Q4 2020 BlackRock Inc Earnings Call
Finally, I would like to welcome everyone to the block walk incorporated fourth quarter and full year 2020 earnings teleconference. Our hosts for todays call will be chairman and Chief Executive Officer, Laurence the stink.
Chief Financial Officer, Gary Shedlin President.
President Robert ask a P value of General Counsel, Christopher J. need online for being placed on mute to for debt any background noise. After the speakers remarks from will be a question and answer period. If he would like to ask a question. During this price seems to be press Paul done to number one on.
Your telephone keypad, if you would like to withdraw your question price. The koski. Thank you Mr. Neil you May begin your conference.
Thank you good morning, everyone I'm, Chris Meade, 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 Blackrock actual results may of course differ from these Steven.
As you know Blackrock has filed reports with the FCC, which was some of the factors that may cause the results for Blackrock to differ materially from what we see today.
Blackrock assumes no duty and does not undertake to update any forward looking statements.
So with that I'll turn it over to Gary.
Thanks, Chris Good morning, and happy New year, I hope, everyone and their families remain safe and healthy through the holidays and it's my pleasure to present results for the fourth quarter and full year 2020, before I turn it over to Larry I'll review, our financial performance and business results, while our earnings release discloses, both GAAP and as adjusted Finance.
For results I will be focusing primarily on our as adjusted results.
Throughout Blackrock history, we have consistently and systematically invested in our business with a commitment to serving clients employees shareholders and the communities in which we live and operating as a result, while the world faced unprecedented challenges in 2020, we are well prepared to provide clients with thought leadership investment insights from risk managed.
Non tools to ensure the physical and emotional well being of our employees and to give back to our communities Blackrock strong performance. During this challenging year as a testament to our diverse and resilient business model, our steadfast focus on helping clients achieve their long term goals and the dedication of our incredible people.
We generated net inflows of $391 billion, and 2020, representing 5% organic asset growth and seven per cent organic base fee growth meeting our organic growth target for the six time in the last eight years importantly, we finished the year with increased momentum generating $127 billion of total net inflow.
I was in the fourth quarter, reflecting record quarterly organic base fee growth of 13% strong performance from our entire active franchise, along with near record I share as flows which benefited from client Rerisking and year end tax planning contributed to this quarter's robust organic base fee growth.
We continued to play offense in 2020 is the strength and stability of our operating model allowed us to invest through volatile markets, both organically and inorganically expand our full year operating margin and returned approximately $3.8 billion of capital to our shareholders.
Each of our critical growth priorities, including I shares a lot and private markets Alpha generation whole portfolio solutions and sustainable investing drove significant growth during the year full year revenue of $16.2 billion was up 11% operating income of $6.3 billion rose 13%.
An earnings per share of $33.82 was up 19% versus 2019.
For the fourth quarter, Blackrock generated revenue of $4.5 billion and operating income of $1.8 billion up 13% and 20% respectively from a year ago.
Quarterly earnings per share of $10.18 was up 22% versus 2019, driven by higher non operating income and reduced diluted share count versus a year ago, partially offset by a higher effective tax rate in the current quarter.
Non operating results for the quarter included $153 million of net investment income, primarily driven by mark to market gains on our unhedged seed and co investment capital.
Our as adjusted tax rate for the fourth quarter was approximately 20%, reflecting $61 million of net discrete tax benefits. We currently estimate the 23% as a reasonable projected tax run rate for 2021. So the actual effective tax rate may differ as a consequence of nonrecurring or discrete items or potential changes in tax law.
Legislation during the year for.
Fourth quarter base fees of $3.4 billion were up 10% year over year, primarily driven by 7% organic growth and the positive impact of market beta and foreign exchange movements on average at U.M., but partially offset by lower securities lending revenue and higher discretionary money market fees in the current quarter and strategic pricing investments over the last year.
In addition, while fourth quarter base fees were up 5% sequentially the impact of lower securities lending revenue during the quarter driven by a continued tightening of cash spreads was the primary reason we saw a sequential decline of 0.2 basis points in our annualized effective fee rate. Despite the positive impact of strong organic base fee growth.
As we look into 2021 based on current market conditions and interest rates. We are planning for the possibility of lower securities lending revenue and higher discretionary money market fee waivers as compared to 2020 and isolation. This could have an additional 0.3 basis point negative impact on our fee rate this year as.
Compared to our fourth quarter annualized base fee rate.
Share in mind at a higher interest rate environment and continued strong organic base fee growth could mitigate these headwinds, especially with continued momentum in our higher fee active equity and alternative businesses and that nearly roughly and that nearly 40% of growth money market fee waivers are generally shared with distributors, reducing the impact on operating income.
Fourth quarter performance fees of $419 million were up 75% year over year capping a record year for performance fees that totaled $1.1 billion more than doubled 2019 levels. While this year's performance fees reflected strong alpha generation across the entirety of our alternative end long only investment platforms.
Proximately, 60% of the full year increase was attributable to a single hedge fund strategy that delivered exceptional performance during the year.
