Q2 2021 BlackRock Inc Earnings Call
Okay.
Good morning, My name is Jerome and I will be your conference facilitator today.
This time I would like to welcome everyone to the block incorporated second quarter 2021 earnings teleconference. Our hosts for todays call will be chairman and Chief Executive Officer Laurence D. Fink.
Chief Financial Officer, Gary S <unk>.
Suddenly precedent for proper Tesco Quito, and general Counsel, Christopher J Meade all lines have been placed on mute to prevent any background noise I forget speakers remarks, there will be a question and answer period. If he would like to ask a question. During this time simply press star and the number 1 on your telephone keypad.
And if you would like to withdraw your question press the county. Thank you. Mr. Meade you may begin your conference.
Thank you good morning, everyone I'm, Chris Meade, the general counsel of Blackrock.
Before we begin I'd like to remind you that during the course of this call. We may make a number of forward looking statements. We call your attention to the fact that Blackrock as actual results and of course differ from these statements.
As you know Blackrock has filed reports with the SEC, which lists some of the factors that may cause the results of Blackrock to differ materially from what we say today.
Blackrock assumes no duty and does not undertake to 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 of 2021.
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 as adjusted financial results I will be focusing primarily on our as adjusted results.
Last month at our 2021 Investor day, we highlighted how the investments we have consistently made to support growth have enabled us to execute on our framework for shareholder value.
We are investing and evolved over time to create a globally integrated investment and technology platform that enables clients to construct resilient whole portfolios that meet their objectives, regardless of market environment, where our risk appetite.
And we continue to invest and our industry, leading high growth franchises, such as Etfs private markets and technology and are accelerating investments to drive growth and our ESG traditional active and solutions capabilities.
The combination of our comprehensive and integrated investment platform with global and local distribution capabilities. Once again delivered strong results for the quarter and we remain very well positioned to continue delivering differentiated organic growth and the future.
Blackrock generated total net inflows of $81 billion, and the second quarter, representing 4% annualized organic asset growth.
As previously disclosed second quarter net inflows included the full impact of a $58 billion low fee institutional index redemption from a large U S public pension client.
Strong net inflows from Etfs and our entire active franchise. Once again contributed to this quarter's robust 10% annualized organic base fee growth.
Over the last 12 months, our broad based platform peering diverse investment capabilities with best in class technology and rigorous risk management has generated over $500 billion of total net inflows, representing 13% organic base fee growth well in excess of our 5% long term target.
Second quarter revenue of $4.8 billion increased 32% year over year and operating income of $1.9 billion rose 37% earned.
Earnings per share of $10.03 was up 28% also reflecting lower non operating income and a higher effective tax rate compared to a year ago strong year over year comparisons benefited in part from significant improvements and equity market conditions versus a year ago.
Non operating results for the quarter included $145 million of net investment income, primarily driven by mark to market gains and our private equity co investment and unhedged seed capital portfolios.
Our as adjusted tax rate for the second quarter was approximately 24%. We now estimate that 24% is a reasonable projected tax run rate for the remainder remainder of 2021, primarily reflected an increase and certain state tax rates, though the actual effective tax rate may differ as a consequence of nonrecurring or discrete items or.
<unk> changes and tax legislation during the year.
Second quarter base fees and securities lending revenue of $3.8 billion was up 27% year over year, primarily driven by the positive impact of market beta on average AUM and strong organic base fee growth, partially offset by higher discretionary money market fee waivers lower securities lending revenue and strategic pricing investments over the.
Last year.
Sequentially base fees and securities lending revenue was up 5% however.
However, our effective fee rate was down 0.3 basis points and strong organic base fee growth driven by our higher fee active businesses and the impact of 1 additional day and the current quarter were more than offset by higher discretionary money market fee waivers and the impact of divergent equity beta in the quarter.
During the second quarter, we incurred approximately $165 million of gross discretionary yield support waivers driven in part by continued strong flows into our U S government money market funds, while the fed's recent technical adjustments to the I O E. R and R. P have modestly helped we still expect discretionary fee waivers to persist address.
Around current levels for the near term.
However, future levels of discretionary fee waivers may also be impacted by several additional factors, including the level of AUM and funds with existing waivers gross yields and competitive positioning.
Performance fees of $340 million were up significantly from a year ago, reflecting strong performance across our entire investment platform, including liquid and illiquid alternatives and long only strategies.
Quarterly technology services revenue increased 14% from a year ago while.
While annual contract value or a C V increased 16% year over year and continued to reflect strong growth from the second quarter of 'twenty, and 'twenty, which was impacted by slower sales and extended contracting in the early days of the pandemic we.
We remain committed to low to mid teens growth and HCV over the long term.
Total expense increased 29% versus the year ago quarter, driven primarily by higher compensation direct fund and G&A expense employee compensation and benefit expense was up 34%, primarily reflecting higher incentive compensation driven by higher operating income and performance fees and higher deferred compensation.
Reflecting the impact of additional grants associated with prior year compensation and certain compensation arrangements related to a previous acquisition.
