Q2 2019 Earnings Call
And I will be your conference facilitator today.
At this time.
Our hosts for todays call will be chairman and Chief Executive Officer.
President Robert S., Kapito, and General Counsel, Christopher J. need.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
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 Blackrocks actual results may of course differ from these 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 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 and good morning, everyone. It's my pleasure to present results for the second quarter of 2019.
Before I turn it over to Larry to offer his comments I'll review, our financial performance and business results.
While our earnings release discloses, both GAAP and as adjusted financial results I will be focusing primarily on our as adjusted results.
Global trade tensions once again escalated in the second quarter and market volatility followed.
US equities climbed to record highs, though domestic equity markets move down 7% in may only to increased 7% in June our emerging markets remain challenged and the 10 year Treasury bond traded below 2%.
Clients accelerated rebalancing and de risking activity shifting out of equities and into fixed income and cash.
Blackrocks globally diverse investment platform combined with industry, leading risk management and portfolio construction technology was purposely designed to not only withstand today's market volatility, but thrive in it.
Our strategic positioning fosters deeper partnerships with clients enables us to meet their goals in a variety of market environments and drive more consistent and differentiated organic growth.
Blackrock generated a record $151 billion of total net inflows in the second quarter were 9% annualized organic asset growth as clients. Once again turned to Blackrock for solutions oriented advice to meet their long term investment needs.
Lower total organic base fee growth of 3% reflected mixed change favoring lower fee fixed income and cash assets and the impact of volatility driven outflows from higher IP higher fee Ishares financial instruments and precision exposures during the month of May.
Second quarter revenue of $3.5 billion was 2% lower than a year ago.
Driven in part by lower Securities lending revenue and lower performance fees in the current quarter.
Including $61 million of costs associated with the successful launch of closed end fund.
Operating income of $1.3 billion was down 11% compared to a year ago.
Earnings per share of $6.41 was down 4% as lower operating income and a higher effective tax rate were partially offset by higher non operating income and a lower diluted share count in the current quarter.
Non operating results for the quarter reflected $79 million of net investment income.
Primarily driven by the revaluation of certain strategic minority investments and higher marks on unhedged fixed income seed capital investments, but also reflected additional interest expense associated with the mid April issuance of debt to partially finance the acquisition of the front.
Our as adjusted tax rate for the second quarter was approximately 24%.
We continue to estimate that 24% as a reasonable projected tax run rate for the remainder of 2019, though the actual effective tax rate may differ as a consequence of nonrecurring or discrete items and issuance of additional guidance on tax legislation.
Second quarter base fees of $2.9 billion were down 1% year over year. Despite the positive impacts of organic growth and acquisitions, primarily driven by lower securities lending revenue the negative impacts of divergent equity beta and foreign exchange movements on average AUM and strategic pricing investments.
Quarterly securities lending revenue declined $33 million or 18% compared to record levels a year ago due to reduced gross exposures, partially linked to hedge fund deleveraging in the second half of 2018.
Lower demand for hard to borrow us equities in the softer M&A environment and lower spreads.
In addition, the trend of reduced European seasonal demand continued from previous years.
Divergent equity beta and FX continue to impact year over year base fee growth.
While the S&P 500 was up 7% on average year over year, many markets linked to our higher fee equity products, including Asia emerging markets and global natural resources were down 8% over the same time period, resulting in an overall decline of 2% in our revenue weighted equity composite index.
Dollar appreciation over the last year had a negative 1% impact on our year over year base fee growth.
Sequentially base fees were up 3% as a result of higher average AUM and the effect of one additional day in the quarter on an equivalent day count basis, our overall fee rate declined 0.4 basis points in the second quarter, reflecting this divergent equity beta and the impact of mix shift towards lower fee fixed income and cash assets.
Performance fees of $64 million decreased 30% from a year ago, reflecting lower revenue from long only equity products. However, we have seen improved performance in many of our single strategy hedge funds since year end better positioning us to generate performance fees in the second half of the year.
Quarterly technology services revenue increased 20% year over year, reflecting continued momentum and institutional Latin and the impact of the front acquisition, which closed in may.
The combination of the front with Aladdin sets, a new standard in investment and risk management technology, and reinforces latins value proposition as the most comprehensive investment operating system in the world.
As Larry will discuss in more detail overall demand remains strong for our full range of technology solutions and we are already seeing revenue synergies related to the combination of different analysts.
Advisory and other revenue of $53 million was down $25 million year over year, primarily reflecting lower fees from advisory and transition management assignments.
