BlackRock Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 13, 2022

There are 8 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 BlackRock Incorporated 4th 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

Shudlin 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

Thank you. Mr. Meade, you may begin your conference.

Speaker 1

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, to the call. We call your attention to the fact that BlackRock's actual results may of course differ from these statements. As you know, BlackRock, which lists some of the factors that may cause the results of BlackRock to differ materially from what we say today.

Speaker 1

BlackRock assumes no duty to not undertake to update any forward looking statements. So with that, I'll turn it over to Gary. Thanks, Chris. Good morning and Happy New Year to everyone. I hope everyone and their to the operator.

Speaker 1

It's my pleasure to present results for the Q4 and full year 2021. Before I turn it over to Larry, I'll review our financial performance and business results. While our earnings release discloses both GAAP and as adjusted financial results, As always, I will be focusing primarily on our as adjusted results. Throughout BlackRock's history, we have consistently and systematically invested in our with a long term focus and commitment to serving clients, employees, shareholders and the communities in which we operate. As a result of these long term investments in 2021, we grew organically at our fastest rate ever and continue to expand our organic growth premium versus the industry even as our assets under management reach new highs.

Speaker 1

We have continually invested to develop industry leading franchises in ETFs, to Private Markets, Technology, our active investment platform and more recently in ESG and in China. These investments all reflect a singular focus on helping clients construct resilient whole portfolios and they are driving the record levels of growth we're seeing today. BlackRock generated net inflows of $540,000,000,000 in 2021, representing 6% organic asset growth and 11% organic base fee growth. To each of our strategic priority areas drove significant growth during the year. Importantly, despite 4th quarter volatility, We finished the year with strong momentum, generating $212,000,000,000 of total net inflows, reflecting annualized organic base fee growth of 9%, to continued strong flows from our entire active franchise, along with record iShares flows, which benefited from typical year end rebalancing and tax management, who contributed to the 4th quarter's robust organic growth.

Speaker 1

We continue to build out our platform in 2021 as the strength and stability of our operating model allowed us to aggressively reinvest in our business, deliver record financial results and return approximately $3,700,000,000 of capital to shareholders. Full year revenue of $19,400,000,000 was up 20%. Operating income of $7,500,000,000 rose 19% And earnings per share of $39.18 was up 16% versus 2020. For the Q4, BlackRock generated revenue of $5,100,000,000 and operating income of $2,100,000,000 up 14% and 11%, respectively, from a year ago. Quarterly earnings per share of $10.42 was up to 2% versus a year ago, reflecting a higher effective tax rate and lower non operating income in the current quarter.

Speaker 1

Non operating results for the quarter included $86,000,000 of net investment income, driven primarily by mark to market gains in our private equity co investment portfolio. Our as adjusted tax rate for the Q4 was approximately 25%, driven in part by discrete items. We currently estimate the to 24% is a reasonable projected tax rate for 2022, though the actual effective tax rate may differ because of non recurring or discrete items for potential changes in tax legislation. 4th quarter base fee and securities lending revenue of $4,000,000,000 was up 17% year over year, Primarily driven by 11% organic based fee growth and the positive impact of market beta on average AUM, Partially offset by higher discretionary money market fee waivers versus a year ago and strategic pricing investments over the last year. Sequentially, 4th quarter base fee and securities lending revenue was up approximately 1%.

Speaker 1

Our 4th quarter annualized effective Fee rate decreased by 2 tenths of a basis point from the 3rd quarter as the continued positive impact of strong organic base fee growth was more than offset by the negative impact of divergent equity beta, which accelerated into quarter end and lower securities lending revenue in the current quarter. We incurred approximately $135,000,000 of gross discretionary yield support waivers in the 4th quarter, essentially the same as the 3rd quarter, Bringing total waivers to approximately $500,000,000 for the full year. Given the current prospects for higher rates in the near term, We now anticipate most of these waivers would cease shortly after the first 25 basis point increase in the Fed funds rate, resulting in a 1.5 to our annualized effective fee rate. Recall that approximately 50% of these gross fee waivers are generally shared with distributors, Reducing the impact on operating income. For the year, we generated record performance fees of $1,100,000,000 which were increasingly diversified compared to a year ago and reflected strong alpha generation across our platform.

Speaker 1

Notably, since a year ago, performance fees from liquid alternatives have increased more than 150 to the Q1 of 2019. And our unrecognized deferred carry balance has more than doubled to over $1,400,000,000 as our private markets platform continues to scale. Quarterly Technology Services revenue was up 11% year over year and full year revenue of $1,300,000,000 increased 12%. Annual contract value or ACV increased 13% year over year and we remain confident in our ability to continue delivering low to mid teens ACV growth as demand for Aladdin's end to end cloud based SaaS solution is stronger than ever. We are Heavily investing to scale Aladdin for its next leg of growth in order to extend our capabilities in high demand areas such as the whole portfolio, to Private Markets, Wealth and Sustainability.

