Q3 2019 Earnings Call
And I will be your conference hopefully theater today at this time I would like to welcome everyone to the block block incorporated first quarter 2019 or uniques teleconference.
Our hosts for today's call will be chairman and Chief Executive Officer, Lori B C.
Chief Financial Officer Gallery S. Shedlin.
Positive Robert ask Peter.
General Counsel Christopher Jamie.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, burble be a question and answer theory it.
If you would like to ask questions redefine heap Leach Xpress bar, that's the number one on your telephone God.
He would like to withdraw your question press the pound ski picky, but for me you may begin your conference.
Good morning, everyone I'm, Chris Me, the General Counsel bar.
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.
Call your attention to the fact that Blackrocks actual results we of course differ from these statements.
As you know Blackrock has filed reports with the FCC, which lists some of the factors that may cause the results.
To differ materially from what we see today.
Blackrock assumes no duty and does not undertake to update any forward looking statements.
With that I'll turn it over to Gary.
Thanks, Chris [noise] and good morning, everyone. It's my pleasure to present results for the third quarter of 2019.
Before I turn it over to Larry to offer your comments I'll review, our financial performance and business results, while our earnings release discloses, both GAAP and that's adjusted financial results I will be focusing primarily on our as adjusted results.
The third quarter was once again marked by significant market volatility associated with ongoing ongoing global trade tensions and geopolitical uncertainty around the world.
Well U.S. equities finished the quarter up 1% emerging market equities ended the quarter down 5% and the U.S. dollar continue to appreciate against the Euro and pound.
We have seen previous periods of market volatility industry flows slowed in the quarter clients continue to rebalance and de risk favoring fixed income and cash for equities, even within equities investors demonstrated caution shifting from momentum to value favoring hard dividend and low volatility funds.
Blackrocks business model, However continues to work as well as it ever house over the last 12 months, we've generated approximately $350 billion were 5% total organic growth.
Our fully integrated one Blackrock business model was purposely built to bring together the entire for to meet client needs in todays evolving ecosystem.
Our globally diverse investment in technology platform, including our risk management and portfolio construction tools is positioned to deliver not simply products, but comprehensive solutions to clients no matter the market environment.
We remain focused on thoughtfully investing in our business for the long term and capturing growth in areas of tires client demand. These include our shares, especially higher growth in higher fee segments like factors fixed income sustainable and Mega trend Dts illiquid alternatives and technology, where we continue to evolve labs multi asset analysts.
Rigs and portfolio construction capabilities.
These investments will position Blackrock to continue delivering higher and more consistent organic revenue growth across market cycles.
Blackrock generated $84 billion total net inflows into third quarter.
Or 5% annualized organic asset growth driven by continued momentum from our industry, leading fixed income and cash businesses.
Total annualized organic base fee growth of 3% reflected this mix shift toward lower fee products, but was also impacted by volatility driven outflows from higher fee market driven assures each yes in August in particular E M. Our flagship emerging market GTF $6 billion of outflows during the quarter.
Third quarter revenue of $3.7 billion increased 3% year over year, an operating income of $1.5 billion rose by 7%.
Earnings per share $7.15 were down 5% compared to a year ago. However, as higher operating income and a lower diluted share count were offset by lower non operating results and a higher effective tax rate in the current quarter.
Non operating results reflect the $7 million of net investment loss, primarily driven by the mark to market valuation of our minority stake in Envestnet.
Recall that non operating results in the year ago reflected a $40 million game attributable to the disposition of our equity interest in DSP.
Non operating results versus a year ago also reflected additional interest expense associated with Blackrocks mid April debt issuance to partially financed the front acquisition.
Our as adjusted tax rate for the third quarter was approximately 23% compared to 16% a year ago, which reflected $90 million of discrete benefits. We estimate 23% is a reasonable projected tax run rate for the fourth quarter of 2019, though the actual effective tax rate may differ as a consequence of nonrecurring or discreet items.
And the issuance of additional guidance on tax legislation.
Third quarter based fees of $3 billion were up 3% year over year.
Primarily driven by organic growth the positive impact of market beta in acquisitions, partially offset by the negative impacts of foreign exchange and strategic pricing investments and lower securities lending revenue.
Dollar appreciation over the last year had a negative 1% impact on our year over year base fee growth, while lower cash spreads led to a 6% year over year decline in securities lending revenue.
As previously mentioned Blackrocks differentiated platform has generated total organic asset growth one was $350 billion over the last 12 months, but divergent beta and mix change items that we can't control continued to impact or absolute level of base fee growth as compared to growth in average a web.
The S&P 500 was up 4% on average year over year. The Blackrock revenue weighted equity index was actually down 1% as markets linked to our higher fee equity products in Europe Asia Pacific the emerging markets and natural resources were flat to down 8%. In addition in the recent market environment clients preference.