Total expense was up 4% year over year, driven by higher DNA expense, which reflected fund launch costs and acquisition related expense in the current quarter.
DNA expense was up $77 million year over year, and $82 million sequentially, primarily due to $59 million or product launch cost associated with closed end fund launches during the quarter.
We exclude the impact of these product launch costs when reporting our as adjusted operating margin.
Quarterly DNA expense also included approximately $20 million in professional fees and contingent consideration fair value adjustments related to historical acquisition activity.
Intangible amortization expense was up $10 million sequentially, reflecting amortization of intangible assets acquired in the front acquisition.
Our second quarter as adjusted operating margin of 43.1% was down 210 basis points from a year ago, but up 120 basis points sequentially as us equity markets return to historic highs from a year ago.
Despite a more challenging overall revenue capture environment driven by current market volatility we continue to see strong performance in future drivers of differentiated growth, including EPS alternatives technology and portfolio construction and remain deeply committed to investing responsibly for the long term.
Our capital management strategy has always been to first invest in our business and then return excess cash to shareholders through a combination of dividends and share repurchases.
In connection with the previously mentioned different acquisition, which closed on may 10th.
We raised $1 billion in tenure debt at a 75 basis points spread to treasuries. This represented the tightest credit spread ever for a 10 year senior debt issuance by a public asset manager.
As a reminder, in the first quarter, we completed our targeted level of share repurchases for 2019 repurchasing $1.6 billion worth of common shares.
While we will be opportunistic in repurchasing additional shares during the remainder of the year, we did not repurchase any shares of common stock in the second quarter.
Quarterly net inflows of $151 billion were positive across asset classes investment styles regions and client types.
Flows benefited from particularly strong demand across our fixed income platform, reflecting changing client preferences and validate our unique ability to partner with clients globally to meet their long term needs in a variety of market environments.
Blackrocks institutional franchise generated a record $87 billion of net inflows, representing 6% annualized organic base fee growth.
Flows were led by fixed income and reflected demand for our top performing active strategies and liability driven investment solutions.
Institutional active net inflows of $73 billion were driven by $59 billion of active fixed income flows which included two sizable client wins blackrocks global insights and unique ability to offer holistic solutions are resulting in more significant strategic fundings than ever before.
Multi asset net inflows reflected continued growth in our Lifepath target date franchise and active equity net inflows of $3 billion were primarily into quantitative strategies were long term performance remains strong.
I shares net inflows of $36 billion, representing 8% annualized organic asset growth reflected continued growth in core fixed income factor and sustainably Ts.
As previously seen in periods of significant market volatility similar to the dynamic we saw in 2018, we saw outflows from higher fee financial instrument and precision exposure Ats, which clients used to express real time capital market sentiment and tactically allocate risk exposure.
Quarterly outflows from these products resulted in Ishares annualized organic base fee growth of 1% for the second quarter and had a dilutive impact on blackrocks overall annualized organic base fee growth.
I shares crust two trillion dollars AUM during the quarter and achieved the number one share of industry flows globally in the us and in Europe and in key product areas, including fixed income factors and sustainably Ts. We continue to project a doubling of the globally TF market by the end of 2023, including significant growth in fixed income factors NSG as well as in Europe .
Retail net inflows of $2 billion reflected strength of Blackrocks municipal fixed income franchise and the event driven liquid alternative funds as well as the successful close of the $1.4 billion Blackrock Science and Technology Trust to Blackrocks largest closed end fund launch in the last seven years and the industry's largest in the last five years.
Momentum in our alternatives franchise continued with approximately $3 billion of retail and institutional and in net inflows in the second quarter. In addition, we have approximately $24 billion of committed capital to deploy for institutional clients in a variety of alternative strategies, representing a significant source of future base and performance.
Finally, blackrocks cash management platform for $26 billion of net inflows as we continue to leverage scale for clients and deliver innovative digital distribution and risk management solutions.
In summary, our second quarter results highlight the value clients place in our investment platform and our ability to use technology and risk management to develop broad based solutions across EPS alpha seeking an alternative strategies.
While we can't control market volatility the diversification and breadth of our business positions us to serve clients in a variety of environments, helping to drive consistent and differentiated organic growth through economic cycles. We will continue to invest responsibly on behalf of clients and shareholders to execute our strategy for long term growth with that I'll turn it over to Larry.
Thanks, Gary.
Good morning, everyone and thank you for joining the call.
For several quarters I've spoken about the increasing depth and breadth of conversations Blackrock is having with clients.
And this quarter's results demonstrates how those conversations are resonating.
