Q1 2020 Earnings Call
Good morning, My name is Amy and I'll be your conference facilitator today at this time I was I spoke of anyone Black Hawk incorporated first quarter I just want to earnings teleconference.
Justin and stays calls will include chairman and Chief Executive Officer, Mark do you think.
Robert that's the P. does Chief Financial Officer, Gary Shiffman, Chief operating officer, and head of Blackrock solutions public scoping global head of I shared and insects investments <unk> laundry and general Counsel. That's for Jade me all lines have been placed on me, but any background.
After the speaker's remarks, there will be a question and it's just curious if he would like to ask the question. During this fine the press Sars and another one on your telephone keypad. If he would like to withdraw your question. Please press. The pass me. Thank you Mr. needs you may begin to topic.
Thank you good morning, everyone I'm, Chris mean, the general Counsel 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 black box actual results may of course difficult for next season.
As you know Blackrock has filed reports with the FCC, which with some of the factors that may cause the results of Blackrock to differ materially from what we say today.
Blackrock assumes no duty and does not undertake healthy any forward looking statement.
So with that I'll turn it over to Larry.
Thank you Chris.
Good morning, everyone.
And thank you for joining the call.
I know this is a difficult time for many people so first and foremost.
You your families.
Brent your neighbors.
We're all staying healthy insane.
Before I begin and want to take a moment to express my gratitude.
Everyone at Black book.
For the men and women women on the front line of this crisis, the doctors and nurses and everyone working so hard to date.
But in their own help at risk.
Worker safety and health.
Our communities and tour countries.
Into all of you. Thank you.
As they wrote in my Chairman's letter to shareholders.
We're living and working and Unprecedent environment.
Just a few short months.
Cobot 19 outbreak.
Has transformed the world for all of Us as individuals.
The businesses small and large.
Great and higher industries.
Every government around the world.
Yes presented tremendous medical economic and human challenges there will be long lasting.
And we'll read Gerber rate for years to come.
Oh global markets were impacted by extreme volatility liquidity receded.
And an oil price war exasperated stress.
Swift actions by policymakers.
And several central banks represented the type of decisive Wisconsin.
Our needed.
Overcome this extreme market adversity.
There's been tremendous monetary policy to stabilize financial markets.
And we're beginning to see the type of fiscal policy that could stabilize our economies.
No one knows precisely how long these conditions will persist.
However, I expect the continued action taken by governments taken by Central Bank.
With careful design and coordination will help the economy recover.
And I believe that coming out of the crisis, we have an opportunity to accelerate towards the more sustainable world.
Through these challenging times.
The strength and resilience of Blackrocks business model has become even more apparent than ever before.
The investments that we've spoken to in many many quarterly updates over the long term to diversify our investment capabilities.
And to operate a unifying technology platform a lot and are differentiating us.
In this moment for clients.
For our shareholders.
And for employees.
We did that design or operating model, where this pandemic, where any bar or in almost any virtual work environment in mind.
But because of Blackrock strong culture.
And our long history connecting a global.
Organization.
On one technology platform.
Has enabled more than 95%.
Over 16000 employees, who work remotely come home.
While continuously delivering seamlessly.
For our clients.
The areas in which we strategically invested over the last few years.
Sure Yes.
Liquid alternatives.
Sustainable investment strategies and Aladdin.
Our all helping solve clients unique needs in this environment.
And continuing to deliver strong performance and growth.
Uh huh.
Momentum in 2019 continued into the first quarter and we saw 75 billion a net inflows in the first seven weeks of the year.
Despite market related outflows, including over $40 billion, a de risking by institutional clients and index strategies in the last five weeks or the quarter.
We ended the quarter with 35 billion, a net inflows driven by cash.
And liquid alternatives.
I sure sustainable and factory T S.
And our active equity platform.
Over the last month.
Blackrocks biggest priority has been focusing on the health and safety of our employees.
All their families.
Hi, focusing sit by focusing first on or employees, ensuring there well being and positioning is them with our technology.
Tools and the support they need.
Blackrock has been able to accomplish a tremendous amount.
These times, having a unified technology platform that connects US all digitally is more important than ever.
Our performance during the quarter would not have been possible without a unifying technology without the unifying risk management system and careful business continuity planning.
I'm incredibly proud on how Aladdin has enabled us to rebuild blackrock beyond its walls to deliver the operational really resilience.
Advice and solutions our clients need at this time.
Aladdin cautious record trade volume in recent weeks, even with a remote global workforce and has provided.
A transparent view, which is a risk in scenario analysis for the benefit of our asset management clients.
But not only as Aladdin proved to be a significant differentiator for Blackrock itself.
But it has enabled nearly 253rd party Aladdin clients other asset managers asset owners banks and insurance clients to also operate seamlessly during this time.
We've been hearing incredible positive feedback from the OLED and community about its resilience its benefits and so our clients. We're able to proceed just as strongly as Blackrock.
Rob Goldstein, Blackrocks, Chief operating officer, and head of Blackrock solutions will join US today will discuss in a few moments Blackrock organizational.
And technology strength during this time and also how a lot it is delivering for third party clients.
In addition to our technology certain products, especially I should have once again proved to be a critically important tools, providing liquidity and transparency to investors end markets.
As we have seen repeatedly in periods of market volatility investors, including many first time acid managers and institutional users turned to ice yours.
Incremental liquidity.
Market access as well as long term investments.
I sure generated 14 billion of net inflows in the most volatile quarter. We've experienced in recent history benefiting from a 44 billion of inflows in the first seven weeks of the year.
Our diverse product lineup across sustainable investments factors strategies and core equity continue to drive growth the sustainably Ts, bringing in $10 billion of net inflows alone the best quarter in its history.
Despite outflows from market driven fixed income and precision segment. These dts performed exactly.
As expected as client views into actively reposition portfolios.
Reduce risk during market stress.
As we invested in the growth of fixed thinking Bts Mehdi speculated on how these products would behave during green market shock and whether or not they could withstand waves of selling.
Having now been through a once in a generation market shock.
And market participants had noted that six thinking bts retested be odd to doubt and worked incredibly well.
We believe this will serve as a further accelerate.
For fixed it can be t. EPS growth going forward.
So lame Rob G Global head of Bts and index investments is with US today and will speak about how ice years' experience increased investor adoption.
Deliberate tighter bid ask spreads than any other eat Tia and underlying securities.
Provided incremental liquidity and price transparency, especially in fixed income for all markets and for all of the investors.
Because interest rates globally back to historic lows the investment that Blackrock continues to make the bill a diversified illiquid investment strategy and differentiated.
Global sourcing capability across are all true platform are benefiting our clients as they took to meet their long duration liabilities.
Blackrock raised a total a 7 billion of net inflows and commitments in illiquid alternatives this quarter, our third best quarter in history.
We also deployed $2 billion on behalf of our clients.
And closed several large client commitments in the midst of market volatility, including our third vintage global energy and power fund.
It's a third fund, which raised a total of $5 billion, surpassing the total assets in the first two capital raises.
[noise] investments we made in our active equity platform are also showing results.
We generated.
Fourth consecutive quarter of active equity inflows with $4 billion, even as the broad active equity mutual fund industry saw more than $100 billion of outflows during the first quarter.
