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BlackRock, Inc. (NYSE:BLK)

Q3 2010 Earnings Call

October 20, 2010 9:00 a.m. ET

Executives

Robert Connolly – General Counsel

Ann Marie Petach – CFO

Susan Wagner – Vice Chairman and COO

Laurence Fink – Chairman and CEO

Analysts

Robert Lee – KBW

Craig Siegenthaler – Credit Suisse

Michael Carrier – Deutsche Bank

Bill Katz – Citigroup

Mark Iriazarry – Goldman Sachs

Jeff Hoffman – Stifel Nicolaus

Roger Smith - Macquarie

Operator

Good morning, my name is Christy, and I will by your conference facilitator today. At this time I would like to welcome everyone to the BlackRock Incorporated third quarter 2010 earnings teleconference. Our host for today’s call will be Chairman and Chief Executive Officer Laurence D. Fink, Chief Financial Officer Ann Marie Petach, Vice Chairman Susan L. Wagner, and General Counsel Robert P. Connolly.

(Operator Instructions) Mr. Connolly, you may begin your conference.

Robert Connolly

Thank you, good morning. This is Bob Connolly, I’m General Counsel of BlackRock. 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 update any forward-looking statements.

And with that, I will turn it over to Ann Marie, our Chief Financial Officer.

Ann Marie Petach

Good morning everyone. Today we’re reporting record as suggested earnings of $2.75. This is evidence that historical CGIM in BlackRock businesses have come together as one BlackRock. Delivered strong product performance and customer focus resulting in earnings growth.

We’ve included some supplemental slides in our earnings release for the first time. I’ll refer to these slides as I discuss the results. And I’ll be talking as usual primarily about as suggested results.

Starting with slide 1, third quarter net income was $537 million. Operating income was $737 million, and earnings per share were 2.75. Net income and earnings per share reflected 16% improvement compared to the second quarter, and really giving improvement over time.

Operating income increased 2% compared to the second quarter. This excludes 17 million expense in the third quarter associated with fund 1 class, for 1.2 billion build America bond trust. This is the first closed end fund we were able to do in about 2 years. And I think really is successful traction in the business.

Moving on to slide 2. The year-to-date operating margin of 38.7%, looks like early synergy realization, and the initial investment to fund future top line growth.

Our 2010 margin has improved over time and exceeds our 2007 margin by 1.3 percentage point. The 2010 margin exceeds the 2009 performer margin by almost 2 points. And this reflects dyssynergies associated with bringing the two firms together.

And while we’ve been committed to the margin, we also are committed to achieving top line growth, and are investing in the future. Including iShare, retail, defined contribution, Solutions, Asia, alternative, and our global trading platform.

Our commitment to these and other opportunities gives us confidence in BlackRock’s long-term organic growth prospect.

Moving on to slide 3, you can see on the right hand side of this slide, we’ve laid out the 2010 market. I would note that in the third quarter, markets improved as illustrated through movements in the Dow, by really about 10%. At the same time, if you look at the average market in the third quarter compared to the average markets in the second quarter, they are actually down about 2%. This is interesting to reflect on because our base fee’s really reflect average market. So our base fee’s do not yet reflect the full improvement’s in the market, those improvements will begin to be reflected in our fourth quarter results.

At the same time, really our co-investments in our product do get marked on a period end basis. So do fully reflect the market.

With that, move along to slide 4. On the right hand side of the slide, you can see our earnings per share of 2.75. Those were composed of $2.61 of operating earnings and $0.14 of non-operating earnings. It’s good to see non-operating earnings for the first time in a little while, compared to non-operating expense.

You can see that these improved compared to the second quarter, both in operating improvements of $0.15 and non-operating improvements of $0.23. And also note we reduced the third quarter year-to-date as adjusted tax rate, from 33 ½% to 33 ½% from 35%. This reflects the benefits of favorable tax rulings and resolution of certain tax provisions.

These are ongoing benefits. We expect the full year tax rate to be consistent with the year-to-date rate, and we do expect the ongoing tax rate next year to reflect a full point of this 1 ½ point improvement.

The tax adjustments related to the first 6 months of the year, included in the third quarter are about $0.11.

Moving on to slide 5, third quarter revenues of 2.1 billion are up about 3% from the second quarter. Strong investments performance across both absolute and relative return base product resulted in 114 million of third quarter performance fees.

Performance fees improved 64 million from the second quarter explained by an extremely strong performance on the U.K. emerging company fund, and that fund had a third quarter lack. Gains on liquidation of fixed income hedge fund. With all that, it’s worth noting that the fourth quarter is still our primary recorder for performance [inaudible].

BlackRock Solutions and advisory second quarter revenues remain strong at 101 million, that’s down 13 million from the second quarter reflecting the timing of completion of advisory assignments, offset partially by growth and ongoing [Aladdin] revenue.

The pipeline is strong with active interest in Aladdin and advisory services. We’re working on some of the largest claim opportunities with themes, and feel really good about the mix of ongoing business and the continuing opportunities.

Moving on to slide 6, base fees of a billion 794 million remain consistent with the second quarter. Markets and positive net new business contribute to higher revenues associated with fixed income, multi-asset and cash product. While equity revenues were affected by lower fees on security lending, with the end quarter as the peak, and lower average equity market.

Moving on to expenses on slide 7, third quarter as suggested expenses were a billion, 355 million. Expenses were up about 5%, but the increases were closely linked to revenue and [inaudible] growth and positive product performance. That performance is then to higher incentive comp. It’s important to note that our comp to revenue ratio for the third quarter at 35.7 remains right in line with our long-term comp to revenue ratio of 35%. The other expense to note is the 17 million of fund 1 class, associated with that build America bond trust that I mentioned earlier.

Finally, I’d note that G&A expense did improve by 15 million driven in part by higher than assumed recovery rate on year-to-date value added taxes.