Leading to significant.
Strategic wins.
We generated 151 billion of total net inflows in the second quarter, representing 9% annualized organic growth.
Inflows were driven by a record activity in fixed income and cash and were positive across all client types.
Asset classes.
Regions.
And both active and index strategies as clients assessed.
The full breadth of Blackrocks platform.
In a more volatile environment.
The deliberate investments we have made.
Blackrocks investment and technology platform are manifesting in the quality and quantity.
Of our engagements with clients.
While financial results are not immune to market volatility as Gary described.
We have we are having comprehensive conversations with more clients globally than ever before about outcomes and solutions.
Asset allocation portfolio, construction and investment and risk management technology.
The combination of these capabilities and expertise into a one blackrock approach.
Gives us a distinct.
And unique global perspective, and gives us a distinct.
Voice with so many clients around the world and is translating into a larger.
Deeper.
Strategic mandates for Blackrock.
Following improved investor sentiment and global equity market rally to the start of the year macro and geopolitical uncertainty once again returned.
The us China trade tensions flared renewing concerns about a slowdown in global growth.
Emerging markets equities have been negatively impacted our are down for the quarter.
At the same time us equities have hit a record high.
In Europe , all the uncertainties around Brexit continued to weigh on investor sentiment a focus on interest rate policy has also led to an unusual situation, where a strong demand for safety.
Has supported fixed income price appreciation well equities have been delivering income.
And after a period of rising rates, both the federal reserve and the ACB has shifted towards a more dovish stance.
The market now expect several federal reserve rate cuts by the end of 2020.
In the PCB as highlighted a readiness to introduce new easing measures to address inflation shortfalls.
And hopefully to extend the economic expansion.
The combinations of these events on top of the melt up in us equity markets.
Has driven a shift in risk sentiment in financial markets globally.
Investors are de risking in rebalancing out of equities into fixed income and cash in order to achieve their intended asset allocations in their portfolios.
As the investment landscape evolves clients continue to turn to Blackrock.
Today clients are looking for better more resilient portfolios that can help them.
Meet their goals.
They continue to demand transparency value and convenience in addition to sustainable long term returns and better long term outcomes.
Blackrocks client centric approach and scale positions us well to deliver on each of these client demands.
As our investments in asset allocation, our investments and portfolio construction, a spectrum of investment solutions and technology, along our ability to bring all of those capabilities together that are generating growth and long term value.
For Blackrock shareholders.
Last month, Blackrock Cross the 10 year anniversary of our announcement to acquire Barclays Global investors.
Our willingness to dust disrupt ourselves in the industry by bringing active and index together is creating the foundation of what Blackrock is today.
More importantly, what makes that transaction and each of our subsequent acquisitions. So successful was their desire and disciplined to integrate the organizations into one.
One platform.
One unifying global culture.
And one technology.
While we face a different landscape and a set of challenges now the culture and the approach that drove us to that combination 10 years ago are just as relevant today.
They willing to Reimagine, our business to think comprehensively about our clients' portfolios.
And to innovate and to use technology in new ways.
All to help meet our clients' needs.
Blackrocks Global voice is translating into a large client wins with insurance companies pension and wealth distribution partners.
Our conversation with clients.
Our about understanding their investment challenges and helping them shape and execute strategic portfolio construction decisions.
The strong organic asset growth, we saw in the second quarter reflects this approach.
And contributed to record institutional net inflows driven by a number of significant strategic client mandates.
As clients chose to de risk and rebalance their portfolios Blackrock saw significant demand for fixed income strategies.
We generated our second consecutive record quarter for fixing them with a $110 billion of net inflows.
Diversified across our active and index fixed income platforms.
Inflows were led by a $65 billion into active fixed income strategies, where performance remained strong with 82 and 86% of the assets above the benchmark or peer medium for the third a three and five year periods.
We also saw increased demand in our cash management business, which generated net inflows of $26 billion, representing a 23% annualized organic asset growth.
Results benefited from from client de risking activity as well as a number a significant cash client wins.
In addition to the ability of our diverse investment platform that can capture shifts in client preferences across asset classes long term growth for Blackrock will be driven by our strategic positioning.
And our competitive advantages.
Blackrock has the most diverse investment platform by investment style.
From index and EPS.
To alpha seeking.
And to illiquid alternatives, which enables us to be the leader in the industry to do more towards portfolio construction.
To have global scale in our in our increasingly establishing a local identity, which positions us to capture growth in high potential markets around the world.
And we have leading risk management and technology capabilities to serve the entire asset management value chain.