We have invested four years interactive equity platform and better data analytics and technology in more informed risk taking.
Culture.
And <unk> and having global and global scale in reach.
You are seeing strong performance that it was 76% of are fundamental active equity.
It's it's above benchmark or peer medium for one year and I'm confident the business is well positioned.
To capture more client demand as clients reposition their portfolios in the coming months.
Throughout the recent market volatility what did during trend.
Has been the move to sustainable investing.
In addition to the $10 billion, a sustainable MTF inflows I've already mentioned.
We continue to see fraud and strong interest in active sustainable strategies, even as equity sold off more broadly.
In January Blackrock committed to be placing sustainability at the core of our approach as an investment manager in how we manage risk how we construct portfolios designed products and engage with companies.
And to be making sustainable investing accessible to more people.
These commitments remain a priority and we continue to make progress in executing on them.
The pandemic, we're experiencing now is furthering highlighting.
The value of sustainable portfolios.
We've seen sustainable portfolios deliver stronger performance than traditional portfolios during this period.
And we expect clients rebalancing in the current environment will include a substitution some traditional assets the sustainable wants as they see the potential for the long term benefits.
Blackrocks goal to be is to be a leader in a global leader in sustainable investing we believe the assets. We managed for clients in this category for each over a trillion dollars by the end of the decade.
We also saw strong quarter for a multi asset but for him, which also generated $4 billion net inflows.
Our global allocation franchise, a long term flagship product.
Now onto a Rick readers leadership significantly outperformed peers and stay true to three decade promise.
Providing upside return with limited downside capture.
Global allocation is now positioned in the top quintile of its peer group.
The one.
Three and five year period, respectively.
Blackrocks cash management platform generated a record $52 billion. It net inflows in the first quarter benefiting from a surge of industry flows into U.S. government funds over the past three weeks.
Our commitment to build scale on the in their cash management business.
And and extend the.
A rigorous risk management platform to every part of Blackrock is providing a key differentiator.
For our clients.
The strength of our results in the first quarter directly linked to our efforts to stay connected with clients throughout the crisis.
Investors globally are looking to Blackrock, even more insights force thought leadership on the economy and markets I'd geopolitics on asset allocation.
Our goal is to help clients navigate market volatility while also staying focused on the long term goals through.
Through virtual connectivity, we're having a richer conversation with clients than ever before about their whole portfolio.
And in many cases deepening our partnership with them.
Over the last three weeks Blackrock has connected with nearly 50000 clients.
Significantly Lipsig all historical records for client context.
VI has hosted does it cause reaching thousands of institutional investors in financial advisors.
And providing daily update email thousand more we have subscribed.
In the last week of March alone Blackrocks senior business leaders met virtually with approximately 100 Ceos CIO goes.
Executives public officials further amplifying.
Hundreds of outreach calls from our client facing team.
This connectivity.
Enables us to better understand the challenges of our clients are facing.
And a comprehensive platform of solutions have enabled us to help clients reallocate risk.
Clients rebalance.
Helping clients provide more liquidity.
Capturing opportunities in response to market moves.
Blackrock investment Institute B., I, our financial markets.
Advisory groups, EPAM 18, and our global public policy group has closely engaged with regulators.
Central bankers and other public officials that provide guidance on practical.
Targeted monetary and fiscal solutions in support of the global economy. During this time.
Blackrocks, if it made group, which advises financial an official institutions as well as well as other public and private capital markets participants has been awarded mandates to advise both in New York Federal Reserve Bank and the bank of Canada on programs designed to facilitate access.
Two capital for businesses that supports the economy.
We are honored to have been awarded these mandates and approaches assignments with great sense of responsibility.
Advisory work is built into the fabric of Blackrock.
Beginning as early as 1994, when we worked with general electric to unwind Kid pick up the body's mortgage.
Assets are ethane FM, a practice has adopted and evolved overtime working across in a way of mandates from prices oriented assignments to regulatory and sustainability frameworks.
Given the sensitive nature.
These assignments FM may as a segregated walled off business within Blackrock.
And operates behind a stringent.
Information barrier.
While still providing the benefits of Aladdin.
VI.
Blackrocks global scale.
And reach to our clients.
From a our most recent partnerships are a testament to the trust Weve earned over time.
And we will continue to work with others around the world to navigate during this difficult period.
[noise] truly extraordinary ties Blackrock remains focused on continuing to drive forward on our commitments to our clients shareholders and employees. This is required greater and more frequent connectivity than ever before with our board of directors, Our global Executive Committee and our broader employee base.
[music].
Since the start of the crisis, I am sending weekly strategic financial and operational updates to our board.
Our global leadership team is meeting every single day, rather weekly as we do during normal times, and we're hosting global firm wide town halls each week.
Ensure our people our partners are feeling updated.
And feeling connected.
Just as we are focused on strong corporate governance and communication across Blackrock, our investment stewardship team continues to engaged and communicate with companies through this time on behalf of our clients.
In addition to proxy season fast approaching.
The team is actively engaging with companies on topics like operational resiliency and how companies are taking care of their employees contributing to their community and living their purpose. These issues are more important than ever before.
Blackrock is helping our communities during this time a great need early in the first quarter before the full impact of the pandemic up ending global markets. We contributed our remaining 20% stake in Pennymac, where existing donor advising fund and we created a newly established Blackrock Foundation with a goal is supporting.
More inclusive and sustainable economy.
Since then through these charitable funds, we committed $50 million to immediate cobot 19 relief efforts. Our focus has been twofold supporting frontline medical workers for the true heroes in the crisis and supporting crude banks, which are on the frontline to helping address the financial hardship.
And so both social this allocation as the pandemic is for you to so many.
[noise] challenging environments have always been always offered Blackrock an opportunity to further differentiate ourselves.
With all our stakeholders and in the industry itself.
And I'm proud to say that is happening once again.
I believe blackrocks position has never been stronger.
We remain committed in growing and investing at Blackrock.
Our performance today reflects the investments we made.
In the resilience of our platform by supporting our people by building, our culture and forging deep partnerships where clients.
We have consistently and strategically invested for the long term to create the most diverse global asset management and technology service from in the World.
And we believe we're better positioned than any from the weather shocks.
These and help our clients.
Who the same.
Throughout the firm.
There have been countless examples of everyone living our purpose to help more people achieve financial well being and it could not be prouder or more grateful for the commitment a blackrocks people.
The world is facing a challenge that is truly unprecedented in our lifetimes.
Blackrock will continue to do everything we can to support our clients.
Societies, where we operate more broadly as we seek to overcome this.
To everyone on the call.
Well our shareholders.
Two blackrocks employees and our colleagues around the world.
Please stay safe and healthy.
With that I'd like to turn it over to Gary to talk about our financial results.
Thanks, Larry and good morning, everyone. Thank you for joining our earnings call and I hope everyone and their families are remaining safe and healthy.
Before I turn it over to Robin Salim I'll briefly review, our financial performance and business results for the first quarter of 2020, well our earnings results discloses, both GAAP and as adjusted financial results I'll be focusing primarily on our as adjusted results, which exclude the financial impact of our previously announced charitable contribution.
