BlackRock Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 12, 2021

There are 10 speakers on the call.

Operator

Good morning. My name is Jerome, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Bloc Kwang Incorporated Third Quarter 2021 Earnings Teleconference. Our host for today's call will be Chairman and Chief Executive Officer, Lawrence D. Fink Chief Financial Officer, Gary S.

Operator

Shedlin President, Robert S. Capito and General Counsel, Christopher J. Meade. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period.

Operator

To withdraw your question, press the pound key. Thank you. Mr. Meade, you may begin your conference.

Speaker 1

Thank you. Good morning, everyone. I'm Chris Meade, the General Counsel of BlackRock. Before we begin, 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's actual results to discuss the results of BlackRock to differ materially from what we say today.

Speaker 1

BlackRock assumes no duty and does not undertake to update any forward looking statements. To turn it over to Gary. Thanks, Chris, and good morning, everyone. It's my pleasure to present results for the Q3 of 2021. To Before I turn it over to Larry to offer his comments, I'll review our financial performance and business results.

Speaker 1

While our earnings release discloses both GAAP and as to turn the call over to our financial results. BlackRock's proven track record of delivering for stakeholders to reflect our ongoing commitment to anticipate change before it happens and continually invest for the long term. To. Our globally integrated investment and technology platform enables us to construct resilient whole portfolios for clients. We rely on thought leadership, to take a look at

Speaker 2

our global investment insights and

Speaker 1

state of the art risk management tools to help clients navigate ever changing and increasingly volatile market environments. Our approach is resonating more than ever and is reflected in the continued strong momentum we are seeing across our entire platform. BlackRock generated total net inflows of $75,000,000,000 in the 3rd quarter, dollars 98,000,000,000 of long term net inflows, to turn the call over to Bob. Representing approximately 4% annualized organic asset growth were partially offset by net outflows from lower fee cash and advisory AUM. In addition, strong net inflows from ETFs and our active franchise once again contributed to this quarter's 9% annualized organic base fee growth.

Speaker 1

Over the last 12 months, our differentiated investment management platform, which pairs active and index capabilities across the entire range of traditional and to turn the call over to the operator

Speaker 2

for the Q1. Has now

Speaker 1

generated over $450,000,000,000 of total net inflows, representing 13% organic base fee growth, to turn the call over to Eric to discuss our financial results. Well in

Speaker 2

excess of our 5% long term target.

Speaker 1

3rd quarter revenue of $5,100,000,000 increased 16% year over year, to While operating income of $1,900,000,000 rose 11% and reflected the impact of approximately $96,000,000 of fund launch costs primarily associated to discuss the successful launch of a $2,000,000,000 closed end fund in late September. Earnings per share of $10.95 was up 19% compared to a year ago, to also reflect significantly higher non operating income in the current quarter. Non operating results for the quarter included $298,000,000 of net investment to turn the call over to Tom. Primarily driven by non cash gains related to our strategic minority investments in Icapital and Scalable Capital As well as mark to market gains in our private equity co investment portfolio. Our adjusted tax rate for the Q3 was approximately 24%.

Speaker 1

We continue to estimate that 24% is a reasonable projected tax run rate for the Q4 of 2021, though the actual effective tax rate may differ as a to turn the call over to the operator for questions. 3rd quarter base fee and to turn the call over to John and 13% organic base fee growth despite higher discretionary money market fee waivers and strategic pricing investments over the last year. Sequentially, base fee and securities lending revenue was up 5%. Our 3rd quarter annualized effective fee rate on a day count equivalent basis

Speaker 2

to introduce

Speaker 3

our financial results.

Speaker 2

Increased by 2 tenths of a basis point from the

Speaker 1

Q2 as the positive impact of strong organic based fee growth driven by our higher fee active businesses And lower discretionary money market fee waivers more than offset the negative impact of diversion equity beta, primarily associated with the accelerating decline in emerging markets to take a look at the Q3. During the Q3, we incurred approximately $130,000,000 of gross discretionary yield support waivers. To discuss the financial results. Lower discretionary yield support waivers in the current quarter were linked to the Fed's technical adjustments to the IOER and RRP in June, As well as outflows from U. S.

Speaker 1

Government money market funds during the current quarter. Performance fees of $345,000,000 reflected generally strong performance from our single to turn the call over to our strategy hedge fund platform over the last year. The decline in year over year fees reflected lower revenue from a single hedge fund with an annual to turn the call over to the operator for the Q3 and which delivered truly exceptional performance a year ago, partially offset by higher revenue from illiquid products. Quarterly Technology Services revenue increased 13% from a year ago. Annual contract value or ACV increased 16% to extend year over year and continue to reflect strong growth from the Q3 of 2020, which was impacted by slower sales and extended contracting in the early months of the pandemic.

Speaker 1

To We remain committed to low to mid teens growth in ACV over the long term. Total expense increased 19% versus the year to turn the call over to

Speaker 2

the operator for the

Speaker 1

Q1, driven primarily by higher G and A, compensation and direct fund expense. G and A expense was up $139,000,000 or 30% to review the financial results and financial results. We will now begin the Q3

Speaker 4

of 2019, primarily driven

Speaker 1

by higher technology and portfolio services expense in the current quarter. 3rd quarter G and A expense also included 90 to turn the call over to the operator for questions. And $29,000,000 of contingent consideration fair value adjustments related to the estimated final payment on our successful Citibank acquisition in 2018. To recall that we exclude the impact of product launch costs from reporting our as adjusted operating margin. To Core G and A expense for the Q3, which excludes the impact of product launch and transaction related costs, was up 3% from the 2nd quarter.

