BlackRock Finance Inc (BLK) — Q4 2020 Earnings Call Transcript

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

Thanks, Chris. Good morning and Happy New Year. I hope everyone and their families are safe and healthy during the holidays. It’s my pleasure to present the results for the fourth quarter and full year of 2020. Before I pass it to Larry, I will review our financial performance and business results. While our earnings release includes both GAAP and adjusted financial results, I will primarily focus on our adjusted results. Throughout BlackRock’s history, we have consistently invested in our business with a commitment to serving clients, employees, shareholders, and our communities. As a result, despite the unprecedented challenges in 2020, we were well-prepared to provide clients with thought leadership, investment insights, and risk management tools to ensure the wellbeing of our employees and to contribute to our communities. BlackRock’s impressive performance during this difficult year demonstrates the strength of our diverse and resilient business model, which is driven by our commitment to help clients achieve their long-term goals and the dedication of our amazing team. We generated net inflows of $391 billion in 2020, representing 5% organic asset growth and 7% organic base fee growth, meeting our organic growth target for the sixth time in the last eight years. Notably, we concluded the year with strong momentum, achieving $127 billion in total net inflows in the fourth quarter, showcasing record quarterly organic base fee growth of 13%. Overall performance from our entire active franchise, along with near-record iShares flows benefiting from client de-risking and year-end tax planning, contributed to this quarter's substantial organic base fee growth. We adopted a proactive stance in 2020, utilizing the strength of our operating model to invest through volatile markets, both organically and inorganically, expanding our full-year operating margin and returning approximately $3.8 billion of capital to our shareholders. Each of our key growth priorities, including iShares, Aladdin, private markets, alpha generation, whole portfolio solutions, and sustainable investing, contributed significantly to our growth during the year. Full-year revenue reached $16.2 billion, an 11% increase. Operating income of $6.3 billion grew by 13%, and earnings per share increased by 19% to $33.82 compared to 2019. In the fourth quarter, we generated revenue of $4.5 billion and operating income of $1.8 billion, reflecting year-over-year increases of 13% and 20% respectively. Quarterly earnings per share were $10.18, up 22% compared to 2019, driven by higher non-operating income and a lower share count, although partially offset by a higher effective tax rate in the current quarter. Non-operating results for the quarter included $153 million in net investment income, mainly from mark-to-market gains on our unhedged seed and co-investment capital. Our adjusted tax rate for the fourth quarter was approximately 20%, benefiting from $61 million in net discrete tax benefits. We currently estimate a 23% tax run rate for 2021, although the actual effective rate may vary due to non-recurring items or changes in tax legislation during the year. Fourth-quarter base fees of $3.4 billion increased by 10% year-over-year, mainly driven by 7% organic growth and favorable market data and currency fluctuations affecting average AUM, partially offset by lower securities lending revenue and higher discretionary money market fees in the current quarter along with strategic pricing adjustments made over the last year. Additionally, while fourth-quarter base fees increased by 5% sequentially, the decline in securities lending revenue during the quarter led to a minor decrease of 0.2 basis points in our annualized effective fee rate, despite the positive effect of strong organic growth. As we move into 2021, based on current market conditions and interest rates, we are preparing for lower securities lending revenue and higher discretionary money market fee waivers compared to 2020. This could result in an additional 0.3 basis point negative impact on our fee rate this year relative to our fourth-quarter annualized base fee rate. However, our higher interest rate environment and continued strong organic base fee growth could help alleviate these challenges, especially with ongoing momentum in our higher-fee active equity and alternative businesses. Approximately 40% of gross money market fee waivers are typically shared with distributors, which lessens the impact on operating income. Fourth-quarter performance fees reached $419 million, a 75% increase year-over-year, concluding a record year for performance fees totaling $1.1 billion, more than double 2019 levels. This year's performance fees reflected robust alpha generation across our alternative and long-only investment platforms, with about 60% of the annual increase stemming from a single hedge fund strategy that performed exceptionally well during the year. Quarterly Technology Services revenue rose by 11% year-over-year, and full-year revenue increased to $1.1 billion, up 17%, partly due to the eFront acquisition. Demand for integrated and resilient