BlackRock's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.17.14 | About: BlackRock, Inc. (BLK)

BlackRock, Inc. (NYSE:BLK)

Q1 2014 Earnings Conference Call

April 17, 2014 8:30 am ET

Executives

Laurence Fink - Chairman & CEO

Gary Shedlin - CFO

Robert Kapito - President

Matthew Mallow - General Counsel

Analysts

Ken Worthington - JPMorgan

Craig Siegenthaler - Credit Suisse

Robert Lee - KBW

Matthew Kelly - Morgan Stanley

Chris Harris - Wells Fargo

Marc Irizarry - Goldman Sachs

Michael Carrier - Bank of America

Operator

Good morning. My name is Carmen, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated First Quarter 2014 Earnings Teleconference. Our host for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Gary Shedlin; President, Robert S. Kapito; and General Counsel, Matthew Mallow. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will a question-and-answer period. (Operator Instructions).

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

Matthew Mallow

Thanks very much. Good morning, everyone. Before Larry, Gary, and Rob make their remarks, let me remind you that during the course of this call we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual results will of course or may of course differ from these statements. As you know, BlackRock has filed reports with the SEC, which list some of the factors that may cause the results of BlackRock to differ materially from what we say today. And as we usually warn you, BlackRock assumes no duty and does not undertake to update any forward-looking statements.

So with that, let the call begin.

Gary Shedlin

Thank you, Matt, and good morning everyone. It's my pleasure to be here to present the results for the first quarter of 2014. Before I turn it over to Larry to offer his comments, I'll review our quarterly financial performance and business results, and as usual I will be focusing primarily on as adjusted results.

BlackRock delivered first quarter earnings per share of $4.43, up 21% compared to 2013. Operating income was $1.1 billion, 15% higher than a year ago, reflecting continued revenue growth and a decline in G&A expense.

First quarter non-operating results reflected $69 million increase in the market value of our seed and co-investments, which were impacted by the monetization of a non-strategic opportunistic private equity investment. The first quarter as adjusted tax rate was 30% and we continue to believe this remains appropriate planning assumption for 2014.

Underpinning our results was continued organic growth despite volatile market conditions in the first quarter. We saw $27 billion of long-term net new flows, representing an annualized organic growth rate of approximately 3% with organic revenue growth once again outpacing organic asset growth notwithstanding the volatility which impacted our shares during the quarter. Our highly diversified multi-client platform generated more than $5 billion of net flows across each of our Retail, iShares, and Institutional businesses.

First quarter revenues were $2.7 billion, up $221 million or 9% from a year ago, and were driven by continued growth in base fees, performance fees, and revenues from BlackRock Solutions. We once again experienced year-over-year base fee growth across all long-dated asset classes.

Base fees increased to $162 million or 8% from a year ago as average assets on our management increased as a function of organic growth, market appreciation, and the acquisitions of the Crédit Suisse ETF and MGPA real estate businesses. Base fees were roughly flat compared to the fourth quarter and part due to change in our AUM mix, which was impacted by relatively weaker data in markets with higher fee products and a lower day count in the first quarter.

Performance fees for the quarter increased $50 million from a year ago, primarily due to a performance fee associated with a planned final liquidation of the opportunistic 2007 vintage closed-end mortgage fund that was partially liquidated in the fourth quarter. This fund now holds only a residual balance with limited additional performance potential.

BlackRock Solutions revenues of $154 million were up 22% year-over-year and were roughly flat compared to the fourth quarter. Our Aladdin business, which represents 71% of BlackRock Solutions revenue in the quarter, was up 10% year-over-year. Sequential results were once again impacted by the timing and recognition of certain revenues as we continue to onboard a number of very large clients on to the Aladdin platform.

Our Financial Markets Advisory or FMA group continues to post strong revenues. Now this quarter reflected a higher level of revenue associated with asset disposition assignments in prior quarters, the FMA group continues to develop a more institutionalized advisory model with a focus on helping clients navigate and implement requirements for the changing regulatory environment.

Expenses for the first quarter rose $80 million year-over-year, driven primarily by increases in revenue-related items including compensation and direct fund expense, partially offset by a decline in G&A expense.

Compensation expense increased from a year ago broadly in line with growth in the overall business. As we have previously noted, the first quarter adjusted compensation to revenue ratio generally runs higher than the full year due to the seasonality of payroll taxes, which increased year-over-year due to appreciation of BlackRock's share price.

General administration expense declined $80 million year-over-year due to a number of factors, including the impact of closed-end fund launch costs in last year's first quarter, a current one-time benefit from a reverse of UK-related real estate related retirement obligation, which is no longer required to be funded and lower other expense, partially offset by foreign currency exchange movements.

