BlackRock Finance Inc (BLK) — Q1 2019 Earnings Call Transcript

Good morning, everyone. I am Chris Meade, the General Counsel of BlackRock. Before we begin, I’d like to remind you that during the course of this call we may make a number of forward-looking statements. We call your attention to the fact that BlackRock’s actual results may of course differ from these statements. As you know, BlackRock has filed reports with the SEC, which lists some of the factors that may cause the results of BlackRock to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So, with that, I will turn it over to Gary.

Thanks, Chris, and good morning, everyone. It’s my pleasure to present results for the first quarter of 2019. Before I turn it over to Larry to offer his comments, I will 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. BlackRock generated $65 billion of total net inflows in the first quarter or 4% annualized organic asset growth, reflecting our differentiated solutions-based approach to addressing client needs. Our first quarter results reflect the benefits of our integrated business model and the investments we have made to diversify our investment platform, enhance our risk management and technology capabilities, and build local expertise at global scale. First quarter revenue of $3.3 billion was 7% lower than a year ago, reflecting the impact of fourth quarter equity market declines on our 2019 base fee entry rate. Operating income of $1.2 billion was down 11% compared to a year ago, while earnings per share of $6.61 was down 1%, as lower operating income and a higher effective tax rate were partially offset by higher non-operating income and a lower share count in the current quarter. Non-operating results for the quarter reflected $135 million of net investment income, driven by higher marks on our unhedged seed capital investments and the revaluation of certain strategic minority investments. Our as-adjusted tax rate for the first quarter was approximately 22% and included a $22 million discrete tax benefit related to stock-based compensation awards that vested during the quarter. We continue to estimate that 24% is a reasonable projected tax run rate for the remainder of 2019 though the actual effective tax rate may differ as a consequence of non-recurring or discrete items and issuance of additional guidance on tax legislation. First quarter base fees of $2.8 billion were down 5% year-over-year, primarily due to the negative impact of non-U.S. equity markets and foreign exchange on average AUM and an associated mix change favoring lower fee fixed income assets compared to a year ago. On a constant currency basis base fees were down 3% year-over-year. Sequentially, base fees were up 1% or 3% after adjusting for the impact of a lower day count in the first quarter, driven by market appreciation, organic base fee growth and higher securities lending revenue. On an equivalent day count basis, BlackRock’s fee rate increased from 18 basis points in the fourth quarter to 18.2 basis points for the first quarter of 2019. Performance fees of $26 million decreased meaningfully from a year ago, reflecting lower revenue from liquid alternatives and long only equity products. As noted on our fourth quarter earnings call, investment underperformance entering the first quarter resulted in certain quarterly locking funds falling below high watermarks. We saw improved performance in many of these funds during the last three months, which better positions us for the remainder of the year. Continued momentum in institutional Aladdin resulted in 11% year-over-year growth in quarterly technology services revenue, and 17% year-over-year growth on a trailing 12-month basis. As Larry will discuss in more detail, overall demand remains strong for our full range of technology solutions. Advisory and other revenue of $49 million was down $22 million year-over-year, primarily reflecting lower earnings attributable to an equity method investment. On a sequential basis, the decline reflected lower fees from advisory and transition management assignments. Total expense decreased 4% year-over-year, primarily due to lower compensation and volume related expense. Employee compensation and benefit expense was down $54 million or 5% year-over-year, reflecting lower incentive compensation driven in part by lower operating income. Sequentially, compensation and benefit expense was up 5%, primarily reflecting higher seasonal payroll taxes, and an increase in issuance and mark-to-market of deferred compensation, partially offset by lower incentive compensation driven in part by lower performance fees. Direct fund expense was down $19 million or 7% year-over-year, primarily reflecting the negative impact of equity and foreign exchange markets on average index AUM. G&A expense was up 1% year-over-year, reflecting higher technology expense, partially offset by the impact of product launch cost in the first quarter of 2018. Sequentially, G&A expense decreased $61 million, reflecting seasonally lower marketing and promotional expense, lower professional services expense and $31 million of contingent consideration fair value adjustments related to prior acquisitions recorded in the fourth quarter of 2018. Our first quarter as-adjusted operating margin of 41.9% was down 220 basis points from a year ago, reflecting the negative impact of markets and foreign exchange on quarterly base fees and a strategic decision to continue investing responsibly for the long term. While we are always margin aware, we have deep conviction in the stability of our business model, which allows us to better navigate the financial challenges associated with short-term market