Q2 2020 BlackRock Inc Earnings Call
At this time I would like to welcome everyone to the Blackrock incorporated second quarter 2020 earnings teleconference.
Our host for today's call will be chairman and Chief Executive Officer, Laurence do you think.
Chief Financial Officer, Gary S. Shedlin.
President Robert as computer and General Counsel, Christopher J. made.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer period.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If he would like to withdraw your question. Please press the pound cake.
Thank you Mr. made you may begin your conference.
Thank you.
Good morning, everyone.
Just need the general counsel at 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 me statement.
As you know Blackrock has probably reports with the FCC, which the some of the factors that may cause the results of Blackrock could differ materially from what we see today.
Blackrock assumes no duty and does not undertake update any forward looking statements.
So with that I'll turn it over to Gary.
Thank you, Chris and good morning, everyone. It's my pleasure to present results for the second quarter 2020.
I hope everyone and their families are remaining safe and healthy in the current environment.
Before I turn it over to Larry to offer his comments I'll review, our financial performance and business results, while our earnings release discloses, both GAAP and adjusted financial results I will be focusing primarily on as adjusted results.
Blackrocks ability to deliver for clients employees the communities in which we operate and our shareholders no matter. The market environment is a testament to the resilience of our differentiated business model, which has been purposely built for the mindset of consistently investing for the long term.
Our performance throughout the Cobot 19 crisis, including the strength of de second quarter results is a direct result of the scale business model supported by diverse global investment capabilities best in class technology and rigorous risk management.
He portfolio approach is fostering deeper partnerships and now more than ever clients want to hear from Blackrock.
Blackrock generated $100 billion of tone that flows in the second quarter, reflecting 6% annualized organic asset growth and 10% organic base fee grows as clients read risk and once again turned to Blackrock for solutions oriented advice to meet their long term investment needs.
Organic growth reflected record flows into our ishares fixed income meteorites and active equity our fifth consecutive quarter. A positive flows in this product category and continued leadership in cash management solutions momentum also continued and sustainable strategies and illiquid alternatives.
Second quarter revenue of $3.6 billion increased 4% year over year.
An operating income of $1.4 billion rose by 10%.
Earnings per share of $7.85 was up 22 per cent compared to a year ago also reflecting higher non operating income lower effective tax rate and a lower diluted share count in the current quarter.
Non operating results for the quarter included $210 million of net investment income driven primarily by mark to market gains on unhedged seed capital investments and our minority stake in Envestnet and also reflected incremental interest expense associated with the successful pre refinancing of our May 2020.
One debt maturity.
Our as adjusted tax rate for the second quarter was approximately 23%. We continue to estimate the 23% is a reasonable projected tax 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 let just.
Relation.
Second quarter based fees of $3 billion were up 2% year over year, primarily driven by organic growth and higher securities lending revenue, partially offset by the negative impact of equity beta and foreign exchange movements on average at U.M. and strategic pricing changes to certain products.
Securities lending revenue increased 40% year over year, and 33% sequentially, primarily driven by higher average on loan balances. It's hedge fund leverage recovered from March lows and higher cash spreads.
Sequentially based fees were down 3%, despite higher securities lending revenue in positive organic growth in the quarter due to significant impact of first quarter global market declines and foreign exchange movements on our second quarter entry weight and average anyway.
Impact of negative divergent beta was also the primary reason, we saw a decline of 22 basis points sequentially and our second quarter effective fee rate.
Performance fees of $112 million increased 75% from a year ago, reflecting higher revenue from alternative and long only equity products. Since the end of the first quarter. We've seen strong performance from certain single strategy hedge funds, which better positions us to generate performance fees in the second half of the year.
Technology services revenue increased 17% year over year, reflecting continued momentum in Latin and the impact of the front acquisition, which closed in may of last year since acquiring the front, we've executed on our integration plan and feedback from current and prospective clients as well as our own alternatives team has been overwhelmingly part.
Yes.
We remain committed to low to mid teens growth in technology services revenue over the long term.
Driven by new clients deeper relationships with existing clients and expansion of the Latins functionality, the operational and financial impact of this crisis underscore more than ever the need for robust enterprise operating and risk management technology solutions. However, as mentioned last quarter and despite successfully implementing over 18.
Latin go lives since the pandemic began near term revenue growth may be impacted by extended sales in contracting cycles in the current environment.
Advisory and other revenue of $39 million was down $25 million sequentially, primarily reflecting the absence of Pennymac equity method earnings following the charitable contribution of our remaining equity stake in the first quarter as well as lower transition management assignments.
Total expense was essentially flat year over year, driven in part by higher compensation and lower GNS expense employee compensation and benefit expense was up 6% year over year, reflecting higher base fee and incentive compensation driven in part by higher performance fees.
Gionee expense was down 82 million year over year and $165 million sequentially.
