Q4 2022 BlackRock Inc Earnings Call
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Mr. Meade you may begin your conference.
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.
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 see today.
Blackrock assumes no duty and does not undertake to update any forward looking statements.
So with that I'll turn it over to Gary.
Thanks, Chris Good morning, and happy new year to everyone. It's my pleasure to present results for the fourth quarter and full year 2022.
Before I turn it over to Larry I'll review, our financial performance and business results, while our earnings release discloses, both GAAP and as adjusted financial results I will be focusing primarily on our as adjusted results.
As a reminder, beginning in the first quarter of 2022, we updated our definitions of adjusted operating income operating margin and net income year over year financial comparisons referenced on this call will relate current quarter results to these recast financials.
Throughout Blackrock history, we have consistently invested in our business with a long term focus and commitment to serving clients across market environments. We have established leadership positions in high growth areas, such as Etfs private markets outsource solutions and technology and we have integrated these industry leading capabilities into our one blackrock.
<unk> business model and culture to create a distinct and differentiated value proposition for clients.
As a result of these investments we grew organically at our fastest rate ever in 2021, and while 2022 was one of the most challenging market environments in over 50 years clients around the world. Once again turned to Blackrock for advice and assistance to construct more resilient portfolios in good times and bad times.
Whether adding or reducing risk our continued industry, leading organic growth demonstrate the clients are increasingly consolidating more of their portfolios with Blackrock for long term solutions that solve their most challenging investment needs and address their unique risk preferences and priorities.
During 2022, Blackrock generated industry, leading total net inflows of over $300 billion.
And delivered positive organic base fee growth.
<unk>, we ended the year with strong momentum generating approximately $114 billion of total net inflows in the fourth quarter, representing 3% annualized organic base fee growth and reflecting continued momentum ishares and significant outsourcing mandates.
All your revenue of $17 $9 billion was down 8% operating income of $6 7 billion and earnings per share of $35.36, both declined 13% compared to 2021.
For the fourth quarter revenue of $4 $3 billion was 15% lower year over year, primarily driven by the impact of lower markets and dollar appreciation on average AUM and lower performance fees.
Quarterly operating income of $1 $6 billion was down 25% while earnings per share of $8 93 with.
It was 16% lower versus a year ago also reflecting higher nonoperating income and a lower effective effective tax rate in the current quarter.
Non operating results for the quarter included $159 million of net investment income driven primarily by mark to market gains in our private equity co investment in seed investment portfolios and our strategic minority investment in investment.
Our as adjusted tax rate for the fourth quarter was approximately 23% driven in part by discreet items. We currently estimate that 25% is a reasonable projected tax run rate for 2023, primarily due to an increase in UK tax rates.
The actual effective tax rate may differ because of nonrecurring or discrete items, where potential changes in tax legislation.
Fourth quarter base fee in securities lending revenue of $3 4 billion was down 14% year over year in line with the corresponding decline in average AUM, primarily reflecting the negative revenue impact of approximately $1 seven trillion dollars of market beta and foreign exchange movements on AUM over the last 12 months.
<unk> fourth quarter base fee in securities lending revenue was down 4% despite positive organic base fee growth in the quarter, our fourth quarter annualized effective fee rate decreased by approximately one half a basis point from the third quarter, reflecting the previously discussed impact on our fourth quarter entry rate continued mix change favoring lower fee mandates.
And lower securities lending revenue.
Fourth quarter, and full year performance fees of $228 million and $514 million, respectively decreased from a year ago. The declines primarily reflected lower revenue from liquid alternative and long only mandates, partially offset by higher fees from illiquid alternatives, notably as our private markets business continues to scale.
Full year performance fees from illiquid alternatives increased 42% year over year, and our unrecognized deferred carry balance which represents a portion of our potential future carrier fee revenue exceeds $1 $4 billion.
Our Aladdin business delivered record net new sales in 2022 and demand for our technology solutions has never been stronger quarterly technology services revenue increased 4% year over year and full year revenue of $1 4 billion increased 7%.
With periods reflected significant revenue headwinds associated with the FX impact on Aladdin is non dollar revenue and market declines on Aladdin fixed income platform assets.
Annual contract value or HCV increased 8% year over year on a constant currency basis, we estimate ACP would've increased 10% from a year ago.