Speaker 1

To We have made no changes to the discretionary investment spending plans we have previously outlined and would expect a sequential increase in our 4th quarter to provide a brief overview of our core G and A spend to be generally consistent with previous years, reflecting seasonal increases in marketing spend, additional costs related to return to office planning to provide an update on our ongoing technology costs associated with Aladdin Cloud migrations. Employee compensation and benefit expense was up 116,000,000 to turn the call over to the operator for questions.

Speaker 2

Thank you, Steve. Thank you, Steve.

Speaker 1

Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone.

Speaker 1

Good morning, everyone.

Speaker 2

Good morning, everyone.

Speaker 1

Good morning, everyone. Good morning, everyone. Good morning, everyone.

Speaker 2

Good morning, everyone.

Speaker 1

Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone.

Speaker 1

Direct fund expense increased 38% year over year, primarily reflecting higher average index AUM to and intangible amortization expense increased $11,000,000 year over year due to our Imperial acquisition. Our 3rd quarter as adjusted operating margin to turn the call over to the operator for the call over to the operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 1

Thank you, operator. Thank you, to higher contingent consideration fair value adjustments and higher intangible amortization expense compared to a year ago. We're seeing more opportunities to invest for growth than ever before. We reopened the closed end fund market in 2019 by making it more efficient for investors to to review those products at NAV. By synthetically seeding these new funds, we've now raised $14,000,000,000 in active AUM, to introduce your host for today's call.

Speaker 1

Representing over $170,000,000 in new revenue. Our strategic minority investments in Icapital and Scalable Capital are reinforcing our tech for flow strategy And simultaneously generating very attractive returns for shareholders. And we continue to build our best in class ESG capabilities, to discuss the next question and answer session. Most recently by acquiring rhodium's models related to the fiscal risks associated with climate change. Effective use of our balance sheet to seed new products, to co invest alongside clients or make strategic minority investments, both supports our growth and drives value for our shareholders.

Speaker 1

To And while our capital management strategy remains first to invest in our business, we also remain committed to returning excess cash to shareholders to and repurchased an additional $300,000,000 worth of shares in the 3rd quarter. As we discussed at Investor Day, We continue to invest in our highest growth franchises such as ETFs, private markets and technology, and we are accelerating investments to drive growth in our to extend the call to questions. Each of these areas once again delivered strong results in the Q3. Quarterly long term net inflows of $98,000,000,000 were driven by continued momentum in our ETF and active platforms. To Our ETFs generated net inflows of $58,000,000,000 in the 3rd quarter, positive across each of our product categories, to Representing 7% annualized organic base fee growth.

Speaker 1

ETFs attributable to our strategic category drove over 50% of net inflows in the quarter, Reflecting continued strength in fixed income and sustainable ETFs. Core Equity and Higher Fee Precision Exposure ETFs to turn the call over to the operator to discuss the financial results. Retail net inflows of $23,000,000,000 representing 11% annualized organic base fee growth were positive in both the U. S. And internationally

Speaker 2

to take your questions. And across all major asset classes.

Speaker 1

Retail multi asset results included the impact of the previously mentioned $2,000,000,000 closed end fund raised to take a look at the outlook for the Q1 of 2019 in late September. Inflows continue to reflect broad based strength across our active platform and remain well positioned to meet investor needs to provide a brief update on our outlook for risk adjusted alpha and yield in the current market environment. BlackRock's institutional active net inflows of $26,000,000,000 to Representing 6% annualized organic base fee growth were led by $25,000,000,000 of multi asset net inflows. To provide a brief overview of our financial results. Growth included the impact of a significant outsourced CIO mandate from the Asia Pacific client, continuing our momentum in an important growth area where we are to provide cost effective whole portfolio solutions to the world's most sophisticated institutional clients.

Speaker 1

We also saw continued demand for our LifePath target date offerings and Larry will update you about a recent milestone for our new LifePath Paycheck Retirement solution. Institutional index net outflows of $8,000,000,000 broadly reflected equity net outflows, which were partially offset by fixed income net inflows to as clients continue to rebalance portfolios after significant market equity market gains or sort to immunize portfolios through LDI strategies. Overall, BlackRock generated approximately $45,000,000,000 in quarterly active net inflows across the platform, Including our 10th consecutive quarter of positive active equity flows. Demand for alternatives also continued to With nearly $7,000,000,000 of net inflows into liquid and illiquid alternative strategies during the quarter, driven by single strategy hedge funds, to provide a quick update on our financial results. Fundraising momentum remains strong and we have approximately $29,000,000,000 of committed capital to to deploy for institutional clients in a variety of alternative strategies representing a significant source of future base and performance fees.

Speaker 1

BlackRock's cash management platform experienced net outflows of $12,000,000,000 driven primarily by redemptions from U. S. Government and offshore Sterling prime money market funds to in line with the broader U. S. Money Market Fund Industry.