Generally due to significant amounts of non core DNA expense, including contingent consideration fair value adjustments foreign exchange Remeasurement and product launch deal and legal costs in prior periods.
Second quarter, DNA expense of $388 million, which included $12 million related to a fixed asset impairment and several million dollars of incremental costs associated with cobot 19 also reflected meaningfully lower team the expense versus pre pandemic levels.
In January we communicated an expectation for <unk> for an approximately 5% increase in 2020 core DNA expense versus comparable 2019 levels driven by continued investment in technology and market data, including sustainability initiatives and the full year impact of the front acquisition.
Present, given reduced levels of team the in the current environment, We would expect core DNA expense for the year to be closer to 2% higher than comparable 2019 levels.
Our second quarter as adjusted operating margin of 43.7% was up 60 basis points from a year ago, primarily reflecting lower gene a expense in the current quarter.
We remain margin aware and committed to optimize inorganic growth in the most efficient way possible. Our long term strategic growth plan continues to be focused on ice shares illiquid alternatives and technology as well as driving sustainable investing in creating whole portfolio solutions as you will hear more from Larry we have never been better better position.
To deliver for clients and to continue generating differentiated organic growth with that in mind, we expect to restart selective hiring in the second half of this year.
Our capital management strategy remains first to invest in our business and then return excess cash to shareholders through a combination of dividends and share repurchases. During our first quarter earnings call, we reaffirmed commitments to both our dividend and share repurchase plans for the year.
In late April we completed the debt issuance to increase liquidity in the current environment take advantage of historically low interest rates and pre refinance our 750 million dollar for the quarter percent notes due may 2021.
We successfully issued $1.25 billion of new tenure notes with a 1.9% coupon, which was the lowest U.S. dollar coupon Blackrocks deadstock and the second lowest tenure coupon ever from a financial issuer.
In May PNC successfully monetize its entire 22% position and Blackrock to a secondary stock offering, culminating a 25 year partnership with our firm.
This transaction effectively completes blackrocks evolution to a 100% publicly held company and we are humbled by the commitment of many of our largest and longest tenured shareholders, who participated in the offering and welcome a number of significant new investors to our company.
In connection with the secondary sale Blackrock repurchased $1.1 billion of its shares directly from PNC at a price of $415 per share.
Total we've now repurchased 1.5 billion dollars' worth of common shares during 2020, completing our targeted level of share repurchases for the year, but will remain opportunistic should attractive relative valuation opportunities arise.
Over the past 15 weeks Blackrock has been more connected declines than ever before offering differentiated advice and solutions that are unique to our globally integrated and scaled investment in technology platform.
Organic growth of $100 billion in the second quarter suggests that these clients want to hear from less now more than ever.
I sure is net inflows of $51 billion, representing 11% annualized organic asset growth and 13% annualized organic base fee growth reflected continued growth in fixed income and sustainable EFS, partially offset by outflows from precision international equity exposures as institutions continue to use these instruments.
For tactical allocation decisions.
Year to date I shares net inflows are now in line with a year ago. Despite a more challenging first quarter led by strong growth in the second quarter. Many of the trends that favor the growth of Bcfs have been further capitalize as a result of recent market disruption and coupled with the performance and resilience of our shares. During this period has strengthened our conviction in the overall growth.
Outlook for EPS.
Ishares fixed income Etfs generated record quarterly net inflows of $57 billion in the second quarter, driven by renewed investor appetite for fixed income and acceleration in long term secular growth trends and even stronger investor confidence in fixed income Etfs following their strong performance midmarket stress earlier this year.
Momentum in sustainable I sure as also continued with $8 billion of net inflows in the second quarter.
Ishares remains committed to its goal of increasing investor access to sustainable investing through EPS and we now lead the market globally in this high growth strategic product category.
Retail net inflows of $16 billion, representing 11% annualized organic asset growth were positive in both the U.S. and internationally inflows were led by high yield bond active equity and event driven liquid alternatives funds.
Institutional net outflows of $5 billion reflected approximately $3 billion of active inflows, primarily driven by fixed income lightpath target date funds OCI Io systematic active equity and illiquid alternative strategies offset by nearly $8 billion that index outflows primarily in fixed income.
Institutional and retail demand for alternatives continued in the second quarter with approximately $3 billion of net inflows across liquid and illiquid strategies driven by infrastructure private equity solutions and our event driven hedge fund. We currently have approximately $24 billion of committed capital to deploy for institutional client.
Once in a variety of alternative strategies, representing a significant source of future base and performance fees.
Blackrocks cash management platform across $600 billion, a bit U.M. during the quarter driven by $24 billion of net inflows a significant portion of that growth was driven by corporate clients, who opted to reinforce balance sheets and strengthened liquidity in the current environment and we also witnessed strong flows back into institutional prime funds as growth.
