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BlackRock, Inc. (NYSE:BLK)

Q4 2009 Earnings Call

January 27, 2010 9:00 am ET

Executives

Ann Marie Petach - CFO

Robert Connolly - General Counsel

Laurence Fink - Chairman and CEO

Sue Wagner - Vice Chairman and COO

Analysts

Robert Lee - KBW

Craig Siegenthaler - Credit Suisse

Mike Carrier - Deutsche Bank

William Katz - Buckingham Research

Marc Irizarry - Goldman Sachs

Jeff Hopson - Stifel Nicolaus

Roger Smith – Macquarie

Operator

Good morning. At this time, I would like to welcome everyone to the BlackRock, Inc. fourth quarter 2009 earnings teleconference.

Our host for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Ann Marie Petach; and General Counsel, Robert P. Connolly.

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 instructions) Thank you.

Mr. Connolly, you may begin your conference.

Robert Connolly

Good morning. This is Bob Connolly here with Larry, Ann Marie and Sue Wagner, who is our Chief Operating Office. Before Larry and Ann Marie make their remarks, I want to point out that during the course of this conference call we may make a number of forward-looking statements. We call to your attention the fact that BlackRock's actual results may differ from these statements. As you know, BlackRock has filed with the SEC reports, which list some of the factors, which may cause our results to differ materially from these statements. Finally, BlackRock assumes no duty to and does not undertake to update any forward-looking statements.

I’ll now turn meeting over to Ann Marie.

Ann Marie Petach

Thanks, Bob. Good morning, everyone. We’re reporting earnings for the first time since December 1st acquisition of BGI. As you would see from the results, earnings have been positively affected by a combination of the BGI acquisition, continued strength in new assets, positive markets, continued cost disciplines, and strong business momentum.

I'll be discussing primarily as adjusted results. Fourth quarter net income was $379 million, or $2.39 per share including $2.34 per share of operating earning and a $0.05 per share of non-operating money. Net income includes 29% compared to third quarter and over four times compared to a year ago.

December 1, BGI transaction contributed $94 million to the fourth quarter net income. As a reminder, as adjusted results excludes BGI transaction and integration costs, which were $152 pre-tax in the fourth quarter and $183 million for the full year. These costs are comprised primarily of banking, legal and profession fees, restructuring and integration related compensation costs and other consulting and G&A expenses.

Over $50 million of these expenses would have been capitalized under the prior acquisition accounting standard. These costs will continue into 2010 and are in line with the $300 million to $350 million estimates we provided previously. We will continue to exclude these costs from as adjusted results in 2010.

For the full year, the net income was $1.21 billion and earnings per share was $7.30. Net income was up 19% from the year ago despite strong headwinds coming into the start of the year, which affected revenues and operating income, specifically in the first half of the year.

Non-operating income started the year negative as the value of co-investments on the company’s balance sheet crossed in the first quarter. Since that time, we’ve been writing those assets back up as markets have steadily improved throughout the year. On a full year basis, our balance sheet investments ended the year up $2 million more than offset by net interest expense of $48 million.

Note that the fourth quarter results will include the interest expense associated with the $2.5 billion of term debt, which we issued in December. Also note that the full year tax rate came in at 33% due in course with the favorable settlements of certain tax matters in the first half of the year and to the geographic mix of earnings. We would expect our 2010 tax rate to be higher in the 35% range in 2010.

Fourth quarter revenues of $1.544 billion improved by $404 million or 35% compared to the third quarter and $480 million or 45% compare to a year ago. The improvement in revenues from the third quarter reflects $278 million in the base and facility lending revenues associated with the $1.8 trillion in AUM related to the BGI transaction. The improvement also reflects revenues associated with the $42 billion of positive long dated asset flows and over $22 billion of net positive markets and FX assesses on AUM.

The fourth quarter revenue included performance fees of $125 million, the improvement of $76 million from the third quarter and $102 million from year ago, the improvement reflects a period of more loss than the third quarter a trend of improving fund performance and the additional BGI related performance fees. As far as the revenues trend it was pointing out that long-dated assets of $2.8 trillion at December 31 include not only the $1.8 trillion of acquired assets under management, also $221 billion of long-dated asset growth throughout the year.

BlackRock Solutions and advisory fourth quarter revenues remains strong at a $108 million reflecting a continued appetite for analytic and aligning services and continued advisory assignments, although the piece of advisory assignments had well balanced for prior periods as great stability has returned financial institution.

BRS continues to have a strong pipeline of financial market advisory, Aladdin and risk reporting opportunities as the focus of client has shifted from short-term assessment to long-term solution. As adjusted operating income of $561 million improved $161 million or 40% compared to the third quarter and $191 million or 52% compared to fourth quarter 2008. Fourth quarter included a $141 million of operating income related to BGI. The BGI acquisition and organic revenue changes explained earlier were key drives to the operating income improvement.

The operating margin as adjusted of 39.7% reflects the combination of improved revenues and continued cost discipline. As adjusted compensation cost increased compared to prior periods due to the addition of BGI employees and increased incentive comp related to improved earnings. Our compensations revenue ratio has been favorable at about 35% over the past three years. Those are performance of the financial market has started greatly over the past three years. We have consistently crossed the balance of interest of shareholders and employees resulting in stability and the constant revenue ratio.

Our G&A expenses excluding transaction (Inaudible) expenses increased relative to prior periods primarily to the BGI transaction. In addition fourth quarter G&A included an increasing occupancy cost and a reserve associated with an outstanding collaborate loan to emphasize.

Fourth quarter included only a $2 million benefit from balance sheet related foreign currency, whereas the fourth quarter of 2008 included a $31 benefit. With the fourth quarter income statement we have introduced a new expense line item called the (Inaudible) fund expense. This item includes expenses, which are directly related to the Fund’s operation but paid by the company.