Total expense decreased 4% in 2022, reflecting lower compensation direct fund expense and G&A expense for.
For the full year employee compensation and benefit expense was down 5%, primarily reflecting lower incentive compensation due to lower operating income and performance fees and lower mark to market impact of certain deferred compensation programs, partially offset by higher based compensation.
The year over year comparisons of fourth quarter compensation expense are less relevant because we finalized full year compensation in the fourth quarter.
2022, direct fund expense decreased 7% year over year, primarily reflecting lower average index AUM.
The sequential decline in quarterly direct fund expense also includes the impact of higher rebates that seasonally occur in the fourth quarter.
Excluding product lines caused fourth quarter G&A expense increased 2% year over year, reflecting ongoing strategic investments in technology and the impact of higher foreign exchange Remeasurement expense, partially offset by lower occupancy and sub advisory expense for the full year, we estimate the core G&A expense was up 11% compared to 2002.
91, primarily driven by higher technology spend associated with our Aladdin cloud migration and a return to more normalized levels of T&D expense are.
Our full year as adjusted operating margin of 42, 8% was down 400 basis points from a year ago, primarily reflecting the negative impact of markets and foreign exchange movements on revenue and the ongoing longer term strategic investments, we've been making in technology and our people.
Blackrock industry, leading organic growth is a direct result of the disciplined investments we have consistently made through market cycles as we've shown throughout our history. It's often in times of greatest uncertainty, where Blackrock differentiated model enables us to continue playing offense and we emerged even stronger.
Since July we have been aggressively managing the pace of our discretionary spend so we would be better prepared for 2023, a year in which we will need to increasingly focus our resources on areas of greatest opportunity and.
In order to continue investing in our people and critic and critical strategic priorities. During the year, we recently restructured the size and shape of our workforce to free up investment capacity for our most important growth initiatives by taking a targeted and disciplined approach to how we shape. Our teams we not only increase investment capacity for these initiatives.
But also create opportunities for our incredible talent.
This resulted in a fourth quarter restructuring charge of $91 million, primarily comprised of severance and accelerated amortization of previously granted deferred compensation awards for approximately 500 impacted employees or two 5% of our global workforce.
This charge appears as a single line expense item on our 2022 GAAP income statement and has been excluded from our as adjusted results to enhanced comparison to prior periods are.
Our business is incredibly well positioned to take advantage of the opportunities before us and we remain deeply committed to optimizing organic growth in the most efficient way possible at present, we would expect our head count to be broadly flat in 2023, optimizing the shape of our talent pyramid and growing our footprint in IHOP innovation centers will continue to be.
Central to our talent strategy, allowing us to continue to support growth at scale.
In addition, we would also expect a mid to high single digit increase in 2023 core G&A expense driven by the upcoming move to our new Hudson yards headquarters continued investment in technology to scale, our operations and support future growth and the annualized impact of migrating Aladdin clients to the cloud which is now substantially.
<unk> complete.
We are also investing through prudent use of our balance sheet. The best positioned Blackrock for continued success. During 2022, we allocated $1 $2 billion of new seed and co investment capital to support our growth and our year end portfolio now approximates $3 9 billion.
Our strategic minority investments are reinforcing various elements of our strategy and simultaneously generating very attractive returns for our shareholders. During the year, we invested in circle and became the primary manager of the U S. D C cash reserves and we recently made a minority investment in human interest a tech enabled end to end retirement plan.
<unk> provider, which is helping Americans employed by smaller businesses access easier ways to save for their retirement.
We also remain committed to systematically returning excess cash to shareholders through a combination of dividends and share repurchases and returned a record $4 9 billion to shareholders in 2022, including $1 9 billion of share repurchases an increase of over 30% from 2021.
Since inception of our current capital management strategy in 2013, we've now repurchased over $13 billion of Blackrock stock, reducing our total outstanding total shares by 13% and generating an unlevered compound annual return of approximately 15% for our shareholders.
At present based on capital spending plans for the year and subject to market conditions, including the relative valuation of our stock price. We are targeting the repurchase of at least $1 5 billion of shares during 2023.
As you will hear more from Larry Blackrock strategy has always been guided by our clients' needs. We are relentlessly focused on providing choice delivering strong investment performance and executing our fiduciary duties with excellence.