Speaker 1

Total expense increased 20% in 2021, driven primarily by higher compensation, to G and A and direct fund expense. For the full year, compensation expense increased 20%, reflecting higher base salaries and higher incentive compensation driven by growth in operating income and higher deferred compensation expense. Recall that year over year comparisons of 4th quarter compensation expense are less relevant because we determined final full year compensation in the 4th quarter. 4th quarter G and A expense increased 15% year over year, reflecting higher marketing and promotional expense, which included higher T and D expense, higher occupancy expense, partially driven by higher COVID testing costs and higher portfolio services and technology expense. For the full year, Excluding approximately $350,000,000 of non core G and A expense, which included $274,000,000 of aggregate fund launch costs, Core G and A expense was up 15% compared to 2020.

Speaker 1

Recall that we exclude the impact of fund launch costs when reporting our as adjusted operating margin. The year over year increase in core G and A was largely attributable to technology, data and portfolio services expense, all of which drive revenue growth. Increased technology and data spend was driven by our Aladdin cloud migration, market data investments to support our index and ESG franchises and broader tech spend to support productivity improvements. Approximately 2 thirds of the increase in our 2021 portfolio services expense related to sub advisory costs associated with significant OCIO wins and are offset by associated base fees. 2021 direct fund expense increased 24% year over year, primarily reflecting higher average index AUM.

Speaker 1

Sequentially quarterly direct fund expense declined despite higher average index AUM due to higher rebates that seasonally occur in the 4th quarter. Finally, full year intangible amortization expense increased $41,000,000 year over year due to our Perio acquisition, which closed in February 2021. Our full year as adjusted operating margin of 45.2% was up 30 basis points versus 2020. Our business has never been positioned to take advantage of the opportunities before us and we remain deeply committed to investing responsibly and aggressively to market cycles, so we can continue to generate differentiated organic growth over the long term. Consistent with this growth ambition, We are once again targeting record investment in our people, strategic priorities and platform infrastructure during 2022.

Speaker 1

At present, we would expect headcount to increase by as much as 10%, with a continued focus on optimizing our talent pyramid for more junior roles and growing our footprint in Ihub Innovation Centers. We would also expect core G and A to increase by 15% to 20% as we continue to invest in technology to scale our operations and support future growth, including completing Aladdin's cloud migration, delivering new Aladdin capabilities in continuing to open the platform to promote client innovation. We are also investing through prudent use of our balance sheet to best position BlackRock for continued success. During 2021, we allocated $1,500,000,000 of new seed and co investment capital to support our growth and our year end portfolio now approximates to $3,700,000,000 Our strategic minority investments are reinforcing various elements of our strategy and simultaneously generating very attractive to returns for our shareholders. And we continue to invest inorganically when we see opportunities to accelerate our organic growth in key strategic growth areas, as we did to our acquisitions of the physical climate and transition risk models of rhodium and Boringa, which will be critical to building best in class to ESG capabilities within Aladdin.

Speaker 1

We also remain committed to systematically returning excess cash to shareholders through a combination of dividends and share repurchases and return an aggregate of $3,700,000,000 to shareholders in 2021. Since inception of our current capital management strategy in 2013, We have now repurchased over $11,000,000,000 of BlackRock stock, reducing our outstanding total shares by 11% and generating an unlevered compound annual return of 20% for our shareholders. At present, based on capital spending plans for the year and subject to market conditions, Including the relative valuation of our stock price, we are targeting the repurchase of $1,500,000,000 of shares during 2022. In addition, our Board of Directors has declared a quarterly cash dividend of $4.88 per share, representing an increase of 18% over the current level. Finally, in early December, we completed the debt issuance to take advantage of current low interest rates to pre refinance our 750,000,000 3.3eight notes to June 2022.

Speaker 1

We successfully raised $1,000,000,000 of new 10 year notes with a 2.1% coupon, the 2nd lowest U. S. Dollar coupon in BlackRock's debt stack. As you will hear more from Larry, BlackRock's strategy has always been guided by our clients' needs. We relentlessly focus on helping them meet their financial Objectives and our deeper and broader relationships with more clients are driving growth across our entire platform.