The investments we have continuously made over the years to build a scaled business model with diverse global investment capabilities best in class technology, and rigorous risk management have enabled us to differentiate ourselves and serve clients in a variety of market environments, our ability to deliver for clients employees and shareholders. During this glow.
Mobile crisis was absolutely sustained by that commitment.
As Larry mentioned Blackrock entered the year was incredibly strong momentum.
During the first seven weeks of the year total net inflows of approximately $75 billion, representing 7% organic asset and 9% organic base fee growth for paced by strength in our shares and Americas EMEA retail.
However, as the market reacted to the carbon 19 health crisis and its projected economic impact in late February.
Blackrock equity index declined approximately 25% by quarter end, and we saw institutional and retail clients de risk and seek liquidity.
Consistent with broader industry trends, we experienced outflows for the balance of the quarter.
Primarily an institutional index I shares and active fixed income, partially offset by strong inflows into our cash management franchise.
The aggregate Blackrock still generate approximately $35 billion of total net inflows during the quarter, representing 2% annualized organic asset growth. However, annualized organic base fee decay of approximately 1% reflected outflows from higher fee I shares precision exposures mix change phase.
Offering lower fee fixed income Etfs, and broad based redemptions and active fixed income strategies.
Blackrock has demonstrated environments like this create unique opportunities for growth as long as we have the discipline to realize them.
While we why we will not reduce our workforce. This year as a result of cobot 19, we have determined to freeze hiring in the current environment.
We remain committed act decisively as one Blackrock to focus our existing resources, where the impact will be greatest and too aggressively reallocate some challenging markets.
We intend to continue playing offense. So we are able to deliver differentiated organic growth once we emerge from this crisis.
First quarter revenue of $3.7 billion increased 11% year over year, while operating income of $1.3 billion was up 3% and reflected the impact of $84 million of costs associated with the successful closed end fund launch this past January.
Earnings per share of $6.60 were essentially flat compared to a year ago as higher operating income a lower effective tax rate and a lower diluted share count in the current quarter for more than offset by lower non operating income versus a year ago.
Our as adjusted tax rate for the first quarter was approximately 18% and included $64 million of discrete tax benefits, including benefits related to stock based compensation awards that best in the first quarter of each year.
We continue to estimate the 23% is it reasonable projected tax run rate for the remainder of 2020.
So the actual effective tax rate may differ as a consequence of nonrecurring or discreet items and issuance of additional guidance on previously enacted tax legislation.
Non operating results for the quarter reflected $17 million of net investment income as mark to market losses on unhedged seed capital investments and our minority stakes in investing that more than offset by $244 million unrealized gain related to our on foreign investment and capital, which completed a successful recur.
Capitalization during the first quarter.
First quarter base fees of $3.1 billion were up 9% year over year, primarily driven by organic growth of 4%. The net positive impact of market data and foreign exchange on average are you at an effective one more Dan the quarter and higher securities lending revenue, partially offset by strategic pricing changes certain products.
On an equivalent day count basis based fees were flat sequentially and our effective fee rate increased 0.2 basis points from the fourth quarter, reflecting strong fundraising activity and illiquid alternatives.
However, as a result of significant global market declines, including the impacts of divergent equity beta and FX related dollar appreciation, we entered the second quarter with an estimated ace fee run rate approximately 12% lower than our total base fees for the first quarter.
Performance fees were $41 million for the quarter up $15 million year over year, reflecting higher fees from liquid alternative products.
Recent market volatility has impacted the performance of certain long only in liquid alternative products and could result in reduced ability to earn performance fees for the remainder of 2020.
Quarterly technology services revenue increased 34% year over year, reflecting the impact of the front acquisition and continued growth in a lot.
Excluding the impact of different technology services revenue grew 13% year over year.
As Rob Goldstein will discuss in more detail, we continue to complete Aladdin implementations for new clients and overall demand remains strong for our full range of technology solution.
While we continue to target low to mid teens technology services revenue growth over the long term near term revenue growth may be impacted by extended sales cycles and longer implementation periods as clients work remotely.
Advisory and other revenue was $64 million was up $15 million year over year, primarily reflecting higher transition management assignments and increased equity method earnings related to our historical investment in Penny Matt.
Please note that serves as a result of the charitable contribution of our remaining 20% equity stake in Pennymac earlier. This quarter, we will no longer recognize noncash equity method income related to this investment going forward.
Total expense increased 15% year over year, driven by higher Gionee compensation indirect fund expense.
DNA expense was up $165 million year over year, reflecting $84 million closed end fund launch costs associated with the successful January close to $2.3 billion Blackrock Health Sciences Trust two.
We exclude impact of these product launch costs when reporting our as adjusted operating margin.
The increasing year over year GNS expense also reflected higher technology expense.
Moving certain onetime costs related to facilitating remote operations associated with cobot, 19, and higher professional services expense, partially offset by lower marketing and promotional expense.
Quarterly GNS expense also included approximately $60 million in contingent consideration fair value adjustments and costs related to certain legal matters, including after on capital LLC.
Sequentially DNA expense increased $38 million, largely driven by the aforementioned fund launch and legal costs, partially offset by seasonally lower marketing and promotional expense lower contingent consideration fair value adjustments and lower FX remeasurement expense.
Our first quarter results reflect a final fair value adjustment to our contingent payments related to the successful acquisition of first reserves and we would expect less variability in contingent consideration fair value adjustments going forward.
Employee compensation and benefit expense was up 7% year over year, reflecting higher based compensation, partially link higher headcount.
Sequentially comp and benefit expense was down 6%.
Rarely, reflecting lower incentive compensation, driven by lower operating income and performance fees, partially offset by higher seasonal payroll taxes and higher base compensation.
Direct fund expense was up $35 million or 14% year over year, primarily reflecting higher average index 81.
Our first quarter as adjusted operating margin of 41.7% was down 20 basis points from a year ago.
Primarily reflecting higher levels of noncore, GNS expense, including legal costs and contingent consideration fair value adjustments.
Larry stated earlier, our current priority is to ensure the health and safety of our employees and to maintain operational excellence to best serve clients in this environment.
We continually focusing on managing our entire discretionary expense base, and we will be prudent and reevaluating. Our overall level of spend once we're able to more confidently assess the longer term revenue impact of this crisis over the coming months.
As always we remain margin aware committed to optimizing organic growth in the most efficient way possible and laser focused on a long term strategy centered around I shares illiquid alternatives technology, and creating whole portfolio solutions.
We are well positioned for differentiated growth even during this crisis much as we were on we began the year.
Our capital management strategy remains to first invest in our business and then consistently returning excess cash to shareholders through a combination of dividends and share repurchases.
Blackrocks cash generation and liquidity position remains strong our debt to equity ratio is less than one times EBITDA with no debt maturities in the next 12 months and we continue to use our cash flow to seed and Coinvest new products.
As we've previously announced in late January we increased our quarterly cash dividend by 10% the $3.63 per share and have no plans to reduce our dividend during the remainder of the year.
We also repurchased $400 million worth of common shows in the first quarter at present based on our capital spending fans for the year and subject to market conditions, including the absolute and relative valuation of our stock price, we still anticipate repurchasing at least $300 billion of shares per quarter for the balance of the year insist.
And with our previous guidance in January.
