BlackRock Management Presents at 2014 Credit Suisse Financial Services Forum (Transcript)

Feb.15.14 | About: BlackRock, Inc. (BLK)

BlackRock, Inc. (NYSE:BLK)

2014 Credit Suisse Financial Services Forum Conference Call

February 11, 2014 8:00 AM ET


Gary Shedlin – CFO

Tom Wojcik – Head, IR


Craig Siegenthaler – Credit Suisse

Craig Siegenthaler – Credit Suisse

So, leading off the 15th Annual Credit Suisse Financial Services Forum, we are pleased to have Gary Shedlin, Chief Financial Officer of BlackRock.

For those who don't already know Gary, he just doing BlackRock in early 2013 from Morgan Stanley where he was Vice Chairman of Investment Bank and focused on providing advice to financial institutions, including assets management companies. Well, Gary only worked at BlackRock for about a year now. He had held a close long-term relationship a company as a banker and helped BlackRock with many of key transactions. But Gary is CFO of the largest assets manager in the world.

Just remind to all of you who probably know the details anyway, BlackRock manages $4.3 trillion in client assets to more 120 different investment teams and is arguably the most diversified business mix in the world. The BlackRock of today sure looks different then when you first started advising the company back when it was mostly institutional bond manager, back in your early banking days, right Gary?

Gary Shedlin

Absolutely that's correct, and thank you for having us. Just want to introduce this good looking man to my right is Tom Wojcik, who is our Head of Investor Relations at BlackRock.

So I basically go to know BlackRock back in 1993, which was the year BlackRock sold to PMC, I will give a big round of applause to anyone who can tell me what the purchase price was in 1993, is there anybody out there who actually knows that? $230 million was what BlackRock sold to PMC for in 1993 and today PMC actually books an annual dividend in excess of the purchase price that they paid for BlackRock in 1993.

And so, you correctly stated it. We were effectively a domestic institutional fixed income manager up until about 2006, at which time we did our first transformational deal with Merrill Lynch investment managers which rapidly overnight took us to have an equity business, having retail business and having a significant presence outside the United States, primarily through Merrill's ownership of Mercury. And then once again 2009 really the final part of the transformation was complete with our acquisition of BJI, which basically brought us in to the passive marketplace both in terms of ETFs and non-ETF business.

And so that really transformation for us has really set us for a lot of strategic discussion we are going to have today in terms of how we can become really all things to all people and really lean on our diversification being a multi-asset, multi-product, multi-geography player.

Craig Siegenthaler – Credit Suisse

Excellent. And Gary one of the big shifts we have seen within the U.S. retail industry from some style box segregated products to outcome-oriented products. How is BlackRock positioned for this cyclical change and what are your own thoughts on the emergence of this trend?

Gary Shedlin

Yes. So, I think there are two separate issues there I mean there is a retail story and an outcome story and I would think about retail and outcomes as really a big part of both our institutional and our retail strategy. But let's talk about retail for a minute. I think there is really four key trends that are driving retail growth going forward and the first one as you mentioned Craig is definitely outcomes. They are the new alpha. McKenzie today estimate that, the outcomes business itself would be a $2 trillion assets class by the end of 2015, so that's happening very, very quickly. And again we are as I mentioned in terms of the evolution of BlackRock really well positioned having both an alpha business, beta business or active and passive business and being able to put those together and customize really to drive solutions for our client base.

So in that respect, it's really incredibly important. We hit outcomes really in three key ways. First is a fully bundled offering and this is where we basically create our own products and we basically deliver an outcome solution to the client ourselves. Examples of that could be something like global allocation, which is about a $90 billion fund family today or something like multi-asset Income Fund which is a relatively new fund a little bit in excess of $5 billion again strong returns low bow and very high income. We can basically take those products. We can sell them to the investor as an outcome-oriented solution and obviously that's critically important.

Secondly, we can hit it. It is basically by providing building blocks to what we're calling other people's asset allocation models. And so as you all know, as we saw basically dis-aggregation of manufacturing and distribution, most of the distributors today are looking rather than manufacturing product, looking to add value to asset allocation. Examples of that would be a Morgan Stanley asset allocation model that they provide to their financial advisers and in that case really trying to provide the individual building blocks.

