Q1 2023 BlackRock Inc Earnings Call
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Thank you Mr. Meade you may begin your conference.
Okay.
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 those statements.
As you know Blackrock has filed reports with the SEC, which list 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 Martin.
Thanks, Chris and good morning, everyone. It's my pleasure to present results for the first quarter of 2023.
Before I turn it over to Larry I'll review, our financial performance and business results our earnings release discloses, both GAAP and as adjusted financial results I'll be focusing primarily on our as adjusted results.
Beginning in the first quarter of 2023, we updated our definition. So that's adjusted operating income operating margin non operating income and net income. They now exclude the compensation expense impact of mark to market volatility associated with certain deferred cash compensation plans and the non operating impact of an economic hedge.
The company began in 2023.
We believe this change provides investors and management with a more useful understanding of our core financial performance over time and increases comparability with other asset management companies.
<unk> regularly reviews, our disclosures with the goal of providing helpful information to our investors and streamlining where appropriate to this end. We also simplified our disclosure of distribution revenue and expense beginning in the first quarter.
I'm excited to be presenting for the first time as CFO as many of you know most of my first 17 years at Blackrock were spent in client facing roles and I can tell you firsthand Blackrock was built for clients financial cracks and economic damage from this rapid rate hiking cycle burst into view over the last few weeks 20 years the easy money is.
Definitely behind us the world, suggesting to higher rates and tightening credit conditions. Blackrock platform has been built over time to help clients in all market environments market dislocations presents significant opportunities for Blackrock and most importantly for our clients asset management firms connect investors to capital markets.
And we see these recent dislocations driving more economic activity and growth to markets. We've spent 35 years, creating more access creating more connections among long term investors capital markets and the real economy, we've unlocked new markets through ice shares and personalized SMA as we pioneered unconstrained bond strategy.
<unk> and we put Aladdin on the desktops of thousands of investors and advisors, leading the industry, leading our clients on this journey with World class investment capabilities markets insights advice and technology. That's the center of Blackhawk's growth strategy, where our partner we have long term perspective, we have the ability to move quickly in times of <unk>.
Rs, where our whole portfolio adviser, providing end to end technology and investment portfolio servicing clients use Blackrock as a scale enabler they use our platform as a service they use it to streamline and support the growth in commercial nimbleness of their own business, our unique platform combination of Etfs advisor.
Outsourcing technology alongside with active in private markets capabilities, that's what's driving Blackrock differentiated organic growth.
Whether adding or reducing risk our continued industry, leading organic growth demonstrates the clients are consolidating more of their portfolios with Blackrock and in the first quarter Blackrock generated total net inflows of $110 billion, representing 5% annualized organic asset growth and 1% organic base fee growth first quarter.
Revenue of $4 2 billion was 10% lower year on year, primarily driven by the impact of significantly lower markets and dollar appreciation over the last 12 months on average AUM as well as lower performance fees operating income of one 5 billion was down 17% while earnings per share of $7.93 was lower <unk>.
17% versus a year ago also reflecting a higher effective tax rate, partially offset by higher non operating income.
Non operating results for the quarter included $60 million of net investment gains driven primarily by mark to market gains in the value of our private equity co investment portfolio and unhedged seed capital investments.
Our as adjusted tax rate for the quarter was approximately 25%. This reflects lower discrete tax benefits related to stock based compensation awards that vested in the first quarter of each year compared to the first quarter of 2022, we continue to estimate that 25% is a reasonable projected tax run rate for the remainder of 2020.
Three the actual effective tax rate may differ because of nonrecurring or discrete items or potential changes in tax legislation.
First quarter base fees and securities lending revenue of $3 5 billion was down 9% year over year. This reflected the negative revenue impact of approximately 800 billion of market beta and foreign exchange movements on our AUM over the last 12 months and was partially offset by the elimination of discretionary money market fund fee waivers and higher securities.
Lending revenue.
Sequentially basically in securities lending revenue increased 3%, reflecting higher average AUM and securities lending spreads, partially offset by the impact of a lower day count in the first quarter on an equivalent day count basis, our annualized effective fee rate was modestly lower compared to the fourth quarter, mainly due to changing client risk Brett.
Frances performance fees of $55 million decrease from a year ago, primarily reflecting lower revenue from alternatives.
In 2022, our Aladdin platform delivered record net sales and we continue to see strong client interest for our technology solutions quarterly technology services revenue was approximately flat compared to a year ago, reflecting this continuing strong demand, but also significant headwinds associated with the foreign exchange impact on Aladdin.
Non dollar revenue and market declines on Aladdin <unk> fixed income platform assets over the last 12 months sequential technology services revenue was impacted by onetime fees in the prior quarter and the timing of implementations.