investment management technology remained strong, although growth in 2020 technology services revenue was affected by the pandemic’s impact on sales and contracting cycles. Additionally, year-over-year revenue growth included certain eFront clients transitioning from an upfront license model to a hosted model, which aligns with our broader Aladdin community and recognizes revenue over the contract's duration. As more clients adopt eFront’s hosted model, this will affect year-over-year revenue comparisons. To provide better visibility into Aladdin's business momentum, we plan to disclose growth in annual contract value (ACV), which is a year-over-year comparison of our technology services revenue run rate and offers a clearer picture of growth similar to leading tech companies. By year-end 2020, Technology Services ACV grew by 12% compared to the previous year, and we remain committed to low-to-mid-teens ACV growth in the long term. Advisory and other revenue decreased year-over-year in both the fourth quarter and full year, mainly due to the absence of PennyMac equity method earnings following our charitable contribution of our remaining equity stake in early 2020 and lower advisory and transition management revenue during the year. Total expenses rose by 10% in 2020, driven mainly by higher compensation and non-core G&A expenses. For the full year, compensation expenses increased by $571 million or 13%, largely due to higher base and incentive compensation linked to increased performance fees and operating income. Overall, G&A expenses climbed by 7% year-over-year, influenced by higher levels of non-core items, including product launch costs, legal fees related to COVID-19, and fixed asset impairments, but offset by lower contingent fair value adjustments, foreign exchange re-measurement expense, and deal-related costs for the year. Excluding around $280 million of non-core G&A expenses in 2020, which consisted of $166 million of aggregate fund launch costs, core G&A expenses were essentially flat compared to 2019, as increased technology and portfolio services fees were counteracted by lower travel and entertainment expenses. Remember, we exclude fund launch costs when reporting our adjusted operating margin. Our full-year adjusted operating margin of 44.9% increased by 120 basis points compared to 2019, supported by record performance fees and securities lending revenue during the year, alongside lower core G&A expenses than expected. As previously mentioned, our business is well-positioned to capitalize on upcoming opportunities, particularly amid industry consolidation and disruptions, to achieve differentiated organic growth. We are committed to investing responsibly and aggressively throughout market cycles and for the long term to optimize organic growth efficiently. Accordingly, our 2021 investment plan currently includes reallocating lower travel and entertainment expenses back into our business to support incremental investments in technology and market data related to our sustainability and other growth initiatives. Currently, considering anticipated expense growth and a more normalized level of performance fees, along with the current rate environment that may affect year-over-year comparisons of securities lending revenue and money market fee waivers, we expect our 2021 adjusted operating margin to align closely with our 2020 results. We are also strategically using our balance sheet to position BlackRock for ongoing success. In 2020, we invested over $1 billion in new seed and co-investment capital to fuel our growth, and our year-end portfolio now stands at approximately $3.5 billion. We continue to pursue strategic minority investments, and later today, we will announce an investment in Clarity AI, a sustainability analytics and data science platform. Additionally, in the fourth quarter, we announced the acquisition of Aperio, which specializes in customizing tax-optimized index equity SMAs to enhance our wealth platform and provide comprehensive portfolio solutions to ultra-high net worth clients and advisors. After the transaction closes in early February, we will incur additional intangible amortization expenses relative to 2020. We are also committed to consistently returning excess cash to shareholders through dividends and share buybacks, returning a total of $3.8 billion to shareholders in 2020. We repurchased around $1.5 billion of shares at an average price of $439 per share, taking advantage of PNC’s decision to exit their ownership stake in May. Since adopting our current capital management strategy in 2013, we have repurchased more than $10 billion of BlackRock stock, reducing the total outstanding shares by 11% and providing our shareholders with an unlevered compound annual return of 19%. Based on our capital spending plans for the year and dependent on market conditions, including the stock’s relative valuation, we are targeting to repurchase $1.2 billion of shares in 2021, consistent with our guidance from last year. Additionally, subject to market conditions, we anticipate board approval later this month for an increase in our first-quarter 2021 dividend. As you will hear from Larry, BlackRock is in an excellent position to meet client needs with