Good morning. My name is David, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Inc. Fourth Quarter 2011 Earnings Teleconference. Our host for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Ann Marie Petach; and Head of Corporate Development and Investor Relations, Patrick Olson. [Operator Instructions] Thank you. Mr. Olson, you may begin your conference.
Thanks, operator. And good morning, everyone, and thanks for joining BlackRock's Fourth Quarter Earnings Call.
Before we begin, 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 lists some of the factors which may cause our results to differ materially from these statements. Finally, BlackRock assumes no duty to and does not undertake to update any forward-looking statements.
With that, I'd like to turn the call over to Ann Marie to discuss our financial results. Ann Marie?
Ann Marie Petach
Thank you, Patrick. Good morning, everyone. Thanks for joining. I know it's a busy earnings morning out there today. I want to take you through the financial results for the quarter and the full year, which were quite positive given the extraordinary global market volatility.
BlackRock delivered strong financial results this year, with full year EPS up 8%. This performance highlights the strength of the company, the breadth of our product set and our global footprint. Combined with our risk tools, these strengths uniquely position us to meet the diverse needs of clients in this challenging environment. While flows for the quarter were strong relative to the industry, we were not immune to the impact of the current markets on our revenue. Still, we maintained strong margins by balancing beta-driven revenue effects with expense management.
We also took actions to position the business well going into 2012. The business generated operating cash flow of $2.7 billion for the year, allowing us to fund a large return of cash to shareholders. This includes the repurchase of 618,000 shares, costing about $100 million in the fourth quarter. Larry's going to be talking more about the market environment generally and our focus areas for 2012.
The key takeaway for me is that in the turbulent markets we've been seeing, BlackRock demonstrated that our product and geographic diversification is working. We are built to help clients in markets like these, and we can perform well despite global headwinds and macro uncertainties. With that, let me quickly walk you through the results. As I make my comments, I'll be referring to the supplement. You can find it on our website. And as usual, I'll be talking about primarily as-adjusted results.
As you can see on Slide 1 of the supplement, we announced full year earnings of $11.85, again, reflecting a year-over-year growth in EPS of 8%. This was driven by a 7% increase in operating earnings and supported by our share buyback activity. Operating's earnings growth was driven by both revenue growth and margin improvement.
On Slide 2, you can see that our full year operating margin improved from 39.3% in 2010 to 39.7% in 2011, and this margin improvement despite again the market environment. Our compensation-to-revenue ratio of 34.7% was consistent with 2010, which was 34.8% and, really, the range we've been running in for the last several years of 35%. So nothing's changed there.
Slide 3 shows the extent of market volatility in the fourth quarter. Given the majority of our equity assets priced daily and focusing on average rather than period-end markets. U.S. markets fared relatively well, ending the year with a strong recovery. But world markets, emerging markets, energy and mining fared poorly, driven in part by European uncertainties. Compared to prior periods, world markets were down around 5%, and emerging markets were down in the double digits. Volatility and global market declines affected investor sentiment. And since about half of our equity AUM is tied to non-U.S. markets, this obviously impacted our revenues.
We generated business that buffered some of these market effects, as we saw net new business, clients-favored index, EPS and multi-asset products in the face of this uncertainty. These products saw inflows and was otherwise, generally, a negative flow environment.
I'm now going to walk through a comparison of fourth quarter results compared to a year ago then discuss our results compared to the prior quarter. On Slide 5, you can see that earnings per share of $3.06 included $3.14 of operating earnings and $0.08 of nonoperating expense. EPS was negatively impacted by lower performance fees but benefited from our share repurchase program. While we recorded positive marks on our investment portfolio, the marks were just not as positive as a year ago. The fourth quarter as-adjusted tax rate was 32%. We've been running in this area for the last few quarters. All things being equal, I think this is a reasonable rate to think about as we enter 2012.
Moving to Slide 6. Year-over-year operating earnings of $841 million reflected revenue diversity, organic growth and expense controls, partially offsetting the market-related effects on revenues.