Yields have remained above relevant thresholds, we have not waived fees on flagship government funds. Today. However, we expect potential fee waivers may be implemented during the second half of the year.
Finally second quarter advisory net inflows of $14 billion.
We're primarily linked to asset purchases managed by our from financial markets Advisory.
Revenue linked to these assignments is primarily reflected in the advisory and other revenue line item of our income statement.
Blackrock second quarter results once again demonstrates the resilience of our platform.
Underscore the importance of our deep longstanding partnerships with clients and highlight the value of investments we've made over time.
The diversification and breadth of our business positions us to serve stakeholders in a variety of environments and to continue playing offense. So we're able to deliver for clients employees and shareholders. Both during and after this crisis with that I'll turn it over to learn.
Thank you Gary.
Good morning, everyone and thank you for joining the call.
I know this continues to be a difficult time for many people. So first and foremost I hope you all are staying healthy and say.
Our clients are turning to blackrock more than ever so they face increasingly uncertainty.
About the future.
Pensions many of them already on underfunded are having an easy or even harder time meeting their liabilities and a persistent low rate environment.
Insurers are dealing with the dual impact of a sharp increase in payouts and declining asset values.
Individuals are becoming even more dependent on the retirement savings, which are all the more challenging.
To build in this environment.
People are people have now worked for months at home.
Also maintaining distance from their friends and loved ones.
This prolonged isolation is increasingly many people's desire for connectivity.
I feel this way I see it across all our people at Blackrock I am hearing it from our clients worldwide.
Blackrock strong fiduciary culture, and our unified operating and technology platform has allowed us to adapt to serve and connect with our clients through this period.
Across all segments, all geographies clients have sought timely contextualize context to help them analyze economic indicators.
I understand policy actions.
Make sense of these turbulent markets and rebalance their portfolios accordingly.
Blackrock strategy has been centered around sharing the insights that meet this demand and delivering the comprehensive investment in technology solutions, our clients need to build resilient portfolios.
We are bringing together the entirety of the Blackrock platform for more clients in more ways than ever before.
And as a result clients are interesting Blackrock with a greater share of their assets through a deeper partnership.
Blackrock generated $100 billion net inflows in the second quarter, representing 6% organic asset growth and 10% organic boat base fee growth.
Our platform with position to meet this client demand because of investments we made overtime to build the truly.
Hyatt centric business.
It is critical that we continue to invest in a business through these difficult times, not only to serve clients, but clients and shareholders, but to support our employees and communities now more than ever compassion forward thinking will be essential to our future.
The who've been told Cobot 19 continues to be severe.
The virus is highly effective.
Trapeze remain elusive and vaccinations are still months away.
Well economic pressures are not comparable to the human last month long shutdowns had been devastating to those who have lost their jobs and income.
Over the past few weeks government leaders have been forced to make inevitable choices between stemming the virus and reopening the economy.
In some emerging market countries. These choices are even more difficult, giving given the fragility of their economic system fragility of their healthcare infrastructure and the lack of fiscal and monetary space.
Despite this backdrop financial markets have rebounded as historic stimulus measures by the world Central banks and governments have been unquestionably successful in limiting investor fears.
The policy measures combined with the anticipated pace a recovery as fuel optimism in the market.
The S&P 500 for example has bounced back more than 40% since it slows in March is once again approaching a record high.
We're speaking to you from our New York City offices as Blackrock employees begin their return to the office in split operations on Monday.
I mean, I remain cautiously optimistic about our path to recovery and Im heartened as we begin to return to somewhat normality.
There will be society, a positive suicidal changes from this pandemic, despite the uncertainty and the suffering is causing today.
More companies will adopt the more permanent remote work coming out of this crisis, which will have a positive environmental impact as congestion eases in cities and hopefully improve quality of life for more people and the uptake in the use of technology very more people than ever before will catalyze change in many industries, including.
Acid in wealth management.
The same time local and national governments grappled with the lingering economical as a pandemic, including its potential to use that spread income inequality, if the real and financial economies remain divergent.
Blackrock is leveraging the full breadth of our capabilities to meet our clients where they are.
The relevant they're changing needs and to provide them with solutions.
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Aladdin has enabled Blackrock and as clients to seamlessly operate from home I hear Cts have provided investors with transparency liquidity and price discovery.
And price discovery during periods of extreme market stress.
Clients turned to our skilled cash management platform for liquidity and safety driving 77 billion of inflows in the first half of this year and blackrocks ability to be whole portfolio partners for clients, a proven critical as more institutional and client and well clients are turning to us for help designing and.
Implementing a more resilient portfolio.
Our client centric approach drove $18 billion net inflows year to date, and Blackrock managed models and outsourced CIO solutions.
Our strong fiduciary culture is resonating in the depth of our relationships in the strength of our results.