Our G&A expense in the first quarter also benefited from a delay in the timing of certain expense items, including marketing and promotional spend which will be incurred throughout the remainder of 2014.

Our operating margin for the first quarter was 41.4%, 140 basis points higher than a year ago. Notwithstanding the lower level of G&A expense in the current quarter, we continue to demonstrate benefits of scale in our overall business.

We remain committed to using our cash flow to optimize shareholder value by reinvesting in our business and returning excess cash to shareholders through a consistent and systematic capital management policy. As previously discussed, we announced a 15% increase in our quarterly dividend to $1.93 per share of common stock. We also repurchased an additional $250 million worth of shares during the first quarter and are committed to maintaining a steady level of repurchases during 2014.

BlackRock's financial results reflect the breadth and depth of our investment and distribution platforms. Our first quarter results reflect continued focus on key strategic themes including income, outcomes, alternative, and strategic data, as clients look to both active and passive vehicles to meet their evolving long-term investment needs.

We continue to see strong growth in global retail. Retail long-term net flows were $14 billion for the quarter, representing 11% annualized organic growth rate and were positive across all asset classes. International retail once again demonstrated strong results generating long-term net inflows of $9.8 billion representing a 25% annualized organic growth rate.

Equity flows of $4 billion were led by our top performing European equity suite, while fixed income net inflows of $2.5 billion were driven by demand for our short duration, unconstrained and high yield bond products. Multi-asset net inflows of $2.7 billion reflect the continuing momentum in our global allocation fund, a key component of our bundled outcome oriented family of products.

U.S. Retail's quarterly long-term net inflows of $4.2 billion, representing annualized organic growth of 5%, were led by fixed income's continued success in our duration managed product suite. We also saw accelerated interest across our diversified retail alternative platform with $1.5 billion of net inflows. Importantly, our global long/short equity fund, managed by our SAE team saw accelerated flows in the quarter with each of global long/short equity and global long/short credit attracting more than $700 million in net new assets during the quarter.

Global iShares generated $7.8 billion of net new business in the quarter driven by fixed income flows. In the face of market volatility iShares continued to deliver the efficiency, liquidity, and performance our clients expect from the leading global ETF provider. In total, iShares equity flows for the quarter generated nearly $1 billion in net new assets, which flows into developed markets more than offsetting outflows of nearly $8 billion from EEM, our flagship for emerging markets ETF.

In recent weeks, however, we have witnessed a change in emerging market sentiment and flows have reversed with approximately $4 billion coming into EEM since quarter-end.

The global ETF industry experienced strong fixed income flows during the quarter and iShares was well-positioned to capitalize on investor demand with a diverse suite of offerings across duration and style. For the quarter, we captured the number one global market share of industry fixed income ETF flows generating approximately $6.6 billion in net new assets, including $4.6 billion from Europe.

Our institutional business generated $5 billion in net long-term inflows for the quarter. Strong passive net inflows is $17.6 billion were partially offset by active net outflows of $12.6 billion. Overall results were characterized by a number of sizeable client inflows and outflows driven by a variety of factors.

Within passive, we saw both rerisking and increased usage of Liability Driven Investing or LBI as clients rebalanced their pension plan taking advantage of strong equity markets and improved funding ratios. As markets and interest rates continue to rise, we expect to see more of this type of immunization activity. That said we also saw the redemption of single large LBI assignment in connection with the annuitization of a client's pension obligation.

Active outflows were driven by several factors including corporate events and legacy performance issues. Active fixed income flows were impacted by a single $6 billion outflow driven by the acquisition of the client by an entity affiliated with a competing asset manager. Fundamental equity flows were negatively impacted by a large subadvisor redemption, which was linked to legacy under-performance.

Finally despite continued strong overall performance we also experienced outflows of approximately $4 billion in SAE, including a significant client redemption that we were able to leverage the breadth of our platform to capture a larger passive mandate from the same client.

Larry will discuss performance in more detail but we believe that our current investment performance in both active fixed income and equities is strong and competitively well-positioned.

During the quarter, we also saw continued growth in targeted institutional sub-segments including the client contribution where we generated more than $8 billion of net inflows with particular strength coming from our LifePath, target based suite and passive equity offerings. In institutional alternatives, net inflows into hedge funded funds were offset by capital return and other liquid products. However, strong fundraising continued in illiquid alternatives with more than $1 billion in commitments raised for the fifth consecutive quarter.

Across retail and institutional clients, we saw almost $2 billion of core alternative flows during the first quarter, the highest category flows we have seen four years.