All of these expenses are essentially recouped by the company through a unitary fees of (Inaudible). These expenses include index-licensing fees associated with iShare product, (Inaudible), transfer agencies and Fund accountancy. We have isolated these fees as their expenses, which are likely to bury directly with revenue or network accounts or other metrics whether associated with the volume of the business. The increase in this expense compared to prior periods relates to the BGO transaction.

The BGI transaction did not affect our balance sheet exposure to seed in co-investments. We did not acquire any such investments with the company. Overall balance sheet exposure remains at levels greatly reduced from a year ago. The total value of investments portfolio stands at about $840 million or about $735 million excluding investments which represent hedges or which are hedged.

As I mentioned earlier, the last three quarters have actually been a trend of gradual write up for these assets. Offsetting a portion of the write down was given in the first quarter of 2008. As I have said before, we do not run any proprietary investments, but rather invest alongside our clients or feed new products as required for the base business.

As you will see in our 10-K the BGI transaction has had some material effects on the balance sheet. Most notably, our acquisition of the UK group pensions business will add about $140 billion of offsetting assets and liability. Based on 141R acquisition accounting, the BGI transaction will be valued at about $15 billion and will come on to the balance sheet primarily in the form of the intangible assets and goodwill.

The majority of the intangible assets have been determined to be indefinite life. The amortization of intangible assets related to the BGI transaction in the month of December was less than $2 million. In December we completed all of the long-term financing associated with the BGI transactions, including the issuance of 37.6 million shares to Barclays Bank, the issuance of 17.8 million shares to other investors and the issuance of $2.5 billion of term debt. Fully diluted shares at the end of the year were about $196 million.

In summary 2009 was an extraordinary year in terms of in improving business trends, markets and transformational change. The combination of organic growth and the BGI transaction has positioned us uniquely to work with our clients and deliver solutions to their investment and liability management objectives. We also have broad diversity of the investment product and with management tool, which allow us to support clients with their knowledge that we are working fully as fiduciary on their behalf.

With addition of iShares we have a new suite of products well suited for retail and institutional investors in a rapidly expanding market. As we enter 2010, we will be exploring both efficiency opportunities in our base business as well as investment opportunities to continue to support strong organic growth in the future.

With that I’ll turn it over to Larry.

Laurence Fink

Thank you, Ann Marie. Welcome, everyone. I would like to wish everyone a happy new year and importantly welcome all our new clients, our new investors as this is the first formal phone call of a conversation related to our year-end and more importantly our closure of the BGI transaction on December 1st.

And so the firm is actually in a very good position in terms of where we are going forward and let me describe some of the key activities as they looked out in 2010.

As we reflect in 2009, BlackRock results strongly indicate that our business model of providing asset management and risk management services to retail and institutional clients, worldwide is working and that we are very well positioned for 2010. An independent investment management company with a strong fiduciary culture, an organization that has no proprietary trading, it don’t complete with the clients whereby virtually 100% of our revenues is client driven business, an organization that invest and manages more money for teachers, firemen, school teachers, individuals (Inaudible) in the world, I believe our business model has proven especially in these times to be a business model that works in a more scrutinized in a more transparent world of investing.

And importantly I believe the platform of BlackRock, of multi-asset products, having a strong position in beta products and alpha products, strengthened fixed income equities and alternatives with a strong risk management culture has positioned BlackRock to help and assist our clients with their investment in risk management needs and I believe this will set us apart in 2010 as it set us apart in 2009.

As our fourth quarter release stated our merger with BGI has progressed very well. We are very excited about where we are at this time, a little reference, when we closed our MLIM transaction in 2006. That transaction took eight months from contract to closing, the BGI transaction which is far more complex, required a much larger proxy solicitation, much more complexities in the businesses, we closed that transaction in six months, some times it’s held very hurried, some times we made mistakes, some times we miss communicated, overall though the merger closing went extremely well and I am very please to say that we are in a very good position going forward.

We are very excited about the intellectual teams with BGI interfacing with the BlockRock teams. As I said here today in late January, I cant tell you that excitement we are seeing worldwide with our employees on the opportunities we have in terms of blending the different business products together and going to our client representing a one solid product across regions across distribution channels and obviously across products. The intersection of beta and alpha is be coming more for announces. We believe clients worldwide asking just as many questions about beta strategies as alpha strategies.

And these strategies are not separated anymore, where maybe five or ten years ago when people thought about beta it was much more simplistic and now through technology and innovation much of it from the historic legacy BGI and other firms of the intersection of beta with alpha is becoming a very important component of our conversations and positioning with our clients. And it is that intellectual (Inaudible) that we have from legacy BlackRock and legacy BGI that we’re bringing in across to our clients.

As we stated in the press release integration is very hard and we’re going to have more bumps and we’re not going to have this completed for about two years as we stated when we closed the transaction. We are on target though on schedule we have already put all the global cash products on our laden by the end of the first quarter we’ll have all legacy BGI products on our Greenrisk Management risk reporting platforms and so we are moving ahead quite nicely and we are working very closely and trying to bring all these products for clients.

I need to just be very clear to everyone, merger integrations are hard, free everybody on to one platform on to one BlockRock platform just takes times, it takes commitment and takes repeating ourselves many time. We have been successful, as I said, to date. We’ve many more milestones to ensure that we are representing our clients onto one common platform and we are coming with one common voice across the world.

Obviously as the world is changing, as the financial markets change as governments reflect on how best positioned the financial markets, we’re working alongside with those changes with the regulatory regimes at the same time we’re doing integration. As globalization continues to expand this also means we have to change our business model as we try to grow internationally, which I’ll discuss a little bit later.

Let me just go into some of the assets under management and trends hopefully for those who read our release we’re trying to be as transparent as possible, we’re providing you with information on reported basis, on a pro forma basis and we know these trends and all the numbers can be difficult to understand so obviously we’ll prepare to answer a lot of questions.