I don’t have a slide on the non-operating, but the non-operating earnings of 39 million do include 66 million of positive mark on co and seed investments and 27 million of net interest expense. The total value of the investment portfolio stands at a billion or 950 million when you exclude those things that are hedged, or which represents hedges of liability. The increase from the second quarter reflect both strong performance of our product as of September 30, that’s the 66 million of positive marks, and that’s a quad multiple asset category, and the seeding of two new funds. We see that a new U.S. retail fixed income products a floating rate income fund, and a new [inaudible] called Value Credit Partner. We’ve already seen assets flowing into both of these products, we’re confident that these new funds will be a good opportunity for our clients.

As I’ve 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.

Moving on to slide 8, we generate substantial cash flow, and we turn a meaningful amount back to shareholders. We’ve done this consistently over time. During the quarter, we repurchased approximately 900,000 shares, about $140 million and that is out of our 5.1 million share authorization.

We are well positioned to benefit from business trends, and well positioned for future growth. Our client appreciation for our business model and the products which we offer them, is reflected in our $46 billion price line which Larry will discuss in a moment.

A broad diversity of investment products in which management tools, allows us to support client’s needs and position us well to expand our client base going forward.

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

Laurence Fink

Thank you, Ann Marie. Good morning, everyone. During our last quarterly call I updated to our shareholders, the changes we’ve made in our governments model and our leadership changes. BlackRock needed to be prepared to take advantage of changes. In a global capital market, regulatory reform, and the opportunities we have from our historic merger with BGI.

Our third quarter results really illustrated the tremendous opportunities we have in helping our clients deal with the tax of low rates. We’re providing advice in portfolio composition by delivering a multi-asset class solution, a risk management solution to our clients. No other firm has the breadth of products utilizing beta and alpha products like BlackRock, and we are in a very strong position to take advantage of these opportunities as clients struggle with this environment.

We don’t know of any liabilities that clients are possessing that can be achieved through these low rates. And it’s going to have to be done through construction of a multi-product strategy to achieve something close to their liabilities. This is going to be a big issue, especially as we roll into 2011, and as our clients worldwide have to reassess how large their liability is grown due to low interest rates, so pension funds in the United States are going to have to reassess what their increase liability is, because of the low 10 year rate. And this is going to create much more noise going into the first quarter in 2011. And as I said, no other firm has the capability and breadth of products to take advantage of this.

In less than 1 year, our merger with BGI has become a big success. We could not have provided the range of products, ideas, and creativities to our clients before our combination. We, after the second quarter, we finally brought all the organization together in a comprehensive cohesive way. We are working together as a one firm and we spoke about one BlackRock, but it’s very important to note now, in the third quarter and certainly rolling into the fourth quarter, we are a unified firm, we have a great level of community now at the firm. The firm feels and understands, I’m talking about our citizens, understand the opportunities we have, and they all see these opportunities we have with our clients, and their getting that type of feedback.

This is not just a U.S. issue; this is worldwide throughout our platform of the comprehensiveness of the one firm BlackRock today.

We still have one more year in our technology conversion so integration is not over. And I need to remind everybody that, I need to remind all our employees at BlackRock, we have a big job to complete the technology conversions to bring all our resources, all our products on to one global risk management system, but we are right on track, maybe a little ahead of schedule. But we still have a large need to making sure that we have everything put together. So we’re right on schedule, right on track on technology and I would say, relative to our Merrill Lynch merger in ‘06, we’re actually further ahead today in our culture togetherness. And so we made great strides over the last three quarters, and we’re now beginning to see the elements of success from all the hard work that everyone put together.

Let me review the assets and give a little more clarity. Closed the quarter at $3.44 trillion, up 9%. But I’d like to also give color on only 34% of those assets are active. $1.18 trillion. So the argument that we’re so large, there are other firms as large as we are, a $1 trillion in active. We believe there’s great opportunities for us in the alpha side. And this is just not a beta play. On beta and index obviously, because of our iShares platform and our leadership position in terms of institutional indexing, that represents 53% of our platform. And then we have about 284 billion in cash which is 8% and our advisory business which as you saw, which I’ll start discussing in a minute. You see about a $4 billion decline in our advisory. That’s just basically payments of the normal principle and interest payments that are going to our clients. And that will be – that is part of that advisory assignment as the assets slowly roll off. And that should always be taken into consideration.

Another good example of the opportunities that we have, is the regional makeup of our assets. From the $3.46 trillion, $2.1 trillion are in the America’s. That includes South America that includes Canada, and obviously the U.S, 983 billion in India, and 374 billion in Asia and the Pacific.

As I said in repeated calls, we believe the greatest opportunity for us is outside the United States. And when we talk about outside the United States, it will be included in the America’s because we see a huge opportunity in South America continue growth in India and strong opportunities we have in Asia Pacific.

As Ann Marie discussed related to flows, $52.6 billion elongated flows, $1.8 billion of cash which I want to talk about in a minute, in terms of stabilization in the money market business, and the $4.3 billion advisory pre-payments which I discussed negatively to bring our total flows approximately $50 billion.

As we discussed in the second quarter, and I did speak at an investor conference, we still saw some of the outflows, or dyssynergies that we expected. One large pension fund where we had over 40% of their plan with planning in the third quarter to reduce their – our role with them, and they did, at the end of the quarter, redeem about $17 billion, a very low fee business.

Let me talk about the ins-and-out, because people are concerned about dyssynergies. The average basis points of dyssynergies, losses, is about 8 basis points. The 50 odd billion dollars of inflows is approximately 15 basis points. So we have been consistently telling you that the businesses that we’re losing, are businesses that – you know, we’re working with the clients where we have dyssynergies, and the opportunities we have, obviously, carries over into the higher [hierarchy] businesses. And this is very important to take note.

The other thing that I would like to give everyone a real perspective. Since June of last year, June ‘09, when we announced the transaction, we knew we were going to have large dyssynergies. Let’s put this in perspective now. We’ve have dyssynergies from the date of the announcement today, over 1 year and 1 quarter, we’ve had less than 5% of dyssynergies in the overall platform.. This is not a big issue and in our opinion, way too much has been focused on it. And this is why we were trying to give a little more clarity about it.

We are actually very excited about the flows, the opportunities we have. And as I said, much of these flows, which I’ll talk about in a minute, are because of the multi-asset strategy platform that BlackRock has.