This has favored lower risk assets and approximately 85% of organic growth over the last year has been in fixed income and cash which have relatively lower fees.
Classes.
While base fees were up 3% sequentially as a result of higher average age when and the effective one additional day in the quarter on an equivalent day count basis, our overall fee rate declines 0.4 basis points versus the second quarter, reflecting this ongoing impact of mix shift and divergent beta.
Performance fees of $121 million decreased $30 million year over year, reflecting lower fees from alternative and long only equity products.
Sequentially performance fees increased as result of a single European hedge fund lots annually in the third quarter and once again delivered strong performance over the last 12 months.
Quarterly technology services revenue increased 30% year over year, reflecting the impact of the front acquisition and continued growth in a lot.
Demand remains strong for a full range of technology solutions and digital distribution tools.
Total expense was up 1% year over year, primarily driven by higher compensation expense and expense linked to the front acquisition offset by lower Gionee and direct fund expense.
<unk> expense was down $29 million from a year ago, primarily due to lower transaction related and foreign exchange Remeasurement expense, partially offset by higher technology expense in the current quarter.
Sequentially DNA expense was down $86 million, primarily due to $59 million or product launch costs incurred in the second quarter and lower contingent consideration fair value adjustments and foreign exchange Remeasurement expense in the current corridor.
Consistent with prior years, our fourth quarter DNA spend will be seasonally higher than the first three quarters of the year.
At present after adjusting for the acquisition to be front, we anticipate that our full year core DNA spend will be generally in line with the full year guidance. We provided in January as a reminder, fourg in a expense excludes the impact of product launch costs contingent consideration fair value adjustments foreign exchange Remeasurement expense.
And transaction related fees.
Direct fund expense was down 4% year over year, and 5% sequentially. Despite higher average AUM due to a benefit recognized in the current quarter. We would expect direct fun expense to return to a more normalized level in the fourth quarter.
Intangible amortization expense was up $15 million year over year, reflecting a full quarter of intangible asset amortization related to the front acquisition.
Our third quarter as adjusted operating margin of 46% was up 180 basis points from year ago, reflecting significantly lower levels of noncore DNA expense in the current quarter.
Ongoing market volatility is contributing to increased beta divergence and client preference for fixed income and cash leading to a more challenging industry wide revenue capture environment.
However, blackrocks differentiated business model financial position and strategic alignment with high growth opportunities.
I was just to continue investing responsibly for the long term.
Capital Management strategy is specifically designed to support this invest invest first ideology and then return excess cash to shareholders through a combination of dividends and share repurchases. During the first quarter. We completed our targeted level of share repurchases for 2019, repurchasing 1.6 billion dollars' worth of common shares and.
As stated that we would be opportunistic with respect to repurchasing additional shares during the remainder of the year.
In line with that commitment, we repurchased an additional $100 million worth of common shares during the third quarter, taking advantage of attractive relative value offerings valuation opportunities that it rose during August market volatility.
Quarterly net inflows of $84 billion benefited from continued strong demand for ishares alternatives fixed income and cash, reflecting blackrocks unique ability to meet client needs in a variety of market environments.
Ishares GTS are unique and having a broadly diversified set of products that serve both long term buy and hold wealth investors and institutional asset owners as well as tactically oriented institutional investors, who value secondary market liquidity and the vibrant options ecosystem.
I shares net inflows of $42 billion, representing 8% annualized organic asset growth reflected continued momentum in fixed income factor and sustainably Ts. Each end market segment that has strong long term growth potential and a higher fee relative to blackrocks total fee rate.
Quarterly fixed income flows of $24 billion was driven by clients ongoing adoption of these products as a critical component of their portfolios.
Factor and sustainable EPS generated $13 billion of quarterly flows as investor demand for these exposures, especially in the us in Europe increased in the current.
Blackrock is the industry leader in all three of these fast growing categories.
Retail net inflows of $7 billion reflected broad based strength to active fixed income, partially offset by outflows from multi asset world allocation products.
Blackrocks US wealth advisory franchise continues to gain share and has seen year to date organic growth of 8% in alpha funds and SMS days, while the industry as a whole remains flat.
Institutional and retail demand for alternatives continued with $3.5 billion of net inflows into illiquid and liquid alternative strategies in the third quarter, driven by real estate private credit infrastructure and event driven hedge funds.
In addition, we have approximately $22 billion of committed capital to deploy for institutional clients in a variety of alternative strategies, representing a significant source of future base and performance fees.
Blackrocks institutional franchise generated approximately $4 billion of net inflows in the quarter positive institutional index flows driven by continued strengthen LDR more than offset approximately $4 billion of institutional active outflows in the quarter, which were primarily due to several clients specific active fixed income rig.
Options.
Net inflows into higher fee quantitative active equities and alternative strategies resulted in overall positive institution organic base fee growth for the quarter.
