Q3 2021 BlackRock Inc Earnings Call
Good morning, My name is Jerome and I will be our conference facilitator today at this time I would like to welcome everyone to the block.
<unk> third quarter 2021 earnings teleconference.
For today's call will be chairman and Chief Executive Officer, Laurence D Fink.
<unk> Financial Officer, Gary S. Shetland.
Precedent Robert F Capito, and General Counsel, Christopher J meet all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If he would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like could withdraw your question press the pound key. 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 actual results may 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.
Thanks, Chris and good morning, everyone. It's my pleasure to present results for the third 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.
Blackrock has proven track record of delivering for stakeholders reflects our ongoing commitments, we anticipate change before it happens and continually invest for the long term.
Our globally integrated investment and technology platform enables us to construct resilient whole portfolios for clients.
We rely on thought leadership global investment insights and state of the art risk management tools to help clients navigate ever changing and increasingly volatile market environments.
Our approach is resonating more than ever and is reflected in the continued strong momentum we're seeing across our entire platform.
Blackrock generated total net inflows of $75 billion in the third quarter $98 billion of long term net inflows, representing approximately 4% annualized organic asset growth were partially offset by net outflows from lower fee cash and advisory AUM.
In addition, strong net inflows from Etfs and our active franchise. Once again contributed to this quarter's 9% annualized organic base fee growth.
Over the last 12 months, our differentiated investment management platform, which pairs active and index capabilities across the entire range of traditional and alternative products has now generated over $450 billion of total net inflows, representing 13% organic base fee growth well in excess of our 5% long term target.
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Third quarter revenue of $6.0 billion increased 16% year over year, while operating income of $10.0 billion rose, 11% and reflected the impact of approximately $96 million of fund launch costs, primarily associated with the successful launch of a $2 billion closed end fund in late September.
Earnings per share of $105.0 was up 19% compared to a year ago also reflecting significantly higher non operating income in the current quarter NAV.
Non operating results for the quarter included $298 million of net investment income.
Primarily driven by noncash gains related to our strategic minority investments in capital and scalable capital as well as mark to market gains in our private equity co investment portfolio.
Our as adjusted tax rate for the third quarter was approximately 24%. We continue to estimate that 24% is a reasonable projected tax run rate for the fourth quarter of 2021, though the actual effective tax rate may differ as a consequence of nonrecurring or discrete items or potential changes in tax legislation.
Third quarter base fees and securities lending revenue of $12.0 billion increased 22% year over year, reflecting the positive impact of market beta on average AUM and 13% organic base fee growth, despite higher discretionary money market fee waivers and strategic pricing investments over the last year.
Sequentially base fee in securities lending revenue was up 5%.
Our third quarter annualized effective fee rate on a day count equivalent basis increased by two tenths of a basis point from the second quarter as the positive impact of strong organic base fee growth driven by our higher fee active businesses and lower discretionary money market fee waivers more than offset the negative impact of divergent equity beta primarily associated with.
The accelerating decline in emerging markets during the current quarter.
During the third quarter.
Incurred approximately $130 million of gross discretionary yield support waivers lower discretionary yield support waivers in the current quarter were linked to the feds technically technical adjustments to the I O E. R. R. R. P. In June as well as outflows from U S government money market funds during the current quarter.
Performance fees of $345 million reflect generally strong performance from our single strategy hedge fund platform over the last year the decline in year over year fees reflected lower revenue from a single hedge fund with an annual performance measurement period that ends in the third quarter, and which delivered truly exceptional performance a year ago, partially offset by higher.
Revenue from illiquid products.
Quarterly technology services revenue increased 13% from a year ago annual contract value or <unk> increased 16% year over year and continued to reflect strong growth from the third quarter of 2020, which was impacted by slower sales in extended contracting in the early months of the pandemic we.
We remain committed to low to mid teens growth in HCV over the long term.
Total expense increased 19% versus the year ago quarter, driven primarily by higher G&A compensation and direct fund expense.
G&A expense was up $139 million or 30% year over year, primarily driven by higher technology and portfolio services expense in the current quarter.
Third quarter G&A expense also included $96 million of fund launch costs, primarily associated with our first ESG oriented closed end fund the $2 billion Blackrock ESG capital allocation trust and $29 million of contingent consideration fair value adjustments related to the estimated final payment on our successful Citi Banamex.
<unk> acquisition in 2018.
Call that we exclude the impact of product launch costs when reporting our as adjusted operating margin.
Core G&A G&A expense for the third quarter, which excludes the impact of product launch and transaction related costs was up 3% from the second quarter. We have made no changes to the discretionary investment spending plans. We have previously outlined and we would expect a sequential increase in our fourth quarter core G&A spend to be generally consistent with.
This year's reflecting seasonal increases in marketing spend additional costs related to return to office planning and ongoing technology costs associated with Aladdin cloud migrations.