And then in the past times of crisis Blackrocks financial markets Advisory team has been once again called upon to serve governments and the broader public.
If I may work as an advisor extends back to 1994 and the work they are doing today with five governments around the world, including the New York Federal Reserve Bank on programs that support the economy is another reflection of blackrocks ability to deliver insights and information.
These recent partnerships are also a testament to the trust we have earned executed these types of assignments overtime.
And the trust of clients and regulators have in Blackrocks culture.
Volatile markets create opportunities for generating alpha and we're seeing the benefits across our active platforms, which is which is a top performing with 82% of both fundamental active equities and taxable fixed income assets above benchmark or peer medium for the three year period.
Strong at the performance across a number of our flagship mutual fund franchises drug global retail net inflows of $16 billion in the second quarter positive across the United States, Europe and Asia Pacific.
Closed globally were led by demand in our top performing high yield bonds, our health science products, our technology funds supported by our global distribution reach and a deepening partnership with wealth managers and financial advisors around the world They turn to Blackrock for insight.
And whole portfolio solutions.
Across retail and institutional active equities regenerated generated a record $8 billion, a net inflows our fifth consecutive inflow quarter for active equities.
The momentum we are seeing is a direct result of our investment to evolve the platform with better data analytics technology.
And a more informed risk taking culture with global scale and reach.
Our diverse and top performing active fixed income platform was well positioned for renewed client appetite in the second quarter and saw $13 billion of inflows following outflows across the industry in the first quarter.
Growth was driven by high yield and the second close of the Blackrock Securitize Investor Fund, which investment assets financed under an adjacent the recently reintroduce Federal reserve term asset backed security loan facility.
Hi demand is strong across our top performing fixed income platform, which includes five of the 29 Morningstar gold rule related active fixed income mutual funds in the United States.
Clients, the differentiated sustainable alpha and their portfolios more than ever before.
Blackrock has never been better positioned to meet their needs and I'm confident we will continue to generate the differentiated organic growth and all our active strategies.
Blackrock is working with our clients in more ways.
In both active and index.
I hear generated $51 billion, a net inflows in the second quarter.
Led by demand for fixed income and sustainable partially offset by outflows in certain precision and core international equity EPS as clients use ice year to rebalance the core of their portfolios or express risk off settlements in Europe, and the emerging market equities.
Hi, She was has a purposeful differentiating business model. It serves the broadest set of clients with the most diverse set of VTS.
Our combination to value.
Performance and versatility allows us to effectively serve individuals.
And with financial advisors, and wealth managers and enable institutional investors with a tool for strategy and tactical allocations and liquidity management.
Client demand for ice shares is accelerating globally, particularly in fixed income and sustainability and then the ri channel, where our flows are up meaningfully and our leading market share position has further strengthened since the move into commission free trading by us brokerage firms last year.
We remain confident in the long term growth of both ice shares in the ETF industry.
I sure is fixing a bcf generated a record $57 billion, a net inflows in the second quarter.
Through extreme market turbulence, the functioned incredibly well, which is unlocking new source of client demand globally and particularly.
Pension funds insurers and asset managers, including over 61st time institutional clients and fixing ABTS in the first half of this year are increasingly turning to EPS as a preferred technology for liquidity.
Transparency lower transaction costs, and a better price discovery across market cycles and across the fixed income market.
There are using Ats for active fixed income strategies and we continue to believe fixed income EPS can double in the next five years to two trillion dollars will ishares, leading the market.
Demand for sustainable products continue to accelerate as clients are increasingly turning to SG not only for investments that reflect their values, but also to enhance performance.
Risk management and portfolio construction.
Blackrock generated a record $17 billion unsustainable I shared Cts inflows year to date outpacing the $12 billion from all of 2019, as we innovate and expand access to sustainable investment solutions. For example last year when we launched our look liquidity.
Environmentally aware fund or leave strategy. It was the first.
Money market fund to incorporate SG in one year it has grown to $13 billion.
Last year, we launched for ice your SG asset allocation Dts, the first of their kind and together with other launches. We now have more than three quarters of the way towards our three year commitment of 150 E. G DTF offerings.
We're also.
Developing sustainable data analytics within all added to address the need for better data and better technology the focus on climate risk.
We continue to anticipate Blackrock sustainable assets under management will reach one trillion dollars by the end of the decade, and we're focused on investing in this fast growing area.
We are seeing increased demand for private market strategies as clients look for uncorrelated sources, a return to meet their long duration liabilities.
We generated over $3 billion of illiquid alternative inflows in commitments in the quarter, driven by infrastructure and our private equity solutions.
Infrastructure will be a key component the driving growth as we look ahead to restarting the global economy infrastructure investments benefit not only investors, but create jobs in local community for individuals who work on the development operations maintenance as such assets.