volatility. Since year-end, beta has been constructive, organic growth has improved and a number of our hedge funds are back above high watermarks. All of which contributed to 9% growth in our assets under management and position us well for the second quarter. We remain focused on funding our most critical strategic initiatives to optimize organic growth and significantly advanced two of these strategic initiatives, technology and illiquid alternatives during the first quarter. We are confident these investments will enhance outcomes for clients and generate long-term value for shareholders. Last month, we announced the binding offer and exclusive agreement to acquire eFront, the world’s leading end-to-end alternative investment management software and solutions provider. As clients increasingly add to their alternatives allocations, the ability to seamlessly manage portfolios and risk across public and private asset classes on a single platform will be critical. The combination of eFront with Aladdin will set a new standard in investment and risk management technology, and reinforce Aladdin’s value proposition as the most comprehensive investment operating system in the world. Subject to the French Works Council process, we expect the transaction to close in the second quarter. We have also announced the first close of long-term private capital, LTPC is an innovative perpetual direct private equity fund designed to create value for the long term. Limit reinvestment risk and operate with lower volatility than comparable vehicles. It’s a crucial new component of BlackRock’s comprehensive alternative investment capabilities, which now include hedge fund solutions, real assets, private credit and direct private equity. LTPC is another example of BlackRock’s ability to assess the market, organically develop our capabilities and deliver the products and solutions clients need most. Our capital management strategy has always been to first invest in our business and then return excess cash to shareholders through a combination of dividends and share repurchases. As previously announced, we increased our quarterly cash dividend by 5% to $3.30 per share of common stock and repurchased $1.6 billion worth of common shares in the first quarter including $1.3 billion repurchased in a private transaction at approximately $413 per share. We have now completed our targeted level of share repurchases for 2019, but we will remain opportunistic should relative valuation opportunities arise. BlackRock is having deeper and more strategic conversations, with a greater number of clients than ever before and our first quarter results highlight the value of the investments we have made to assemble the industry’s broadest offering of active and index investment strategies, coupled with technology and portfolio construction tools. The diversity of our platform positions us to serve clients’ needs in a variety of market environments and enables us to generate consistent and differentiated organic growth. Quarterly net inflows of $65 billion were positive across active and index strategies, as well as in our cash management business. BlackRock’s institutional franchise generated $29 billion of net inflows representing 4% annualized organic asset growth, flows were led by momentum in fixed income, reflecting continued demand for liability-driven investment solutions and our top-performing active strategies. Institutional active net inflows of $15 billion were driven by $13 billion of active fixed income flows reflecting strong activity in our insurance client channel. Momentum in our illiquid alternatives franchise continued into 2019. Record quarterly net inflows of $6 billion were led by infrastructure, real estate, private credit and the previously mentioned first close of LTPC. In addition, we have approximately $22 billion of committed capital to deploy for institutional clients in a variety of strategies, representing a significant source of future base and performance fees. iShares net inflows of $31 billion reflected global client demand for a diverse range of strategies, including core, fixed income, factor and sustainable ETFs. We saw record quarterly flows in fixed income iShares as clients continue to adopt ETFs for corporate, emerging market and high-yield bond exposures. Approximately 40% of iShares’ flows in the quarter were on higher fee products outside of the core, resulting in annualized organic base fee growth of 7% in line with organic asset growth in the quarter. Retail net outflows of $1 billion reflected industry pressures in international equities and world allocation strategies, partially offset by strength in BlackRock’s municipal fixed income franchise and event-driven liquid alternatives funds. Finally, BlackRock’s cash management platform saw $6 billion of net inflows, as we continue to grow our cash business, leverage scale for clients and deliver innovative distribution and risk management solutions through a combination of Cachematrix and Aladdin. In summary, our first quarter results highlight the breadth of our investment strategies, coupled with our industry-leading technology and portfolio construction capabilities and an ability to service clients on a global scale. While we will never be immune to beta headwinds and the impact those headwinds can have in our short-term financial results, we intend to retain focus on investing in our highest growth priorities and exercising prudent expense discipline to ensure we meet the critical needs of clients and shareholders alike. Our goal remains to deliver consistent and differentiated organic growth in the most efficient way possible. With that, I will turn it over to Larry.