Overall, the quarter again demonstrated the consistency and stability by our diverse platform and we continue to believe that we are well-positioned for the remainder of the year.

With that, I'll turn it over to Larry.

Laurence Fink

Thanks, Gary. Good morning, everyone, and thank you for joining the call. While the first quarter marked the fifth straight quarterly rise for the S&P 500, equity markets experienced significant intra quarter volatility. Central Bank policy continued to be a key focus area. Global economic indicators fluctuated relative to expectations and the market attempted to digest heightened geopolitical concerns, all of which impacted asset prices.

Volatility continued in early April as valuation concerns and short-term de-risking drove the worst week for domestic equity market since 2012. And I expect this type of volatility is likely to impact markets for the remainder of the year.

The industry has seen positive mutual fund flow throughout this latest market setback. That's a good sign that long-term investors are actively engaged helping to offset hedge fund deleveraging.

In the midst of these challenges BlackRock clients' goals remain consistent focused on investing to improve their financial futures. More than ever our clients, both institutional and individuals need to think beyond the next new cycle and the next quarter to meet their long-term investment objectives.

BlackRock's focus on long-term strategic themes, like outcome-oriented investing, retirement and longevity allows us to have a differentiated conversation with our clients and to provide them with the advice they need to meet their long-term goals. Our client dialogue is enhanced by our ability to integrate technology and risk management into our investment approach and harness our collective intelligence across the entire firm.

BlackRock attracted $27 billion in long-term net new flows in the first quarter, which again reflects the diversity and breadth of our business with positive contributions coming from all client types, all asset classes, and all regions. We have more products on more buy list than ever before. The level of RFPs we're involved in and the level of client interest across our platform from active and passive and increasingly in alternatives continues to rise, and we're seeing momentum in important long-term asset classes like infrastructure where investments we've made on our platform are beginning to pay dividends. My focus and the focus of BlackRock's leadership is on capitalizing the opportunities we see to deliver the solutions our clients need.

We recognize these opportunities must start with a strong investment performance and performance is at the foundation of the BlackRock culture. We structured our business to give portfolio managers the technology, the risk management tool, and a forum of information sharing, and at the end giving them autonomy to promote the superior investment performance that our clients expect.

One significant differentiator for BlackRock is BII or the BlackRock Investment Institute. By bringing together our investment professionals to daily meetings, topical investment forums, and knowledge sharing events, BII heightened the best ideas from our top investors and shared some of the most interesting solutions with our clients. We're focused on fostering in an environment of information sharing to benefit our portfolio managers while which would ultimately enhance performance for our clients.

We are benefiting from that enhanced performance across our fixed income business where 89% of our active fixed income AUM is above benchmarker peer medium for three years. We are also seeing strong performance in many areas of alternatives, multi-asset and equities, including European and Asian equities, and we fully expect the same from our new equity teams in the U.S.

We talked at length about the work we've done to address performance issues in our U.S. equity business. This quarter, we saw $4 billion of outflows related to a legacy performance in that business primarily driven by a loss of a very large subadvisory assignment. We recognize that our fundamental equity performance was not in line with our clients' expectations; it required a significant investment and talent. We made these investments and we remain encouraged by the performance of our new teams.

Since the new teams joined BlackRock over the past two years, our U.S. basic value improved from the 51st percentile to the 7th percentile, our large cap core from the 76th percentile to the 16th percentile, and our large cap value from the 97th percentile to the 37th percentile. These are the trends that we continue to expect and through these trends we expect to see investors asking BlackRock about what we could do for them in active U.S. equities.

As we know from our experience in restructuring our active fixed income business several years ago, the process is costly and it takes time to build long-term scalable track records. The results we are seeing today in terms of fixed income performance inflows highlights the reward from successfully executing on this type of overhaul. BlackRock is committed to bring in the top-tier alpha producers and we are confident that the moves we made in our active U.S. equity business will position ourselves to achieve that goal.

Fixed income represents a meaningful opportunity for BlackRock. The fixed income ecosystem is going through significant changes. The industry is witnessing a heightened period of client interest and on all fronts BlackRock is positioned to win. The competitive landscape in fixed income is evolving, which highlights the importance of strong performance. As we start to see a shift in the performance paradigm among industry leaders BlackRock has the product and the investment performance in place to attract flows from both retail and institutional clients.

As we've discussed on prior calls, the industry has experienced a shift from traditional, long duration fixed income to more flexible, unconstrained products as clients access the risk of duration they have under portfolios. This theme drove a substantial portion of double-digit organic growth we saw in our global retail business.

International retail, we saw growing momentum in our unconstrained fixed income global opportunity fund which raised over $900 million during the quarter. And in the U.S., our flagship strategic income opportunities fund continue to generate strong investor demand with $2.7 billion of flow in the quarter.