Speaker 1

BlackRock's diverse cash management offerings position us well to serve clients' needs and you will hear more from Larry about how we are expanding our ESG cash offerings to enhance our competitive positioning even further. Finally, 3rd quarter advisory net outflows of $10,000,000,000 were primarily linked to the successful planned wind downs of to turn the call over to our financial markets advisory group on behalf of the Federal Reserve Bank of New York. Recall that revenue linked to these to turn the call over to Bob. Thank you, Bob. Thank you, Bob.

Speaker 1

Good morning, everyone. I will now turn the call over to to strategically invest in our business in anticipation of change and to lead the evolution of the asset management industry. Today, we see even greater opportunity to invest in our employees and our clients and in the communities in which we operate to ensure that we will continue to optimize organic growth in the most efficient way possible. To With that, I'll turn it over to Larry.

Speaker 4

Thanks, Gary. Good morning, everyone, and thank you for joining the call. I truly hope that all of you are staying healthy and safe. Fortunately, I've been traveling again and in recent months to see clients worldwide. It's great to be back in the road, meeting face to face with our clients.

Speaker 4

And I found our clients Actually more engaged, more interested in our conversations than ever before. As investors continue to navigate uncertainty in the markets and in the broader global economic outlook, BlackRock is partnering more closely with our clients to help them achieve long term goals And helping them seeking new opportunities. BlackRock is providing insights on the global economy, guidance on how to navigate the market's volatility and providing solutions for their entire portfolio. Our comprehensive, unified investment in technology platform, combined with our steadfast client centric approach, Is enabling us to deliver constantly and consistently strong results for our stakeholders. Long term net inflows of $98,000,000,000 in the 3rd quarter represented 9% organic base fee growth.

Speaker 4

We're driven by continued strength to conclude our strategic growth opportunities that we've spoken to in the past. Our consecutive quarters of strong growth Are the direct results of these investments that we have made over time to enhance and evolve our business and to be more prepared for the needs of our to We have now delivered organic base fee growth in excess of our 5% target for 6 consecutive quarters, Including 13% growth over the last 12 months. And we also generated 13% year over year growth in to take a look at our technology services revenues as more clients are turning to Aladdin to execute on their growth aspirations And helping them scale their business. After promising global economic restart earlier this year, we saw to certain countries and markets take a step back in recent months as they are confronted with the economic with the virus variants And economic issues. Concerns around slowing economic growth are increasing, while policymakers are evaluating The timing and pace of easing, whether it's rate hikes or reduction in bond purchases.

Speaker 4

And with interest rates still at historically low levels, investors need solutions that can earn a real yield and be resilient to Inflationary trends are appearing more than transitory, Reflecting structural changes, including a shift from consumerism to job creation, rising wage growth And the energy transition. As I said in a speech to the G20 in July, society needs to rapidly invest in innovation to offset inflationary pressures associated with the transition to a net zero economy. We need to make sure that we are pushing just as to thank our employees for their employees and their employees. Against this backdrop, clients are turning to BlackRock more than ever before And we are using the full breadth of our capabilities to meet all our clients' needs. BlackRock's top performing active platform continues to outpace the industry generating $45,000,000,000 net inflows in the quarter and nearly $200,000,000,000 to Over the last 12 months, momentum in active equities continue and BlackRock's number 1 in year to date to take a look at asset gathering in the U.

Speaker 4

S. Active equity mutual fund industry, up from number 3 in 2020. These results reflect our investments over time to incorporate data science, integrate ESG considerations and enhancing portfolio construction capabilities Across the entire active business and we remain committed to continuous innovation so we can deliver Strong and durable alpha for our clients over the long term. In addition to our traditional active strategies, we're also seeing clients to Allocation to private markets as they reach for yield. Institutions are turning to BlackRock for private credit, real estate and private equity solutions.

Speaker 4

And well, we are seeing advisors access private markets through our record, our recent closed end fund vehicle, which to have up to 25 percent allocation to alternatives and our accredited Investor Solutions. In total, we raised about to provide $5,000,000,000 of illiquid alternative flows and commitments in the quarter and we continue to steadily deploy that capital for our clients. Portfolio construction and asset allocation decisions are critical in achieving desired returns and more clients are adapting to review our ETFs as a building block in their portfolios. We generated $58,000,000,000 of ETF net inflows in the 3rd quarter With growth across each of our core strategic and precision product categories, including strong flows in fixed income as plans sought inflation protection And sources of income. We crossed $200,000,000,000 in ETF inflows year to date, Exceeding our 2020 full year flows.

Speaker 4

We are seeing this momentum across the entire ETF industry As more and more investors discover the convenience, the efficiency and the transparency to We see opportunities well beyond the 30,000,000 people who use our ETFs today to continue to believe in the long term growth potential for ETS. And we will remain confident in our ability to deliver to turn the

Operator

call over to

Speaker 4

John. In my conversations with clients, I hear about to see how they are looking to focus on their core business and partner with select investment managers that have the expertise, to take the technology, the scale to navigate the increasingly complex markets. We see outsourcing of portfolio management through OCIO for institutions and for model portfolios to take a look at the financial results for the wealth managers, both of which are

Speaker 2

fast growing areas of the industry.