So we can do that in a number of ways. Obviously, we are trying to drive ETS as a key part of thinking about lower cost solutions for core allocations in some of those models but we're also still trying to basically place ourselves what we're calling a high conviction alpha products into those models to make sure that we get appropriate presence there, and that really is dependent on performance. And frankly, when you look at our performance it's frankly never been better.

So whether it's on fixed income side or whether a traditional or non-traditional, we probably got over the time 75% to 85% of our assets up on median in terms of performance, think about equities again on the non-U.S side we got a very strong European equity platform, our Asian equity business is very strong with -- now and I think we talk at length about some of the changes we made to our U.S. fundamental equities business, which is continuing to get stronger. So we feel really good about the building blocks.

The third key area of outcomes in terms of how we compete is really trying to be much more of an enhanced service provider to the intermediaries and this really is where it gets very exciting for us because now we get to basically bring all the power of the BlackRockies together and start to lever on things like BlackRock Solutions where we can start to create a BlackRock Solutions like on a Aladdin like portfolio services to the investment advisor, and much as we saw the investment advisors start to move away from proprietary product as those types of investments advisors who would rather not rely on the home office model, and in this case either they are coming with their own models in this new world of the SPM, where they may create their own models to try and add alpha or they may rely on third party models.

We can basically provide those types of models and thus and that type of consultancy to the advisor to help them basically in any way they want to think about solutions. And today we have got about $7 billion of investment advisor assets, SPM following on models. Obviously, the hope there that is they can start to put those either into fully-bundled BlackRock product or in fact individual building block product and start to actually create a fee stream from that.

And interestingly if an advisor actually follows our model and basically populates it with BlackRock product, we can almost give them a fully Aladdin like product on their desktop where they can do own stimulations in terms of things. So that's a very fast growing business for us and our hope is that those assets that's $7 billion will actually double in the next year.

Three other trends that really driving retail beyond outcomes which I think are important to note is the second act ETFs, about 45% of our ETFs sit in a retail channel, let's call it, retail ownership and we think obviously that is critically important for us. We are going to continue to try and drive this inherent shift from basically active to passive, which in many cases by the way is replacing single-stock exposures as opposed to mutual funds in and of themselves and that's going to really important for us in terms of where we think that's going to go and we can talk about more that buy and hold and what we are doing that a bit later.

Third key theme that I think it is really important is alternatives are going mainstream, it's not just institutions who are looking to all turn to product today in terms of trying to basically can uncorrelated risk-adjusted returns. Again I am going to cite McKenzie on this, McKenzie is estimating that alterns will ultimately represent 25% of U.S. retail revenue by the end of next year. And obviously we are putting a tremendous amount of effort into that both in the United States where we now have [640 Act] mutual funds led by our Global Long Short Credit Fund which is about $5 billion or $6 billion.

And we are actually starting to make headway with things like Global Long Short Equity which is being run by our Scientific Equity Group, very strong performance and that had good flows at end of last year and is continuing. So we think alternatives are going to be a critical path for us and we are going to participate three.

And finally, really is the trend to unrated funds. When you think about it today, three of our key drivers of growth whether it's SIO, which is our Unconstrained Fixed Income Fund, MII which I mentioned, or Global Long Short Credit, these are three funds frankly that never existed at BlackRock if you go back a 2.5 years ago, and yet we are driving growth through the retail channel.

Today I think there was an estimate that last year total flows into unrated funds actually were about the same or a little bit more than total flows in four and five star funds. So, that is a critical drive for us because we have got this bit infrastructure and a wholesaler force, 275 strong, a single force basically selling both active and passive and our ability to basically shorten time to market through product innovation and really get then into the hands of investors is a huge advantage for us.

So moving on to Asia, where the long-term growth opportunity for the young asset management industry are pretty attractive here. BlackRock is also very well positioned in this market. We have a very large business that's also diverse firm by Mark McCombe which include joint venture with the Bank of China, in Mainland China. We think this business is generally under-appreciated by the market by industrialists given its current size.

