BlackRock Finance Inc (BLK) — Q3 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, I'll turn it over to Gary.

Thanks, Chris, and good morning, everyone. It's my pleasure to present results for the third quarter of 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. Our clients are facing significant challenges driven by increased regulation, market volatility, record low interest rates, and disruptive technology, and as a result, the asset management industry is changing rapidly. During these times, as we've done in the past, we reexamined our strategic priorities and evolved our business model with the goal of better serving the needs of our clients and optimizing organic growth in the most efficient way possible for our shareholders. Financial results for the third quarter of 2016 demonstrate the diversification and stability of our global investment and technology platform and our commitment to investing for the future. We executed on each of the three components of our framework for shareholder value creation in this quarter, delivering organic growth, demonstrating operating leverage, and systematically returning capital to our shareholders. Third quarter revenue of $2.8 billion was 3% lower than a year ago. However, on a constant currency basis, we estimate that quarterly revenue was down approximately 1% year-over-year. Operating income of $1.2 billion declined 1% while earnings per share of $5.14 increased 3% versus the prior year quarter. Non-operating results for the quarter reflected $29 million of net investment gains, primarily attributable to net gains on unhedged or partially hedged multi-asset and fixed income seed investments. Our as adjusted tax rate for the third quarter was 29.7%, reflecting the impact of several nonrecurring items. We continue to estimate that 31% remains a reasonable projected tax run rate for the fourth quarter of 2016, though the actual effective tax rate may differ due to nonrecurring items that could arise in the future. BlackRock generated $55 billion of long-term net inflows in the third quarter, representing an annualized organic growth rate of 5%. Flows were positive in our active and index franchises and across asset classes and regions, increasing the value of our broad-based diversified business model. Third quarter base fees of $2.5 billion were up 4% year-over-year, driven primarily by organic growth, positive beta, and higher securities lending revenue, which was positively impacted by widening asset spreads resulting from a rise in short-term interest rates. Sequentially, base fees were up 2%. While we continue to deliver strong growth, base fee growth has recently lagged growth in average assets under management as client appetite and portfolio construction decisions impact our business mix. In the current environment, client mix shift has favored index over active, fixed income and cash over equities and government funds over prime funds in the money market space. While mix changes amongst and within asset classes won't impact our blended fee rate over time, we remain confident that our diverse business model is capable of generating differentiated organic growth in a variety of market environments, and our scale enables us to prudently manage expenses and defend our operating margin. Performance fees of $58 million declined 72% versus a year ago, driven by our single strategy hedge fund platform. Recall that performance fees in last year's third quarter benefited from a single European hedge fund that delivered exceptional full-year performance. BlackRock solutions revenue of $174 million increased 4% year-over-year and 1% sequentially. Our Aladdin business, which represented 87% of BRS revenue in the quarter, up from 81% a year ago, grew to 13% year-over-year, driven by new clients and several sizable clients going live on the Aladdin platform over the last year. Strong market demand for Aladdin continues from institutional asset managers as well as retail intermediaries who are seeking sophisticated risk analytics and portfolio construction tools to better serve their wealth management clients in the current regulatory environment. Other revenue was down $16 million year-over-year, primarily related to lower transition management activity in the current quarter. Total expenses decreased 4% year-over-year and were flat sequentially, driven primarily by lower compensation expense. Employee compensation expense was down $56 million or 6% year-over-year, reflecting lower incentive compensation, primarily driven by lower performance fees versus a year ago. G&A expense decreased $7 million or 2% from a year ago and $4 million or 1% sequentially as we continue to exercise discipline over our discretionary spend in the current environment. At present, we anticipate fourth quarter G&A expenses to be moderately lower than last year's normalized levels after adjusting for $23 million of quarterly deal-related costs incurred a year ago. Finally, distribution and servicing costs decreased 12% year-over-year and 5% sequentially, primarily related to the acquisition of BoA Global Capital Management in April of this year. Despite an overall decline in year-over-year revenues driven by a reduction in performance fees, we have delivered 3.5% organic growth over the last 12 months and expanded our as adjusted operating margin versus a year ago, evidencing our continued commitment to strike an appropriate balance between investing for future growth and practical discretionary expense management. In line with that commitment, earlier this month, we reviewed prices on 15 U.S. iShares for ETFs and several actively managed U.S. bond funds. We chose to use our scale and leadership position to invest on behalf of clients and financial advisors as they adapt to the DOL's new fiduciary rule. In isolation, these price reductions will result in an estimated $85 million annualized revenue reduction for BlackRock, representing less than 1% of our total base fees. However, over the mid-to-long term, we expect this investment to be accretive to organic growth and additive to overall shareholder value. During the third quarter, we continued to return excess cash to shareholders and we purchased an additional $275 million worth of BlackRock shares. BlackRock generated $70 billion of total net inflows in the third quarter, including $55 billion of long-term net inflows and $15 billion of cash management inflows. Cash management inflows demonstrate the breadth of our platform and strength of our client relationships in the lead-up to U.S. money market reform. Since the beginning of the year, our platform has experienced a remarkable shift from prime to government funds. BlackRock is now the second-largest 2A7 money fund provider in the United States, and our diverse capabilities across set accounts, collective trusts, and short-duration products position us well for continued future growth. Global iShares generated $51 billion of net inflows during the quarter, representing 18% annualized organic growth. Over the last 12 months, iShares has now generated over $140 billion in net inflows, representing 15% organic growth. iShares equity inflows of $26 million for the quarter were driven by flows into U.S. and emerging markets as investors once again turned to iShares precision exposures as their preferred vehicle to de-risk following the Brexit vote. Importantly, our ETF product segmentation strategy, which tailors products to different client segments, continues to perform well. As an example, our largest institutional clients, who value liquidity and often use derivative strategies, grew $6 billion of quarterly flows into EEM, our flagship iShares emerging markets financial instrument. Longer-term investors, who may be retail or institutional but are more price-sensitive, added nearly $3 billion into IENG, our iShares core emerging markets ETFs. Quarterly iShares fixed income inflows of $23 billion reflected ongoing adoption of ETFs as a means of rapidly accessing and investing in fixed income markets worldwide. Demand was particularly strong in investment-grade corporates and emerging markets as investors continued to search for services and higher yields. Our institutional client platform saw $6 billion of long-term net inflows during the quarter, driven by active net inflows of $8 billion as clients increasingly look to partner with BlackRock to build customized solutions or generate yield to meet their investment objectives. Inflows into multi-asset and solutions-oriented strategies, including our LifePath target-date series and active fixed income, were partially offset by outflows from active equity. In addition, we had another strong fundraising quarter for illiquid alternatives, raising $1 million in new commitments. Illiquid alternatives remain a key area of growth for BlackRock as our institutional clients increasingly search for additional sources of income and uncorrelated returns. BlackRock's global retail franchise saw $2 billion of long-term net outflows, primarily due to outflows from equity and multi-asset funds in another challenging quarter for the active mutual fund industry. Outflows were concentrated in European and U.S. equities and world allocation strategies. Retail fixed income remained a pocket of strength with diversified flows across our top-performing platform, including strong flows into emerging markets high yield, municipals, and European and Asian fixed income. As of September 30, 88% of taxable fixed income assets were at or above benchmark or peer median for the trailing five-year period. In particular, our flagship total return fund continues to generate best-in-class performance and is performing in the top 5% of its peers for the trailing three and five-year periods. Overall, our third quarter results reflect the benefits of the investments we've made to build a diversified global business model. Diversification across investment style, distribution channel, product, and region enables us to deliver differentiated organic growth in a variety of market environments, while our scale allows us to make strategic investments that deliver value for our clients and shareholders. With that, I'll turn it over to Larry.