Quarterly technology services revenue was up 11% year over year and full year revenue of $1.1 billion increased 17% in part, reflecting the impact of the front acquisition.
While demand for integrated and Brazilian investment management technology to support effective risk management and operational efficiency remains strong growth in 2020 technology services revenue was impacted by spending sales and contracting cycles associated with the pandemic in.
In addition year over year revenue growth also reflected certain it from clients shifting from an on premise license model in which revenue is generally recognized upfront to a hosted model, which is more consistent with how we service our broader Aladdin community and where revenue is recognized over the life of a contract.
As we anticipate more clients embracing it from hosted model, which will impact year over year revenue comparisons and in an effort to provide greater transparency into a lens business momentum, we intend to begin disclosing growth in HCV or annual contract value.
CV growth represents a point in time year over year comparison of our technology services revenue run rate and is more representative of how leading technology companies measured their top line growth.
Technology services HCV at year end, 2020 increased 12% versus a year ago, and we remain committed to low to mid teens growth in HCV over the long term.
Fourth quarter, and full year advisory and other revenue deal.
Decreased year over year, primarily reflecting the absence of Pennymac equity method earnings following the charitable contribution of our remaining equity stake in the first quarter of 2020, and lower advisory and transition management revenue during the year.
Total expense increased 10% in 2020, driven primarily by higher compensation and non core DNA expense for the full year compensation expense increased $571 million or 13%, primarily reflecting higher base and incentive compensation driven by higher performance fees and operating income recalled.
The year over year comparisons of fourth quarter compensation expense are less relevant because we determine compensation on a full year basis.
Overall, gionee expense increased 7% year over year, reflecting higher levels of non core items, primarily related to the net impact of higher product launch costs legal fees COVID-19 related costs and fixed asset impairments offset by lower contingent fair value adjustments FX remeasurement expense and deal related costs during the year.
Excluding approximately $280 million of non core DNA expense incurred in 2020, which included $166 million of aggregate fund launch costs for DNA expense for the year remains essentially flat compared to 2019 as higher technology and portfolio services fees were offset by lower TNT expense recall.
Paul that we exclude the impact of fund launch costs from reporting our as adjusted operating margin.
Our full year as adjusted as adjusted operating margin to 44.9% was up 120 basis points versus 2019 and benefited from record performance fees and securities lending revenue during the year and a lower level of core DNA expense than anticipated.
As we have previously stated our business has never been better positioned to take advantage of the opportunities before us, especially in mid industry consolidation disruption to deliver differentiated organic growth.
We remain deeply committed to investing responsibly and aggressively through market cycles and for the long term in order to optimize organic growth in the most efficient way possible. Consequently, our 2021 investment plan. Currently includes the re purposing of lower TNT expense back into our business to fund incremental investments in technology and market day.
In support of our sustainability and other growth initiatives at present, excluding the impact of market beta taking into account our anticipated level of expense growth and more normalized level of performance fees and the current rate environment, which may impact year over year comparisons of SEC lending revenue and money market fee waivers, we would anticipate a 20.
21, as adjusted operating margin generally in line with our 2020 result.
We're also investing through prudent use of our balance sheet to best position Blackrock for continued success. During 2020, we allocated over $1 billion of new seed and co investment capital to support our growth and our year end portfolio now approximately $3.5 billion.
We also continued to make strategic minority investments and as you will hear from Larry Shortly we will announce later today and investment in clarity a high a sustainability analytics and data science platform.
And in the fourth quarter, we announced the acquisition of Appirio, a pioneer in customizing tax optimized index equity EPS amazed to enhance our wealth platform and provide whole portfolio solutions to ultra high net worth and advisors. Following the close of the Appirio transaction in early February we will incur additional intangible amortization expense relative.
For 2020.
We also remain committed to systematically returning excess cash to shareholders through a combination of dividends and share repurchases and returned an aggregate of $3.8 billion to shareholders in 2020.
We repurchased approximately $1.5 billion worth of shares in 2020 at an average share price of $439 per share taking advantage of pncs decision to exit their ownership position in may since inception of our current capital management strategy. In 2013, we have net repurchased over $10 billion for Blackrock stock.
Reducing our outstanding total shares by 11% in generating an unlevered compound annual returned from 19% for our shareholders.
At present based on capital spending plans for the year and subject to market conditions, including the relative valuation of our stock price. We are targeting the repurchase of $1.2 billion of shares during 2021, consistent with our guidance a year ago. In addition, and also subject to market conditions, we expect to seek board approval later this month for an IND.
Greece to our first quarter 2021 dividend.
You will hear more from Larry Blackrock has never been better positioned to deliver for clients as we leverage our unique insights guidance and solutions to help them meet their long term investment needs.
Fourth quarter total net inflows of $127 billion, representing 7% annualized organic.
Growth and 13% annualized organic base fee growth led by flows into Ishares and our top performing active franchise.
Full year net inflows of $391 billion were positive across active and index all asset classes client types and regions and reflected broad based strength across I share as an active and cash strategies go.
