headwinds and uncertainties, I don't see at this time, a Federal Reserve that turns itself into a central bank forced to aggressively ease. It may delay their path towards normalizing interest rates, but I do not see any possibility at this moment that they will be forced to go back into easing mode. I think the actions of the Bank of England today are another good example. The marketplace anticipated an easing. They suggested in their commentary that they are going to possibly ease in August after seeking more data. So if the UK growth rate does fall, as we at BlackRock anticipate, it does not mean it falls worldwide but rather shifts and moves. I would tell you clearly that the U.S. economy is still the area where others want to invest worldwide. Therefore, I don’t see an atmosphere where I have to worry about money market funds in the United States any time soon. I think we're going to live in this environment of low rates for a long time, though.

Hi, Michael.

Hey, good morning. Just a question on the illiquid strategies, an area of growth that you guys have been flagging here. Can you talk a little bit more about the private credit space, how you're building out that part of the business? Do you feel that you have all the pieces and parts, or would you look to buy anything? And then, if you could just also touch upon some of the demand trends that you see, especially in light of this low-rate environment?

Yes, so the private credit business is really customized and very specific to the institutional investor looking for uncorrelated investments in the marketplace that’d be considered outside of the box. We've put together a very strong team with backgrounds in private equity, venture capital, and credit, leveraging all of the resources we have across BlackRock. You can imagine that there are numerous resources and unique transactions that we see; however, we never really had a dedicated pocket of money to take advantage of those opportunities. So assembling this group has enabled us to source transactions globally for these institutional clients, fitting their risk tolerance perfectly with double-digit return profiles unrelated to aspects of the market, which helps to diversify their portfolios. Moreover, these come in sizable amounts—institutions are looking for north of $1 billion type mandates. The struggle for many institutions in this market is getting money invested. We haven’t had a challenge finding opportunities; we simply hadn’t been pursuing them. This is an area where we will continue to add resources and aggregate our capabilities. We’re very optimistic. When we’re meeting with many large institutions, this is exactly what they’re searching for. Mark Wiseman’s upcoming role will also greatly assist us in sourcing these types of assets, as he has a track record in identifying these investments. So, these are very customized, long-term mandates requiring significant teams and resources. We’re very optimistic about this in the future.

Well, I really truly want to just say thank you for joining us, and your continued interest in BlackRock. I can promise you that we will continue to evolve our business to enhance the differentiating platform of BlackRock’s diverse and global platform. I could also proudly point out that our dialogues with our clients have never been deeper or more robust, and when those opportunities arise, we will be a component of their future allocations. Our relentless focus on always improving the Firm will drive that future growth and continue creating long-term value for you as our shareholders. I believe we’re in a good position to do that. With that, have a good quarter and hopefully, it will be a little less volatile than the remainder of this quarter, but it started off as a really good quarter for BlackRock. Thanks. Have a good one.