Speaker 1

4th quarter total net inflows of $212,000,000,000 representing 9% annualized organic AUM and base fee growth who are led by flows into ETFs and our top performing active franchise. Record full year net inflows of $540,000,000,000 were positive across all client types, to investment styles in regions and reflected records for both ETFs and active strategies. ETFs generated $306,000,000,000 of net $4,000,000,000 reflected some seasonality, but also reflected the diversity of our product and client segments and accelerating secular shifts occurring in the market. We saw continued strength in core, but our Strategic Product segments, particularly sustainable and fixed income were the largest contributors to our 4th quarter flows. To sustainable ETF AUM of $150,000,000,000 nearly doubled during the year and our $750,000,000,000 fixed to the platform grew organically by double digits, even in one of the most challenging macro environments for fixed income in several years.

Speaker 1

Clients also continue to use our broad based precision exposures to express risk on sentiment during the year. BlackRock generated full year retail net inflows of $102,000,000,000 representing 12% organic asset growth and 14% organic base fee growth, significantly outperforming the broader mutual fund industry. Retail flows were positive in both the U. S. And internationally, reflecting broad based strength across our active platform.

Speaker 1

4th quarter retail net inflows of $22,000,000,000 reflected similar trends, but also included the seasonal impact of capital gains and dividend We remain well positioned to meet investor needs for risk adjusted alpha and yield and our diversified fixed income to the platform with top performing strategies across total return, unconstrained, high yield and credit offers choice to investors in any rate environment. Institutional index net outflows of $118,000,000,000 in 2021 reflected equity net outflows, Including the previously disclosed $58,000,000,000 low fee institutional redemption in the 2nd quarter, partially offset by fixed income net inflows, as many large clients rebalanced portfolios after significant equity market gains or tactically shifted assets to fixed income and cash. BlackRock's institutional active franchise generated a record $169,000,000,000 of net inflows in 2021, reflecting broad based strength across all product categories and the funding of several significant OCIO mandates. We are seeing strong momentum in our OCIO business, evidenced by another significant core fixed income funding in the 4th quarter. We also saw continued growth in our LifePath target date franchise and remain committed to helping investors around the world plan and invest for retirement.

Speaker 1

In the aggregate, strong growth across active strategies led to 7% organic base fee growth for our institutional channel in 2021. Across retail and institutional client types, BlackRock generated a record $49,000,000,000 of active equity net inflows for the full year, led by top performing franchises in technology, health sciences and U. S. Growth Equities as well as quantitative strategies. We remain well positioned for future growth in our active platform with over 75% of our fundamental active equity, systematic active equity and taxable fixed income assets performing above their respective benchmarks or peer medians for the trailing 5 year period.

Speaker 1

Overall demand for alternatives also continued with $27,000,000,000 of net inflows into illiquid and liquid alternative strategies during the year driven by credit, to Infrastructure and our multi strat and global event driven hedge funds. Total alternatives fundraising notched a record in 2021 And we have approximately $36,000,000,000 of committed capital to deploy for institutional clients in a variety of strategies, representing over $230,000,000 of future annual base fees and significant potential performance fees. Finally, BlackRock's cash management platform generated $44,000,000,000 of net inflows in the Q4 $94,000,000,000 of net inflows in 2021 as we continue to grow market share in a persistent low rate environment by leveraging our scale, product breadth, technology and risk management on behalf of clients. It has been another strong year for BlackRock. Our global scale and diverse platform allow us to continue investing for the future, whether in good markets or more challenging ones, and our differentiated business model remains incredibly well positioned to sustain industry leading organic growth and deliver long term shareholder value.

Speaker 1

Our commitment remains to optimize organic growth in the most efficient way possible and we will do so responsibly to meet the needs of all stakeholders. With that, I'll turn it over to Larry.

Speaker 2

Thank you, Gary. Good morning, everyone, and thank you for joining the call. I hope you all have had a healthy and happy holiday season That all of you are staying safe. Throughout BlackRock's history, we have relentlessly focused on helping our clients meet their investment goals And solve their most complex challenges. We've continually invested and reinvested in our business to meet and anticipate to our clients' evolving and changing needs and to deliver the most comprehensive global investment in technology platform.

Speaker 2

Our 2021 results truly demonstrated benefits of those investments. BlackRock delivered the strongest organic growth in our history, even as our assets under management reached new highs. We generated $540,000,000,000 in net inflows in 2021, Representing a record 11% organic base fee growth. We also ended the year with strong momentum to $212,000,000,000 of 4th quarter net inflows, reflecting our 7th consecutive quarter of organic Base C growth above our 5% target, and we have steadily expanded to our organic growth premium relative to the industry, relative to our competitors, as our clients continue to entrust us with more of their portfolios. Importantly, our growth is more diversified That has ever been.