Global Ishares EPS generated $185 billion of net inflows in 2020, representing 8% organic asset growth and 7% organic base fee growth.
We saw strong growth in core in each of our strategic product areas and our precision exposures, which benefited from risk on sentiment during the fourth quarter.
Within our strategic product segments flows were led by fixed income and sustainable and we also saw inflows into factors. Despite the industry categories seeing outflows for the fourth quarter is typically our strongest quarter for ishares due to year end rebalancing and tax planning, but this quarter was especially strong with net inflows of $79 billion reference.
Operating 14% annualized organic asset growth and a record 17% annualized organic base fee growth, reflecting the breadth of our product and client segments.
Blackrock generated full year retail net inflows of $70 billion, representing 10% annualized organic asset growth and 8% annualized organic base fee growth significantly outperforming the broader mutual fund industry.
Retail flows were positive in both the us and internationally and reflected broad based strength in active fixed income equity and liquid alternatives.
Fourth quarter retail net inflows of $35 billion, reflecting similar trends, but also included the seasonal impact of capital gains and dividend reinvestment.
Institutional index net outflows of $29 billion in 2020 reflected equity net outflows, partially offset by fixed income net inflows as several large clients rebalanced portfolios after significant equity market gains for tactically shifted assets to fixed income and cash.
In addition, a large us public pension client recently announced a diversification of their plan to meet revised guidelines.
CRUK will maintain management of the significant majority of the plan's assets, but we do expect to transition approximately $55 billion of low fee index assets to another investment manager during the first half from 2021, while this transition will result in a significant net asset outflow. It will have a de minimis impact on organic base fee growth.
For the year.
Blackrock institutional active franchise generated $32 billion of net inflows in 2020, reflecting broad based strength across all product categories. Active net inflows were led by $14 billion of multi asset net inflows, reflecting continued growth in our lifepath target date franchise and significant momentum and our own CIO business.
We also generated $7 billion of net inflows and active fixed income primarily from activity among our insurance clients across retail and institutional client types, we generated a record $30 billion of active net equity net inflows for the year and have now delivered seven consecutive quarters of positive flows in this category.
Free cash flows were led by top performing franchises in technology Health Sciences, and us growth equities as well as quantitative strategies.
We remain well positioned for future growth in our active businesses with over 85% of fundamental active equity systematic active equity and taxable fixed income assets performing above their respective benchmarks for per meetings for the trailing five year period.
Overall demand for alternatives also continued with $17 billion of net inflows into our illiquid and liquid alternative strategies during the year driven by infrastructure private equity solutions credit and our multi strat and global event driven hedge funds from.
Gentlemen fund raising remains strong and we have approximately $24 billion of committed capital to deploy for institutional clients in a variety of strategies, representing a significant source of future base and performance fees.
Blackrocks cash management platform generated another $9 billion of net inflows in the fourth quarter, even as the broader industry saw outflows and a record $113 billion of net inflows in 2020 dirt.
During the fourth quarter, we incurred approximately $30 million of discretionary yield support waivers and as previously discussed expect such fee waivers to increase in 2021.
Finally, full year advisory net inflows of $20 billion were primarily linked to asset purchases managed by our financial markets Advisory group recall that revenue linked to these assignments is primarily reflected in the advisory and other revenue line of our income statement.
This time last year, none of us could have predicted the unprecedented challenges that we and our clients around the world would face during 2020.
By remaining true to our purpose investing ahead of our clients' needs and respecting our one Blackrock culture. We look back on 2020 is that year that included some of the strongest and proudest moments of our 32 year history.
Our relationships with clients have never been deeper and we believe in our platform. We believe our platform is as well positioned as it's ever been to meet the needs of all stakeholders over the coming years with that I'll turn it over to Larry.
Thank you Gary.
Good morning, everyone.
Thank you for joining the call.
I Hope you and all your loved ones are staying healthy and safe.
For decades, Blackrock has built our strategy platform and culture around staying in front of our client needs.
We've deliberately invested in our business. So that we are prepared to help clients navigate.
Their most complex challenges as the investment landscape and the world changes all around them and that is showing up in the results today.
The hardships experienced by people globally in 2020 any qualities further exasperated by the pandemic.
Have only strengthened blackrock sense of responsibility to help millions of people build savings.
To make savings easier and more affordable.
Advance sustainable investing.
And contribute.
To a more resilient global economy.
The pandemic has taken a dramatic toll.
On all our lives disrupting the way we work the way we live.
At the same time it has led to a profound shift in how economies and how societies even operate.
Creating opportunities to redesign our society for the future.
Investors around the world most of whom are saving for long term goals like retirement.
For experiencing the economic impact of the pandemic.
This is leading to rising inequalities within and across nations continued low interest rate even in the face of rising inflation expectations and a tonic shift towards sustainable business practices.
These trends will require investors to rethink portfolio allocation.
And they are increasingly turning to Blackrock for insights and solutions. So they.
And Phil fulfill their purpose.
Half of their stake holders.
Our diverse global investment platform with active and index strategies across all asset classes integrated technology data and risk management.