These differentiators aligned with areas of highest client demand and our fueling blackrocks ability to grow faster than the industry average.
Hi, Ishares is one of those areas of highest client demand and generated $36 billion of net inflows in the second quarter.
I shares captured the number one market share of ETF flows globally in Europe , and the United States and a diversified mix of high growth categories, including fixed income.
Factors.
And sustainable EPS.
As well as the core.
Area of our EP platform flows were led by fixed income and core and included $9 billion of net inflows into factor and sustainable EPS.
We also saw clients use certain financial instruments, and precision exposure ETF to express risk off views and tactical asset allocation decisions.
It is a high secondary market liquidity and the unique options and lending markets around these cts that and make them so valuable.
Two institutional investors.
As Gary mentioned risk off and volatility driven outflows from these higher feed ats mass organic fee growth across other ice shares categories, all of which are longer term in nature.
Hi, Ishares crossed an important milestone in the quarter, reaching two trillion dollars into use them.
This is just five years after reading one trillion and 10 years since we acquired the 385 billion dollar franchise.
Importantly.
80% of growth over the last five years has been driven by client inflows.
And we remain confident in the long term secular growth opportunities for EPS and we expect the industry could double in the next five years with ishares maintaining its market leadership.
We are investing in our platform to deliver high quality exposures to clients globally and to increase the adoption of EPS with new clients and for new use cases.
For example, we are seeing more investors use fixed income Etfs, which recently crossed the one trillion in industry assets.
In an increasing number of ways since Blackrocks launched the first fixed income ETF in 2000 to these products have made it more convenient for all investors.
To access a diverse range of exposures.
Institutions are adopting them as replacement for their individual bond holdings to enhance efficiencies of their portfolio management process individuals are using them to help generate predictable income or as a part of our broader portfolio.
I shared fixed income Cts have also repeatedly demonstrated the offer the clients an additional source of liquidity.
And transparency during the times of market stress.
The combination of Blackrocks history has a bond manager.
Our expertise in EPS.
And industry, leading technology and data capabilities create significant differentiation for Ishares in this space and we believe this is just a beginning.
It took 17 years for fixed income ETF to reach one trillion in AUM and they still represent less than 1% of the one on 105 trillion dollar global bond market.
We believe they are well positioned to double to two trillion globally within five years, especially a secular forces like bond market modernization regulation and a move towards portfolios will take effect and create that type of systematic demand.
Sustainable EPS represent another strategic growth area for Ishares as clients increasingly look for look for strategies that target.
A measurable SG impact and financial returns.
We launched the Ishares CSG leaders fund in the second quarter, which generated over 1 billion of net inflows representing the best asset gathering in an equity ETF launch in 15 years.
Since launching our I share sustainable core EPS in October .
We have double assets, the 13 billion and our clients discussion to suggest increasingly more client demand.
The EPS and across our investment platform, we are seeing greater demand for ESG or sustainable investments.
Blackrock has invested to develop significant expertise in this space, we are leveraging our insights and technology to analyze sustainability related risks and opportunities across asset classes. So we can better deliver long term results and opportunities for for clients across index.
Active.
And alternative investment strategies.
Demand for illiquid alternatives will also remain as.
Remained strong as investors search for yield.
And attractive risk adjusted returns in a sustained low rate environment.
We generated $3 billion of net inflows in committed commitments across our illiquid alternatives business in the second quarter led by credit infrastructure.
In private equity solutions.
Our teams.
Consistent fleet consistently deploying capital on behalf of our clients with another $1 billion of committed capital deployed in the quarter.
As clients increase our exposure to private markets, they want more than individual alternative products.
Increasingly clients are looking for alternative solutions.
That fit in the context of their whole portfolios as well as technology to better understand risk and comprehensively manage portfolios across public and private markets.
Blackrocks and offer clients both on the alternative investment solutions and investment and risk management technology.
Our acquisition of the front, which closed this quarter further strengthens our positioning and ongoing growth in our illiquid alternative business and will be supported and enhanced by our EEV front over time.
Blackrocks, leading technology capabilities continues to support and enhance the strong results we are seeing across our entire platform.
Technology services revenues grew 20% year over year, including the impact of different acquisition that closed in may.
We are excited to share that we have already received our first combined client win notification for a different contract alongside and Aladdin contract extension.
This early success is a reflection of the immediate collaboration and teamwork across Aladdin in the front.
And reinforces our value proposition as the most comprehensive investment operating system in the world.
With Aladdin wealth, Blackrock is enabling our wealth management partners to offer transparency and convenience to their own clients.