SIO has generated $10 billion of flows in the last five quarters and now stands at early $14 billion of AUM. What began as a retail theme early last year is now resonating with institutional and defined contribution clients as well. We invested nearly $1 billion in SIO during the last quarter.

Fixed income demand on the institutional side is also been driven by early signs of pension plans taking advantage of improved funding ratios to rebalance and immunize portfolios, and BlackRock experienced strong LVI flow this quarter as a result.

Clients are also increasingly looking to ETFs to manage their fixed income portfolios. A Greenwich Associates report on the institutional use of fixed income ETFs found that one of five non-users plan to start investing in fixed income ETFs in the coming year, while two-thirds of existing users have increased their usage since 2011. Survey respondents named iShares as their preferred provider of fixed income ETFs with pricing, the liquidity and breadth our product offering their top considerations.

Fixed income is a growth business for BlackRock and it has our largest flow category in the first quarter. The breadth of our product offerings and performance meaningfully in excess of our key competitor positions us well for the continuing rotation within fixed income and to gain market share as the landscape continues to evolve.

Our platform breadth and diversity of our deep relations with clients are also a differentiator for BlackRock.

Gary spoke about some of the large flows we saw in institutional business this quarter and BlackRock's ability to bring a variety of products and service oriented solutions to clients often position us to recapture what would otherwise be lost opportunities.

In the case of one pension risk transfer to an insurance provider, although mandates moved away from BlackRock due to successful execution of an LDI mandate, we want a BlackRock Solution assignment to perform monitoring and valuation on that same asset pool. The service transition was made possibly by our existing relationships, our strong management capabilities and risk management capabilities and reputation, which includes providing Aladdin or Aladdin risk support services to 12 of the top 35 insurance providers globally.

As a fiduciary it is critical that BlackRock not only provides the investment performance and solutions our clients need but also to take a leadership role in advocating for the best interest and those are the broader markets and the economy. That's why last month I sent a letter to CEOs of every company in the S&P 500 urging them to focus on the long-term to make investments in their businesses that will create opportunities and drive future growth.

BlackRock believes it is our responsibility and obligation to maximize the value of the assets our clients entrusted us, and that prudent management practices and strong leadership by boards of directors promoting company's long-term successes and to lead a better risk adjusted return for investors.

BlackRock is also working actively with regulator to help build constructive solutions that improve the financial ecosystem for all investors. We recently submitted a letter, comment letter to the Financial Stability Board to address concern over the impact asset managers might have on market stability. While we share the FSB's desire for a safer market environment, and we agree with our focus on products rather than firms, we argue that leverage rather than size should be the primary stream when determining the appropriate level of regulatory scrutiny.

We will continue to engage with regulators and policy makers that help insure that regulation is appropriately focused on where risk may exist at the product and at the product level and the practice level.

Looking forward, we remained committed to partnering with our clients around the world to deliver them all that BlackRock has to offer. Last week, we hosted our Institutional Client Conference where we spoke with more than 100 clients on paving new pass to achieve outcomes for those who entrust us with our assets.

On June 17th, we will be hosting our second Investor Day to discuss key drivers of future growth for BlackRock.

I'd like to close by taking a minute to talk about BlackRock's focus on our talent. Talent is something we as a management team and our board of directors review continuously in order to build a deep bench of senior executives. We view setting high standards for talent as a core responsibility to best serve our clients and investors. We are excited to have a variety of senior leaders stepping into new roles and to welcome a number of senior hires to BlackRock.

Those new hires include Salim Ramji, who was a senior partner in McKinsey & Company, will be joining the firm later this month as our new Global Head of Corporate Strategy. Chris Jones will be joining BlackRock as our Chief Investment Officer and Head of Fundamental Equities for the Americas and Co-Head of our Global Fundamental Equity team. And Helen Zhu recently joined to help BlackRock in our Chinese Equity business. Our talent strategy reflects a focus effort we have taken to develop our people and enhance our culture.

We are committed to rotating leaders into roles that present them with new challenges, driving their responsibilities, and maximizing their impact on the firm. These efforts to develop and invest in top-tier talent will serve to drive BlackRock's long-term growth and to enhance both the experiences of our clients and the value it deliver to shareholders.

As always, I want to thank our employees for a dedicated service this quarter in helping our clients to build better financial futures.

With that, I will open up it for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from the line of Ken Worthington with JPMorgan.