Employee compensation and benefit expense was up $116 million or 8% from a year ago, primarily reflecting higher base compensation and higher deferred compensation related to the impact of grants associated with 2020 compensation.
Direct fund expense increased 38% year over year, primarily reflecting higher average index AUM and intangible amortization expense increased $11 million year over year due to our Purion acquisition.
Our third quarter as adjusted operating margin of 45, 8% was down 120 basis points from a year ago as operating leverage was more than offset by the impact of lower performance fees higher contingent consideration fair value adjustments and higher intangible amortization expense compared to a year ago.
We're seeing more opportunities to invest for growth than ever before we reopened the closed end fund market in 2019 by making it more efficient for investors to access products at NAV by.
By synthetically seeding these new funds, we've now raised $14 billion in active AUM, representing over $170 million in new revenue or strategic minority investments in capital and scalable capital our reinforcing our tech for flow strategy and simultaneously generating very attractive returns for shareholders and we continue to build.
Our best in class ESG capabilities, most recently by acquiring rhodium models related to the physical risks associated with climate change.
Effective use of our balance sheet to seed new products co invests alongside clients, where it makes strategic minority investments both supports our growth and drives value for our shareholders and while our capital management strategy remains first to invest in our business. We also remain committed to returning excess cash to shareholders and repurchased an additional 300 million.
Worth of shares in the third quarter.
As we discussed at Investor Day, we continue to invest in our highest growth franchises, such as Etfs private markets and technology and we are accelerating investments to drive growth in our sustainable traditional active and solutions capabilities. Each of these areas. Once again delivered strong results in the third quarter.
Quarterly long term net inflows of $98 billion were driven by continued momentum in our ETF enacted platforms are etfs generated net inflows of $58 billion in the third quarter positive across each of our product categories, representing 7% annualized organic base fee growth.
<unk> attributable to our strategic category drove over 50% of net inflows in the quarter, reflecting continued strength in fixed income and sustainable Etfs.
Core equity and higher fee precision exposure Etfs saw net inflows of $16 billion and $9 million, respectively led by U S equity exposures.
Retail net inflows of $23 billion.
Representing 11% annualized organic base fee growth were positive in both the U S and internationally and across all major asset classes.
Retail multi asset results included the impact of the previously mentioned $2 billion of closed end fund raised in late September.
Inflows continued to reflect broad based strength across our active platform and remain well positioned to meet investor needs for risk adjusted out, but and yield in the current market environment.
Blackrock institutional active net inflows of $26 billion, representing 6% annualized organic base fee growth were led by <unk> $25 billion of multi asset net inflows growth included the impact of a significant outsourced CIO mandate from the Asia Pacific client continuing our momentum in an important growth area, where we are.
And cost effective whole portfolio solutions to the world's most sophisticated institutional clients.
We also saw continued demand for our Lightpath target date offerings and Larry will update you about our recent milestone for our new Lightpath paycheck retirement solution.
Institutional index net outflows of $8 billion broadly reflected equity net outflows, which were partially offset by fixed income net inflows as clients continue to rebalance portfolios. After significant market equity market gains were sort to immunize portfolios through LDR strategies overall, Blackrock generated approximately <unk> <unk>.
$45 billion in quarterly active net inflows across the platform, including our 10th 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 private credit real assets and private equity solutions.
Fund raising momentum remains strong and we have approximately $29 billion of committed capital to deploy for institutional clients in a variety of alternative strategies, representing a significant source of future base and performance fees.
Blackrock cash management platform experienced net outflows of $12 billion, driven primarily by redemptions from U S government and offshore Sterling Prime money market funds in line with the broader U S money market fund industry.
Blackrock is diverse cash management offerings position us well to serve clients' needs and Youll hear more from Larry about how we are expanding our ESG cash offerings to enhance our competitive positioning even further.
Finally third quarter advisory net outflows of $10 billion were primarily linked to the successful planned wind downs of portfolio is managed by our financial markets Advisory group on behalf of the Federal Reserve Bank of New York recall that revenue linked to these assignments is primarily reflected in the advisory and other revenue line item on our income statement.
Blackrock continued strong performance reflects our commitment to strategically invest in our business in anticipation of change and to lead the evolution of the asset management industry today, we see even greater opportunity to invest in our employees and our clients and in the communities in which we operate to ensure that we will continue to optimize organic growth in the.
Most efficient way possible.
I'll turn it over to Larry.
Thanks, Gary Good morning, everyone and thank you for joining the call.
I truly hope that all of you are staying healthy and safe.
Yes.
Fortunately I have been traveling again and in recent months to see clients worldwide.
It's great to be back on the road.
Meeting face to face with our clients.
And I found our clients actually more engaged or interested in our conversations than ever before.
As investors continue to navigate uncertainty in the market.