Direct fund expense increased 30%, Europe, and Europe, primarily reflecting higher average index AUM.
G&A expense was up $73 million or 19% year over year, primarily driven by higher technology portfolio of services and marketing spend sequentially G&A expense was down $124 million, reflecting the impact of approximately $180 million of product launch costs incurred and the first quarter, partially offset by <unk>.
<unk> technology and marketing spend and.
Tangible amortization expense increased $10 million year over year as a result of our PURELL acquisition.
Our second quarter as adjusted operating margin of 44, 9% was up 120 basis points from a year ago benefiting in part from significant equity market improvements over the last year.
Blackrock has never been position has never been better positioned to take advantage of the opportunities before us and we remain committed to optimizing organic growth and the most efficient way possible. Our capital management strategy remains first to invest and our business, including through prudent use of our balance sheet and then to return excess cash to shareholders, we see them.
Incredible opportunity to make Aladdin the language of all portfolios and are investing to evolve Aladdin and towards next leg of growth as Larry will discuss in more detail.
During the second quarter, we announced a partnership with boehringer, including the acquisition of their industry, leading climate change scenario model, which will enhance aladdin clients capabilities and set a new standard for climate analytics. In addition, yesterday, we announced a minority investment in spite of rock advisors, a tech enabled asset manager focused on providing professional.
And we managed option overlays strategies this investment adds incremental product capabilities to our recent acquisition of a purion and extends our market leading personalized S. M a franchise.
We also repurchased an additional $300 million worth of shares and the second quarter and stand by previous guidance as it relates to share repurchases for the remainder of the year.
As we discussed at Investor day, our strong and resilient platform has never been better positioned to deliver for clients as we leverage our scale unique insights and solutions orientation to meet their long term investment needs.
Net inflows of $81 billion reflected continued momentum across our entire investment business, especially in our ETF and active platforms are etfs generated net inflows of $75 billion and the second quarter, representing 11% annualized organic asset and base fee growth, we call and we also crossed 3 trillion dollars.
And assets globally for the first time.
Core equity and higher fee precision Etfs continued to generate strong inflows, particularly in international equities. However, most of our growth. This quarter came from the strategic category led by continued strength and our sustainable Etfs and renewed strength and fixed income as well as steady positive flows into factor and thematic Etfs.
Retail net inflows of $21 billion, representing 9% annualized organic asset growth and 10% annualized organic base fee growth were positive and both the U S and internationally and across all major asset classes.
Inflows continued to reflect broad based strength across the entirety of our active platform and we remain well positioned to capture demand for both active equities and and as investor appetite for yield where our diversified fixed income range, including unconstrained high yield international and broad market strategies is equipped to meet client demand and any.
<unk> environment.
Blackrock institutional active net inflows of $43 billion were led by $35 billion of multi asset net inflows largely driven by a significant outsourced CIO mandate from a U K pension client.
Larry will also discuss Blackrock is uniquely positioned to deliver customized whole portfolio solutions by capitalizing on our global scale expertise and investment technology and risk management and focus on sustainability. During the second quarter. We also saw continued demand for active fixed income and illiquid alternatives and Lightpath target date offerings.
Institutional index net outflows of $80 billion were impacted by the previously mentioned single client redemption during the quarter outflows from index equities were partially offset by inflows into fixed income as clients rebalanced portfolios after significant equity market gains or sought to immunized portfolios through LTI strategies.
Despite overall asset net outflows across Blackrock institutional franchise for the quarter annualized organic base fee growth was 6% as net inflows into higher fee active and alternative strategies more than offset the de minimis based fee impact of low fee index equity outflows.
Overall, Blackrock generated approximately $63 billion and quarterly active net flows across the platform notching, our ninth consecutive quarter of positive active equity flows.
Demand for alternatives also continued with nearly $7 billion of net inflows into liquid and illiquid alternative strategies during the quarter driven by single strategy hedge funds fund of hedge fund solutions real assets private credit and private equity solutions fundraise.
Fundraising momentum remains strong and we have approximately $31 billion of committed capital to deploy for institutional clients and a variety of alternative strategies, representing a significant source of future base and performance fees.
And finally, Blackrock cash management platform continued to grow generating $23 billion of net inflows and the second quarter driven by both prime and U S government money market funds, despite facing near zero returns and both the U S and Europe client demand for cash strategies remained strong given significant liquidity and the financial system.
And by helping clients manage their cash we're building broader and deeper strategic relationships.
Our continued strong performance is a direct result of a thoughtful growth strategy that has been well executed by a talented group of purpose driven employees, who live the 1 Blackrock culture. Each day, we are thankful for their tremendous effort and contributions to our success over these last 18 months, we will continue to embrace change and invest responsibly for the.
Future. So that we can meet the needs of all of our stakeholders with that I'll turn it over to Larry.
Thank you Gary Good morning, everyone and thank you for joining the call.
We are once again reporting earnings today from our headquarters in New York City, and I'm happy to see more and more of our colleagues and the office and recent weeks and and remain cautiously optimistic.