Larry reference to Blackrock has recently helped thousands of conversations with clients, providing reassurance guidance and strategic advice in the midst of this crisis, our connectivity with clients and the commitments with solutions based approach is resonating more than ever before.
Total net inflows of $35 billion were led by cash management alternative and I shares, reflecting the positive impact at the investments we have consistently made to diversify and scale our globally integrated platform.
Cash management business generated a record $52 billion of net inflows as clients off the safety of our scale platform during the market slide.
And we saw a $3 billion into liquid alternative net inflows and raised an additional $4 billion and commitments across infrastructure private credit and secondary private equity.
Celine will cover in more detail I show saw record on exchange volume, serving as a critical investor tool for liquidity and price discovery and volatile markets and generated $14 billion of net inflows led by $11 billion for equity and $10 billion a sustainable ETF flows.
As expected I sure as highly liquid trading oriented precision exposures saw outflows in this market.
Performs as designed to help investors quickly and efficiently reallocate risk exposure in a volatile market.
Finally, a number of our active strategies continue to generate strong performance and positive flows active equity and multi asset strategies each generated $4 billion of net inflows respectively. During the quarter.
In summary, our first quarter results once again demonstrates the resilience of our platform.
While we're not immune to market headwinds and the impact those headwinds can have on our near term financial results. We remain confident that we will navigate this crisis as we have others and emerged better position for relative gross we intend to remain focused on investing in our highest growth priorities, while exercising prudent expense discipline to ensure we meet the critic.
We'll needs of our employees clients and shareholders.
The diversity of our platform and stability of our operating model position us to outperform in a variety of market environment and will enable us to generate differentiate or organic growth over the long term.
With that I'll turn it over to our Chief operating Officer, Rob Goldstein, who led the efforts to rebuild Blackrock beyond its four walls and ensure our operational capabilities remains resilient and best in class.
Thanks, Gary and just echoing wary and gallery, we are undoubtedly living through one of the most challenging and unusual tons in modern history and I hope that everyone is staying safe and healthy.
So I wanted to spend the next 10 minutes discussing how the collective we have Blackrock has been preparing for and adapting to this rapidly evolving and fluid situation and how Aladdin has played a key role in the business continuity and crisis management of both Blackrock as well as owners.
Lagging clients as many of you know since its founding 32 years ago. Blackrock has been built on a foundation of technology, a thesis that asset management is an information processing business.
It requires a highly efficient highly automated process to function.
This mindset, which is really exemplified by Aladdin and coupled with our one Blackwell culture has allowed us to spend in the past few weeks effectively transitioning Blackrock from a company operating in 91 offices in 40 countries around the world to an almost entirely remote workforce.
Effectively operating in 16000, plus home offices, all while continuing to deliver for our clients and importantly for each other against the backdrop of incredible market volatility and obviously social Strauss.
We have teams that have been planning for business interruption and disaster scenarios. The yields but plans are just plans until a real world prices comes along and a scenario of 95% of the company working from home and equity trading volumes being 65% higher.
Than we've ever experienced before which was what we experienced the week of March 16 was by no means the scenario that we had expected.
Well there was certainly some potholes in the first few days were incredibly proud of the way in which our teams have implemented our plan to protect our employees to deliver for clients and to ensure operational integrity.
We effectively build blacklock outside the walls of Blackrock and we'll use the Latin to provide the connective tissue.
The us business continuity is about ensuring that our employees have access to the resources they need to keep themselves in their loved ones safe in the crisis.
That we have the means to continue serving our clients and to continue to act as a fiduciary did them no matter, where we or they are physically located.
And our people have the tools to interact with each other.
In an entirely virtual worlds.
And importantly that allow them is equipped to operationally process record volumes and to provide transparency into portfolio risks in a rapidly changing highly volatile market for both Blackrock as well as our allied and clients the Latin community.
In summary, it's staying connected stay engaged with each other staying engaged with our clients and leveraging our platform in technology and supporting each other in this unprecedented times.
So, let's take a look at Wassa Blackrock outside the walls of Blackrock actually looks like.
And talk a bit more about how we down here.
As of March 31st we had over 95% of our global workforce of more than 16000 employees working from home.
In order to support this predominantly remote workforce, we relied on both technology and our overarching culture as affirm our one Blackrock culture. It Doesnt change in this model in fact, if anything it needs to be reinforced and maybe even stronger.
Unlike many financial institutions Blackrock operates as a technology company.
Since inception, 32 years ago, we live by this mindset with Aladdin at our core even before the Kuroda virus roughly 90% of our employees logged into our network remotely at some point over a typical 90 day period.
And we offer a number ways to securely connect to our network to modular a personal device or Blackrock laptop missed connectivity was optimize this connectivity was enhanced.
As part of our business continuity planning.
We also works to ensure that everyone across the firm had the appropriate technology to be able to do their jobs come home from ordering thousands a laptop sponsored though to building full work stations at home for groups of portfolio managers in traders.
This effort enabled us to remain fully operational and effective throughout this whole period and it's been steadily improving as we settle into this this new normal.
Interestingly, we have a culture that already Leverages video calls Symphony Checkouts really is the norm.
In fact for the past many years at least five years every employee in the term has had a camera on their work some enabling all internal calls to include video.
This has allowed daily stand ups hurdles team meetings talent holes. So only mine grade seamlessly to this virtual setting that we're living in.
With clients, we have focused on maintaining connectivity no matter, where they only are located clients look to blackrock, even more in times of market volatility and uncertainty.
So our ability to communicate with them to serve them have remained at the forefront of every decision we have made.
Thousands of our institutional retail public sector clients have attended virtual Blackrock events in the past few weeks and as Larry mentioned, we've been talking to our clients more than ever before.
We've also continued to prioritize providing physical and mental health resources toward our two are now largely remote workforce rolling out new or enhance programs to our employees, including telemedicine capabilities access to clinicians to answer urgent.
Corona partners questions through counselling sessions backup child care.
In my 26 years at the firm I don't believe there's ever been the time, we've communicated more to our clients and to our employees. I also don't believe there's ever been a time, where it's been more appreciated.
Our focus on service are focused on communication.
Obviously extends to allow them as well.
The 11 coin community has expressed great appreciation for the responsiveness and the proactive nature of our service teams.
And has said that this stability and resiliency of our platform has been absolutely essential to their own business continuity planning.
Without elevens automation of processes consistency of data and technical resiliency.
Transition to a work from home model would have been much more difficult.
To close the CEO of one of our clients in the recent article on their Kalona virus response quote previously manual processes have been swept away by aligning.
So this is always important.
But obviously it becomes even more important in this environment personally I can't imagine how challenging it must be to run a firm with a cobbled together infrastructure through this situation.
A lot in clients are also looking to us as a partner and a thought leader during these uncertain times.
One example of this was using a lot and to publish what we call a new market driven scenario a stress test based on the Corona environments. So all of our a lot in science in early February.
It's providing clients with a framework for considering the market implications of a global pandemic it allowed them to layer on their own views and ultimately stress test their portfolios on the lab.
Our modeling in analytics teams are constantly working to understand that model the impact of new governmental policies in programs. For example, how forbearance programs may impact prepayment speed and the risk of mortgage backed securities and then sharing those findings with our clients.