Slide 7, you can see how our business model benefits from diverse revenue sources. Fourth quarter revenues were $2.2 billion. This includes $1.9 billion of base fees, $147 million of performance fees and a record $149 million of BRS revenues. In the fourth quarter, we generated $364 million of revenue. That's 16% of the total from sources other than base fees. In 2011, we benefited from increases in revenue across numerous sources. That included full year $72 million increase in sec lending revenue, that's a 22% year-over-year increase, and a $50 million increase in BRS revenues, an 11% year-over-year increase. So you can see we have components of revenues growing at double-digit rates.
Almost 60% of our hedge funds outperformed the relative HFRI indices over the past 12 months. Despite that fact, fourth quarter performance fees of $147 million were down $179 million compared to a year ago. As with many hedge funds across the industry, several of our own hedge funds ended the year below high watermarks. Our performance varies by fund. But as we begin 2012, the gap to high watermarks for the fund that had been our most material performance fee drivers are only below high watermarks in the low single digits. So while performance was down, this feels much different and much better than 2008. At the same time, we continue to benefit from strong performance under traditional products, where we generated $100 million of performance fees in the quarter.
As I mentioned, BlackRock Solutions and Advisory revenues reached a record high for the quarter of $149 million, as well as a full year record high. Growth continued in our core Aladdin business as clients sought out sophisticated tools to manage risk in the face of volatility. The revenues also reflect the completion of a major advisory assignment in the fourth quarter.
On a full year basis, nearly 80% of the growth in BRS revenues came from ongoing Aladdin assignments, which will continue to benefit the revenue base in 2012 and beyond because these are very long-lived relationships. Much of the growth came from international clients, and that's transforming BRS from a predominantly U.S. business to one which is truly global.
Fourth quarter base fees of $1.9 billion, as you can see on Slide 8, are down $88 million from 2010. This primarily reflects the volatile and negative world equity markets. The decline in our equity-related revenues was offset partially by flight of new business into ETFs and other index products, as well as the flows into multi-asset class products. The diversity of our long-dated offerings across active and passive products serving multiple client types and multiple regions is one of our key strengths that helps us maintain strong revenues relative to the challenging external environment. Compared to a year ago, we also saw the revenue effect of the exit from low-yielding cash products, so we did see some reversal of that trend with clients coming back into cash products in the fourth quarter.
Turning now to Slide 9. You can see that our expense controls contributed to a 9% decrease in as-adjusted expenses, which totaled $1.4 billion, as well as contributed to our strong margin. We recorded a $32 million onetime charge in the fourth quarter related to several restructuring opportunities that will benefit us beginning next year. These opportunities were associated primarily with the continued integration of iShares, on more global and integrated approach to marketing and additional efficiencies in technology and operations associated with further progress towards a single global operating platform. We excluded this charge from as-adjusted results.
At the same time, we continue to invest in our business. We added net over 900 people to the firm in 2011. Just last week, we announced the acquisition of a Canadian ETF platform and we continue our commitment to our brand. These are all things Larry's going to talk more about. These are important investments for the long term.
Moving on to sequential quarter results. Operating results were relatively stable, which I know everyone really focuses on how we're doing sequentially, while nonoperating results benefited from the favorable movements in markets right at the end of the year.
On Slide 11, you can see sequentially EPS improved by $0.23. That included $0.21 associated with improved marks on our co- and seed investments, and I'll talk a little bit more about nonoperating in a minute. Stable operating income of $841 million, seen on Slide 12, was supported by stability in revenues and stability in expenses.
Moving to Slide 13. A $56 million increase in performance fees and a $32 million increase in BRS revenues were offset by market-related decreases in base fees, which you can see on Slide 14. The pressure on base fees related to the effect of unfavorable markets on equity and AUM which overwhelmed what was really a good quarter for strong net new business.
As I mentioned earlier, we've continued our expense discipline. As you can see on Slide 15, expenses were stable across most categories. Expenses did include in the quarter $8 million of fund launch costs associated with the $300 million closed-end fund investing in utilities and infrastructure. I think a good example of the type of income-oriented products we're trying to offer our clients.