And global scale and connectivity.
And able us to deliver strong and consistent investment performance.
And for more stable.
Outcomes.
For our clients.
Our voice.
Developed over years of managing assets for a diverse set of clients globally.
Has help Blackrock partner with our clients.
And has helped us to advocate.
On their behalf.
We encourage the companies our clients are invested into operate.
With a long term mindset increased transparency and important sustainability factors and focus on all other stakeholders.
And this is driving Blackrock performance.
Blackrock differentiated approach.
It is resonating with our clients worldwide.
Leading to deeper partnerships with them.
And as you could see driving incredible momentum.
Across our businesses.
Blackrock generated $391 billion of total net inflows and 2020.
Representing 5% organic acid and seven per cent organic base fee growth.
We delivered 11% revenue growth.
13% operating income growth.
And 19% earnings per share growth.
And on top of that we.
We were able to expand our margins.
By 120 basis points.
Over a year over year basis.
These results reflect the benefits for our consistent investments.
And the diversity of our platform.
Flows were positive across all major client types across all asset classes and all geographic regions.
Including more than $1 billion of net inflows in each of the 19 countries.
And into 100 for different products.
His strategic growth areas, we saw a record client demand.
For active equities.
Sustainability.
Our cash products.
And our alternative investment strategies.
We also generated 185 billion of net inflows into I share Cts.
And we also delivered a record $1.1 billion in technology services revenues.
By supporting clients with solutions, no matter their objective or risk preference.
Blackrock is positioned to generate differentiated growth and investing for the future.
Our long term strategy remains to focus on accelerating growth and I shares.
Accelerating our growth and illiquid alternatives.
Accelerated growth in technology.
And making sure that performance.
And generating Alpha is at the heart of Blackrock.
We're doing this through delivering whole portfolio solutions.
And becoming the global leader.
Sustainable investing.
These investments will benefit of course, our shareholders, but are benefiting all our stakeholders.
Sustainable.
Stayed ability reached an inflection point this past year.
Driven by the convergence of business practices regulation technology advancements.
And we're seeing it across client preferences.
Blackrock generated 68 billion of net inflows in sustainable strategies in 2020.
Representing over 60% organic growth and we launched over 100, new products in 2020 to expand Investor choice.
We're seeing strong demand across client segments.
Institutional clients are increasingly seeking sustainable strategies to mitigate exposures and to capture opportunities.
Paul wealth clients are using each yet building blocks, especially are sustainable I share EPS.
In both sustainable and traditional model portfolios.
We recently surveyed investors representing 25 trillion dollars in assets, who said they plan to double.
For scoring double their allocations to sustainable products over the next five years to nearly 40% on average from a level approximately 18%.
Blackrock sustainable investment platform is well positioned to meet this demand and we will continue to believe the $200 billion. We managed is today, we'll go to one trillion dollars and sustainable investments by the end of this decade.
Clients worldwide are continue to adopt EPS throughout the year and I share it drove a $185 billion inflows in 2020.
In the us I share GTS cross two trillion dollars last week, doubling our size and just for years.
Our European I share generated nearly $60 billion, a net inflow is becoming increasingly important to our global growth.
Overall I share GTS, particularly in the first quarter has unlocked new sources of client demand with active managers.
Insurers.
Asset owners globally.
Blackrock scale engineering technology. It ecosystem partnerships have enabled us to maintain robust liquidity across I share Cts and execute some of the largest rebalances.
History.
All with tight tracking error.
And while operating our platform fully remotely in this environment.
We witnessed for defining moments in our business in 2020.
Well I share his outperformed in the face of the most severe market stress test in each have history.
To fixed income EPS shined as a modernization for us for the 100 trillion dollar bond market.
Three.
Sustainable EPS for making sustainable investing more accessible to investors and for we are seeing an increase adaptation of EPS in wealth portfolios as more wealth management industry shift towards a more fiduciary Commission free model.
We believe that these moments and Blackrock performance in them, we'll continue to support and accelerate the long term growth of I shares and the broader ETF industry.
More than 70% of our annual Ishares flows were from strategic products segments led by fixed income and sustainable product categories.
2020 was a turning point for global client adoption of fixed income Bts and fixed income I share generating $89 billion of inflows.
We estimate that over 100 asset managers and asset owners globally were first time adopters in 2020 and fixed income EPS at 80% of our top active managers are now using our fixed income EPS.
Fixed income I share is now at 690 billion dollar business and we continue to believe it will grow to one trillion dollars over the next two to three years.
Sustainable I share Cts saw a record $47 billion net inflows in 2020 and there you almost tripled.
Year over year to $82 billion.
We are rapidly expanding our product suite partnering with index and data providers to expand product choice in this category.
With more than 140, I share EPS index funds globally, we have the broadest choice of any from and our goal is to continue innovating so that more investors more people more savers have greater access to sustainable strategies.
Okay.
Shifting the wealth management landscape towards Digitization centralization and outsourcing in both the United States in Europe are increasing ETF usage among these clients.