For a gradual return to having people back and the office and a little normalcy.
After more than a year of virtual meetings I spent the last few weeks meeting with clients and person again.
I also spoke of the G 20, and Venice, and Sunday about sustainability and climate change and it was great to be back on the road.
Our business is built on listening to the people, we serve and I.
And understanding their needs and.
And there is no substitute for meeting face to face with people to hear directly from them about their investment challenges there are opportunities and what lie ahead for them.
It is through these conversations that we're able to build a deeper relationship with our clients across their whole portfolio.
And to ensure Blackrock is always evolving and staying current and staying in front of their needs.
This long standing client centric approach is powering consistently.
Strong results for the benefit of all our stakeholders.
Total net inflows of 81 billion and the second quarter, representing a 10% organic base fee growth.
Were driven by continued momentum and strategic growth areas.
We saw client demand and are Etfs and <unk>.
Illiquid alternatives are active and sustainable strategies.
As well as our scaled cash management solutions.
And we developed 14% year over year growth and technology services revenues as clients increasingly turned to Aladdin.
We have now delivered organic base fee growth in excess of our 5% target for 5 consecutive quarters.
Including 13% over the last 12 months from over $500 billion of net inflows.
This is driving strong financial performance and I'm very confident.
And we have significant room to grow.
As we are partnering with more clients on larger.
And more comprehensive mandates than ever before and our history.
The global economic restart continues to broaden and the second quarter as vaccinations were rolled out and.
And some countries are gradually reopening.
With significant amounts of cash still on the sidelines markets are anticipating continued growth near term despite the potential for various restrictions in certain regions certain countries due to the variant.
We have seen equity markets rallied year to date with most index is up over 10% for the first half of the year and hitting record highs.
We look ahead to the remainder of the year and beyond.
Inflation concerns and top of mind for investors, who need to assess the potential impact and their portfolios.
Debate remains as to whether this inflation will be transitory or structural and central banks will need to balance their monetary policy decisions all alongside <unk>.
Expansive physicals policy by so many governments.
Yes.
And this environment clients are looking for scaled partners, who have a deeper understanding of the global picture and a platform that can instruct portfolios tailored for their needs and for their future goals.
They are turning to Blackrock to help them navigate uncertainty.
They are turning to Blackrock to invest more opportunistically and there are turning blackrock to help them.
Plan for their future.
And our deliberate investment over many years to build a resilient and scaled asset management and technology platform is helping them.
And their needs.
And we are delivering for them.
Building on what we laid out at our Investor Day last month, we remained focus on consistently improving and investing ahead of our clients' needs and the biggest growth areas of the future.
And in Etfs and the benefit of our investments over time are showing up to accelerated momentum across the franchise.
In June client assets, and our Etfs past 3 trillion dollars globally.
Driven by second quarter net inflows of 75 billion.
Yeah.
It took 15 years for Ishares to get to 1 trillion dollars and assets. It took ishares only 5 years.
To get to 2 trillion and assets.
And it just most recently took ishares only 2 years.
To get to 3 trillion.
Importantly, the more and majority.
Of this growth at each milestone has been organic.
And as more investors using etfs and more ways.
There are we use them to build whole portfolios. They are using ishares to invest beyond traditional market cap weighted indexes.
And they're using I share is more than ever before.
To access the bond markets efficiently.
Our Etfs grew across each of our core or strategic and precision product categories, whether it was more than half of our net inflows coming from our strategic categories led by fixed income and sustainable Etfs.
We saw more than 22 billion of net inflows into our fixed income Etfs as investors sought more efficient ways to access fixed income and turned to us for a more broad range exposure, including Chinese bonds multi sector municipal bonds inflation linked Etfs.
We now manage more than 700 billion and fixed income Etfs and continue to believe that this category will grow to a trillion dollars by 2024 as fixed income Etfs modernize the hundred trillion dollar bond market.
Momentum and sustainable Etfs remained strong with another 14 billion of net inflows and the second quarter, including the launches of our low carbon transition readiness ETF, we have seen $30 billion and net inflows into sustainable Etfs and the first half of 2021 compared to 46 billion and <unk>.
All of 2020.
With nearly a 120 billion of sustainable Etfs Blackrock is 4 times the size of the next sustainable ETF player and we are incredibly well positioned for the future for our clients needs and this fast growing category.
Demand for sustainable strategies, and accelerating from investors worldwide and both index and active within active sustainable strategies, we saw 4 billion and net inflows and the second quarter.
And sustainable investments offer significant opportunities to generate alpha for clients and we are focused on innovating ahead of their needs.
For example, we announced last week the first close for the climate Finance partnership will invest and climate infrastructure across emerging markets.
This strategy is a great example, how public and private sectors can come together to deliver positive environmental and socially impact for our communities and attractive risk adjusted returns for clients, including global institutional investors for governments and for philanthropies.