Thanks, Gary. Good morning, everyone, and thank you for joining the call. BlackRock's business model was built to thrive in all market environments, and clients continue to trust BlackRock in an environment characterized by macroeconomic and political uncertainties, slow global growth, and persistent low rates. In the third quarter, even as industry-wide investor preferences continue to migrate from equities to fixed income and cash, and away from active strategies, the diversity of our platform drove nearly $70 billion of total net inflows. Our $55 billion of long-term net inflows was positive across both active and index strategies and across every asset class and every region. We're seeing ongoing divergence in global monetary policy. While the U.S. signals a slow path to tightening, the U.K., Japan, and other central banks continue with accommodative monetary policy, keeping yields at historical low levels and fueling widening asset liability gaps for both large institutions and also individual savers. As monetary policy reaches its limits in many regions, expansionary fiscal policy, particularly in the form of infrastructure investments, will be necessary to ignite economic growth. The lack of clarity around the outcomes of several upcoming political events, including the path forward on Brexit, elections in the U.S., and the constitutional referendum in Italy, is contributing to growing tail risk and investor caution. Despite underlying uncertainty, market volatility reached lows not seen since 1995 and equity markets rose in the quarter, posting record highs in the United States and the United Kingdom. Many clients are turning to BlackRock to help them understand the risk at the intersection of policy, markets, and economics as government actions continue to drive our markets. Both institutional and retail clients are increasingly utilizing Aladdin risk management technology and portfolio construction tools as well as turning to BlackRock for our insights as a thought leader. In the third quarter, the BlackRock Investment Institute hosted a call on the potential impact in financial markets of the upcoming U.S. election, which had more than 1,000 participants. These differentiators, combined with our global active and indexed investment platform that BlackRock has built over time, enable us to have a deeper and more meaningful conversation with our clients, and more than ever before, clients value BlackRock's diverse global business model. As Gary mentioned, BlackRock generated $55 billion of long-term net inflows in the third quarter, representing a 5% organic asset growth and 5% organic base fee growth. The composition of our flow this quarter is representative of global market conditions and investor sentiment. Across client segments, inflows were led by U.S. and emerging markets equities and debt as investors view the U.S. as a relatively safe haven and emerging markets have gained momentum as commodity prices stabilize. Meanwhile, we saw outflows from European equities amid political and policy uncertainties both from the continent and the United Kingdom. Institutional investors are slowly regaining confidence, and the third quarter was characterized by consistent diverse client flows rather than any one concentrated activity. Our institutional business saw $8 billion of active net inflows in the quarter, driven by strong fixed income and multi-asset flows, primarily from defined contributions and insurance clients. Insurance clients face complex challenges as traditional asset allocation strategies are failing to support their business models. With expertise in understanding the specific needs of insurance clients, BlackRock's Financial Institution Group is putting the differentiated technology advantages of our Aladdin platform to work, constructing and delivering highly customized investment solutions, which incorporate both traditional and alternative asset classes across active and index strategies. Insurance companies are also increasingly employing fixed income ETFs in a broad range of applications. A recent study from Brennan's Associates found that ETF demand from insurers is likely to increase. Of the insurers in the study, 52% expect to increase their use of fixed income ETFs in the next year, and BlackRock is well-positioned to work with large insurers as our investment strategies and techniques evolve. Active fixed income flows from retail investors remain strong in the quarter at $5 billion, driven by flows in high yield and emerging market debt in Asia fixed income, again reflecting investors moving out of the risk curve in search of income as they struggle with historically low rates. At the same time, retail investors continue to pull back from active equity investments driven by a combination of challenging long-term performance track records and accelerating regulatory changes. U.S. active equity mutual funds have experienced over $240 billion of year-to-date outflows, which is a record with over $110 billion of outflows in the third quarter alone, at the same time we've seen strong flows from this client segment across our iShares equity ETFs, which I'll speak about in a moment. Regulatory changes are having a material impact on the retail ecosystem; the Department of Labor Fiduciary Rule, RDR, and MiFID are all impacting how wealth managers serve their clients. We are likely to see a historical shift in how assets are managed and invested as our distribution partners change both their product preferences and their use of technology to adapt to these rule changes. We've been working closely with our distribution partners in the U.S. in advance of the Department of Labor rule implementation. Aladdin for Wealth, our technology and risk management system designed specifically for wealth managers, will be a key differentiator for BlackRock in helping our clients adapt, as