our unique insights, guidance, and solutions for long-term investments. Fourth-quarter total net inflows of $127 billion, which represent 7% annualized organic AUM growth and 13% annualized organic base fee growth, were driven by contributions from iShares and our top-performing active franchise. For the full year, we saw net inflows of $391 billion, which were strong across all asset classes, client types, and regions, reflecting broad-based strength in both iShares and active cash strategies. Global iShares ETFs generated $185 billion in net inflows in 2020, equivalent to 8% organic asset growth and 7% organic base fee growth. We experienced strong growth in core products across our strategic areas and precision exposures, particularly benefiting from the positive market sentiment in the fourth quarter. In our strategic product segment, inflows were led by fixed income and sustainable investments, and we also attracted inflows into factors, even as other categories faced outflows. The fourth quarter is typically our strongest iShares period due to year-end rebalancing and tax planning, and this quarter was exceptional, with $79 billion in net inflows that equated to 14% annualized organic asset growth and a record 17% annualized organic base fee growth. BlackRock achieved full-year retail net inflows of $70 billion, representing a 10% annualized organic asset growth and 8% annualized organic base fee growth, significantly outperforming the wider mutual fund industry. Retail flows were positive both in the U.S. and internationally, reflecting strong performance across active fixed income, equity, and liquid alternatives. Fourth-quarter retail net inflows of $35 billion mirrored these trends, enhanced by the seasonal impact of capital gains and dividend reinvestment. Institutional index recorded net outflows of $29 billion in 2020 due to equity outflows, partially offset by fixed income inflows as large clients rebalanced their portfolios after significant equity gains or tactically shifted assets to fixed income and cash. Furthermore, a large U.S. public pension client recently announced a diversification strategy that aligns with updated guidelines. While BlackRock will manage the vast majority of the plan's assets, we anticipate transitioning approximately $55 billion of low-fee index assets to another investment manager in the first half of 2021. Although this transition will lead to a substantial net outflow, it will only minimally impact our organic base fee growth for the year. BlackRock’s institutional active franchise garnered $32 billion in net inflows in 2020, showcasing broad-based strength across all product categories. The highest net inflows came from multi-asset, totaling $14 billion, driven by growth in our life path and target date franchises, and notable momentum in our OCIO business. We also recorded $7 billion in active fixed income inflows, primarily from our insurance clients. Across both retail and institutional client types, we achieved a record $30 billion in active equity net inflows for the year, extending our streak of seven consecutive quarters of positive flows in this category. The flow strength was led by top-performing franchises in technology, health sciences, and U.S. growth equities, as well as quantitative strategies. We are well-positioned for future growth in our active businesses, with over 85% of our fundamental active equity, systematic active equity, and taxable fixed income assets exceeding their respective benchmarks or peer medians for the trailing five years. Demand for alternatives also remained robust, with $17 billion in net inflows into our liquid and illiquid alternative strategies during the year, driven by initiatives in infrastructure, private equity, credit solutions, and our global event-driven hedge funds. Fundraising momentum is strong, with approximately $24 billion in committed capital available for institutional clients across various strategies, representing a significant source of future base and performance fees. BlackRock’s cash management platform generated another $9 billion in net inflows in the fourth quarter, even as the broader industry faced outflows, culminating in a record $113 billion in net inflows for 2020. During the fourth quarter, we incurred about $30 million in discretionary yield support waivers, and we anticipate these fee waivers to rise in 2021. Lastly, we achieved full-year advisory net inflows of $20 billion, predominantly linked to asset purchases managed by our financial markets advisory group. Revenue derived from these assignments is primarily captured in the advisory and other revenue section of our income statement. A year ago, none of us could have foreseen the extraordinary challenges that we and our clients would confront in 2020. By staying committed to our purpose and investing in anticipation of our clients’ needs while honoring our one BlackRock culture, we can reflect on 2020 as a year marked by some of the most significant and proudest achievements in our 32-year history. Our client relationships have never been stronger, and we firmly believe our platform is exceptionally well-positioned to meet the needs of all stakeholders in the years ahead. Now, I’ll turn it over to Larry.

