BlackRock Finance Inc (BLK) — Q4 2017 Earnings Call Transcript

Thank you. Good morning, everyone. I’m Chris Meade, the General Counsel of BlackRock. Before we begin, I would 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. Good morning and Happy New Year to everyone. It’s my pleasure to present results for the fourth quarter and full year 2017. Before I turn it over to Larry to offer his comments, I’ll review our financial performance and business results. While our earnings release discloses both GAAP and as adjusted financial results, I will be focusing primarily on our as adjusted results this morning. 2017 was a record year for BlackRock, and we once again executed on each component of our framework for shareholder value creation. BlackRock generated $367 billion of total net inflows in 2017, including $103 billion of total flows in the fourth quarter, representing 7% organic asset growth and the strongest flows in our history. Full year net inflows were positive across client type, asset class, major region, and investment style. More importantly, our 2017 net asset flows represented long-term organic base fee growth of 7%, evidencing the breadth and diversification of our global investment platform. We continue to invest in our business, while simultaneously expanding our full year operating margin by 40 basis points; and after first investing for growth, we returned approximately $2.8 billion of capital to our shareholders during the year. Full year revenue of $12.5 billion was up 12% versus 2016, and operating income of $5.3 billion increased 13%. We saw accelerated momentum in the fourth quarter with revenue and operating income increasing 20% and 21% respectively versus the year ago quarter. 2017 as adjusted earnings per share of $22.60 was up 17% versus 2016 and excluded the impact of a $1.3 billion net tax benefit related to the enactment of the Tax Cuts and Jobs Act. The $1.3 billion net benefit was comprised of a $1.8 billion non-cash tax benefit related to the revaluation of US deferred tax liabilities, partially offset by a $477 million repatriation tax expense, which is payable over eight years. Our current analysis suggests a projected tax run rate of approximately 23% for 2018, though the actual effective tax rate may differ as a consequence of non-recurring or discrete items and issuance of additional guidance on or changes to our analysis of recent tax reform legislation. Fourth quarter base fees of $2.9 billion were up 16% year-over-year, driven by market appreciation and organic growth. Full year base fees were up 10% versus 2016, reflecting similar growth dynamics, but partially offset by the impact of historical pricing investments in our iShares business. Fourth quarter performance fees of $285 million reflected strong alpha generation from our diversified hedge fund platform and long-only equity products. Full year performance fees of $594 million were up substantially compared to 2016. Quarterly technology and risk management revenue grew 15% year-over-year, driving 14% full year growth versus 2016 led by continued momentum in institutional Aladdin and Aladdin Risk for wealth management. We accelerated the expansion of our technology portfolio during 2017 with the acquisition of Cachematrix and minority investments in iCapital and Scalable Capital. Our investments in technology and data will enhance our ability to generate alpha and more efficiently serve clients, resulting in growth in both base fees and technology revenue. Total expense increased 11% in 2017, driven primarily by higher compensation, volume-related and G&A expenses. For the full year, compensation expense increased $388 million or 10%, primarily reflecting higher incentive compensation driven by higher performance fees and higher operating income. Our full-year comp-to-revenue ratio of 33.9% declined 60 basis points versus 2016, driven by the changing composition of our employee base and increased technology investment. Recall that year-over-year comparisons of fourth quarter compensation expense are less relevant because we determine compensation on a full-year basis. Direct fund expense was up $138 million or 18% in 2017, primarily reflecting higher average AUM as a result of significant growth in our iShares franchise. G&A expense increased 12% in 2017, reflecting higher core technology and data spend and the impact of various one-off items, including professional fees related to deal activity, Brexit, MiFID II, and tax reform as well as FX re-measurement expenses, increased contingent payments, and purchase price fair value adjustments. We continually focus on managing our entire discretionary expense base. While we would expect 2018 G&A expense to increase in stable markets, we would