Assets at the end of the year were $3.346 trillion. We had continuous strong growth in the fourth quarter of approximately $85 billion of long dated commitments with and then we have about $42 billion of total organic growth after some advisory and cash management reductions. What’s very impressive for the year for long-dated assets we had approximately $200 billion of organic growth as a firm. This is on pro forma basis and we repeat that as using all the years’ performance of BGI and BlackRock.

I will also like to say very light and clear please don’t annualize it. We hope to have an extraordinary year in 2010, but until we have our arms around integration and our platform, I’m not here to tell you this is going to be a reoccurring growth rate, I hope that we can achieve that, but I need to put caution with everyone.

Fixed income as we continue to rebound from the problems we had in ’08, we had strong performance, which lead us to have some very strong momentum. For the quarter we had $43 billion, a new organic growth $14 million of those was active and $29 billion were through index and ETFs.

For the quarter, equities grew by about $36 billion, all of it and then some was in indexing about $46 billion was from indexing. The active side of the equities was down about 10, all of it was from a legacy BGI product, Quant Equity product, which is under some stress now like Quant Equity throughout the industries under a lot of stress right now. This is a business that we are very committed on, this is a business that we believe is going to be robust in the future, but what we had to do in some of our fixed income products over last few year, we’re rebuilding that product and we are experiencing and we expect to experience some more outflows in that one product area.

Institutional flows for the quarter was close to $50 billion. For the quarter, our mutual fund platforms, the legacy BlackRock mutual pie funds grew about 11.6. And iShares platform for the fourth quarter grew by about little over $21 billion was also very remarkable in terms of the iShares positioning, this has been recorded earlier. The market share for iShares platform in the ETF space actually grew last year and we’re adjust under $500 billion in total assets with an industry above just crossing over a trillion dollar of total assets.

BlackRock solutions continue to see very strong opportunities in growth. For the year, we had more assignments than we’ve ever had before in the fourth quarter, new assignments were 14. And we just announced a few weeks ago the acquisition which is very small of a product called Helix. And I think is going to have huge opportunities for BlackRock in the future. This is a little product that always going to be allowing us to analyze commercial mortgage backed securities taking the structure and digging down below the structured and analyzing every loan.

I think one of the outcomes of the credit crises has been too many investors rely too heavily on rating agencies and did not have enough analysis of understanding what’s in the structured products. One of the strong positioning of BlackRock solutions in a latten will be allowing our investors to use this Helix products to analyze their holdings in commercial mortgage securities and understanding all the base assets, all the loans, how they’re performing on a period-by-period basis.

And we believe this is going to be the new fiduciary standards and this is one of the reasons why we bought this, because we believe having that information is going to be necessary if you’re going to invest in these products, not just for BlackRock, but all of BlackRock clients who use the latten system. So albeit is a very small and little acquisition, but we believe it’s going to drive a lot more opportunity and we believe it is going to once again raise the level of fiduciary standards what is necessary when investors buy the structured products. That’s also very important to note we crossed the $9 trillion mark in terms of assets that we are analyzing whether its risk based analysis or latent system for BlackRock solutions. So if you think about the $9 trillion in the solutions based plus the three plus trillion dollars at BlackRock, we have responsibilities of risk management and investment management of about $12 trillion, pretty impressive numbers.

Pipeline remains robust and we continue to see some strong strength of this year, our pipeline is about $38 billion of wins on funded and we continue to see strong flows in our mutual funds and iShare’s platforms.

Let me go over some obvious statistics that I think are important to note and that’s the balance of BlackRock today, which is an important component as we think about our business. Little over $1.1 trillion or 35% our business is active today. About $1.6 trillion or 50% of our business is passive, $350 billion or 10% is cash and about $161 billion is advisory or 5%. And so this firm is very unique in terms of the business mix between active and passive cash in advisory.

Well I think is also very remarkable when you think about BlackRock where we were four years ago, five years ago. We have $1 trillion of fixed income assets, but we have $1.5 trillion of equity assets. On top of that $350 billion in cash or $102 billion of alternatives, $141 billion in multi assets, then about $161 billion in advisory. Another important characteristic of where we are and where we think our business is going, about 40% of our business is now international which I spoke about over the passed few years, this is an important characteristic and that is $1.3 trillion. And about 60% of our business in U.S. is little over $2 trillion.

And so our business mix is very different and more importantly the amount of business that we are doing in the non-US space is growing dramatically. This is where we are going to invest in the future. We continue to believe this is an important characteristics for us and we will continue to spend money in investing overseas especially in Latin America and in Asia.

The other area that is interesting to look at as we think about our businesses are mutual fund ETF investment trust or (inaudible) assets are now more than our separate account. So we have $1.8 trillion in these bundle types of products and in separate accounts we have $1.5 trillion. So what I’m trying to flame out to everyone our business is very different today as it was even a year ago and this is one of the real characteristics and differentiating features of BlackRock going forward.

As we have these products, as we grow the one area growth that we think is going to continue to really differentiate ourselves that is in the multi asset product space where clients are looking for more fiduciary outsourcing or looking for much more of comprehensive business. In that area we saw some very large business flows and that will continue about trend in 2010.

The other opportunities we have as a firm going forward with our business mix is going to be in this fine contribution space. This is a space that we have never been as large as some of our large players that we believe as a sub advisor to some of these large platforms we have some very unique opportunities to provide in the DC space.

The other areas I’d like to just emphasize where I believe we are going to continue to have some dominance, clearly iShares. The business there is going from straight to straight. The teams internationally and domestically have been very protective of the entire ETF space. We’ve been vigilant in terms of making sure we are providing product that needs the test of time. We do not have nay leverage or inverse ETF, we don’t believe ETF should be used as a speculative tool and yet we sometimes worry about in terms of making sure that we are creating the right products that will stand the test of time.