Thank you, Gary, and good morning, everyone. Thank you for joining BlackRock’s first quarter call. BlackRock’s broad investment platform generated $65 billion of total net inflows in the first quarter, representing 4% organic asset growth and 3% organic base fee growth. The extensive range of our investment capabilities, which includes index, alpha-seeking, alternatives, and cash, along with our leading technology and portfolio construction capabilities, enabled us to attract strong flows and importantly, respond to the evolving needs of our global clients. Our commitment to staying ahead of client needs continues to resonate, and we are strengthening our relationships with clients around the world more than ever. Following significant declines in equity markets in the fourth quarter of last year, investors increased their risk tolerance at the beginning of 2019. U.S. markets have recovered their losses, and both developed and emerging market equities are showing signs of recovery, although not fully back to where they were, with about a 10% year-to-date change. High yield fixed income, which was the most challenged category last year, is now experiencing inflows. Improved investor sentiment is partly due to reduced concerns surrounding global monetary policy and trade. The Federal Reserve and other central banks are adopting a more patient approach to monetary policy, alleviating investors’ fears of tightening conditions later in this economic cycle. Additionally, investors' focus on trade tensions has diminished compared to last year, as negotiations between the United States and China progress. Despite strong market performance year-to-date, average market levels are still below where they were a year ago, and investor optimism remains delicate due to ongoing geopolitical risks and global growth concerns. While recent developments in China are expected to boost global capital investment spending, weak Eurozone PMI data indicates a further slowdown in Europe. The U.K. has avoided a hard Brexit in the near term, but those issues are still unresolved. In this global environment, clients are increasingly turning to BlackRock. Our goal has always been and will continue to be to understand our clients’ goals and challenges, so we can better anticipate and evolve ahead of their needs. Today, clients are asking for greater transparency, seeking more value, and, as seen across various industries, they desire more convenience. They want sustainable long-term returns while focusing on outcomes, which represents the major challenges faced by the asset management industry today. I addressed in my letter to shareholders this year the importance of enhancing dialogue around long-term outcomes. As we have throughout our history, BlackRock is committed to investing in our investment platform and technology to deliver the outcomes our clients seek. Each decision we make is focused on improving our ability to partner with clients. In two months, we will celebrate the 10-year anniversary of BlackRock’s acquisition of Barclays Global Investors. Over the last decade, our merger strategy has proven effective, as our agnostic approach to alpha and index strategies provides a unique perspective for our clients. The landscape has changed significantly for our industry and for BlackRock in the past ten years. Rather than seeking discrete products, clients are increasingly looking for partners to help them build customized portfolios. It is only by delivering tailored solutions that we can drive growth and create long-term value for our shareholders, which is why we continue to adapt our platform and organization today. Our strategy for achieving long-term growth is built on three primary drivers: capturing the shift from product selection to portfolio construction, leading in technology across the asset management value chain, and developing global and local expertise in high-growth markets. All of this is aimed at enhancing our clients’ experiences and strengthening our client relationships on a global scale. Last year, we introduced the Client Portfolio Solutions teams to consolidate our strategic advantages, allowing us to create comprehensive solutions for both institutional and wealth clients. Leveraging BlackRock’s distinctive research capabilities, our investment insights, and portfolio construction expertise, Client Portfolio Solutions achieved over $11 billion of net inflows in the first quarter and is gaining strong momentum. We are broadening our capabilities across various portfolio building blocks and investing in highly demanded areas, with ETFs being one of those focal points. iShares attracted $31 billion of net inflows in the first quarter, once again securing the top market share of ETF flows globally in Europe, as well as in high-growth sectors such as fixed income, factor-based, and sustainable ETFs. Additionally, we observed $17 billion of net inflows in U.S. iShares and $15 billion of net inflows in European iShares, which translates to a 17% organic growth. In higher fee iShares categories, including fixed income factors and sustainable ETFs, we generated a collective $38 billion of net inflows, while core iShares brought in $19 billion in the first quarter. While these inflows are somewhat offset by outflows from a limited number of equity iShares due to the reversal of strong tax-related inflows from the previous quarter, iShares continues to benefit from long-term trends, including the global shift towards portfolio construction and fee-based wealth management. Financial advisors are increasingly adopting models to tailor client portfolios in a straightforward and scalable manner. The use of models is driving demand for both ETFs and high-performing alpha strategies, alongside digital tools that help advisors understand risk and fee allocations, positioning BlackRock favorably. After a period of slower growth in 2018, we are witnessing renewed interest in fixed income securities. BlackRock generated $80 billion of fixed income inflows across both active and indexed products, led by the rising adoption of fixed income ETFs, which achieved $32 billion of net inflows across sectors such as high yield, emerging market bonds, and treasuries. Non-ETF index fixed income flows of $29 billion were primarily driven by demand for liability-driven investment strategies as clients seek to