The other thing that we saw - we actually expected to have more inflows in the third quarter from new clients. Some of it was rolled over into the fourth quarter. Ann Marie spoke about a pipeline, about $46 billion of pipeline of which 4.7 billion is elongated flows.

In the first few weeks we had netting of over $7 billion of inflows that were funded already in the first few weeks. So some of that we thought was going to close the last day of the month, was carried over into the fourth quarter.

I think it’s also very important to note that in terms of fees – base fees, as Ann Marie suggested, average equities over the quarter were down 3%. Obviously, at the end of the month, equities were up about 9-ish%, 10%. And that certainly going to be powering the opportunities we have in the fourth quarter in 2011.

Let me just break out a few other product areas and then I would like to speak heavily about alternatives and performance fees. Our iShares business continues to be very strong; year-to-date about $29 billion of flows. We’ve seen some very good flows so far this month. About 12.7 billion of flows were in the third quarter. This business, we see a huge rotation. At the very beginning of the year, we saw a large inflow in fixed income. We are now beginning to see it as evidence in the stock market rally, we’re starting to see more flows into equity, ETFs, both internationally, and in the United States. And this continues to be a very large driver of the opportunities we have at the firm.

Another area that I would like to give credit too, is our new position in the defined contribution business. I spoke about this briefly last time, but year-to-date we’ve seen over $12 billion of flows in our defined contribution business, some very large chunky wins. We have become a leader in the defined contribution business because of the unique position we’re in by having both beta and alpha. And it gives us great opportunities to really go to these plans, and provide them a comprehensive product list.

As we all know, the defined contribution business is growing into fewer and fewer platforms. And I believe the combination of the two historic firms BlackRock and BGI, and now the new BlackRock has given us that opportunity to become one of those big providers in the defined contribution business.

On cash, we had new flows for the first time in 8 quarters. I think what is going on is because of now a longer view of low rates, especially in light of a possibility of a second round of quantitative easing, quantitative easing by the fed. The persistence of low rates is probably going to continue. All of the banks, who were aggressive at the beginning of the year and last year, taking down deposits, have become less competitive and the money market industry is now offering a competitive product related to bank deposits. And I think that trend will continue going into 2011. So I think we’re going to see a shift in flows and we’re certainly seeing that already in the fourth quarter, where we’re seeing increased liquidity flows in the first two weeks of the fourth quarter. And I think that’s another big change in the dynamic of BlackRock, for the last two years, whereas a large money market player, we were seeing significant outflows, quarter by quarter by quarter, and now we’re beginning to see a reverse of that.

The second area that I want to emphasize is the alternative space. Prior to 2008, we consistently had a part of our core earnings with performance fees. It was a large component of our platform, and obviously the last two years, some of those performance fees, because of the failures of 2008, carried into 2009, until we had the high water marks, and now in 2010 we are beginning to see a greater consistency in terms of performance fees.

We have performance fees in over 8 products in the third quarter. We’ve had great successes in our fixed [income] funds, great successes in some of our equity hedge funds, and great successes in our global macro funds.

This is a core part of our franchise, especially as clients are looking to barbell. As clients are looking for multi-asset strategy solutions, our alternative platform has to grow, has to become a larger component of our business.

Ann Marie spoke about some of our investments we make, I need to just reconfirm that, we will not ever be in proprietary trading. All our investments, this is non-operating obviously, are co-investments alongside our clients, this is generally in the alternative space. This is going to be a very large part of our business going forward. This is a very large part of our conversations we have with clients. So we believe this area, as we continue to build this out, especially in light of the changes of Fin/Reg, with the sell side of leaving the proprietary businesses. It just presents much greater opportunities for our platform to provide these opportunities to our clients.

So this is not in our opinion, going to be a periodic issue, this is going to be a component of our business going forward as we prepare to build on our platform in the new Fin/Reg Basel III environment. And more importantly, as low rates continue to be a drag for our clients, and our clients are looking for more of these multi-asset category solutions, alternative represent a larger component of that conversation. And we need to have more and more product in there, and we are going to emphasize more and more of that in the future. This does not take away any of our opportunities we have in the core fixed income, this does not take away any of the opportunities we have in our core equity product.

In both core fixed income and core equity, we continue to see very good opportunities ahead of ourselves. And we believe we’re in a very good position. When and if the market becomes aware of that equity is probably the most inexpensive asset class in the capital market today. We are one of the firms that will be able to take good advantage of that.

Let me talk about solutions. As our numbers showed in the third quarter, we have a great business. We have a huge pipeline of business. These are more chunky, Aladdin type assignments. We are in the cusp of winning two very large Aladdin assignments right now. And because of Fin/Reg, because of Basel III, we’re having more conversations which warrants intuitions, as they reassess what they need under this new regulatory environment, what type of risk system they need. And we are taking advantage of this, and trying to help our clients in this.

In addition, as we become more of a multi-asset class category investment firm, it’s also incorporates risk management. And this gives us that advantage as we talk about equities, alternatives, and fixed income, we also work with our clients on risk management and the utilization of our risk management systems.

Let me just speak about an area that I know other firms spoke about yesterday, and this is related to SEC lending. SEC lending is down quite a bit, a year-to-date from the last few years. And if you look at utilization rates, utilization rates are down about 30 to 40% from prior years in terms of how much demand there is for security lending. I personally believe this is temporary, and let’s talk about the dynamics of why SEC lending slowed down so much.

One, Wall Street proprietary debts are being separated, they were a large user of SEC lending in their proprietary businesses, so that’s one area that has slowed down. And what we can see, almost globally, a de-risking of hedge funds. Another reason why I’m a little more constructive on the global capital markets, by looking at the utilization rates, you see how much de-risking is occurred in the last 2 quarters. We believe SEC lending is a powerful business, we believe it presents very large opportunities as the world becomes more comfortable with the future of the capital markets.

On quantitative equity, obviously a drag part of the synergies. In the third quarter, we announced a very large leadership changes. And a big change under Ken [Croner], to really re-invigorate this area. I am very pleased to say we have visited world-wide our clients on this, and our clients have looked at the changes as something very strong and good. We believe we’re in the stabilization phase, and we believe there’s opportunities ahead for us in the quad equity area. We still may have some dyssynergies from that area in the fourth quarter, but we feel we are in much better shape prospectively going into 2011.