The synergies that we see right now between the iShares team and our BlackRock mutual fund platform team is incredibly strong. If I would have to say that one real surprise (inaudible) connection and opportunities that we have together in building opportunities in the retail space with beta and alpha products together. Institutionally as our fourth quarter suggested, we continued to have very unique opportunities institutionally globally.

As you could see in our press release, we continued to have some very strong market momentum of the official institutions and that business has now crossed over $236 billion in terms of assets. So great growth, great opportunities and we continue to see great successes in the taxable institution space or the insurance base where clients are looking more for fiduciary outsourcing in different products.

I don’t want to spend too much more time because I think it’s important to open it up for questions. We are very well poisoned for 2010. We have a lot risk though, we have the risks of making sure our business model is correct as governments and central banks and are looking at restructuring the financial institutions. We need to make sure that we are differentiated and then clients understand who and what we are.

We have to make sure that our integration continue to go smoothly that our customers who comes first that we representing our clients continually and we need to make sure that we are vigorous in terms of making sure we have growth in all our product areas and in those cases in which we have needs for rebuilding or enhancing, we will be doing that. One area that we are continuing to be bullish on and yet we’ve had a very difficult time especially in the news of real estate business. We have unfortunately been in the news a little too much because of a bad investment in New York city sort of which we, I think we identified many quarters ago that we actually noted off many quarters actually in 2008 and 2009 and yet it is still an unfortunate point.

We are not perfect, we always have to rebuilt despite our scale, about despite our size, we need to vigorous in terms of rebuilding, rebalancing and fixing where there is need to be fixed. And we said real estate is an area that we believe into the long run and we are committed to this area and we believe it’s going to be an opportunity for us in the future. We are not alone in the (inaudible) in real estate. We are just have been highlighted in the last few weeks, but most of the real estate platforms have had a very difficult time. We look at this as an opportunity for BlackRock and we are working with many clients on these opportunities.

Quant Equity in another area that is under a lot of stress industry wide like real estate. Many firms are moving out of the space. We believe it is a great space despite under performance and despite large out flows, we believe the product will stand the test of time, we believe the product will be a strong product in the future and we are very committed in making sure that we represent ourselves in that product area to itself

I’m here to discuss just all products are doing well, I’m not suggesting that BlackRock does everything perfectly. I would say overall though in 2009 we had a great year. We are very well positioned and I’m very bullish on our business model. I think our business morel has been incredibly validated throughout 2009, I believe we are well positioned for 2010.

I believe we have opportunities not just in the United States but globally and I believe we are well positioned in the asset management side as any investor and manager in the world. With that thank you to all the employees and working incredibly hard in terms of the hard work of this integration it is been a remarkably intense period of time (inaudible) there is too many quarters and they saw like a broken record. But I’m very proud of the employees including our merger off in such a record point of time continuing to build momentum and continuing to build our client relationships. I’m standing in and we are sitting here today as a very proud CEO in terms of the success of the BlackRock team.

With that let’s open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Robert Lee – KBW.

Robert Lee - KBW

A couple quick question, first I’m just curious is there any update on your expected cost savings from the acquisition, of I remember correctly I think overtime you talking initially $200 million or so, any change in that?

Ann Marie Petach

No, no change in that, but what I did say in my comments is that we really are going to be balancing, getting the cost and efficiencies in the business and at the same time, appropriately investing in the business to continue top line growth.

Laurence Fink

I would argue that if we found more cost savings it will be all really invested in different parts of the business, whether it’s iShares, the fine contribution in Asia or Latin America. So I think this is the time (inaudible) in investing in a lot of ways not just giving the synergies out. We are reluctant in the synergies, so I don not want to lead you in the idea that we are not committed in terms of making synergies out of there, but I will tell you if there are more synergies I don’t know that going to show us because of our belief that we need to continue to build out.

Robert Lee - KBW

Okay, Larry I know you just mentioned about, you are feeling that, I guess the BGI sales force in the BlackRock, I guess wholesale and sales force (inaudible) well but, I’m just curious, how do you dealt the fact that you have so many product and so many categories, I mean how do you actually kind to get an (inaudible) sales force to focus on that breadth of products, I mean do you?

Sue Wagner

Are you talking more institutionally?

Robert Lee - KBW

Well actually I guess it’[s both, really both retail and institutionally.

Sue Wagner

Let me start up and say at this moment starting yesterday we have our institutional global team here talking about that. How to making sure that we represent our clients, making sure that all our team legacy teams learn each others products. And so this is a big part of the integration process. I think we have a done a very good job in a very short time doing that but the key is going to be in terms of employee education on the product and making sure that each of our client service team have the ability to market and understand those product. An importantly that they are good listeners to our clients and their needs and then coming back to some of the product that we have. And so this is a issue, I think you said it very clearly, on the retail side we do have two separate teams on the ETF team, the iShares team is separated in terms of product versus our historic and legacy mutual fund teams. And so on the retail side we have less have issue and the other end we need make sure and we are doing that to making sure our ETF team, our iShares team has the ability to (inaudible) our mutual fund platform product and vise versa. So this is going to be ongoing educational process. As I said we have the meeting today, I’ll be speaking to that team at lunch today. But it is an issue and I think you should ask that question each quarter and to give you a better statement as to how we’re doing but in the short run I think we’ve shown in terms to our clients that we are a pretty good beginning in terms of offering products. I was in Europe, I guess last week, have been two week ago now (inaudible) so two weeks ago and we had a clients meeting were about 13 clients for dinner in Amsterdam. And they were talking to me about how they really don’t know today who is a legacy BGI or who is a legacy BlackRock person, though we have representatives despite well and we’ve done a quite a good job in terms of bringing all the products to them. Those that I think in the state of the CEO, who is right before bonuses may be somebody ask to do it, but I think we’ve done a good job to date where we have lot of education in front of us.