This enables us to build deeper and broader relationships with more clients and drive differentiated growth across our platform.
Fourth quarter long term net inflows of $146 billion, representing 8% annualized organic asset growth were led by flows into strategic growth areas, including Etfs outsource solutions and illiquid alternatives full year long term net inflows of $393 billion were positive across all regions led by net inflows of two.
<unk> hundred $30 billion from clients in the United States.
Blackrock generated industry, leading ETF net inflows of $220 billion in 2022, representing 7% organic asset growth and 3% organic base fee growth, including a record $123 billion into bond Etfs.
Fourth quarter, ETF net inflows of $90 billion, reflecting some seasonality, but also reflected the diversity of our product and client segments surging demand for our bond Etfs, which saw $47 billion of net inflows represented the second best quarter in our history. We also saw continued strength in core equity Etfs as well as precision.
Exposures as clients reassess tactical asset allocation changes during the quarter.
Full year retail net outflows of $20 billion reflected ongoing industry pressures in active fixed income and world allocation strategies, partially offset by strength in index SMA and our systematic equity income and multi strategy alternative funds.
Fourth quarter retail net outflows of $15 billion reflected similar trends.
<unk> institutional business generated record net inflows of $192 billion in 2022, representing 4% organic asset and 3% organic base fee growth paced by approximately $170 billion of active net inflows, reflecting broad based strength across all product types and the funding of several.
Significant outsourcing mandates.
Fourth quarter institutional active net inflows of 76 billion were also positive across all product types and included the funding of the substantial remainder of the AIG corbridge fixed income mandate.
We remain well positioned to be an investor demand for risk adjusted Alpha and yield and our diversified active fixed income platform with strong three and five year performance records across total return unconstrained high yield and credit is especially well positioned for growth as interest rates stabilize in the latter part of the year.
Demand for private market has also continued with $16 billion of net inflows into illiquid strategies during the year driven by private credit and infrastructure.
In addition, as our private markets business continues to grow we also raised significant new client commitments. In 2022, we now have approximately $34 billion of committed capital to deploy for institutional clients in a variety of strategies, representing approximately $260 million in future annual base fees and significant potential.
Performance fees.
Finally, <unk> cash management platform experienced $32 billion of net outflows in the fourth quarter and $77 billion of net outflows for the year, Despite a particularly challenging year for the broader institutional liquidity industry Blackrock became the number one international money market provider and as rates stabilize we are well positioned.
<unk> to grow market share by leveraging our scale product breadth technology and risk management capabilities.
Before I hand, it over to Larry one last time I would like to take this moment to thank them for giving me the opportunity to be CFO of this amazing organization for the last 10 years, it's truly been a highlight of my career and I'm deeply grateful for the feedback advice and wisdom I acquired from our shareholders our sell side analysts our board.
Blackrock colleagues and most of all the amazing finance team I've had the privilege to work alongside.
Blackrock is incredibly well positioned to continue generating differentiated growth and delivering for clients employees and shareholders and I look forward to continuing the journey in my new role I'm, even more excited for lies ahead with Martin's small as our next CFO I know, we will be in great hands.
With that over to you Larry Gary Thank.
Thank you excellent job.
Good morning, everyone.
And happy new year.
Thanks, everyone for joining this call today and throughout Blackrock history, we are focused on delivering the best financial returns for each and every client.
In line with our objectives and goals.
We remain relentless about staying ahead of their needs of all our clients needs, providing them with more choice innovating to help them achieve financial well being.
Yeah.
We serve clients of all types large small individuals and institutions.
In all parts of the world So providing them choice is critical in helping each of them achieve their unique financial goals.
We have built the industry's most comprehensive and integrated investment and technology platform to provide them with solutions that fit their unique objectives.
Our job is then to deliver the best financial returns based on their individual preferences is this differentiating platform that drives our differentiating results.
Blackrock generated $307 billion of net new assets and positive organic base fees in 2022.
These industry, leading results reflect by the decisions by thousands of organizations that investors that continually place their trust in Blackrock.
The consistency of our results across both good and bad markets.
Markets up and down.
That's where our clients confidence.
And Blackrock performance.
Our guidance and our fiduciary standard.
In the United States, we generated $230 billion of long term net inflows.
And flows were positive across all regions throughout the world.