Growth in model portfolios across all platforms as an example of how technology and the transparency of fee based wealth management are tailwinds for the ETF market.
Model portfolios are driving approximately a quarter of ishares globally growth globally, and we expect growth in models, especially customized models developed in partnership with clients to account for more than half of the Ishares flows in the coming years.
Blackrock is deepening partnerships with wealth managers and financial advisers globally by offering high quality insights and solutions across both index.
And active strategies and no other from can link those two strategies together.
We are seeing strong demand for our from our top performing active mutual fund franchise, even as a broader you as you as active mutual fund industry saw more than $250 billion of outflows in 2020.
In November we announced the acquisition of the period, which will accelerate early leadership in the fast growing us separately managed account space.
Wealth managers are increasingly looking for partners, who can provide personalization and whole portfolio solutions.
Now Blackrock is well positioned to be the partner of choice for the full spectrum of wealth clients.
We want to make it easy for wealth managers to access our investment strategies across funds.
EPS estimate and models and construct a more resilient risk aware portfolio using our technology.
Active strategies and strong performance after fees are critical in building efficient resilient portfolios and as public markets book equities and fixed income become more efficient.
Clients are increasingly looking for a differentiated manager who can find differentiating sources of alpha.
It's not just about beating a benchmark or peer medium, but delivering incremental tangible dollar returns for clients.
Blackrock is investments overtime integrated technology data risk management scale global reach and the Interconnectivity is enabling us to generate strong investment performance at a time when clients need this performance for the most.
Our active business generated over $30 billion, an hour for returns for clients in 2020, which is leading to more client demand than ever before.
Blackrock generated $88 billion, a total active inflows for the year, including a record for Blackrock $30 billion of active inflows in active equities.
Private markets are also increasingly an important component.
For Alpha and Investor portfolios, it as both growth assets and diversification.
Blackrock has built a broad platform across infrastructure.
Private credit real estate and private equity to meet client demands.
We more than doubled for illiquid alternative plan from over the last five years and today, we manage $86 billion on behalf of clients. We raised a record $25 billion a client capital in 2020 led by infrastructure private equity solutions private credit and the final close of our drug.
Private equity long term private capital strategy.
LDPC as one of the largest first time for funds raised the day with a total of 3.4 billion and a great example of blackrocks ability to innovate and organically developed private market solutions.
To meet our clients' evolving needs.
And in an increasingly competitive environment for deploying capital we are leveraging the benefits of Blackrock scale and size.
To deploy capital on behalf of clients.
Our capital markets team gives us a differentiated access to unique deal flow for clients in 2020.
And this team alone helped us source 2100 such opportunities.
20 years ago, we recognize the important value proposition Aladdin can provide for our clients today. Our technology is a 1.1 billion dollar revenue business.
As more clients than ever before are looking for a unified technology platform.
Like Aladdin that can support their whole portfolio across both public and private assets.
And we are committed and remain focused on continuously evolving Aladdin for the next 20 years to come.
As sustainability becomes a critical building block in our portfolio is our ambition is to put a lot at the center of sustainable investing.
And address the challenges investors are facing and in the future.
We launched Aladdin client at climate to help clients better access both the physical risk for climate change and the transition risk to a low carbon economy on their portfolios and we are committed to be providing clients with everything they need for sustainable investing and Aladdin.
Access the sustainability data and its analytics and tools to seamlessly implement sustainable portfolios.
And were in line with this commitment we made a minority investment in clarity AI, which provides tools to access environmental and social impact and will be connecting with the capabilities throughout Aladdin.
Okay.
Our ability to address clients' challenges enables us to fulfill our purpose and drive strong long.
Long term performance.
Over the last five years.
Clients entrusted us with 1.5 trillion dollars of.
Net new assets, which in turn has enabled us to create over 3500 jobs globally.
And on top of all that we delivered.
141% total return for our shareholders.
I am deeply humbled.
By how Blackrock 16500 employees have supported each other and our clients throughout this challenging year.
Which is critical to our success in Twentytwenty.
More than 90 per cent ever employees at our annual employee opinion survey said they are proud to work at Blackrock and we remain committed to upholding our culture.
And every day living our purpose.
We built Blackrock because we believe in the long term growth of the capital markets.
The important for being invested in the capital markets even today.
Blackrock only.
Is 2%.
The global financial assets, and we see tremendous opportunities ahead to continue supporting the growth of global capital markets and helping more people invest and save.
Everything we do is rooted in our culture of focusing on the long term and we will be continuing to innovate using our scale and contributing to more equitable resilient future to benefit our clients to benefit our employees.
To benefit our shareholders and the people in the communities, where we live where we work where we operate.
I firmly believe that the efforts of 2020, well positions Blackrock to deliver value over the long term for all of our stakeholders.
With that let's open it up for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad. If you ask a question. Please state your phone Paul that's it speakers setting easier handsets to avoid any potential feedback please limit yourself to one question.
If you have a follow up please reenter the queue, we'll pause for just a moment to compile the keeney roster.