immunize their portfolios. Moreover, our active fixed income platform saw diversified inflows of $18 billion across core fixed income, municipal bonds, and high-yield strategies, maintaining strong performance with 83% and 85% of assets exceeding benchmark or peer median over three and five years, respectively. We are continually innovating across our platform to meet client demands and ensure growth for our shareholders. In cash management, where we recorded $6 billion of inflows in the quarter, we are utilizing our Cachematrix technology to enhance convenience and transparency for clients. We are also innovating the types of cash management strategies we offer and recently launched a Liquid Environmentally Aware Fund, or LEAF, as a prime money market fund with an environmental focus. This fund will allocate 5% of its net revenues to purchase and retire carbon offsets while directing some proceeds toward conservation efforts. Clients increasingly seek sustainable strategies that deliver financial returns while making a measurable social or economic impact. BlackRock aims to make such strategies more accessible. Beyond specific sustainable investment funds, we are also integrating environmental, social, and governance risk factors into all our investment processes. We firmly believe that business-relevant sustainable data is advantageous for all our portfolio managers and ultimately leads to decision-making that produces better long-term outcomes for our investors and clients. With our ongoing emphasis on evolving to meet client needs, we are developing a new private equity vehicle designed to provide institutional clients with long-term high-quality private company exposures. The BlackRock Long-Term Private Capital strategy offers institutions the chance to invest along the spectrum between publicly traded equities and leveraged buyout-style private equity. This fund will feature a perpetual structure and an active ownership approach aimed at creating long-term value. By the end of the first quarter, Long-Term Private Capital secured $1.25 billion in capital commitments and cornerstone investments. Including LTPC, BlackRock had a record quarter in our illiquid alternatives business with $6 billion of net inflows, as clients continue to seek yield and attractive risk-adjusted returns. We also deployed $2 billion of committed capital during the first quarter and have another $22 billion ready for deployment. As we work to bridge the gap between public and private assets, we recognize that clients benefit when alternative investments are assessed within a portfolio-level risk management framework. That is why we recently announced our intention to acquire eFront, pending certain conditions. This acquisition will enhance BlackRock’s capabilities in illiquid alternatives and technology and enable a more comprehensive management approach across traditional and alternative asset classes. Technology is transforming every aspect of the asset management landscape, and BlackRock’s successes, milestones, and continuous innovations are made possible by prioritizing technology as vital to our entire business. Our Aladdin business continues to show strong global growth, achieving an 11% increase year-over-year in technology services revenues. We welcomed several new clients in the first quarter, including Santander, the first asset manager using Aladdin in markets like Brazil, Argentina, Spain, and Portugal. The momentum in our technology investments will sustain our technology services revenue growth in the coming years. BlackRock’s long-term strategy is to provide technology across the asset management value chain, and we are expanding our technology platform beyond the core Aladdin business to enhance our value proposition to clients and partners, generating direct technology revenues for the firm. As the investment management ecosystem seeks deeper integration along the investment lifecycle, we are extending Aladdin to our asset servicing providers to unlock network benefits further. Earlier this month, we announced a strategic alliance with Bank of New York Mellon to deliver integrated data technology and asset management services through Aladdin for their shared clients, optimizing their investment management and servicing capabilities on a single platform. One of the most significant opportunities for Aladdin moving forward is to establish a common language around portfolio construction for wealth managers, financial advisors, and individual investors. Aladdin Wealth is now live with nine clients across the U.S., U.K., Continental Europe, and Asia, presenting substantial opportunities for Aladdin Wealth to form the infrastructure of the wealth management landscape. More importantly, it establishes an opportunity for BlackRock to enhance our value proposition and brand with wealth partners and their financial advisors. Accelerating trends such as the shift towards portfolio solutions and the broader product usage necessary—along with the need for operational scale and improved regulatory reporting—are pushing for more comprehensive and flexible technology-driven solutions on a global scale. Aladdin is well-positioned to take advantage of these trends as the industry’s leading all-in-one portfolio investment operating system. As we continue to innovate and adapt both our investment and technology businesses to meet our clients’ needs, we are also evolving BlackRock’s leadership and structure to enhance client experiences. We regularly implement organizational leadership changes because we believe these adjustments offer significant benefits to our clients, shareholders, and leaders themselves. Recent announcements focus on bringing BlackRock closer to our clients, enriching our relationships with them, and delivering all of BlackRock’s offerings more efficiently and effectively. These organizational changes support our entrepreneurial spirit by introducing fresh ideas across various areas of the firm and fostering leadership development globally. I can proudly say that I have never been more enthusiastic about BlackRock’s organization and our people than at this moment. We are entering 2019 with a strong commitment to focusing on client needs, positioning BlackRock as the ideal partner for our clients and a leader in emerging growth sectors. With that, let me open the floor for questions.