Annual contract value or ACB increased 6% year over year, we remain committed to low to mid teens ACB growth over the long term, especially as periods of market volatility have historically underscored the importance of Aladdin and generated increased demand.
Total expense decreased 5% year over year, reflecting lower compensation and direct fund expense, partially offset by higher G&A expense.
Employee compensation and benefit expense was down 6%, primarily reflecting lower incentive compensation due to lower operating income and performance fees.
G&A expense increased 6% due to higher marketing and promotional expense, including the impact of higher <unk> expense and higher occupancy expense as a result of our moving to our new headquarters right here in Hudson yards in New York sequentially.
Sequentially G&A expense decreased 10%, primarily reflecting seasonally lower marketing and promotional expense.
Direct fund expense was down 4% year over year, primarily reflecting lower average index a U N sequentially quarterly direct fund expense increased due to higher average index AUM in the current quarter and higher rebates that seasonally occur in the fourth quarter.
Our first quarter as adjusted operating margin of 44% was down 380 basis points from a year ago. This primarily reflects the negative impact of markets and foreign exchange movements on quarterly revenue.
Although markets have improved since the end of 2022, we will continue to be disciplined in prioritizing our hiring and overall investments with the aim of delivering organic growth and a differentiated operating margin the diversification and the resilience of our platform allow us to pursue critical investments while maintaining focus.
<unk> and our margin Blackrock industry, leading organic growth is a direct result of the disciplined investments we've consistently made through market cycles. Our business is well positioned to take advantage of the opportunities before us and we remain committed to optimizing organic growth in the most efficient way possible.
In line with our guidance in January at present, we'd expect our head count to be broadly flat in 2023, and we'd also expect a mid to high single digit percentage increase in 2023 core G&A expense.
Our capital management strategy remains first to invest in our business and then to return excess cash to shareholders through a combination of dividends and share repurchases. We continue to invest through a prudent use of our balance sheet to best position. Blackrock for continued success. This is primarily through seed and co investments to support organic growth.
We will make inorganic investments, where we see an opportunity to accelerate growth and support our strategic initiatives Blackrock stable and differentiated business model enables us to invest and remain opportunistic our acquisition philosophy focuses on extending our product capabilities and our distribution reach prior examples of this strategy are the.
The acquisitions of <unk> front to extend Aladdin whole portfolio coverage of <unk> to scale direct indexing and first reserve to enrich energy and infrastructure investing at Blackrock for our clients.
As previously announced in January we increased our quarterly dividend by two 5% to $5 per share of common stock. We also repurchased $375 million worth of common shares in the first quarter at present based on our capital spending plans for the year and subject to market conditions, we still anticipate repurchasing at least 300.
$75 million of shares per quarter for the balance of the year consistent with our previous guidance in January .
Blackrock is 110 billion of total net inflows evidence our strong ongoing connectivity with clients, which only grew as market liquidity stress events unfolded in the quarter first quarter ETF net inflows of 22 billion were led by demand for our bond Etfs. This was partially offset by seasonal tax trading and sentiment.
Been outflows from U S equity style box exposures and precision Etfs as we've seen repeatedly in periods of market volatility investors use ishares to implement tactical asset allocation preferences and their portfolios are bond Etfs again delivered for clients and generated 34 billion of net inflows we've invested for you.
Years to support the growth of bond Etfs, both to create a diversified bond ETF platform and to deliver the liquidity and price transparency, our clients expect especially during periods of market volatility retail net inflows reflected strength in index SMA is through <unk> and broad based net inflows into active fixed income.
Blackrock <unk> institutional franchise generated 81 billion of net inflows as we continue to partner as a scale enabler a platform for institutional clients seeking turnkey access to investment expertise greater customization industry, leading risk management technology and investment servicing institutional active net inflows of 72.
2 billion were led by multi asset and fixed income net inflows, which included fundings from several significant outsourcing mandates demand for private markets. Also continued with 4 billion of net inflows, representing 16% annualized organic base fee growth led by private credit and infrastructure, we continue to source unique.
<unk> deals for our clients through our global network of relationships. There are underpinned by data analytics and technology. Examples include our agreement to form Giga power a joint venture with one of our diversified infrastructure funds and AT&T.
We have approximately 33 billion of committed capital to deploy for clients in a variety of alternative strategies and this represents a significant source of future base and performance fees in aggregate Blackrock generated approximately 68 billion of active net inflows during the quarter and we've now generated positive active flows in all but two quarters.
At the beginning of 2019.
Finally, <unk> cash management platform saw $8 billion of net inflows in the first quarter flows were driven by surging demand for our cash management solutions in March as clients look to diversify away from deposits and enhanced cash yields March net inflows offset net redemptions in the first two months of the quarter that were primarily due to client specific.