So some of the major headwinds, whether it’s SEC lending, whether it is cash, and most certainly the quant equity side, we believe much of the headwind problems are behind us. And so we feel very good about where we are in all the opportunistic areas, and we’ve done a very good job of addressing these issues.

Overall, in the – before I get into that, let me just say one other thing about performance because we’re as good as our performance. Our performance throughout the year has been quite strong in fixed income, we are very proud of our performance, now going over 7 quarters now in our fixed income team. Performance has been quite strong, with very strong third quarter. In our global equity platform, another great year so far, some really outstanding out performance. And we have pockets here in the United States in our equity team, in terms of our performance; we still have some drags in our U.S. domestic equity team that we want to really address.

We did announce in the third quarter a hiring our U.S. equity CIO who will be starting in November, I believe. And so we are spending a great deal of time, money, and attention of really building out our active portfolio team. We did that 2 years ago in fixed income, we continue to do that. And now we are really doing that in our global equity platform on the active side.

So performance has been strong which gives me much greater confidence going into 2011. And last, I just want to say before we open up for questions, is our business model. I’m more certain about our business model than I’ve ever been. It’s much easier to be more certain about our business model, when we’re getting it reconfirmed by our clients. But most importantly, I’m getting this reconfirmed by our team that they’re hearing from our clients that our products, our footprint, gives us an advantage that no other firm has.

Our business model will be more global, it’s very essential for our future growth. Let us not be confused. A weakening dollar is very difficult for global investors who own dollar based assets. We are beginning to see some global investors sell out dollars and buying other products. Obviously, that’s why the dollars weakening. There’s net sellers a dollar base asset going back into other currencies. And so, I believe, one of the headwinds in 2011, for the asset management business is going to be some selling from global platforms, a dollar base asset. So if you are not a multi-asset platform that is offering more than just dollar base investments, those investment firms are going to have, are going to see some headwinds in 2011. This is a big shift, and if we are trying to do – as a result of quantitative easing, a weakening dollar that will probably slowdown global flows in dollar based assets. We should not be confused about it, that is a net result of the Federal Reserve’s policy, and we’re having more and more dialog with our global investors about investing in non-dollar based assets. We are well positioned for that, unlike so many other investment firms.

So overall, I’m very confident about where we are going into the fourth quarter, and I feel very good about what we’ve accomplished in the third quarter. It was not easy – it was a lot of hard work, it was a lot of stress at times, but it’s all been worth it now with all the opportunities we have ahead of ourselves. Let me open up for questions.

Question-and-Answer Session

Operator

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

Laurence Fink

Hey, Rob.

Robert Lee – KBW

Hey. Good morning, Larry, Ann Marie. Thanks a lot. A couple questions, you know, first, can we maybe talk a little bit about the ETF business. I mean, obviously it’s been in the news a lot about price competition and whatnot, and you know it appears to me it’s mainly in kind of what I call the more commoditized basic S&P 500 kind of products, but could you comment about how you see that shaping up and how you think that’s impacting you going forward?

Laurence Fink

Well, I think our best example of fees are not always prime mover of ETFs, it’s our experience in lowering our fees in our global ETFs in our goal ETF products, IAU. We are offering fees now 15 basis points lower than our competition. We certainly saw an increased percent of flow into our product versus our competition, but we saw a fraction of what we expected or what we thought could happen.

And it’s a great example that most investors of ETFs are more concerned about liquidity and once they get – and liquidity is one of the prime movers of ETF. So there’s no questions that fees are a consideration and will continue to be a bigger drive possibly in the future for ETFs, but we have not seen really any real dramatic change because of low fees. It is about client service, it is about client education which we spend a great deal of time on. It’s about tracking error. If I could cite about one of our ETFs where we witnessed less flows than one of our competitors in one of our products, is because in 2009 one of our international products had more tracking error than one of our competitors. And as a result, they saw more flows. So it’s much more complex than the simplicity of just fees.

Clients want more education in these products than any other retail products that we know of. And so it’s a lot about client service, it’s a lot about education. We try to spend as much time as any firm in terms of the education process of ETFs, how you can utilize ETFs as a strategic instrument in a portfolio. Fees are considerations so we are focusing on fees. We ask that question every quarter, every time we have our quarterly updates with our leadership teams. So we’re mindful of it but we are not seeing any real industry-wide pressure at all.

Obviously one of our competitors lowered their fees on – and they’re a few basis points less than ours. And as you suggested, in the S&P type of indexes, we’ll see. But you know, as I said, I’m not terribly worried about it. I think the next two years it’s going to be all about innovation. One of the areas that we were working on is trying to create like almost an asset allocator ETF in itself though the SEC doesn’t allow that yet. But you know, those are the types of things that we’re looking for, much more like multi-asset strategy ETF. These are a little more complex. We believe there’s great demand for it.

You know, a global opportunity is mutual funds crossed over the $70 billion mark. That’s a great example of clients looking for multi-asset strategy products. We have that in the mutual fund side. We would love to have something like that in the ETF side.

Robert Lee – KBW

Okay, thanks. And maybe a follow-up question actually on the securities lending which you touched on. Should we be thinking that it’s mainly, you know, from here forward that for that piece of your fee revenue stream to improve is really more a function of the rate environment, or do you actually see that there’s an opportunity to increase the, you know, the –

Laurence Fink

The utilization?

Robert Lee – KBW

Yeah.

Laurence Fink

Rob, it’s two functions. Obviously low rates are one drag on tech-lending revenues and the other one is demand from people who wish to borrow stock. I think the biggest change in the third quarter was a reduction – we already have low rates, I think the biggest one is the utilization rates by the industry were down quite a bit as people are trying to reassess what FIN/REG and its implications.

But I do believe, you know as these proprietary debt moved to non-bank entities as there’s a – if there is a future of re-risking on the alternative space area, utilization will go up.