Slide 17 shows nonoperating expense of $21 million, which included $18 million of positive marks, primarily on our co-investments and private equity. On a full year basis, our marks were positive $26 million, and net interest expense for the quarter has been stable. The value of the investment portfolio was up about 10% this quarter, closed the year at about $1.2 billion or $1.1 billion when you exclude investments that represent hedges or which were hedged. The growth relative to prior quarter related primarily to the seeding of several new retail alternative products, all of them we think important opportunities for our clients.
And just to give you the examples, there was a Long/Short Credit Fund, a commodity fund and a Renminbi Bond Fund. As a reminder, we've got no proprietary investments. We invest alongside our clients. We see new product as required for the base business. Our investments are aligned with the interest of our clients. Really, when you think of our whole business model, our revenues and business are predicated on acting as fiduciaries on behalf of our clients, and we receive a fee for providing those services. So we're not a balance sheet company. In fact, when we look at our entire balance sheet, it is really small. We have less than $8 billion of economic tangible assets on the balance sheet. And when you look at where these are, it's cash of over $3 billion, $2 billion of receivables and $1 billion portfolio we just talked about.
Moving to Slide 18. Our operating cash flow was about $2.7 billion last year, up about $100 million from 2010. And as I mentioned previously, we continued our share repurchase of 618,000 shares in the fourth quarter. Our full year payout ratio was 48%, and that included both our dividend and a core repurchase. When you include our repurchase of Bank of America's ownership stake, our payout ratio was 157%. We still have 3.6 million shares remaining under our existing share repurchase authorization. We continue to believe that our cash flow generation allows us ample opportunity to reward shareholders consistently.
So to sum up, despite volatile markets, we delivered a healthy margin, generated substantial cash flow and returned a large amount of cash to shareholders. Looking ahead, we are extremely excited about the opportunities we have to work with our clients in 2012 and believe we are uniquely positioned to continue helping them navigate this challenging environment. We've entered the year more confident than ever in our business model and are intensely focused on executing the growth opportunities we see across our business.
With that, I'll turn it over to Larry who will discuss the market environment, what we're seeing with our clients and the ideas and products that can help them navigate the current markets.
Laurence Douglas Fink
Good morning, everyone. Thanks, Ann Marie. Happy new year to everyone. I'm going to have a little more exhaustive review of the world today, and I'll try to put that in the context of BlackRock, and try to describe from our vantage point what our clients are seeing and what type of questions they're asking us.
Let me just review really quickly 2011, which I think, by any course of the imagination, was a challenging market environment for a lot of people. We have the sovereign credit crisis in Europe, destabilization of the Middle East, continue economic uncertainty worldwide, renewed economic uncertainty in the emerging market area, a lot of tragedy in Japan with the tsunami and the earthquake, and the United States politically disappointing us in terms of the deficit ceilings and the persistent problems of unemployment in the United States, a persistent problem in housing in the United States and, by any long-term measure, muted growth.
Unfortunately for 2012, it's not going to get that much better economically, and yet, I'm quite bullish as I was in 2011 on the direction of the global equity markets. But 2012 will represent a continuation of volatility. We have a very important election in France. I don't think the market appreciates the importance of that election. From my vantage point, if Sarkozy does lose an election, it would move, obviously, France more to the left. And I don't -- I have a hard time understanding the union between France and Germany in that circumstance. And so I think we have more political uncertainty in Europe than we normally do, on top of all this economic uncertainty. We, obviously, in our country in the United States, we have another election, which is going to lead to a lot of political gridlock and greater uncertainty. We have leadership changes in the latter part of this year in China, which could lead to different policy changes. We have threats from Iran, continued unrest in the Middle East and continued sovereign debt crisis in Europe. We will persistently have a muted housing market. I still think it's going to have another 2 years to truly stabilize housing in America. We continue to have unsustainable level of deficits in this country and we continue to have muted growth.