Capabilities and thought leadership likeness hormones focus our building lasting partnerships with clients.
Have led to incredibly strong relationships. These relationships coupled with the power of London have led to very high contract renewal rates and continued interest in doing more together for the Aladdin community.
I believe our client relationships will only get stronger as we navigate this new environment together.
During this time, we even hit a new Aladdin community milestone one I would have never anticipated.
With our first aligning client go lives while both organizations were in full business continuity mode, while everyone was working from home.
We've had seven total go lives in the past four weeks, including in countries like Italy and Spain.
We've also kicked off a number of new client implementations fully remotely it's being truly remarkable.
Latam was built to these times and were both crowd and also quite humbled by the feedback we've received from clients market shocks and market volatility just underscore the need for robust enterprise operating and risk management technology, and Aladdin is uniquely positioned to provide both.
To our clients growth will be driven by the need for more efficient streamlined operations the rise of outcome portfolio construction and the ever growing need for whole portfolio technology solutions.
Building Blackrock outside the walls of Blackrock.
And the resiliency of our platform and technology in response to the Corona virus has been one of the most remarkable projects and efforts I went to witness.
We are proven we could build Blackrock, one blackrock outside our walls.
This is a combined manifestation of our culture, our global platform, Aladdin lots and lots of planning lots and lots of hard work.
Really over many years.
So all now I'll pass it over to saline to discuss how clients have been using DTF sinise shares to invest in this unprecedented market.
Thanks, Rob and just to echo the sentiment of others I hope, everyone is safe and healthy and stays that way.
I'm going to spend the next 10 minutes just talking about what we'd seen this quarter through the lens of Ishares and they're really three points that I wanted to make first I'll give you a little bit of context on the quarter.
Second I will talk you through some of the most extreme tests to EPS and indexation, we've seen in our recent history and I wanted to show you how I shares performance excelled during that period and finally I wanted to give you some insight into how this is unlocking new sources of client demand and accelerating major trends, which is why we remain.
Optimistic about the medium term growth prospects for our shares.
So first we've seen two very distinct environments over the course of this quarter in which I sure has gathered 14 billion.
Flows across our product segments reminded us that I share is in the model it but has multiple product segments across core strategic and precision exposures.
The first half for the quarter saw 44 billion and flows across nearly all product segments as market turbulence head towards the end of February we saw $30 billion that outflows throughout the quarter concentrated mostly in our highly liquid flagship fixed income and a few precision market driven exposures.
Throughout the quarter, our core and strategic product lines, which are each about a third of our assures assets provided a solid 23 billion dollars' worth of flows and often very steady growth.
Core equities delivered $11 billion with its growth largely coming from the growth of model portfolios and buying home segments globally.
Our sustainable line raise 10 billion in the quarter, which puts us as the global market leader with 66% market share.
Our factory Tcfs raised nearly $2 billion, even as the industry saw outflows in fact of strategies.
And our fixed income Bts experienced high volatility during the high volatility of flows during the quarter ending roughly flat.
They fixed income market across active an index, which saw a record outflows of 178 billion engine in the U.S. Hello.
From a client and competitor lens, the first half of the quarter was spread across our wealth of institution clients. The outflows in the second part were largely led by institutions.
The movement to commission free platforms, which we saw in the last quarter of last year across our IEI and direct to the United States has continued to benefit TTF said I shares.
Monthly flows have increased especially from advisors with more investments that we're making to build our brand with individuals.
And finally, the decline in our global market flow.
Share in the quarter occurs largely in the last half and is attributed to three things outflows in our precision and market driven fixed income Etfs a segment that we haven't competitors don't.
Pull back in March amongst global institutional buyers across a range of at risk assets again to segment that we're in the most of our competitors aren't.
And finally switching behavior amongst competitors from their index funds to EPS.
But the real story of this quarter is not inflows, but in resilience and performance I shares as well as indexation and EPS as a category came under what are the most extreme tests in our history.
And I'm not just talking about market volatility, but also the need for liquidity for price discovery for functioning markets in the face of poor market wide circuit breakers for tens of billions of dollars of index Rebalances, an extraordinary markets and with those teams that blackrocks and our partners working from home.
The most important thing that happened this quarter was in the face of these extreme tests I shares function deficient Lee and provided a better way for investors to access markets through this turbulence. They have proved that they do what we said that they would do.
And let me just give you a four facts.
The first simply as usage when volatility surge investors increasingly use dts to allocate capital and transfer risk.
In the latter half of the quarter.
EPS averaged 37% of the tape versus 27% in 29 team.
The second fact is that true these market swings EPS provided a better way for investors to access markets.
Specifically in many instances it was cheaper to trade the DTF than it was to trade the basket of underlying securities.
While you do you have spreads have widened in line with the market. The spreads are the most frequently traded I shares those with 80 via of greater than 100 million are tighter than our competitors.
Third.
Extreme volatility in the equity market showcase the successful implementation of market structure improvements from the last five years to resume after trading halts.
Despite facing market wide circuit breakers on four distinct days in March.
Yes, and I shares resumed trading normally.
And finally as in prior high velocity market episodes, Ishares provided price discovery to the bond market.
EPS had been modernizing the bond market by contributing real time information about pricing and market conditions to take just one example on March 12, and especially volatile day.
The I sure is investment grade bonds, DTF L. QD treated almost 90000 times, while its top five holdings traded an average of 37 times.
Across multiple fixed income sub asset classes mortgages investment grade high yield even treasuries.
Sure GTF prices were leading indicators of actionable markets.
Now our teams are constantly marketing monitoring the market to ensure that our ice yours are performing as clients expect them to.
We are constantly surveilling, a few dozen quality metrics across several thousand EPS globally, but there are four metrics that you can use to assess the health and trading quality of ishares, especially in periods of volatility.
The first as usage.
Yes, as a percentage of equity or bond trading volumes as markets got more volatile more investors turned to EPS, especially high shares and this is a significant strategic advantage.
The second metric is trading costs relative to the underlying assets and how to ETF bid offer spreads compare to the underlying equity or bond portfolios I shares have proven to be more efficient than competitors and the market, which is why total cost matters more than just total expense ratio, especially for tactical allocators.
The third metric is price discovery.
Discounts and premium to NAV are one indicator, but they aren't decisive.
Sometimes the Ts is providing discovery and one way to determine if new TF is providing price discovery to markets is look to the underlying volume of trading in the F versus the volume of trading in the underlying securities markets themselves.
Not all EPS do this but I shares consistently does this better than competitors.
And finally, there is tracking.
This is something we are laser focused on not just an EPS, but across the entire indexing business the Blackrock.
For example flagship fixed income I shares track performance at just three basis points in the quarter well competitors tracked into double digits.
Volatility of are tracking was also lower than our peers over the course of this historically turbulent quarter, highlighting the efficiency with which we manage our products.
Now I shares performance under extreme conditions is unlocking new sources of client demand and expanding our opportunity set let me just give you color from tree accelerants that we're seeing that fuel our optimism for the medium and longer term.
The first stems from what we've been referencing throughout this call the growth of fixed income GTF usage and the modernization of the bond market itself.
Since February we have had hundreds of conversations and reach thousands of clients from pension funds to March wealth managers to asset managers to insurance companies about our fixed income Etfs.