Activity such as stack on wines.
We're actively working with clients on the liquidity management strategy is providing technology market and operational insights and of course, delivering a full range of cash management capabilities.
Blackrock first quarter results highlight the benefits of the investments we've made to build a diversified and resilient investment technology platform throughout our history and in this most recent crisis Blackrock led by listening to clients I am excited about our future and the growing opportunities for Blackrock for our clients for our employees and our shareholders.
And with that I'll turn it over to Larry.
Thank you Martin and congratulations on your first earnings call as CFO .
And good morning to everybody. Thank you for joining the call.
Blackrock is a source of both stability and optimism for our clients, we are helping them navigate volatility and embed resiliency in their portfolios. While also providing insights on the long term investment opportunities to be had in today's markets.
In 2022, Blackrock generated $307 billion of net new assets.
And captured over one third of long term industry flows.
Strong momentum continued into 2023 and we once again led the industry with $110 billion of net inflows in the first quarter.
The consistency of our results across both good and bad markets across from our clients confidence in Blackhawks performance Blackhawks guidance and our fiduciary standards.
As I wrote it as I wrote in my Chairman's letter last month.
Recent market volatility and stress in the regional banking sector are the consequences of prolonged periods of aggressive fiscal and monetary policy coming to an end.
These policies contributed to a sharp rise in inflation with our federal reserve responding with the fastest pace of rate hikes since 2000 excuse me.
19 eighties.
The cost of these hikes is now materializing, including through shocked to regional banks.
Here's our fears of impairment at <unk>.
Held to maturity portfolio was on bank balance sheets, and a crisis of confidence in regional banks setup, a wave of shutdowns seizures and regulatory intervention. So we haven't seen at this scale in a long time.
As these historic events were unfolding, we marked the 30 <unk> anniversary of the founding of Blackrock.
Throughout our history moments of dislocation and disruption had been inflection points for Blackrock.
This is where opportunity arises for both Blackrock and for our clients.
Times like this we have always emerged stronger more differentiated in the industry and much more deeply connected to each and every client.
We founded Blackrock based on our belief in the long term growth of the capital markets and the importance of being invested in them.
Blackrock has grown as a role of the capital markets has grown over the past 35 years.
I believe the current crisis of confidence in the regional banking sector will ultimately fuel another round of growth and the capital markets.
Blackrock will be an important player and there are going to be more opportunities for clients as people companies and countries increasingly turned to market to finance our retirement their businesses and their entire economies.
Blackrock operates a position of strength, while others may be consumed by near term pressures. We are at the forefront of trends and opportunities that will shape, our growth as a firm and deliver the best outcomes for our clients.
The powerful simplicity of our business model is that when we deliver value for our clients.
We also create more value for all our shareholders.
We have stayed hyper connected with our clients offering them. The first the firm's best thinking on what's happening in the markets anticipating their questions and concerns and acting as their trusted partner and advisor in times of need.
Leading with empathy being at the front foot, putting our collective experience at our clients' disposable moving.
Moving fast linking globally, that's blackrock at our best.
Investors are looking to Blackrock for insights and thought leadership on the economy and markets geopolitics and asset allocation.
Within the first week following the SBB collapse, we reached thousands of clients, providing them with real time information and our views of the unfolding of events a.
The Blackrock investment Institute has hosted dozens of calls for institutional investors and financial advisors senior business leaders and investors at Blackrock I bet over 100, CEO CIO as executives and public officials.
Blackrock is financial markets Advisory group advises financial an official institutions as well as other public and private capital markets participants.
SMA recently was awarded a mandate by the FDIC to advise and support asset dispositions related to FCB had signature bank resolutions. We are honored to have been selected and approach. This with all of our SMA SMS with a great sense.
Of discretion.
Deep deep sense of responsibility.
Blackrock is partnering with clients to navigate immediate concerns around market volatility and liquidity, while also staying focused on their long term goals.
Through this connectivity, we're having richer conversation with clients than ever before about their whole portfolios in many cases deepening their relationships with them.
Our Aladdin technology, and an integrated asset management platform enables us to help clients quickly understand their portfolio exposures to help them manage liquidity at express changing risk preferences and capture opportunities in response to market events.
The horizontal connectivity and responsibility and constant open line of communication requires of this most recent crisis continue to be exemplified across the firm.
In the first quarter of 2023 clients entrusted Blackrock with two with 110 billion of total net inflows driving positive annualized organic base fee growth.
Organic growth this quarter was led by ongoing momentum in our long term strategic priorities, including bond Etfs and <unk>.
<unk> CIO mandates.