also expect compensation as a percent of revenue to decline as a function of historical investment and increased scale in our business, resulting in continued upward bias in our operating margin. BlackRock’s record 2017 financial performance reflects these historical investments and the strength of our globally integrated asset management and technology business. During 2017, our differentiated platform delivered 7% long-term organic base fee growth, 9% organic asset growth in our cash platform, and 14% growth in our technology and risk management revenue while also expanding our operating margin to 44.1%. We do not manage the business to a specific margin target, but we are always margin-aware and remain committed to optimizing organic growth in the most efficient way possible. Beyond the P&L, investing cash flow to grow the business is another critical component of our growth strategy. During 2017, we continued to lay the foundation for future growth by increasing our seed and co-investment portfolio by approximately $500 million, and beyond the technology-related acquisitions previously noted, announcing the acquisition of Citibanamex Asset Management furthering our goal to be a full solutions provider in Mexico, and closing the acquisition of First Reserve’s energy infrastructure funds, continuing the build-out of our leading illiquid alternatives platform. We remain committed to returning excess cash to shareholders, and during 2017 returned approximately $2.8 billion to shareholders through a combination of dividends and share repurchases. We repurchased another $1.1 billion of shares in 2017 and now have repurchased almost 16 million shares over the last five years, representing a 20% unlevered annualized return for our shareholders. Consistent with our predictable and balanced approach to capital management, our Board of Directors has declared a quarterly cash dividend of $2.88 per share, representing an increase of 15% over the prior level. In addition, subject to market conditions, including the relative valuation of our stock price, we would anticipate share repurchases aggregating $1.2 billion during 2018. Over the next few months, as we finalize the impact of tax reform on BlackRock and clarify the potential for future investment opportunities, especially our ability to more aggressively seed and co-invest in new products, we plan to reassess our capital management plans for the balance of 2018. Fourth quarter long-term net inflows of $81 billion reflected 6% annualized organic asset growth and marked our sixth consecutive quarter with organic AUM growth in excess of 5%. Record full year total inflows of $367 billion benefited from significant flows into iShares as both institutional and retail clients use ETFs for core investments, precision exposures, and financial instruments. Global iShares generated a record $245 billion of new business for the year, representing full-year organic growth of 19%, with flows split nearly evenly between core and higher-fee non-core exposures. Since BlackRock launched the iShares core funds five years ago, we've seen over $275 billion of net inflows, including $122 billion of net inflows in 2017 alone. Three of the industry's top five ETFs in terms of net new assets globally this year were iShares’ core ETFs, IVV or S&P 500 fund, IEFA for developed international market exposure, and IEMG our core emerging markets fund. Full year retail net inflows of $30 billion were placed by our broad range of fixed income products, our multi-asset income fund, and the indexed equity. BlackRock’s institutional franchise generated a record $55 billion in net flows for the year, positive across alpha-seeking and indexed strategies. 2017 was another strong fundraising year for illiquid alternatives, as we raised more than $11 billion in new commitments. BlackRock now has approximately $17 billion of committed capital to deploy for institutional clients in a variety of illiquid strategies. Finally, BlackRock’s cash management platform saw $38 billion of net inflows or 9% organic growth for the year, reflecting continued market share gains and several large wins. The strong growth in cash management also reflects successful identification and integration of acquisitions to strengthen our platform and leverage our scale. In summary, 2017 was a very strong year for BlackRock. Our diversified business model once again delivered industry-leading organic growth and consistent financial results. We are committed to continuously evolving, investing in, and disrupting our platform to benefit clients. We believe our platform is as well positioned as it has ever been to meet those needs and to deliver long-term value for shareholders. With that, I’ll turn it over to Larry.