Thank you, Gary. Good morning, everyone. And thank you for joining the call. I hope you and all your loved ones are staying healthy and safe. For decades, BlackRock has built our strategy, platform, and culture around staying in front of our client needs. We've deliberately invested in our business so that we are prepared to help clients navigate the most complex challenges of the investment landscape and the world changes all around them. And that is showing up in results today. The hardships experienced by people globally in 2020, and inequalities further exacerbated by the pandemic have only strengthened BlackRock’s sense of responsibility to help millions of people build savings, to make savings easier and more affordable, advance sustainable investing, and contribute to a more resilient global economy. The pandemic has taken a dramatic toll on all our lives, disrupting the way we work, the way we live. At the same time, it has led to a profound shift in how economies and how societies even operate, creating opportunities to redesign our society for the future. Investors around the world, most of whom are saving for long-term goals like retirement are experiencing the economic impact of the pandemic, which is leading to rising inequalities within and across nations, continued low interest rates, even in the face of rising inflation expectations, and it's a tonic shift towards sustainable business practices. These trends will require investors to rethink portfolio allocation, and they are increasingly turning to BlackRock for insights and solutions, so they can fulfill their purpose on behalf of their stakeholders. Our diverse global investment platform with active and index strategies across all asset classes, integrated technology, data, and risk management, and global scale and connectivity enables us to deliver strong and consistent investment performance and for more stable outcomes for our clients. Our voice developed over years of managing assets for a diverse set of clients globally, has helped BlackRock partner with our clients and has helped us to advocate on their behalf. We encourage the companies our clients are invested in to operate with a long-term mindset, increased transparency and important sustainability factors and focus on all of their stakeholders, and this is driving BlackRock’s performance. BlackRock’s differentiated approach is resonating with our clients worldwide, leading to deeper partnerships with them. And as you could see driving incredible momentum across our businesses. BlackRock generated $391 billion of total net inflows in 2020 representing 5% organic asset and 7% organic base fee growth. We delivered 11% revenue growth, 13% operating income growth, and 19% earnings per share growth. And on top of that, we were able to expand our margins by 120 basis points over a year-over-year basis. These results reflect the benefits of our consistent investments and the diversity of our platform. Flows were positive across all major client types, across all asset classes, and all geographic regions including more than $1 billion of net inflows in each of the 19 countries and into 104 different products. In strategic growth areas, we saw record client demand for active equities, sustainability, our cash products and our alternative investment strategies. We also generated $185 billion of net inflows into iShares ETFs and we also delivered a record $1.1 billion in technology services revenues. By supporting clients with solutions no matter their objective or risk preference, BlackRock is positioned to generate differentiated growth and invest for the future. Our long-term strategy remains to focus on accelerating growth in iShares, accelerating our growth in illiquid alternatives, accelerating our growth in technology and making sure that performance and generating alpha is at the heart of BlackRock. We're doing this through delivering whole portfolio solutions and becoming the global leader in sustainable investing. These investments will benefit of course our shareholders that are benefiting all our stakeholders. Sustainability, a recent inflection point this past year, driven by the convergence of business practices, regulation, and technology advancements is something we're seeing across client preferences. BlackRock generated $68 billion of net inflows in sustainable strategies in 2020, representing over 60% organic growth, and we launched over 100 new products in 2020 to expand investor choice. We are seeing strong demand across client segments. Institutional clients are increasingly seeking sustainable strategies to mitigate exposures and to capture opportunities. While we have clients are using ETF building blocks, especially our sustainable iShares ETFs in both sustainable and traditional model portfolios. We recently surveyed investors representing $25 trillion in assets, who said they plan to double underscore double their allocations to sustainable products over the next five years to nearly 40% average from a level of approximately 18%. BlackRock's sustainable investment platform is well positioned to meet this demand and we will continue to believe the $200 billion we managed today will go to $1 trillion and sustainable investments by the end of this decade. Clients worldwide are continuing to adopt ETFs throughout the year, and iShares drove $185 billion inflows in 2020. In the U.S., iShares ETFs crossed $2 trillion last week, doubling our size in just four years. Our European iShares generated nearly $60 billion in net inflows becoming increasingly important to our global growth. Overall, iShares ETFs particularly in the first quarter as it unlocked new sources of client demand with active managers ensures asset owners globally. BlackRock’s scale engineering, technology, and ecosystem partnerships have enabled us to maintain robust liquidity across iShares ETFs and execute some of the largest rebalances in history, all with tight tracking error and while operating our platform fully remotely in this environment. We witnessed four defining moments in our ETF business in 2020. One, iShares outperformed in the face of the most severe market stress test in ETF history. Two, fixed income ETFs shied as a modernization for us for the $100 trillion bond market. Three, sustainable ETFs are making sustainable investing more accessible to investors. And four, we are seeing an increased adaptation of ETFs in well portfolios as more wealth management industry shifts towards a more fiduciary commission free model. We believe that these moments and BlackRock performance in them will continue to support and accelerate the long-term growth of iShares and the broader ETF industry. More than 70% of our annual iShares flows were from strategic product segments led by fixed income and sustainable product categories. 