In nearly every case when we took them through the facts and show them. How I sure has performed under extreme cases, they came away we reinsured.
Weve, even started to convert long term skeptics towards the end of the quarter. We saw first time buyers among significant asset managers insurance companies and pension funds globally deploying a few billions to start towards our fixed income Ishares line.
This is part of a bigger movement, it's one that Larry and Robin spoken about which is the modernization of the bond market and this latest extreme test is another proof points about how issues are becoming an essential technology in the fixed income market and when that market is under stress investors during the ushers even more.
Our conviction is even stronger today than fixed income EPS will be a two trillion dollar market over the next four years and the significant growth opportunity for Blackrock.
The second accelerant stems from the growth of model portfolios globally.
In times of volatility, we see more investors, especially in wealth management move to discretionary model portfolios. The reasons are straightforward their simpler cheaper more diversified and tend to perform better over the medium term.
Sure as benefits in two ways through the models that Blackrock managers and even more significantly through the models that third parties often our clients manage themselves were ishares plays a central role at the core and increasingly in factors and SG.
Last year growth in models accounted for about 30% of Ishares flows in the United States and we're seeing that growth accelerate Q1 was a record quarter for our managed models advisors.
Models are critical area of growth and we think it should account for half of my schurz growth over the medium term.
The third and final accelerant, it's sustainable Dts, which is we think is not only a major growth area, but one that is right for indexation.
Q1 was a record quarter for us and sustainably Ts a $10 billion. We now manage 40 billion across Etfs and index mutual funds, but these are just early days client demand has surprised us to the upside we're seeing nice years being bought as part of tax loss harvesting campaigns as core parts of asset allocation and model portable.
It is and its tactical exposures by institutional investors.
Ishares is leading the market in part because of product and education, but also commitment and an intention to focus on building out a global and diverse set of products that now numbers 100 across Etfs and index funds.
We expect our sustainably EPS are going to grow four or five x. over the next three to four years.
I Hope you better understand forces that are driving our flows this quarter, especially precision market driven segments and institutional clients in the diversity of the platform.
That doesn't make the next quarter the one after that any easier to predict even with the upswing that we've seen in the past couple of weeks.
But what is both predictable and stronger as a result of Q1 or two things.
The resiliency and performance of our shares in the face of the most extreme tests that we have faced in our history and the growth opportunities that these tests and the accelerants are driving.
As we looked at that medium to long term, our confidence in I shares and our prospects for double digit asset growth strong revenue growth and market leadership remained strong so with that I'd like to turn it back to Larry.
Thank you selling.
And I want to thank all of you for joining us this morning.
Hopefully you heard from hearing from Seleven, Rob I hope you've got a sense.
Of the depth of the leadership team at Blackrock beyond Bob can be too and myself.
I Hope you also found todays insights helpful and better understanding how Blackrock is helping our clients.
On our employees navigate this unprecedented environment and how our diverse business model provides us greater resiliency in times like this.
The strategic investments we've made over recent years in key areas for growth continues to deliver.
And we believe Blackrock is more differentiated.
In this environment than ever before.
I cannot be prouder.
How Blackrock 16000 employees have come together during this time to help one another and to ensure we're doing everything we can.
Behalf of all our clients worldwide.
With that let's open it up for questions.
At this time I would like to remind everyone in order to ask your question. Please press Star then the number one on your telephone keypad did you ask the question Pete feature phone off at the speaker setting and your your handset so point any potential feedback.
Limit yourself to one question. If you had a follow up question. Please reenter the queue. The parts are based on it to the path documenting roster.
Your first question comes from the line of Michael Cypress with Morgan Stanley Michael Your line is open.
Hi, Michael Great. Thanks, Hey, good morning, everyone.
Maybe just Larry in your shareholders letter you mentioned that one of the biggest changes for asset managers is around the use of technology and.
You had mentioned that asset managers will have to be as good at it is any tech firms I guess curious how you see the industry bridging the gap from where we are today to that aspiration all state of of as good as it has any tech from and what areas on the technology front are you at Blackrock, how focused on improving today.
Hi.
Mike I'm pleased to have Rob goes to in our head of technology to give you a much more precise answer that I can rob.
Okay. Thanks, Larry Thanks, Michael the.
It's an interesting question as I mentioned during my my comments earlier that since the beginning we've always thought on the asset management business as an information processing business, where you have enormous amounts of data that you need to effectively manage process and compiling away that it becomes akshay.
The bullet becomes trustworthy and people can make decisions about it and whats amazing is that even in this year 2020 with all of the technology innovation that has happened in the broad world did in our in our industry. The truth is asset management and the broader.
Our industry with which it lives and does not have a common language that is used across market participants and that's what we've been trying to accomplish and that's been our aspiration with regard to Aladdin, we actually have a strategy that we call Tech 2025 that has a few.
Basic pillars to it which is about this concept of building in enabling this whole portfolio ecosystem and having a lot in d. The language of portfolios in terms of doing that that ecosystem and world where focus is on bringing together both public and prime.
That markets.
Into one combined language and one combined platform.
We're extending aladdin to be a platform to not just be a system, but to be a platform and to be a language that effectively connect same with other important technologies within the broader ecosystem that we live with them and then lastly, I'd just say within Blackrock wearability folk.
Yes on data, how we use data, but also how we leverage new techniques, particularly techniques like artificial intelligence advanced data science to do more information processing to find more alpha signals within data in fact, what's interesting.
Is some of the capabilities that we had developed within our a high lab, which is something still.
During the households.
Some of those capabilities actually were quite important in terms of the scale that we achieved through this recent market volatility.
Your next question comes from the line as Craig Siegenthaler with Credit Suisse. Craig Your line is on them.
Thanks, Good morning.
I wanted to come back to the financial markets Advisory business.
Could you walk us through each of the government programs that you've already been assigned to and then also how should we think about the potential a lemon see opportunity for the firm.
Thanks, Craig Let me answer the first part and maybe I'll allow Gary to finish up the question.
As I mentioned that call.
We have built out if I may.
From the very beginning to the firm.
Actually our first revenues when we started the Perm was we didn't call. It estimate but it was an advisory assignment and then it really took hold as I think I said in in our call. It it's been part of our platform truly since 1994.
And over time, we've really successfully completed.
Are these crisis oriented mandates.
We have been working on regulatory assignments for financial institutions.
And now we're actually working with a number of institutions on an funny as GE risk in risk analytics and their strategy related to it. So it has been truly a component of Blackrock that over the last few years, we haven't really discussed.
Because it becomes much more notable during financial crisis like like it did in 2018 2012.
We don't we did that build this with the idea that we're going to we're going to be needed. During these crisis and we've built at the core to help our clients during.
Normal times and resiliency, but I don't think during crisis I don't think does any from the world is better prepared to be working on these truly critical assignments of designing programs for.
Testing, our our clients whether it is assistance in terms of.
Related to monetary policy the the in terms of how it is effectuated.
The procedures in the policies.
And this is something I'm very proud of.
It has been already noted that we won.
Rather large aside.
The Federal Reserve Bank of New York with Bank of Canada, and now the European Commission ideas G and we're having dialogue.
Well it's different.