So markets are going to be influenced a lot by these events, driven by government and politics. Yet at the same time, balance sheets are improving worldwide. Corporations in the United States, in many cases, in Europe have never been stronger. Cash balances have never been bigger, and the amount of de-risking that has been done worldwide leads me to have a -- despite all this uncertainty, a more positive overview. And one of the big challenges for all investors worldwide is to stop looking at the blogs, the immediacy of news and focus on long-term challenges and how to manage your long-term liabilities over those long-term challenges. This is not being done as much as they should be. This is why we've seen such a de-risking. But it is my belief for those investors who have the ability to overcome the challenges of the short-term news events and start focusing on their own internal challenges and their own internal liabilities and try to design portfolios and returns that will navigate higher returns over 5- and 10-year cycles. Those investors are going to be benefited much more than those who are continue focusing on the immediacy of the moment.
And so I believe, overall, we are going to have a positive trending market over the course of 2012, and yet, there's going to be a lot of volatility within that time. It is very -- it is not surprising to me watching how Europe has stabilized, at the same time, that you're the ECB do their own form of quantitative easing and they could do that through a 3-year term debt repo, which is giving a lot of purchasing power, not unlike what happened in the United States when our Federal Reserve did the quantitative easing. So you're starting to see aggressive auctions now in sovereign credits in Europe. Let's hope those continue. But this is as a result of the ECB actions. And I don't believe the ECB has been given enough credit for their actions. Mario Draghi also has one more major tool in his toolkit that our Federal Reserve does not have. A short-term rates in Europe were 1%, so there's a great opportunity, if necessary, to lower rates also in Europe to producing more steep yield curve, which will invent -- ultimately create better opportunities in buying longer-term credit. So I think we're going to have this mix and match going forward in 2012, but I have, like I did in 2011, a bias towards focusing on long-term investing.
These challenges, though, really create real difficulties for a lot of our investors, and I'm pleased to say BlackRock is well positioned to work with our clients. And I'm not just talking about institutional clients. And I'm not talking about just U.S. clients, but global institutional clients. Our retail clients are all looking for advice. Most investors -- pension funds are looking for returns of 7-plus percent. Very hard to achieve that when you own bonds that are yielding 2%. And so the dialogues we need to have with our investors are very different than the dialogues we had 5 and 7 and 10 years ago when you had significant opportunities in yield and bonds to make those type of returns. Dialogues today require talking about many more aspects of investing today, and no firm in the world is as well positioned to have that more complete dialogue talking to our investors' challenges.
Earlier or late last year, we did have an institutional conference with our clients, and the theme of the client -- of the conference was investors are no longer have the ability to find low-hanging fruit, but they're going to have to spend more time in finding that high-hanging fruit. And I think that's going to be the theme for 2012.
The other big issue, and no one else has this platform, clients have to spend more time focusing on their own specific solutions. And I -- the way we are positioned -- and I'm going to talk about some of the major theme for 2012, how we're positioning to help our clients into solutions, but I just need to also, as I do every time we talk about it, is the overlay of what our BlackRock Solutions risk management Aladdin platform allows us to do in navigating these types of solution-based conversations with our clients.
So if I had to just reflect on the fourth quarter, as we think about now going into 2012, the diversity of our business model has substantially dampened the impact of volatile markets. Ann Marie spoke about the growth of solutions, the beta products versus alpha products, and I'm going to go into more granular detail about the Defined Contribution about multi-asset strategies. But it's the diversity of products that is allowing us to have more complex conversation with clients, more stable earnings and a more powerful future, especially in this low-rate environment that I don't believe people truly understand the impact on many asset managers, the impact on our clients of this persistence low-rate environment.
So let me talk about our growth areas for 2012 in these uncertain markets that I just discussed. Also, I have to overlay not just this uncertain market as we enter 2012. We are going to have a persistent issue related to the aging populations worldwide and the need for better retirement solutions. It's interesting for me to watch the global dialogue of the U.S. and the Europe about deficits. And yet, there's such a small dialogue about retirement. It is my opinion the retirement crisis or the lack of monies necessary to meet our aging population and our -- and a population worldwide that's going to live longer, the biggest crisis is not just going to be a sovereign credit crisis, but the biggest crisis we're going to face in the coming years is a retirement crisis, the -- having the appropriateness of money to live the lifestyle that you're accustomed to during your retirement ages. This is not being discussed. This is a severe issue, and the persistence of low rate aggravates the problem much greater.