Blackrock broader active platform is playing an increasingly important role and our clients' portfolios and we are seeing the benefits of our investment and our growth and our investment performance, we generated $63 billion of active net inflows and the second quarter across equities fixed income multi assets and alternative strategies.
This growth is outpacing that of the 70 trillion dollar active management industry as we continue to captive active market share.
Long term investment performance is strong with over 85% of our fundamental active equities systematic active equities taxable fixed income assets outperforming the benchmark or peer medium over the past 5 years.
By delivering durable outflow for clients, we remain well positioned to continue to generate growth and active strategies.
More clients are looking to outsource their entire portfolio as regulations intensify.
Operating costs rise and investing grows more complex.
They want customized solutions spanning active index alternatives powered by sophisticated technology and risk management.
The breadth of Blackrock investment platform our portfolio construction expertise.
And our Aladdin technology uniquely positions us to meet these clients' needs.
We are honored to be entrusted to manage over $30 billion of pension assets for British Airways and the second quarter through the creation of a bespoke bespoke investment and service model.
This partnership represents the largest of its kind and the U K pension fund and we believe it'll be a catalyst for more transformational change and the industry.
We manage over $200 billion and Oc I O assets today and believe the trend towards outsourcing will only continue to accelerate.
We are also seeing demand for personalization and growing more among the financial advisors and our wealth clients.
And we're continuing to invest behind the democratization of tax efficient.
Personalized portfolios at scale.
Blackrock is partnering with financial intermediaries, and providing model portfolios, which utilize our broad range of ice shares Etfs and actively managed funds as well as separately managed account strategies across alpha factor investing and index investing.
Building on our acquisition of Imperial we recently announced a minority investment in spite of rock advisors, which will further enhance our ability to provide wealth managers and financial advisors with tax efficient personalized portfolios and risk management solutions.
This is another major step we are taking to advance our market, leading franchise and personalizing and personalization of SMA alongside Etfs.
<unk> continued to see high growth rates as advisors, and personalization and tax management to well client portfolios.
Blackrock is the second largest SMA provider today with over 200 billion and assets, including a period and we remain focused on investing and a comprehensive platform of solutions and customization capabilities for the wealth management market.
Blackrock its commitment to evolve.
And to meet our clients' needs is reasonably most evident and sustainability.
As we adapt to the fundamental restructuring that the energy transition is driving across the economy. We are investing a cross product data and technology capabilities. So we can help clients address their impact of sustainable factors and their portfolios and help them capture significant client demand.
And for sustainable solutions.
Last year, we began developing a lot and climate to fill a need in and climate risk analytics and to help investors better understand and act on climate risk.
I'll add and climate measures at both the asset and portfolio levels, the impact of physical risk like extreme weather events and transition rais risks such as policy changes new technologies and energy supply.
In June we will further and in June we further advanced our land and climate through a new partnership with bringing up the combination of <unk> climate transition risk models, and Aladdin financial and physical risk models will provide investors with the ability to better understand and customized.
The risks the climate risk exposures.
This partnership is a significant milestone and the build out of a lot and climate and what.
We'll set a new bar and the industry for climate analytics and risk management tools.
We are also committed to bringing the benefits of our global platform to clients around the world by deepening our local infrastructure we.
We are investing and people who speak every language too.
To understand and local markets and regulations and have insight into how the changing world intersects with each of our clients goals.
This includes investing and the leading.
This is excuse me this includes investing and to be the leading global asset manager.
And in China.
Rapid economic development and wealth accumulation and the world's second largest economy has propelled the growth of the 9 trillion Chinese domestic asset management industry.
Earlier this year, we obtained our wealth management joint venture license and last month, we received our fund management company license.
We are the first global asset manager firm to obtain this type of license.
We are now well positioned to extend the breadth of our investment solutions and insight to all of our client segments across China and help more people transition their savings to investments in China, including and preparation for their retirement.
With more than half of Blackrock assets linked to retirement.
We are incredibly focused on innovating.
And helping our clients address the retirement and crop prices around the world.
Client demand for our light path target date funds remained strong with 17 billion of net inflows year to date, representing a 10% organic growth and outpacing the entire industry.
Yes.
The need for retirement income and retirement is also accelerating.
A recent study Blackrock conducted found that nearly 90% of the participants across every generation.
Once our retirement income solution and 96% of planned sponsors feels responsibility for helping their participants generate and manage their income and retirement.
Blackrock is developing lightpath paycheck to address is globally. This growing need and we are already seeing strong.
Commercial demand.
And with several initial client commitments and support from an institutional and investment consultants.
The incredible momentum we are seeing across our entire platform is a direct result of our dedicated employee base.
I have never been prouder of Blackrock, nearly 17000 employees I've seen their commitment to our clients and to each other and the incredible ways throughout this pandemic.
And in recognition of this hard work and to have them share and Blackrock <unk> growth and success.
We are investing and our employees through and 8% raise and base salary compensation for all employees up to and including director levels.
As of September 1.2021.
And we strive to cultivate and environment at Blackrock, where employees feel supported and have a diverse and inclusive environment, where they can thrive and grow and build a career and life.