Robert Lee – KBW

Thanks. And maybe one last question just on FIN/REG, I know it’s still a lot to be sorted out but can you maybe touch on it a bit? I mean, it might if I remember correctly, you know, you guys end up getting regulated as a bank holding company because of the ownership structure to some degree. How do you, any sense to this point that you can kind of get out from under that, or if not that somehow it impedes your ability to do different types of business, how do you think of that?

Laurence Fink

Well A, we are regulated today by the Fed, by the OCC, by the FSA, by the SEC and on and on and on. So we are already a very regulated institution. To date, we have not seen any issues related to the issues around being regulated.

I think you’re asking the question related, would a BlackRock be considered a systemically important institution, and you know, until we see how the regulators come up with a definition of what is systematically important, we don’t know if we would be part of that inclusion. We have told the regulators, I don’t have a problem of being part of that group as long as it’s a comprehensive group that’s included alongside with us.

And so we really don’t see much of a problem in terms of FIN/REG and how that impact BlackRock at all.

Robert Lee – KBW

All right, great. Thanks for taking my questions.

Operator

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

Laurence Fink

Hey, Craig.

Craig Siegenthaler – Credit Suisse

Good morning, everyone. I appreciate the added color on this $17 billion mandate this quarter, but can you help us with the expected timeline of the merger-related redemptions? You know, should we expect to decline in the fourth quarter, maybe in a DX out to $17 billion mandate and when can these merger-related redemptions get back to zero?

Laurence Fink

Probably next year, early next year, first quarter. Sue, do you have a –

Susan Wagner

Yeah, I mean, there is – we made a note about what’s netted out of the pipeline. There is a one that’s netted out to the pipeline now that we don’t think the client is going to be ready to assess until very late first quarter, or it could be early – even early second quarter. That is really driven by the client, so we’re netting it out now because we know it’s coming.

You know, it’s a little hard to say because the clients have to decide when they can, you know, when they want to affect stock and we’re trying to flow that information through to you as soon as we have it.

Craig Siegenthaler – Credit Suisse

Can you give us a ballpark on that mandate? Is that around $10 billion? Is it that large?

Susan Wagner

Yes.

Laurence Fink

It is 10 billion, but it’s netted into 46.

Susan Wagner

Right. It’s netted out –

Laurence Fink

Forty-six is net of that.

Craig Siegenthaler – Credit Suisse

Great. Great. And then just one follow-up question. On your multi-asset platform, have you experienced any situations where the level of wins here have been a little slower than you expected due to BlackRock’s ownership or, excuse me, level of management of assets with the potential client?

Laurence Fink

No. No because so much of this is, you know, some of its fiduciary outsourcing where that’s a new trend. These are just very lumpy types of businesses. It’s going very strong in Europe. It’s LDI, you know, low rates could slow down LDI, you know, if the rate continues to go lower. But no, we’re in active dialog with many, many institutions. The RFP’s are very strong. If anything their RFPs are probably as robust as they’ve ever been.

Craig Siegenthaler – Credit Suisse

All right, great. Thanks for taking my questions.

Operator

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

Laurence Fink

Hi, Mike.

Michael Carrier – Deutsche Bank

Hi. How you doing? Just one question on the allocations. You know, I think on the retail side we all track it and try to gage, you know, when –after we close a return, on the institutional side it just seems like you’ve got a lot of different parties and how they can fund the gaps differ.

So you’ve got the public pensions that can honestly contribute cash if there’s a gap there. You’ve got the government pensions where it’s a lot harder because you might have to raise taxes and I’m not sure on the international side because it’s not as close there. But you know, when you look at the different players out there, it just seems like when you start getting into the first quarter of ’11, it’s going to be very hard for consultants to be talking about allocating more to fixed income when yields are where they are. And given –

Laurence Fink

I agree. Totally agree.

Michael Carrier – Deutsche Bank

But it would differ by customer, meaning will the public, or will the company pensions be able to, you know, remain allocated to fixed income but just contribute more cash versus, you know, the government pensions where they’re in a bind right now so they might have to allocate more in equities?

Laurence Fink

Well, I believe all large – all pension plans worldwide are going to have to reassess their asset allocation. They’re going to have to reassess their risk and how they evaluate risk. This is why I call low rate tax on pension funds and savings. We don’t talk about that enough. Obviously we need low rates to reinvigorate or economy. The low rates is a great subsidy for borrowers and a great tax on savers and pension plans and we don’t talk about that.

So if one believes we’re going to have a persistence of low rates for a while globally, it’s going to – it’s going to be – I believe, and this is the types of conversations we’re having with foundations and endowments, they’re going to have to allocate more to equities and alternatives. So these are very difficult conversations. As we know, the reason why we had so much flow in the fixed income over the years was institutions determined they needed to de-risk. Accounting makes only equities more – it’s a more volatile asset class so people have favored fixed income. And you know, I do believe as a fiduciary, the plans are going to have to accept a little more volatility and take more risks to achieve their liabilities. Or they’re going to have to go back to their constituents and lower the liabilities, which obviously they’re trying to do that in Paris and we see the results of the protesting. You have in the UK today, taking about a major reduction in how they look at the public payrolls, and so this is not just a U.S. phenomenon.

Mike, this is a giant issue, and as you said correctly, this is going to be a big first quarter issue as they have to re-sect their liability rate and with low interest rates, low 10-year rates, it’s – the gap grows.

Michael Carrier – Deutsche Bank

Okay. And then just, you know, on the second quarter call, you mentioned, and Emory was saying that your target is try to maintain the operating margins, you know, given that either you continue to reinvest and you know, watch some of the expenses where you can.

If you just look at what the market has done, and just assuming, you know, stable markets from here with assets up 9%, like are we closer to realizing some positive operating leverage as we get into the fourth quarter next year just given the market rise and then later in 2011, you know some of the BGI energies?

Laurence Fink

A, I think the investments are going to have to continue as I worry about the outflows in dollars, as we have to – I think our statements in the last few quarters, we’ve got to build Asia, we’ve got to build our investment team in non-dollars. I mean, to me, that’s more essential than ever before. But I think it’s Ann Marie’s and my view that our target is a margin of about 40%, I think that is achievable. That is what we have set to all our business leaders, that type of target. And we believe over time we’re going to be able to do that. You know, we still have another year left in terms of technology integration. When that’s finished, that will increase our margin in somewhat right there. And so, we believe we could achieve those targets. I will say, anything over 40% is probably a statement that we’re over – we’re not investing enough. So we just have to make sure we’re doing the right thing for the competitive nature of the business, so it’s not a hard target, it is a soft target. But I do believe, Ann Marie speak up about it, I believe we’ll be able to achieve that 40% margin.