Speaker 2

In 2021, our active platform, including alternatives, Contributed $267,000,000,000 in inflows, representing nearly half of our total net inflows. ETFs remain a significant growth driver with record flows of 306,000,000,000 And our technology services revenues grew by 12%, reaching 1,300,000,000 This strong momentum across our entire business drove record financial results. For the year, BlackRock delivered 20% revenue growth, 19% operating income growth, 16% EPS growth and at the same time we expanded our margins. 2 years into the pandemic, we continue to confront new virus strains. For confronting divergent restriction approaches country by country and even an uneven economy worldwide.

Speaker 2

Meanwhile, inflation has reached the 40 year high as we see several structural changes take hold. Consumer demand has shifted from services to household goods as people are spending more time at home and benefiting from higher levels of savings. Labor shortages are causing supply chain bottlenecks as people have more choice in the gig economy. The quit rate in the United States has never been higher reflecting the confidence of employees. And we will need to recognize that The energy transition is inherently inflationary given the significant cost differential between clean and traditional technologies today.

Speaker 2

And that is why we are so optimistic about investing in green technology to move the energy transition forward. BlackRock is always focused on evolving and staying ahead of our clients' needs as they navigate change, And they are coming to BlackRock more than ever before. They value BlackRock's insights. They value the breadth of our solutions. They certainly value our global footprint.

Speaker 2

As a result, BlackRock is building deeper partnerships with more clients across their whole portfolio throughout the world. We have strong conviction in our ability to continue generating differentiated organic growth over the long term Because we have built a platform to help our clients as a fiduciary to meet their objectives in all market environments. And we continue to invest ahead of their evolving needs and are swiftly and aggressively trying to embrace new market opportunities. Our long term strategy remains to be remains to keep alpha and performance at the heart of BlackRock, to accelerate growth in iShares, to build out our illiquid alternatives, to continue to differentiate our technology, To deliver a whole portfolio solution and become the global leader in sustainable investing. BlackRock is a $2,600,000,000,000 active manager And our multiyear investment in incorporating data science, sustainability and new tools for portfolio construction Resulting in stronger growth than at any time in our corporate history.

Speaker 2

We generated a record $267,000,000,000 in net inflows from Active Strategies in 2021, Including a 2nd consecutive year of record active equity inflows. Active Strategies contributed over 60% of our to annual organic AC and our growth is significantly outpacing that of our peers and the broader industry as we take market share in this fragmented landscape. BlackRock's Active Mutual Fund captured the number one share of industry flows in 2021 And our organic growth rate has tripled that of the industry. As Gary discussed, Our investment performance remains strong with 88% of our taxable fixed income and 78% of our fundamental active equity funds above benchmark or peer median for a 5 year period. And in the U.

Speaker 2

S, nearly 80% of our active mutual funds are rated either Morningstar 4 or Morningstar 5, Positioning us well for future growth. Clients are increasing their allocation to to alternative strategies as they search for diversification and higher returns. BlackRock has built a broad platform across infrastructure, private credit, Real Estate and Private Equity to meet that demand. We raised a record $42,000,000,000 in client capital in 2021 and are confident in our ability to accelerate our growth as a leader in private markets. Infrastructure, for example, has significant secular tailwinds, Driving growth and will be an important engine of fiscal stimulus for economies looking to build for their future.

Speaker 2

BlackRock is incredibly well positioned to capture opportunity in this area. We are one of the largest infrastructure managers in the industry with over $35,000,000,000 in to client assets, including one of the largest renewable power platforms. We have grown our platform fourfold in the last 5 years and look forward to partnering with more clients as we raise new vintages in our flagship funds and launch new innovative strategies in this asset class. IShares also had a record year As the global ETF industry crossed $1,000,000,000,000 in annual inflows for the first time. Growth was driven by greater adoption globally from asset owners, asset managers, wealth managers and more recently from many of the approximately 40,000,000 first time investors who opened self directed investment accounts over the last 2 years.

Speaker 2

BlackRock and iShares ETFs who generated a record $306,000,000,000 of net inflows in 2021. We saw strength across each of our product categories, Including over $100,000,000,000 in net inflows into our core ETFs for the first time and nearly $80,000,000,000 in our fixed income ETF And more than $50,000,000,000 into each of our sustainable and precision ETF categories. We saw strong client demand for fixed income ETFs despite a challenging macro environment for fixed income more broadly. Our growth benefited from the diversity of our product range across inflation linked bonds, municipal bonds, Sustainability and Emerging Market Exposures and the diversity of our client base, many of whom are increasingly using ETFs a part of their active portfolio construction. Worldwide ETFs are increasingly becoming the vehicle of choice for accessing a broad range of investment exposures, both in a passive way and in an active way.