2020 was a turning point for global clients' adoption of fixed income ETFs and fixed income iShares generating $89 billion of inflows. We estimate that over 100 asset managers and asset owners globally were first time adopters in 2020 in fixed income ETFs, and 80% of our top active managers are now using our fixed income ETFs. Fixed income iShares is now a $690 billion business and we continue to believe it will grow to $1 trillion over the next two to three years. Sustainable iShares ETFs saw a record $47 billion in net inflows in 2020 and AUM tripled year-over-year to $82 billion. We're rapidly expanding our product suite partnering with index and data providers to expand product choice in this category. With more than 140 iShares ETFs and index funds globally we have the broadest choice of any firm and our goal is to continue innovating so that more investors, more people, more savers have greater access to sustainable strategies. The shift in the wealth management landscape towards digitization, centralization, and outsourcing in both the United States and Europe are increasing ETF usage among these clients. Growth in model portfolios across all platforms is an example of how technology and the transparency of fee based wealth management are tailwinds for the ETF market. Model portfolios are driving approximately a quarter of iShares global growth and we expect growth in models, especially customized models developed in partnership with clients to account for more than half of the iShares flows in the coming years. BlackRock is deepening partnerships with wealth managers and financial advisors globally by offering high quality insights and solutions across both index and active strategies. And no other firm can link those two strategies together. We are seeing strong demand for our top performing active mutual fund franchise even as a broader U.S. active mutual fund industry saw more than $250 billion of outflows in 2020. In November, we announced the acquisition of Aperio which will accelerate our lead in the fast growing U.S. separately managed account space. Wealth managers are increasingly looking for partners who can provide personalization and whole portfolio solutions. And now BlackRock is well positioned to be the partner of choice for the full spectrum of wealth clients. We want to make it easy for wealth managers to access our investment strategies across funds, ETFs, SMAs, and models and construct a more resilient, risk aware portfolio using our technology. Active strategies and strong performance after fees are critical in building efficient resilient portfolios. And as public markets, both equities and fixed income become more efficient. Clients are increasingly looking for a differentiated manager who can find differentiating sources of alpha. It's not just about beating a benchmark or peer median, but delivering incremental, tangible dollar returns for clients. BlackRock's investments over time in integrated technology, data, risk management, scale, global reach, and the interconnectivity is enabling us to generate strong investment performance at a time when clients need this performance the most. Our active business generated over $30 billion of alpha returns for clients in 2020, which is leading to more high demand than ever before. BlackRock generated $88 billion of total active inflows for the year including a record for BlackRock, $30 billion of active inflows in active equities. Private markets are also increasingly an important component for alpha and investor portfolios, as both growth assets and diversification. BlackRock has built a broad platform across infrastructure, private credit, real estate, and private equity to meet client demands. We more than doubled our illiquid alternative platform over the last five years, and today we manage $86 billion on behalf of clients. We raised a record $25 billion of client capital in 2020 led by infrastructure, private equity solutions, private credit, and the final close of our direct private equity long term private capital strategy. LTPC is one of the largest first time-funds raised to date with a total of $3.4 billion, and a great example of BlackRock's ability to innovate and organically develop private market solutions to meet our clients' evolving needs. And in an increasingly competitive environment for deploying capital, we are leveraging the benefits of BlackRock scale and size to deploy capital on behalf of clients. Our capital market team gives us a differentiated access to unique deal flow for clients in 2020. And this team alone helped us source 2,100 such opportunities. 20 years ago, we recognized the important value proposition Aladdin can provide for our clients. Today, our technology is a $1.1 billion revenue business. As more clients than ever before are looking for unified technology platforms like Aladdin, that can support their whole portfolio across both public and private assets. And we are committed and remain focused on continuously evolving Aladdin for the next 20 years to come. As sustainability becomes a critical building block in all portfolios, our ambition is to put Aladdin at the center of sustainable investing, and address the challenges investors are facing and in the future. We launch Aladdin Climate to help clients better access both the physical risk of climate change and the transition risk to a low carbon economy on their portfolios. And we're committed to providing clients with everything they need for sustainable investing in Aladdin. Access to sustainability data, and its analytics, and tools to seamlessly implement sustainable portfolios. In line with this commitment, we made a minority investment in Clarity AI, which provides tools to access environmental and social impact, and we'll be connecting with the capabilities throughout Aladdin. Our ability to address clients' challenges enables us to fulfill our purpose and drive strong, long term performance. Over the last five years, clients entrusted us with $1.5 trillion of net new assets, which in turn has enabled us to create over 3,500 jobs globally. And on top of all that, we delivered a 141% total return for our shareholders. I am deeply humbled by how BlackRock 16,500 employees have supported each other and our clients throughout this challenging year, which is critical to our success in 2020, More than 90% of our employees in our annual employee opinion survey said they are proud to work at BlackRock, and we remain committed to upholding our culture and everyday living our purpose. We built BlackRock because we believe in the long term growth of the capital markets, and the importance of being invested in the capital markets. Even today BlackRock only is 2% of the global financial assets. And we see tremendous opportunities ahead to continue supporting the growth of global capital markets, and helping more people invest and save. Everything we do is rooted in our culture of focusing on the long term, and we will be continuing to innovate using our scale and contributing to more equitable, resilient future, to benefit our clients, to benefit our employees, to benefit our shareholders, and the people in the communities where we live, where we work, where we operate. I firmly believe that the efforts of 2020 will position BlackRock to deliver value over the long term for all of our stakeholders. With that, let's open it up for questions.