Aladdin wealth is giving advisors better capabilities to connect with their all clients and providing wealth managers with a better risk management portfolio construction tools.
Our goal is to make Aladdin wealth, the leading technology platform for wealth managers and deepened our value proposition with our partners and our financial advisors.
We seek strong momentum going forward as industry consolidation shifting product usage and regulatory requirements are creating the need for more holistic.
More flexible technology, driven solutions at both institutions and wealth managers.
Blackrock is well positioned to capitalize on these trends.
And is committed to enhancing our technology capabilities to continually meet our clients' needs.
Over the course of Blackrocks 30 year history and in the 10 years since the financial crisis, and our acquisition of BG.
Markets have experienced various periods of volatility and uncertainty.
I firmly believe that in markets like these clients, but an even greater premium on the differentiated value proposition.
At Blackrock can offer.
We remain focused on what we can control, bringing together the entire firm to serve clients strategically investing in our key competitive advantages and leveraging our global scale to be more disciplined in how we invest.
We are deepening our strength by adapting our businesses to be challenging client needs being a leader in the highest future growth areas of our industry as serving our clients more broadly then any firm and our industry.
By continuing to keep clients needs.
At the forefront of our priorities.
We will continue to be driving differentiated growth for our shareholders.
And I'm confident we're very well positioned for business for the future.
With that let's open it up for questions.
At this time I'd like to remind everyone in order to ask a question. Please.
And the number one on your telephone keypad.
If you ask a question. Please take your phone on the speaker setting and 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'll pause for just a moment to compile the acuity roster.
Your first question comes from the line of Ken Worthington from JP Morgan.
Good morning, Ken.
Hi, Good morning, Thank you for taking my question so.
We're really going after cash management in fixed income sales.
Hoping you could talk about the pipeline for both so clearly to Q was huge.
There was a sort of a change in the rate outlook.
Lots of repositioning what portion of that repositioning might be left as we look forward there.
And then it seems like Blackrock was a disproportional winner in both fixed income and cash strategies you did mention some of the drivers in your prepared remarks, but.
If you could just maybe highlight the factors that you see.
Which may have driven not only just good sales, but market share wins here as well.
Thank you Ken.
So I would say.
What we are what we are seeing more than ever before clients are are finding the management of fixing the more difficult.
In the in in house manage it.
They are looking for deeper relationships to have either windows to the market by employing firms like Blackrock to magic a core part of their portfolios in fixed income and in some cases now they're looking to outsource the entire platform of fixed income.
And they're looking for more of a technology solution as a component of that and it just leads to what I've been saying each quarter can that no.
Is having this holistic outcome orientation with our clients is leading to these type of broad conversations. We are we have many deep broad conversations ongoing now.
And we don't see that type of behavior dissipating in terms of these types of big types of opportunities, but but a part of that also is just a systematic approach to fixed income.
Where we are able to provide both.
Index or ETF solutions alongside active solutions.
And I do believe they coexist together, we're going to we are seeing more clients who were employing.
ETF solutions for fixed income alongside active solutions, and so having a comprehensive conversation having the ability to source more.
More product and Thats, obviously in this environment now smaller organizations are having a harder time sourcing whether it's in the private credit markets or even in the public credit markets and so this is where scale is becoming even more important and also having that global footprint.
In terms of in terms of relationships is building. These types of flows I'll, let Rob talk about the cash side, but we.
We have been we've been saying this is a huge competitive opportunity for us in and we think much of that is started to manifest in this quarter and we believe in the quarters to come.
So let me just accent larry's comments, so the depth and the breadth of the conversations that we're having with clients is really resonating now and leading to these large strategic wins.
Because clients are looking for a long term strategic partner.
So these conversations are about understanding the investment challenges they have and helping them execute.
Strategic portfolio construction decisions and we have now the unique ability to offer holistic solutions and this has to include technology portfolio construction modeling capabilities.
Have various asset allocation strategies that involve involve both passive and active strategies and includes trading and includes analyzing credits and it also includes balance sheet.
Management. So all of these things have been more significant to get these strategic fundings than ever before.
And I think the results you saw in this quarter really reflect this.
And the clients of putting an even greater premium on this differentiated value proposition that we offer part of this is also cash.
We saw a $26 billion.
Of cash management net inflows in the second quarter and we are now number three.