Finally, blackrocks cash management platform, so $32 billion of net inflows a post financial crisis record and cross the 500 billion AUM threshold as we continue to leverage scale for clients and deliver innovative digital distribution and risk management solutions through cash matrix and a lot.
Cash is a strategic asset class and blackrocks diverse cash management offerings, including Prime SG government and munis position us well to serve our clients cash needs and continued to grow our market share.
In summary, our third quarter results once again demonstrates the resilience of our globally diversified investment in technology platform to drive consistent and differentiated organic growth in a variety of market environments.
Our focus remains on delivering the solutions our clients.
To achieve their long term investment objectives, we can't control market volatility or the impact that may have on our revenue capture quarter to quarter, but we can ensure that we meet the needs of our clients by generating exceptional risk adjusted performance across all of our investment products, we continue to leverage our competitive positioning.
And the stability of our financial model to invest responsibly in high growth areas, such as GTS alternatives and technology that are critically important new clients and shareholders alike.
With that I'll turn it over to Larry.
Thanks, Gary Good morning, everyone and thank you for joining the call.
Well than ever before clients are looking for asset manager partners, who understands excuse me their whole portfolio and investment goals.
The one partners, who can provide insight in the context of a complex.
And changing investment landscape and rather than just sell products.
So looking for asset managers, who can deliver solutions that meet their financial objectives.
The third quarter, a number of macroeconomic and geopolitical events drove global market volatility.
And heightened investor uncertainty.
Blackrocks differentiated model continues to generate strong results.
I always looking ahead to recognizing unmet client needs, we're positioned blackrock with the diversity scale and global full portfolio perspective to help our clients navigate their investments in all market environments.
As Gary mentioned, we generated 84 billion of net total net inflows.
Showing strength in many areas across the combined active and index platforms.
We increased revenues by 3% and operating income by 7% year over year.
During the third quarter geopolitics were once again, a primary driver of markets impacting investor sentiment.
Global market index sold off at a tumultuous August as the U.S treasury yield curve inverted trade tensions escalated.
However markets reversed course in September and following a significant rotation out of momentum stocks and into value that had been building over the last year us markets achieve their greatest year to date gains in more than two decades and averaged 3% a higher sequentially in the third.
Quarter.
Meanwhile.
Even with a partial recovery in September .
Merging market indexes averaged 3% lower for the quarter.
A 6% divergence in these markets.
As fixed income.
The low end negative interest rate environment persists.
In an effort to extend the economic expansion, we're seeing unprecedent synchronize signs of intervention by central banks globally.
For the first time since the financial market, the fed announced that they would add liquidity into the system. After a brief spike in short term repo rates signal liquidity constraints or may be supply issues.
Meanwhile, in Europe , the SCB announced they would restart their asset purchase program to support their inflation targets.
The simultaneous rise in historical safe assets alongside riskier equities is a third quarter highlights.
Investors uncertainty about the global economy, the state of trade negotiations.
And the federal reserve as path of monetary easing.
This unprecedented environment.
And faster than any time since the financial crisis clients are transforming what they demand from asset managers, they demand transparency value convenience.
Higher returns and better outcomes.
They want to global perspective, it insight from partners They trust.
Blackrock is uniquely positioned to meet those client needs our combination of active index factors cash and alternatives.
Powered by our industry, leading portfolio construction and risk management technology enables us to take a whole portfolio approach is resonating with clients where than ever before.
The value of our differentiated model. We have built is increasing as we make the most of the Blackrock blackrocks capabilities from the asset management to risk analytics to E as GE solutions through partnerships and strategic advice.
One recent example of how we bring the best to Blackrock together for clients as our strategic partnership with Rabobank in the Netherlands, we're providing an innovative solution consisting of a custom set of funds that combine technology.
Data and investment in risk management tools through Aladdin that benefits the needs are rabobank clients for transparency and value.
We also recently published our eighth Global Insurance report, which includes Blackrocks analysis of key findings from our survey of 360 insurance companies in 25 countries, representing more than 16 trillion assets.
Insurers are increasingly focused on building portfolio resilient through diversification and better portfolio construction.
They want to optimize fixed income integrate private markets and increase sustainable investing seems which we see more broadly across our client base.
Blackrock has the insights that technology, the whole portfolio context to help our insurance clients understand practical actions that they could take to address their needs and we have the breadth and solutions that they are seeking.
Our ability to be a valued partner is a direct result of the investments. We've made to stay ahead of our clients' needs and innovate across our platform.
Our innovations across illiquid alternatives fixed income Bts factors sustainable investments cash and much more are driving our inflows.
Clients have entrusted us to manage $350 billion of new assets over the last 12 months alone representing 5% organic growth rates and.
And as clients Rerisk got to cash in the fixed income Blackrock will participate add benefit by virtue of our solution based approach.