Look, Asia is important for us as whether it's under-appreciated or not I leave that up to you all, but I would say about Asia a couple of things. It is a roughly a $350 billion business in terms of assets, revenues are probably about $850 million. Importantly we have 2,000 on the ground in Asia. So when you think about that and that business candidly from a channel and product standpoint doesn't look materially different from overall BlackRock in terms of the multi-product, multi-asset, multi-channel business.

So the key thing to understand is we are really driving that business no different than rest of BlackRock. We are not a manager, trying to manage assets from New York, in Asia. We are on the ground, we are on the ground in Japan, we are in the ground in numerous countries Asia ex-Japan and on the ground in Australia. So, we are really competing there as a local player but trying to leverage all these trends to basically broader BlackRock brings to the table, reputation, plan, innovation, diversification, distribution, product strategy, product management and alike, and I think that's a critically differentiating factor for us that's going to help in terms of growth.

Obviously, a lot of the macro trends that are relevant whether it's you mentioned China, whether it's basically demand for retail product in China, whether we need to do a better job trying to basically do what am calling in inbound investing into the market place and managing those assets on the ground and trying to get more assets on the global product. That's happening in China, that's happening in Japan, that's happening all through Asia and I think we are really well-positioned to leverage that, especially when you think that really there are very few on the ground managers nearly as what the reputation and the brand that we have on the ground. So, we are optimistic about the business and doing fantastic job there.

Craig Siegenthaler – Credit Suisse

So as a leader in ETFs space with the iShare franchise, can you speak to any secular trends or key growth drivers for pass this strategy more broadly. For example, can you help us identify certainly geographies and also distribution channels that are still under ETFs products and have potential for significant upside?

Gary Shedlin

So look, I think we are in the early stages of ETFs and there is a number of factors that are going to drive that. As we think about our iShare's business our publicly stated target that is probably low double-digit growth on the assets side, and I think it's important to understand that today we have about 27%, last year we ended about 27% share in that business there and about 38% share of base book of business.

Clearly, increasing adoption and global penetration of iShare ETF products broadly presents a pretty big runway for growth. I think if you look at the U.S. and Europe, you will get two different outcomes. So the U.S. really -- our challenge as you know we're much more heavily institutionally weighted in terms of our business here.

We've got to do a better job in terms of penetrating what we call in the by in hold. And we're going to do that really in three key ways. I think we have talked about a lot of those before. It's segmentation through the course today is about a $100 billion business in terms of assets under management last year.

We did about $25 billion of flows which represented a 30% organic growth rate and that's going to be critically important for us to penetrate. We obviously have our extended strategic relationship with -- to hit the direct channel and that's going to help us drive growth there and the good is that, that business put up about 15% inorganic growth last year which was in excess of 9% of business ultimately.

And finally, we have got to leverage our new integrated sales force. So, I mentioned the 275 wholesales that are out there they are now working as one single sales force. We have got new compensation schemes in place to make sure everybody doing what they are supposed to do, and that's going to be critically important for us.

Two, and I was just talking about Europe I mean Europe again tends to be more institutional, but with the advent of RDR and new distribution -- that are happening there and moved to basically customized lower cost alternatives solutions while at the moment we are seeing most of that happening in index mutual funds, we are confident that ultimately iShare can play a role in that.

The second really key thing for us again concept of building blocks that we already talked about. So, as investors think about more cost effective ways to get core allocations in terms of their overall business that's going to be another continuing driver for growth. And finally there is innovation, and innovation continues to drive growth in the business, so whether it's the advent of hedged vehicles that we're a little late to but we are not play and catch up, whether it the advent of fixed income business more broadly where ETF is greatly under penetrated.

There is only 0.3% today penetration of $100 trillion in fixed income versus 3% penetration in equities. Innovation is going to driver a continued growth. So it's really expanding the use and that's going to investor education using building blocks and I think innovation which is going to continue to driver. I don't know if anything else you can add on that.