Globally as a money market provider and these flows come from both large separate account wins and strong flows into our institutional money market funds as we continue to innovate leverage scale and deliver a digital distribution and risk management solutions. So as a reminder, more than 95% of Blackrocks cash assets under management is institutional where we are differentiated with our scale risk management and technology. So we believe this differentiated set of cash offerings, including money market funds separate accounts Cts Cts and other short duration strategies help us to serve our clients.
And lastly, I would say in cash we are transforming our cash management business.
By delivering distribution and risk management technology through a portal that we have cold cash matrix and also through Aladdin. So we are creating a technology first distribution strategy and this is driving our success in cash as well as holistic approaches to get these large strategic wins.
Your next question comes from the line of Bill Katz from Citi. Your line is.
Okay. Thank you very much good morning, everyone. Thank you very much for your comments and taking the question. This morning.
So Larry I, just want to step back a little bit and I was wondering if you could sort of help us sort of frame out what gets the active equity market going again and within that.
At least from a flow perspective and from within that how does products like precidian.
With active shares play into that and then what might be the risk to the passive business if any.
Let me talk about active equities and.
I'll, let Gary talk about Precidian, but I want to just say what comment about what does it do to passive.
Cts.
We had active positive flows in our equity business last year that last quarter.
It was in the form of a closed end fund, where we raised 1.6 billion.
And we saw good inflows in our.
Our scientific.
Active equity team, where we had great performance, so I, [laughter], where where you see with other.
Other asset managers, where they outflows. It's all performance base you have to prove over time value for their money.
And this is one of the big things, we've always been talking about if you cannot show the value where the fees for their returns you're going to continue to see inflows and other types of products, you're going to continue to see more flows into alternatives because of.
The inability of getting active active alpha in equities and so when you think about a holistic approach pension funds or insurance companies or they they allocate their their active risk across the whole spectrum of investments if they don't believe they could get the value for their money in active equities, they're going to move that where they could get active alpha into more illiquid. So thats the trend you're seeing and so you're seeing more of that.
A transformation in the end the in the alternative space, where they're getting more active alpha and you are seeing there thats being barbell by a predominance in EPS.
So if more and more managers can provide value for their money.
In terms of active Alpha returns after fees, then we're going to see systematic more flows back in the active.
In the equity side.
And so I'm not here to.
Project that the whole industry is going to have active returns I think it's harder and harder as I've been commenting over the years about.
Active managers producing active alpha with all the democratization of information that it's becoming much harder to differentiate yourself and thats, what weve seen and so we have systematically been shifting our equity teams.
And to more thematic.
Into more model based and scientific.
Into I would say more specific portfolios with fewer shares stock holdings.
And so we believe that's where active equities is going to be migrating and we've been doing that over the last two years and now we're starting to see some of that success.
On on on the on the rise of active VTS, which I'll, let Gary talk about that as has noted that will have no impact.
And owners, who are no impact on index based strategy people using index based strategies for a purpose and that is really the getting back to my conversation about.
Alpha allocation. So when you think holistically about your alpha allocation, where are you going to get your active alpha.
And so thats the bigger issue more than anything.
And I do believe when people go into index based strategies across factors are across.
Across sustainable types of products those are more precision instruments was or instruments to give them those type a reference that's not going to change and so we ill, let Gary talk about Precidian, but you know.
If if active investing becomes a larger component.
Then.
There could be an increased role of active VTS, but let me have Gary I'll talk so bill I'll say, just two things and then we'll move on one is obviously Blackrock is a strong proponent of industry innovation.
And anything that basically enhances investor access to the markets were all for that.
And secondly, I would say that our goal for the future is to be wrapper agnostic. So to the point Laramie exists and investor wants a passive products retail investor or they can choose between an index mutual fund or any TF is it's an institutional account, whether it's a commingled trust fund or a separate account and I think similarly to the extent that investor chooses they want an active product. We similar to think if the future holds that they can choose between a traditional mutual fund or an ETF and thats. Good for investors then, we'll obviously make sure that we.
Position ourselves to be part of that that industry growth.
Early signs I think are still out I mean, there are some benefits versus a traditional mutual fund for an active ETF in the concept and as maybe more tax efficiency and less cash drag, but obviously there are still some complications as it relates to transparency. The implications that transparency has for creates and redeemed in bid ask spreads and how that that instrument thats going to trade and so I think it's early days, we're going to continue to watch the development of the product itself and how it relates to the ecosystem around it and we will ultimately make the best decision for for investors going forward.
Your next question comes from the line of Patrick death from autonomous.
Good morning, Patrick.
Good morning, guys.
Oh, I think last quarter, you mentioned on the nine clients ramping up on Aladdin for wealth and that it was still kind of early days in terms of seeing.