We have even more opportunities for Blackrock going forward and continue to invest in the highest growth areas for the future I shares illiquid alternatives and technology.
And I shares we've doubled our assets from one trillion dollars five years ago to more than two trillion dollars today.
We believe the ETF industry itself can double over the next five years and we're investing to support the growth as the industry and maintain Blackrocks leadership.
The movement by independent financial advisors, and direct platforms in the us to eliminate transaction cost is increasing accessibility to.
To investing for more and more people and we believe will accelerate.
DTF adoption.
The elimination of various to investing is a good thing it democratizes access and enables more people to save invest and reach their long term financial objectives.
With a commission free moves.
We now have access to more clients than ever before.
And we remain confident that I share value proposition will continue to drive growth.
And Blackrock I shares market leadership.
I sure generated 42 billion of net inflows in the quarter led by strong growth in fixed income factors core and European Ats, we once again capture the number one market share in ETF flows globally.
In Europe , and the high growth catheter categories, including fixed income.
Factors and sustainable EPS.
I shares is not just one but rather several product segments.
Core.
Fixed income.
Factors sustainable.
Mega trends.
Ed precision Dts, each with a range of different ways that deferred clients are using them.
For the segments fixed income factors sustainable and Mega trends represent more than 600 billion of AUM today and have generated more than 20% annual organic asset growth on average over the last five years and having a higher average fee rate that blackrocks overall business.
Demand remains exceptionally strong.
For fixed income EPS were I shares as a market leader.
We captured 24 billion of net inflows in the quarter and a record 87 billion already year to date as client demand for fixed income exposures accelerated including from or from other asset managers.
Growth is coming from the adoption of VTS as replacement.
For individual bonds.
And individual sources of liquidity and transparency during times of markets dress.
Fixed income Ats have also been utilized by more and more fixed income investors for active purposes, using ats as a mechanism to get active returns.
We're also increasingly seeing clients adopt shorter duration fixed chicken bts as a substitute for cash in their portfolios and now with commission free this proposition is even stronger for cash substitutes.
Fixed income EPS, our technology that is accelerating and we'll definitely modernize the global bond market.
We are the industry leader in factors in our factor I shares have more than tripled and assets over the last five years from 44 billion to 161 billion in any one today, including over a 25% annual organic growth rate on average.
Year to date, we captured the number one share a factor flows surpassing NY ESO factor players as well, we see increase adoption in model portfolios and from our eyes as well clients look for a high value factor exposure that support resilience and defensive positioning in there.
Folios.
Demand is also coming from European clients looking for greater value than traditional active and better returns than traditional indexes.
Sustainable Ats, our strategic segment that while relatively small today at 40 billion in industry.
We believe can grow to $400 billion over the next decade as more clients look for strategies that target a measurable SG impact and financial returns.
I sure sustainably Ts represents $16 billion and assets up from a billion dollars five years ago.
We have generated more inflows and sustainably tested any other manager this year and have four out of out of the industry five largest sustainable EPS.
Hi demand for sustainable investment solutions extends well beyond our Ishares business.
Shifts in demography demographic and investment conviction are driving increased interest in sustainable invest investing globally and these forces are likely to accelerate.
Blackrock has committed to providing clients with choice across investment spectrum that aligns with their investment goals.
We currently manage over $65 billion in dedicated sustainable investment funds and additional $500 billion, an accounts that apply exclusionary screens.
We are integrating SG data is GE tools SG research insights to support our investment teams.
Every asset class. So all teams active and passive can incorporate material SG data into their process.
Well the idea of enhancing risk adjusted returns.
I spoken in the past about using technology to drive more Blackrocks revenues technology is a priority at a strategic differentiator for Blackrock and addition to generating direct technology revenues were increasingly using technology to enhance our results in our asset management business.
For example, we're transforming our cash management business by integrating technology into our business model, we're delivering cash matrix technology to help clients streamline their operations and quickly and efficiently make more informed decisions.
Five years ago cash management was 281 billion business $1 billion business.
Through technology organic growth and acquisition, we crossed 500 billion any you I'm in July this represents over a 200 basis points global market share increased from five years ago and is an important milestone as scale is a key value proposition for clients in the asset class and Chris.
Currently more and more Blackrock holistic client relationships are starting through a cash management assignment.
Illiquid alternatives is another area, where we're innovating to scale, our business expand our platform and integrate technology into a business model and momentum is increasing.
Including net inflows and commitments.
We raise over $5 billion in illiquid alternatives in the third quarter led by real assets and private credit.
We have raised a total of 46 billion in the last three years and nearly doubled our illiquid alternative platform the $92 billion in Asia.
And dry powder today.
Demand for private markets remain strong as clients seek longer duration higher returns.
And and a front further strengthens.
Our illiquid alternatives and we will support growth overtime.