Thanks, Gary. Good morning, everyone, and thanks for joining the call. The strength of BlackRock’s 2017 results reflects long-term strategic advantages we've created by constantly investing in our business ahead of our clients’ changing needs. BlackRock generated $367 billion of total net inflows during the year, an increase of over 80% versus our previous record of $202 billion last year. These flows reflect the trust we have earned from clients to help solve their most difficult investment challenges and they are the strongest flows we've ever generated in a one-year period. They were driven by our ability to deliver complete investment solutions, industry-leading technology, and thought leadership through an evolving investment landscape. Equity markets reached an all-time high in 2017, driven by synchronized economic growth around the world and continued easy monetary policy. Europe is experiencing its fastest economic expansion since 2011, aided by greater political certainty. After 30 years of stagnation, Japan is once again seeing positive growth. In the US, strong corporate earnings, increased consumer demand, and tax reform have continued to drive strong equity markets. And as the leadership in China continues to gradually address historical leverage levels and pivot towards higher growth areas, Chinese GDP once again expanded at a rate approaching 7%. Yet, we are seeing a paradox of high returns, and yet we still see high anxiety. As past prices have instilled more caution in investors, the industry has seen a continued focus on downside risk, putting a premium on lower-risk bonds, anchoring interest rates at historical low levels, and driving many investors to overallocate to cash and to other safe havens. However, in these times of greater certainty and economic growth, there's an even greater need to focus on investing in the long run. As an example, an individual with $1,000 in 1950 would have around $20,000 today if they saved in a US bank account versus $1 million if they invested in the S&P in 1950. Just as we believe in the importance and benefits of clients investing for the long term to create better financial futures, we also believe in investing in BlackRock with the same future perspective. We enter 2018, BlackRock’s 30th year with more than $6 trillion in assets under management. From our roots in 1988 as a fixed-income manager, we've invested over time to expand the breadth and globality of our businesses to stay ahead of our clients' needs, and we're seeing the benefits of those investments in our results today. In 2017, 13 countries and 68 different products generated more than $1 billion of net inflows. BlackRock’s technology is now used by clients in 50 countries and more people than ever before are looking to BlackRock as a thought leader, as evidenced by over 8,000 media mentions received through the BlackRock Investment Institute in 2017. While past investments have shaped the BlackRock of today, we remain steadfast in our approach to investing in BlackRock’s future, and we've just finished two days of meetings with BlackRock’s Board of Directors where we reviewed our strategy tactically and our long-term strategies for the future. Our consistent investment in iShares and the broader ETF ecosystem has propelled the BlackRock iShares franchise to more than $1.7 trillion of assets across 800 different funds. Record iShares inflows of $245 billion in 2017, including $55 billion in our fourth quarter earned iShares the number one share of global, US, and European flows for the year as well the number one share in equity and fixed income and in core exposures and also in smart beta. Growth has been driven by our commitment to provide clients with a differentiating offering, capital markets and technical product expertise, a diverse set of products ranging from the established industry benchmarks to innovative exposures, investment thought leadership, and importantly distribution technology. Growth has also been driven by increasing adaptation by clients using ETFs in different ways as ETFs have made investing more accessible to both institutions and individuals. And over the past two years, $368 billion of inflows in iShares have matched the entirety of the ETF business we acquired from BGI in 2009. And as we think about providing even more clients with the ability to use ETFs to deliver efficient model portfolios, we've invested in a number of digital wealth technologies to better serve our distribution partners in a changing wealth landscape. FutureAdvisor, our digital wealth offering in the US, Scalable Capital, our strategic investment in Europe, both strengthen our relationships with intermediary partners, allowing them to effectively scale their businesses with a systematic investment process and ultimately expand the ETF market and iShares’ reach. Beyond digital wealth, technology is enabling more productive engagements with more financial advisors than ever before, driving accelerated asset and base fee growth across our platform. BlackRock is using better data and technology to scale our own wealth advisory sales teams and equipping them with better insights about our clients and their portfolios, giving a much better texture about markets. In 2017, in the US for example, we extended our reach to do our business with 25% more advisors and conducted nearly 1 million advisory engagements without meaningfully increasing our cost base in this distribution channel. We continue to invest in technology both organically