financial advisors sharpen their focus on the quality and cost efficiencies of funds. We also expect that they will use ETFs more and more at the center of their portfolios. Advisors are using ETFs alongside high conviction active funds, and they are using ETFs as an active tool to manage their clients' assets. Throughout BlackRock's history, we've anticipated a series of changes in the ecosystem and have taken strategic actions to adapt. This has included combining our active and index strategies on one platform through the BGI acquisition in 2009, continuously enhancing our Aladdin risk and investment management technology, launching the iShares core series in 2012, which exceeded our expectations by growing at an average organic asset growth rate of 24% since inception, and most recently acquiring FutureAdvisor. Each of these strategic actions represents an investment to better serve our clients and drive growth in our business. As our ecosystem evolves further, asset managers can no longer rely on data to subsidize investment spending. BlackRock's diversified business and our history of successful execution allows us to continue to invest when other firms may not be able to, while using our balance sheet to seed new products, streamlining the organization to reallocate investments to strategic initiatives, making tactical technology or product acquisitions, or leveraging our scale to re-price products for our clients. We are committed to seeking out the most efficient ways to grow our business. Earlier this month, we made a strategic investment in our U.S. iShares core ETFs by reducing prices to meet our clients' needs for high-quality long-term holdings. In doing so, we are taking steps to be the leader in the core segment by providing clients with the best quality and value of any ETF sponsor, making iShares a clear ETF choice for financial advisors building portfolios under the new fiduciary standard. We are maximizing the benefit of our scale to drive maximum value for our clients and our shareholders, and we expect to see increased organic asset and revenue growth in the iShares core series over time. We also expect this investment to drive growth across our broader range of iShares precision exposures, where clients place significant value on characteristics like liquidity and tax efficiency. And finally, we expect this investment to drive growth across our active business as we deepen our relationships with all our distribution partners. Our early results have been strong. Since the re-pricing action just last week, our U.S. core market share of net flows has grown by 25 points to 59%, and our iShares outside the core have also been logging strong flows. iShares saw $51 billion of net inflows in the third quarter, and year-to-date, as of yesterday, we've seen close to $100 billion of inflows in 2016. Fixed income iShares continue to be a substantial growth opportunity for BlackRock, and we achieved a significant milestone in the quarter by reaching $100 billion in our European fixed income ETF AUM. iShares is a world-leading ETF provider holding the number one share of U.S., European, and global equity and fixed income ETF flows year-to-date. Going forward in a lower beta environment, alpha generation has the opportunity to drive a greater percentage of overall investor returns. BlackRock saw positive active net inflows of $4 billion in the third quarter. Active flows were driven by our leading global fixed income platform, where we have scale, product diversity, and strong long-term performance, with 88% of our assets above benchmark or peer median for the five-year period. The combination of active and index strategies will continue to play an important role in our clients' portfolios, and BlackRock has all the components unlike our peers, as well as portfolio construction capabilities, risk technology, and better portfolios. I've emphasized the importance of technology many times today. Technology is an essential component of adapting to our regulatory changes and, more broadly, to a changing investor landscape. As advisors take on greater portfolio construction responsibilities in a fee-based account, they are increasingly using BlackRock's solutions, sophisticated tools, and risk analytics to build better portfolios. As a result, we are seeing strong interest in our Aladdin for Wealth, our I Retire platform, and our FutureAdvisor offerings. Institutional clients facing persistent low rates and searching for yield require a deeper look into their entire portfolio, and BlackRock's technology can help them see clearly and allocate more effectively. Aladdin continues to build momentum with institutional clients, and revenues grew over 13% year-over-year. We are committed to constantly innovating on our existing platform as well as thinking of new ways that we can serve our clients' needs with technology. This remains a key differentiator for BlackRock relative to any other firm in the asset management industry. In a time of significant change for the asset management industry, I believe BlackRock is better positioned than at any time in our history, and we've never had more opportunity to work with our clients than we do today. We are at a pivotal point, with uncertainty in politics, regulation, and the market likely to play out over the coming months. Our clients are apprehensive, but they are coming to BlackRock for advice, and our priorities remain helping them to meet their investment goals in all environments. We have a unique ability to use our scale, our breadth of active and index products, our global reach, and our portfolio construction and risk management expertise, along with technology advantages, to meet our clients' evolving needs and drive their future growth, as well as our future growth as a firm and future growth for our shareholders. Now let's open it up for questions.