Speaker 4

BlackRock is well positioned to capture to take this opportunity and partner with our clients across our whole portfolio. Few asset managers have the scale and the diversity of offerings to do this. And the consolidation we have seen in the industry is a further validation of our business model that we've already built here at BlackRock. We're also innovating to expand client options for how they participate in proxy voting decisions. Much like asset allocation and portfolio construction, where some clients now can take an active role, While others outsource these decisions to us, more of our clients are interested in voting on their index holdings.

Speaker 4

This is another great example of 1 BlackRock effort to further democratize choice for our clients and is in line with our commitment to provide them with a broadest to provide a range of options. Client demand for more holistic and flexible technology driven solutions is also increasing. Technology services grew revenues grew by 13% year over year as Aladdin capturing opportunity from industry shifts And we are leveraging our user provider model to further evolve Aladdin. The combination of Aladdin and eFront has been well received by clients and we now have over 2 dozen clients Using both across your entire whole portfolios. As we've done throughout our history, we continue to invest to move ahead of our clients' needs and evolve BlackRock to lead in the biggest long term opportunities of the future.

Speaker 4

And we are seeing meaningful progress in executing on these opportunities. In sustainability, momentum remains strong, so we generated another to turn the call over to Eric to discuss our financial results. Active sustainable net inflows of $7,000,000,000 We're led by the launch of our ESG Capital Allocation Trust Closed End Fund, which Gary mentioned earlier. In ETFs, iShares is leading sustainable provider, Capturing nearly 50% of the industry category inflows year to date. In Europe, Almost half of all industry flows are now going into sustainable ETFs, up from less than 10% Just 3 years ago.

Speaker 4

Clients also want impact oriented strategies that seek to deliver a targeted environmental to take a look at our social outcome. We recently repurposed one of our money market funds to seek positive social outcomes by supporting a diverse trading ecosystem. BlackRock will also be contributing 5% of our management fees, net revenues from the funds that support students at historically black colleges to and universities in predominantly black institutions. This fund has already grown more than 40 percent 20% to 4,500,000,000 Since this conversion in July and we are proud to work together with our clients to help make a positive impact On the futures of many diverse students, on the futures of many diverse business owners and in their own communities. BlackRock is also supporting clean energy solutions that change the demand curve for hydrocarbons, Which is actually accelerating today and driving energy prices higher.

Speaker 4

The gap in cost between clean energy technologies and those that will emit greater amounts to ask you to read the question and answer session.

Speaker 2

The greenhouse gases is still very large for most things,

Speaker 4

which is why BlackRock is supporting a range of initiatives to help bring down to The green premium of clean energy. Building on our partnership with Temasek earlier this year to advance a decarbonization solution, the Black to turn the call over to Craig Hallum. This grant will help to speed the development and commercialization of clean energy technologies and BlackRock will provide our investment expertise to as the program deploys its financing around the world. We have a long history of innovating to help millions of people worldwide to conclude retirement readiness. And today, we are the largest investment only defined contribution provider in the industry with over $1,000,000,000,000 of assets to take this under management on behalf of over 7,200 defined contribution plans excuse me, 72,000 defined contribution plans.

Speaker 4

Our target date franchise LifePath has seen $23,000,000,000 of net inflows so far this year, Representing a 9% organic growth rate, far in excess and broader in the target data industry. And we continue to innovate ahead of the future needs of our clients. We recently announced a significant milestone in our retirement income solution, LifePath Paycheck. Five large plan sponsors whose plan together represents about $7,500,000,000 in target date investments I've elected to work with BlackRock to implement our LifePath Paycheck solution as a default investment option in their investment retirement plans, Subject to necessary approvals and conditions, we remain committed to working alongside our clients and partners to help more people address to turn the call over to the to We believe that globally integrated financial markets provide people, companies and governments with better and more efficient access to continue to invest in our business and our ability to grow our business. This conviction drives our long term strategy in China As it has in every community in every country where we operate.

Speaker 4

BlackRock's to clients have benefited from our focus on the long term and we will bring this perspective to help global clients invest in China And importantly, to deliver investment solutions to Chinese investors. After receiving our FMC and WMC to see license earlier this year, we launched our first two products in the Q3 raising over $1,000,000,000 in 2 weeks for more than 110,000 investors. This milestone demonstrates the value proposition of BlackRock's platform and the strength of our partnerships. To It also highlights the start of BlackRock's living its purpose in China by helping more people secure in China a better future And investing in the long term and retiring hopefully in dignity. Just as we continue to evolve our business to meet client needs, we also evolve our entire organization.

Speaker 4

A key driver of BlackRock's success over the years has been our focus and deliberate talent processes on delivering leaders With a broad range of expertise, a deep commitment to the firm and a one BlackRock mindset. To turn the call over to the evolution also extends to our Board of Directors. We recently elected 2 new directors to turn the call over

Speaker 2

to our Board, Beth Ford,

Speaker 4

President and CEO of Land of the Lake and Kristin Peck, CEO of Xodus. Beth and Kristin are recognized leaders in their to introduce our investors and their peers and their peers and their peers. They will help BlackRock and the Board to navigate our future on behalf of all our shareholders. Looking ahead, I am confident The investments we're making today will enable us to capture greater opportunities and to deliver industry leading growth in the years to come. More immediately, I'm very excited to welcome our colleagues back to BlackRock's offices in certain parts of the world where we begin our future of work to It's our culture, which can't be built or maintained remotely over the long term.