After a period like no others and the firm's history Blackrock has never better positioned.
For the future.
My recent trips to Europe, and the middle East to meet with our clients have only further validated our differentiated positioning and our approach to building deeper broader relationships with our clients.
We have always led by listening to our clients and hearing what they want what they need and.
And through that through anticipation and embracing change and innovating.
And stay in front of our clients' needs that has what's driven us going forward. Our fiduciary focus has guided the deliberate.
Our deliberate newness in terms of investments we have made to build a more resilient asset manager and a more resilient and technology platform by anticipating and stay in front of our clients' needs and we will continue to deliver industry, leaving leading growth to benefit all our stakeholders for the long term.
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 1 on your telephone keypad. If you do have a question and please take care of phone off speaker setting and use your handset sales point any potential feedback. Please limit yourself to 1 question if you have.
A follow up please reenter the queue, we'll pause for just a moment to compile the kidney and Boston.
And your first question comes from Ken work and fun.
And at J P. Morgan your line is open.
Good morning, Brian Hi, Good morning, Thank you for taking my question.
Digging further into direct indexing and customized SMA. So maybe first can you give us some additional color and how spider rock complements our customized that's amaze and your direct indexing capability sort of carrying out and.
And then you highlighted in your prepared remarks and number of times the importance of retirement solutions.
Should we see a carryover in spite of rock capabilities permeating the retirement management part of your business and if so what does this mean for wife path and its evolution over time.
Let me have Rob start off and then Rob.
And then I'll entertain me here.
Here. So as you know more clients are looking for personalization.
And that's what we're seeing and direct indexing and.
And we are.
Our combination with a carryout, which Larry had mentioned actually enhances our ability to deliver a personalized taxed manage sma's and gives us a 2 plus year acceleration in that space, while we continue to organically build additional capabilities.
For a different client segments, so blackrock core SMA capabilities, historically, where and actively manage equities fixed income and multi asset.
A period.
And this experience and building index based highly custom investment solutions. So.
These are complementary businesses and they enhance our value proposition for our whole portfolio S amaze across equity and fixed income and Alpha factors and index solutions. So with over 200 billion and SMA is including a <unk> <unk>.
Blackrock is a market leading whole portfolio sponsor and with the prospect of higher income and capital gains taxes. We've now built a pipeline of over $6 billion and potential new Purion mandates just since the transaction closed. So this is.
And example of how we are.
Getting more into the personalization and direct indexing and of course E. T F and direct index complement the tech that we are investing in and building it.
Cannot.
And on.
Target date, and Lightpath and and Lightpath paycheck.
And we put a great deal of energy on Lightpath paycheck.
We are in a position now and we're working with many different plans.
And we see this revolutionizing.
The 401, K DB plans and corporate plans.
We are in discussion with many many corporations and I think we have a lot of future growth and a lot of future announcements in terms of our positioning there and this is actually quite separate from what we're doing and the customized side.
<unk> 2 <unk>.
But.
We believe this is going to change the retirement business.
And we are we have worked with all the consulting firms we have buy recommendations on this from across many of the consulting firms.
We're in dialogue with many many of the plans and we hope and the next few quarters to have some very significant announcements related to the success, we are seeing and lightpath paycheck, which will be changing as I said.
And this is blackrock responding to the future needs of our clients I think when we are able to announce this and.
And with our clients. This is going to really identify how retirement and it's gonna be reshaped and why the need for more of a more certainty during retirement dear during the.
And the deep accumulation period of time why that is so important and why there's such urgency around that and we are very proud of the R&D work that we did over the many many years now and now in these private conversations it is really resonating more than ever before with our.
With our clients across the United States and hopefully this could be something that we could expand beyond the United States, but this is gonna be sum of AC.
A significant part of our whole foundation and the last thing I would just say related to Lightpath target date franchise were up to now 370 billion alone without even talking about the Lightpath paycheck and so this is going to continue to accelerate where we're taking market share.
Yeah.
With credit Suisse. Your line is open.
Hi, Craig.
Hey, good morning, Larry.
I had a question on the ETF adoption and I know you've covered a lot of this and the Investor day, but I had a follow up here.
Which client verticals do you think provide ice share is the most 1 to 3 year upside.
And have you seen any significant rise or decline in demand among any of the client segments over the last 6 months and I'm, taking some of the bigger ones like U S. R. A E insurance and retail.
So good question Craig.
Know that we have.
Said over and over that we see significant room for continued growth and Etfs and the penetration of the equity and bond markets is still very low.
We expect generational shifts on Lac unlock a lot of new growth, especially whole portfolios and where.
And our Etfs and fee based are around 11% new investment capabilities like ESG and overall capital markets replacements, where we're seeing Etfs that are about 5% of the total market and 1% of the bond market.
We expect to give you a number to throw out by 2025 that Etfs are going to more than doubled to 15 trillion and even at that level, we would still be a small part of the markets and which we compete which is why we think there are decades of growth ahead.