Hey, Craig.

Hey. Good morning, Larry. So we continue to see BlackRock expand further in that tech sector. We saw this again in the first quarter with the acquisition of eFront. My question is how will BlackRock clients use this software technology? And also, more importantly, how do you plan on monetizing this technology, including potentially supporting your alternative fundraising effort?

So we look at technology in five business brands across BlackRock and we are focused on every business. Actually we had a leadership retreat last week this past weekend. And we spoke about how we have to work on technology in every business. It’s not the business that should be untouched with technology. Technology has to be the component of shaping how we do business. So we look at technology in five different areas. We look at technology to deliver better alpha using more data sources. We are using technology now, as I spoke about in my prepared remarks, creating technology for more convenient portfolio construction. Obviously, we are using technology with more operational efficiencies, Aladdin provider is a good example. Throughout our history, we are using more and more technology for risk management. And now we are using technology to create more convenience with our clients by delivering better tools for distribution and so we are framing technology across all these businesses. eFront really is a great example of us using technology to help us in delivering two out of the three major long-term strategies that we spoke about in my shareholder letter. We speak about why technology has to be driving BlackRock and why alternatives have to continue to drive the future of BlackRock. eFront still helps us deliver in those two key categories; the third one is China. If I have to say a fourth one is retirement, but those are two of the key characteristics of our forward growth strategy. Related to eFront in itself it is going to be provided as a new revenue component of Aladdin and it’s going to be an add-on cost to our Aladdin platform. It will be integrated on top of the Aladdin platform over time, but it will be another sleeve and we are actually there were some overlaps with the clients and there were many new clients that are part of eFront, so it allows us to have broader depth globally. And so we look at this acquisition as another milestone of us really trying to build technology across all asset categories and we did cite that we had some weaknesses in alternative technology in Aladdin and this really helps us accelerate the added sleeves of alternative technology on Aladdin. So this will be another revenue center for BlackRock as a part of the Aladdin platform.

Thank you, Larry.

Hi, Robert.

Good morning, Larry, and everyone. Thank you for taking my question. Can you elaborate on the alternatives platform? It seems you have invested significant time and resources in acquisitions and organic growth. Do you feel that your current platform adequately covers most strategies, or are there still gaps that you aim to address?

Sure.

Rob, we believe we are in a strong position with our illiquid platform right now. We have a diverse range of products that cover the major categories. LTPC places us firmly in direct private equity, along with our significant real estate, infrastructure, and private credit businesses. We also offer various solutions-oriented businesses, including funded hedge funds, funded private equity, and broader alternative solutions. Overall, we feel we have a presence in all the high-growth markets. At this moment, we have approximately $65 billion in illiquid assets and around $22 billion in committed capital. This gives us substantial scale. Individually, our businesses may not seem large enough, but we anticipate that they will grow with successor funds as we continue to deliver the returns our investors expect. We will keep looking for strategic opportunities to enhance the scale of these businesses. It's important to highlight that our culture matters greatly to us. We are not looking to buy out anyone but rather bring in people who want to be part of our unique platform, just as we've done with new partners like Tennenbaum and First Reserve in the past. We aim to make decisions that are beneficial for both clients and shareholders. In summary, we will remain alert for opportunities while feeling confident in our current growth platform.