Hi, good morning everybody. So first, maybe we'll just start off with a DOL question. It's been a couple of quarters, and I guess the distribution networks and the platforms had a chance to kind of digest the rules. And Larry, you alluded to you guys are working closely with your distribution partners on helping them adapt to the changes. So, maybe a little bit more color from the perspective of what kind of changes are you anticipating? Obviously, we saw the announcement from Merrill and Edward Jones a couple of months ago. But more specifically, I guess, with respect to number of products, fee structures, and any more granularity, I think, will be very helpful.

I don't have much more to add beyond what you've mentioned. We've observed the changes at Merrill Lynch and Edward Jones. It's clear that the fiduciary rule is altering how our distribution partners handle their clients' accounts, shifting towards a fee-based approach rather than a commission-driven one. We anticipate a transition towards a model-based framework where the CIO offices of different distribution platforms will start creating asset allocation strategies. We believe that under the DOL rules, fees will gain significant importance, which is one aspect we can confidently assert. While we cannot predict the exact outcomes, we expect a shift towards managed portfolios that leverage centralized models and corporate asset allocation, leading to a reallocation of funds towards passive strategies and ETFs. We foresee a systematic movement of assets away from active management, and we're preparing for that. Our discussions indicate a heightened demand for risk management tools, which is why we've adapted Aladdin, previously an enterprise system for large institutions, for Wealth management to serve individual accounts. This allows advisers and organizations to assess all client relationships through a risk management perspective. We believe that under DOL regulations, having that oversight will be essential, motivating the development of this technology. We are already engaging with numerous distribution partners regarding Aladdin for Wealth, having signed one institution and actively discussing with many more about leveraging Aladdin for their clients' investment strategies. We see this as a significant opportunity for us and feel well-equipped to navigate it. I believe no other organization possesses those capabilities, which places us in a advantageous position. This unique stance enables us to engage not only in discussions about passive strategies but also in portfolio construction and active strategies. Collaborating with these institutions to manage risk on behalf of their individual clients presents a unique opportunity that we've not had before.