Backlog has purposely built a diversified infrastructure investment team, which now manages $28 billion and client assets and we look forward to partnering with more clients in this asset class.
Our results today or are all enabled by our unified technology platform with which is a significant differentiator and growth driver for Blackrock.
Technology services revenues grew by 17% year over year as clients turned to Aladdin for comprehensive end to end technology that supports the entire investment process.
As Gary mentioned it has been one year since we acquired the front and we recently crossed an important milestone with our first client going live on joint Aladdin and different solution.
Trades at a fueled aladdin growth across institutional wealth and provider segments are only accelerating this crisis, we continue to target low to mid teens technology services revenue growth over the long term.
Two years ago I wrote about the importance of every company operating with a sense of purpose that in order to deliver durable long term returns company needs to focus on other stakeholders not just their shareholders.
This has been further amplified cobot 19 pandemic.
Our investment stewardship team, which has been speaking with companies for years on these issues have intensified their focus and dialogue with companies over the last few years to better understand how they are managing the S. SG.
Asking questions like how are they incorporate Howard corporation, protecting and inspire and their employees.
How are we contributing to society how are they balancing the pressure of society with efforts to oversee long term financial and operational performance.
With that Blackrock, we are focused on living our purpose with compassion and with a lot of courage.
This includes working together to build the more there and just society.
Recent events of racial injustice have been appalling painful and truly eye opening because the reveal how pervasive these issues are in our society.
Blackrock has firmly committed to racial equal.
Quality and while we've made a lot of progress in these recent years. It is clear to me that we have not we are not where we need to be that is why blackrock is making a long term commitment to building more inclusive a more diverse for up from end user platform enter voice to advocate for change within our industry and more broadly.
We laid out some very specific goals for ourselves over the next several years the process of building a more just equitable society will not be easy or quick and driving real change will require long term accountability and measurable progress.
I am honored by the trust that clients.
Governments and communities that have placed in Blackrock.
Which we approach with a deep sense of responsibility.
We are committed to staying focused on our mission and true to our purpose. This is what enables us to thrive even during these unprecedent in time and to deliver long term value.
To our clients.
To our shareholders and to all our stakeholders.
We crossed an important milestone and blackrocks evolution as a public company in May.
PNC exited their full position and Blackrock with which means many more stakeholders now have the opportunity to participate in Blackrock future growth and performance.
I want to thank PNC and their leadership for their support over the past two and a half decades.
Sacroc could not be who we are today, if we did not have that strong partnership with PNC.
But I also want to welcome our new shareholders.
And thank our existing shareholders, who have continued to put their trust and support and Blackrock overtime.
With that operator, let's open it up for questions.
Thank you 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.
If you do ask a question. Please take your phone off peak there are setting and use your handset to avoid any potential feedback.
Please limit yourselves to one question.
If you have a follow up please reenter the queue.
Just a moment compiled the Q and a roster.
Our first question comes from the line of Dan Fannon of Jefferies.
Thanks, Good morning, Dan My question.
Okay.
My questions around flows if you could expand on the strength of active equities and then also talk about but at the asset where you saw some outflows.
So thank you Dan.
You know that we believe that all asset management decisions are active and this clients focus more on outcomes. Both alpha seeking an index are going to play a pretty big role in their portfolios to drive returns.
And in a lower return environment Alpha generation is even more critical is active managers have the potential to deliver a much greater portion of total investment returns so active strategies.
They critical role in building efficient portfolios for clients with strong performance after fees.
Now the type of volatile market that we've seen in 2020.
Created a lot of opportunities for alpha generation.
And as Larry mentioned, our integrated platform is positioned to deliver investment solutions and portfolio construction leveraging the industrys most comprehensive array of active and index strategies across equity fixed income multi asset alternatives and cash.
Cash.
And the investments that we've made in our platform.
And our optimization of the unique assets that we have our scale access to relationships and information globally, our data and technology, including Aladdin and portfolio construction expertise have positioned us to capture client demand than drive investment performance.
In equities, we have arrived it's about performance Blackrock has now seen.
Five consecutive quarters of active equity inflows, including 8 billion in the second quarter and eight and 18 billion over the last 12 months.
The active equity net inflows in the first quarter were driven flows into several top performing franchises, where organic growth has been supported by a track record.
Consistent active equity outperformance differentiated offering at the right value and distribution partnerships included.
Our health Sciences, with 3 billion of net inflows performing in the top cortile for three years and five years.
Technology with 3 billion of net inflows performing in the top decile for the three and five year periods.
Capital appreciation and large cap growth with a 1 billion of net inflows performing in the top cortile for the three year and five year periods. In addition.
We saw a billion in scientific active equity flows from institutional clients.
So it's been a long journey the investments we've made over the past few years, including high quality in house research capabilities.