And then as a broader global economic outlook Blackrock is partnering more closely with our clients to help them achieve long term.
So our long term goals and helping them seeking new opportunities.
Blackrock is providing insights on the global economy guidance on how to navigate the market volatility and providing solutions.
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Our comprehensive.
Hence of unified investment and technology platform.
Combined with our steadfast client centric approach.
It is enabling us to deliver constantly and consistently strong results for our stakeholders.
Long term net inflows of $98 billion in the third quarter represented 9% organic base fee growth were driven by continued strength in our strategic growth opportunities that we spoken to you in the past.
Our consecutive quarters of strong growth are the direct result of these investments that we've made over time to enhance and evolve our business and to be more prepared for the needs of our clients.
We have now delivered organic base fee growth in excess of our 5% target for six consecutive quarters, including 13% growth over the last 12 months.
And we also generated 13% year over year growth in technology services revenues as more clients are turning to Aladdin to execute on their growth aspirations and to helping them scale their business.
After a promising global economic restart earlier this year, we saw certain countries and markets take a step back in recent months as they are confronted with the economic virus variants.
And economic issues.
Concerns around slowing economic growth are increasing while policymakers are evaluating.
The timing and pace.
Of easing.
Whether its rate hikes or reduction in bond purchases.
And with interest rates still at historically low levels investors need solutions that can earn a real yield and be resilient in a <unk>.
Higher inflationary world.
Inflationary trends are appearing more than transitory, reflecting structural changes, including a shift from consumerism to job creation.
Why is it wage growth.
And the energy transition.
As I said in a speech to the G 20 in July society needs to rapidly invest in innovation to offset inflationary pressures associated with the transition to a net zero economy.
We need to make sure that we are pushing just as hard on the demand side as we are on the supply side, otherwise, we risk risk supply issues that drive up the cost for consumers.
Especially for those who can least afford it.
Against this backdrop clients are turning to Blackrock more than ever before and we are using the full breadth of our capabilities to meet our clients' needs.
Blackrock top performing active platform continues to outpace the industry generating 45 billion.
Net inflows in the quarter and nearly 200 billion over the last 12 months.
<unk> been active equities continue and Blackrock is number one and year to date asset gathering in the U S active equity mutual fund industry up from number.
Number three in 2020.
These results reflect our investments over time to incorporate data science integrate ESG considerations and enhancing portfolio construction capabilities across the entire active business.
And we remain committed to continuous innovation. So we can deliver strong and durable alpha for our clients over the long term.
In addition to our traditional active strategies. We're also seeing clients increased portfolio allocations to private markets as a reach for yield.
Institutions are turning to Blackrock for a private credit real estate and private equity solutions and well we are seeing advisors access private markets through our record.
Our recent closed end fund vehicle, which have up to 25% allocation to alternatives and are credited investor solutions. In total we raised about $5 billion of illiquid alternative flows and commitments in the quarter and we continue to steadily deploy that capital for our clients.
Portfolio construction and asset allocation decisions are critical in achieving desired returns and more clients are adapting our etfs as a building block and their portfolios.
We generated $58 billion of ETF net inflows in the third quarter with growth across each of our core strategic and precision product categories, including strong flows in fixed income as clients sought inflation protection and sources of income.
We crossed $200 billion in ETF inflows year to date exceeding our 2020 full year flows.
We are seeing this momentum across the entire ETF industry as more and more investors discover the convenience the efficiency and the transparency that the ETF vehicle as well.
We see opportunities well beyond the 30 million people, who use our etfs today and continue to believe in the long term growth potential for Etfs.
And we remain confident in our ability to deliver strong organic base fee growth and lead the industry.
In my conversations with clients I hear about how they are looking to focus on their core business and partner with select investment managers that have the expertise the technology the scale to.
To navigate the increasingly complex markets.
We see outsourcing of portfolio management through OCI O four institutions and for model portfolios for the wealth managers, both of which are fast growing areas of the industry.
Blackrock is well positioned to capture this opportunity and partner with our clients across our whole portfolio.
Few asset managers have the scale and the diversity of offerings to do this and the consolidation we have seen in the industry as a further validation of our business model that we have already built here at Blackrock.
We're also innovating to expand client options for how they participate and proxy voting decisions.
Much like asset allocation and portfolio construction, where some clients now can take an active role while others outsource these decisions to us more of our clients are interested in voting on their index holdings.
This is another great example of one Blackrock effort to further democratize choice for our clients and is in line with our commitment to provide them with the broadest range of options.
Client demand for more holistic and flexible technology driven solutions is also increasing technology services grew revenues grew by 13% year over year as Aladdin capturing opportunity from industry shifts and we're leveraging our user provider model to further evolve.
Aladdin.
The combination of Aladdin E front has been well received by clients and we now have over two dozen clients using both across their entire whole portfolios.