Ken Worthington - JPMorgan

First, I would like to see if you could talk about the level and the outlook for institutional fixed income investment dollars in motion. You called that in the press release the shift towards unconstrained and you talked in the call about short-term strategies, but taking this from another angle would you expect the amount of money in motion to increase further given the high profile performance and management stability issues at PIMCO and to what extent has this already started and, based on your past experience, what kind of scale of opportunity is there here?

Laurence Fink

I don't ever comment on our competitors. PIMCO is a fabulous investment firm so and Bill Gross has been a friend of mine for over 40 years, not that quite long about 38 years so. We're in a great position; we're seeing increasingly more dialogue from institutional clients than we've seen before. We began to see accelerated inflows on the retail side but now we are in more dialogue with more consulting firms, advisory firms to pension fund. So corporations are looking at how they should look at fixed income. Some of it is -- some of the movement is towards unconstrained into like SIO products. And let me just speak about BlackRock and reiterate having close to 90% of our products above their benchmark and some of them are in -- and many of them are in the top quartile now is a reason why people are coming to BlackRock both institutionally and retail.

Where we are beginning to see some increased dialogues though, Ken, is in defined contribution side where this is an area where we had very little penetration on the fixed income side, we had large penetration on the index equity side. So we are now enjoying more flows retail and institutional and in all components of institutional, and I believe we will begin in the second and third quarters to see an acceleration in terms of money in motion as you called it in the fixed income universe.

Ken Worthington - JPMorgan

All right. Thank you. And then to follow-up, can you talk about the performance of the core alternative strategies so far this year? We're seeing some hedge fund strategies suffering pretty weak absolute returns earlier in this year and I'm interested to hear how your various strategies are performing and maybe which areas are performing better and which areas are performing worse?

Gary Shedlin

Well, you're correct in saying there some hedge funds that have done very poorly and that was heavily oriented towards the macro strategies. Our macro strategy hedge fund has relatively poor performance. However, our single hedge fund strategies or fixed income hedge fund strategies have all done quite well, and in fact we took advantage of some of the pain within the marketplace over the last two months.

I would say overall we performed very strongly in our hedge fund strategies. Our multi -- our long/short equity or long/short fixed income hedge funds where we're seeing some very large flows both retail and institutional we had good performance. So we continue to see acceleration in conversations in the alternative space too.

Two areas that I would like to highlight on the outside where we're beginning to have a total change in dialogue one is our real estate area where we have had performance issues out five years ago. And we have changes of leadership there, we did the acquisition of our teams and we are now in more dialogues on real estate than we had been in many, many years and infrastructure. Infrastructure we brought along a team over three years ago and we are now starting to see accelerating flows into our infrastructure alternative area. We're about $2 billion and I expect to see a doubling of flows over the next 12 months to 24 months in our infrastructure area. This is an area that I think is going to, we're going to have to continue to do invest in.

As we think about the world going forward, there is a greater and greater need for infrastructure in the developing world, in the developed world and most certainly in the U.S., and we believe this is a great asset category for many of our investors. And so we look at this as an area of extreme growth.

Operator

Your next question is from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Credit Suisse

Just want to circle back on institutional fixed income specifically LDI. I thought it was interesting that the mandate wins here seems to be really concentrated in passive and not active. So first, do you think we need higher rates for this rate to really accelerate? And then, will these wins you think reside mostly in a passive business or a mix between active and passive?

Laurence Fink

Well LDI is a means in which you're trying to minimize risk and I do believe because of the growth in passive fixed income strategies in the ETF area and in obviously in the index side it's a great product for moving into LDI. So I would say there would be a higher propensity for investors seeking passive strategies and active strategies for LDI. But I think you're going to see in some care areas a growth of may be the unconstrained product areas into LDI also as a way of having a diversification in terms of fixed income strategies. But you should assume when people go to an LDI strategy they're essentially de-risking and a component of that de-risking is staying pretty current on to an index and this is why you're seeing a higher propensity to go into passive strategies.

Craig Siegenthaler - Credit Suisse

Thanks, and just my follow-up here on the illiquid alt business which is mostly a retail phenomenon. Which specific types of platforms and investor basis are really demanding these products and I'm really thinking about what your long/short credit and long/short equity fund?

Laurence Fink

I'll let Rob talk about that.

Robert Kapito

So the retail base is thirsty for alternatives, and so long/short credit and long/short equity but both global are important for the retail base. And we've launched since 2011 six '40 act alternative products; they continue to raise money. In the first quarter alone it was $1.4 billion, and that's driven as I mentioned by the long/short credit, which has had very good performance as well as the global long/short equity funds, and each of those has raised over $700 million putting them in the selling fund. So it's really a retail thirst and of course that's coming from what else is available to them which is low rates on the fixed income side, and sometimes using dividend fund as a surrogate. So they need that double-digit returns and that's where we're seeing the interest from.