Hi, Larry. Good morning everyone. So I just wanted to follow up the last DOL question. I'm wondering, have you tried to size up the potential money that could be in motion U.S. retail? And you're seeing a lot of money in motion outside of U.S. retirement, which is supposed to be the focus of the DOL rule, so really in traditional brokerage?

Let me give to Rob to answer.

So we have found there is such a significant amount of cash that's on the sidelines because rates are so low and equities have not returned what people have expected that the money that is potentially in motion is probably the largest. We've done studies to show that globally there's 50 plus trillion that's sitting in cash. And I don't think anybody knows how big that can be relative to the size of the markets. So depending upon changes in interest rates and changes in equity volatility, a lot of that money can come into motion. So it's not only coming into areas of retirement; it's overall. And the studies that we show range anywhere from 38% to 60% of clients' portfolios are now sitting in cash. So we think that a lot of that money will start to move once we get through the election and the next decision on where interest rates are going to be.

Thanks, good morning.

Good morning.

I guess just to follow up on the pricing changes. Can you discuss the process of kind of the product selection and how we can think about your active product portfolio and potential pricing changes going forward to be more competitive as you highlighted in the DOL rule?

So that's a very large question. So first of all, on the ETF side, this is a strategic investment that we're making in the future growth of BlackRock. So where we focused and reduced our prices were in the U.S. iShares core ETF, and that was to meet specific demand by our clients. They are long-term holders, and a lot of them will be purchasing these either directly or through models because of what you have just mentioned with Larry in the DOL opportunity. We want to be a leader in this segment, in the core segment. We want to provide the clients with the best quality and value of any ETF sponsor and to make sure that iShares is the clear ETF choice for financial advisers that are looking to build their portfolios under the new fiduciary standard. Now when we talk about that in particular, 90% of our iShares, we have not changed the price on. This is really targeted at this specific segment that is very fee-sensitive. And as Larry mentioned in his opening remarks, we know that people like the brand, and now price is becoming in that segment something that's very important to be included in the models and focused on. So we responded directly to our clients in that specific segment. When it comes to the mutual funds, we have a pretty large array of mutual funds. We have lowered the pricing in some of our bond fund platform. We have 23 funds there. We took a look, and we wanted to make sure that especially in this low-interest-rate environment, we are being responsive to our clients and our adjustments were in 14 of those funds, eight taxable and six municipals, which is about $23 billion in assets, and we want to make sure that we continue to be top quartile manager but also top quartile as far as expenses. So, we are watching what clients need in this environment, and we are responding to the specific segment that they required us to.