and inorganically. Our Aladdin technology, which we have invested in since the foundation of BlackRock, has played a major role in allowing us to scale our own business efficiently over time. It is a key reason that BlackRock has been able to grow from 8 people managing about $1 billion in assets when we founded the firm to nearly 14,000 employees entrusted with $6.3 trillion today. Aladdin and our other technologies and risk management offerings generated $677 million of revenues in 2017, representing a 14% year-over-year growth, and we now have over 200 Aladdin clients, including more than a half dozen of Aladdin Risk for wealth management. The importance of technology continues to increase across our platform and is intersecting with every major strategic theme we are focused on, including retirement. We see tremendous opportunities to leverage our technology such as iRetire for example to address the ongoing global retirement challenge. Technology is impacting businesses like cash management as well and in 2017, we acquired Cachematrix, a technology portal that enhances banks' abilities to address our corporate clients’ cash management needs. Cachematrix allows BlackRock to provide a scalable technology solution to our bank clients while also expanding the reach of our cash management strategies. BlackRock saw $38 billion of net inflows into cash management strategies in 2017 and we now manage $450 billion in cash assets as the investments we made to grow and scale this business over the last few years are bearing wonderful results. For clients looking for greater alpha potential, BlackRock is leveraging the powerful combination of our human insights and technology to deliver consistent, durable alpha. 70% and 83% of our fundamental and systematic active equity assets respectively have performed above benchmark or peer mediums for one year and those numbers are 72% and 87% for a three-year period of time. On the distribution side, we reaffirmed our belief in the long-term growth potential of the Mexican market through our recent announcement to acquire Citibanamex Asset Management business. The combined firm will enhance BlackRock’s access to Mexico's wealth management, providing clients access to BlackRock’s international products and to build a partnership to create more innovative multi-asset solutions. We also focus on other high growth geographies like China where significant regulatory changes are opening up new opportunities for the future. Last month, BlackRock obtained our private fund management registration, which enables us to manufacture and privately distribute onshore funds in China to qualified institutions and high net worth individuals in China. With more assets under management on behalf of a more diverse client base than ever before, the responsibility BlackRock feels towards our clients has never been greater. We have a responsibility to meet the clients’ demands for investment strategies that will create a positive environmental and social impact while generating strong financial returns. We recently hired Brian Deese, a former senior advisor to President Obama on climate energy to lead our sustainable investment business where we see a significant long-term opportunity for BlackRock worldwide. As a fiduciary, we have a responsibility to engage with companies in which we invest to ensure long-term value creation for clients. We have the industry's largest investment stewardship team and we're rebuilding this team even further as we recognize the growing importance and value of a strong stewardship. Our team engaged with more than 1,600 companies in 2017 on a range of issues and voted on more than 17,000 shareholder meetings worldwide on more than 162,000 proposals. It is a dedication of our employees across the globe that drove our 2017 results and positions us well for 2018. Since BlackRock’s founding, we have encouraged everyone to act like owners and all employees work hard to instill the principles of our firm’s culture. It's important that we continue to institutionalize that culture, especially as we prepare for the future for BlackRock. Rob and I have never worked harder, nor enjoyed our jobs more than ever before, and we have every intention of being here all the time and no intentions of leaving. But, it is also a reality that we won’t be here forever, and BlackRock’s future is critical in linking and retaining what I consider the best management team in the industry. We have a robust leadership plan that we regularly review with our board, including ongoing development initiatives for our senior team. We recently implemented a key strategic part of that plan by issuing a one-time long-term equity incentive grant to a small group of senior leaders. These equity awards will vest over an extended timeframe of five to seven years and are focused on ensuring the interests of the next generational leaders, individuals who we believe will play critical roles in BlackRock’s future and are aligned with both clients and shareholders as mine and Rob have been over the last 30 years. As we enter 2018, all of us at BlackRock are humbled by the trust our clients have placed in us. We will continue to make investments in BlackRock’s future, grow our investment and technology capabilities, expand our geographic footprint, and further enhance our talent so that we can ensure we meet our daily responsibility to our clients and deliver the returns to our shareholders that we all expect. With that, let's open it up for questions.