As we've done throughout our history, we continue to invest ahead of our clients' needs and evolve Blackrock to lead in the biggest long term opportunities of the future.
And we are seeing meaningful progress in executing on these opportunities.
And sustainability momentum remained strong and we generated another $31 billion of net inflows across all regions.
Active sustainable net inflows of $7 billion were led by the launch of our ESG capital allocation Trust closed end funds, which Gary mentioned.
Mentioned earlier.
As ETF and Etfs Ishares as leading sustainable.
<unk>, leading sustainable provider, capturing near that nearly 50% of the industry category inflows year to date.
In Europe.
Half of all industry flows are now going into sustainable Etfs up from less than 10%.
Just three years ago.
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Clients also want impact oriented strategy that seek to deliberate targeted environmental or social outcome.
We recently repurposed one of our money market funds to seek positive social outcomes by supporting a diverse trading ecosystem. Blackrock will also be contributing 5% of our management fees net revenues from the fund to support students at historically black colleges and universities in predominantly black institutions. This fund is alright.
We're already growing more than 40%, 20% to $9.0 billion since its conversion in July and we are proud to work together with our clients to help make a positive impact.
On the futures of many diverse students on the futures of many diverse business owners and in their own communities.
Blackrock is also supporting clean energy solutions that change the demand curve for hydrocarbons, which is actually accelerating today and driving energy prices higher.
The gap in cost between clean energy technologies, and those that will admit greater amounts of greenhouse gases is still very large for most things, which is why Blackrock is supporting a range of initiatives to help bring down the green premium of clean energy.
Building on our partnership with Tomasic earlier, this year to advance a decarbonization solution. The Blackrock Foundation announced last month, a $100 million grant to breakthrough energy catalyst program. This grant will help speed the development and commercialization of clean energy technologies.
And Blackrock will provide our investment expertise as a program deploys its financing around the world.
We have a long history of innovating to help millions of people worldwide improve retirement readiness and today, we are the largest investment only defined contribution provider in the industry with over one trillion dollars of assets under management on behalf of over 7200 defined contribution plan excuse me 72.
2000 defined contribution plan.
Our target date franchise Lightpath has seen $23 billion of net inflows. So far this year, representing a 9% organic growth rate far in excess and broader.
The target data industry.
And we continue to innovate ahead of the future needs of our clients.
We recently announced a significant milestone in our retirement income solution Lightpath paycheck.
Five large plan sponsors whose plan together represents about $12.0 billion in target date investment have elected to work with Blackrock to implement our Lightpath paycheck solution as a default investment option in their investment retirement plans subject to necessary approvals and conditions.
We remain committed.
To working alongside our clients and partners to help more people address the challenges.
Of spending and income in retirement.
We believe that globally integrated financial markets provide people companies and governments with better and more efficient access to capital that supports economic growth around the world.
This conviction drives our long term strategy in China as it has in every community and every country, where we operate.
Blackrock clients have benefited from our focus on the long term and we will bring this perspective to help global client clients invest in China.
And importantly to deliver investment solutions to Chinese investors.
After receiving our FMC in WMC license earlier this year, we launched our first two products in the third quarter raising over $1 billion in two weeks for more than a 110000 investors.
This milestone demonstrates the value proposition of Blackrock platform and the strength of our partnerships.
It also highlights the start of Blackrock living its purpose in China by helping more people secure in China, a better future.
And investing in the long term and retiring hopefully and dignity.
Just as we continue to evolve our business to meet client needs. We also evolve our entire organization.
A key driver of Blackrock success over the years has been our focus and do.
And deliberate process is on delivering leaders with a broad range of expertise a deep commitment to the firm in a one blackrock mindset.
This commitment to the evolution also extends to our board of directors.
We recently elected two new directors to our board Beth <unk>, President and CEO of land to the Lake and Kristin Peck CEO of Zotos Beth.
Beth and Kristen are recognized leaders in their respective industries and they bring a wide range of valuable perspectives and experiences that will help Blackrock and the board navigate our future on behalf of all of our shareholders.
Looking ahead I am confident.
The investments, we're making today will enable us to capture greater opportunities and to deliver industry, leading growth in the years to come.
More immediately I'm very excited to welcome our colleagues back to black box offices in certain parts of the world, where we begin our future of work pilot.
It's our culture, which can't be built or maintained remotely over the long term.
It ensures we can never forget who we are who we serve.
It also helps us in our markets and our industry and most importantly helps us continue to evolve and experienced the constant change in the world having togetherness in connection with all of our employees is vital for our culture and vital for serving the needs of our clients.
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 do ask a question. Please state your phone off of it.
Peter setting any use your handset to avoid any potential feedback to leave it here. So please limit yourself to one question. If you have a follow up please reenter the queue. We will pause for just a moment to compile the Q&A roster.