Speaker 2

And as barriers for ETF adoption comes down, it is enabling a new generation of to the access markets and more and more of them are looking to ETF as a default investment vehicle. For those wanting to create more customized indexes, our Aladdin technology has long provided this capability to institutions. And through our recent Imperio acquisition, we can now provide custom index capabilities to U. S. Wealth Advisors.

Speaker 2

Following a breakout in 2020, momentum and sustainable investments continued We generated a record $104,000,000,000 of net inflows in 2021 as client demand for sustainable strategies accelerated. We now manage $509,000,000,000 in sustainable AUM, more than double from a year ago and remain committed to innovating and expanding choice for our clients. 1 of the biggest opportunities of this generation will be helping our clients navigate to global transition to a net zero economy. We have already seen $4,000,000,000,000 of capital move from traditional investments to sustainability ones In the last 2 years alone, and this is just the beginning. The transition will not happen overnight and it will require significant investment in technology.

Speaker 2

BlackRock is working with companies across a wide range of carbon intensive sectors that are proactively transforming their businesses And whose innovation will be critical to the world's decarbonization agenda. We believe these companies will present an important investment to the next question. BlackRock is intently focused on helping our clients participate in these opportunities and understand the impact of the transition on their portfolios through better data and analytics. Our ambition is to move more capital into transition than anyone else. Our multi decade investment into Aladdin Technology platform continues to differentiate BlackRock, both as an asset manager and a leading fintech provider.

Speaker 2

We generated $1,300,000,000 in annual technology revenues, up 12% year over year. We remain focused on continually evolving Aladdin for the next decade and beyond. We are innovating and extending our capabilities into areas of high client demand, including whole portfolios, Wealth and Sustainability. The combination of Aladdin and eFront, for example, which allows a client to bring together their whole portfolio in one place and customize its scale has already been embraced by over 2 dozen clients and the pipeline The breadth of BlackRock's investment strategies, our technology capabilities and our 1 BlackRock culture are truly what differentiates us in providing whole portfolio solutions to our clients. In my conversations with clients around the world, I'm hearing about the challenges they're facing and their desire to consolidate the number of partners that they work with.

Speaker 2

They are increasingly choosing BlackRock as their partner of choice for those large, strategic, complex relationships. This is resonating especially in our work with insurance clients. Our strong 4th quarter inflows included a previously announced to $49,000,000,000 of active fixed income mandate from a large strategic insurance client. Our role at BlackRock is to leverage Our insurance expertise and our diversified global platform across asset management, technology, sustainability, advisory solutions to deliver fully and completely to our clients. We see significant opportunity to work more closely with our insurance and broader OCIO clients in 2022 and beyond.

Speaker 2

Our ability to address client challenges enables us to fulfill our purpose And drive long term performance that benefits all our stakeholders. Over the last 5 years, Clients have entrusted us with $1,800,000,000,000 of net new assets. That's our organic growth for the last 5 years. We crossed $10,000,000,000,000 in AUM in the 4th quarter. As with every milestone we've reached over the decade, we are incredibly humbled By our client support and their incredible trust they have placed on us.

Speaker 2

All of us at BlackRock feel and take this deep responsibility in managing every dollar our clients awarded us, whether it is that individual investor using one of our ETFs in their first portfolio or investment account We're a very large pension fund entrusting us with our whole portfolio. It is truly an honor That we recognize every moment and every day. BlackRock's consistent results are possible because of our dedicated employees. I often talk about the importance of putting a company's purpose at the foundation of a relationship with all stakeholders. Our purpose is resonating with our employees more than ever.

Speaker 2

BlackRock employees' base has remained stable over the last 2 years amidst a turbulent environment, and I'm extremely proud of how Passionate our 18,000 employees are in helping more and more people experience financial well-being. I want to take this moment to thank each and every one of our employees and every one of them individually For their continued partnership resilience and hard work and dedication through another difficult year. Everything BlackRock does is rooted in our culture of focusing on the long term. And we will continue to innovate. We will continue to be using our scale And contributing to a more equitable, a more resilient future to benefit more clients, to benefit our employees And to benefit our shareholders and the people and communities worldwide where we operate.

Speaker 2

I firmly believe that the efforts of 2021 will position BlackRock to deliver value over the long run for all our stakeholders. With that, let me open it up for questions.

Operator

At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad.

Speaker 1

To to questions.

Operator

Your first question comes from the line of Alex Blostein with Goldman Sachs. Your line is open.

Speaker 2

Hi Alex. Happy New Year.

Speaker 3

Hey, good morning everybody. Happy New Year to you all as well. So maybe we could start with a question around just The active dynamics for BlackRock in 2021. Clearly, great year, record year in active flows across the board, equity, succinct, etcetera. How sustainable do you think this trend will be, I guess, into 2022?