I'm interested in your insights on the evolving global access to ETF distribution and its potential impact on BlackRock. For instance, Ameritrade has altered access to its ETFs on its commission-free platform, resulting in some ETF providers being removed while others have been introduced. Additionally, Vanguard has been excluded from several large platforms due to not paying the platform fees. Does the distribution for ETFs operate differently compared to mutual funds? What does this mean for the competitive landscape of ETFs? Lastly, could this lead to consolidation in the ETF space?

Let me have Rob start off with that answer.

So, I don't think it drives consolidation. This is a growing market and with the interest in it, there's a lot more players that want to be involved in the distribution. There are a lot of people that want to get in the game. Sometimes, you get in the game by different offerings you would have at different price levels. So, I think this is just the normal process of a product growing and figuring out better wrappers and better ways to distribute that product. So we're not worried about it. We participate in it. We watch it very closely. It's just part of the normal growth, I believe of any product on a distribution platform. And also, the distribution platforms are changing themselves and becoming a lot more competitive, and when you add this along with a lot of the regulatory issues that are looking at transparency and cost, this is all going to be very, very fluid.

Let me just add one other thing, Ken. As you know, we do not work directly with individual clients. Our business model involves collaborating with distribution platforms to assist them in serving their clients. The changes you see in some distribution platforms align well with the BlackRock business model. We engage with all distribution platforms globally. The access we are experiencing in Europe, where managers have been consolidating for years, is evident in both the mutual fund and ETF sectors. In the United States, the access we provide is demonstrated by the various distribution platforms utilizing many of BlackRock’s models for ETF creation and portfolio development. If I were to express a preference, the trend of using fewer investment managers isn't something new. I don't believe it's a recent trend for ETFs either; it has been ongoing for years. This trend complements our business model of collaborating with all distribution platforms without competing with our distribution partners.

I think since you merged the scientific and active equity businesses, could you maybe give us an update on the progress of those two working together and maybe any anecdotes or examples of how it has led to improved performance for any specific strategies on either side?

So we are combining our efforts so that we can offer a spectrum of equity investments to our clients. But clearly, when you take a look at what scientific active equity offers, it is a lot of signals that are very short-term oriented, and if you look at fundamentals, there is a lot of work that's on long-term signals. It just makes sense to us to combine the two because they both are related to each other. So when we combine those two with the BlackRock Investment Institute that we have that looks at both micro and macro issues in the marketplace, we think that we are going to get much better value and performance from our portfolio managers, who will have much better information both about the short term and the long term. And actually, we’re seeing the results of that already in the performance of both sides of the portfolio. When we combined those two, keep in mind we're also combining the research both in the quantitative method and the fundamental method. And this has also worked very well for us in light of the MiFID II requirements where I’m not sure people are aware, but we have over 400 analysts internally that develop our own research. So we're putting together the quantitative and the fundamental tools, we're putting together the research, the portfolio managers all have access, and what's happening is we're getting much better wholesome alpha from both of the teams. So, so far, I would say it's been a very good success.

I would just add one last thing. We did have $1 billion of outflows, which were forecasted when we did the restructuring. We actually saw more inflows; we actually forecasted actually a little more outflows, and I would say very clearly the trend for 2018, we will have positive inflows on our active fundamental and scientific equities in 2018.

I guess I wanted to ask you around the tax reform. So, obviously over the next few weeks, we’ll get updates from other companies as well, but I guess bigger picture, when it comes to the asset management business, how much of the tax benefit do you expect the industry to retain versus how much is going to get competed away? And then when it comes to BlackRock specifically, how are you guys thinking internally about reinvesting some of these benefits, particularly when it comes to additional fee reductions?

Alex, why don’t you begin your question again if you’re on?

Sure. Yeah. I’m on. Sorry about that. So the question was just around the tax reform. I guess we’ll get updates from the rest of the industry and obviously the asset managers as a whole are reasonably well positioned to get the benefit, given relatively high tax rates, but how much of that do you think is going to get competed away and then specifically when it comes to BlackRock, how are you guys thinking internally in terms of reinvesting some of the tax savings and how much of that do you think will have to come in the form of lower fee rates? Thanks.

So Alex, Happy New Year. It’s Gary. Maybe I'll take that and Larry and Rob can jump in. I think, we're going to speak for BlackRock. We'll let the industry speak for themselves more broadly. But I think, from the very top, we've obviously always been committed to investing in our business first and returning excess cash flow to shareholders. And as you know, last year, we returned $2.8 billion to shareholders in a combination of dividends and share repurchases. So, we've never been capital constrained at all and our capital management policies have not changed. We're committed to a 40% to 50% dividend payout ratio and obviously over time, paying out the balance of excess cash in the form of buybacks. So while the reduction in our tax rate that we've talked about will clearly increase our after-tax cash flow and obviously earnings per share, it does not impact the basic metrics that you all watch each and every day and we hold ourselves accountable for which is basically delivering revenue, expense, operating income and margin. And decisions that we make around how much we're going to invest into our P&L and any obviously associated pricing investments that we may make going forward are completely independent of our tax rate. We are still 100% committed to optimizing organic growth in the most efficient way possible. That being said, clearly, an increase in incremental cash flow from tax reform could positively impact our capital management decisions, which reflects both potentially dividends and buybacks. Our plan is to, I mean, given the tax reform is basically three weeks old, our plan is to effectively reassess our latest capital management recommendations, probably around mid-year once we finalize the impact that tax reform is going to have on BlackRock. There’s going to be lots of additional guidance that’s going to be forthcoming as well as making sure that we are considering all of the balance sheet opportunities that we have over the next several months, including more aggressively seeding and co-investing in new products.