As you know, Rob, we have been very systematic in how we have been approaching this. It has not been what I would call metamorphic by any means. If you think about just our infrastructure platform, we started really infrastructure in 2012 by lifting out a team of people. We are over $20 billion now in infrastructure growing quite nicely. We are raising a couple more funds. So it’s been very systematic and I think the same thing will be done over LTPC. Over time, that’s going to continue to grow. We actually have opportunities that continue to build that out. We have real estate and so over time this is a growth area. Our first quarter was up $6 billion in growth. That was a record quarter for us as Gary suggested. We have $20 billion or $22 billion of the drag of committed capital right now and they will be put to work. We look at this as a real opportunity and our clients are looking to us to be really focused on these types of opportunities. So I am pretty constructive on where we are at this point in time.

Can I add one thing? The other part that we are excited about is that we have done some institutional surveys and it shows that the largest reallocation is going to be to the alternative space. So we do need to have a wide product base to satisfy our current clients’ needs. But also you know that we are very important to the retail base and they want exposure to the alternatives area. So we are also working very closely with our retail distribution partners to create the appropriate wrappers, to put the alternatives that have the appropriate risk and reward for those clients that are looking for it. So it’s not just institutional investors, it’s also retail investors that are looking to us for some exposure in the alternative space.

Thank you. I have a follow-up question, Larry. You mentioned a reversal of the fourth quarter ETF equity flows due to tax reasons. However, overall in the industry, despite the market rebound, demand for equities, both index and active, seems to be quite low. Is this mainly due to investors shifting their portfolios more towards alternatives, alongside stronger fixed income demand, or is there something else happening in that business?

We noted a significant reallocation from cash into fixed income as many investors anticipated rising interest rates and ongoing tightening from Central Banks. This shift occurred as a result of changes in the Central Bank's forward forecasts and many investors finding themselves underinvested, prompting them to extend their duration investments across the board. As Rob Kapito mentioned, investors continue to adopt a barbell strategy, increasingly leaning towards alternative investments. The first quarter also revealed that investors are still reducing their equity positions, leading to considerable outflows in global equities. I believe we are at a turning point where the markets, despite recent rallies, hold considerable upside potential because of the persistent underinvestment in equities, especially in the first quarter. With renewed economic activity in the United States, trending towards a 2.5% growth in the second quarter, and a stronger economic outlook from China, I contend that there is a high likelihood of investors beginning to reallocate into equities. On a daily basis, we engage with investors who are eager to determine where to invest their funds. There are significant amounts of capital sitting on the sidelines, as many anticipated a downturn in the fourth quarter and believed interest rates would continue to rise. In fact, the greater risk lies in clients being under-invested rather than over-invested, suggesting there is more potential upside, particularly in equities.

One tactical observation is that if someone started last year with a 60-40 stock mix, which many people did, by October that mix would have shifted to 80-20, presenting an excessive risk level. Consequently, there were numerous tactical asset allocation adjustments made to return portfolios to the 60-40 mix, which required selling stocks and purchasing bonds. During the same period, the risk-free rate increased from zero to 3%, making bonds an attractive option compared to cash. This trend became evident in November and December, providing an opportunity to realize tax losses for the first time in a long while. Now, in the first quarter, as people are realigning to their desired allocations, it seems the appetite for risk is re-emerging in the market, which is apparent in the current tactical allocations being made.

Hey. Good morning, guys.

Hi. How are you?

I am well. Thanks. You mentioned that the nine live Aladdin for Wealth clients. Could you update us on where you think we are on the ramp-up of noticeable incremental flow from those nine go-lives, update us on the pipeline of new go-lives this year and are there any meaningful milestones you are just looking to see a more noticeable uptick inflows from that channel?