Tom Wojcik

One of things to add is just new usages as Gary mentioned but now new usages with new clients basis. We have global financial institutions for the first time putting ETF on balance sheet, using them in the U.S. with some of our fixed maturity products very early days for that, but also in EU using some fixed income and equity products and actually tapping into a new market. It hasn't been there before so as ETF are in the U.S. some of the rest of the world there are huge loss of investment organization that is happened much yet and we are really pushing.

Craig Siegenthaler – Credit Suisse

Now turning over to U.S. fixed income assets class. Given the sharp rise in interest rate last year, many investors have been more concerned with the potential for outflows for bond managers. BlackRock in 2014 is quite diversified. You still have $1.3 trillion overall bond business. Can you talk how you are specific bond product mix is positioned for higher rates including specifically your core products your general unconstrained products ETFs which kind of just hit on and also more importantly the LDI?

Gary Shedlin

Sure. So we do have $1.2 trillion fixed income but let's kind of walk through the different pieces of that, so we can give people a better sense of some of the dynamics. So on the institutional side, keep in mind that off that $1.2 trillion, roughly 75% of that is institutional. In that context a lot of money is already basically matched LDI mandates actually managed in some assets liability way.

So in terms of as rates rise and I think we have already shown this, we tend to have more stability in our fixed income book just by virtue of the fact that it has a heavily institutional bend, and we actually think that overtime, we talk a little about this last week, as we start to see increasing equity markets lots of pension funds are choosing to immunize generally and they immunize whether they choose LDI or they simply just take their games and move to things into fixed income, we actually think that's a pretty nice hedge to rising markets on the equity side.

On the retail side, this is a class of good news bad news. So we didn't have a great 2009 in terms of performance and as a result we kind of struggled a little bit during the period of time I think we have effectuated a really strong turnaround in our fixed income performance and as I mentioned earlier our fixed income products today really across the board are incredibly well positioned from a performance standpoint.

The good news for us or advantage for us either way you want to look at it is run up happened we didn't get a lot of that core/total return retail money. It went to number of competitors in particularly so as rates really started to move into last year, the good news is we didn't see the outflows. So we never had it coming in.

We didn't really see it going out as a consensus we're not really feeling the pain in terms of retail and the outflows. We hit I think the unconstrained category pretty early and that's helped us significantly in terms of our flows into our fixed income business in addition to obviously some of the alternatives there that are doing fixed income investing.

So I think the story on retail for moment is pretty good story. So stable and institutional growing on retail. When iShares candidly our product base was a little bit more weighted to long-duration product. I think if there was some criticism that we would put on ourselves as we didn't do it a good enough job of anticipating that as we should have.

So we are slow to game in terms of developing the short duration product to capture some of that outflow last year in iShare product. We have done that off late so we have introduced a host of new short duration products in recent months and that's basically is everything for short duration clones of our high yield investment grade from ETF side liquidity products short duration product and I think that we feel that we are much better positioned in terms of that.

Overall, BlackRock stood at $10 billion of active fixed income inflows last year in a year in which frankly the industry broadly was in outflows, and I might say in terms of the unconstrained point that you raised. It's interest because that phenomena really started in retail and we are now really seeing institutions start to pick up.

So just in the last six months of last year we put up close to in excess of $5 billion of institutional money which sometimes which is hard for people to see because it's coming in lots of singles and it's going into the fund itself but as institutions now start to their money migrate to much bigger mandates on that we will start to see some separate accounts momentum drive around that.

Craig Siegenthaler – Credit Suisse

Now looking at the defined contribution channel. We have all heard Larry Fink and other thought leaders in the industry discuss how the U.S. retail investor is under-invested for retirement. Specifically how BlackRock and other DCIO businesses and even record keepers helping the U.S. consumer to address his future needs.

Gary Shedlin

So retirement is a huge them you obviously heard Larry's talk mid-year. He had a big speech done at NYU talking about the challenges of rising interest rates longevity retirement and that's been a huge theme for us in terms of growth. Our DC business today, Rob Goldstein likes to call us the biggest DC manager that no one's ever heard about. We're $525 billion DC manager today.