Hey, Brian.

Hi. How are you doing?

Good.

Great. Just want to circle back on DOL maybe sort of the tempo of the changes that we'll be seeing over the next couple of quarters with implementation happening largely before April. And do you sense advisors are ready to make these changes right now from mutual fund to ETF, or do you think they're really still in preparation mode in terms of those education and then understanding allocation better? Maybe you can link that in with Aladdin for wealth, distraction with your distribution partners, and whether you think Larry how this is going to develop around sort of robo platforms? Thanks.

I believe everyone is currently adopting a wait-and-see mindset, and while there’s been significant preparation, no one wants to make premature moves. It's crucial for firms to adjust their relationships with their financial advisors and clients to avoid falling behind competitors. Therefore, we might witness extensive discussions where many stakeholders are hesitant until a solid strategy is established. I think that behind the scenes, firms are considering various potential outcomes, which could lead to either a gradual shift towards managed portfolios or a more abrupt change. Personally, I expect the adjustments to happen quickly, although my team tends to view these changes as more incremental. There’s ongoing debate within BlackRock regarding the nature of these transitions. Additionally, the legal obligations that firms have under the DOL will likely influence these changes. However, it's important to note that these decisions are ultimately made by our distribution partners, who must choose strategies that best serve their clients under the new regulations. I’m confident they will remain focused on their clients’ needs rather than their own interests. Our goal is to leverage our platform and foster dialogue using our active and passive strategies, especially through Aladdin for Wealth, to aid our partners in adapting to the new DOL rules. One constant need will be the integration of more risk management tools, as they are essential for ensuring compliance with the new regulations. We’ll likely see an increase in managed accounts, as evidenced by trends at firms like Merrill and Edward Jones, but the critical question will be how much of the portfolio is allocated. Overall, I anticipate a shift towards greater use of passive strategies and ETFs over active ones. Given our position with Aladdin for Wealth and our collaboration with distribution platforms, we believe we are well-positioned to respond to these changes while aiming to be a supportive partner. Currently, we are engaged in detailed discussions with various institutions regarding their navigation through these changes, and we hope to contribute positively to their outcomes.

Hi there.

Good morning.

Good morning. I just wanted to follow up briefly. I agree that BlackRock is unmatched in what it offers to distributors. However, the reality is that distribution is becoming more challenging due to stricter regulations, and distributors may experience some revenue loss as a result. As a result, they will likely seek more support from their asset management partners, whether that be in terms of commissions, revenue sharing, or marketing contributions. I'm interested to know if you share the view that asset managers will generally need to invest more to access essential distribution channels?

Yes, I think that's going to be pretty obvious going forward. When you have periods like this, everybody goes to their vendors, distributors, and asks for some sort of big concessions. So with the DOL rule, certainly, there's more pressure on all of the vendors and all the expenses that people have. So, for us, I don't think it means less distribution; I just think it means more efficient distribution and that pricing is going to be an issue. I expect that we, as a firm, are going to go to our vendors as well and expect some fee concessions. And then also, as a company, we have to watch our own expenses. And I think you've seen that over the last couple of quarters, that we're making sure that we're much more efficient. And there I feel very confident for our future, and this is because of our technology; we can be much more efficient than any other asset managers out there. So I think you're right on the mark. This is going to be very good for the clients. And we have found in the history of BlackRock, when it's good for the clients, it's also good for us.

Let me just echo that. I think it's very important. If clients believe they have a fair opportunity to be in the market to build a better financial future for themselves, if they believe the Department of Labor rules gives them that security that people are working on their behalf, and they put more money to work, moving money out of all this cash into bank deposits into the financial markets, we will be the best-positioned firm for that. So we welcome these changes. We welcome a better environment to allow our clients a just and fair engagement in the global capital markets to help their financial future.