We generated organic growth across index and active and across all long term asset classes from fixed income to equities, the multi asset to alternatives as clients turn to Blackrock for more solutions across their entire whole portfolio.
We ended the year with very strong momentum with $114 billion of fourth quarter, net inflows, representing 3% annualized organic growth base fees.
We estimate that Blackrock captured over one third of the long term industry flows in 2020 to leading the industry and delivering positive organic base fees for the year.
Over the past five years alone Blackrock has delivered an aggregate $1 eight trillion dollars of net inflows or 5% average organic asset growth compared to flat or negative industry flows.
Over this five year period of time have been both rallies and contractions.
But blackrock has always delivered growth, reflecting the power of our connectivity to our clients are.
Our fiduciary standards and a diversified platform.
2022 was a year of transition and.
A complex market environment for every one of our clients.
We witnessed transformation and the geopolitical world order that rewired, globalization and supply chains up ending assumptions about inflation.
And drove the normalization and eventually tightening of monetary policy.
Production constraints labor shortages in energy and food price disruptions and price increases followed the Russian invasion of Ukraine, causing inflation did a 40 year high sparking a cycle of rate hikes by central banks.
Inflation continues to be a top concern. Despite recent cooling we saw at the end of this year and the beginning of this year global global growth continues to slow.
The challenge the challenge as society has experienced.
In the past year, but since the pandemic.
Has eroded hope.
And reinforced pessimism in many parts of the world.
We have seen a decline in birth rates.
An increase in the aging populations.
Horizon nationalism, and populism and I fear that we are entering a period of economic malaise.
To correct this the role of business.
It becomes even more critical than ever.
Leaders must continue to invest in technology and research and development to improve long term prospects and to provide a vision that offers hope about the future.
Fundamentally investing is also an active hope hope.
Hope that the future will be better than the present.
People do not have hope they will not take money out of the bank of Canada and invested in a 30 year retirement outcome.
Today, the financial narrative, so often about the near term market moves the topic of the day like latest mean stock or a media headlines about political polarization.
Throughout our history Blackrock has taken a long term approach to investing.
It is Blackrock will to show people the benefits of investing for the long term to give them hope that over time their returns with a balanced portfolio can deliver long term financial security.
Against the current backdrop Blackrock has an even greater obligation to help our clients Wade through the uncertainty and gives them the confidence to invest in the long term.
We see many opportunities for our clients to capitalize on market disruption.
To rethink portfolio construction.
To consider the renewed income generation potential of bonds.
Going to reallocate the sectors that may be more resilient in the face of elevated inflation.
Blackrock is uniquely positioned to help clients navigate opportunities in this environment because of our diversified platform and integrated investment management technology advisory expertise.
Our whole portfolio approach is resonating more than ever before and underpins the record $192 billion of long term net inflows from institutional clients in 2022.
Institutional clients are choosing Blackrock because of our scale, our resources and the expertise to take on the challenges of each and every market.
Clients select us because we say at adverse for them in the long term and in alignment with their beneficiaries, whose time horizon span decades.
And in an increasingly complex investment environment, we're seeing strong demand from clients looking to partner with Blackrock for outsource solutions and expect this to continue in 2023.
Just in the last two years Blackrock has been entrusted to lead several significant outsourced mandates totaling over $300 billion in.
AUM spedding existing and new clients.
And I am proud to say our pipeline remains very strong.
In 2020 to Blackrock to help millions of investors plan for their financial futures and they continue to chart Ishares Etfs for long term investments.
Ishares led the industry with $220 billion of net inflows.
We are proud that <unk> offers the most choice in the RV industry in.
In 2022 alone we launched over 85, new Etfs globally and in a testament to our scale.
The demand from our clients at our diversification.
We had over 70 different Ishares Etfs.
With annual net inflow, surpassing 1 billion.
Our growth was well well was well diversified across our core equity or fixed income factors sustainable and thematic ETF product categories, and we have seen repeatedly in periods of market uncertainty investors turn to Ics precision exposure Etfs to make those tactical asset.
Allocation decisions into year end.
Icos bond Etfs generated a record $123 billion of net inflows, we again led the industry and six of the top 10 asset gathering bond Etfs in 2022, where ishares.
When I started my career, a long time ago as a bond trader it was much more difficult for individuals to access the bond market.