People tend not to hear as much about it because most of that for us is not driven through open-end mutual funds, it's driven through more passive vehicles. We are the originator of the year date products that's celebrating its 20th anniversary today that went over $100 billion just last quarter. So DC is a big business for us. We talked about in our institutional world as part of our drive to offset some of the secular decline in DB. DC is one of the three fast rivers if you will in the institutional market place.

In recognition of that kind of that momentum and the commitment that we have actually we just formed a U.S. Retirement Group at the end of last year. Chip Castille who runs our DC business was put in charge on that, and the goal there really is to grow very significant focus to trying to solve and bring to bear retirement solutions for the individual whether that be in 401(k), whether that be an IRA, whether that be for people who are just in taxable products who are looking to basically save more for the future.

And Chip's ability to really be the external face of retirement for BlackRock, was really going to try and drive and link together products strategy, product development and manufacturing and the like to really think about this significantly more holistically in terms developing those solutions.

And again we talked about innovation, there are certain words that we going to talk about almost everywhere but innovation is obviously a critical part of that. And so many of you may have seen we launched last year something called CoRI which was Cost-to-Retirement Index which really Chip really worked on personally to develop and again this is trying to think about a solutions approach to basically retirement.

So rather than thinking about this in terms of the traditional glide path that we have always thought about life-end this is really trying to figure out how much income someone is going to needs based on their lifestyle in retirement and then basically you use a series of algorithms to basically back into based on thinking about almost option value and future values of [annualization] and rates and when markets start to come back and say if that's my goal what do I need in terms of assets given a variety of different investment horizons.

And so that's been a big win for us and we're actually going to be launching some products there to basically link the Index to revenue.

Craig Siegenthaler – Credit Suisse

One business evident that you have strong competitive advantage is the BlackRock solutions business including the LDI platform. Can you talk about long-term expectations for this business and also how this business performed out of kind of BGI business and also existing BlackRock business?

Gary Shedlin

Sure. So solutions was really the framework of regional BlackRock I mean interestingly from the first everyone heard the famous stories about the micro system, computer server next to the coffee maker and if you haven't you should we see video that we put on the website. But really BlackRock solution was the technology infrastructure that was created for BlackRock, and it was really used to drive everything that we do every day to create a fully integrated portfolio management, risk analytics, trading and account systems that we use, every portfolio manager uses every day.

I guess the advent really of the third-party business came when Kidder blew up and GE needed some help and basically they needed to understand what exactly they have so they handed Rob Goldstein to say he personally got the floppy disk that he got from GE guy and basically went back and all of the boom the concept of using Aladdin as a third-party vehicle was born.

So today we have really two key businesses and what we are calling BlackRock Solutions. There is the Aladdin business which is actually acronym and that's the second kudos if anyone can with the acronym that [inaudible] means I'll that you that later. But we have the Aladdin business which today of the $575 million that we booking in BlackRock solutions today is roughly 75% of that. We should think about that as more of the annualized stream of that.

We still believe that this business will continue to grow in the mid-teens in terms of the growth rate and growth rate there is really coming from two key themes. One obviously as that business is going to grows as our clients assets grow so people do have people on third party assets on and secondly that business is going to grow just as we book new clients, and that's really being driven by global investment platform consolidation and it drive multi-asset solutions.

So as example, we booked a very significant clients, that a new client at the end of last year who is going to use Aladdin internally but we had a renewal of another client just earlier this year who actually expanded the asset class. So, because we have multi-asset capabilities, that client wanted to put emerging markets on to Aladdin so that basically comes on. So that business going to continue to growing and again we don't have any revised view of mid-teens growth.

The FMA business which is our financial markets advisory business. This business really came into its own during the crisis as we had a number of clients seek to users that help to understand balance sheet risk. It's really balance sheet capital markets advisors but also assets disposition of guys who basically liquidated main lean portfolio for AIG and some of the Bear Stearns portfolios. And this business has been a little bit lumpier. It was in crisis mode but frankly we have seen this business really successfully evolve into more of a steady state from crisis management really as a number of financial institutions are looking to us to basically help them to navigate the changing and evolving inventory landscape.