Good morning, Bill. I think we lost Bill.

I was wondering if you could talk on the cash management side for a moment just in terms of now we have new rules in place, a lot of money moving coming into that. Can you talk a little bit about where you think the products ultimately land and the kind of pricing associated with that?

Leading up to the October ruling, there was around $1 trillion moved from prime funds to government funds, which I believe has not been fully recognized. This significant shift was triggered by a government change, demonstrating how governmental actions can profoundly impact the market. We experienced a substantial transition from prime funds to government funds and were positioned well to support our clients during this time. Our own prime funds saw about $60 billion transfer to government funds, and we gained over 1% market share during these events, resulting in $15 billion in net inflows. We view the money market fund industry as a strong business. Though we are earning lower fees from government funds compared to prime funds, this is a situation everyone is encountering. I am confident that as clients grow more comfortable and evaluate the risks associated with prime funds, some money will return to prime funds—not the entire $1 trillion, but I believe clients will recognize that prime funds now offer a higher return with significantly reduced risk compared to before, particularly since the rules governing prime funds have changed. The reporting of net asset values and positioning has made them much less risky than in the 2000 to 2008 period. It may take time for clients to fully discern the differences between the two types of funds. Many will need to consult their risk committees to initiate any changes because of the uncertainties associated with a dollar net asset value, leaving some clients unable to switch without adjustments to their rules. We are actively assisting numerous clients in understanding these trade-offs. Initially, clients lacked the opportunity to engage with their risk committees regarding these adjustments, but I am optimistic that they will do so over time. One of BlackRock's strengths is supporting clients in assessing these risks and opportunities. Significantly, as central banks shift their strategies and credit spreads widen, the benefits of prime funds compared to government funds may become pronounced, encouraging more clients to seek board approvals for investment in prime funds, even without a stable dollar net asset value.

Good morning. Thanks for taking the question. So first, just a follow-up on Gary's point on the price cuts and the core ETFs being long-term accretive. Maybe, is there a timeline or AUM threshold that allows you to cross into that accretion level? And then more broadly speaking, could you help us think about the profitability trade-off within BlackRock, right? Because generally, most folks agree that you'll gain share in your iShares and likely fixed income business but see pressure in Active Equity. And so is there a growth ratio in the AUM in between that iShares business and the Active Equity business that we could think about that represents a DMZ or breakeven line? Because I'm sure it's not just about revenue growth; it seems more complicated than that. Thanks a lot.

Sure, Brennan. There's a lot happening right now. We've spent a considerable amount of time discussing changes driven by regulatory factors and other elements affecting the current environment. When we assess the business as a whole, our focus is not on a detailed product-by-product analysis or breakeven metrics. Instead, we concentrate on the overall diversification and breadth of our platform, and how all our products integrate into a cohesive solution for our clients. Our priority is to make decisions that best serve our clients and to showcase the advantages of our platform, whether it's its diversity, global reach, or scale, to foster better results for our clients and, ultimately, for our shareholders. While we acknowledge the importance of understanding breakeven points, which you can calculate by looking at fee changes and estimating revenue capture, what matters more is the balance of what our firm offers. Our leading, active managers are closely linked to the unique strengths of Aladdin and our technology platform, allowing us to provide more comprehensive solutions for our clients and maximize scale for both them and our shareholders.

Good morning.

Good morning. Thanks for taking the question. Just wanted to shift gears a little bit and can you just talk a little bit about seed capital how are you deploying that today versus say one to two years ago? And just given some of the limited resources that you in the industry have on seed capital just curious how are you thinking about maximizing that value and what are you prioritizing today?