There are options were high cost mutual funds are paying large markups to brokers to buy bond directly.
20 years ago Ishares launched the first for U S listed bond Etfs and today, we provide over 450 ETF choices across our 760 billion Ishares fixed income platform.
And then a certain rate and credit environment. This years Ishares bond Etfs benefit for having the most diverse product offerings in the industry spanning governments.
Investment grade high yield emerging market municipals innovations like by Reits and I bonds.
The diversification means we can meet our clients' demands as it evolves earlier this year investors use ishares.
Ishares bond Etf's express preference for short duration Treasury and more recently, our high yield our corporate long duration Etfs had been leading the flows.
The role of bonds in our portfolio is increasingly relevant for the first time in years investors get actually earn very attractive yields without taking much duration or credit risk.
Just a year ago. The U S. Two year Treasury note was yielding approximately 90 basis points and today theyre, earning over 4% with corporate bonds, earning over five and high yield earning eight.
Clients are coming to Blackrock to help them pursue generational opportunities in the bond market and our leading <unk> three two trillion fixed income and cash platform is well positioned to capture accelerating demand.
In addition to our industry, leading bond ETF flows clients turn to Blackrock high performing active platform, where over 80% of taxable.
Fixed income assets are performing above benchmark or peer medium for the three and five year period.
There will be more money moving around and as investors Recalibrate. We believe we will benefit as clients build portfolio will Hyatt with high performing active investments alongside Etfs and of course private market strategies.
The need for income and uncorrelated returns against the backdrop of higher inflation and a more challenged market for public equities will continue to drive demand for private markets.
We raised $35 billion in client capital in 2022 led by private credit and infrastructure.
We're successfully scaling successor funds delivering larger funds through <unk>.
<unk> subsequently fund vintages.
2020, our third global energy and power fund raised a total of $5 billion.
Surpassing the total assets of vintage one and two combined in 2020 to the fourth fund raised $4 5 billion in Investor and initial investor commitments at first close achieving over half of our targeted seven $5 billion raise.
Our diversified infrastructure funds are providing social and economic benefits to communities in the United States.
And around the world.
We recently announced an agreement to form Giga power, a joint venture with one of our diversified infrastructure funds at AT&T, which upon closing will provide fiber networks to customers and communities outside AT&T traditional service area. The network will advance efforts to bridge the digital divide.
<unk> and ultimately helps for local economies and the communities in which get a gigabit or operates.
One of the largest opportunities in infrastructure investing over the coming years will be the renewable infrastructure in the United States. The inflation reduction Act contains a range of measures to spur greater investment in demand for renewable energy infrastructure and technology.
In Europe , the energy supply shocks of 2022 of only sharpen the focus on energy security and given rise to the European Commission's Rep power EU plan for renewal energy investments.
Client demand for income and uncorrelated returns also resonated in our multi asset and fundamental active equity platforms, where we saw in our tactical asset allocation and an equity dividend franchises, we see great opportunities for clients in our income and dividend growth equity offerings, which can be tools to help thread.
Needle between generation and income and growth that could potentially outrun inflation.
Okay.
Aladdin is foundational to how we serve clients across our platform.
It helps us deliver precise tracking for our Ishares Etfs it allows us to onboard and serve as increasingly large complex mandate and it has consistently demonstrated its value.
Receding.
Assessing high trading volumes and providing transparency into portfolios of vault in volatile markets.
Our multi decade investment in Aladdin continues to differentiate Blackrock and continues to differentiate Aladdin.
As an asset manager.
Periods of market volatility have historically underscore the importance of Aladdin and then $19.
In 2022, we saw record net sales of Aladdin contributing to 10% growth in our annual contract value on constant currency basis.
We see clients doubling down on technology, and leveraging fewer providers to do more with less this is evidenced by our mandates this year about half spanning multiple aladdin products.
We continue to evolve and enabled clients to further simplify their operating infrastructure with Aladdin.
It's increasingly wanted Taylor, how they use aladdin to meet their own unique and specific needs and we are providing them with choice and flexibility.
We are creating deep integration with ecosystem providers and third party technology solutions. Our partners include asset Servicers cloud providers digital asset platforms trading systems, and others, who could work with clients and their Aladdin environment to provide a more customized and seamless end to end experience.