So as an perfect example rather than basically helping Greece or her Majesty's treasury which is some other stuff. I mean I bumped into Rob Reilly this morning, who is CFO of PNC and they would tell you that they CCAR reports when you think about it are thousands and thousands of pages and when you think about Board of Directors of financial institutions trying to basically get comfortable with what's in these documents and there is huge driving change in the regulated environment helping to identity from the third-party whether the loss expectations or loss content of the portfolio are right if you will.

There is a huge opportunity for us to basically play that role as an advisor and I'm candidly even with the crisis all over the last two quarters our FME business put up roughly 40 million bucks of revenue for each quarter and that was, those were high quarters in the history of the firm for that.

Tom Wojcik

One other thing just to mentioned as you think about BlackRock solutions certainly you see the $575 million on the income statement business what you don't is a lot what Gary talked about on the initial question on the outcomes and solutions and how BlackRock bringing those for their clients and the business the FME business is really pushing into our retail and institutional and iShares channel and a lot of that manifesting into flows and rest of the financial statement or rest of performance of the business. It's really pervasive within the firm everything that and FME brings to the firm.

Craig Siegenthaler – Credit Suisse

Excellent. So at this time we still have some more prepared questions but we want to open up the audience and see if there is any question out there from the audience. So if there are questions please raise your hand and someone will bring a mic over to you.

Question-And-Answer Session

Craig Siegenthaler – Credit Suisse

Let me ask a -- it's a clean story, It's a very clean story. So let me ask just a question here on operating margin. You had some very nice improvement over the last few years here, what your incremental margins on average and how do you think about that by product, by flow versus kind of market appreciation? And kind of what are the long-term expectations for the operating margin of BlackRock?

Gary Shedlin

Yes. So, this is a question we get a lot and we absolutely, we look at lots of analytics internally on margin and profitability and how we think about different business. I mean important this is we really run the businesses as part of one business, as part of BlackRock. We don't run a lot of segments and in fact we have only one segment.

So we don't really think necessarily about try to grow the margin that's important although we obviously have sense of where we should be allocating capital. Look if we could grow the margin to the sky and not invest any incremental dollars in the business, that would really be a fantastic thing. The reality of that, it is simply not true and we have to invest in our technology platform not only for our own benefit but to keep light and sharp, we have to keep investing in our brand, we have to invest in our infrastructure and sales force and we talked about the ability to drive product flows.

We have to obviously meet the needs of ever increasing regulatory and compliance cost that are critical to organization along with all the other controls that you need to invest in. So we continue to have to invest. I was a banker for a long time. I used to look at the charts and I would read those chart and people would tell me that your PE multiple is only your ability to grow. And so, we continue to invest in the business. We are not going to be able to drive that growth and if we can't continue to drive the growth we can't get our premium PE multiple that we aspire to.

So at the end of the day, we are really looking at really trying to do two things. One is for the level of growth that we're trying to achieve to maximize that margin, but we are not going to basically start the business. It would be very easy for us to basically bring growth down and deliver a much higher margin but at the end of the day am not sure anyone in this room will ultimately be happy with that outcome.

So we are looking to run the business with dual purposes, basically meet our growth targets, market and you know we are kind of committed to in stable markets, we don't really expected that margin to fall below 40%. We obviously put up 41.4% last year but that was pretty good beta environment but obviously not all beta is created equal as we have seen in the last few weeks and this again in period in May and June. So we are kind of committed to that. We think 40% is a reasonable floor in the context of a stable market but we are not going to commit to anything other than that.

That being said, there is no question that if we do get those types of markets there should be positive upward bias to what we can deliver, and that basically just comes purely from scale and scale both in our passive business and it comes from scale being leverage all of this infrastructure cost that I spoke about we will it's in brand, whether it in talent, whether it's in technology, whether it's in legal regulatory simply just across the institutions that we've done.

Craig Siegenthaler – Credit Suisse

Got it. And then just on question on your earlier comments. We have the RDR new regulations in the UK, based on kind of an early look, what do you think is the outcome there? Do you think you can actually kind of pick up a lot of market share with some of your passive products quickly or kind of how do you think this plays put?