Operator

Your next question is from the line of Robert Lee with KBW.

Robert Lee - KBW

First question is on just about a year-and-a-half I mean two years ago you made a move to combine the ETF and the retail distribution force. Just curious if there any way of quantifying or color you could give on what impact you may be seeing that has in terms of hoping to drive ETF flows and you like you're still at the early stages of that or is that kind of been helpful run rate so to speak?

Laurence Fink

So we are still at the earlier stages in that and what it gives us the ability to do is have more holistic conversations with our clients because clients own both passive and active whether they describe that an index funds, ETFs, or active portfolios. So most clients have been focused more on asset allocation and this way having people I can talk both sides of that conversation really resonates with them creating portfolios that are much more sticky going forward or that when there's an asset allocation they will asset allocate within BlackRock because we can offer the whole slate of products.

It has taken a while to get that underway because it requires a significant amount of training combining the sales force to have that and also to, in a sense, upgrade our sales force to be able to talk more holistically. So while we've seen success it's still in the early stages and we expect more to come on that.

Robert Lee - KBW

And maybe as a follow-up you've had really strong retail organic growth outside the U.S. Maybe give a little bit color on maybe by geographic region or country kind of where you're seeing that and kind of if there is any specific markets that I believe or by -- I know there's the odd equity business I guess in the UK, but any color there would be helpful?

Laurence Fink

Rob, it's been very broad based, it's been so gratifying. It's throughout EMEA and Latin America actually. Areas of great growth have been really, I would say the core of Europe, Italy, Germany, Switzerland where we saw very good flows. So it just continues to dominate, and then even in Asia I don't know retail flows about $2 billion came from different countries in Asia. So it speaks very broadly about our global footprint and our growing brand recognition in PacAm, in Europe and in Asia and we continue to drive a strong position as an independent asset management platform working with our distribution partners worldwide.

But also let me -- also say what is a key driver to the success is the expansion of high performing products whether it's our performance in fixed income, our performance in European equities, active equities where we're in the top decile for five years, and our growing success in Asian equities where we have Andrew Swan now with about two-and-a-half years under his belt at BlackRock with exceptional performance. So it is about our positioning worldwide globally, but it also the underlying component of that success is a growing success in our active product suite.

Operator

Your next question is from the line of Matthew Kelly with Morgan Stanley.

Matthew Kelly - Morgan Stanley

First, I wanted to just touch on the ETF landscape and there's been a lot of activity both iShares and in competitor. So I'd just be curious how active we should expect you to be on the new product launch perspective and where your efforts are focused both by product and region, and where you've seen the most interest from some of your competitors? And maybe that's a better question for Rob, either of you.

Laurence Fink

Yes, let me just give you a macro view and let Rob get into the granularity of products. But if you look at -- we had real large movements within the ETF space. In the first few weeks of January, we had up to $8 billion of outflows in EM, which was pretty disconcerting. Since that we had $4 billion of inflows. But importantly, since quarter-end, which is all public, so I can talk about it, we've had $10 billion in net inflows in our iShares products. So year-to-date we're over $17 billion of net flows. At quarter-end we were approximately $7.5 billion, so huge change in momentum.

And so getting into the both the competitive landscape change, generally when you have more I would say more of an international flavor of investing we benefit, when it's more of a domestic flavor some of our competitors benefit. But I would tell you we're in a very good position to remain a leader in the ETF business in 2014. Rob, why don't you go talk about some of the products that we're launching and we're proposing and…

Robert Kapito

So we focus on what our clients' needs are the changing landscape in the markets. So we have eight new products already this year. And we're currency hedged to our enhanced international equity products and the other are fixed income. Obviously, there was a very big demand for short duration due to the fact that people -- most people thing that interest rates at some point have a higher probability of rising and there has also been a lot of interest in the municipal area.

So we're going to be very opportunistic, we're going to follow the lead of our clients. And in some cases we're going to grow market share and in some cases we're going to take market share where we may have been late to the gain but we see an opportunity and people respect the brand, our ability to have the best tracking errors and liquidity in the marketplace. So we're going to go out in both of those. But we're going to continue to be -- have our nose close to the marketplace. And we will be very active in new products that we believe that we can have scale.

Matthew Kelly - Morgan Stanley

Okay, great. And then my follow-up is, I'd just curious to get your thoughts as a management team on the recent changes in the UK budget and impact on pension markets over there and where you're kind of -- where that -- where BlackRock is positioned to potentially benefit from any of those changes that they can throw?