Robert Lee - KBW

Great. And may be just a follow up question for Ann Marie, I think I may have missed it, did you say that the intangible amortization related to the transaction was only $2 million in Q4, I may if understood that?

Ann Marie Petach

Yeah, it was just a little bit less than $2 million. The bulk of the intangibles were in definite loss.

Robert Lee - KBW

Okay, and with the definite live intangibles is that some, could you give us sense of any proportion that is tax deductible, and may be what kind of tax benefits it may be over to drive from it?

Ann Marie Petach

No, I think that looking at individual pieces that the whole tax equation, I touch to give you an idea of the year, to bring to most of the total tax rate my comment sort of being the 35% range in 2010.

Operator

The next question comes from the line of Craig Siegenthaler of Credit Suisse.

Craig Siegenthaler - Credit Suisse

Just first question Laurie, now I think your product manual has really expanded in to really every significant side out there, I was hoping to provide a little perspective on flows and this liquidity crisis is really followed out and you see in force go to money markets and then the credit and convertibles and equities we start to see some dripping session of pesticide. Where do you think we are between really the institution on the retail channel in charge in terms of moving back to equities, and how do you think actively manage domestic equity stands and can we get better flows there in just in time.

Laurence Fink

We still continue to see or despite we had a very strong fourth quarter in terms of cash relative to the industry, we still believe we’re going to see net outflows and cash, because we believe we’re going to see a persistently steep yield curve in 2010 and which will move money out from cash to other risk based assets whether it’s a two year treasury or emerging market debt. And so we continue to see that in terms of institutional cash institution to the city with records amount of cash. Institutions have actually 2.5 years of excess cash flow a record amount corporation the United States do not really come to the debt market, say how that much cash sitting with them, so there even have to raise new debt if they have debt maturities over the next year or so. And so we see large cash balances with an institutions have not restock your inventories as they historically have or one would suggest with all those cash we’re going to obviously more M&A activities from corporations over the course of the next year. So that’s more on the corporation side and to in terms of investor cash we are certainly seeing more and more investors migrate from cash to other risk based assets and I think that will continue to be the case. And on retail side we still see retail moving from money market funds into demand deposits, because we still see that trend I think that trend will persist and but let me talk about in terms of retail flows. Our retail flow so far are very strong this month into equities especially internationally I think our flows month to date is way over a billion dollars in terms of retail flows, most of it is an equities and some of them fixed income in terms of the US, I don’t have the clear picture on the mix so I can’t talk about that, but I think you heard something Craig, I believe we’re seeing a continue flow out of more active strategies into index strategies, I think that will continue, I think investors are looking for some form of beta we still see very strong trend out of the US equities into emerging market and global equities, I think that trend will continue this year we’re seeing that both domestically and internationally our fastest growing funds are global opportunities fund by across to $61 billion mark so it not just global of funds but funds actually build from the US into different product areas so we continue to see the same type of trends that we saw after the second quarter into more international products. I don’t see any trend changes on that Craig so I think those the trends that we saw in the third and fourth quarter will persist at least for the foreseeable future.

Craig Siegenthaler - Credit Suisse

And any hope for domestic active accretes?

Laurence Fink

If you have performance, if you have the right products, the question you can see it, but I still believe you don’t did (inaudible) fund which I just talked about the $61 billion fund has great opportunity he get, but always money in US equities if he choose, I think we’re going to see more flows into more, if you’re going active strategies you’re going to more these actively allocation strategies, I think we’re going to see less money going to the bucketed strategies of S&P or things like that so one should not think that this is just going out of S&P or domestic strategy. They’re going to more I will tell you at client spend more time investigating beta strategies we were ask going to be bar bell and moving more into more actively treated equity strategies like our global allocation fund. S I think you’re going to see more bar bell as people to have a higher concentration on beta.

Operator

Your next question comes from the line of Mike Carrier of Deutsche Bank.

Mike Carrier - Deutsche Bank

Just the question, when you get to these asset levels, the question always comes up on the organic growth side and how you to maintain, maybe not the level this year, but just the healthy level on continues to drive pretty good earnings growth. So I think we can always try to gage where investors are the flow commentary is helpful, I guess on the distribution side whether its on the retail platform or the institutional or the US and particularly international just now with the new BlackRock including BGI where are you and where do you see like the greatest opportunities whether its getting into new clients or the offering some of the products that maybe one in those distribution channels?

Laurence Fink

The biggest trend as I said to Craig was I think you’re going to see continue large allocation to beta strategies, large allocation from retail into ETFs as you have instantaneous flexibility of going into a sub category whether it’s a financial intuition, inductor or a semiconductor inductor, or a healthcare induct or if you want to have beta strategies that are going into country specific of Mexico, or Brazil or India or China to regional inductor like MSCI and other product area. So we’ve never had that flexibility and this is one thing I’ve said this very loudly to all to anyone who had listened to me in terms of working with regulators and governments. I think people don’t truly understand the transformation of investments for individuals and institutions with the advancements of ETFs if they have such quick flexibility of moving into different asset strategies. We never have that flexibility of instantaneously investing in Brazil or Taiwan or India. And so the speed in which investors can migrate into different strategies still is going to play out for the years to come. And if going to change its scope of investing and I think this is something that is still not totally recognized or understood. But I think we’re going to continue to see some very strong flows in our beta strategies institutionally and retail.