And the Blackrock investment Institute have positioned us better than ever before to capture client demand and we'll continue to invest in data and technology to drive sustainable Alpha generation and we are incredibly proud of our equity team.
On the multi asset area. The net outflows of 5 billion were primarily due to outflows from global allocation as the world allocation industry category. So a pressure blackrocks global allocation franchise significantly outperformed peers.
And stay true to its three decade promise of providing upside return and limited downside capture.
Global allocation is now at the top of its peer group performing in the seventh 12, and 20 Onest percentiles.
Over the one three and five year periods.
Global allocation has seen its share of the world allocation category net outflows fall from minus 32% at year end to minus 10% through May 20.
While maintaining its minus 8% market share.
Of the category of assets under management.
So look we continue you know that we've made changes in our global allocation rebuilt the team we are in seeing very good momentum in that.
And.
We expect to see.
Growth return back in that.
But we also continue to see multi asset inflows into our Lightpath target date franchise and continued momentum in our CIO business. So.
It's an important area for us, but we are going to say, both inflows and outflows as the world turns to different allocations, depending upon the volatility in the markets.
Your next question comes from line as Craig C. controller of credit Suisse.
Hi, Greg.
Hey, Good morning, Larry Hope you guys are all doing well.
Starting with fixed income meets yes, we also the strong momentum into Q, but what do you see as the key drivers, which claimed groups with the biggest buyers and then how do you think about the addressable market relative to your two trillion dollar target as we size the operates in even longer term.
So Craig we obviously have big ambitions for fixed income Etfs.
And this last quarter has validated that this is an important asset class for fixed income going forward.
In some of the previous comments, we mentioned that the industry has crossed the one trillion dollar mark and assets under management and we predicted this with double by 2024, but today. The category is already over 1.3 children trillion with growth split evenly.
During the second half of last year in the first half of this year.
And our conviction and I share his leadership.
Has been strengthened as a result of the strong performance in market disruption that you saw in the first quarter and record I share as fixed income flows of 57 billion in the second quarter.
So more directly investors of all kinds have more confidence in fixed income EFS than ever before following the extreme test in the first quarter.
Ishares fixed income LCFS performed under extreme stress with better liquidity.
Price discovery usage tracking and bid ask spreads than the underlying markets and competitors. So as a result, we've seen increased demand from both institutional and retail investors, including a notable acceleration and adoption coming from wealth.
Managers asset managers pension funds and insurance companies all around the world.
We just published earlier this week a paper cold turning point, which provides further facts around our performance and why investors are using fixed income Etfs.
We have seen I share as a track over 60, new highly sophisticated pension plans.
Active asset managers and insurance clients to become first time fixed income.
Errors and now hold 10 billion year to date.
Even prior to the federal reserve purchase of fixed income Etfs insurance companies were a net buyers of fixed income etfs throughout the volatile first quarter and more than 2 billion worth of El Cubo D was purchased in the first three months by by these institutional investors with.
83% occurring before the federal reserve announced plans to buy EPS. So today, we manage over 634 billion in fixed income ETF assets and that's up from 514.
This time last year.
And 400 into two years ago. So.
So I shares gathered 47% of the 118 billion of industry flows year to date into fixed income Ats.
And this inflow into MTF contrast.
With the continuing outflows that the rest of the fixed income industry has faced over the first half of 2020. So investors of all types are recognizing that fixed income etfs are more efficient more transparent offer better performance and more convenient ways to access the bond market. So we continue to.
I believe that global fixed income LCFS can double to two trillion in the next three to four years driven by the modernization of the 100 trillion dollar bond market.
Andrew from conversions of bonds securities by institution Central banks, and Alpha managers, NTT apps, and we're going to continue to evangelize and we will continue to work with clients on how these tools can provide them.
With good value in the fixed income market.
Our next question comes from the line of Ken Worthington JP Morgan.
Hi, good morning.
Good morning.
Maybe taking fixed income from a slightly different direction interest rates have fallen to unprecedented lows in the us in fixed income product yields are following.
Theres speculation that the ultra low interest rate environment could alter or traditional us asset allocation. For example, the 60 40 model to the detriment of fixed income allocations. So do you think there our longer term implications of lower or ultra low yields on investor asset allocation to fixed income.
If so are the implication similar or different for retail versus institutional and ultimately what does this mean for the growth of Blackrock traditional fixed income assets.
So with low interest rates there is still a room for a significant allocation to fixed income.
We see it in the asset allocation models, and we see it and specifically in the models that we are building.
Both for the eight channels and also for other institutions.
Blackrock generated $60 billion fixed income in inflows across both the active in index platforms and this was meeting new demand and new client appetite or fixed income so investor confidence in both the active fixed income funds.