Good morning, Alex.

Great. Good morning, Larry, good morning everyone, Happy New Year to you all. First question, I wanted to ask you guys around scale at BlackRock in relation to the margin guidance that you guys provided for 2021. I guess given the strong exit on the revenue front, this implies a pretty healthy pickup in spending. I know you talked about some specific areas like technology and market data, but can we maybe get a little more specificity on kind of what are the key areas where you expect to add into 2021? And again beyond that, how should we think about the ability of BlackRock to deliver positive operating leverage beyond 2021?

Thanks, Alex. It's Gary. Happy New Year. I'll start off and then let others join in. Our performance in 2020 highlights our strategic commitment to responsible investment in our business through various market cycles. We saw a margin improvement of 120 basis points over last year, driven by several unique factors that might differ next year. As we look ahead, we recognize that last year's margin benefited from record performance fees, a record in securities lending revenue, and lower core G&A expenses than anticipated. This year’s margin increase was likely higher than what we would typically expect. We are well-positioned to capitalize on the opportunities ahead, and we are committed to responsible and aggressive investment. Many have inquired about our plans for next year, particularly about whether we would channel some of our reduced core spending levels into profits. Our current view is that the opportunities we see in the industry suggest a unique chance to stay proactive and reinvest that money into the business. This will support additional investments in technology, market data, and other growth initiatives. We plan to invest significantly more next year by repurposing some of those resources. It's important to note that we did not complete all our investment plans this year; we implemented a hiring freeze in March and only began rehiring in late Q3, so we're catching up. We also aim for incremental growth in private markets, iShares, Aladdin, sustainability, stewardship, and our operations in China. In technology, we are making progress on our cloud migration and are identifying opportunities in tech infrastructure and safety improvements. With this in mind, we believe it’s the right time to increase our investment, and given the higher margin this year, we expect a more moderated margin outlook for 2021.

Hi, Glenn.

Hello there. How are you? Okay. So, if I look back on 2020, it's interesting, right? Because rates go to zero, and there's a lot of things at play, but you had really good fixed income flows, both active and passive, and that's continuing. I'm sure it is a big picture that goes into Larry's opening remarks. As people start thinking about higher rates and potential inflation on the outlook, how do you think asset allocations are going to change, particularly on the fixed income front?

I don't have a crystal ball. The forward curve indicates that interest rates may rise significantly, potentially reaching 180 for the ten-year. We believe that even at that level, the allocation will not change dramatically because liability rates are likely to remain longer, which will sustain the demand for equities. However, in terms of fixed income, we haven't seen much change in client preferences; they continue to show interest in products like SIO, a specialized fixed income product that typically isn't focused on duration. We expect an increase in global demand for global bonds as a strategy against a potential decline in the U.S. dollar. We are also noticing that emerging markets are beginning to exhibit interest as part of a macro trade, along with growing interest in private markets and private credit, where we are well positioned. Therefore, I don't anticipate a significant large-scale rebalancing away from core fixed income assets. On a positive note, if rates rise along the yield curve, it will strengthen the banking system and make lending more accessible. I view a rising yield curve as a positive indicator for the economy, which likely leads to improved equity valuations. Rob, do you want to add anything to that?