Clients also came to Blackrock for immediate liquidity and tactical allocation needs, whether it was through our diversified cash management offerings, our short duration fixed income products precision etfs or exposures and valuation all tools into Aladdin, we were there for our clients, providing advice options and swift execution.
<unk>.
Blackrock Etfs once again prove their value as critically important tools for active management and in providing liquidity transparency price discovery to clients during stressed markets.
Across our ETF platform Blackrock generated net inflows of 22 billion in the first quarter.
Industry, leading flows into bond Etfs were particularly offset by outflows from our precision Etfs.
These tactical asset allocation tools are unique to Blackrock are used to express risk on or risk off views as they were this past quarter.
In periods of weaker equity markets, we see investors Leverages, the ETF segment to actively reduce their exposures and for tax loss harvesting trades.
As a result in markets like the first quarter Youll see outflows from our precision segment and the opposite and risk on markets. We have seen this pattern play out following the equity sell off in 2018 in December and in the first quarter 2020, and most recently in the third quarter 2022.
Each of these prior periods inflows follows when risk sediments retard.
The high utilization of precision Etfs reinforced the value proposition associated with Ishares strong secondary market liquidity and unique options.
In lending market ecosystems.
Blackrock led the industry with 34 billion of bond ETF net inflows and we're representing over 60% of total fixed income ETF trading volumes during the quarter.
Especially as the U S treasury market experienced large and historic moves.
Investors turn to bond Etfs access treasury markets and manage interest rate risk.
Blackrock U S. Treasury ETF range is over $180 billion of assets, providing exposures across the entire yield curve.
<unk> use blackrock, leading platform to manage their risk.
To quickly shift to safe Haven assets and to manage their cash.
I've always has often talked about.
How etfs have been modernizing the bond markets by contributing real time information about pricing and market conditions, notably ETF liquidity remained strong even as the underlying market liquidity became more challenged.
Trading costs and Ishares U S. Treasury Etfs remained low despite moving higher and the underlying bonds.
For example, Ishares 20 year, plus year Treasury bond ETF bid ask spread held at one basis point, while the underlying bonds at many times traded far wider.
Blackrock fixed income Etfs are increasingly being used for active management.
Blackrock one active managers pioneered the use of fixed income Etfs for many years ago for liquidity management for hedging and for efficient tactical allocation.
Today, we see most of the world's leading asset owners wealth managers and active asset managers as clients of Blackrock fixed income Etfs.
We are evolving these client relationships from single use cases to broader adoption, including active applications for a more holistic view of fixed income portfolio allocations across fixed income Etfs actively managing strategies and for individual bonds.
I assured performance under extreme conditions continue to unlock sources of client demand and expand our opportunity set.
Investors of all types are turning into ice shares bond Etfs, both in normal market environment, and particularly during times of market shocks.
Liquidity has also become paramount for our client cash as a lifeblood of individuals and organizations, especially in times of stress and our teams have been partnering with clients as they reevaluate where they put their cash and how to balance holdings assets and traditional bank deposits alongside other options like money market funds.
Our ultra short bond strategies.
In the month of March Blackrock saw over $40 billion of net inflows into our cash management strategies, we expect to shift from deposits to money market funds to be a longer term trend and are actively working with clients to help them diversify that as the yields there earning on their cash.
Cash are often gets overlooked now that yields are back after a back after a decade of.
Last decade of near zero rates.
We're excited to help clients put their cash to work at Blackrock.
Through our cash matrix, and Aladdin technology, our risk management and product innovation and collaboration across the three three trillion fixed income and cash platforms.
We are positioned blackrock to be a partner of choice for our clients' liquidity and cash management needs.
Asset owners and investment and wealth managers are increasingly looking to focus on core competencies and outsource more of their investment process as they do this they want a partner that can provide seamless integration solutions better faster and more efficiently.
Our notable successes that onboarding and executing outsourcing mandates over the past several years.
Catalyzed dialogues with more and more clients.
Early in 2023, two large pension funds chose Blackrock for significant OCI O engagements.
In the United Kingdom, Royal Mail announced selected Blackrock manages over $10 billion of defined benefit scheme trusting Blackrock to look over the pensions of its <unk> hundred 18000 members.
In the United States, we are honored to have been selected by a named fiduciary for our pension covering more than 350000 Union workers and retirees.
These mandates and other outsourcing assignments underpinned $81 billion of institutional net inflows in the first quarter or yet more examples of how Blackrock range of resources.
Our experiences and our deep connectivity in local markets are resonating with more and more clients and supporting more and more clients.
In the last three years Blackrock has been entrusted to lead outsourcing mandates totaling $400 billion in <unk>.
Including $200 billion in the last 12 months alone and just yesterday was announced that we have been appointed as a primary asset manager partner to Lv the UK mutual insurer.