Speaker 3

And then I also was hoping you could expand on how faster increases in interest rates Could also impact asset allocation decisions over the next 12 to 18 months.

Speaker 2

Sure. Excuse me, I'm getting over a cold from my grandchild. To our Results in our active investment strategies is really one of the core to transformations of BlackRock over many years of work. The history of BlackRock was an active fixed income manager. To our acquisition of BGI with our fantastic quantitative approach to both fixed income And Equity Active Strategies, our development in our illiquid space where we built out that platform.

Speaker 2

Our recommitment And fortify our fundamental equity teams over the last 5 years, which led to great performance. In addition, over the last 5 years, Alex, and you're aware of this, our build out of our distribution team, to our build out in the RIA channel, having $102,000,000,000 of inflows from retail globally, A large portion of that was active. So it's not just building out our investment teams and fortifying them, but it was building out also our distribution sides of our businesses too. This all led to a well positioned as active strategies continue to be a choice with more and more investors worldwide. And let's be clear, many of our flows in ETFs were from Active Strategies too.

Speaker 2

So across the board, The $267,000,000,000 of inflows represented from great performance, well positioned, And I think that will continue to build in 2022. I would say the other major thing is, and I talked about this quite a bit in my prepared remarks was our whole portfolio approach. We believe more and more organizations are going to be looking to outsource large components of their balance sheets, whether it's an insurance company, a pension fund, an endowment. And we're looking for an organization that can position that quite well. And because of our business model of having both active and index products across having the technology to interface with our clients.

Speaker 2

We are probably the best positioned organization in the world to meet those types of opportunities. And so if anything, I think that momentum in Active is going to accelerate going forward, Especially in the OCIO area and whole portfolios. This is going to be driving more and more of our success. Obviously, we saw flows in sustainability that continues to be driven. Our success in illiquids has really been a cornerstone of our 2021 results.

Speaker 2

So I'm extremely optimistic on our positioning for 2022 and beyond. In terms of rising rates, It really depends on how rising rates are going to be resulting in. Are we going to see a flattening yield curve with rising rates? Are we going to see a steepening yield curve? I tend to believe we're going to have more of a flattener If central banks raise rates 8 to 10 times, which the forward curve suggests, we could have a 2.25 year, 2.5 year, let's say, short term rate.

Speaker 2

The real question is what does that mean for the 10 year rate? Those questions and how that plays out is going to be very important. The biggest opportunity that we have is how Black Box is positioned and the opportunities we have. I really do believe whether we have to rising rates, a flattening yield curve, a steepening yield curve, we will be part of the conversation with all our investors worldwide.

Speaker 1

Yes. Larry, maybe I can just jump in on the rates. Just one thing for Alex. I think, obviously, the dynamic between rates Going up and our level of AUM, I think, is well known. But I would just highlight a couple of things.

Speaker 1

One is, We are our $2,800,000,000,000 is primarily institutional for sure. And obviously, those are very sticky assets that are Both strategic and matched for liabilities. So we think we have very sticky assets. 2 is we're obviously very well positioned in terms of our broad based fixed income platform, so whether it's unconstrained, high yield, total return or short duration, I think we've got that. So we're ready for a rotation.

Speaker 1

And more importantly, I think really is if rates go up, a bunch of cash is likely to come off the sidelines. And so that will Enable us to basically move that cash into other asset classes. And as I mentioned in my remarks, very importantly, we waived $500,000,000 fees last year in our cash business. That first 25 basis point move by the Fed and as Many people think that could come as early as the Q1. We think that will free up almost all of those waivers.

Speaker 1

That will have about a Half a basis point increase on our annualized effective fee rate. And obviously, we talked about while we share roughly half of that with our distributors, That will drop a significant amount of incremental profitability to the bottom line.

Operator

Your next question comes from the line of Craig Siegenthaler with Bank of America. Your line is open.

Speaker 2

Hi, Craig. Happy New Year.

Speaker 4

Hey, good morning, Larry, Rob, Gary. Hope you're all doing well. First, I just want to congratulate you on being the first Asset Manager to reach 10,000,000,000,000.

Speaker 2

Well, it's just a number. Thank you though.

Speaker 4

So my question is on the ETF business. We saw that the New York State Insurance Regulator just published an update on the capital treatment of fixed income ETFs, as bonds instead of equities. I know this has been a focus for a while, but do you think this could open the door to larger to Jeff Allocation from your insurance company clients.

Speaker 2

Let me give that to Rob.