So with those ideas, I wanted to talk about where we believe, for BlackRock, are 5 key opportunities for making, obviously, our clients in a better position, but in doing so obviously, making BlackRock a better stock to own. Part one, we do believe very strongly as people start looking at risk budgeting, the use of indexing in ETFs becomes a larger component of your framework, and we are very much a part of that dialogue. Despite some negative flows in alpha products, which was industry-wide, we benefited as a firm because of our strong position in the beta products, both in the index funds and the ETF products. We believe this will carry on.
And when you think about risk budgeting, we believe -- and we just started seeing a trend. We're going to see more and more investors move out of active types of strategies and some -- in some, not all, fixed income strategies to go into more indexing. We believe they're going to see, as a result of it, more of a barbelling a lot of investors in fixed income and go into the high-yield area, maybe the bank loan area. There's great opportunities in other product like munis. They're obviously going to go into emerging market debt.
But in terms of treasuries and maybe mortgages, you're going to see a lot more need for -- in the risk budgeting component, indexation or ETFs. And then you're going to allow these institutions to start thinking about taking greater alpha risk in other product, whether it is high yield or any other types of yielding product. And it may mean a greater allocation, which really, the first time in many years, impacted the equities in the form of dividend stocks and other things like that. But our first position is indexing and ETFs.
Our second area of growth for 2012 and beyond, as we have been investing aggressively, as Ann Marie spoke about, and that is alternatives. Where we believe clients are going to use indexing or ETFs on one side of the barbell, and they're going to be more aggressive in terms of alternatives. We expect the alternative paydays to start coming out as we build -- are building more and more teams, and we will continue to build out more and more products and teams in the various alternative space. We are in the markets right now in a -- in many types of products, whether it's alternative energy, private equity and other forms of alternatives space. We are in the market of raising money right now.
But I will also say, we see great opportunities in many alpha products at BlackRock. We had outflows in our scientific active equity area last year, but our performance was great. The dialogue with our clients is beginning to have a turnaround, and we think we will see, by the end of 2012, inflows into this product. As I mentioned early before, we are continuing to have great dialogue about high yield. Emerging market debt, today we won a very important assignment today, about $350 million in emerging market debt fund. So we are starting to see clients start navigating and not just in alternatives, but in other types of, what I would call, higher alpha opportunity long-holding products.
We are seeing clients focus on model-driven fixed income. We are seeing clients saying, after a lot of negative noise earlier last year, the clients who entered the muni market last year had some of the great returns of anyone as we witnessed state and local governments navigating down their deficit issues and becoming a little more responsible. And the muni market responded very, very nicely on that. So we are seeing not just opportunities in the beta product, but in also the specialized alpha products, which leads me to our multi-asset strategy solution.
More and more clients are looking for more of a fiduciary relationship with firms like BlackRock. Other firms are participating very nicely in this. But clients are coming to us for a more -- they're looking for a more complete solutions. They're looking for a more complex, more comprehensive relationship with us, and most importantly, they're looking for a deeper dialogue. And in the fourth quarter, when I go over some of the highlights of some of the wins, this is an area that we're continuing to see growth. We're continuing to add more employees in this area and building a broader depth of people.
The third area -- excuse me, the fourth area is retirement and income. As I said, I can't think of a more important area that we all have to focus on. This is not just a U.S. phenomenon. This is going to be a worldwide phenomenon. Aging population worldwide is creating much greater need for better retirement solutions. And I think at BlackRock, we are trying to navigate products into these solutions. We're showing up more and more of the Defined Contribution business, where we added $6.3 billion in the fourth quarter net new business or -- and we added $31 billion of net new assets in our DC business for the year, which represented, for us, about a 10% organic growth area in this area. And as I think I said in other quarterly report -- earnings, there's only less than a dozen firms that are in this area of defined contribution. And so we're seeing seismic changes in the asset management business. The Defined Contribution, movement out of defined benefit, and the Defined Contribution is a very good example of that. Obviously, the movement out of active into indexing is another good example. The utilization of ETFs is another good example.