Gary Shedlin

Yes. RDR is changing a lot. I think we are obviously starting to see a large movement as we get into kind of a non-retrocession environment which is starting to move throughout Europe we think. The traditional distributors there are thinking much more -- less about proprietary products and they are thinking much more about again cost effective, cost efficient customized solution product where they are basically playing much more of the tactical assets allocator and basically trying to full the buckets again with these building blocks more and more which are going to low cost alternative.

So we have -- whether it's our ETF platform and iShares which are trying to basically deliver more leverage with whether it's our co-mingled trust funds that we're basically going to use or basically it's our new index mutual funds which many of you saw we re-allocated from an institutional market classification in our earnings report and our assets table to retail. We are definitely starting to see that.

In many cases it's going to be bulky. So you will see big mandates as they come in but over time I think there is definitely an upward bias no different to kind of low cost customized solutions.

Craig Siegenthaler – Credit Suisse

Excellent. So let me just give one more try if there is any questions from investors. We've got one here in the front.

Unidentified Analyst

[Question Inaudible].

Gary Shedlin

Well, we are caught up in it unfortunately just by virtue of some of the wrong ones that are out there. There is really no new update I mean you know I can kind of tell you what the state of play is but we frankly know nothing more as an organization than we did when the OFR report really came out.

So I think there are a couple of things that's going on in SIFY We obviously saw the OFR report come out. We obviously saw a significant reaction to that both at the industry level and industry participants so you've seen the SEC who asked for comments, which was slightly unusual given it wasn't their report and basically ourselves and frankly a number of the firms that you all work for put in letters and you can read all of those on the SEC website they're posted.

Dick Werner who runs OFR had the pleasant task of testifying for a number of committees over the last few weeks. He was in house financial services, Standard Banking and I think he took some criticism and heat for a lot of things that we heard him before did Dodd-Frank mean to capture the assets manager industry, was there transparency, was the study flawed again these were the questions that he was basically getting.

And interestingly I think the criticism that would level candidly was equally balanced between the left side and the right side of the aisle. I think we have also seen a number of kind of industry observers basically putting their views whether it's in the Times the Journal or the FTE. Again kind of we will you are on liberal or other kind of more conservative view it seemed everybody has basically got an issue with that.

I think Werner said a couple of thing that are relevant. One, he said in terms of his testimony that OFR does not designate that's obviously up to SSAR, OFR simply reports and he secondarily said frankly even more importantly he said that focus is not on at the manager level, the focus is not at the product. And I think we tend to agree that was basically the fundamental issues that we put forth in our letter.

We're agents, we are not principals. We don't think as one big portfolio manager with $4.3 trillion of assets. We have got thousands and thousands and thousands of different portfolio and each one those has different decision makers, each one is already regulated in many respects either as a SEC regulated vehicle or you said for instance or just mandate was basically given to us by third-party client. So again, we are acting as fiduciary.

If you think about what's kind of going on in Europe with FSB and everything I ask what they're doing. Frankly they have taken a product centered view and we obviously again agree with this. So it seems like things are moving in that direction which we would be cautiously optimistic about and unfortunately we are something who don't know the answer.

The FSB report is focused on funds and size and it's not clear does that makes a lot of sense as $100 billion test that they put forth but let's be honest there is a plenty of index fund that's over $100 billion that I think we all agree don't creates a systemic risk. And where you have seen problems before whether it's a long-term capital management or the Prime Fund frankly neither of those were $100 billion funds and those created a fair amount of habit in the market place.

So we don't -- I'm not sure if there is any one part of it, that's right. There are a lot of discussions we are continuing to have a seat at the table in terms of trying to driver our view point and what we think view point are important for our investors, our shareholders, our employees and we're going to continue to have a seat that table. But really we don't have any sense as to kind of where they are, what the timing is or frankly even if you get in to the god forbid scenario which is someone says you are [secular], actually I don't know what that mean, and we have already seen that for instance with whether it's GECC or AIG or [inaudible] I don't, three of those guys have been at SIFY now for six months and as far as I can tell I don't think they know what it means yet.

Craig Siegenthaler – Credit Suisse

With that, I think we're out of time. Gary, Tom, thank you very much and why don't we all give them a round of applause. Thanks very much guys.

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