And we fully intend to be the market leader and revenue growth and and truly organic client driven flows and and total assets as this evolves.
And we recognize that we have to offer choice and the vehicles that we show clients, but Etfs I believe are going to lead and that so there are some key client segments..1 is Europe, which is adopting very very quickly.
The the how.
Wealth area through model portfolios of again of which we are a leader is showing huge growth and certainly and institutional clients primarily in fixed income is showing growth and then another segment and sustainable what you.
<unk> about which we are the leader is also showing growth. So what makes our ETF platform unique relative to any competitor.
And is its diversity and broad client base. So for example, our global client base is made up of self directed investors wealth managers pensions insurers and active managers, we have the most diversified platform with 2.3 trillion and the U S and 650.
Billion in Europe, and 2.3 trillion and equity and 700 billion and fixed income. So you can see how this matches up against the client segments I talked about and most importantly, which may be overlooked we provide the most secondary market liquidity. So U S ice.
Shares traded almost 9 trillion in 2020 versus 7 trillion and 2019 and EMEA I shares traded 1.2 trillion and 2020 versus 1 trillion in 2019. So this along with our precision exposures.
<unk>, which are often unique to us while it has been a drag and prior years are actually a driver of our strong revenue growth. This quarter. So we're excited about the growth specifically in the segments that we are a leader in today.
And Gary next question comes from day line of Alex and policy with Goldman Sachs. Your line is now open.
Good morning, Alex.
Hey, good morning, Larry and good morning, everybody.
Hoping you guys could flush out the expense dynamics, a little bit and the quarter as well as we look out further and the year.
Very strong revenue environment revenue is up 25% and the first half.
But the comprehend is actually up.
On a year over year basis price cap as well now I know performance fees tend to skew that upward sometimes so maybe help us think through the rest of the year and then just bigger picture your framework around expense management and margins. Thanks.
Thanks, Alex it's a it's Gary good morning.
So let's break it down maybe.
Individually so in terms of the comp side.
We talked about Comping up about 34% and that primarily reflected higher incentive compensation and you correctly pointed out that and <unk>.
Compensation is very much tied to both profitability and performance and so as we saw higher operating income and performance fees that that definitely ticked up.
But we also saw higher deferred compensation year over year that was up.
By about $100 million, a year over year and I'd say, there's really 2 things there 1 is more ongoing which is.
The ongoing impact of additional grants associated with last year's compensation, obviously, we defer a significant component of current compensation for retention.
And last year saw a a rather large level of deferrals, especially as it related to performance fees and the level of performance fees last year that was I'd say, that's probably about 60 or so percent of that increase.
But there was also a 1 time.
What I would call a crystallization and acceleration of certain compensatory arrangements tied to the success of 1 of our historical acquisitions that was probably about $35 million or about 70 basis points on the comp ratio that ultimately should migrate away now that that has been.
Settled out so that's it on comp.
And I would think about it obviously Larry mentioned the base salary increases, which is more a function of going forward.
And he talked to all about recognizing the accomplishments of our tremendous employees over the last 18 months.
I don't expect that to have a very significant impact on our financials this year, but it could be.
Given its effective date of September 1st let's call it roughly 20 basis points or thereabouts on both comp and margin impact on a purely isolated basis.
For the rest of the year.
In terms of G&A.
We have a I think we gave you some guidance at the beginning of the year, we've made no reductions to discretionary investment spending plans in terms of <unk>.
G&A spend and hiring that we originally budgeted for the year and that we referenced on our call I think much as others are I think we're probably hiring a little slower than we had anticipated.
And we're working on that to make sure we can get the employee support to support our growth plans.
But we would as I think is somewhat customary for us to anticipate our overall level of G&A spend to be higher and the second half, especially around such areas like marketing technology, and then as Larry mentioned, if people get back to traveling obviously, we haven't had a lot of TNT and the first part of the year, but the potential for that I think exists.
And.
For for next year.
And you know I think so broadly speaking that's it on the comp there was kind of a 1 time issue and on the G&A side again, our plans are generally exactly the same as we laid them out to you.
At the beginning of the year.
And your next question comes from the line of Patrick and Gavin.
Economies and research your line is open hi.
Hi, Patrick and good morning, everyone.
It's obviously hard to handicap, the chances of a change and the capital gains tax rate at this point, but are you guys seeing any change in either retail or institutional behavior change and and conversations around that concern.
B a specific gain harvesting or just just wanted to talk about options should or should it come through.
So not really I mean look and maybe that is 1 of the reasons and Rob can be and talks about the personalization and customization of the tax efficient strategies I think across the board. The awareness of after tax returns are becoming more dominant in the raw and channels, but I don't think.
It's.
Excuse me I don't think its.
Reflective yet and I don't think people are motivated or seeing any real changes and behaviors related to the potentiality of these changes and taxes.
But I think there is just a much greater awareness of and the ability now to create customized personalized tax efficient portfolios and I think thats whats going to be driven Rob do you have and anything saying. That's another reason why people are moving towards Etfs, which are much more tax efficient tool and the typical and mutual fund.