Speaker 4

That ensures we can never forget who we are, who we serve. It also helps us in our markets, in our industry, And most importantly, helps us continue to evolve and experience the constant change of the world. Having togetherness in to connection with all our employees is vital for our culture and vital for serving the needs of our clients. With that, let's open it up for questions.

Operator

To turn the call over to the operator for questions. Thank you. To avoid any potential feedback. Your first question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Speaker 5

Hey, good morning. Thanks for taking the question. Just wanted to ask about alternatives given prospects here for rising yields and to and interest rates, there's some fear in the marketplace that this could soften flows into alternatives products. So just would be curious to hear your perspectives on how you see to take a potential for investor allocations to alternatives products to evolve in a rising rate scenario. And then as you look across your alternatives franchise to say maybe you could just touch upon some of your recent initiatives on illiquids and just any sort of views on which you think could be the largest contributor to growth at BlackRock amongst your illiquid products.

Speaker 5

Thank you.

Speaker 4

Well, first of all, hi, Michael. I'm going to let Rob Capito answer that question.

Speaker 6

So Michael, as you know that we have been involved in the alternatives business in one way or another for a pretty long time, to especially in the retail sector since 1988. And our goal has been to to access the retail area for alternatives by keeping our promises over a long period of time on performance. So to start with the growth in retail alternatives is certainly compelling as part of our strategy to serve advisors' whole to take your questions. And what we've chose to do is bring a diversified product lineup to the retail to take a look at alternative investor. So our job is to bring the appropriate wrappers for those to provide the solutions to help reshape their portfolio at a period of time when rates and returns have been very low.

Speaker 6

And what we've seen them do is move from 1% to 2% of their portfolio to allocations up to 20%. So year to date, just in that sector, we've raised over $24,000,000,000 of net inflows and that's at to provide an update on our financial results. We will

Speaker 2

now begin the question and answer session. Thank you, Steve. Thank you, Steve.

Speaker 6

Thank you. Thank you. Our next question comes from the line of and credit vehicles and our public private closed end fund offerings. So our recent launch of alternatives to take a look at the portfolio analytics for financial advisors on the web based BlackRock Advisors Center And the continued product expansion is going to help us grow with those clients. And in the recent years, we expanded our retail alternatives to include private credit and private equity, pre IPO access to growth equity through closed end funds, to And we're working to expand our retail alternatives offerings now across real assets, sustainable and co investment opportunities.

Speaker 6

So just in the closed end funds alone, we provide a wrapper that will enable us to provide up to $3,000,000,000 And alternatives to that. And just in summary form, in total, we manage about $180,000,000,000 to take a look at the outlook for the Q1 of 2019. Across liquid and alter illiquid alts, dollars 29,000,000,000 right now in dry powder to invest and deploy to Approximately $210,000,000 of future annual base fees and including liquid And Liquid Credit, our platform is now over $310,000,000,000 We're the top 5 manager in that. And we've built out alternatives platforms and raised another $100,000,000,000 of gross capital over the last to raise $100,000,000,000 more in the next 3 years. So just for September year to date, We have raised $25,000,000,000 of gross capital and deployed $10,000,000,000 And because there is some expectation that rates can rise, Still, these are longer term investments that have enough spread in it that I believe that the demand is going to continue to take a look at the Q1 of 2019 for quite a

Speaker 2

long period

Speaker 6

of time. And I think Larry's rate scenario, which he said in the beginning, is rates low for longer, We'll only enhance the ability for people to want more alternatives.

Operator

And your next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Speaker 7

Great. Good morning. Hi, Larry. Thank you for taking the question. So inflation concerns are clearly everywhere.

Speaker 7

And Larry, as you highlighted in your to Mark, that's something you guys are clearly focused on as well. So, maybe a 2 part question here. So one, when it comes to BlackRock's own cost structure, where are you seeing expense growth and margins heading into 'twenty two? We obviously saw you make changes on the salary front last quarter, but curious if this is becoming a bigger issue For sort of total comp and G and A as you think forward. And then secondly, from a product perspective, what are the strategies you're advising clients to lean into more aggressively into 2022 to protect their portfolios against the upside inflation risk.

Speaker 7

Thank you.

Speaker 1

Let's take these pens first. Hey, Alex, it's Gary. How are you? So We're obviously we have seen some expense growth, which I think is expected in the context to The outsized organic base fee growth that we're delivering on the top line. For the 3rd quarter, Our margin obviously was down about 120 basis points versus a year ago.

Speaker 1

And I'd say there were a couple of things there that kind of clouded what would have been to some operating leverage in the business. Really three things in particular, one was lower performance fees year over year. If you recall, we had this discussion last year that performance fees in general hit the P and L at a much higher marginal margin than the rest of the business because there's only Really compensation associated with it and no other operating costs in the business. And so when we see performance fees decline as they did year over year, That has an impact on margin. Secondly, we had higher contingent consideration fair value adjustments or non core expense this quarter, which is related to the City of Anamax Final payment and we had higher intangible amortization.

Speaker 1

So if you look at those three things, those three things really more than offset Our margin on a year over year basis where you would have seen some operating leverage improvement. In terms of just looking at those individual costs, I mean, when you look at comp, comp is up about 8% year over year. Again, that was highly driven by base salaries, but not just to The mid year that you saw, remember comparing it to a year ago, we'll have normal base salary increases at the beginning of the year. We have the mid year headcounts a little higher. We obviously have a period this year versus where we didn't have it last year and FX has basically increased the dollar cost of some of that compensation also.