Your first question comes from Michael High price with Morgan Stanley. Your line is open.
Hey, good morning, Thanks for taking the question.
I just wanted to ask about alternatives given prospects here for rising yields and interest rates. There is some fear in the marketplace that this could soften flows into alternative products. So just would be curious to hear your perspective on how you see potential for industrial allocations to alternative products to evolve in a rising rate scenario.
And then as you look across your alternatives franchise today, maybe you could just touch upon some of your recent initiatives on our liquids and just any sort of views on which you think could be the largest contributor to growth at Blackrock amongst your illiquid products. Thank you.
Well first of all Hi, Michael I'm going to let Rob.
Vito answer that question so.
Michael as you know that we have been involved in the alternatives business in one way or another for a pretty long time, especially in the retail sector since 1988.
And our goal has been to.
Access the retail area for alternative this by keeping our promises over a long period of time on the performance.
So to start with the growth in retail alternatives, certainly certainly compelling as part of our strategy to serve advisers whole portfolios.
What we chose to do is bring a diversified product lineup to the retail.
Alternative investor So our job is to bring the appropriate wrappers four of those products that provide the solutions to help reshape their portfolio at a period of time when rates and returns have been very low and what we have seen them do is move from 1% to 2% are there.
Portfolio.
<unk> allocations up to 20%.
So year to date just in that sector. We have raised over $24 billion of net inflows and that set of approximately 85 basis point average fee rates across what we'll call our retail liquid alternatives and credit vehicles.
And our public private closed end fund offerings.
So our recent launch of alternatives portfolio analytics for financial advisors.
The web based Blackrock Advisor center and the continued product expansion is going to help us grow with those clients and in the recent years, we expanded our retail alternatives to include private credit and private equity.
Access to growth equity through closed end funds and we're working to expand our retail alternatives offerings now across real assets.
Anable and co investment opportunities. So just in the closed end funds alone we provide a wrapper.
That will enable us to provide up to $3 billion in alternatives to that and.
And just in a summary form.
In total we manage about 180 billion across liquid and altered the illiquid alts 'twenty.
<unk> $29 billion, right, now and dry powder to invest and deploy.
Approximately $210 million of future annual base fees, and including liquid and illiquid credit. Our platform is now over 310 billion for the top five manager in that and we built that alternatives platforms and raised another 100 billion of gross.
Capital over the last five years, and we expect to raise 101 billion more than the next three years. So just or September year to date, we have raised 25 billion of gross capital and deployed $10 billion and the cost.
There is some expectation that rates can rise still these are longer term investments that have enough spread that I believe that the demand is going to continue for quite a long period of time, and I think larry's rates scenario, which he said in the beginning as rates low for longer.
Only enhance the ability for people to want more alternatives.
And your next question comes from Alex Blasting lead with Goldman Sachs. Your line is open.
Hi, good morning.
Larry Thank you for taking the question. So inflation concerns are clearly everywhere and Larry as you highlighted in your prepared remarks, that's something that you guys are clearly focused on as well so.
Maybe two part question here. So one when it comes to Blackrock own cost structure, where are you seeing expense growth in margins heading into 'twenty. Two we obviously make changes on the salary from last quarter, but curious if this is becoming a bigger issue for sort of total comp and G&A. As you think forward and then secondly from a product perspective, what are the <unk>.
<unk>, you're advising clients to lean into more aggressively.
Into 2022 to protect their portfolios against the upside inflation risks. Thank you.
Let's take the expense versus.
Hey, Alex it's Gerry how are you.
So.
<unk>.
We're obviously.
We have seen some expense growth, which I think is expected in the context of the outsized organic base fee growth that we're delivering on the top line.
For the third quarter.
Margin, obviously was down about 120 basis points versus a year ago and I would say there were a couple of things there that kind of clouded what would've been.
Some operating leverage in the business really three things in particular, one was lower performance fees year over year.
While we had this discussion last year that performance fees in general hit the P&L at a much higher marginal margin and the rest of the business because there is only really compensation associated with it and no other operating costs in the business.
So when we see performance fees decline as they did a year over year that hasnt impact on margin.
Secondly, we had higher contingent consideration fair value adjustments were noncore expense this quarter, which was related to the Citi Banamex final payment.
And we had higher intangible amortization. So if you look at those three things those three things really more than offset.
Our our margin on a year over year basis, where you would have seen some some operating leverage improvement.
In terms of just looking at those individual cost I mean, when you look at comp comes up about 8% year over year again that was highly driven by base salaries, but not just the mid year that you saw him remember comparing it to a year ago, we will have normal base salary increases at the beginning of the year. We have the mid year head count is a little higher.
We have a purion this year versus where we didn't have last year and FX.
Is basically increase the the dollar cost of some of that compensation also.