During this time of historic Mark market volatility clients globally are increasingly interested in how we can help them with outsourcing.
We are hearing with all types of clients not only pension and insurance insurers, but also now endowments and foundations health care organizations and actually larger family offices.
We expect the trend towards outsourcing to continue with Blackrock driving investment management and technology transformations for our clients.
Technology outsourcing is similarly on the rise as companies look to replace multiple loosely connected systems with a single strategic partner, who offer a complete solution.
A lot of that enables clients to operate horizontally to share consistent data and to build and manage all portfolios.
Okay.
Well theres been tremendous ups and downs in the broader market and operating environment, the need for Digitization and efficiency through technology remains a constant it.
Market volatility and the growing demand for immediate precise information on direct and indirect exposures is only underscoring the need for a robust technology operating and risk management technology offered through Aladdin.
In the week following the collapse of SCB.
We saw significant increases in usage.
Of Aladdin as exposure and interactive modeling tools as our clients sought to understand their exposures to specific securities to sectors and to their yield curve.
They leverage Aladdin capabilities to manage interest rate risk and portfolio is it set enterprise level broker and trade restrictions.
Similarly, Aladdin wealth clients turn to the platform to better understand their clients exposures as they have in other significant market events like the start of Covid and the Russian invasion of Ukraine usage following failure in the U S regional banks more than doubled at many of our wealth our wealth claim.
Platforms.
Aladdin was designed Aladdin was built for these type of times.
And we are proud that our technology is enabling all of our clients to act quickly and with clarity and with much greater confidence during these market shocks.
Our results this quarter and amid the most recent crisis are only the latest example of Blackrock doing what it does best stay in front of our clients' needs, helping them to see challenges as opportunities and providing hope for what comes next.
In 2023 is presenting an incredible opportunities for long term investors, there's more yield to be earned in cash infrastructure and private credit or offering attractive returns.
This can be a major component in portfolios and equities are at much better valuations Blackrock is connecting our clients to these opportunities and providing them with the confidence to continue investing for the long term.
Especially in periods of dislocation or willingness to re imagine our business and to be nimble and seizing emerging opportunities have bolstered our growth and generated differentiated value and returns for our shareholders are stable and differentiated business model enable us to remain opportunistic and.
We will continue to be deliberate and systematic in our investments we are constantly looking at opportunities as we assess possible accelerators of growth support our strategic initiatives and test the boundaries of how we think about Blackrock business.
At our founding 35 years ago, when Blackrock was as much of a concept as it was a company.
There was one thing we knew we had to get right and that was always start with a client.
We've listened to them, we learned a lot from them, we put their needs first.
Since then we have developed leading franchises with Etfs.
In advisory outsourcing and in technology, and we worked tirelessly to integrate these capabilities into a one blackrock business model and culture.
It is this combination of capabilities that make blackrock truly unique.
And were opening new channels for growth by scaling our alternatives franchise by expanding the market for bond Etfs, providing clients access to emerging opportunities in areas like transition finance.
Our momentum is a result of many years of thoughtful investments in the infrastructure.
Needed to support complex global mandate as a whole portfolio level.
The power of Blackrock integrated platform enables us to deliver better outcomes for our clients and differentiating growth for you our shareholders.
Over the past five years.
Blackrock has delivered an aggregate of one eight trillion dollars of total net inflows or 5% average organic asset growth compared to flat or negative industry flows.
Over this five year time period black.
Markets have been both have both rallied and have had contractions.
So blackrock has consistently generated organic growth.
Reflecting the resiliency of our diversified platform and the investments we made towards that platform.
Clients are trusting more of their portfolios with Blackrock and an endorsement of the platform performance. We offered guidance, we provide and the fiduciary standards, we uphold to each and every client.
As we look forward our success and what we will achieve comes down to our people.
Everything we have accomplished and will accomplish is because of how we have all worked together to put our clients first.
I'm, so incredibly proud of how our employees rally together in a time of crisis to support our clients.
Their fellow colleagues.
And then making sure we're supporting every one of our stakeholders.
Looking back at the last 35 years. It is our people who have enabled us to achieve all of that we have has as an organization.
We are just getting started.
Blackrock is still in the early chapters and I'm more excited than ever about the potential and the promise that we have lying ahead. Thank you operator, let's open it up for questions.
Okay.
Thank you 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 it speaker setting and use your handset to avoid any potential feedback.
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Pause for just a moment to compile the Q&A roster.
Yes.
Your first question comes from Michael Cyprus with Morgan Stanley . Your line is open. Please go ahead.
Great. Thank you good morning, Mike.