We continue to innovate in a variety of areas to expand the choice we offer clients. We're transforming on how clients can engage with companies. They are invested in through our voting choice technology.
Blackrock was the first organization to build and launch technology empowering institution clients at Blackrock separate accounts and nearly 650 pooled vehicles to choose how to vote the shares of the companies they own through our own index capabilities.
Nearly half of our clients index equity assets under management are now eligible. This includes our public and private pension plans, we manage in the United States as well as retirement plan, serving more than 60 million people around the world and in just the last six months the number of index equity clients nearly committed devoting choice.
<unk> has more than doubled.
We are also working to expand this capability to individual investors in markets like the United Kingdom and in funds, where it's possible.
The majority of Blackrock slides are investing to finance retirement.
And Blackrock has been in the forefront of innovation and advocacy for retirement solutions throughout our entire history.
We recently made a minority investment in human interest, which is helping small and medium sized businesses to provide affordable accessible retirement plans to their employees. So more American can serve and say for our secured financial future.
We believe human interest visions aligns closely with Blackrock mission of helping more people experience financial well being by making them by baking retirement plans accessible to more Americans.
We've always believed in being agile in how we manage Blackrock that.
That is how we built our industry, leading position and generated value for shareholders over the long run.
The uncertainty of the opportunity around does it makes us even more and more important that we stay in front of the changes in the market and focus on delivering for each and every client.
To extend our market leadership, we must invest in our people invest in our platform for the long term by allocating resources, where they are needed most.
That are cost effective and support our ability to scale.
As Gary mentioned, our restructuring effort resulted in a number of valued colleagues and friends, leaving the firm.
We greatly appreciate the contributions they have made to Blackrock and wishing the best for them.
Blackrock remains a growth company, even with this restructuring.
Our head count will still be 6% higher than a year ago.
Looking ahead.
We have deep conviction in our strategy and ability to execute with scale.
And with expense discipline.
We are honored that our clients have entrusted us with over $300 billion of net assets in 2022.
We see similar clients needs reshaping and shaping the opportunity set through 2023 being a large insurance company seeking outsourced partnership with scale and expertise pension funds looking for attractive yields and less duration and credit risk are financial advisers, using our models and ishares they build.
Better portfolio to meet the challenges of long term challenges of our clients.
The investments we have made over the years have also position us to capture emerging opportunities in bond Etfs.
Huge opportunities in the rebuild out of infrastructure in the United States and the world and opportunities in the in transition finance.
Our momentum in Aladdin has never been stronger and our advisory capabilities continued to play a critical role in our dialogue with clients.
I spoken frequently over the years about the need for Ceos to effectively articulate the value of their companies delivered to shareholders clients employees and other stakeholders.
Similarly, as the CEO of Blackrock I have a responsibility to articulate the Blackrock story and it has never been more critical to do that now.
Over the past year Blackrock has been the subject of a great deal of political and media discourse. It is my duty to address the questions being asked of US a responsibility that I take very seriously.
Some of these people have suggested we are either two progresses. Some of them have suggested were too conservative in how we manage our clients' money.
I wanted to just tell everybody where neither.
We're a fiduciary.
We put our clients returns first.
We offer every client investment choices and then pursue their objectives that they choose and the performance.
<unk>.
I want to make it clear to our clients our shareholders and all of our stakeholders that we will be deterred in pursuing the outcomes that our clients desire.
This steadfast focus has not only enabled us to deliver for our clients, but also to drive growth for each and every one of our shareholders.
Since our IPO in 1999.
<unk> has delivered a 7700% total return to our shareholders.
And this is the strongest return of any financial services company in the S&P 500 over that period.
I think blackrock employees for their commitment to upholding our culture and living every day our purpose.
There are always driving to better serve each other and each of our clients and finding new and innovative ways to be helping our.
Stakeholders achieve.
A financial wellbeing.
I really do want to call out and thank Gary once more for his last earnings call.
He had been a friend way beyond this permit Blackrock has been an adviser.
Sometimes he has been tough sometimes it's been lovely.
Eddie but Gary has been an important part of driving our growth over these last 10 years and drive the success of our share price for our shareholders.
I am thrilled personally and professionally he will continue to be with us for Blackrock as a vice chairman and I look forward to having Martin small join us as the CFO for our next call in April .