Your first question comes from Alex Blostein with Goldman Sachs. You May now ask your question.
Good morning.
Good morning, Larry Good morning, happy new year to you as well.
First question wanted to ask you guys around scale at Blackrock and in relation to the to the margin guidance you guys provided for 2021, I guess given the strong exit on the revenue from this implies a pretty healthy pickup pickup in spending I.
I know you talked about some specific areas like technology and market data, but can we maybe get a little more specificity on kind of what are the key areas, where you expect to add into 21 and it goes beyond that how should we think about the ability at Blackrock to deliver positive operating leverage beyond 21.
Thanks, Allison Gary Happy New year, I'll take the for slag at that and then.
Let others chime in.
So.
Look our performance in 2020, clearly reflects as we've talked about Atlantic for strategic commitment to investing responsibly and our business across market cycles, and our margin of the year of 120 basis points improvement over over last year benefited from a number of what I would call.
Items that we saw in 2020 that will be potentially a little different next year and of course, we're trying to steer into a crystal ball like.
Like everybody else, but margin last year benefited from record performance fees. We had securities lending revenue that was also a record and I think as we've talked about we did have a lower level of core gx DNA expense than anticipated. So if you think about it from my perspective, the margin pop. We saw this year was probably a little bit higher.
For than we would normally have have expected.
As we stated previously we have never been better positioned to take advantage of the opportunities in front of us.
And we are passionate and as you know about investing responsibly and aggressively so.
Many of vast and in fact, we were asked at your at your conference about.
About our plans for next year, and whether we would drop some of those those reduced core spending levels to the bottom line in our view at this point is when we look out at the opportunities in front of us and what's happening in the industry that we see a very unique opportunity to continue playing offense, maybe even a little harder and to invest that money.
Back into the business too.
To support incremental investments in technology market data in a variety of other areas to support those those growth initiatives. So when you say like what those are I think it's very consistent with what we've talked about I think we look to investing meaningfully higher next year.
In terms of repurchasing some of those dollars and remember we didnt really complete our all of our investment plans during the year. We you put a hiring freeze on in 2020 in March and didn't really start rehiring until late in the third quarter. So we're a little bit behind so theres little bit of catch up and there is a little bit of incremental that's going to happen.
The.
Strategically think private markets I share as a Latin sustainability whole portfolios stewardship.
China, which is obviously starting to ramp up as we're going to get operational there in terms of technology. We are in the midst of our cloud migration, we are seeing opportunities in terms of tech infrastructure as well as health and safety improvements throughout the organization. So I think with that with that in mind we.
We feel that this is the right time for us to kind of ramp it up and.
Given that we saw a little bit of a higher margin. This year than we would have anticipated it results in a little bit of a.
A more moderated margin story for 2021.
Hi.
Your next question comes from Glenn Schorr with Evercore here, we don't ask your question.
Hi, Glenn.
Hello, There how are you.
Okay. So if I look back on 2020.
It's interesting right because rates go to zero Ann.
And there is a lot of things at play, but you had really good fixed income flows both active and passive in that and that's continuing.
I'm curious big Big picture It goes into Larry his opening remarks.
As people start thinking about higher rates and potential inflation on the outlook. How do you think asset allocations are are going to change, particularly.
On the fixed income from.
Well I don't have a crystal ball.
So.
Right now the forward curve does show interest rates going up quite significantly.
As high as 180 last time I looked for the tenure.
I mean, we are seeing.
We believe that because even at that rate.
That is not going to chase the allocation that remarkably because I do believe that that rate liability rates are still going to be longer at all.
And as a result, the demand for equities will persist, but in terms of fixed income.
We have not really seen much change in client preferences. They are consistently looking at products like Seo.
Which is a spin.
Specialized fixed income products that is not targeted.
Targeted to.
It's not targeted avidly to duration we.
We expect to see more global demand and global bonds as a as a mechanism away from the the potential.
A lowering of the us dollar.
We will we are continuing to see emerging markets beginning to show interest as as a macro trade.
Add where we continue to see more and more interest in private markets in private credit so I at which we are strong in all of these so.
I don't think you're going to see a persistent large scale rebalancing out of core core fixed income assets.
The positive side I would say if rates go up for the yield curve, it's going to make obviously the banking system to be much stronger.
It's going to make lending, even even easier to be to be had I think a rising yield curve is a positive sign for the economy.
And so all of that in my mind leads to probably better equity valuations. Rob do you have anything you want to add to that yes, I think that demand is still going to outstrip supply, but I think Glenn the way the way we look at it is as people allocate to fixed income they're going to allocate different.
Larry.
And the fixed income I share as flows are going to benefit from the low rate environment.
As weve already start to see and as people start to do this reallocation. This is why we've seen as Larry mentioned in his opening remarks over 100, new asset managers and asset owner clients come into fixed income, but come in through I shares.
And a good statistic is 80 per cent of the top asset managers are now using fixed income EPS. So we think there is still demand, but the demand is going to be shown differently as they come in and we're very well positioned.
In our eyes share business, so take that money and in fixed income.