Ann Marie Petach

And certainly the context you put it in Mike, is very important. We’ve had, and haven’t yet fully realized some of these market tailwinds. And that certainly – certainly that helps to flow through the margin.

Michael Carrier – Deutsche Bank

I guess, just when you do the budget process, I’m just trying to figure out when you’re planning for a year, the way that we look at things, you know, average markets are normal markets, so if you get a 10% tailwind to the market that you weren’t expecting…

Laurence Fink

Our margins will increase.

Ann Marie Petach

Yeah.

Michael Carrier – Deutsche Bank

And then, Ann Marie, just one quick thing on the tax rate, you mentioned there was some nuances there, can you just say what the year-to-date tax rate is on like what you consider core? And then next year I think you said a point lower, but I just want to make sure I got that right.

Ann Marie Petach

Yeah, the year-to-date on core, and this is the thing that is expected full year regular course, so this is our as suggested rates at 33 ½%. And so, that’s down 1 ½ points from where we had been running at 35%. And so for next year, what I said is that’s a 1 ½ point improvement, 35 to 33 1/2 . We expect one point of that to be an ongoing benefit going into 2011.

Laurence Fink

Our new tax rate Mike, is a permanent change for us. We’ve been able to work with the tax authorities on the types of taxes we pay, and we’ve been able to change our tax rates going forward.

Michael Carrier – Deutsche Bank

Okay, yup, that’s helpful. Thanks a lot.

Operator

Your next question comes from the line of Bill Katz, of Citigroup.

Laurence Fink

Hey, Bill.

Bill Katz - Citigroup

Hi, good morning, everybody. Thank you for taking my questions. Just come back to the dyssynergy discussion for a moment. So curious about what Larry, what percentage of the client base has now sort of registered with you, if you will, in terms of their potential of removing any assets related to any kind of combined exposure?

Laurence Fink

Bill, I don’t think we tracked that. I think it’s important to say, in any limits less than 5%. So they’re chunky. So it’s smaller than that. It’s just a small component. There are a few others who are – you know, but it’s really not that significant, it’s something that we talked about at the deal time, and it’s rolling through. So do you have anything?

Ann Marie Petach

Bill, the only thing I would add is that obviously we’re talking with and meeting with all of our clients on a regular basis. There are, as we forecasted with this pipeline, a handful of others where we know that there’s action they will be taking, and we think there’s yet another handful that are probably still evaluating concentration issues. We think the pays clearly has a number of clients but coming to the end, but again, as we’ve indicated some of these can be very large AUM numbers at very low sea level. And we’re trying to float the information as we know it.

Bill Katz - Citigroup

Okay, that’s helpful. So come back to the margin discussion for a moment, Levi was just writing down some quickly, but sounds like that, of that, in versus out, you’re losing stuff in single digits, you gain things and so that 15 basis point range. So at the margin, if you’re bringing things in that are sharply lower than your run rate, fee rate, what’s the incremental margin on, I guess, the index, and the iShare platform relative to legacy business, and how does that square up relative to your thoughts that your margin could turn toward 40%? It sounds like more of a 2012 phenomenon.

Laurence Fink

Well, in some of our flows are in the, as you suggested, the iShare, some of the flows are in index. Those are high margin businesses. You know, some of the fiduciary outsourcing businesses are lower fee businesses, Bill. So if we can continue with that trend, and that type of business, our margins even in 2011 will increase. I don’t expect a 40% margin in 2011, but I do expect improvements in our margins in 2011.

Bill Katz - Citigroup

Great, that’s helpful. And then this last question, I think you both just had a conference recently, you had a slide in your [inaudible] which we appreciate. So talk about dividend payout, and I know the board looks at that in February, paying about 50% I guess on a combined buyback, and dividend payout. Any thoughts here, given your free cash flow and product breath about any kind of material dividend change?

Laurence Fink

So next year our free cash flow will be over $2 billion, we know that. This is a consideration that our board will look at. We don’t anticipate any major in organic change in our platform. We may look at little things to add, whether it is a little aphid management firm in overseas, but – so, I think we will look at a re-evaluation of our dividend and share repurchase policy, there’s no question. I think one of the considerations that I have to consider, this is why I’m glad its February, not now. Is what will the government do to related tax rates and dividends. If they change the tax rate in dividends, I would argue stock repurchases may be more powerful than dividends. If dividends stay at the same rate, I would argue dividends are more powerful than stock repurchase. And so, until we understand how the government tax policy plays out, I don’t know how we’re going to balance those two items. But I think it’s essential to assume, we have a – just by our earnings generation, we’re going to have an upwardly bias dividend.

Bill Katz - Citigroup

Okay, that’s helpful. Thanks for taking my questions.

Operator

Your next question comes from the line of Mark Iriazarry, of Goldman Sachs.

Mark Iriazarry – Goldman Sachs

Oh great thanks, hey Larry. So just on the upcoming Fed meeting and potential QE2. You mentioned that it seems like there’s some more cash mandates coming in. But can you talk about what the outlook is for fee waivers, you know, where fee waivers stand today. And you know, with prime and government money market funds yield potentially heading lower, what’s the expectation for fee waivers?

Laurence Fink

I don’t think QE2 is focused at all on the short end. QE2 is focused on the 10 year, the 5 to 10 year area. You know, there’s suggestions that is not discussed it, but you’ve heard conversations about QE2 is going to be rate targeted. And I think rate targeting is not the short-end, because the shortened is essentially 10 basis points. It’s going to be in the areas where small and new businesses need to fund. It’s going to be obviously the target Mortgage origination. To me, that’s what the Federal Reserve’s trying to do, is target a rate so you can stimulate the economy whether through asset inflation in the form of rising equity market and/or availability of cheap financing and mortgages, and in terms of this. And also, the availability of money by institutions for small and new businesses.