So fifth area that we're focusing as the theme for 2012 is income. Investors worldwide have to rethink about income. In this low-rate, volatile environment, clients are looking for more products that can provide, obviously, less volatility in pure equities. But their -- but they can't afford to own bonds yielding 2%. And so they are looking for solutions that, as I discussed before, that may have high-yield elements to it. It may have preferred stock, preferred bond elements to it. And most importantly, it's going to be heavily oriented towards dividend stocks that have lower beta tracking than the normal equity markets. But once again, to have a dialogue with our client about these products, have -- showing how these types of products can have lowing track -- lower beta than the market but higher return than bonds, requires a comprehensive dialogue with our clients.
Let me just overlay all that, as I said earlier, which differentiates us in that BlackRock Solutions, which clearly had an exceptional year and quarter. The momentum into 2012 continues. As Ann Marie spoke about it, this was predominantly a U.S. business that is becoming a very global business for us. This year, we expanded, as I said, in Europe and Asia. We added 2 more Aladdin clients in Japan. We saw a huge increase in our advisory relationships and assignments in Europe to work with governments and financial institutions navigate their circumstances. And we reached now -- in terms of the Aladdin system utilization, we now have $10.2 trillion onto our risk analytic platform that we help clients in navigating risk. Our pipeline for Aladdin implementation has never been stronger. We are only weakened in that platform because of the utilization of people and time, and I believe 2012 will be even more robust for us than 2011.
Before I go into some specific details, I also have to just say, our #1 responsibility is producing returns. And that's true for tracking error in our beta products, where we exhibited some very weak tracking error in one of our products in 2010. We turned that around, and we had very positive flows in our emerging market ETF product. We have to have a very strong alpha, where I would say, in 2011, some of our products underperformed. Some of our products did very well. But overall, we did well. I am not happy with where we are. I wanted to be even better than well in terms of the alpha products. We know our clients are not just hiring us for advice. They're hiring us for performance, and every client and every employee understands that.
In 2011, to build this momentum, we're continuing to invest in our people and our brand. Going into 2012, we are going to build our brand awareness worldwide, it'll be a major strategic effort for us. And as Ann Marie discussed as a statement of growth, we added close to 900 people worldwide as we continue to build out our platform.
One other thing I wanted to just talk about the returning of value to our shareholders. Obviously, 2011, we did quite a bit of that. It is my expectation that we are going to continue to use an enormous large free cash flow, combination of dividends, stock repurchases, and a little later, I'll talk about some possible M&A opportunities.
Let me go into the details of the different products really quickly and then we'll open up for questions, because I know a lot of you are going to jump off but then get on to the other institutions who had calls today.
Overall, in the ETF market, our iShares product really picked up momentum from, I would say, a slow start in the first quarter to a very strong finish. I am very pleased to say that our flows into 2012 continue to be quite aggressive where we already, year-to-date, and our ETF products have close to $4.4 billion in new flows into our products. For the year, last year, we had about $53 billion of flows, and it really picked up a lot of the momentum in the fourth quarter. I am pleased to say that we recaptured the #1 share in net flows in the United States, where, as I said earlier in the year, we really did not do as well as we expected. I think I said in our last third quarter report that I expected much more from our team and we are starting to see that. And we continue to have a large international dominance in our ETF platform worldwide.
We continue to try to build that dominance, as Ann Marie announced -- noted, that we did buy Claymore Securities, an ETF platform in Canada. And why that was important for us because we have a huge market in Canada right now, and we're very happy with our position in Canada. Our presence in Canada was predominantly institutional. Claymore has a very strong retail presence where we did not have that type of strong presence. They had some very strong products like the Canadian dollar gold fund, very simplistic products. And it's those simplistic products are the best, so I don't mean that in any negative way. I mean that in a very positive way. And so it really fit very nicely into our product mix and our client profile mix. And so we look forward to doing that. And I do believe, just as a footnote, there are going to be many more opportunities for us to fill in our ETF presence worldwide if these -- if and when other companies come up for sale.