Your next question comes from Craig Siegenthaler Red.
Credit Suisse. Please ask your question.
Hey, Craig revenue year.
Hey, good morning, Larry Happy New year, and hope you guys are all doing well.
Uh huh.
Actually is from scale Weve all witnessed it picked up in M&A activity in the EPS American industry.
And many Ceos have discussed the need for distribution scale and since Blackrock is the largest asset manager in the world with the largest distribution platform globally I just wanted to hear your perspective on Blackrock unique distribution scale advantage and also do you think firms that have a trillion or 500 billion a day.
We really need to buy other firms to improve their scale.
And also hoping Gary can chime in too just given his deep background in M&A.
Let me just start on that one part and.
This last part.
You got it you want to.
Sorry.
So as we think about.
I guess it was a two part question. The first question was on scale and and how do we think about that in the context of M&A, Craig or is it what our unique scale first question is on.
Talk about Blackrock unique distribution scale advantage and then you look at the industry do you think other firms that are fairly large, but not the same size and blackrock do they really need to buy other firms to improve their scale and is that a real advantage for them.
Well I'm going to try to avoid commenting on what other firms should do.
But obviously as you know our.
Our competitive advantage in terms of what we believe drives a lot of our value proposition is global reach.
Its best in class technology risk management diverse investment capabilities across the spectrum of active and passive and then obviously to be able to bring all of that.
All of that together.
We've been at that now for well over a decade in terms of not only trying to identify the pieces that we need but also integrating those pieces into a distinct and unique one one blackrock culture.
We think thats really critical to our success today, both in terms of being able to reach clients with boots on the ground as Larry mentioned 16000, plus people over half for those people are outside of the Americas. These days.
Moving.
Capabilities to have thoughtful investment discussions by virtue of the fact that we are local in our local markets and Larry talked about that a lot Ann.
Obviously.
I don't think that there's really a great opportunity for a number of our competitors to just recreate aladdin over.
Overnight in terms of those capabilities. So I think again breadth of product breadth of reach breadth of insight all brought together with technology and risk management creates this unique.
Franchise that frankly seems to be humming on on multiple cylinders today and I think we do we view that as unique yes, do we view it as something that other people could create potentially but I'll leave that to the challenge, but as I said, we've been we've been doing this for a decade and it's going to take quite a long time for people to try to replicate I think what we have right now let me turn.
Try to respond to the first part of the question.
I believe our distribution platform has been buttress quite a bit over the last five years has been a long term commitment.
We are providing a unique this is gary suggested across the world in terms of providing that that the.
The conversation that intersects both active and passive and risk analytics no from can do this at this moment.
I believe the elevation of content by the wealth manager has been one of the giant changes too as the wealth management industry has moved away from fee based to you know to advisory base.
They've really elevated their ability to have deeper broader conversations and they're looking for.
A few partners, who could work with them and build that out.
And we are certainly one of the go to firms.
Were helping that and we're able to help them deliver that global insight.
That advice.
And more importantly, the solutions that helping them. So it is a combination of.
Of having high shares in our active strategy, but now with the overlaying of technology to customize portfolios.
And today, the customization of portfolios and personalizing, a portfolio is becoming more and more need in the wealth management space. It is not about selling a bond fund or a stock funded anymore. It is not about buying a stock or a bond. It is not a holistic whole solution.
Folio.
And so our unique this is about that and how we deliver it.
Just as a response to the industry the industry has been always.
Designed around a specific product specific fund.
And for the firms, who only have a product or in one one asset category. They have a difficult time to really respond to whole portfolio solutions and I believe this customization the personalization of whole portfolio solutions is becoming the dry.
Fiber.
The driver in terms of most of the wealth management conversations do we need to do more acquisitions for distribution not in the United States not in Europe.
Could we do somewhere in another part of the World, where we don't have a strong footprint sure that is consistent what I've said over the last three to five years.
And importantly, what we are going to do like we announced a day they clarity AI minority interest. What we are trying to do is provide in this portfolio customization also uniqueness and data and analytics to drive better decision, making which will ultimately drive better performance and I.
I think that is also the uniqueness of Blackrock and why we are so constructive on the opportunities we have working with wealth managers worldwide.
Your next question comes from Robert Lee with KBW, you May ask your question.
Rob popping up.
Hey, everyone happy new year, and open wounds doing well thanks.
Larry I guess, a regulatory question it does feel like after being pretty quiet and dormant for no bunch of years So on C.
More talk about re looking at you as.
Demand for us for their systemic weights than we think so at this point you maybe your take on you know where you see if you see where you see that kind of chatter picking up is there for the.
In Europe for year mean.
Your perspective, I think would be.
Yes.
Great question.
Well, we've built blackrock around the whole foundations of a strong global capital markets.
I think we have been a big beneficiary over the years by we believed in global capital markets and the expansion of global capital markets over the last 20 years and I think the size of our of our footprint and the size of the one that we manage is because of our commitment to building broad scale capital markets. One of the interesting points I said this.