Speaker 1

So that's really the main driver was the base salary, but the mid year salary increase really didn't have that much to do on a year over year basis. On the G and A side, that was up About 30%, but again a bunch of components there. Technology expense increased year over year and you will still continue to see that going forward. The to take a look at the next question. The primary driver there obviously is technology infrastructure, primarily the ongoing migration of Aladdin to the cloud, Which we're probably about halfway through, but we'll be accelerating into next year.

Speaker 1

You're also seeing higher portfolio services costs, which again It's part of our success story in OCIO. So where you see us winning large outsourced wealth Solution mandates either in Europe or institutional mandates like the BA Pension Fund or the significant win that we just announced this quarter In APAC in New Zealand, you're going to see higher portfolio services costs because not all of those mandates are managed in house. To We use 3rd party advisors. When we use 3rd party advisors, you're seeing those expenses reflected in that line item with the P and L. It's grossed up on revenues, but we also have to bear the expense.

Speaker 1

And obviously, there's always still some noise that we see Year over year in our non core here, we talked about the Citibanamex payment and higher fund launch costs, which again are in both cases associated with higher revenue. Finally, on the direct fund expense side, I think that is purely variable. That is obviously tied in most part to our growth in our index AUM, which is fundamentally driven by our success in iShares. That number was up roughly 38% year over year, but there's always going to be some noise in that number as we try to effectively manage that expense on behalf to take a look at the Fund shareholders. So in this case, this year, while there are some timing issues, it did reflect some one time expenses associated with moving to Indexes from one provider to the next to try and basically get those at lower cost.

Speaker 1

And when you exclude a little bit of the noise, that number was probably up to 31% year over year versus average iShares AUM increase of close to 34%. So I would say, yes, There's some expense increase. I would say it's less tied to inflation for us than other players. It's really more to continue to invest for growth. And obviously, if we're able to continue to deliver organic base fee growth well in excess of our 5% target, which to take a look at the last 6 quarters in a row to 9% clip, 13% over the last 12 months.

Speaker 1

We're going to see some elevated expenses to be able to drive that

Speaker 4

to And on the products in a more inflationary environment, I would just clearly tell you that Our platform is large, it's diverse. We're having conversations with clients globally where they should be allocating. I do believe you're seeing higher allocation towards equities over the last year across our clients' portfolios. As equities rallied, they did less in terms of rebalancing. The bigger question is how do you allocate across equities?

Speaker 4

What is the role of emerging markets? But I don't think inflation is playing a dominant role in the conversations. Even in fixed income, we're obviously, it's very obvious to ask you a question. And so those clients in fixed income are worried about their duration risk. They could go down Into a low duration product.

Speaker 4

They could go into various different products with less convexity and less issues. They could go in some type of inflationary protected type of notes too. That's not going to be that large. But the resiliency of our platform Really allows us to have that conversation, whether it's in a deflationary world or in an inflationary world. And I do believe the If you look at the geographic dispersion of our growth, the conversations worldwide represent These types of conversations, what should we think about inflation?

Speaker 4

What role should we play? What is the role of alternatives In an inflationary environment, what is the role of equities and across fixed income? So I actually believe It's the volatility of the global economy is allowing us to have these robust deep conversations. And I don't think there's one global trend going in and out of one product because inflationary fears and some clients don't believe in that. Some people actually believe it's transitory.

Speaker 4

So I mean, that's the I would look at this when there is uncertainty And when we're in a transition period, more clients come to BlackRock than ever before because we're asking those questions. And I think because of the robustness of our platform, whether it's an Index oriented strategies or active strategies across the spectrum, we have the ability to work with them across all economic environments.

Operator

Your next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Speaker 2

To turn the call over

Speaker 8

to Eric. Hey, good morning. Good morning, everyone. Maybe I should just switch gears to the sustainable investing growth. I think, Larry, you were you made some comments at a conference on the path to net 0.

Speaker 8

At the current rate, We're not there yet. Maybe if you can talk about how you think the demand and the capacity to offer impact fund products, more impact fund products, you already have the carbon readiness and the domestic JV, going forward and is that going to be should we be thinking of that as a pretty strong organic growth path going forward?

Speaker 4

What flows in this COVID world have accelerated into sustainable products? Let me give you the context. I think the Global Capital Markets, public institutions are moving very rapidly to adapt more disclosures related to sustainability. More clients, including our hydrocarbon clients are looking to adapt how to continue to provide hydrocarbons to fit the needs of the current needs of our society, to But also slowly adapt in a more sustainable platform too. So across the board, we are having very deep and Deep conversations.

Speaker 4

And I must say the conversations we're having with the hydrocarbon companies and the hydrocarbon from chemicals to oil, They are more robust than ever. They're deeper. They're broader than any other time. And but our flows Continue to grow and dominate. We continue to be a dominant leader.

Speaker 4

Year to date, we had about $80,000,000,000 of Sustainable inflows, we had $32,000,000,000 of those inflows in the Q3. When I talked about the shift in finance, we're seeing that. Now specifically on your question related to impact, this is one of the reasons why we wanted to be A partner in breakthrough energy. We want to learn more of the science and the new technologies. This is why we partnered in our Decarbonization Fund with Tomasik.