Yes. I think that demand is still going to outstrip supply. But I think, Glenn, the way we look at it is as people allocate to fixed income, they're going to allocate differently. And the fixed income iShares flows are going to benefit from the low-rate environment, as we've already started to see. And as people start to do this reallocation, this is why we've seen, as Larry mentioned in his opening remarks, over 100 new asset managers and asset owner clients come into fixed income but come in through iShares. And a good statistic is 80% of the top asset managers are now using fixed income ETFs. So we think there's still demand, but the demand is going to be shown differently as they come in, and we're very well positioned in our iShares business to take that money in fixed income.

Hey, Craig, Happy New Year.

Hey, good morning, Larry. Happy New Year, and hope you guys are all doing well. Actually is on scale. We've all witnessed the pickup in M&A activity in the asset management industry. And many CEOs have discussed the need for distribution scale. And since BlackRock is the largest asset manager in the world with the largest distribution platform globally, I just wanted to hear your perspective on BlackRock's unique distribution scale advantage. And also, do you think firms that have a trillion or 500 billion of AUM really need to buy their firms to improve their scale? And also hoping Gary can chime into just given his deep background in M&A?

So why don't you start on that one part and I'll finish the last part?

Sorry, I’m not on. So as we think about your first question regarding scale and its relevance to M&A, could you clarify what you mean by unique scale?

First question is on, talk about BlackRock's unique distribution scale advantage? And then, as you look at the industry, do you think other firms that are fairly large, but not the same size as BlackRock. Do they really need to buy other firms to improve their scale? And is that a real advantage for them?

I'm going to try to avoid commenting on what other firms should do. However, our competitive advantage is our global reach, best-in-class technology, risk management, and diverse investment capabilities across both active and passive strategies. We have been working for over a decade to identify and integrate these elements into a unique BlackRock culture, which we believe is essential for our success. We have a strong presence with over 16,000 employees, more than half of whom are based outside the Americas, allowing us to engage in meaningful investment discussions in local markets. While other competitors may attempt to replicate our unique capabilities, such as the Aladdin platform, we see our breadth of product, reach, and insight, supported by technology and risk management, as a distinctive advantage that is currently thriving. We consider this uniqueness significant, and while others could attempt to replicate it, it will take substantial time for them to reach our level.

Let me try to respond to the first part of the question. I believe our distribution platform has been buttressed quite a bit over the last five years has been a long-term commitment. We are providing a uniqueness as Gary suggested across the world in terms of providing that conversation that intersects both active and passive and risk analytics. No firm can do this at this moment. I believe the elevation of content by the wealth manager has been one of the giant changes too. As the wealth management industry has moved away from fee base to an advisory base, they've really elevated their ability to have deeper, broader conversations. And they're looking for a few partners who could work with them and build that out. And we are certainly kind of one of the go-to firms. We're helping that. And we're able to help them deliver that global insight and advice, and more importantly, the solutions that help them. So it is the combinations of having iShares interactive strategy. But now with the overlay of technology to customize portfolios. And today, the customization of portfolios and personalizing a portfolio is becoming more and more in need in the wealth management space. It is not about selling a bond fund or a stock fund anymore. It is not about buying a stock or a bond. It is about a holistic whole solution portfolio. And so, our uniqueness is about that and how we deliver it. Just as a response to the industry, the industry has been always designed around a specific product, a specific fund. And for the firms who only have a product or in one asset category, they have a difficult time to really respond to whole portfolio solutions. And I believe this customization, the personalization of whole portfolio solutions is becoming the driver, the driver in terms of most of the wealth management conversations. Do we need to do more acquisitions for distribution? Not in the United States, not in Europe. Could we do somewhere in another part of the world where we don't have a strong footprint? Sure. That is consistent with what I've said over the last three to five years. And importantly, what we are going to do like we announced today the Clarity AI minority interest. What we are trying to do is provide in this portfolio customization, also uniqueness and data and analytics to drive better decision making, which will ultimately drive better performance. And I think that is also the uniqueness of BlackRock and why we are so constructive on the opportunities we have working with wealth managers worldwide.

Hey, Rob, Happy New Year.

Hello everyone, Happy New Year. I hope you are all doing well. Larry, I have a regulatory question. It seems that after several years of silence, there is now increased discussion about reassessing asset managers in terms of their systemic risk. What are your thoughts on where this conversation is gaining momentum? Is it more prevalent in Europe or here? Your insight would be appreciated.