The end of the my speech today, our size relative to the global capital markets is almost virtually unchanged for what it was in 2009.
So in 2009 were under 2% of the global capital markets and today, we're a little bit over 2%.
The global capital markets, so as much as we've grown the world capital markets to grow the use of government debt as a mechanism for an ads deficits of growth the use of.
The equity markets for Ipos, and new companies and the expansion of other countries expanding their capital markets, whether the capital markets expansion in the middle East or where parts of Asia have been really quite extraordinary. So we are benefiting that what we need in our in that and Weve always welcome that.
We need to make sure that regulators focus on a well functioning capital markets to build a more resilient economy.
So we have encouraged regulation.
Worldwide.
Sure.
Well functioning capital markets.
And that is the key criteria, how we look at it.
I would say the one myth about asset managers.
The asset manager industry is highly regulated already.
At Blackrock, we are regulated by the FCC.
Because we have a trust bank were were regulated by the LCC were regulated for the CFTC by FINRA.
Overseas, we are regulated across the board.
We are not a bank.
And Thats why we are not regulated by one regulator.
The federal reserve.
Lower regulated by almost any other organization.
And regulator.
The asset management industry is still highly fragmented.
And so I believe we welcome a conversation.
And we are encouraged about how regulators are focusing on the need of a well functioning capital market.
But the concept of that asset management is for is not regulated that must be coming from.
From bankers were not a bank we don't Oh.
All 8.7 trillion dollars over assets.
Our other People's hard earned savings and money.
We have a contract with every one of our clients.
And most of our short term funds mutual funds EPS they could they could sell those assets at a day and our institutional liquid portfolio as they could do it over 30 days and depending on some of the long term private assets that depends on the contract that we have with each individual client, but the notion that asset.
Batteries is or.
Our not regulator Inc.
Just a myth it is not true.
But as the largest asset manager in the world as a as a fiduciary to all our clients savings we what.
Highly functioning.
Markets and at the time when markets need more supervision was all cases, we have been systematically in favor of ensuring market safety and soundness.
And we will encourage that going forward.
Your next question comes from Ken working from with JP Morgan You May ask your question.
Hi, good morning.
Im curious your views on the outlook for tax managed investing in the aftermath of Cove it.
The outlook for higher personal income and investment taxes in the us and abroad.
To what extent might demand here provide another catalyst for EPS in direct indexing growth.
Inside and outside the U.S. and did the outlook for tax managed investing contribute your interest in Appirio.
Well the answer is yes, but it comes under a broader.
Sure and that is we're seeing increased demand for what is called personalization and customization.
And that includes tax managed and it also includes SG and includes factor preferences.
And as mentioned before wealth managers are looking to do more with fewer partners. So they want partners, who can offer a whole portfolio solutions and Thats why we are positioning ourselves to be the partner of choice.
With our acquisition of Appirio, we are further enhancing our value proposition for.
For a whole portfolio SM A's across equities fixed income Alpha factors and index solutions, because ultimately we want to make it easy for wealth managers to access our investment strategies across funds.
EPS Esa amaze, even models and be able to construct more resilient risk aware portfolios using our technology. So we're seeing as a result of our investment in serving more and more wealth managers, we saw 185.
Really in of I share of flows we're seeing strong active flows including inflows across active mutual funds, even as the industry saw outflows and were reaching out to more advisors with our advisor center and our partnership with investing that now.
Now on the.
Self indexing part of your question.
Look self indexing indexing certainly has some advantages.
The advantages our cost and flexibility. So we're exploring constantly self indexing in areas, where there aren't well defined indices and that would be in smart beta in fixed income for.
Factors in SSG and currently we have six self index Cts. So we also continue to have great relationships with our index providers and we believe this often significant value in having a third party provider Ann.
And clients, especially institutions often value of the brands and are benchmarked to those particular indices.
As well the major index providers, they provide services more than just the brand. They provide research IP tracking corporate events. So we're also seeing a better price competition, among the index providers and the sharing of IP.
And I think you have also seen our recently announced collaboration with Morningstar focused on enhancing style investing for clients to better represent the size and style mandates and the us equity market. So.
A lot said, but a lot of that has to do with.
This customization this personalization and as you rightfully say a lot of that is going to be focused on tax going forward and we want to be positioned well for that.
Ladies and gentlemen, we have reached the allotted time for questions Mr. Fink do you have any closing remarks.
Thank you operator.
Thank you for all for joining this morning for your continued interest in Blackrock Buck.
Blackrock 2020 results are a direct result of a steadfast commitment to serve our clients and putting their needs at the center of everything we do.
We will continue to invest.
And innovate in the years to come so we can be better helping millions of people.
The buildup savings to make investments easier more affordable.
We're going to continue to advance sustainability investing and contribute to a more resilient economy.
All of that in my mind, we'll be continuing to drive the success Blackrock in 2021 and beyond.
Everyone have a good start everyone. Please feel safe.
Everyone. Please stay healthy and everyone. Please get a vaccination.
Thank you bye bye now.
[music].
Okay.
[music].