So that's really the main driver was the base salary, but the midyear salary increase really didn't have that much to do on a year over year basis on the G&A side that was up about 30%, but again, a bunch of components there technology expense.
Increased year over year, and you will still continue to see that going forward. The primary driver. There obviously is.
Technology infrastructure, primarily the ongoing migration of Aladdin to the cloud, which we're probably about halfway through but we will be accelerating into next year Youre also seeing higher portfolio services costs, which again.
As part of our success story, CIO, So where you see us.
Winning large outsourced wealth solution.
Solution mandates either in Europe, or institutional mandates like a pension fund or the significant win that we just announced this quarter and.
In APAC in New Zealand.
Youre going to see higher portfolio of services cost because not all of those mandates are managed in house, we use third party advisers. When we use third party advisors, you're seeing those expenses reflected in that in that line item of the P&L. It's grossed up on revenues, but we also have to we have to bear the expense.
And obviously, there's always still some noise that we see year over year in our noncore here, we've talked about this Citi banamex payment and higher fund launch costs, which again in both cases associated with higher revenue.
Finally on the direct fund expense side.
I think that is purely variable.
It is obviously tied in most part to our growth and our index AUM, which is fundamentally driven by our success in Ishares.
That number was up roughly 38% year over year, but there is always going to be some noise in that number as we try to effectively manage that expense on behalf of the fund shareholders. So in this case this year, while there are some timing issues. It did reflect some one time expenses associated with moving indexes from one provider.
Our next to try and get those at lower cost.
And when you exclude a little bit of the noise that number was probably up about 31% year over year.
Versus average Ishares AUM increase of close to 34%, So I would say yes.
There is some expense increase I would say, it's less tied to inflation for us.
Then other players, it's really more tied to continuing to invest for growth and obviously.
If we if we are able to continue to deliver organic base fee growth well in excess of our 5% target, which we've done for the last six quarters in a row to 9% clip 13% over the last 12 months, we're going to see some elevated expenses to be able to drive that success.
And on the products and then more of an inflationary environment.
I would just clearly tell you that our platform is large it's diverse we're having conversations with clients globally, where they should be allocating I do believe you're seeing higher allocation towards equities over the last year across our clients' portfolios as equities rally they did they do.
Les in terms of rebalancing. The bigger question is how do you allocate across equities what is the role of them emerging markets, but I don't think inflation is playing a dominant role in the conversations.
Even in fixed income, where obviously, it's very obvious long duration assets are going to be impacted the most and so those clients in fixed income or worried about their duration risk they could go down.
To a low duration product that could go that could go into various different products with less convexity and less issues.
They could go into some type of inflationary protected type of notes to that's not going to be that large but the.
Resiliency of our platform.
Really allows us to have that conversation, whether it's in a deflationary world we're in an inflationary world.
And I do believe the if you look at the geographic dispersion of our growth.
The conversations worldwide represented.
These types of conversation what should we think about inflation.
Should we place what is the role of alternatives and in an inflationary environment. What is the role of equities and across fixed income. So I actually believe it's the volatility of the global economy is allowing us to have these robust deep conversations and I don't think Theres one global trend.
Going in and out of one product because inflationary fears and some clients don't believe in that some people actually believe its transitory.
So.
That's the.
I would look at this when there is uncertainty and when we're in a transition period more clients come the blackrock than ever before because we're asking those questions and I think because of the robustness of our platform whether it's an index oriented strategies are active strategies across the spectrum, we have the ability to work with them across all economic.
Environments.
Your next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great. Thanks, Hey, good morning, good morning, everyone.
Maybe just switch gears to.
Sustainable investing.
Growth where are you were you made some comments at a conference on the path to net zero.
At the current rate.
We're not there yet.
Maybe if you can talk about.
How you think the demand and the capacity for Blackrock to offer impact fund products more impact from the.
Readiness and the time Mystic JV.
Going forward and is that going to be should we be thinking of that as a pretty strong organic growth path going forward.
Flows.
In this COVID-19 world of accelerated into into sustainable products. Let me give you the context I think the global capital markets.
Institutions are moving very rapidly to adapt more disclosures related to sustainability.
More clients, including our hydrocarbon clients are looking to adapt how to continue to provide hydrocarbons to fit the needs of the current needs of our society, but also slowly adapt in a more sustainable platform too so across the board we are having very deep.
Deep conversations and I must say the conversations we're having with our hydrocarbon companies in the hydrocarbon.
Chemicals to oil.
There are more robust than ever.
They're deeper there broader than any other time.
And but our flows.
Continue to grow and dominate we continue to be a dominant leader year to date, we had about $80 billion of sustainable inflows, we had $32 billion of those inflows in the third quarter when I talked about the shift in finance, we're seeing that now specifically on your question related to.
The impact this is one of the reasons why we wanted to be.
Our partner in breakthrough energy, we want to learn more of the science and the new technologies. This is why we partnered.