I would like to bring up one point, Alex, because you connected tax reform with fee reductions and I don't see any correlation or connections. We will consistently review every one of our products. If we do believe a product can return better returns for us over the long term and we believe the need to lower fees, we will be doing that, unrelated to tax reform. And tax reform is obviously a below-the-line result anyway and fee cuts are above the line, but we systematically review our products and fees and will continue to systematically look at fees to provide the best value to our clients, but it's totally unrelated to tax reform.

Maybe Larry, just to follow-up on a comment you just made briefly about 2018 and active equity inflows, can you talk about, I guess, the backlog or kind of the institutional framework on how it looks today and maybe the consultant discussions of how those have evolved? I assume that's part of the bullish outlook.

So the first quarter of the year, a lot of institutions look at changing their portfolios and diversifying. Obviously, there is a lot of interest in the equity markets right now because of 2017 and a lot of forecasts for 2018. So we are involved in those discussions and of course it really helps to come off a good year in performance in 2017 to be included in those. And those discussions are really across the board in various types of equities and they include more processional types, whether it be smart beta or multi-asset solutions, which we’re very well positioned for. So, there are a lot of discussions. I do think you're going to see a lot of interest from the institutions to potentially replace some of their alternatives that will go into equities and also to take some of the cash positions they have and put them into equity. So quite frankly, we're very optimistic on that and we will be included.

Let me just say one last thing. Arch, we have experienced success over the years in our performance in model-based equities. We're engaged in more conversations, and the atmosphere is strong, creating a much better backdrop. We feel very positive about the environment. The discussions we're having indicate that consultants are increasingly interested in our products. Therefore, we believe this environment is conducive to better dialogue with more clients, which should lead to more positive inflows. So I'll leave it at that.

Can you provide your perspective on the potential impact of organic growth, especially in iShares, resulting from your technology investments? You've mentioned Aladdin Wealth, as well as Cachematrix and your capital efforts in Europe. Are those products and services currently generating inflows? Additionally, as you develop these initiatives over the next two to three years, how do you anticipate they will enhance organic growth, given your competitive advantage?

Well, on iShares specifically, because you phrased that with iShares and you expanded, iShares specifically, I think what is changing the momentum for us in a positive way or enhancing the momentum is we're delivering a better service through technology to more RIAs. Historically, we were weak in the delivery of information and services to the RIA channel. As I said in my prepared remarks, we’re using technology to provide better services alongside our humans to connect with our financial advisors, both traditional ones and the RIA ones. And as I said in my prepared remarks, we are working with 25% more advisors today than we did a year ago with very little added in cost. So we're using technology to aid the conversation, to enrich the conversation, to fulfill more information and then follow up with human connectivity. So that’s probably the most, the best example where we are bringing in more flows. The other area where we are bringing in more flows is working with more of the distribution platforms on providing model-based products and customizing it. In those cases, much of the product flow in these model-based products would be flowing into our iShares basis. In terms of technology overall, we have a very robust pipeline for Aladdin for wealth management. We see increased inquiry in the institutional side. As I said, 50 different countries now, broader and broader penetration and we would expect a continuation of the growth rates of 14% going forward in our technology platform. We're very encouraged about bringing this all together. So, it's not one thing. It's by having Scalable Capital in Europe, by having FutureAdvisor. These are all connecting and creating more dialog, deeper penetration. So I don't want to suggest it's one thing, but it's a multitude of all the things that we've been investing in, working in, investing in that is creating a better, deeper, or consistent dialog with more financial advisors. You mentioned Cachematrix. That's not a delivery system for ETFs, but it is a very strong delivery system for us to connect with banks and the bank channels for them to drive more cash and money market types of products into the BlackRock platform and that's one of the reasons why we had accelerated growth in our cash management platform in 2017. We expect a furthering of opportunities in our cash management business.

I just wanted to jump into another topic with, you talked about the ETFs, they’re increasingly being used by investors for asset allocation decisions and also generating alpha. What other major investor groups are using ETFs in this manner? And I always think about the US RIA channel as sort of a big one, but outside of this group, what other investor groups and maybe even institutional channels are doing this?