Thank you everyone and let's open it up for call for a question.
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 take your phone off of its speaker setting and to use your handset to avoid any potential feedback.
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.
We will take our first question from Daniel Fannon with Jefferies.
Please go ahead.
Thanks, Good morning, and happy new year.
Happy new year.
Yeah. Good thank you.
Wanted to follow up on your comments around asset allocation and thinking about conversations you are having with clients here.
Into 2023, clearly fixed income is an area that you've talked about.
Can you talk about do you need to see rates peak before you start to see that demand are you seeing it now and then also what other kind of assets outside of fixed income products that you see really incremental demand as we think about this year.
Bob I'll take that one Dan Ralph compete out here.
<unk> has as you know experienced a very difficult market in 2022.
There were joined double digit declines across all global equities and bonds I.
I don't think we have to wait to actually call rates.
Whereas our top or not to know that the traditional 60 40 portfolio has been challenged and right now they need a partner to help them rethink their allocations, which youre going to have to be much more nimble because of the change.
In market structure, and specifically, how each asset class is going to be matched.
We find that they are turning to Blackrock more and more for bolt insights and solutions.
And the three areas that are more common or inflation protection.
Cost of the uncertainty of where rates are going to go there and are looking for income.
<unk> from the products they have and from cash.
And they're looking at how to navigate the private markets, which continue to grow in size.
We have built over the years a platform that is allowing us to address these client needs. Both in good markets and in bad ones and I think the results that Larry described in 2020 to demonstrate.
How we have been able to participate significantly for our clients, but now to answer your question, even more indirectly we see a lot of tailwind that I think is going to support our growth trajectory into 2023.
The first one is certainly fixed income.
Thus for the first time in years insurers and pension funds can actually earn very attractive yields without taking much duration or credit risk.
And our $2 five trillion dollars fixed income platform is strong the performance across our flagship franchises are excellent and we are well positioned to help clients and back to their allocations as the rate environment.
Stabilizes so our fixed income teams both in active and passive already.
A lot of that will come through Etfs.
And we expect that.
The industry is going to reach 15 trillion in the next few years with I assure is leading the growth as it did in 2022, whether it's through fixed income core or precision we have the most diversified lineup of Etfs and as you know.
In the U S. Etfs only represent two 3% of the bond market. So we have a lot of runway here.
On the private market side, I would emphasize infrastructure and private credit and one of the largest opportunities will be in renewable infrastructure and that will benefit even more from the infrastructure reduction Act.
That has been passed in the U S. And an example, Larry gave in his remarks was the recently announced infrastructure and JV with AT&T.
Cope Giga power, which is an example of this momentum, which we think there will be many other JV is available to us with other companies in renewable infrastructure.
And private credit continues to expand as public financing retreats and more company seed capital and there were a couple of others that I think should be highlighted especially as growth areas for Blackrock. One is outsourcing and we have seen this trend over the last several years.
And our recent successes with significant size mandates are going to position us well to execute on our strong 2023 pipeline.
One that has been overlooked is models there is a shift in wealth management.
Some individual stock fund selection.
A whole portfolio based approach and that is accelerating demand for our models.
More importantly, Blackrock managed models are only a fraction of the opportunity the biggest growth potential comes from other model managers using ishares and other index products as building blocks and very large size and their asset allocation.
And then of course lastly, as Aladdin because you know that in periods of market volatility. It has historically increased the importance of Aladdin to our clients as we saw in our record net sales in 2022, so all of these.
Position us for continued growth in the years ahead.
Our next question comes from Alex Blaustein with Goldman Sachs. Please go ahead.
Hey, good morning, everybody and Hello happened in Europe as well.
Congrats again on your next move in maybe in the spirit up as being your last CFO earnings call. We'll get an expense question in there. So heard you on the core G&A guide mid to high single digits for 2023, maybe help us frame sort of the market conditions that this guide contemplates and I guess how are you.
Are you thinking about the expense base more broadly, including compensation compensation rate things like that for the year.
Thanks, Alex.
So maybe just some context right. We I think we've spent the last couple of calls talking about.
Our philosophy of really trying to drive organic growth because we know that that is obviously a critical driver of our of our p/e multiple.
And I think we are.
We're also mindful.
That.