Meaning full identifiable incremental organic growth from that could you update us on that number and maybe to what extent you're seeing more line of sight.
Increased adoption of Blackrock product.
Through that ramp up process.
So.
You know the biggest opportunity for a lot is to make at the language of portfolio construction for wealth managers for financial advisors and also for individual investors. So Aladdin.
You know is currently live was 11 clients global globally. This is a lot of four wells were continue to see very strong client interest.
I would caution you to say.
That.
When we get in a lot of assignment there is a.
Sometimes three this could be as long as six month implementation part of that before they come alive.
And there is also of course ramp up fees that we have until they get large and they started to grow. So we are seeing more and more demand and quite frankly for every one client that takes on Aladdin or Aladdin for wealth it creates demand to become the standard.
And how people are going to look at.
Okay and what this does is simply brings risk transparency and portfolio construction capabilities, both in the institutional market and in the end the wealth market and also when we are having conversations about our risk technology. It also peaks their interest in what we can do with their portfolios and balance sheets and adds onto other business that we might do with them and quite frankly ISO versa. So when it comes to Aladdin for wealth. There is a whole education process for advisors to use that technology and you can have any app you want but you actually have to use it and we're finding the increased interest is not only because of the risks technology provides.
It's becoming an asset gathering tool for these advisors. So our expect expectations is it's going to grow we have more client interest in it.
And it's I think going to continue to grow as it's been growing in the past for us.
Okay.
Your next question comes on the line of Brian Bedell from Deutsche Bank.
<unk>.
That's great. Thanks, very much taking the question.
If we could just dive into the the nature of the active fixed income institutional mandates I know you touched a lot about it on this Larry but.
If you can talk about maybe what do you think has changed for Blackrock and offering a holistic solutions. Obviously, you guys have been well positioned for that for for quite some time, but you seem more optimistic on those types of mandates are going going forward. So is it the technology, that's linking and that's actually generating this growth or is it something else and then just.
Added to that is the fixed income ice share usage as substitutes for bonds are you seeing that as a fairly permanent secular trend that should help the fixed income for the quarter in quarter out.
Thanks, Brian Let me I'm going to let Rob answer most of that.
This really.
Is just a very vivid example of our positioning as an organization globally.
All right, where our scale is bringing.
Are the ability to.
Source assets.
Our consistency and performance are agnostic ability to provide.
Passive and active.
In fixed income.
And so its really manifesting now into deeper broader conversation, but Rob why don't you.
Yeah, I think then that can that quick and dirty answer is just that.
They need a strategic partner, it's not about just filling or checking a box with one particular product. So when you can go and you can provide the technology to them you can provide opportunities for modeling portfolios portfolio. Construction. When you can give that answer and have the products in house to give them the appropriate asset allocation, whether it be passive and active whether you can actually trade to get the allocations to provide them the products that they need whether you can do the credit work on their current portfolio and improve it.
Then whether you can actually look holistically, depending upon what type of client is and help them with balance sheet management because in a period of low interest rates every basis point counts and that's where also cash comes in to be able to provide the appropriate allocations in that balance sheet to improve it or the portfolio itself really makes it different in a low interest rate environment.
So that's where we're seeing the.
The interest in having more dialogue with us because I think this approach is unique in our industry.
The second part is really what's driving.
Fixed income to go more and more into an ATM structure and you're going to hear a lot from Blackrock about this because there's really four or five different reasons. One is there is an evolution and portfolio construction and millions of people are actively using.
Fixed income Etfs in new and innovative ways to achieve a variety of outcomes. So keep in mind. It is still a great way to de risk.
Your portfolios. It is a good way to have more liquidity more transparency more diversification and better tax it's just a better wrapper.
There's growing adoption now by institutional investors, so institutions like pension funds asset managers and insurance companies rely on fixed income Etfs for very quick efficient market access.
As the bond market now starts to Modernise electronification of bond markets are going to support the growth of fixed income EPS as well as in trench Vantiv EPS as part of a vibrant fixed income marketplace. So technology is also helping this market to grow.
And then as the previous question alerted us to there's constant ETF innovation. This is the development of new bond DTF exposures and what its adding is the most important part of this which is convenience of investors to access the fixed income market with better liquidity at a better price and we are constantly now coming up with new tools to customize portfolios and drive future bond ETF adoption. It is right now a very small portion of the fixed income market. We are very optimistic about the future growth.
As Larry mentioned global fixed income ETF assets under management crossed a trillion in June .