You know, it’s essential, if you look at all the statistics, job growth in America is almost from – entirely from small and new companies. If you net our all the large companies, it’s basically flat for the last 5 years. So I think the Federal Reserve’s obviously they’re doing this to try to get a stimulated job market, and it’s all about jobs. My opinion is they’re – if their targeting, and their targeting to find ways of re-invigorating the small and new company creation, which would then create jobs.

Mark Iriazarry – Goldman Sachs

Okay, and on fee waivers?

Laurence Fink

Oh, I’m sorry. Fee waivers, institutional I don’t believe there are any fee waivers on the retail side. We have some fee waivers, but they’re small.

Ann Marie Petach

Compared to the second quarter, we really haven’t seen anything.

Mark Iriazarry – Goldman Sachs

Okay, and then Larry, just on the non-agency, [inaudible] put back issue. What do you – how big is that business for BlackRock, and what percentage of that business you think could potentially be put back to the banks. I think you guys are meaningful player in that space.

Laurence Fink

Well, let me just talk about it. That’s a big – giant component of the mortgage market from the originations of I guess ‘06, ‘07, ‘08. I’m not going to comment whether we’re involved or not involved in it, I would say – I would say when I always hear this consistency, BlackRock’s number one job is to be a fiduciary for investors and making sure that we are looking out for our investor’s interest. We are a player in the non-agency market, I wouldn’t call ourselves a significant player in that area, but even if we were an insignificant player in that market, our job is to be – if there is indeed an issue around the underwriting of loans put into a security, it is our fiduciary responsibility of inspecting that.

And so, from my perspective, it’s not a significant for the banks, as for some of the players believe though. I believe whether we are involved or not involved in this, I believe it’s essential that investors do believe there’s an issue, they have a right to inspect, but I think the market reaction to banks stocks, was probably overdone. It’s obviously another drag on earnings for those who are involved, who actually indeed had those issues. But not all those firms had all these issues. So let me just leave it at that.

Mark Iriazarry – Goldman Sachs

Okay, great, and just on the global allocation, the funds obviously continue to be big gainers of flow, can you talk about why at 70 billion how you’re not capacity constrained, you know, in global Al, and how big do you think that fund could get or how big do you want it to get as a percentage of your sort of business?

Laurence Fink

Well A, I think global Al is a function of the global capital market. As global capital markets grow and opportunities grow, as IPOs flourish overseas, and are much smaller in the United States which we’re seeing total evidence of that. A global Al product, actually has more opportunity today than they did a few years ago. I asked that question to our portfolio team, maybe 2 weeks ago. Because, obviously, we’re always worried about it and if we believe we can’t earn alpha, we’re going to close it. And the team came back and said they believe the opportunity is quite large, and they would not – they believe even managing over $100 billion would not be an issue for them. But we always ask those questions, we have to make sure that we’re doing the right thing, and the team is very confident of their model and the opportunities that they have going forward.

They’ve also repeatedly said as a team that the information they get, get from the one BlackRock

cross fertilization, is very powerful. And so they’re getting even more ideas in our platform. We also have, and this is one of the – a product that had performance ceased, we have a global assent, a global macro hedge fund that they cross fertilize ideas from the hedge fund side to the mutual fund side, but their styles are different. I think the flow of information of BlackRock has really given us those types of opportunities. In both cases I think the global assent fund, which is approximately $7.8 billion to be way north of $10 billion, and we hope that’s some of our growth in the alternative fate. And the global opportunities fund, with our team, we’re comfortable towards being significantly largely.

Mark Iriazarry – Goldman Sachs

Okay, great, thanks.

Operator

Your next question comes from the line of Glen Shore, of [inaudible]

Glen Shore

Hey Bob. Larry, I’m curious, as the banks go through their increase risk waiting and adjusting to the new reality, does that create some opportunities for you on the red arbitrage side to potentially take off load some of their higher risk waiting assets. You touched on it a little bit, I don’t know if that’s a huge opportunity for solutions or a huge opportunity for BlackRock itself in the funds.

Laurence Fink

Well, I think some institutions are selling some of their balance sheets, and actually if you look at some of the security firms, their balance sheets actually grow in the third quarter. But, I would say the greatest opportunity for us related to FIN/REG and Basel III is going to be on the solutions base. We may take – have an opportunity related to asset flows, but we would participate alongside all the other investors, so I don’t think we’d have an advantage in anyway. But clearly, institutions, especially in Europe are involved in some significant conversations now with institutions who understand their going to need a much more comprehensive risk system, and we’re in dialog right now. We’re in implication and we’re in dialog now – we’re in contract negotiations dialog, that’s how far along we are.

Glen Shore

Good deal. On – switching over to performance, obviously good to see you’ve come through in the third quarter through I think you mentioned 8 funds, and you also mentioned fourth quarter is more of the main quarter. Any way you could put it in terms of products or AUM in the funds that have those eligibility? Because with performance trending the way it’s going, you’re just trying to get arms around a head of mile, that’s all.

Laurence Fink

Yeah, good question, I don’t know if I have that on my fingertips, I’m going to have to get Ann Marie to follow-up on that. But let me go over… Our whole view on this, especially as we’re talking to clients, we need to continue to build this out. We need to show our investors, our company, and our clients that we have more than just a few products. So we’re going to have 10 or 12 key products that we can offer. They’re going to be in equities, they’re going to be in 6 incomes, they’re going to be in global macro, and I would like to say that coming year, that we actually have some real estate products. We actually have our real estate platform, and U.K. has done great. We’ve had flows in there. It’s not just a negative story worldwide. Actually a stable story that’s here in the United States, and a positive story in the U.K. So it’s – all we can say is we’re seeing more and more clients looking to barbell as they start focusing on the low tax, low rate environment. They’re looking – we’re seeing more indexing of equities as a trend. And a barbelling and more alternatives, or more what we would call active strategies. Active alpha strategies in equity.