And the fixed income Etfs actually grew and following the strong performance and the liquidity management needed amid this market stress in the first quarter and second quarter, where we were pretty well positioned so even though interest rates were lower we saw that people needed in all turn.
Innovative to cash and what we saw his incredible demand into both the high yield any investment grade credit area.
So we saw a 13 billion of active fixed income that inflows and that reflected 8 billion and 5 billion of net inflows from both retail and institutional clients respectively.
Institutional flows were pretty broad based so even though rates were low the retail flows were led by the high yield franchise.
With about $8 billion of net inflows and where our flagship high yield bond.
Is performing in the 17 percentile now the other point about low interest rates is no note that when it comes to EPS, where the number one global franchise player so rates seem low in the us to today.
But they have been lower outside of the U.S.. So we are seeing a huge demand for us fixed income.
From Asia and from Europe, So even with low rates, it's all relative.
I still think that the fixed income market is going to continue to grow.
You also saw the volatility.
In the markets, which is going to lead to people needing to execute in a more efficient way, so I understand where you're going in that but people will be still looking for fixed income. It just may move from treasuries two credits to alternative structures.
Our next question comes from the line of Glenn Schorr Evercore.
Hi, Glenn.
Hello, There how are you.
So I want to talk about liquids.
Thank you good good to hear.
Hey, I want to talk about the illiquid build clearly it's it's happening I heard your comments about both infrastructure in private equity and I see a 75 billion now.
So the question is is where do you still need to build them, maybe focus a little bit more on the private credit side.
And one in conjunction with that get your opinion on the recent.
Well ruling for inclusion in four on K and target date funds. Thanks.
Great question.
So.
We continue to emphasize in grower.
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Our liquid alternatives, we're seeing growth across the world and every every area of the world and across all the different distribution channels.
I believe we continue to have very large real opportunities as I said earlier we.
We are going to continue to be driving.
Great growth in our and our old in the.
Infrastructure area, and we could continue to see real opportunities in some of our.
Some of our credit opportunities and even in some of the private equity areas, we're going to continue to build this out.
Organically.
Building out our teams.
Our hedge funds actually across the board have done exceedingly well in these very volatile times.
Our European hedge fund is.
Once again double digit performance, our health science products continued to be doing exceedingly well.
And so I think what is really happening overall is I think five years, we were not as recognize as being.
Participant in the illiquid alternative space and today, we are.
We are in the top five in terms of asset growth and we continue to be driving even more accelerated accelerated growth in these areas.
And related to the Dol rule.
Related to be in.
Hi, good date funds.
Positive development.
Increase access.
Individuals' the benefit in the private markets.
We're very well positioned whether relationships.
In that area.
And obviously, because our like Pat target date franchise being more than $260 billion.
We have great opportunities to present different asset categories into these strategies and so we're very well positioned.
Very early days, we have to see how this implementation will work what type of disclosures that is going to be necessary.
But.
We're excited about these opportunities it furthers the opportunity for us to have an accelerated position in the liquid area because of our strength and positioning and are in our target date business and so I'm quite excited about this opportunity, but but we need to wait and see how this is going to be implemented the type of.
The type of disclosures, we need to do we need to make sure that investors know what they're investing again, they know the associated risk and that we're talking about retirement assets and as a fiduciary we have to ensure that our clients retirement assets are protected and they understand fully the risks associated with the investments and so as investors move there Rick.
Time and assets across different investment spectrum.
A great need for risk analytics, and this is only going to be more opportunity for E front and Aladdin as more and more clients are starting to look at.
And there's going to be great need for technology and technology utilization to help them understand.
The risks and I believe the need for technology and risk management in these areas is going to be required as out for all of us as a fiduciary to all our clients retirement assets.
Yes.
Our next question comes from your line of Alex Pulsing with Goldman Sachs.
Good morning, Alex.
Good morning, everybody.
Question for you guys around a lot and then specifically I wanted to talk about provider Allied and we haven't gotten an update on that in a little while but it looked like city I think joined the platform.
Thank you guys already partner would became a handful of other so maybe talk a little bit about where the buildout stands whether or not Blackrock is still kind of the primary customer of provider widen and when do you guys would anticipate other asset managers potentially joining the service.
So a lot in provider as you know us created as a response to the industry's desire for closer integration.
Along the investment life cycle to drive efficiency.
And as a leading investment management platform.
Used by 90, plus asset managers globally, Aladdin is uniquely positioned to drive increased standardization across the ecosystem.
So by working directly with asset Servicers to streamline the operating model Aladdin provider Leverages, a latins proprietary data interfaces and workflows to drive this connectivity and the transparency and the information symmetry between the asset.
And the asset servicer.
So through provider Aladdin.
We have the capability now to enable custodians and middle office Outsourcers to service client assets directly on Aladdin and this allows a further refinement and reduction of friction and our clients operating models, improving the data quality and stream.