Good morning, So a question on cash management since Covid. The banking system has seen a massive influx of deposits I think worth about four trillion dollars of that is deposits yet the banks today arent offering much in terms of yield on those deposits. So the question is how do you think about accelerating money flow money fund flows and capturing a.
<unk> share of deposits and might there be a structural shift if rates are going to remain higher for longer. So just curious how are you thinking about that.
Thanks, Mike appreciate it I Hope you had a I hope you had a good holiday.
It is an incredibly dynamic time for the cash and liquidity markets. This has historically been a stable value low or no expected return asset class where people do lots of operational things.
But we've obviously entered into this period that started with kind of rates and inflation.
And has been supercharged essentially by banking banking sector tremors and as you correctly flagged we've seen an extraordinary amount of inflow into money market funds and clients I think paying very close attention, where they keep their operating cash and where they keep cash where they can earn a yield premium over deposits.
And in every single cycle deposits, obviously tend to lag where money market rates are in deposit betas or just lower so I think there is absolutely a structural shift in the marketplace. That's driven by two things one just rates inflation, but also just clients paying a lot more attention about where theyre going to keep their cash balances for.
For purpose of what they do we're really well positioned here, we had 40 plus billion dollars of flows in March we had some outflows in January and February that we're really resulting from stack unwind, but we feel very good about our positioning we have a $683 billion cash platform, we've grown at 50% over the last five years and I think uniquely as is with <unk>.
Most things that Blackrock, we are a tech first distribution strategy with assets like cash matrix and Aladdin and we also have a very global business that has real diversity of offering across money funds Etfs separate accounts last thing I'd, just say about that is I.
I would think about this structural shift that you've that you've that you've proposed is not just being about money funds or segue accounts, but being about all of the cash and cash surrogates. I mean, there are so many things you can go throw a dart at that yield 5% now and I would look at a lot of what's happening in the bond ETF World is also being about picking up a yield premium.
Over cash and so we expect to be really well positioned as clients do a lot of that work.
To use the ETF markets to use money funds as well as a whole array of active fixed income solutions.
Our next question comes from Craig Siegenthaler with Bank of America. Your line is open. Please go ahead.
Good morning, Craig.
Hey, good morning, Larry I hope everyone's doing well.
So thank.
We are.
That's good hope you're enjoying the new offices too.
So there is much brighter.
Sorry.
So we're still very focused on the potential for sizable fixed income reallocations.
Rates are now looking to plateau.
And it seems like the most the largest migrations may come from retirees in the U S pension plan channel. So I wanted your updated perspective on this topic given your conversations with large institutions and wealth management platforms and I'm also curious to see if you have any updated thoughts on the reallocation between <unk>.
If enacted because at the flow next on site to.
Blackrock could be a real big winter on that.
So Craig it's Rob I'll.
I'll take that one so now that we're coming off of the highest inflation and for the years the fastest increase in rates in 40 years.
The tail end of it.
War in Europe , a lot of geopolitical tensions and last year the S&P down.
19% and of course, we're in the midst of fed tightening.
And the result of all of this is yields are back.
For the first time in years investors can actually earn very attractive yields without taking much duration or credit risk.
And this is a pretty remarkable shift.
This is really a once in a generation opportunity in fixed income.
And clients have been over the last many years because of low rates under weighted in fixed income.
At Blackrock we.
Are very well positioned.
With our <unk> three three trillion fixed income and cash platform.
But in order to capture these these assets we have to have performance.
And our one year in fixed income is in the 70 <unk> percentile in three year and five year in the 90 percentile.
And our active funds are four and five star Morningstar rated.
So we have the performance. We also offer over 450 bonds Etfs choices, which is more than five times. The next largest issuer across the entire yield curve.
Also have the most diversified client base and that is looking.
Each quarter to have more and more allocations in Etfs and in active fixed income, especially in this environment.
We have expanding capital markets group.
And obviously a lot of expertise in the capital markets to be able to extract the most value for our clients and using fixed income instruments.
And now our cash and alternative platform are also attracting clients in this environment seeking yield and alpha.
So the bottom line is we expect the interest rate environment to continue.
The fed sees this signals is looking for and inflation and growth.
What this means is that money will be in motion as clients build portfolios with high performing active investment alongside Etfs and private market strategies and this is really important because we will be the beneficiary.
The fact that clients are using both and in fact nine of the 10 top global asset managers use our ishares or liquidity management.
Hedging and efficient tactical allocation. So it's no longer active or index, it's active and index and Etfs and even when the markets stabilize fixed.
Is going to be back in demand.
Wei.
We're going to be one of the biggest beneficiaries of that.
Active.
Movement into the asset class.
Our next question comes from Glenn Schorr with Evercore. Your line is open. Please go ahead.
Good morning, Glenn.
Hello, Good morning.