I direct technology service revenues grew 30% year over year as more clients are looking for holistic and flexible technology solutions to operate their businesses more effectively and more efficiently.
For institutions.
A lot is an enterprise investment and risk management systems that power the entire investment process on one single platform.
What truly differentiates Blackrock is its user provider business model its ability to provide integrated multi asset capabilities throughout the entire investment process.
From sophisticated part of portfolio analytics, and construction to trade execution to compliance.
And to investment operations, the combination of the front with Aladdin further reinforces.
I'll add as value proposition as the most comprehensive investment up operating system in the world.
I will add it is also a powerful solution for customers and custodians, who service Eric assets through Aladdin provider.
As well.
For wealth managers, who need to offer transparency and convenience to their own clients through Aladdin wealth.
We now have 13 clients using Aladdin wealth and expect to further grow to come from our expansion into different wealth segments and markets around the world.
Aladdin is increasingly the language portfolio construction for wealth managers.
Understanding and managing risk is critical to.
To helping clients achieve the financial outcomes consistent with the intended objectives and risk preferences.
We're also seeing more and more clients use Aladdin wealth as a business in April the grow their business in a differentially way in the markets using it to have client centric portfolio based conversations that enhance their dialogue with their clients.
We're seeing strong momentum going forward as industry consolidation shifting product usage and regulations are increasing the need for a more holistic and flexible technology driven solutions at both institutions and wealth managers.
Blackrock is well positioned to capitalize on these trends and is committed to enhancing our technology capabilities to continue to meet our clients' needs and their future needs.
In a world, where the where the merits of globalization are being challenged by so many.
Blackrock has and will continue to be a global companies.
We have a global footprint with employees in over 30 countries with clients and more than 100.
Countries, and we are making a global impact working to improve issues such as retirement every country, where we operate.
This focus on using our expertise in high growth regions around the world positions Blackrock to both drive increased flows and fulfill blackrocks purpose of helping more and more people experienced financial well being.
We recently crossed the Twentyth anniversary of Blackrocks IPO.
On October 1st 1999, Blackrock listed on the New York Stock exchange for $14 a share.
Today, we're trading around $434 per share representing a 19% compounded annual growth rate for our shareholders.
As black rock as market changes and as our clients expect more from US we stay true to the innovative instincts that has defined Blackrock and enables a strong results we're seeing today.
We at Blackrock will continue to evolve we will continue to innovate.
We will continue to stay in front of our clients to meet our clients' needs, while reinforcing our key strategic differentiators.
Our global scale and reach a culture centered on client needs a global global voice heard around the world and a one blackrock approach to delivering for clients.
With that I'll open it up for questions.
At this time I would like to remind everyone in order to ask question.
Forward certainly number one on your telephone keypad.
You asked a question please speaker portfolio.
Speakers setting you sort of handsets to avoid any potential feedback.
Please limit yourself to one question. If you have a follow up please we entered into Q, we'll pause for just a moment to compile the Kimi software.
Your first question comes from Craig Siegenthaler with credit Suisse.
Your question.
Morning, Craig.
Hey, good morning, Larry.
I wanted to get your perspective on how the commission cuts over the last two weeks at the brokers will impact both distribution and also the overall quite competitive dynamics.
On these you assay broker platforms and also any impact as we think about either flows there the underlying economic still.
I'm going to get let Rob Kapito answer that question, but if you can see my face I'm smiling at the opportunities.
So Craig.
Commission free trends have been very positive for ice shares.
As Larry mentioned in his opening remarks, the elimination of barriers to investing.
Simply means that more and more investors are going to have the ability to use EPS.
And as the market leader this is got to be good for Blackrock.
More clients than ever before have access to the value and quality of Ishares funds.
Hopefully achieve their investment goals. So commission free trading is actually accelerating MTF flows in the two fastest growing use swelled channels. One is the us ri EA and that represents a five trillion dollar market that has grown at a 10% Tom pound.
Annual growth rate.
The other area is the us direct investors and they represent 7.5 trillion dollars in market that has grown at a 10% compound annual growth rate. So our share on the broker platform has expanded.
Since the commission free trends began and these segments are becoming a larger growth engine for Blackrock overall. So we're confident this will increase the number of investors using AI shares.
The essential part of their portfolios and with our focus on quality exposures at very good value. We think that we will continue to lead the industry.
As you know globalize shares generated 42 billion.
Net inflows, representing 8% annualized organic asset growth and these flows were driven by growth in fixed income core factor and sustainable EPS.
So just to reiterate because this is important.
Fixed income Etfs are a technology and they're accelerating the modernization of bond markets and had a very good quarter with 24 billion of net inflows led by treasuries mortgage backed and high yield corporate bond funds.
We are also seeing clients increasingly adapting shorter duration fixed income Etfs.