Speaker 5

That's a great question, Craig. As to catch everybody up towards the end of 2021. You saw the New York Department of Financial Services Published a rule which permits insurance firms to treat diversified liquid bond ETFs Like bonds for the purpose of risk based capital. And this puts bond ETFs on a level playing field with bonds in an insurance portfolio. So, so far we are really excited by the initial client feedback and interest to ETFs because of this rule, we are very optimistic as how this could lead to future growth.

Speaker 5

And this is just another sign of an unlocked come as ETFs are gaining increased understanding. And in the past, we've said that we expect by 2025 that ETFs are going to reach 15,000,000,000,000 From $10,000,000,000,000 today, we still believe that. And even at that level, ETFs would still be a to a small part of the capital markets, which is why we think there are decades of growth ahead. And so we're very excited about the fact That insurers now will use more ETFs to represent their bond portfolio. But a good question and a good insight by you.

Operator

Your next question comes from the line of Michael Cypress from Morgan Stanley. Your line is open.

Speaker 6

Hey, good morning, everyone. Happy New Year. Thanks for taking the question. Just wanted to ask on Aladdin. I was just hoping you could update us on your number of Aladdin initiatives.

Speaker 6

You guys have a lot going on there from migrating to Microsoft Azure, to the Snowflake partnership, Aladdin Climate. Maybe you could just expand upon the progress on those different initiatives where they to Stan, some of them earlier stages than others. What's been built out? What's left? And any sort of early feedback from clients?

Speaker 6

And maybe you could talk a little bit how you see that unlocking the revenue growth ahead?

Speaker 2

Let me tackle the scale of Aladdin Climate and I'll have Gary to comment on the progress with Azure and Snowflake. As I said in my prepared remarks, client demand for Aladdin has accelerated, especially With more and more remote working, having a comprehensive platform, a whole portfolio solution platform is really highlights the opportunities and the strength of Aladdin and more and more to investment firms, asset owners and insurance companies are looking for Aladdin As an opportunity to expand their ability to navigate markets. As we built out Aladdin, as you suggested, Michael, the whole space where Aladdin is growing out, Whether it is the Aladdin provider connecting every Aladdin user to its custodial relationship, intersecting that. To Aladdin Wealth Connecting Aladdin to Wealth Managers And having them more connected. And we are in the beta sites right now of rolling out with some of our Aladdin Users already on Climate.

Speaker 2

And that will continue to be, in my mind, one of the principal drivers for Latin utilization going forward. And then the greater utilization of alternatives, the combination of Aladdin The eCred really extended Aladdin across the entire investment ecosystem end to end. And so with Aladdin provider, with Aladdin Wealth and now Aladdin Climate across all the portfolios, I do believe it is going to drive Accelerated growth for Aladdin going forward. I'm incredibly optimistic about the opportunities we have. And I truly believe as more and more regulators are asking questions related to Climate and how do you quantify climate as a risk?

Speaker 2

The need for Aladdin is essential in terms of understanding that risk as one measurement. I mean, there are many other tools that people could use, but it will be one of the measurements that people can utilize. And I would also add one of the great strengths for Aladdin over the last 2 years and why greater utilization is open Aladdin. We are now allowing every user of Aladdin to put their own models in that are proprietary to them. So Aladdin as a risk management system is not a monolithic system.

Speaker 2

What Aladdin has become It's more an operating ecosystem and helping the owners of money, the asset managers of money to really navigate across asset categories, communication to clients, communication to the custodial bank and having your own proprietary risk system. And that has been one of the great transitions of Aladdin. And then dovetailing that the infrastructure of Aladdin related to Azure and Snowflake, and I'll allow Gary to talk about what we're doing on the infrastructure to create a more resilient Aladdin.

Speaker 1

Thanks, Larry. So Mike, I think you were specifically asking about cloud. I'll give you just a couple of comments. We are obviously migrating Aladdin from BlackRock managed data centers to the cloud and we think that that partnership With Microsoft in particular brings a number of enhanced capabilities to both ourselves and Aladdin clients. I mean the big four for us to localized data hosting, as Larry talked about, really unlocking growth, as a key part of our strategy to open Aladdin, where clients are really looking to use both data and APIs in ways that differentiate them and help them express their own competitive advantage.

Speaker 1

We're looking to accelerate innovation and finally migrating to the cloud is going to help us support greater computing scale and elasticity at our clients as we see client demand to use data clearly increasing. More importantly though, it's beyond just the cloud. I mean, we're making investments really to address the needs of what we consider the investor for the future. Obviously a focus on whole portfolio solutions, you know about our acquisition of eFront where we bring public and private capabilities together in one platform, to sustainability data and analytics, which will be very critical. We talked about flexible tech solutions And connectivity that we just talked about, but also integrated data ecosystem that will allow clients to combine both Aladdin and non Aladdin Data, which I think is going to be important.