Governments right now and so I do believe it's going to continue to be up opportunities for us.
It will continue to give us strong differentiation.
And I'd been I'm very proud of how resilient. This division is but importantly, how is helping our clients.
Hi, capturing all the information flow from Black box and helping design these effective programs with our clients and yet retaining the confidentiality.
All the information segregated segregated separated differentiated.
We are this is a very strong component of our fiduciary culture.
Financial aspects, Gary do you want to respond to that please.
Sure Larry So Craig good morning.
As Larry said, we're obviously very proud to be advising both in New York Fed and the bank, Canada on programs to support the economy.
I don't think it'll come as a major surprise to you that it's our policy not to comment on the terms of our relationships with individual clients. That's obviously up to our clients to determine whether they want to publicly disclose that information.
On our on our work with them, but I can offer you. The following from a pure income statement perspective any revenue related to these assignments is actually going to flow through our advisory and other revenue line item from a geography standpoint.
In terms of advisory flows in the first quarter you will note on our AUM schedules that we did note of $1.2 billion of advisory flows during the quarter on page four of our earnings release and those in fact were driven by management of assets link TD, The New York Fed assignment.
All public information regarding our mandate with the New York Fed will be available some is and some will become available on their website.
As it relates to the first.
The CMBS facility itself that that actually does have a and investment management agreement and a specific fee schedule on.
The website and you know that'll get fee rate of two basis points on the first 20 billion on a quarter basis points on the next 30 and no incremental revenue after 50 billion.
As it relates to the other two facilities the a the primary and the secondary market corporate credit facilities, the actual investment agreements and fees on those have not been published yet by the fed but there are on term sheets that broadly talk about.
Outlines of each of those on their website and that such time as agreements are.
Signed they will ultimately.
The spirit of transparency by the fed posted on their website.
In terms of I'd, just say the bank of Canada relationship as Larry mentioned FMC has been selected as an advisor on the design of a commercial paper purchase program to help support the flow of credit to the economy by leaving strains in there.
Key markets fans Cana is also retained to other.
Full one is an additional asset manager and one as a custodian and again all that information I would point you words their website for more detail.
Your next question comes from the line as Bill Katz with Citigroup.
Right.
Okay. Thanks for telling everyone. Good morning, everyone. Thank you for the comments and simply hope everyone is safe and healthy tool. This.
And then Mick concerns.
Larry.
And just sort of curious you had mentioned you've been content when it seems others close you've been in sort of contact with a lot of your clients throughout the quarter, particularly till the end of quarter.
Moving parts, but I'm sort of wondering if you're getting any sense of how allocation changes made shift here with the beyond the institutional side or the retail side and I was wondering if you get maybe answer the question to the prism of maybe asset allocation versus product allocation. Thank you.
Let me start with that related to the de risking risking.
Rob Kapito talk about this too because he is on that front line with us.
Obviously, we had vast de risking.
From February 21st to the end of the quarter.
And much of it was done using indexed products to go in and out of marketplaces.
Hi conversations have been very broad.
In terms of what how clients are going to start inching back into the marketplace. So we had a recent call.
In the month of April.
750 institutional clients.
And 75% of that group.
Express plans to actively take on more risks.
And by start beginning the by dips.
Well only 5%.
Express that they are taking risk off the table.
And we're seeing this across the board in our illiquid alternatives space, we are actually having deeper longer broader dialogue than ever before clients are looking to looking continued to look for that as we showed sustainability issues clients are just as interested today.
Well the underpinnings of of the global economy is related to covert team.
And so I would say.
Clients.
Broad de risking.
Or what do they get the foundation views.
Some of them will be.
Already entered the market.
Some are going to be waiting because they expect another debt.
And it really depends on the clients position.
We actually have some clients who are needed to sell.
Because of the decline in energy prices there are all many reasons.
We are you had not just the de risking but.
We have government to need cash flow and need to spend on that.
So that's also.
In my mind that growth.
As oil price, we're being driven down it obviously created.
In an environment, where those countries that have been benefiting rising energy prices have stabilized.
We're investing dollars and now they are they.
To support their economy, the they've done other things.
In terms of using some of their.
Fast savings to support their own economy.
We also expect to see.
Clients continue to.
Look at different equity strategies in fact, whatever one great client a black box.
Heard from us about opportunities and they sold a large component of their U.S. government bonds.
And bought a portfolio.
Conservative portfolio diverted stocks so so.
Selling government bonds and going to a higher yielding asset class with upside potential.
In terms of beta so they obviously went from one extreme government bonds too.
Two.
Not hyper growth equities, but equities that provide the foundation of higher income than what you could earn in bonds. So across the board. Let me wrap Wap continue to give you a little more textured color.
Yes, so we're in a unique position because of the diversity of the platform.
So we get to look at clients preferences as they evolve.
And what we did see was some outflows in active fixed income.
But then where people go we saw 52 billion of inflows into cash we saw a 4 billion into active equity and 4 billion into multi asset and 4 billion into liquid and illiquid alternatives. So a lot of clients look that were level.
Those were in interest rates.
And look to actually re risk and it was broken down more by institutional and retail certainly a lot of institutions. Some chose to de risk in that shows.
The build up in liquidity moving into cash.
When others realize valuation opportunities in equities, where at levels, which they had wished they were able to invest in amongst these declines so they entered.
On the retail side people were a bit concerned about credit.
And they were concerned about being in there right credits that represent companies that represent the new normal or the have better business models.
But one thing in the asset allocation, which I didn't expect and give Larry credit for calling this one was in this reallocation.
People use this to go into DSG oriented products or the structure their portfolio in a more SG oriented way and we saw that.
In the flows and reflected in our SG oriented products.
Which had extraordinary and close so that was one of the interesting aspects of this change in asset allocation.
Your next question comes from the line attaching data upon its usage Patrick Your line is open.
Hey, good morning.
A lot of investors have been growing that the fed purchasing F and in particular non investment grade GTF finfet, some sort of bail out for Blackrock in the in TTF industry more broadly what is your reaction to that do you think that FCB needed it or is it more of a quick way to backstop the underlying and finally do.
I think I shares flows.
Since then.
Where health meaningfully by that shift at the fed.
No I object to your the way you Q.
Framed it has a bailout.
I don't know where you're coming from without question.
I think its consulting.
There was.
All the issues around what we're doing with governments.
Is based on great practices.
There was never any questions about supporting one market are using tools.
But to get into the details of the answer after I responded tier bringing to the question, let me give the answer to saline.
Yeah look.
In terms of.
Investment grade and high yield flows.
Those who have continued to recover as those markets have continued to recover.
I think that.
He asked whether it's our investment grade Cts, our high yield Dts are part of those markets.
And so as clients have chosen to.
Add risk or come back into risk they've done those into investment grade and high yield.
Including accessing the underlying by market and the bond DTF that we and others represent.
Your next question comes from the line as Dan Fannon Mcafee, Dan Your line is open.
Thanks, Good morning, Gary I'm, asking you could you provide.
Some additional color around being margin aware as well as staying on the offensive and obviously, we heard the comments around still waiting to think about the duration of this market backdrop, but just curious as to what you're doing now and what potentially you could do if things don't recover from here.
Gary.