Sure.
De Carbonization fund with Tomasic.
The demand is growing precipitously in terms of clients interested in finding new being part of this transition and so the capital is there what is not as prevalent are the projects are the opportunities.
We are having conversations with with universities, we're having conversations with governments across the board on how can we provide capital and one of the more dynamic conversations we're having with the traditional hydrocarbon companies across the board is how can we partner with them in terms of moving helping them move forward on on their sustainable.
<unk> on their decarbonization strategies other strategies around sequestering.
Their own carbon I mean, so many of the big multinational hydrocarbon companies are building new dynamic technology. So they can be the leaders in the sequestering of hydrocarbons of carbons.
At the same time that accelerating they may be using that to do.
Produce more energy at this time, but these are the type of solutions, we're having across the board.
<unk> heard the question.
My view is we're not moving fast enough, yes, I think that movement.
Towards sustainability is very fast and rapid related to public companies I think regulators worldwide are asking public companies and banks to do more disclosure my greatest fear and I spoke about this in my Ventas speech three months ago is we're creating a hybrid world a bifurcated world the pressure on public company.
And banks and asset managers are enormous we're not putting any pressure on private companies and there was a great story today and one of the newspapers about as hydrocarbon companies divesting some of their hydrocarbons the buyers or private equity firms. Okay that doesn't change the net zero world and Thats why im saying, we're never going to get to a net zero world. If we're not.
And we're not moving Holistically together public and private.
And then I spoke about obviously.
Editorial today it related about the need to invest in the emerging world. There is huge pools of capital standing by but we are not able to evaluate the first loss piece and so many of the brownfield investing in the emerging world and it is estimated the emerging world eats a trillion dollars a year.
Become more sustainable as a backdrop the emerging world minus China represents 34% of the hydrocarbon output.
And so if we are going to continue at the pace of $150 billion.
When theres a need of a trillion dollars were fooling yourself or are we going to get to a net.
Zero World, we're going to be fooling ourselves to getting to a net zero world. If we're only asking public companies. We are fooling ourselves if we believe by restricting supply with our traditional hydrocarbon companies.
That only raises energy costs, which were witnessing now.
And that is creating not adjust transition, which I spoke about in my last two CEO letters. So we have to be vocal we have to be we have to be forceful about at Blackrock is a leader in this and we are seeing the flows and I continue to see this big shift in investor.
Folios as they move away from traditional indexes to more sustainable types of indexes as they're moving away from different types of strategies and they are moving into these other strategies, we need to accelerate this.
Need to accelerate in a way that we're working with.
Our great hydrocarbon companies not against them.
Your next question comes from the line of Bill Katz with Citigroup. Your line is open.
Okay. Thank you very much good morning, everybody and thank you so much for taking the questions. Today I appreciate all the discussion maybe a two part question just keeping in line with that one is can you maybe peel back a little bit on why you're so successful.
In the retirement business, and where do you sort of see the paychex opportunity gaining scale and share and then completely unrelated but maybe for Gary how do you think about the exit fee rate base fee rate just given the divergent beta versus the very strong flow mixed dynamics. Thank you.
So bill the story is we're able to look at our clients' portfolio a holistic over the long term and our focus is to have our clients being able to retire in dignity.
Not a one off situation, it's a constant look at our portfolio over a period of interest rates and solve the problem with the appropriate wrappers and products. We have the scale of products. We have the performance we have the wrappers. So honestly. It is it is the focus.
A significant portion of all black box assets are dedicated to retire. This is what we do and while we dovetail that into the analytics that we provide.
We really can fulfill the entire gamut of retirement, so its product performance and technology and focus on what we think is the most important business that there is in the world is keeping our promises to clients. So they can retire in dignity. So bill I would add one.
More thing that Rob was talking about I think our consistency of messaging to our clients across many many years now.
Bill.
Deep relationships with our clients.
I don't believe our 9% growth rate.
As a onetime thing I think we continue to be growing our presence in this market. We continue to try to be an innovator with lightpath paycheck or.
Now I will let Pat paycheck about $340 billion.
I am sorry.
Our target date, and Lightpath paycheck, our most recent growth.
So I look I look I think conversations have never been broader and more robust.
And we continue to drive these conversations I believe more and more of the large plans are looking to Blackrock for that type of advice that type of handholding.
And I believe more than ever before especially in this world of.
Of.
Need for more employees that need to be.
Build deeper relationship with your employees I believe the conversations that every corporation now and how to create better connectivity with their employees is becoming a broader conversation than we've ever seen in the last 20 years I think the companies that have deeper connections a better a better retirement plan better health care plans.
Better health care plans are the companies that are driving more consistency with our employees less higher retention rates. So I truly believe this is going to this is one of those transitory things that are happening and I think it is catching a lot of organizations by surprise now the fluidity of employees moving from.