As a substitute for cash in their portfolios on the factor EPS. We saw 9 billion of net inflows as investors sort resilience in their portfolios and defensive positioning for example in or mid involve factory TF.
The sustainably EPS of 4 billion of net inflows as we see increasing client demand for achieving sustainable outcomes alongside financial returns and as Larry mentioned I shares captured that number one market share of global European core fixed income factor in sustainable ETF flows.
In the third quarter. So this is just another way that we think is going to increase interest and demand for EPS for our investors I'd just add one more thing Rob Rob said, it and as I said I think in my prepared talk.
Having commission free for low duration.
Mix.
Hey, great alternative to bank deposits.
A really good solution towards.
Money market funds.
And so a commission free in the fixed income realm cash in fixed income is a real opener for so many more participants.
Your next question, Kevin from Alex Blostein with Goldman Sachs. You May ask your question.
Great Hi, Larry Good morning, everyone.
Just building on the last question. So commission freed up trading accelerating growth into Cheops makes total sense I was hoping that you guys could comment on some of the economics.
That could come out of this in particular I was curious how the payment and potential savings really from.
Investments, maybe some some of the payments that you guys are currently making some of the platforms come through whether or not.
Thats a margin improvement dynamic for Blackrock or is that a scenario of additional spending for auto platforms are a lower management fees on some of the GMV. So maybe you could help us kind of flush out economics, a little better. Thanks. So let me let me just say one thing our relationship with fidelity because it kind of alluded to it is as strong as ever our relations way beyond.
EPS, it's about education is about working with their their platform.
And and so our relationship with.
Fidelitys unchanged, if thats, what youre trying to allude to.
Related to what we've.
Pay them and other things, we have a great relation with fidelity, where we have great opportunities looking forward with them to let Rob.
And we have other.
Distribution agreements.
They're not impacted by this it really just simply gives us more access and since we are already a very known commodity to these distribution groups. This really only enhances it and it really is not impacting.
The fees that we are charging on our EPS. This as a way for our clients to get in commission free that trade, which is very important as clients have moved more away from individual stock picking to portfolio construction and are using ats as a made.
Your tool in that portfolio construction, so getting into it is where they're saving the money is not really impacting our fees and maybe Gary wants to add to that I think you guys. Both got I don't think Theres. Any question. This is a great outcome for well branded scale DTF providers and we're going to continue.
Due to prosecute our strategy as we ever have.
But I don't see that there's any any impact on our pricing structure as it relates to EPS from from this move.
Your next question comes from the line and Mike Carrier with Bank of America. You May ask your question good morning, Michael.
Good morning, Larry.
Given the strength in alternative close this quarter I wanted to get your view on the outlook and how you're positioned to grow given rising allocations in the private markets, maybe some of the near term challenges, we're seeing private companies looking to go public.
Well I think what on one segment of private companies are having problems. So that's more growth oriented.
Technology companies that are having problems going public I don't I don't see the overall market is that.
Isn't much trouble, but related to Blackrock and alternatives.
As we said for a number of years, though alternatives as strategic priority for Blackrock, we're now up to $126 billion and liquid and illiquid strategies.
We managed now $71 billion of illiquid.
Across infrastructure real estate private credit and now LT PC.
We raise 5 billion.
Last quarter between commitments and.
And wins.
And we raised over the last three or $46 billion doubling our a on the category.
I also believe this is one of the fundamental reasons why we think technology can next.
Helped us in flows our acquisition any front, obviously, it's going to make the Aladdin system, even more robust, which I talked about.
But he also gives us a greater ability to penetrate in terms of illiquid alternative sales.
And so we truly believe there is a deeper connection between what we're doing in technology and in the illiquid alternatives and this is consistent with all our for the entire Blackrock.
Platform.
We have consistently differentiated ourselves in the fixed income universe for 30 odd years by having risk technology.
After the BG.
Transaction, we added all the sleeves of technology for equities.
And that became a bigger component of what we're doing and now through the front acquisition that really does help us.
Having a unique perspective at a unique ability to integrate what we're trying to do in terms of.
Illiquid alternatives, so you're correct in saying.
We're seeing more and more utilization of.
Alternatives as an asset category, we know many clients are moving from 10% to 12%. Some clients are moving the 12% to 18% in terms of allocation.
But there are also areas within the illiquid area that in some markets.
Valuations are fully priced too.
And so I don't think its.
It's a perfect scenario the area where are we believe in where we have a unique.
Emphasis on where I believe over the next five to 10 years is we're going to see an expansion that will be in the.
In the if as infrastructure side.
We believe this structure is going to be a bigger and bigger component of of both public and private like we did in Abu Dhabi.
But we see many many opportunities like we did in Mexico, a few years back.
So we believe that.
It can be first of the great client demand for the product.
And the key is finding the strong supply and I do believe more and more entities more and more players are looking to do this.