We come through these periods of volatility generally better position than our competitors because of our all of our diversified model that gives us the ability to continue to invest going forward when others simply cant do it.
I think as we've talked about there's this conundrum right, which is on the one hand, we know that RPE multiple was driven by growth and on the other hand, just understanding that.
In the context of the overall market our revenue run rate is down and there is a little bit of a misalignment between our expense base and our revenue capture rates versus where it was a couple a couple of years ago, but I think as we saw coming.
Coming out of the pandemic.
We continued to invest in our business and that resulted ultimately in the two best years in Blackhawks history. In 2021, and then 2022, we have once again delivered by generating over $300 billion of net inflows, while most of the industry has been an outflow. So our challenge today it really remains to ensure that.
We can continue to invest in our highest growth opportunities.
And we're obviously committed to doing that by trying to relentlessly reallocate resources across the organization.
We obviously don't go we don't go into a year predicated on any beta assumptions, we try to take data out of it I think Rob has built an amazing job of explaining where we think most of the growth potential or on the revenue side and so it's with that in mind that in July and that we really began to more aggressively manage the pace of our hiring.
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Our discretionary spend and more recently determined to affect it.
Broader restructuring of the size and the shape of the workforce to really free up that investment capacity to ensure that we can continue to basically drive our most important growth initiatives and obviously create opportunities for our talent to develop and prosper. So I think <unk> seen that.
And we talked about that.
For next year.
We expect our head count will be broadly flat, we are going to continue to optimize our talent pyramid and grow footprint ni hub innovation centers globally in the U S EMEA and APAC and as I mentioned, we would expect a mid to high single digit increase in our core G&A expense, that's coming off a lower base.
Because as you know we initially had given you guidance, 13% to 15% increase we actually came in closer to 11.
It will be growing off a lower base and that will continue to be driven by the variety of things that I mentioned on the call Hudson yards technology to scale ops and.
And obviously the annualized <unk> of a number of expenses, including our Aladdin cloud migration cost, but I really want to remind everyone that our highest margin business is beta and obviously, we've seen that both on the way up and we also see it on the way down in this market hopefully recover.
We are very confident to see to say that our revenue growth over the long term should meaningfully outpace our growth in any of these discretionary expense items and ultimately be accretive to our operating margin.
We'll take our next question from Michael Cyprus with Morgan Stanley . Please go ahead.
Hi, Michael have a great. Thanks.
Hey, good morning, happy new year, and Gary Congratulations on an amazing 10 year run and a CFO wish you all the best unit realm.
Just a question that I'm, hoping you could unpack a bit of the strength that youre seeing in a lot of it went to record wins and how you think about extending the platform to other use cases and verticals and how youre thinking about the drivers of growth over the next several years.
We have been <unk>.
Incredibly focused and broadening the capability to Aladdin as you know over the last 10 years, whether its aladdin provider.
Oh.
The work, we are doing related to the trading platforms. So.
On top of that with Aladdin accounting.
Using Aladdin for private markets through E front.
And then I would say probably one of the more interesting directions is using aladdin for whole portfolio reviews and views.
All of this is leading to more and more conversations on top of that as we built up deeper and deeper expertise in different products.
Clients, who historically hired us years ago, only let's say in our fixed income platform right now looking at black Aladdin across privates across equities across other areas. So let's be clear a lot of the growth is with existing clients, but also a lot a lot of growth is now with the new clients. So we are not only just.
Seeing clients in the old geographic footprint, we're seeing new clients, expanding geographically more and more clients.
Flows now in Europe .
In South America, and Mexico, So Aladdin is becoming one of the key enterprise components.
To determine the split between both.
Ats index and active as you recall active.
Ladies and gentlemen, we have reached the allotted time for questions. Mr. Frank do you have any closing remarks.
I do operator, I want to thank everybody for joining.
And for your continued interest in Blackrock.
Our fourth quarter and full year performance is a direct result of our commitment in serving our clients each and everyone individually, providing them choice and helping them to guidance with our fiduciary standards that help them evolve and build their needs for logged for the long term.
I'm incredibly excited about 2023 and the opportunities ahead of us.
And I believe Blackrock is in a position that unlike any other time in our history I want to thank all of you and everyone. Please have a great start to our new here.
This.
Todays teleconference. You may now disconnect and have a great day.
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