Speaker 4

The demand is growing Precipitously in terms of clients interested in finding new being part of this transition. And so the capital is there. What is not as prevalent are the projects, are the opportunities. We are having conversations With universities, we're having conversations with governments across the board on how can we provide capital. And one of the more dynamic to take a look at the traditional hydrocarbon companies across the board is how can we partner with them in terms of moving helping them move forward On their sustainable strategies, on their decarbonization strategies, on their strategies around sequestering of their own carbons.

Speaker 4

I mean, so many of the big multinational hydrocarbon companies are building new dynamic technology, so they could be the leaders in The sequestering of hydrocarbons of carbons, at the same time that accelerate they may be using that to produce more energy at this time. But these are the type of solutions we're having across the board. You've heard the question with my view is we're not moving fast enough. Yes. I think that movement towards sustainability is very fast and rapid related to public companies.

Speaker 4

I think regulators worldwide are asking public companies and banks to do more disclosure. My greatest fear and I spoke about this in my Venice speech 3 months ago We're creating a hybrid world, a bifurcated world. The pressure on public companies and banks and asset managers are enormous. We're not putting any pressure on private companies. And there was a great story today in one of the newspapers about as hydrocarbon companies divest to some of their hydrocarbons, the buyers Our private equity firms.

Speaker 4

Okay, that doesn't change the net zero world. And that's why I'm saying, we're never going to get to a net zero world if We're not moving holistically together public and private. And then I spoke about in an editorial today related about the need to invest in the emerging world. There is huge pools of capital standing by, to take a look at the emerging world.

Speaker 2

There is huge pools of

Speaker 4

capital standing by, but they are we are not able to evaluate the first loss piece In so many of the brownfields investing in the emerging world. And it is estimated the emerging world needs $1,000,000,000,000 a year to become more sustainable. As a backdrop, the emerging world minus China represents 34% of the hydrocarbon output. And so if we are going to continue at the pace of $150,000,000,000 of investments, when there's a need of $1,000,000,000,000 We're fooling ourselves, are we going to get to a net zero world? We're going to be fooling ourselves to get into a net zero world if we're only asking public companies.

Speaker 4

We are fooling ourselves as we believe by restricting supply with our traditional hydrocarbon companies, That only raises energy costs, which we're witnessing now. And that is creating not a just transition, which I spoke about in my last to so we have to be vocal. We have to be forceful about it. BlackRock is a leader in this to And we are seeing the flows and I continue to see this big shift in investor portfolios as they move away from traditional indexes to more sustainable types of indexes. As they're moving away from different types of strategies and they're moving into these other strategies, we need to accelerate this.

Speaker 4

We need to accelerate in a way that we're working with our great hydrocarbon companies, not against them.

Operator

Your next question comes from the line of Bill Katz with Citigroup. Your line is open.

Speaker 9

Okay. Thank you very much. Good morning, everybody, and thank you so much for taking the questions today. I appreciate all the discussion. Maybe a 2 part question, just keeping in line with that.

Speaker 9

One is, can you maybe peel back a little bit on why you're so successful, in the retirement business And where do you sort of see the Paychex opportunity gaining scale and share? And then completely unrelated, but maybe for Gary, How do you think about the exit fee rate, base fee rate, just given the divergent beta versus the very strong flow mix dynamics? Thank you.

Speaker 6

So Bill, the story is we are able to look at a client's portfolio holistic over the long term to And the focus is to have our clients be able to retire in dignity. It's not a one off situation. It's a constant look at a portfolio over a period of interest rates and solve the problem with the appropriate wrappers and products. We have the scale of products. We have the performance.

Speaker 6

We have the wrappers. So honestly, it is the focus, to A significant portion of all of BlackRock's assets are dedicated to retirement. This is what we do. And when we dovetail that into the analytics that we could provide, we really can fulfill to the entire gamut of retirement. So it's product, performance and technology and focus on what we think is the most important

Speaker 4

So Bill, I would add one more thing that to I think our consistency of messaging to our clients across many, many years. And we've built a Deep relationship with the clients. And I don't believe our 9% growth rate is a one time thing. I think we continue to be Growing our presence in this market, we continue to try to be an innovator, whether it's LifePath Paycheck or which now LifePath Paycheck is about $340,000,000,000 Sorry, that's our target date. And LifePath Paycheck, our most recent growth.

Speaker 4

So I look I think conversations have never been broader, more robust. And we continue to drive these conversations. I believe more and more of the large plans are looking to BlackRock for that type of advice, That type of handholding. And I believe more than ever before, especially in this world Need for more employees, the need to build deeper relations with your employees. I believe the conversations at every corporation now and how to create better connectivity with their employees is becoming a broader to take a closer look at the next few years.

Speaker 4

I think the companies that have deeper connections, a better to Retirement plans, better health care plans are the companies that are driving More consistency with their employees, less higher retention rates. So I truly believe this is going to this is one of those transitory things that are happening. And I think it's catching a lot of organizations by surprise now, the fluidity of employees moving from 1 economy to another economy moving to one business to another business. And I truly believe this refocus On the needs of the employees and retirement is a major component of that refocus is going to be a larger and more dominant theme. And I think this is when I talk about this, we're in this transition now.