Great question. We’ve built BlackRock on the strong foundations of global capital markets. Over the years, we've greatly benefited from our belief in global capital markets and their expansion over the last two decades. The size of our footprint and the assets under management we oversee reflect our commitment to developing broad-scale capital markets. Interestingly, our size relative to global capital markets has remained nearly unchanged since 2009; back then, we represented under 2% of global markets, and today we’re just above 2%. As much as we’ve grown, global capital markets have also expanded, particularly the use of government debt to finance deficits, the equity markets for IPOs and new companies, and the remarkable growth of capital markets in regions like the Middle East and parts of Asia. We have welcomed this expansion. However, it’s crucial for regulators to maintain well-functioning capital markets to build a more resilient economy. We advocate for regulations worldwide that support this goal. It’s a common misconception that the asset management industry isn’t regulated. In fact, it is highly regulated; at BlackRock, we adhere to SEC, OCC, CFTC, and FINRA regulations, and we face regulatory scrutiny globally. While we are not a bank and thus not regulated by the Federal Reserve, we are overseen by many other regulators. The asset management industry remains fragmented, and we are open to discussions about its regulation. The idea that the asset management industry is unregulated is a myth, often perpetuated by bankers. Our $8.7 trillion in assets consists of our clients’ hard-earned savings and money, and we have contracts with each client. Many of our short-term funds can be liquidated within a day, while our institutional liquid portfolios allow for transactions over 30 days. The nature of long-term private assets depends on individual client contracts. As the world’s largest asset manager and a fiduciary for our clients, we aim for highly functional markets. In times when market oversight is essential, we have consistently supported measures that ensure market safety and soundness and will continue to do so in the future.

Hi, good morning. I'm curious your views on the outlook for tax managed investing in the aftermath of COVID. And the outlook for higher personal income and investment taxes in the U.S. and abroad. To what extent might demand here provide another catalyst for ETFs and direct indexing growth inside and outside the U.S. into the outlook for tax managed investing contributes your interest in Aperio?

Well, the answer is yes. But it comes under a broader picture and that is, we're seeing increased demand for what is called personalization and customization. And that includes tax managed, it also includes ESG, and includes factor preferences. And as mentioned before, wealth managers are looking to do more with fewer partners. So they want partners who can offer whole portfolio solutions. And that's why we are positioning ourselves to be the partner of choice. With our acquisition of Aperio, we are further enhancing our value proposition for whole portfolio SMAs across equity, fixed income, alpha factors, and index solutions. Because ultimately, we want to make it easy for wealth managers to access our investment strategies across funds, ETFs, SMAs, even models, and be able to construct more resilient risk aware portfolios using our technology. So we're seeing as a result of our investment in serving more and more wealth managers, we saw 185 billion of iShares close. We're seeing strong active flows, including inflows across active mutual funds, even as the industry saw outflows. And we're reaching out to more advisors with our advisor center and our partnership with investment. Now, on the self-indexing part of your question. Look, self-indexing certainly has some advantages. And the advantages are cost and flexibility. So we're exploring constantly self-indexing in areas where there aren't well defined indices. And that would be in smart beta, fixed income, factors, in ESG. And currently, we have six self-index ETFs. So we also continue to have great relationships with our index providers. And we believe there's often significant value in having a third party provider. And clients especially institutions, often value that brands and are benchmarked to those particular indices, as well the major index providers, they provide services more than just the brand. They provide research, IP tracking, corporate events. So, we're also seeing better price competition among the index providers and the sharing of IP. And I think you've also seen our recently announced collaboration with Morningstar focused on enhancing style investing for clients to better represent the size and style mandates in the U.S. equity market. So, a lot set, but a lot of that has to do with this customization, this personalization. And as you rightfully say, a lot of that is going to be focused on tax going forward, and we want to be positioned well for that.

Thank you, operator. Thank you all for joining this morning for your continued interest in BlackRock. BlackRock's 2020 results are a direct result of a steadfast commitment to serve our clients and putting their needs at the center of everything we do. We will continue to invest and innovate in the years to come so we can be better at helping millions of people to build up savings, to make investments easier and more affordable. We're going to continue to advance sustainability investment and contribute to a more resilient economy. All of that in my mind will be continuing to drive the success of BlackRock in 2021 and beyond. Everyone have a good start. Everyone, please feel safe. Everyone, please stay healthy. And everyone please get a vaccination. Thank you. Bye-bye now.