Rob, well, I’m going to let Rob comment too. I would say, every institution we talk to has asked questions related to how they could use ETFs in their portfolio, whether that’s internally managed entirely by an institution or they have accommodations internally driven asset management and external managers. But I would say from pension funds, the sovereign wealth funds to insurance companies are all now utilizing more ETFs for strategic asset allocation purposes. And Rob, do you want to call up?

It's really broad-based, Craig. Right now, we're seeing, it starts out from trading desks on Wall Street that are using ETFs to hedge their positions. It's going to fixed income investors that are using ETFs side by side with their bond portfolios. It's emerging markets investors, both institutional and retail that are looking to have more diversified instant access into the emerging markets area. It's portfolio solutions providers that are using it as part of a multi-asset class solution. It's the RIA channel, as you mentioned, who are also trying to customize solutions and quite frankly, it's a lot of asset managers that are using iShares as a technology to have more operating efficiency in their portfolios and not have as many line items. You also have the insurance companies who have thousands and thousands of line items of portfolios that are looking to be much more efficient and also have portfolios that have more liquidity. And now with all of the regulatory issues and where there has been fee pressure, you have a whole new group of people that are using them to substitute in the active space, because it's obviously much, much cheaper. So it's really, quite frankly, very, very broad-based with the tail at the end of the year and start of the beginning of the year, coming more in fixed income than it is in equities and more in emerging markets because people are starting to allocate some of their monies outside of the US for 2018 that happens to be a strategy across many of the distribution channels. So, we're really participating all across the board. And lastly, I would say is people who are innovating now in the smart beta area because we have over 100 funds that are ETFs for smart beta. So, this is a market that really is still in the early stages and every day, we have another client that comes in and finds another use for it. So, I'm just very optimistic on using this as a tool to help clients make better portfolios.

I have a two-part question that is somewhat unrelated. First, could you help us identify the core G&A expense number for the fourth quarter? Gary, you made some comments regarding margins and comp ratios. How are you envisioning the growth pace for that line, once we normalize from the fourth quarter? Additionally, could you clarify your earlier statement about equities potentially increasing from alternative allocation? It would be helpful to understand that better, especially regarding any major changes we might expect in 2018.

Do you want to take the first part?

Yeah. I’ll take the first. There are a lot of clients that we have that have a large allocation to alternative whether they are hedge funds or private equity who have been somewhat disappointed in the returns that they had in 2017, relative to the returns they could have had had they had exposure in the equity markets directly. So, there are some clients that are looking to move that increased allocation to alternatives directly into the equity market for 2018 as they have become more bullish, and that's in light of all of the things that you know about, whether it be tax rates, earnings, global growth, et cetera, et cetera that they may have. They may be able to have a bigger return in the outright equity market than they do in some of the more alternative spaces.

So, Bill, to your first part of your question on G&A, so, yes, higher year-over-year G&A and frankly also sequential G&A was driven by a number of what we would consider manageable core decisions that we’re obviously very conscious of, like technology, data, M&P, obviously, some occupancy as our headcount is growing. The higher annual G&A expense, which was up about 12% clearly reflected, a, as we've talked about, a specific goal of ours of continuing to invest in core technology and data. The annual, the year-over-year, the sequential, all three frankly also reflect the impact of a number of one-off items. We tried to highlight some of those, professional fees were higher related to a bunch of things. We had M&A activity during the year. We had Brexit planning. We have MiFID II planning. We have a bunch of stuff that was done in the fourth quarter in anticipation of tax reform as well as a number of other things that just kind of hit FX re-measurement expense. We also saw some increased contingent payments associated with some prior deals. And as we've talked about before, we need to mark-to-market ongoing contingent payments. And so in some respects, as those expenses go up, those are good things because it means that those contingent payments are more in the money because of the fact that those deals are doing that way. That being said, our level of G&A spend has basically remained pretty much constant over the last five years and that's notwithstanding the fact that we've built and leveraged our scale. We've obviously done a number of deals as well over that period of time. I think the important thing that we're trying to convey here is that, you can't just look at G&A without looking at the overall discretionary expense base and there is obviously an interplay between our G&A expense and our compensation expense. As we're investing more in data and technology, we continue to change the composition of our employee base and you're actually seeing comp to revenue come down. So while we will continue to focus on managing the entire expense base, as we stated, we would expect 2018 G&A to creep up a little bit, but we would also expect comp to revenue to decline and we don't think any of that will basically impact the unstable markets, the upward bias in our overall margin.