Robert Kapito

Well, I'm glad you asked that because this is a huge opportunity for us and we spend a lot of time and effort developing our retirement products around the world and I think you heard Larry talk a lot about the need for retirement products. And what you're talking about is really the UK pension reform where there will be less money going into the annuity product and more money going into products that are created for retirement. And as you know you've heard us talk about our extensive U.S. DC experience with our LifePath products and our floating products.

We estimate that this opportunity in the UK alone could be about $25 billion in assets that might have gone into annuities that now will be, as Gary likes to say, money in motion. So we intend to put a lot of effort on putting together more retirement products to capitalize in this market. And I think BlackRock is uniquely positioned because of our multi-asset strategies and our product development, specifically tailored to the retirement area of which almost two-thirds of our assets at BlackRock are retirement related.

Operator

Your next question is from the line of Chris Harris with Wells Fargo.

Chris Harris - Wells Fargo

So Michael Lewis caused quite a stir with his book that came out this month. And Larry, just wondering where you guys stand on the whole debate about market structure, whether you think the markets are rigged or whether you think regulators should be doing more to kind of level the playing field, if you will? And just kind of asking this question because giving your size and obviously you guys have a lot of influence as to how the market structure unfolds?

Laurence Fink

Well, we have invested tens and tens of million of dollars for making sure that the high frequency traders did not arbitrage us. We looked at it is a fiduciary responsibility making sure that we always provide our clients best execution. And we only do execution with the reputable counterparties and market venues. So this is something that we've been focused on for years.

Obviously, it's a piece of -- it's a book that quits, obviously greater public awareness and we think there should be greater public awareness on these activity. But this is something we've been focused on for years, it is not -- our behavior has been consistent that our job as a fiduciary and get the best execution.

We believe that market structure should always be there to be protecting investors. We believe in the concept of equal access of information. We believe in the concept of simplification of order types and message orders. So this is something we've been living with it may be in the public purview but this has been as a component of the market for years and years and years and I think I spoke about this in the past few quarterly updates that we have been vigilant in making sure that we're building adequacy in terms of our trading platform that we are providing best execution for our clients. That's what I care about more than anything else that we are there making sure that with all of the new technologies that we are not been arbitraged or that we have more friction cost in our execution.

Because of the high preponderance of our equity holdings or index, as you know, we have to be so mindful of friction related to trading. And so this is why we've been very aggressive making sure we have that we focus on best execution, and I think this is a story that should be discussed, but this is a story that we've been aware of for years and have addressed it internally in terms of our platform.

Chris Harris - Wells Fargo

Understood. Thank you very much for that. And just really quick follow-up on the business. You called out the performance of some of your newer team members and they're really having a very good impact, just kind of curious to get your thought, how long do you think it's going to take for the better performance to really start moving the needle on flows. Do you think it might take something like three years to really start getting a lot better or in your experiences could we start seeing a bigger opportunity?

Laurence Fink

I want to say bifurcated market. In alternatives you could have no track record and announce a strategy and if the strategy makes sense, we've seen this in the marketplace; people are able to raise money. So it really depends on the product itself as we are beginning to see some nice flows and certainly much more dialogue in our Asian equity platform where we have just under a three-year track record there.

It takes more than a year for the key, I would say, on products like large cap core and large cap value and it may be three to four years -- two to three-year type of process. After three years, I think you then get on many buy lists across the board.

Robert Kapito

Some of these teams though actually that have joined the --

Laurence Fink

Have carried.

Robert Kapito

Have a following. So even though they didn't have a track record here, they are bringing with them track record. So we are now that they're onboard we're seeing those people be more willing to move now that they know they have settled in with us, so we will see some flows from there.

Laurence Fink

And that's the key if they continue to have the performance that they had at their prior place, we can benefit early. But in terms of our witnessing what happened in fixed income, in that case it was really more than a three-year process in which we needed to reprove ourselves because we had such a strong position in fixed income, we lost it, and it took three to four years of building that team back and building the performance back up. I don't think there is anyone straight line that's the way that we have review all the different products, it really depends on the circumstances around the team and the product itself.

Operator

And your next question is from the line of Marc Irizarry with Goldman Sachs.

Marc Irizarry - Goldman Sachs

Larry, can you talk about the growth of fixed income on constrained. It's interesting that you're now seeing I guess an institutional interest for SIO. Is that a trend, number one, the expected institutional interest will continue to drift towards on constrained you're seeing that may be with allocations? And then relatively are you concerned at all about capacity and maybe trading friction in fixed income as the quest for returns in yield, goes more sort of off index, if you will?