And that's that the air and so actually it's a another another growth area for Etfs.
And your next question and canvas from fan and Fannie Mae.
Jefferies Your line's open.
Hey, Dan.
Larry You mentioned that you were having some of the largest conversations are big mandates with clients and and previous history and I was just curious are you used to give a backlog number on these calls and obviously, you're a much bigger and more diverse today, but hoping you could help us size and kind of like kind of more near term.
Potential flow picture or those dialogues and the kind of size those mandates as well. So we can think about the potential there.
Yes, well you're right, we don't do that and we're not going to do that on this call, but I think when you think about it.
When I referenced the British Air OCI and mandate. We believe this is going to this is just the beginning of more focus on the virtues and the value proposition of first for these.
Pension funds to think rethink how it's organized should it be done.
Under a platform like Blackrock and that and.
And you know do we create the efficiencies and most importantly are we can we have a better fiduciary outcome on behalf of their participants.
And all of this is about their participants and can we provide a better outcome for the participants and I really do believe.
We were thinking that but we've had some very large wins.
We have a few other clients and in the last.
A few quarters, where and large dialogue with many more but I want to underscore what with the transformation of Lightpath paycheck could be too these are going to be.
These could be some very large opportunities to and having.
The defined contribution business being re imagined.
And we thought and that is how we framed it how can we imagine and provide better certainty to the participants how to provide better outcomes and how can that lead to a better close this between the employer and the employees and.
And how can they build deeper bonds when the employees retired during the day accumulation period of time. These are broad based solutions that we've been focusing on no different than the broad based solutions, we focus on the needs of focusing on climate and portfolios.
The board and so.
And I believe what we what we are and what you're seeing in the past related to above trend line growth above 5% organic growth is because of the deepening relationships across the board and I concluded and my speech I do believe we are going to continue to see this type of elevated opportunity.
And it's because we are so relentlessly focused on how to.
Think about our clients.
And help them become better and what they're doing and I truly believe whatever the outcome of British air.
And and.
And the other measure that we talked about and I would say with the strong performance that we've had and our active platform.
Flows generally follow.
And when you can have and no firm can have this when you could have.
Dialogue, where you are agnostic about the role of index assets like Etfs.
And active assets.
And then focusing on whether it's tax efficient portfolio of strategies.
Or focusing on a sustainability overlay.
Now focusing on outcomes related to more certainty Gary do you accumulation periods of time. This is what's driving the flows and this is what I think is differentiating blackrock that we are spending more time.
We're investing as Gary talked about our investments and the future and these are the type of investments, we're making and and making sure that we're staying in front of the needs of clients and providing something unique and differentiated and I.
I do believe that is resonating more and more and let me just leave it at that.
And your next question comes from July and if Bill Katz with Citigroup. Your line is open.
Okay, and good morning Merrill and once you take and good morning, everybody can you hear me Okay, yes perfectly okay wonderful. Thank you. So thank you for taking the questions. This morning, a great update and maybe a 2 parter and sorry to ask 2 questions, but sort of interesting things going on.
And 1 Larry at what point do you start to think about upgrading your 5% organic growth rate. It seems like everything you're talking about here has just very powerful and long tailed opportunity and then somewhat unrelated but just sort of following up on that last conversation on the on the.
Paycheck opportunity where is that share coming from thank you.
I'm going to let Gary answer that because Gary.
Gary as a CFO is the 1 who really are.
Is the tendering of our platform and he is also R. R.
He provides the balance between me and him and so I love him Gary.
And.
Thanks, Larry and greatly appreciate it.
And others.
So.
Look bill I think that you know it won't surprise you to hear a lot of the same answers that I've traditionally given you on that I think we feel very good about our organic growth potential going forward I think it reflects the platform we've built.
It reflects global reach full range of investment capabilities integrated risk great performance.
But as you know you know growth is also somewhat tied to markets in particular and I think.
Some of the growth that we're seeing today clearly as a result of the type of environment that we're in and so we try not to get too focused on a particular environment, but really look across cycles.
And I think if you look at what we've done over the last 5 years, we've actually averaged about a 5% organic base fee growth over the last 5 years.
And while we've actually.
Really the more important piece of this is not how fast we necessarily grow and a more.
Risk on environmental Don and I know, Larry It doesn't like that term I think the reality is that when we see the markets fall back.
We stay positive and so even in tough markets like 16, and 18, where the industry was roundly negative we were still and positive.
Territory.
And I think I would also remind you that you know look the industry is basically right around 3% in terms of where everyone.
Things the industry more broadly is going to grow so at 5% we're already growing if.
If you will at a 60% premium to where we think the industry is and we feel very comfortable with that.
Because of our breadth because of our solutions orientation and our technology platform I think we feel very very good about both secular growth secular growth more broadly and maintaining share and places like ETF. We feel like we have a ton of room to run and places like illiquid, where the market is growing and where we're generally still low single digit share.