So we are very optimistic on the Aladdin for Wealth, because for the first time it gives a lot of the financial advisors the ability to look and test their clients' portfolios to make sure that they are taking the right risk in them. And so as they come on, we are building it together. They are asking can we do this, can we do this, what can we show our clients and of course within each system, the things that these firms are able to send out to their clients have to be approved and that takes a little time. So there’s a little bit of a lag. So there was a lag in implementation, and now we are in process with many of them on getting them on to the systems and to understand how it works and what they can actually use for their clients. So it has been an eye-opening experience for many of their clients. What we didn’t realize was that Aladdin for Wealth can be used as an asset-gathering tool and most clients in the retail area have accounts at more than one firm. And if you are one of the firms that can show your client the risk and reward of their portfolios and then improve it, that is a great advantage, and we are seeing a lot of money move for those who have Aladdin to those who don’t. Also, the business has moved from individual stock and bond picking to asset allocation and portfolio construction and that’s what the financial advisors are expected to be able to do. By using Aladdin for Wealth, they are able to take not only one portfolio but hundreds of portfolios and organize them in an appropriate way for risk return using portfolio construction. It also helps each of these individual institutions utilize their models, as well as have an alternative model to compare it against BlackRock’s models and so Aladdin for Wealth is helping the financial advisor to have tools for better decision making right at their fingertips, and also, of course, if they are using our portfolio allocation or our tools, there’s a high probability that they may look favorably upon our products. In portfolio construction today, because of the way the compensation system works, they want to use the cheapest products that they can find to do that portfolio allocation and those wind up being ETFs and index products, of which we have a significant market share. So Aladdin for Wealth is helping the financial advisors have the tools to do their job better. It’s helping us to be part of the infrastructure and the ecosystem to build out better tools and technology for our firms that unfortunately under-invested in technology and at this time cost is very important to be able to buy it at a good price and have it maintained is, I think, just going to grow for the future. So we are very excited about it. But as we have done with Aladdin, as we have brought clients on, we are learning as well what some of the advisors are in need and we are building it together to have the best tools and the tools will also create an ecosystem that is also working with their custodians so that it’s much easier. And Larry mentioned the word convenience, so it’s a tool that’s right at their fingertips that they can log on and get really good information and very good scrubbed data so that they can have a better system.

But Patrick, let me clarify some of the terminology. The most significant immediate impact from a P&L standpoint will be the revenue appearing in our technology services line, where the Aladdin Wealth line will be reflected. There are two components to Aladdin Wealth; one is a top-down view from home office driving technology revenue, and the other is the bottom-up impact at the individual adviser level, which will generate the approach you initially asked about. Keep in mind, much of this is happening in real-time as we are currently rolling it out in many locations. There is a training element to get all advisers familiar with the new tools they will have access to. Therefore, the flow deltas that will drive our base fees will take a bit longer than the immediate technology revenue impact that you will see sooner. In other cases, like Envestnet, where we are not using Aladdin Wealth but implementing our portfolio construction technology on the desktops of the IRAs, I believe you will see a more immediate effect on base fees since there is no specific technology revenue tied to that type of partnership.

But early indications before the Aladdin Wealth users who have been on the longest show there is evidence of increased flows to BlackRock. We don’t have enough statistics to really identify where it is. We don’t have enough data with all the different users. As we said, nine clients worldwide and we are in conversations with many more clients. So our objective is to have, as Rob just suggested, the architecture for risk in the wealth management channel using Aladdin for Wealth.

Hi, Michael.

Hey. Good morning. Hey. Thanks for taking the question. Just on another question on Aladdin here with eFront, that now brings you into alternatives. Just curious as you look across the Aladdin platform what other adjacencies could make sense or capabilities that you would like to see strengthened with Aladdin particularly as you look across the competitive landscape today?

I think we are committed to being an end-to-end provider for risk management and analytics from the front to the back. So I think we have been building out a lot of that in particular ourselves. I think the decision to do eFront was a conscious decision frankly that it was going to take us a lot longer to build that. Our belief is that the eFront transaction accelerates our development in the private asset classes conservatively by five-plus years. So I think we felt we needed to attack there when we can. Otherwise, I think, we will continue to add on all the obvious adjacencies when we think about an end-to-end provider and we continue again to continue to be tactical and opportunistic to basically balance where we think it makes sense to buy versus where we think it makes sense to build.

It’s clear that we are focusing on inorganic opportunities by reviewing and understanding the entire technology landscape. We are not pursuing asset management mergers and acquisitions in developed markets. Instead, we are looking for technology-related inorganic opportunities that enhance our capabilities as an end-to-end provider, whether that involves data provision, new technology, or AI. We will keep building or pursuing acquisitions as needed, and we have a dedicated team continuously examining the global ecosystem.

Hi, Alex.

Hi. Good morning, guys. Thanks for taking the question. So, Gary, maybe just a refresher on some of the guidance that you guys provided in the beginning of the year, given the fact that markets moved pretty considerably over the course of Q1. Maybe how you guys are thinking about outlook for G&A for the rest of the year. I think your original guide implies something a $1.6 billion kind of annual number, does that still hold and then any other comments around expenses would be helpful? Thanks.