I wanted to ask about the effects of aging populations and longer lifespans on asset flows within the industry. Do you think that this leads to money staying invested longer, thus creating a more stable asset base? Additionally, what opportunities do you see for innovation in linking asset management with insurance and technology? For instance, considering your iRetire technology, what potential role could insurance play in addressing the needs of aging populations and those living longer?

I believe this is a significant issue facing every major developed country, and it's also affecting many developing nations, including China. In my discussions with various clients, regulators, and politicians globally, this topic comes up frequently. I am convinced that longevity is often overlooked, and we've failed to communicate the importance of being a long-term investor, especially as people are living longer and spending more time in retirement. This creates an increased need for investments in long-term assets. I think this contributes to the current flat yield curve, which also reflects inflation. However, the demand for long-dated assets is still robust, and this is evident in credit spreads and the resilience of equity markets. Globally, there is strong interest in long-term financial assets, which I believe supports the fundamental strength of the financial markets. In our LifePath products, we have extended the duration of ownership for equities. Institutional clients continue to show strong demand for long-dated assets. A pressing issue we need to tackle is how to assist individuals in the de-accumulation phase of retirement. It’s crucial to provide the right advice and enhance financial literacy for this stage. Many people, especially those around 50, are unprepared for retirement due to insufficient investments and reliance on cash and bonds. During a recent board meeting, we discussed our long-term strategy, including how to transform retirement globally. This is a key long-term goal for BlackRock, intersecting with technology and our operations in the U.S., Europe, and potential developments in China. While I don’t have all the answers yet, we have multiple teams at BlackRock dedicated to addressing retirement, longevity, and de-accumulation issues. These are critical questions that need to be addressed, and I hope we can create products to fulfill these needs. As an industry and as a society, we still have work to do. There isn't enough discussion in the U.S., Europe, or elsewhere about navigating longevity and retirement, as well as ensuring individuals have sufficient financial literacy to prepare for retirement and the transition to de-accumulation.

Hi. This is Kaimon Chung in for Glenn Schorr. Just wanted to get your perspective on the electronification of fixed income. I saw a recent headline that BlackRock and one of your biggest competitors plan to go fully electronic in bond trading, which would be up from the 30% of bond volumes that you trade today. So what are you specifically doing in that area and how fast do you think you can get there?

So, we’re higher than the 30% that you're talking about. Most sponsors now are traded electronically. We have to be in this business. We’re one of the largest traders of fixed income instruments. So we are involved and invested in various methods to trade electronically. We have people focused day-to-day on technology in trading. So, we're very involved. I think it's going to be higher and higher every single year, but we're also involved in making sure that the markets operate in a very effective and efficient way. So we have a very large trading staff. Every one of them is involved in the electronic trading business and we'll be continuing going forward. This is really an important part of also our Aladdin, where we are helping others who don't have that electronic execution capabilities to have it through our technology.

I would say one other point. We have looked at technology as a major component of how we have our trading platform. If you look at the scale of our platform today versus the scale of five years ago, one of the – and why our margins have increased as a firm systematically, is the technologies that we utilize in operations of the platform. And the trading platform that we have today is mostly driven through technology. And that's one of the great advantages and that's one of the great advantages that we have related to Aladdin and why so many clients are looking to employ Aladdin because the need for greater efficiencies in the operations of trading is becoming more and more important, and for those organizations that are not prepared electronically, they have too high costs. And as fees are coming down and if you don't have those efficiencies, you're going to be left behind. And I would also say one of the most important things about electronic trading and utilization of Aladdin, it brings down operational errors. So it is a major component of what we do and we're very proud of the trading platform that we created and the efficiencies it has created for us on behalf of our clients. Let me just close and thank everybody for joining this morning. Our end-of-the-year call – our 2017 results are directly linked to the investments we've made over time, and importantly, I do believe the results that you're seeing in terms of our flows is a direct result of the trust that clients have placed on BlackRock. We will continue to leverage our differentiating scale and invest in our technology, and invest in the value proposition for our clients, and importantly create a great value proposition for our shareholders. I'd like to thank everyone with this call and wish everybody a Happy New Year and hopefully our year continues as robust as it has in the first 12 days of the year. Have a good one.