We’re very constructive on alternatives, I didn’t say that nothing in my prepared talk, but I think as I said crises both institutionally and retail are going to do more bar belling strategies. And we saw some very good flows that our CIA platforms as clients are putting large sums of money back into hedge funds, (inaudible) part of the bar belling strategy that we’re seeing. As I said in my prepared speech, I don’t expect to have or we should not plan on having the same type of organic growth that we had in 2010. But I’m pretty constructive on our positioning for organic growth versus our piers. I’m not here, I can’t project what type of organic growth we’re going to actually achieve, those in the function of a growth of the global capital markets. But one thing is certain for me as Central banks worldwide move away from quantitative easing or in another words buying assets. What that means to me is that they are going to be more dependent on the growth of capital markets, because who is going to finance the U.S. or who is going to finance Europe as Central banks are not going to be the financier in the future and to be more dependant on the global capital markets to be the financier of developed growth.

So I am quite constructive that the global capital markets will continue to grow and I can’t see another firm that is as well positioned to take advantage of that global growth. And that’s going to add to the organic growth as our clients will start building more cash, more opportunities, they are going to be looking to put more money to work outside of cash, I think we’re just in a very good position. I would say though we need to continue to build that Asia and Latin America to really see the lot of that. We’re not as well positioned as we should be, because much of that money is not going to go into dollar based assets, it’s going to go into global markets as shine at and other regions build their own domestic capital markets. And so that’s for the opportunities are making sure that we are positioned to take advantage of the growth of global capital markets in the world.

Mike Carrier - Deutsche Bank

Okay, and then Ann Marie just two questions on some of the numbers on BGI. The margin looks like it come in at 45%, which is much stronger than it was last year, what due to the market. When you talking about the synergies at 200 just get where the run rate is today. Much of those synergies in the current run rate on the expense level and underperformance these overall any sense of how much of the performance fee or related to BGI?

Ann Marie Petach

As far as the BIG margin and going forward, we’re not going to try and segregated the two results, because really as a combined part, it’s a big random where the results end up, because we now have BlackRock people reporting to BGI people, BGI people reporting to BlackRock people. But I wouldn’t try and dissect a lot into the individual margin or transaction As far as the performance fees of the 125 about 24 on the income statement was provided to BGI.

Operator

Your next question comes from line of William Katz of Buckingham Research.

William Katz - Buckingham Research

Hi guys thanks very much, just couple of questions as I wondering you’ve still come back to be join yet again may be you talked generally about display contribution maybe Latin America and etcetera. I was wondering if you could talk a little bit about specifically we have seen the greatest lift for BGI over the 12 to 24 months.

Laurence Fink

You mean BlackRock

William Katz - Buckingham Research

Yes.

Laurence Fink

I think I said this last year, I think it will be in the beta products were I just believe we’re going to continue to see some real growth, real opportunities if we’re able to expand the product by having actively manage ETF specially in terms of asset allocation products, I think will be a very large growth area. I do believe we’re going to continue to see very large growth in our non US ETF products. And I do believe clients are going to continue to allocate heavily into fixed income into municipals especially [goals] and so I think more the same is going to happen Bill, I don’t think there’s going to be remarkable reversal, I don’t think we’re going to see a huge reversal into actively manage our equities, but I do believe as we see today and our mutual area we are seeing a continue growth in active equities, but not to the same extend as what we’re seeing in the beta products.

Alternatives will continue to be an area that we’re going to be emphasizing, so as the world improves as the global capital markets stabilizes, I think we’re just in a very good position to take advantage of those opportunities in flows. I don’t think there is any thing I could highlight other than maybe the beta products as we see more and more clients barbell using the beta and asset. So we are very just very well positioned for that type of conversation of managing both beta and alpha products. I would say which I didn’t’ in prepared talk, the one thing that I could say as surprise too is we are not seeing as much of issues with our clients in terms of concentration issues, I don’t want to say we haven’t seen any can we have seen some, but I would say the lesson we’ve budgeted when we announced the transaction last June and clients have separated the beta and alpha strategies buy in large in terms of thinking about how they should they think about the new BlackRock.

William Katz - Buckingham Research

My second question as of last quarter I’m suspect (inaudible) you ask it anyhow. You obviously generating significant amount of free cash flow. You put the term debt on so to curious if you could talk a little bit about the dividend policy maybe a share repurchase and share repurchase in the construct that you’ve had some interesting legalization being proposed by the President about ownership changes of prop changes and extra and too your largest shareholders obviously you have indirect ownership on your stock so one that there is an opportunity here may be too enhance the floats and how or maybe use the shares to be purchase from that so curious more broadly on your capital management plans?

Laurence Fink

The given policy is reduced in the first quarter by our board, but I think our policy has been consistent in the past and I believe that consistency will continue on going forward and I was speak to on behalf of the Board and so that something will be announced sometime in February when we up, our next board meeting on terms on dividend policy, but I think we’re going to have the same consistency so we could look back and see how we have done it in I would think it will be pretty very similar in the future. I don’t see anything addressing with the President announced in the (inaudible) I would actually say that as we still don’t know what ultimately happen and it will be we will take sometime for Congress to come to terms with what the President spoke about I guess the broker rule or the broker plan or whatever I think if something of that nature occurs I would actually think the investment in BlackRock is actually a better thing because we have proven to be a higher returning asset for them and so if anything I would think their ownership probably more a stable and what have been otherwise I cant speak about my large investors and their financial situation but there is no question A we will be fight full in the future in terms of thinking about float if there are any opportunities with any of our large investors will be flat full in terms of share repurchases if there was any changes with our large investors and so I think all those things are open issues, we’re going to have some very large free cash flow and with that free cash flow we either can utilize that in terms of more acquisitions in terms of BlackRock solution space we’re can use that for just general business opportunities or we can use that in some form of dividend or share repurchases and I think we’re going to have many options with the free cash flow that we’re going to have in the future, Ann Marie, do you need to go and add anything to that?

Ann Marie Petach

No.

Laurence Fink

I can’t be committed on anything, Bill, so basically – things.