Speaker 1

We're about 2 thirds complete with our client migrations. That is ahead of our initial plan, And we anticipate completing the remainder of those client migrations, likely in the first half of twenty twenty two.

Operator

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

Speaker 7

Great. Thanks. Good morning, folks. Good morning. Happy New Year.

Speaker 7

Maybe just to circle back on sustainable investing, it looks Looks like that continues to be about nearly 20% of your organic growth and now at over 500,000,000,000 You're well on your way to making that $1,000,000,000,000 mark well before the end of the decade if this type of pace continues. But maybe, Larry, if you could talk about how you're seeing recent trends in demand momentum in the U. S. Obviously, Europe has been more of the growth engine over the long term on sustainable investing. But maybe you can just talk about that differentiation.

Speaker 7

And then also just on carbon transition as well. This is such a developing market. I don't know if you have a view on What a longer term market opportunity for investment product could be from an AUM size in that area and what products you are targeting for them?

Speaker 2

Great question. Thanks, Brian. Well, in 2020, we made a large statement related to the tectonic shift that we see that is going to occur In the investment world, and we continue to see rising interest in sustainability worldwide. And I think just by evidence of 2021, we saw $31,000,000,000 of flows in the U. S.

Speaker 2

And sustainability, $65,000,000,000 of flows from EMEA, which you suggested more in Europe, dollars 8,000,000,000 from APAC and We went from about $100,000,000,000 in 2019 to $500,000,000,000 today. I think we're in different spots as evidenced By those flows, as you suggested, in Europe, if you do not have a sustainability lens, you will not to be awarded any mandates today. It is a component of all I want to underscore all investing in Europe today. In the United States, it's still quite mixed depending on the institution, But it's growing. It's growing because, a, we are able to create customized portfolios.

Speaker 2

This is the power of Aladdin for us, customized portfolios for those clients who are looking to start looking at sustainability as an to the Investor and Investment Risk. And I believe this will continue to be driving flows in the coming years. The big opportunity and the greatest opportunity in this area is investing in new technology. As I said in my prepared remarks, if we move to a green economy tomorrow Without new technology, it is going to lead to an unfair and unjust transition. And as we witnessed in so many places already with rising energy prices, we've seen governments capping energy costs to the consumer.

Speaker 2

Even the European countries that are so focused on sustainability like France and Spain have caps on heating and other things like that. So this is going to be a very Long, as I discussed over the years, a very long transition and very and it's not going to be a straight line. The opportunity then is to be working with traditional hydrocarbon companies, who are going to be part of the solution. It's going to be working with agricultural companies who are part of the solution. It is investing in new startups, Whether it is to create blue or green hydrogen or blue or green ammonia, to find new solutions for green cement and steel, for investing in new opportunities and sequestering of hydrocarbons.

Speaker 2

So we believe climate transition opportunities for renewable power for these new technologies is going to be Are going to be great. And I do believe there's going to be huge investment opportunities going forward. So it's a combination of navigating your current portfolio as a lens, but also the opportunities in investing in side by side with hydrocarbon companies for investing in new technologies and new startups. Gary, why don't you carry on and talk about sustainability too, please?

Speaker 1

I think you got it, Larry. I think you hit on all the key parts of the question in terms of just flows. I mean, unless, Brian, there was anything specific you wanted additional color on the flows. I think Larry captured it. EMEA was basically 65% of flows Sustainability for the year.

Speaker 1

Larry mentioned, the U. S. Being about $30,000,000,000 I think importantly, the U. S. Was up 50% year over year, Notwithstanding as it's still only about a third of those flows, but otherwise, I think, Larry, you captured it.

Speaker 2

Thank you.

Speaker 1

Okay.

Operator

All right, ladies and gentlemen, We have reached a lot of time for questions. Mr. Fink, do you have any closing remarks?

Speaker 2

Thank you, operator. I want to thank all of you for joining us today And your continued interest in BlackRock. Our 4th quarter and full year performance is a direct result of our commitment to serving our clients, investing for the long term, anticipating their needs. And hopefully, you could hear from Gary and I and Rob. We see tremendous opportunities ahead.

Speaker 2

And BlackRock's focus remains on investing in our people, investing in the communities where we operate And to stay in front of our clients' needs. If we do all those well, our shareholders are going to be the biggest beneficiary. And I do believe this is what has enabled us to continue to deliver strong, durable, long term returns for all of our shareholders. Thank you again and let's hope We have a great start in the New Year and we all stay healthy and safe. Talk to you in a few months.

Speaker 2

Bye bye now.

Operator

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

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Earnings Conference Call
BlackRock Q4 2021
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