Speaker 4

I think many corporations are surprised at this. I think COVID and how we work remotely, people feel many people want to work remotely. They feel differently about their work life balance. This is all transforming our society in many ways in a great way, but we're in this transition and some industries are going to be huge winners in this And some industries are going to be losers of this. But most importantly, I think the common thing, those companies that Working with their employees with purpose, building a deeper, broader connectivity with their employees.

Speaker 4

They're retaining their employees with greater regularity. And importantly, they're able to attract the best and the brightest. And we're seeing that more and more. And our conversations about to take your questions. Business purpose and stakeholder capitalism, I think it resonates with our corporate clients who have these defined contribution plans and they're asking us to create that greater depth of robustness and then you overlay what we're trying to do related to innovation.

Speaker 4

I think it really is a compelling story why BlackRock.

Speaker 1

And Bill, on your second question, which I think was about fee rates going into the 4th quarter, We generally don't provide a lot of guidance on that. We'll leave that to you guys. But I will say a couple of things on that. Obviously, you'll see that the to spot rate entering the Q4 was moderately lower, but not a big deal than average assets for the Q3. So I think we're probably about same, but I would direct you Towards Page 5 of our supplement, I think obviously a lot of things go into the fee rate.

Speaker 1

And in fact, I'd say that from an organic to take a look at the growth perspective, every month of Q3 was generally was very consistent. So it wasn't like we saw a lot of Volatility in terms of our organic growth, but clearly you do see some differences in the spot to rates in terms of markets relative to the average rates. And you'll clearly see there that as we've talked about in terms of to take a look at the conversion equity beta, we did see an acceleration in terms of the decline of certain emerging markets as we got to the end of the 3rd quarter. And I think you'll see that on the supplement where some of our higher fee markets in Asia, the emerging markets and commodities in particular are all down roughly Somewhere around mid to high single digits with actually the BlackRock Equity Index on a spot basis down about 3%. So No question that we did see diversion beta accelerate into the end of the quarter.

Speaker 1

But again, given some of the other stuff, I think That might have a moderate, very moderate impact on the fee rate, but I don't think anything significant.

Operator

And your last question comes from Robert Lee with KBW. Your line is open.

Speaker 3

Good morning, everyone. Hope everyone is doing well. Maybe real quickly, this goes back to maybe alternatives business and I was interested on the AEL win, The $50,000,000,000 win, obviously, we will promote the strategy, but a big win. But can you maybe talk about what you're seeing And how you feel like you're positioned in the insurance market. Insurance has always been a big client and you see more CIOs are going their exposures.

Speaker 3

I mean, do you feel you have the right product set as in the insurance industry as they look to to expand the infrastructure credit and whatnot. I mean, just kind of get a better feel for how you're tapping into that. That's fine.

Speaker 6

So Gary and I will borrow about this. We're seeing that insurance portfolios have always had an allocation to We're all calling alternatives. But as the alternative packages have become much more complicated, Certainly, the technology and the management of those is not really caught up. So we're being asked by insurance companies who to I have determined that in many cases, it would be better, cheaper, faster with the technology to outsource many of those investments. And of course, that's a very, very big part of our platform, and we're being called in more and more to be a partner With insurance companies on their portfolio overall, and it's a huge growth area for us with Aladdin to Because the technology has not kept place.

Speaker 6

So we're seeing a lot of interest from the insurance companies, And it spans the growth from private credit, especially real estate And infrastructure, and those are three areas that we've spent a lot of time developing. And certainly in Aladdin, Our ability there is second to none. So it's become a bigger opportunity for us in the last year or so.

Speaker 1

I couldn't agree more. So our big business today obviously is in excess of $450,000,000,000 plus You mentioned AEL, which is which will fund in the 4th quarter, very significant mandate. And I think Rob is right. Portfolio resilience, diversification, portfolio construction, which takes advantage of our great performance in core fixed income, Our increasing momentum and capabilities across the breadth of private markets and leveraging to Technology. So I think there's no question.

Speaker 1

I would say it's resonating well beyond just insurance companies because we're seeing it. Obviously, we've seen The British Air Pension, we've seen a number of outsourced wealth solutions in Europe, where I think all of these things have strong applicability and we're seeing to obviously increase momentum in our broad based multi asset capabilities that you're seeing come through in our quarterly results. So thanks for the question, Rob.

Operator

Ladies and gentlemen, we have reached a lot of time for questions. Mr. Fink, do you have any closing remarks?

Speaker 4

Thank you, operator. I want to thank all of you for joining us this morning and for your interest at BlackRock. Our 3rd quarter results again is a direct results of a steadfast commitment in serving our clients, Listening to our clients, responding to our clients and hopefully staying in front of our clients' needs, so we could be with them as they evolve and change. I see as large of opportunity ahead of BlackRock than ever and BlackRock's focus to remain on investing in our people, on our communities where we operate across the world and in our platform. And most importantly, as we continue to stay ahead of our clients' future needs, we will continue to be driving excellence on behalf of all of our shareholders.

Speaker 4

With that, thank you. Hopefully, everyone have a safe and healthy Q4.

Operator

This concludes today's teleconference. You may now disconnect.

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Earnings Conference Call
BlackRock Q3 2021
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