Laurence Fink

Unquestionably we are in more dialogues with more public and private institutional plans than ever before on the concept of some form of unconstrained. It may not just be SIO there are other products, we have FIGO, we have other types of products. So we are and we're looking at creating more unconstrained type of product, so it may not just being one. And we are beginning to see more interest on the defined contribution side for unconstrained. So I think this is going to accelerate in a very large way.

Unquestionably anyone specific product like an SIO will have, see this could not be $100 billion fund, it was never designed to be something like that but do we have quite a bit of bandwidth and capacity for the near about future absolutely. And so we're not concerned about capacity at the moment in any one of our products. But it -- this is just beginning, this groundswell towards -- moving towards an unconstrained type of fixed income product. I think this will accelerate and I think it will become a very large -- well it is a very large component of our dialogue with institutions worldwide today. The -- what is second part of your question? Marc was that -- did I answer that?

Marc Irizarry - Goldman Sachs

Just in terms of trading?

Laurence Fink

Oh, trading. Yes, friction cost. There is no question as balance sheets of the dealers are more contained you see wider spreads than fixed income. I don't think this is a long-term problem, it may be a short-term problem; it will move, it will create more movement towards exchange trading for fixed income. And I do believe this is one of the reasons why more interest in ETFs and fixed income. So you don't have to focus on a bond, you could focus on ETFs that have maturity or ETFs that are connected to benchmarks. And so this is one of the reason why we think fixed income ETFs will grow dramatically over the course of next two years.

But there is no question, there is times of great illiquidity and fixed income as dealers have cut back their capital associated with fixed income. And at times it represents larger friction cost than other times, but I do believe that will create a faster evolution towards more exchange traded fixed income platforms.

Operator

Your final question is from the line of Michael Carrier with Bank of America.

Michael Carrier - Bank of America

Gary, maybe a few number questions. So I think you mentioned and you saw it in the release just on G&A, there were some items that were real estate benefit. And then I think non-op gains were a bit elevated and then same thing with performance fees. So I guess any color around some of those lumpy items?

Gary Shedlin

Sure. So on the G&A expense, as we mentioned the current quarter reflects what we call a dilapidation reversal, which is a function of some building we have over in London that obviously artificially reduced expenses for the quarter.

As we also mentioned, there were some lower expense due to timing of the spend; the most major component there is our MMP spend that we called out on a variety of quarters.

The fourth quarter as you know was actually impacted in many cases by the opposites, we had higher MMP spending during time and we have some lease exit cost and a variety of other accruals. So I think if you listened carefully, which I'm sure you did, in the fourth quarter we tried to walk you through what portion of our fourth quarter G&A increase was kind of tied to our continued growth of the business and we really haven't changed our view on that at that moment. So I think that the type of analysis you guys generally did in the fourth quarter looking at the first quarter, we still standby.

In the non-op side, you correctly mentioned that the non-op was driven by the monetization of the non-strategic opportunistic key investment that was really tied to some years ago where we had a little bit of different strategy around potentially growing our off business, which obviously has changed at the moment. And so I would say again there that the street generally was fairly consistent in terms of estimates of our non-op with the exception of that one-time item.

And I think on performance fees we really talked about it. I mean, we mentioned in the fourth quarter this is really the final piece of that liquidation. And at the moment, we would expect that most of the performance fees to be generally recurring in nature tied to our core goals business.

Laurence Fink

But as you think about business, we are going to have return of capital, successful monetizations of these things, this is the normal course of business and also this is why we have to continue to have an engine of growth of new products and this is one of the key components of it.

Gary Shedlin

And in connection with that again another $1 billion of commitments that were in the quarter which takes that up for now five consecutive quarters. So keep in mind that those numbers are not hitting our net new business flows until the capital is actually deployed, and once that capital is deployed it then obviously becomes available both to generate performance fees in the future.

Operator

Ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, do you have any closing remarks?

Laurence Fink

Just thank you for your commitment in investing in BlackRock. As I said earlier, I think the quarter is an example of the diversification of our business model, of having a strong presence in active and passive and fixed income and equities and alternatives and it really shows up quite well in our first quarter.

And probably the other two major point that I would like to lead everybody, during the course of the quarter as we had this extreme volatility and market movement, every day during the volatility we had consistent inflows, which leads me to say that much of the market movement was more of a hedge fund oriented fast money type of behavior, long-term investors were committed to putting money to work and we saw no change in investor behavior in the first quarter. Also as a statement towards -- as we look towards the second and third quarter, we have never been in more active dialogue with more clients, with more consultants, with more distribution partners about BlackRock products probably in our corporate history and hopefully we can show you at the end of the second quarter that those dialogues turn into commitments.

Once again, thanks for all the support, and I want to thank all the employees for all the support. Thank you.

Operator

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

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