So I know we've talked many times in the past, but if you look at the last 12 months, you have 3% organic asset growth and flat base fee growth.
I think that's a function of where the flows are going but I wonder if you could talk about index and ETF in versus active equity out.
And more of whats what your outlook is on the core underlying pricing. Thank you.
Hey, Glenn it's Martin how are you. Thanks for the question.
In 2022, we delivered positive organic base fee growth. Despite the most challenging market environment, our industry has ever seen as Rob mentioned, the S&P was down 19% on the year. The AD was down 13% of the year and we still drove industry, leading organic growth and positive base fee growth and I'd say the first quarter here at <unk>.
23 was no different.
You had a stressed market you had a lot of volatility and Blackrock still delivered 110 billion of total net flows and 1% organic base fee growth.
Our mission our aim our strategy is not to be the fastest grower in any quarter. Our aim is to deliver organic growth that's more differentiated more consistent through market cycles over the long term Glenn and we've done that we've had 5% organic base fee growth on average over the last five years 18 to 22, we had over 5%.
Ganic base fee growth in seven of the last 10 years and I think what's really important to look at it is in these years that have been marked by exceptional market volatility like 16, 18, and 2022, we still were able to deliver positive base fee growth.
And I think when you when you when you sort of look at the flows going forward.
The first quarter always has the seasonal element to it that has ETF tax trading where we have precision exposures that are really important growing asset base overtime, but we tend to see inflows into precision exposures in the fourth quarter related to ETF and mutual fund dynamics and then we tend to see some reversals of those flows in the first quarter.
From precision exposures.
Those tend to come at higher fee rates and a lot of the flows that come from outsourcing on fixed income come at slightly lower fee rates and I think that's some of the impact that you saw this quarter, which is really just about changing risk preferences, we don't manage to a fee rate and.
And we don't manage to.
Particular set of products with the clients, it's about obviously, winning mind sharing portfolios and so I think over time, you'll continue to see good solid growth there.
Yeah.
Our next question comes from Alex <unk> with Goldman Sachs. Your line is open. Please go ahead.
Hi, Alex.
Hi, Larry Good morning, everybody. So I was hoping we could get a little bit deeper into how the events in the banking space over the last several weeks changed the opportunity set for Blackrock.
A number of benefits as you mentioned there are some obvious things like cash management, but what does that mean for a while and what does it mean for advisory what does it mean for all.
I was hoping to get more perspective on what are what are the opportunities you look to lean into more on the back of this dislocation.
Well, let me start on a more holistic.
Response to that and that is.
It is our fundamental belief that more and more economic activities in our flow through the capital markets.
And we certainly with this set of that.
In February and March and continue.
In April .
As more and more deposits are leaving and theyre going into Etfs and into.
Sure.
Any form of cash.
Money market funds.
<unk>.
And in this type of dislocation is just going to create more and more opportunities for us.
My talk I spoke about what this means for Aladdin the niche.
Market uncertainty the need for.
Having a single based technology platform to help you navigate.
Instantaneous.
With the market.
As more and more necessary.
I think again.
Our SMA advice is another good example of us working with <unk>.
Our regulators policymakers working with our clients and helping them in terms of advising them.
So just more and more opportunities, but I would also say.
On a more holistic basis.
Over the over the first 35 years, we use market dislocations as as a mechanism to re look at our own footprint.
To review, how we should be positioned for the future. We will continue to be very opportunistic on that.
Look for opportunities in a very disciplined way.
I've talked about repeatedly expanding our footprint.
Expanding our product.
Offerings.
Better and deeper and more extensive technology utilization. So all of those things are something that we're looking at across the board.
But I look at.
The issues that we're seeing today the market dislocations.
Enormous opportunities for Blackrock.
And in just our relationship with our clients the depth of the conversations we're having and the consistency of conversations.
I think it's pretty imperative to talk about having one eight trillion dollars over the last five years of asset growth.
This is happening during.
Good markets and bad markets.
The consistency in which clients are looking for Blackrock to play a deeper and broader role because of our fiduciary standards are advice, our discipline, but I would just say the uniqueness of our platform Alex resonate resonated so loud in the first quarter having a.
Aladdin, having SMA having.
Having the Ishares platform integrated with our active platform across the board that we can deliver a more holistic a deeper a broader response to our clients.
Two our policymakers to our regulators no firm can provide that and it's and.
And the conversations that we had as a firm.
With our clients with our regulators with our policymakers worldwide.
With more frequent more resilient than ever before all of this.
Ah is a opportunity for us and opportunity to build those deeper relationships and the opportunity for more and more clients to see how their business can become more resilient. If they took on a ladder opportunity for us to help them redesign their portfolios using SMA.