I would also just say things we are one of the leaders in renewable energy.
The cost now to put up solar fields.
It produces electricity at fort cheaper than natural gas.
As a leader in renewable energies is going to be a major component of our future we were.
One of our flows wasn't there in a renewable energy fund.
Where we just raise another big block, we're about to close the the for the final raise of that.
Fund so overall, it's a major component of.
How we are evolving our organization and we're very excited about.
The dialogue with we're happy with more clients.
Your next question comes from till Cat.
With Citi can be asking me bill.
Hi, everybody. Thank you for taking the questions.
So maybe a two part question if I could see I guess the first part of it is I just think about your spending outlook into the new year, you highlighted three different areas alternatives technology and passive where are you in respect of growth cycles for that so I think about a year on year increase.
Separately, Gary you mentioned that you stepped into the stock in.
Yes, we thought about relative value you sort of clarify when you say relative value. How you think about that what are the the multiples of the group to the market. So curious if you're a prison to what you are seeing that opportunity.
Sure Bill so in terms of your spending question.
Was it a question as we're thinking about the new years, how you're thinking about.
He can answer that okay sorry.
Okay, well I'll just assume it's a question. So yes, I mean, I think look we're obviously very mindful that we're in a.
A market environment that.
Makes predicting beta or counting on beta in the lower return world given where.
Volatility is giving were divergent beta is more fixed income markets are more complicated. So we are obviously more aware than ever.
That we need to basically continue to invest in.
Our major engines of growth maybe highlighted alternatives, we Heidelberg technology, we highlighted Dts. There is obviously much more beyond that but those are the three that are incredibly critical priorities for the year and we're going to seek to get as much.
Investment dollars into those businesses as we can going forward, which means given our commitment to continue to be margin aware that we're going to reallocate as aggressively as we tend to make sure that we are being mindful of both margin and long term value creation for for shareholders.
In terms of.
The second question, which was.
The second part of question.
The capital turn thank you.
In terms of capital return.
I think you mentioned a number of when we look at value.
Relative to our peers, we look at value relative to the market overall, we look at value relative to what we believe our growth prospects are and we're conscious constantly trying to basically see where we think it makes sense just given some of the.
The market goes down so asset manager mentality comes from where we think theres some valuation opportunities that make sense for our shareholders going forward. So we look at all three of those things.
Absolute and relative.
Your next question comes from Michael Fifer with Morgan Stanley . Please ask your question.
Hi, Mike Good morning.
Hey, Thanks for taking the question just wanted to dig in a little bit more on now low or negative rates with rates, so low and going lower across the world and negative rates in some parts I guess as we look out over the next couple of years, how do you see that impacting the asset management industry. Just in terms of how you're managing the business. How you structure portfolios. The impact is going have to.
And asset allocations as well and just maybe a second part related to the asset allocation. We've seen a lot of flows into fixed income, but with rates a low at what point do you see.
An influx of flows into equities just given returns rates are so what's the catalyst for equity inflows.
Let me just started off we built a model Blackrock.
Really too.
Be able to work with our clients and risk on environments risk off environments low vol High vol.
And the key is working on their long term solutions.
And all the ins and outs of markets, let's let's be clear it's on the margin for most investors, it's not big giant changes may reallocate, 456% of their portfolio and navigate around that the same time. So much of the flows are maybe they're outsourcing more and more of their portfolio.
So there may be looking forward they may be consolidating managers.
But I'd say the most important thing that.
We've designed the organization is to make sure that we have the diversity the platform. So we could be the best we can as a solution provider to our clients.
And at what the other thing that we're trying to drive and making sure that not one asset classes drives our business.
And so answering your question about low and negative interest rates.
It appears that they're going to be with us longer than I think we all expected at the beginning of year.
And with that I think client trends have been to move still to de risking until they have some sign as to where they should navigate at the same time clients on the margin are still as a de risk in some categories, they're looking to put some of that money to work.
In higher risk or.
Or less liquid strategies like illiquid alternatives to try to get as much returned as they possibly can as I said in.
Earlier conversation that.
There are some areas that look rich to us already in the private area, but for a lot of opportunities in other areas.
I don't see persistence and low rates being a major cause for four four clients looking for.
Lower fees in fact.
2019, I would not qualify as a year of.
Massive fee pressure, but when clients are looking to do big giant restructurings or looking to do a major reallocation of many managers into one manager there certainly looking forward for fee reductions if you're able to have.
A majority of those assets. So you offer that type of scale in there it doesn't really impact our margins as much.
But I don't I don't.
I don't know, but really matters for us and.
Where clients going when do they pivot back in the equities.
We're not seeing any indication at the moment that clients are asking more and more questions about when do they jump back in as I said I think we get.