And we think our investment performance positions us well to continue to play a major role and active.
So for the moment.
And until we get through this cycle and see where we come out the other side.
5% is the target and we feel very good and better performance going forward relative to that.
On Lightpath paycheck.
As I tried to frame.
It is U S based so specifically.
But we are redefining defined contribution business and the United States I think that's what it is.
But globally it was retirement as a 70 trillion.
Has it is a big gap.
We need to rethink retirement, as we moved away from DB.
But we need to find better ways of creating more certainty and a defined contribution world.
I think this is 1 of the big problems, we have and our society today the uncertainty of retirement.
And this is 1 of the problems that we've been focusing on for years and years and years to try to find a way to.
Have something closer to a defined benefit, but having those but having it still being and defined contribution way.
And I think Theres, just great opportunities and we are having robust conversations on this bill and I.
I think it's it's it's going to reshape or we imagine will redefine the defined contribution business.
Yeah.
And your next question comes from Michael Tsai price right.
Morgan Stanley Your line is open.
Hi, Michael Good morning, Hey, good.
Morning, guys. Thanks for taking the question just had a question here on a on a ladder and I was just hoping you could update us on the pipeline and I recall and the past you had spoken about a slow down and.
Patients, but given the recovery here and the reopening and just curious if you think we can see that accelerate and then also on the technology services revenue and think that was up about 14% and the quarter, but the ACB was up a bit higher than that so I'm just hoping you could help unlock some of the moving pieces there between your ACB definition and the technology services I think Youre E C.
V excludes some of the consulting fees and implementation fees and just hoping you might be able to quantify how much that is relative to the overall technology services line. Thank you.
Thanks, Mike So again, we're not going to get very specific on pipelines, but we will give you some tonality.
And on our Aladdin and growth rate so.
As we've talked about there was clearly increased client demand accelerated by Covid for comprehensive whole portfolio solutions that involve greatest system as Asian fewer vendor relationships as a number of financial service companies and other insurers asset managers and funds trying to minimize their costs and and more importantly.
And trying to basically take down the number of data sources.
And that Theyre relying on.
We feel that growth going forward is going to be a function of a number of things, but it's going to be primarily gaining new clients expanding relationships with existing clients expanding the platform through enhanced functionality.
And products and obviously under our expanding into Underpenetrated geographies.
Most notably Europe and Asia.
With that what we've said at Investor Day, and we'll continue to reinforce is given all of that that our pipeline is as strong as it's ever been and we continue to reaffirm our.
Low to mid teens growth rate for technology services revenue as it relates to HCV.
<unk> was up 16%.
And as you correctly note.
We do have we're migrating a bunch of the upfront business over to Aladdin in terms of.
It's hosted model as opposed to have its traditional model that does as you say have different accounting.
And vacations, and so we decided to put <unk> out as a key performance metric.
We think and better reflects the overall.
Some of the business and takes away some of the timing and accounting changes from migrating models over so ACB was up 16% and.
And I think as you also correctly note.
That's probably a little faster than we would expect the longer term to be given our target and I think that's a function of.
Some of the business coming through today at a more rapid rate.
It was delayed from a year ago and the early days of the pandemic as we as we highlighted a longer sales cycles and contracting periods. So we're definitely seeing a little bit of and acceleration there, but again reaffirming our low to mid teens growth outlook I would just add 1 thing 2 things 1 is and there's a lot of this before our meetings in Europe last week.
Demand for data and analytics on sustainability.
And is going to grow exponentially.
And this is why we've been so aggressive in terms of building out our analytics and data.
Across the board.
And I do believe this is gonna be a major sleeve and major opportunity.
And for Aladdin Aladdin climate is going to be a major component of Aladdin and we believe having the differentiating data and analytics as it can be further.
And why clients are going to be looking to add on.
A lot and across your portfolio.
And what we've witnessed since the acquisition of <unk>.
On the front to the need for data and analytics related to.
Alternatives.
And across all of the alternative space integrated and comprehensive data and risk analytics environment is really really important. So if you overlay the movement and the capital markets and client demand and alternatives. If you overlay the demand for clients it related to sustainability and climate.
That's going to be a major change and that's going to be a major component of it and that's why it's a method tortorice now having that role and helping us drive Aladdin and climate. So as you move away from.
Our client relationships.
I'll leave it at that.
Ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, If you have any closing remarks.
Thank you operator, I want to thank everybody for joining the call this morning and.
Andrew and your continued interest and Blackrock, our second quarter results again.
And were a result of the steadfast commitment of focusing on our clients first.
And importantly, thinking and investing and anticipating their needs and the future.
I see a tremendous opportunity ahead, and Blackrock <expletive> focus remains on the long term fiduciary commitment to all our clients worldwide.
We will continue to invest and our business. So we can deliver that long term value for our stakeholders and leave the asset management industry and the many many years ahead.
Thank you again and have a great remainder part of the summer.
And lets everybody hope to have a great third quarter talk to that and bye bye.
This concludes today's teleconference. You may now disconnect.
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