William Katz - Buckingham Research

Okay just one last question, thanks for taken all the questions. This has been some interesting developments coming out of the SEC as I guess going to get simply board on over next day so around the money market business, just sort of warning to even update and so how you view the business, how do you see that economically viably you obviously talked about some further market share grows in the share to demand deposits have seem straight forward, but just sort of longer term, may your thoughts on the business?

Laurence Fink

I love the business, it’s a business that we’ve think with our positioning with corporations in our scales are going to be great business for us, I do believe we will be one of the strong entities in the space in the years to come. I do believe the money market business in area that government needs to roll over shut down and look at because of the reserve fund situation there was a period of time where the money market business was under severe stress, we needed the liquidity bank of the federal reserve to stabilize the money market business and the commercial paper area.

And so one of the outcomes will be some form of capital that will be set a side, which would obviously lower margins in the money market business if that’s going to be required and we have been very involve in conversations with our regulators on this, if something obviously that we are involved in and that we will continue to be involved in, but we believe the money market business will evolving to large scale business with few and I believe we will be one of those fields will be heavily involved in that in the future and may have lower margins in the future if were our capital going to be needed to stabilize the business.

I would also reflect though after the crisis was over in terms of the reserve fund I believe they were turn pretty over 99.75 of all monies back to their investors and so much of the problems with the money market business was some with a liquidity run and some of it obviously was credit that returned 99.75, but it’s going to clear to make the money market business robust and strong for our client, I believe there are going to be some pharma need to having reserves of capital associated with that business.

Operator

Your next question comes from the line of Marc Irizarry of Goldman Sachs.

Marc Irizarry - Goldman Sachs

Question on the DC channel. Can you help put that opportunity for BlackRock in perspective, particularly we’re hearing a lot more about guarantees in that channel and that’s seems more to be an insurance product rather than national management product. How do you sort to plan to go-to-market there and particularly could you comment on guarantees in DC?

Laurence Fink

You are correct, that’s an insurance product. We are working with some insurance product, a joints carriers on that. So we will be the manufacturer they will be the distribution in the wrapper, so that’s one area that we are working on we are working with our scale now with our products we’re working also directly with many more corporations in terms of offering a more diverse product. I believe because of diversity of products whether it is beta products or alpha products more distribution platforms are adding more BlackRock products to their channels. We have a dedicated DC team that we’re committed in building out, it’s a scenario that quite frankly with an area that we under invested in, it is an area that we did not have the appropriate scale and now today we have the scale and the investments to be a player in the future.

Marc Irizarry - Goldman Sachs

Okay, great that’s helpful. And then just in terms of the pipeline, can you give us some information on the long term of the breakdown of the pipeline by assets?

Laurence Fink

Somebody is turning to the page and giving it to me, Ann Marie, just gave it to me. Let me see pipeline (inaudible) forward. Total fixed income is $23 billion, the total pipeline is 25.7, 25.7 is the pipeline of fixed income, brokered 50-50 with passive and active. And equities is $6 billion, it is $3 billion of outflows and fundamental and $9 billion of passive, that’s still the issue of the quantitative equities. So it’s out of the pipeline, $36 billion of the stated 32ish long dated and there is year-to-date out flows in cash.

Marc Irizarry - Goldman Sachs

Okay. And what have you seen in terms of your win rates of business since the closing of the deal, have you noticed any change in the metrics of search activity that’s notable?

Laurence Fink

Searches, very, very strong and that’s a function of clients re-looking at their risk tolerance and starting to think about making more money than cash returns. And so that’s the function of where we are in the cycle. I don’t have any trends in terms of wins versus anything I can tell you, we are involved in more special situations, we’re involved as much more multi asset products strategies with clients. Clients are looking to us to send a great deal of time. I think the important trend which is very different than any year and that is in the ETF space of our iShares.

Historically, and I think this has been noted by many analyst, ETF have very strong fourth quarters and very weak first quarters. So you see for tax strategies a lot of people buy ETF to offset stock selling to take gains or take losses and they hit the beta through the ETF and they reverse that trade in January as a taken them tax strategy that was appropriate. [Audio gap] at the end of the year. And so obviously it’s only a month now, we don’t have a lot of the trends, we don’t have any long-term trends, but clearly the momentum in ETF in January are pretty resounding compared to last few years.

Marc Irizarry - Goldman Sachs

Great. That’s helpful. And just in terms of sec lending, what impact did that have on your revenues this quarter and how should we think about that going forward given sort of the outlook for rates?

Laurence Fink

Three issues in sec lending, sec lending one is you make money on the cash balance of that, cashes virtually zero and the return so that will continue to be pulling down the returns on sec lending. The other issue on sec lending though is just borrowing rates. And we saw as I said earlier, very large flows into hedge funds and also we saw that hedge funds in November, December actually de-risked a lot, because they’ve had such gains, so the real question is, are we going to seek higher utilization rates on sec lending as hedge funds have more capital to invest. It’s too early to make that determination, but those are the two big areas for sec lending the cash return which is going to be small and will remain small on the borrowing rates on the equities or the fixed income. And do you have anything else?

Ann Marie Petach

The other comment I would make is that for recording we are combined sec lending revenues along with our base fees and the reason for that is the really split between those is a bit random. So some clients might choose to pay no base fee and really we take 100% to some kind of revenue share, some might not share much of the sec revenue, lending revenue, but might pay a larger base fee. So that as we really analyze this business we found that really representing something as a sec lending revenue number with a bit of a random not really represented as number. So we’ve included that because we really do it as a bundle business and the bundle pricing is the relevant pricing not to individual segments.

Operator

Your next question comes from the line of Jeff Hopson with Stifel Nicolaus.