Glen Shore

Got it. One last one. Just a follow-up on this notice of non-performance to the service, trusting that you may or may not be a part of, I’m curious on your thoughts on both the timing, meaning this issue’s been out there for a good 18, 24 months now, and the fact that the underlining MBS market haven’t had a huge run, does that speak towards what you all think is the magnitude of the success, or lack thereof, of pursuing. I mean, I totally get the fiduciary duty part, but the fact that the underlining markets haven’t gapped up, and this is coming after 18, 24 months of being out there, does that mean anything?

Laurence Fink

Glen, I asked that same question to a bunch of people yesterday, why now versus 6 months ago. You know, please don’t take this as a firm position, you’re asking me my opinion. I’m offering you my opinion on this. I think it has to do with a greater – first of all, I’m told that this is been something that’s being discussed for months, and months, and months. I think what happened was, it got in the news because it was mentioned in another press conference. But I think this was in the news, this was going on for months and months and months. So I can’t explain the timing of it yesterday, but I do believe why it became a much more of a lightning rod yesterday, it’s all related or linked to the foreclosure issue that became a lightening rod 3 weeks ago.

I think it’s just a statement that the mortgage market still has problems, and has a problem in related to we have a really big problem as a nation with millions of potential foreclosure in our economy. I think it also is a statement that if there are that many foreclosures, could some of those foreclosures been because of badly underwritten loans at the beginning.

So I think it’s all linked, and that’s just my opinion and so I don’t want to – but I do believe – I do know that these conversations have been going on for months. And it’s the lightening rod was this week.

Glen Shore

Okay, that’s great. I appreciate it Larry.

Operator

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

Laurence Fink

Hi Jeff.

Jeff Hoffman – Stifel Nicolaus

Hi, thanks a lot. Larry, you mentioned barbelling, and I know you have a lot of products on the alternative side. Flows there have been, I guess neutral. Any sense of when, I guess, the collection of buckets will kind of move in the right direction?

Laurence Fink

Good question. You know, we reorganized that whole effort. We’re hiring a team of specialist working alongside our generalist on this. I think we did not see as many flows as we expected too. Obviously, we were working on integration and we needed to have individuals working with the manufacturing teams who have a much more close connection with the alternative space. And so, we’re doing that.

We are actually seeing some good flows now. And I do believe, because of the performance that we had in the third quarter, and a consistent year now, going into 2011, we’re going to start seeing some flows.

We’re certainly having more road shows, we’re certainly having more meetings on some of our key alternatives than we’ve had in the entire year.

Jeff Hoffman – Stifel Nicolaus

Okay, and fiduciary business, is that included in the pipeline?

Laurence Fink

Yes.

Jeff Hoffman – Stifel Nicolaus

Okay, because I’ve seen a couple of bigger wins that I guess haven’t funded, is that….

Laurence Fink

Well some of them have, some of them have.

Jeff Hoffman – Stifel Nicolaus

Okay, got you. Okay, great, thanks a lot.

Operator

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

Roger Smith - Macquarie

Hi, how you doing? I guess I just want to go back to the discussions that you’re having with clients on re-risking. What I’ve – after you have these conversations, do they just look at you with a blank face, or what’s the problem? What actually gets them to do something?

Laurence Fink

Well I would say, I would say right now a lot of clients are frightened. They’re not doing as much as they want, and I think they’re very worried because they see where this 10 year rates are, and they know they’re going to have a winding GAAP issue. You know, I think clients are in the introspection stage right now. I’ve met with many public boards, and private company teams recently, and these are the types of conversations we’re having. I think they know this is what they need to do if they’re trying to achieve that liability. In some cases, some are going to say well, we’re not going to, we’re not going to re-risk, we’re going to create a greater GAAP, or we’re going to go – or we’re going to have to find some way to changing the benefits. It’s a very complex, difficult question. It’s not – this is certainly not something that can be addressed in one meeting. But they are looking for our advice, I’m sure they’re talking to many other people. We are seeing some institutions, I’m aware of a couple of institutions that are in the process of really reducing their fixed income. And they started a process of buying – equities, global equities, and so I’m aware of a few institutions that are doing that.

If you just look at ETF trends, you’re starting to see for the first time this year where more money’s going – more money is going into equity ETF. So you’re starting to see that change there too.

Roger Smith - Macquarie

Okay, great, and then on the DC platform. Can you just give us an update on how ETFs could fit in there?

Laurence Fink

Sue, you want to do it?

Susan Wagner

I think I would say keeping general is that ETF. One is that on the DC platform, critical product is our target base funds. The life past portfolio, and the life past portfolio, use ETF inside. So that’s one of the ways which we’re seeing those products get used. We think there’ll be other opportunities to create product for target base that will use ETF [inaudible]. In addition, there has been an initiative ongoing to work with administrators, primarily I would say in mid, and small size plan, to permit ETF to be used directly on those platforms. And you know, that I think is less of an impact today, but it continues to be what we’re doing.

Roger Smith - Macquarie

Okay, great. And then, just lastly, on the BlackRock’s Solutions numbers, can you sort of give us an idea of what’s going on inside there from a – like structuring fee, or one-time fee level to what might be sort of an ongoing number so we can sort of get a gage on how that should look going forward?

Laurence Fink

Well I think what we’re seeing is, you’re seeing more elongated business flow, and less one time advisory fee, type of business. One example is, this one thing I said we were going into contract negotiation right now. It began as a one timer that is now migrating into a full fledge long-term assignment. And so the conversations of these longer term assignments, Aladdin type assignments, are picking up. And that’s what we were trying to obviously migrate our clients to, so we have a greater certainty of our flows.

Ann Marie Petach

Just sort of repeating what Larry said, what I would say, year-to-date this year compared to year-to-date a year ago, we have a much heavier mix of ongoing revenues than the advisory segment. They’re both very important to us, I don’t want to put any value more than another, but a lot of the places where we did work on advisory segments, actually translated into ultimately ongoing assignments. So they’re both very important to us, and one you don’t often translate into the other over time.

Roger Smith - Macquarie

Great, thanks very much.

Operator

We have reached the allotted time for questions. Mr. Fink, Ms. Petach, are there any closing remarks?

Laurence Fink

No, thank you everyone.

Operator

This concludes today’s teleconference, you may now disconnect.

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