Our or helping out a regulator during times of stress so.
I am constantly reminded the depth of our a range of of of products the range of our abilities.
Is so differentiated which leads to these very unique.
And more fulsome conversations that we have with clients worldwide.
Operator.
Yes, just one moment please.
We'll go next to Bill Katz with Credit Suisse. Your line is open. Please go ahead okay.
Okay. Thank you very much good morning.
Good morning, everyone and one congrats on the new role.
Larry can you talk maybe expand a little bit more in terms of the capital market opportunity with maybe the greatest specificity as it relates to the private markets and then also as you think about your money market platform cash management platform and my sense has always been more institutional skewed.
Where are you in terms of the retail opportunity and in both the private credit and the money market side.
Are you scaled enough organically or could this be an opportunity to sort of expand the inorganic opportunity as well. Thank you.
I'm going to let Rob talk about the organic and then I will talk about some of the inorganic so we.
We have over the years as you know built up a huge credit efforts.
With analyst teams.
Pursuing opportunities are large reach because of our ownership.
<unk>.
Stock.
Our clients and other entities gives us some really good insight and we need to follow these credits, we think that working closely together with them as they're expanding their businesses gives us insight and opportunities to work with them on the private credit side and also.
So as opportunities to work with them as they build out either the infrastructure that they have as they transition their businesses into new opportunities. We can be right there with them, helping them finance that so we think we're going to see and be able to source opportunities for our clients.
Both retail and institution role that other.
<unk> asset managers.
Im not going to sit so that spans not only the private credit universe.
<unk> grade credit universe, but it also expands new asset classes.
That'll be in infrastructure.
Right long duration assets that have a yield for our retail clients.
And then as well as other private.
<unk> opportunities. So we're really well positioned for this and we're looking to take advantage of that.
Clients.
When it comes to inorganic I'll turn it over to Larry to comment on that.
Inorganic.
I look at the things that we've done in the past by expanding our products in a range whether it was a front.
<unk> formed a Latin into a platform that is both unique and differentiated because it's both public and private.
Markets I look at what we did with the <unk> in terms of wealth management and the opportunities we have in tax strategies and direct indexing.
When I look at cash matrix, and how that played a role with our money market funds.
In the last few months.
<unk>.
And so it is through inorganic opportunities that we look at the sing.
Seeing if we can expand our footprint.
As I said in my prepared remarks.
We are asking ourselves to a re imagined blackrock what are the other big opportunities.
Would there be a big opportunity as more and more organizations use technology. How can we how can we double down on what we're doing with Aladdin technology.
Can we build out our footprint globally at this time and so we're looking at across the board as there are issues.
I believe Blackrock can play a role in some of these opportunities and I think there was a quote sometime in the last few weeks about something I said to our team I don't know where it came from but it is indeed I did said I said to be in the game, we must play the game and so we're in the game where across the board working with our clients across the board working with <unk>.
Policymakers across the board we are.
Working with.
Regulators worldwide.
We're here to help we're here to advise we're here to navigate and if all through all of that there there is a opportunity for something inorganic and transformational.
We're gonna be prepared to do something like that but I'll just leave it at that.
Yeah.
Ladies and gentlemen, we have reached the allotted time for question Mr. Frank do you have any closing remarks.
Yes. Thank you operator I want to thank all of you for joining US. This morning, I know today is a really busy days, especially with all the other banks and financial institutions reported today. So I'm very very happy that you've taken this time and your interest in Blackrock.
Hopefully you heard from Martin and Rob and I, how proud we are of the way Blackrock came together.
And supporting our clients in the most recent quarter.
But the consistency of Blackrock now over the last 35 years.
Clients have been central to everything we do.
I see just a tremendous opportunity for us probably I see more opportunities now for Blackrock than I have in the last few years as Rob talked about opportunities in fixed income our investments that we've made huge investments we made in technology. The huge investments we made in by the ETF is huge investments we are making at all.
<unk> and private credit all of this is allowing us to have a differentiating opportunity and if you overlay that with what we have done with our technology and Aladdin overlaying, what we've done with SMA and our unique position with Etfs. It just gives us a tremendous opportunity ahead of us.
And I would I would.
Double down on the idea that we're going to be focused on delivering the power of platform to our clients and that power of working with our clients will translate totally directly to you our shareholders.
Wanted to thank everybody for all the support.
At Hudson yards is invigorating I must tell you. The 4000 employees. We have in New York are invigorated by our new space to light the energy the opportunity hopefully that's translating into how we do our business with our clients everyday.
Thank you everyone have a good quarter.
Ladies and gentlemen that will conclude today's call. We thank you for your participation you may disconnect at this time.
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Yeah.
Yes.
Okay.
Yeah.