Jeff Hopson - Stifel Nicolaus

Okay, great thanks a lot. A couple of questions. On the number side, the BGI 95, is that just pure operating or does that include the effect on interest expense. And then Larry on the ETF business, obviously you have a great market share, great momentum, but a number of players have come into the business some significant and some concerned about the fee pressure there, can you respond to that concern?

Laurence Fink

We’re very bullish on our position in the ETF space. We believe our position is one of tremendous strength, we see more opportunities than we’ve ever seen before and yet because of the increased completion, because of the expansion of the product, we have never anticipated or believed that our market share will remain at (audio gap). We believe our growth will be very strong because we believe the space is going to grow very fast as more and more players did it and they are actually feeds upon itself. We look at this is as a growing business and yet we would not be surprised if our market share went down with new players, new opportunities. I would say though there are lot of noise about active ETF, I think in many cases active ETF is misunderstood, active ETF would be a very hard product to have a liquidity that people are looking to have when they invest in ETF. That is one of the key components of ETF and that’s liquidity.

I would say clearly having first mover and scale will remain to be a very dominant reason for people using iShares, but if you can not create the liquidity in the construction of an ETF, it’s going to very hard to have liquidity and so in a pure active ETF the constructors are going to need to know the active managers portfolio every minute to construct the underlying assets to build ETF and create liquidity and I think that is not understood as well it should. The reason why ETF have succeeded is in my mind, liquidity and the opportunity to invest in a product or a region or an area and I believe that will continue to be the dominant reason for investing in ETF.

As we expand ETF products, the key is, can we create liquidity in those other products and that’s less certain. So I think we’re in a very good position. We have dominant positions in most of the regions of the world in many of the products, we continue to innovate and create new products we’re focusing on many products such as fund to funds of ETFs which will allow us to have the liquidity a global allocation ETF those of types of products that we think we’ll have a lot of applicability in the future, but we welcome the competition, we would agree with those competitors are getting to the space this is a space to be in and so we’re certainly not freight and we believe there was room for many more.

Ann Marie Petach

And let me come to back to your first question the $95 million related to BGI net income is indeed just in after tax statement of the operating results, so its does not include the interest expense or any other expenses associated with the transaction or that in for take the interest expense for what be an ongoing expense.

Operator

Your next question comes from the line of Roger Smith of Macquarie.

Roger Smith – Macquarie

I’ve just have one follow up on the money market funds. You’ve talked about regulatory capital. Could you give us more specifics around what you’re thinking there, would you believe that Tier 1 ratio would be inline or is that something with in industry fund.

Laurence Fink

No, lastly we are looking for as an industry fund, I think the biggest mistake in the system is socializing credit risks and that’s exactly that’s the banking system and that’s why people now looking at okay we have socialize risks how we manage socialize risks and I think that’s one of the key is that Obama plan is to reduce some of that socialize risk. So the last thing we need to do as socialize money market risk.

I believe firms that get into their money market business need to set aside capital if not Tier 1 or anything like. Steady side capital associated with the business whether that’s four basis points or five basis points no different like a loan loss reserve or whatever that number is appropriate and I’m not here to suggest and has been determined yet. But setting aside a capital and building up a capital base over the course of the number of years, so you have capital associated specifically for that business.

At the moment our auditors will not allow us to do this, we are not allowed to set aside capital and so we need to relief on this to allow us to set side capital specifically for this business as a means to have a loss reserve for that business and right now it is prohibitive because we can’t do it and this is the type of thing that we are suggesting, I’m not suggesting we should not have some form of maybe industry wide liquidity bank, but the liquidity bank cannot take credit risk and the credit risk have to fall in the individual manager. This is a dividing line between us and some other players I must say as we don’t believe in socialization of credit risk and I think the Obama plan is actually stating that related to the banks and the last thing we needed a new socialization of credit risk.

Roger Smith – Macquarie

Okay, great. And then on the alternative does look like things are starting to get a little bit better here. Can you tell us what do you think the appetite for the view on risk is from institutions in here and as it really looking for multi manger funds or is it single manger or what sort to happening in the alternative space.

Laurence Fink

I think its really a function of the clients experience from ’08, ’09. I think if you had brushed with fire and badly flinched those institutions have less risk appetite and those who only marginally we’re harmed and now we’re looking at opportunistically investing. So we see in a multi manager products of large continued interest we did have great year last year in our multi manager products and so we are seeing flows and in inquiry because of our experienced and in our individual products we are starting to see more flows, just this week, I think its $300 million going up to $600 million mandate from our state pension plan in our global asset fund, this is the legacy BGI, single strategy of global investing and so it really depends on the clients appetite, but world wide I would say, as I said clients are looking for multi manger products, but they were also looking for a single manger strategies were benefiting from both and I think this is all function of the bar bell that I have discussed repeatedly during the phone call.

Roger Smith – Macquarie

Okay and then just lastly on the scientific equity, what’s going on there that the closing investors could leave that the product and then how big is that product at BlackRock right now?

Laurence Fink

The product is approximately 100 millionish today (audio gap) as we said, we’re very constructive on it, but it is an area that other firms have announce either abandoning other firms are de-emphasizing and we are committed in building, so it is an area that’s under stress in 2010, it is an area that we knew that’s under stress when we looked at performs of BGI and it still remains to be under stress, but it is an area that we believe has real strong of long term applicability as an investment product in equity.

Operator

Ladies and gentlemen we reach the end of the allotted time for questions. Mr. Fink, Miss. Petach, are there any closing remarks?

Laurence Fink

Just once again thank you all the employees who are listening. Thank you to our investors who tolerated us during these trying times and through this integration. As I said earlier, 2009 turned out to be a very strong year for BlackRock, for investors, for our clients, for our employees and I’m very excited about the opportunities we have 2010. Thank you everyone.

Operator

This does conclude today’s teleconference. Thank you for your participation. You may now disconnect.

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Source: BlackRock, Inc. Q4 2009 Earnings Call Transcript
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