Clients are heavily in equities now what we see every quarter is marginal changes in their portfolio allocation, it's not dramatic changes Rob doing I know, it's going to say in dovetailing.
Port that you did Michael that we read that was very good.
Our surveys show something very similar that clients are not adding into their equity portfolios that are using that portion to go into alternatives and it's getting back to the original barbell trade, where they are using short term fixed income so that.
They're keeping the risks the same and then allocating more to alternatives actually I think this is a benefit for us for two reasons one in portfolio construction they need to use the cheapest products and we are offering the passive in the EPS, which are growing in that way too.
We're also offering the alternatives, but three more importantly is sourcing assets.
And it's become very difficult for clients to source assets by themselves and therefore, they're putting out more money for people that can actually find that these particular assets, which dovetails into what Larry is saying into new asset classes being real assets like infrastructure and.
Others, which they would have a very difficult times sourcing of themselves. So it's actually fitting in.
To the strategy that we have both having passive and lower priced product and now offering the higher price source assets, whether it be private credit, which you saw grew dramatically last quarter here and the real asset and other alternatives, which we agree with you.
Are going to continue to grow.
Your next question chemists from Patrick Patrick with upside in its reasons, we ask your question.
Good morning.
Good morning, guys.
Could you dig in a bit more on the client specific institutional bond outflows against what still looks like pretty robust flows broadly and through that lens are you still seeing a big institutional mandates pipeline I guess outsourcing the bond management capability like we talked about last quarter.
Sure Patrick it's Gary so.
Again, if you think about some of the trends that we've had we've talked about during the year I think we've seen broad based strong performance and flows in our active fixed income business Thats come from a combination of some of the market environment that we've talked about but also.
Really strong performance across the platform candidly.
If you recall last quarter, we called out a number of very significant.
Large strategic client wins, and we actually had about $65 billion of positive flows in the second quarter.
This quarter, we had a couple of clients that went the other way.
And we had I think in the I read about $7 billion.
Outflows in the quarter again, I would call those more client specific lumpy redemptions.
We're it's hard to look at this in any three month period of time I think more broadly you need to look at the longer term trend and on a trailing 12 month basis.
We're running right now at about $55 billion of active fixed income inflows, which is representative of about a 7%.
Organic.
Organic asset growth rate, so I think.
We will have timing issues, but the the.
Clear trend here is very positive in terms of strategic positioning of this of this business.
Your final question Kevin from.
Ken Worthington with JP Morgan you May ask your question.
Hey, Ken Hi, Good morning. Thank you for squeezing me in on one follow up on the earlier questions on E brokerage and do you think fee move to zero commissions and he brokerage might impact pricing in the wealth management industry more broadly either on full service brokerage to advisory were pricing seems to have been pretty resilient.
Thus far and if so are there opportunities for Blackrock to adjust its approach to distribution.
In the wealth management industry.
You highlight or is it.
Yep.
Cash cash EPS and any brokerage are there similar examples sort of for change in wealth management. Thank you.
No question the resiliency of the overall fees for wealth management has been is pretty inelastic so far.
We are start were started to see some of the brokers charge at much lower fees than the traditional wealth management platforms in terms of the overall.
Advisory fee, but unquestionably when when when commissions are free.
The investor is going to have to make a choice.
It worth are they the value proposition of having that advice worthwhile versus having a commission fee relationship.
Every.
Clients going out to make that assertion.
But but I do believe.
Like we've seen in Dts, we've seen now in the brokerage.
There is more and more fee pressure across different segments of.
Financial services.
Quite frankly through technology distribution.
Is a better connection to so I believe were.
Where we are going to benefit.
With the evolution, what's going on in wealth, though.
Is no.
His models and portfolio construction.
And I do believe a portion of that is going to be.
Factors and.
As Jay I think that those will be the added.
Products like we said, how cash and short term duration bonds will be.
We'll be lifted by that but we also believe the utilization.
Models and portfolio construction is going to be a major component of that value proposition.
For advice and through that advice, we are absolutely confident that factors and he is GE will play a larger role.
And it will accelerate adaption of those products.
And gentlemen, we have reached the allotted time for questions Mr. spring.
Any closing remarks.
I would just like to thank all of you for joining this morning and for your great questions and your continued interest in Blackrock.
Our third quarter results are directly linked to our deliberate investments we've made.
Over time.
But more importantly, our results speak loudly about the deep partnerships were making globally.
Our clients I said, it time and time again clients are looking for solutions, they're not looking for asset manager, who is talking about a product clients are looking for asset managers, who are helping them with their purpose not the asset managers purpose.
The client is looking for for organizations that can help them.
And risk off periods.
In periods of risk on.
And I believe that if you look at our 350 billion a flows over the last 12 months our model is working.
And we're continuing to be excited about the opportunities we have for Blackrock in the future.
Thank you.
This concludes todays teleconference. You may now disconnect.