Sure Dan Good morning.
So.
Just looking back at the margin.
For the quarter or I think we mentioned it was down 20 basis points from a year ago, primarily due to higher DNA. So, let's let's put that in perspective first.
No DNA was up significantly 43% year over year versus an 11% increase in revenue.
That included about 155 million of what we would call noncore items for the quarter.
Think we've called out a bunch from but just to be clear. We have 84 million of fund launch costs, we had 35 million of certain legal costs.
25 million of our what we hope is kind of the last big engine fair value adjustment that was related to first reserve had some FX remeasurement and importantly, we had some incrementally higher technology costs in the quarter associated with business continuity planning.
So that 80% to that year over year increase was due to those noncore items and that actually impacted our margin by about 170 basis points for the quarter alone. If you exclude those noncore items, our DNA was up about 8%.
Which was about $30 million and again that was driven by higher technology expense and professional fees professional fees offset by lower TNT and and marketing spend.
So I think it's important just to kind of keep that in some.
Some perspective.
I think as we think about the rest of the year in terms of expense.
I would say kind of following.
Obviously, a significant amount of our expense is in fact, let's call. It variable I mean, 50% of our expense base is.
Amicable in the context of compensation, that's people and an incentive comp and we've got about 30% of our expense base that would be related to a U M type.
Hi drivers like direct fund expense and district, Shannon and then I would say of our DNA you know probably about half of that is is manageable. The remaining I mean, the biggest pieces there our marketing spend and our TV spend which will both clearly be lower.
And in the current environment.
But as I think we think about expense right now.
As Larry mentioned, our current priority is really to maintain the health and safety of our employees to ensure operational excellence to best serve our clients in this environment. I think we have shown repeatedly that we had pretty strong expense discipline in our prepared to manage the entire expense base and we will clearly be.
The prudent in reevaluating that once we actually have a better assessment of what the long term revenue implications of this crisis. Our we've been asked US now for five weeks I think last thing we want to do is to basically react to quickly for crisis that we don't yet know whether it will be.
Months four weeks four quarters.
And in the meantime, I think we're going to make sure we act decisively and we're going to focus resources.
And where.
Committed obviously not to reducing our workforce. This year as a result over 19, but we are going to slow down slowdown hiring I.
Thank you know in previous difficult and volatile markets I think you've seen us through our model or be able to grow organically and send margin.
We think it's incredibly important you continue playing offense, we've seen prime in time again firms who have cut back to quickly and then when things get back to normal there simply not ready to.
Basically take advantage of all the opportunities in front of them.
So we're going to continue to basically watch and monitor and as part of that.
You know I might say that we decided to postpone our investor day. This year due to current events, but we are going to plan to maintain regular dialogue with shareholders and the investment community over the coming months through these expanded earnings calls through a number of virtual events boosted by our business leaders and will definitely keep you up to.
Feed in terms of.
The details as a as they become more clear.
Your final question today comes from Ken Worthington JP Morgan Your line is open.
Hi, Ken I, I guess, hi, I. Thank you for the extended comments this quarter and thank you for squeezing me and.
We saw a huge moving cash in money market funds.
In the market sell off but regulators had to step in again to support money market funds. If regulators impose further restrictions on money market funds could this next round of rules, possibly kill off the money market fund structure or maybe just prime funds or to the financial markets really need this month.
The market fund structure for the keep though in commercial paper markets.
That's a great question, Ken let me give it to Rob Peter.
So I think the money market a business as an important business and of course as you clearly identify that's broken down into more of a treasury based and a prime based.
But for companies you know the short term debt that they borrow from investors through prime money market funds really do serve it as an important source of cash flow, which covers sometimes operations and and within that sometimes payroll and you.
I can imagine in an environment that we're going into.
This is a very important area for them to be able to raise cash so.
While the prime funds have changed obviously into into floating rate notes I think what's important than these funds is that.
There are sold to the right people on the right people understand that.
For us.
Just to keep in mind Prime funds really represent a 121 billion of the 594 billion that we have in our cash business.
And we're managing that flows into our prime funds and keeping liquidity liquidity above what I would consider appropriate risk levels.
And our two a seven guns and we've built liquidities and the in these funds and feel pretty good about our current position.
And when this crisis occurred we were very quick to raise significant liquidity early in the crisis, one due to our strong market position that we were able to access good secondary market liquidity.
But one is also from learning from the past.
So we wanted to stay well in excess of our regulatory liquidity thresholds through the entire month of March. There's also a lot of credit work that has to go into these tonight I don't think people on a rep.
I understand the amount of effort and time and work that goes into making sure you also.
Our buying the right product here and I know that there are several of our competitors that.
At this step in and support these funds, we did not need to step in to support our funds. So the fed is also made expansions the previously announced facilities, allowing the money market mutual fund liquidity facility to accept municipal variable rate demand notes and bank.
Cds as collateral.
And allowing the commercial paper funding facility to accept high quality tax exempt commercial paper as eligible securities and lowering.
Prices as well on the on the commercial paper so.
Look we think it's still an important funding source.
Will this particular crisis.
Bring more regulatory pressure it could but I think it would impact the prime funds first.
And that the other funds, which I still think are very important.
Not only for the issuers, but also for clients to maintain the cash positions.
Get some sort of the rate.
For that and be comfortable with that credit quality.
Hey, we think that we have reached the allotted time for questions that you think you have any closing remarks.
First of all thank you for joining us this morning.
And your continued interest in Blackrock.
Let me just state first I'm very honored by the trust.
That our clients.
But governments and communities have placed for Blackrock.
We approach it was a deep sense of responsibility.
We.
We are a fiduciary every.
Auction, we do work to do Sherry in terms of information, we're a fiduciary.
In terms of how policy executed.
And let me just say, we're committed to making sure.
But we're doing everything we can for our clients.
We are committed.
In making sure our advice is one is a fiduciary to governments.
And we will continue to build that presence and I do believe.
The results of our.
Working with many many government is the testimonial to the fiduciary.
Validation of the who and what we are.
I'm also incredibly proud.
In the way our organizations come together.
Guided by our longstanding principles.
And being true to our purpose to support each other.
In supporting our clients.
In supporting all the communities, where we operate.
During the time of great need.
I just want to emphasize more than ever before.
Hey, long term focus never been more critical for investors.
Well, that's taken Blackrock here over the last 32 years or ability to always focus on the long term.
And we will continue to invest we will continue to innovate in the years to come.
We will continue to build the best leadership team in financial services.
And we will continue to try to be the best source of stability.
In times of crisis.
We want to meet our clients' needs more than ever.
We want to make sure that the communities where we operate.
As a community of growth not contraction.
And more than ever before.
We need to fulfill our purpose.
Helping more people worldwide.
Experiencing.
Financial well being.
Trust.
And hope.
Hope for their future.
Hope for the future of their community.
Hope for the future of their children and their children's children.
And that's our purpose at Blackrock do that the work with communities.
To work with our clients.
And the whole dearly and tightly.
Our our employees so the feel safe.
And with that safety, they could continuously build that safety and hope to our clients.
Please everyone stay safe.
And have a wonderful quarter best we can in the second quarter. Thank you bye bye.
This concludes todays teleconference. You may now disconnect.
[music].