And even at a trillion fixed income etfs represent less than 1% of the 105 trillion dollar global bond market. So.
We have high expectations for growth and we think we're going to we're going to benefit from the growth in this market.
Your next question comes from the line of Craig Siegenthaler from Credit Suisse.
Hi, Craig.
Hey, good morning, Larry.
So I wanted to see which of your recent investments in digital tools are providing blackrock the biggest competitive advantages now clients.
And also we take a step back and look at your major competitors in financial services and firms that also have an ETF businesses like the Vanguard Schwab is JP morgans with digital direct to consumer distribution platforms. What are your thoughts on entering the wealth management space at some point.
Gary.
Well I'll I'll give you an update on our investments I think obviously, we've made a number of minority investments Craig which are definitely part of our capital management strategy I think we are.
Looking to use our balance sheet and the stable cash flow that our business generates.
More aggressively to basically position us to effectively learn.
And partner with a number of very innovative companies without necessarily having to take full control day, one I think it basically helps us add value to their business and ultimately de risks our.
Our strategy of ultimately having the option to combined with those companies over time more frankly, they may benefit from their unique culture and.
And basically our broader reach.
So today, we've we've basically got a number of them, obviously, our capital and scalable our most well known.
Again, I think scalable kind of.
Expands our robotic robo advisor capabilities and what we've done with future advisor into Europe , which I think is being is very successful I capital obviously.
It is more on the front end of the alternative strategy and will at some point.
Really whether we own it or not we will basically pair very nicely with what we're doing on an E front Aladdin technology combination.
We've obviously done other things even more unique and our.
Minority investment.
Into invest in that I think has been incredibly beneficial not only in terms of the fact that the stock has gone up significantly since we bought it but more importantly, it offers an opportunity to get a Latin on the desktops of.
No thousands and thousands of our days in a way that effectively helps them not only benefit their own practices, but helps distribution of our underlying asset capabilities and then there is a number of smaller issues smaller companies, whether its embark our acorn's again, which gives us an opportunity to learn about the evolution of distribution in a more technological way and to basically help these companies drive more value as it relates to the issue of going direct we have no intention of going direct we are in intermediary model, we partner with lots of companies, who distribute our products and frankly, all the investments that we're making are intended to basically be beneficial.
To our shareholders and to clients, but frankly respecting the fact that we are in intermediate and model going forward.
And I would just say one on a more holistic basis.
What I write.
I feel that there's a focus on the societal changes and we are seeing USIS vital changes with more millennials and more Gen X and they are much more adept and using technology and we need to be at the forefront of helping them.
I do believe the retirement crisis in Americas as a component of lack of financial literacy and so everybody is all our respective jobs is to use technology to improve.
Is the proof financial literacy and improve better transparency for people are investing we need to take the fear out of managing of money for most people.
And then if we could reduce that fear of management of money I think the outcome will be leading to more people putting their money to work and that's one of the structural problems, we see in Europe and other parts of the world.
And so to me it is only in its going to have to be through better.
And more unique technology and that is what's driving us to try to provide leading technology Aladdin for wealth to creator to create more transparency. When you think about the movement on that especially on the on the.
On the advisor side with more and more movement towards Illiquids by what do you think about.
I capital and then any front, if we can provide better transparency and information on the liquid side alongside Aladdin for wealth.
The cash it will lead to better.
Financial literacy for towards investing in the liquids, but it will probably lead to better outcome investing for everybody and so when you think about how we are trying to design our technology.
And our technology offerings that is all the foundation is some of the things that I write about and how we can then take this and really build a unique position and all the societies. We work in in terms of trying to provide better financial literacy better financial outcomes.
And so thats the entire foundation, what we're trying to do.
Ladies and gentlemen, we have reached our allotted time for questions Mr. Fink do you have any closing remarks.
Well I want to thank everybody for joining us this morning and for the continued interest at Blackrock.
Our strong second quarter results.
It is really linked to.
That those these deliberate investments we made over time.
And what I've been continuously talking about our deep partnerships, we've built with clients globally.
Being foot printed globally by providing a deeper purpose and in all the communities we operate.
We see meaningful opportunities to continue to leverage our differentiating scale.
Blackrocks purpose of trying to help people, having and achieve better financial outcomes, we're trying to use our leverage to invest in our investments and technology capabilities.
For the ultimate.
Value creation for our clients and to the value creation for our clients is going to lead to longer term deeper value for our shareholders going forward.
Everyone have a good summer hopefully people have some time to take off and we'll talk to in fall.
This concludes today's conference call.
Yes.