Our seed capital portfolio currently exceeds $1 billion, and we are focused on growing this, prioritizing our investment in the business. This is a crucial part of leveraging our stores; we aim for stable cash flow to invest in products that will yield better outcomes for our clients and foster future growth. Currently, we are seeing significant inflows in multi-asset and fixed income as we look for smarter cash solutions that may evolve. Our liquid business aligns with formal co-investments rather than what we classify as seed. We're strategically planning for two to three years ahead to identify new blockbuster opportunities that can highlight our strengths, particularly in factors and smart-data for our style-advantaged products. We're also allocating considerable seed capital to enhance scale and stability. We can provide seed capital in larger amounts than many of our competitors due to our very stable cash flow, which exceeds $3.5 billion annually. Our capacity to seed more frequently and at a larger scale enables us to make stronger commitments to the products and expedite our time to market, allowing us to capitalize on market opportunities more rapidly.

Good morning, Michael.

Good morning, thanks guys. Larry, we spend a decent amount of time on DOL, I just wanted to shift over to some of the SEC proposals when we got the liquidity rule? and then also in Europe MiFID II just wanted to get your updated thoughts any hurdles that you see for BlackRock and the industry, I know some EPS got exemptions on the liquidity rule, but just your thoughts on the liquidity rule and then also on where MiFID II is headed?

This is consistent math, and we take into account everything we observe, especially concerning regulatory changes. If regulatory changes compel clients to invest, we stand to benefit significantly. Consequently, we have strongly supported rules aimed at investor protection. In recent years, we faced situations concerning liquidity and the influence of some mutual funds that were temporarily frozen. Naturally, this negatively impacted the entire industry and raised questions about uncertainty. The SEC attempted to address this issue, and I believe they have found a reasonable solution given the circumstances. We welcome the SEC’s involvement and believe they should play a more significant role in protecting the integrity of capital markets. As more resources flow into these markets, the demand for safety becomes increasingly critical. We collaborate closely with regulators in Europe regarding MiFID and MiFID II, providing input to aid regulatory agencies in developing their solutions. We expect that MiFID II liquidity rules and the SEC's initiatives will create a greater requirement for risk management tools. Clearly, with regulations like the liquidity rule, the need for robust risk management increases, highlighting BlackRock's strengths. We have designed our organization and technology with these considerations in mind, prioritizing client protection. This does not significantly alter our investment management practices, as we have never engaged with illiquid products in our strategy. While some investors may change their behaviors, especially those focused on illiquid assets, the evolution of MiFID II and liquidity risk regulations is ongoing. More regulatory oversight will emerge in our capital markets, ensuring the necessary protections for investors. It is essential to maintain proper safeguards. When these safeguards are in place, the funds that Rob Kapito discussed as being idle will likely be put to use. Many individuals are not hesitant to invest simply because they are worried about upcoming events; rather, they feel that investing hasn’t been equitable for them. Implementing these regulations can instill a sense of protection for retail investors, leading to increased confidence and potentially greater investments in the capital markets, benefiting everyone. Regarding the SEC liquidity rules, we are faced with a lengthy document that will take time for our legal team to fully comprehend and navigate. A preliminary review indicates a heightened need for risk management tools to comply with these new liquidity regulations effectively. We have already integrated various liquidity components into the Aladdin risk models to support our portfolio managers. In terms of MiFID, we have time to collaborate with European regulators before its implementation, which is scheduled for 2018, and we expect to gain clearer guidance to ensure compliance with these new rules. Ultimately, these developments will increase reliance on risk management tools within the asset management industry, potentially incurring higher costs for some asset managers as they build these tools. I'll conclude my comments here as I'm beginning to lose my voice.

Yes, our third quarter results highlight the benefits of our scale, which underscores the importance of having a diverse range of products and a global platform. BlackRock embodies this platform, with its scale, product diversity, and global presence. One of the key themes from the third quarter is the impact of the strategic investments we have made in our platform over the past few years. These investments include the BGI acquisition, developments in the Core Series in 2012, and enhancements to our infrastructure, ESG products, and technology related to Aladdin and FutureAdvisor. These efforts position us to meet the evolving needs of our clients. Despite market challenges, we have effectively positioned ourselves in this environment. Our ongoing investments will deepen our relationships with both retail and institutional clients. It is crucial that we stay ahead of our clients' needs to provide the best service possible. This proactive approach is a defining characteristic of BlackRock and has significantly contributed to our success in the past, as well as to our future positioning. Thank you all for joining us this morning and for your continued interest in BlackRock.