<unk> economy to another economy, moving to one business to another business and I truly believe this refocus on the needs of the employees in retirement is a major component of that refocus is is going to be a larger and more dominant theme and I think this is when I talk about this we are in this trans.
<unk> now I think many corporations are surprised at this I think COVID-19 and how we work remotely.
People.
Many people want to work remotely they feel differently about their work life balance. This is all transforming our society in many ways in a great way, but we are in this transition and some industries are going to be huge winners in this and some industries are going to be losers of this but most importantly, I think the common theme those companies.
That are that are working with their employees with purpose building a deeper broader connectivity with their employees they retain their employees with greater regularity and importantly, they are able to attract the best and the brightest and we're seeing that more and more in our conversations about business purpose and stakeholder.
Capital of them I think it resonates.
Resonates with our corporate clients, who have these defined contribution plans and they are asking us out to create that greater depth.
Robustness and then you overlay what we're trying to do related to innovation I think it really is a compelling story Wi Blackrock.
And bill on your <unk>.
Second question, which I think was about fee rate going into the fourth quarter.
We generally don't provide a lot of guidance on that we'll leave that to you guys, but I will I will say a couple of things on that obviously, you will see that the spot rate entering the fourth quarter was moderately lower but not a big deal and average assets for the third quarter. So I think we're probably about the same but I would direct you.
Towards page five of our supplement I think obviously a lot of things go into the fee rate and in fact, I would say that from an organic growth perspective.
Every month of the third quarter was generally.
It was very consistent so it wasn't like we saw a lot of.
Volatility in terms of our organic growth, but clearly you do see some differences in the spot.
Rates in terms of markets relative to the average rates and you will clearly see there that.
As we've talked about in terms of divergent equity beta we did see an acceleration.
In terms of the decline of certain emerging markets as we got to the end of the third quarter and I think youll see that on the supplement where some of our higher fee markets in Asia, the emerging markets and commodities in particular all down roughly.
Somewhere around mid to high single digits with actually the Blackrock equity index on a spot basis down about 3% so.
No question that we did see divergent beta accelerate into the end of the quarter, but again given some of the other stuff I think that might have a moderate very moderate impact on the fee rate, but I don't think anything significant.
Okay.
And your last question comes from Robert Lee with <unk>. Your line is open.
Great Good morning.
<unk>.
Hope everyone's doing well.
Maybe real quick.
The alternatives business.
And I was interested in.
On the <unk>.
<unk> obviously.
Strategy.
Strategy, but the big win but can you maybe talk about what youre seeing.
<unk> growth will position us for market in terms of voice from our big clients.
Two more.
Those are Boeing their disposals.
Where you have the right product set.
And frankly industry as they look to expand into structured credit and whatnot.
This is probably good.
Upfront.
So Gary Barbell list, we're seeing insurance portfolios have always had an allocation to what we're all calling alternatives.
But as the alternative packages have become much more complicated.
Certainly the technology and the management of those is not really caught up so we're being asked by insurance companies, who have determined that in many cases, it would be better cheaper faster with technology to outsource many of those investments and of course, that's a very very big part of.
Our platform.
We're being called in more and more to be a partner.
With insurance companies on their portfolio overall and so.
So huge growth area for us with Aladdin because the technology is that kept place. So we're seeing a lot of interest.
From the insurance companies and it spans the growth from private credit.
Especially real estate.
And infrastructure and those are three areas that we've spent a lot of time developing and certainly an aladdin our ability there is second to none so it's become a bigger opportunity for us in the last in the last year or so.
Couldnt agree more so our big business today, obviously is in excess of 450 plus billion dollars, you've mentioned ABL, which is.
Which will fund in the fourth quarter very significant mandate I think Rob is right.
Portfolio resilience diversification portfolio construction, which takes advantage of our great performance in core fixed income our increasing momentum.
Mental capabilities across the breadth of private.
Private markets and.
Strong applicability and we're seeing obviously increased momentum in our broad based multi asset capabilities that youre seeing come through in our quarterly results. So thanks for the question Rob.
Ladies and gentlemen, we have reached the allotted time for questions. Mr. Frank do you have any closing remarks.
Thank you operator, I want to thank all of you for joining US this morning and for your interest at Blackrock.
Our third quarter results again, as a direct results of our steadfast commitment to.
Serving our clients listening to our clients responding to our clients and hopefully staying in front of our clients' needs. So we could be with them as they evolve and change.
As large of opportunity ahead of black box than ever and Blackrock focus remains on.
On investing in our people.
On our communities, where we operate across the world and in our platform.
And most importantly, as we continue to stay ahead of our clients' future needs. We will continue to be driving excellence on behalf of all of our shareholders.
Thank you hopefully everyone have a safe and healthy fourth quarter.
This concludes today's teleconference. You may now disconnect.
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