Thanks, Alex. I would say really short answer is no change in guidance. I think that, as we said at the beginning of the year, we are very focused on managing the entire discretionary expense base. We continue to see our 2019 kind of core level of G&A expense to be essentially flat to our core level for last year and we are continuing to invest. I mean, as always there are things that come up that are effectively kind of not manageable, so we saw another, let’s call it, I would say, roughly $15 million to $20 million of kind of like non-core G&A in this quarter between paying some fees to get eFront done and some more purchase price contingency, fair market value adjustments and some FX implications. But in terms of what we are managing, we are continuing to stick to the plan that we laid out for our Board in January. I think that we try to anticipate. We saw some volatility. And as I said in my prepared remarks, I mean, we are very much focused on the long-term not trying to manage doing margin on a quarter-to-quarter basis, obviously, we saw a lot of that beta back, which helped position us and I think we feel a little bit better with the markets where they are right now, when we went into our budgeting season back in the fall. But we are not going to continue to keep an eye down the field and play offense, and continue trying to optimize growth in the most efficient way possible.

Hi. Thanks guys. Just wanted to ask a quick one on the advisory and other line. I know you guys had mentioned some items that moved it on a year-over-year and sequential basis, but it was a pretty big step down. And so, I guess, just what’s the outlook and how should we think about that line going forward from this lower 1Q type level?

Our other revenue line item consists of three main components. The largest component is an equity method investment that we've held for several years, which contributes our share of other companies' earnings. This aspect is a bit more complex since we do not have control over it. Comparing year-over-year, this was the most notable change. The other two components in this category are our Financial Markets Advisory business and our transition investment management business. These are smaller revenue generators, but they have consistent performance and are important for BlackRock, as we aim to grow and stabilize them as much as possible. However, both have elements that are more tied to capital markets. Overall, the primary driver of the year-over-year change was the equity method investment, which I believe is well-known and can be tracked by everyone as easily as we do.

Hi, Ken.

Hi. Thank you for fitting me in. Can you help us understand how iShares’ operating margins and margins on incremental revenue have changed over the past two or three years? Core is much larger, fee rates have decreased, but assets have increased significantly. Given these various factors, I would like to understand how margins may appear in iShares and how the substantial growth in core and overall iShares has influenced the margins on incremental revenue.

Ken, as you know, we do not discuss the margins of our individual businesses. Our focus is on a unified BlackRock model to ensure that all our businesses operate cohesively rather than in silos. This is crucial to our culture and how we manage the business on a daily basis. Consequently, we don’t maintain fully allocated P&Ls for our businesses because we believe this approach is not suitable for our day-to-day operations. I can provide insights on the revenue line item. Back in December, during our conversation at Goldman, we discussed the long-term growth potential for iShares and ETFs, indicating an anticipated topline asset growth rate of approximately 12% to 15%. We expect certain sectors to experience faster growth than others, which is why we have suggested an organic base fee rate lower than that figure. Historically, our organic base fee rate has been around 6 to 7 percentage points lower, as we noted in our presentation at Goldman. While I can't provide exact figures, that is the general range. This accounts for changes in our mix due to stronger growth in our core offerings and strategic pricing investments that we’ve made and plan to continue, benefiting both our clients and shareholders. Notably, this quarter, organic base fee growth matched organic asset growth, both around 7%. This reflects that about 40% of our flows are outside of the core areas, including fixed income, strategic beta factors, ESG, and other precision exposures, which are typically more tied to capital markets and carry higher fees than our core offerings. We firmly believe that as our core grows, the growth outside of the core will also continue, as investors tactically allocate their portfolios around core ETFs. Regarding revenue, we are confident that our iShares business will grow beyond our long-term target of 5%. However, when it comes to specific margins, I’ll leave that analysis to you, as we do not manage our business in that manner.

I do. I want to just thank everybody for joining this morning and your continued interest in BlackRock. I believe our first quarter results are directly linked to the investments we have made over time and our deep partnerships we built with our clients globally. I think we differentiated ourselves by continuing to leverage our scale. We continue to invest in broad investment and technology platform to deliver value to our clients and shareholders. We are continuing to drive technology as a leading force in the transformation of who BlackRock is and the transformation of how BlackRock works with our clients and we will continue to do that. With that everyone have a very nice spring and we will be talking to you sometime in July. Thanks.