Lining the workflows, so more broadly we're seeing the demand for what we're going to call inter operability.
With asset managers trading venues and the market data providers as they continue to grow as clients they want to increase.
Straight through processing and this will consolidate the number of systems that they have to do their jobs and maintain optionality in their counterparty relationships. So we're continuing to build this out. This is part of Blackrocks long term technology strategy to provide.
Technology for as much of the asset management value chain as possible. So we are continuing to build this out lots of interest and I think it will improve the ecosystem going forward.
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Okay.
Last question comes from one of Bill Katz Citigroup.
Hi.
Good morning, everybody. Thank you so it's taking the call this morning.
So maybe a big picture question for you just given all the moving parts.
I appreciate that the market beta is probably the biggest variable test, but assuming sort of a sort of a neutral view of that how do you sort of see the fee rate evolving from here and then Gary you had mentioned the potential for some money market fee waivers in the second half for the years when if you could help potentially quantify that thank you.
Sure Bill because you hear your voice. So I don't think anything has really changed with regard to our views on.
On fee rates.
You know we talk a lot about what we can control and what we can't control and so as we've talked before our fee rates are obviously in many respects tied to beta in particular divergent beta what's going on an FX client risk preferences.
And the like.
I think as we.
We mentioned last quarter as as we.
Entered the quarter with it with a fee rate that was obviously down as a result of.
What was happening in the markets I think the good news is a combination strong markets inorganic growth.
In the second quarter has almost entirely eliminated the headwind that we had talked about last quarter and while Q2.
As you said is up 13%.
Since the first quarter, it's obviously still sold down so we estimate we're entering the third quarter and run rate, that's essentially equal to our first quarter.
Based fees will probably about 4% higher entering the third quarter them within we were over the second quarter.
But on the equivalent day count bases are based views were still down sequentially as you know.
That was despite higher security lending revenue as well the impact of negative divergent beta and FX was also the primary reason, we saw that decline 0.2 basis points and our second quarter effective fee rate.
You, obviously impact us going forward. So we're still theres still some beta issues. The good news is this quarter, we obviously saw a positive.
Difference at organic base fee growth relative to organic asset growth and thats, because we saw some significant success and some of our higher fee products robs talked a lot about those obviously shares EPS was this a strategic category.
Comes in higher than our average fee rate as well as our active.
Our liquids, so I think to the extent that we can continue to watch and push some of those products, which I think we're incredibly well positioned for as we think about.
All of the trends coming out of the pandemic that had been in many respects magnified.
Before the pandemic, where we were investing so EFS sustainability.
Fixed income more broadly.
I think we're going see some very positive impacts if we can can see that continuation going forward on the fee waiver point.
As I mentioned in my initial calls we haven't yet waived any fees, but in the past.
Clients have struggled with low rates and subject to market conditions, we have used yield support waivers they typically come into play with yields.
Below management fees, we typically share them with our distribution partners.
And previously in other periods of time, we've tried to maintain yield floors of somewhere around one one to three basis points and so while timing is is obviously depends on a lot of things.
How quickly portfolios grow quickly portfolios turnover, we haven't really come into that so as an example are fed fund gross yield today's roughly around 26 basis points, that's an excess of the management fee, which is closer to 17 basis points.
So we do think that kind of putting on our are looking our crystal ball, but we'll probably start to hit us in August or September, but I would say a couple of things as you think about that.
We do choose to implement yields port waivers, we do anticipate that about 40% to 50% of those would be shared with our distributors with that lessens the bottom line impact for us and we would also anticipate that the primary impacts would be on U.S. government funds, which represents today about 50% of our overall our cash business.
And then the final point I would.
Just leave us.
In this current low rate environment is as we also mentioned we've been seeing increasing inflows into prime funds.
And I think as long as those are our operating with the fed currently providing some secondary market support there.
We do think we'll continue to see people migrate out of government funds into those product vehicles, which which we don't anticipate to be impacted by price waivers.
Yes.
And ladies and gentlemen, we have reached the allotted time for questions. Mr. thing you have any closing remarks.
Yes.
I want to thank everybody for joining us. This 40 for continue interest in Blackrock I am proud of the progress, we made and helping our clients through the uncertainty in the first half 2020.
We will continue to invest and innovate in the years income so we get better meet our clients' needs. That's what we're all about.
We're going to continue to generate growth.
And importantly, fulfill our purpose and helping more and more people experience financial big.
That is our purpose.
That is that is what differentiates. This it is our fiduciary culture of building strong deep long term partnerships like clients with our communities, where we work with governments.
And we will continue to do so.
I wish all of you to have a safe and healthy start third quarter.
And let's hope for all humanity, we find a solution quickly.
Where this dreaded disease. Thank you everyone have a good quarter.
This concludes todays teleconference. You may now disconnect.
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