On the retail side, I'm particularly pleased with our North American results in 2011, and I think we're in a very good position for 2012. As I discussed earlier, we picked up market share in U.S. retail. There were huge outflows in the U.S. mutual fund business at ETFs, and we had inflows. I unfortunately believe you're going to continue to see outflows in traditional mutual funds in the United States, as clients are trying to diversify and look for different products, but this trend is not going to be arrested any time soon in the industry. And I do believe BlackRock will continue to pick net market share. As I said over the last few years, this is a big priority for us to continue to build out our presence in the U.S. mutual fund business. When I spoke about one of our priorities in 2012, to continue to build our brand and put a big effort, we believe it's really important for us as we build out our presence in U.S. and international retail, that our brand presence has to be a much stronger result.
In international retail, however, we had outflows, like the industry, and it's a function of the massive de-risking that is going on in Europe. We're sitting here thinking about how difficult Europe is. Imagine if you're sitting there with your pension fund, sitting in some form of a long-term investment, many people have capitulated and frozen, and the whole industry have seen, most recently, outflows in the international retail. And most of this money just sitting in cash, and so it's not this -- it's not like this money is running away and permanently gone. It's -- people are looking for greater stability to get back into the marketplace. At the moment, though, I don't see a turnaround in any short period of time in international retail for an industry. It's -- it will continue to have, I want to call, mediocre flows until we see a more stability in the continent.
Institutionally, same idea. As we have all this uncertainty and the persistence of low rates, we're seeing more and more institutions de-risk, and they de-risk in the form of moving from active to passive. Fortunately, our business model allows us to take advantage of that, and I believe we are going to continue to take advantage of that. It is our hope, as we continue to build out our alternative products, we will continue to benefit from that, and we will see that. So in the fourth quarter, in our -- in institutional, we did have positive flows in our index products. And I must say, we are continuing to see clients seeking probably more passive strategies on the institutional side.
I do believe, like we've seen in many other years, this reminds me of the first quarter of '09 when we discussed to all of you at the end of what happened with '08, how clients capitulated, clients paused, clients looked for advice. And then starting the second and third quarter, we started to see clients doing much more active strategies. I do believe that will be the same process. And I can't tell you the types of conversations we have with our investors now in the first quarter are much more dynamic than we had last year, and clients are looking for the solution-based relationships.
So I'm very pleased about how we are being positioned, but I don't want to say that we are seeing a massive turnaround in that -- in behavior from the fourth quarter into the first quarter. But this is the time pension funds, retirement funds, endowments, insurance company ask themselves how are they going to position themselves in the future. They will be going to their respective boards and talking about strategies, risk budgeting, and that's where we're having a dialogue. And I believe we're playing a bigger role in helping our clients play that role. So I am looking here to be the -- I look to the same themes that we saw in '09 on the institutional side.
Let me just talk -- touch on a few things, and it's getting time for open up there for questions. As I said earlier, our Defined Contribution business continues to be strong with about $6 billion -- over $6 billion of inflows in the quarter. Our multi-asset strategy, once again, the solution-based stuff that I'm talking about, we have $3.2 billion of net new business, and clients are looking for more customized solutions.
One of the good creative products we created last year, and I think I mentioned it in the third quarter, and this is a product that we did a wrapper using annuity products in some of our glidepath products with Met Life. We launched this product in May, and we continue to generate strong inflows. This is something that we budgeted, about $1 billion product. We are now at $2.4 billion in size, of which $1.1 billion was raised in the fourth quarter alone. So when you're innovative, when you've designed products that fit the clients' needs, we see the benefits.
In terms of alternatives, we had outflows in a product that was more currency and commodity based, and that -- we're going to see big inflows and outflows that was more currency-overlay type of product. And -- but we continue to have more dialogue that -- with more investors worldwide in our alternative products. Ann Marie talked about some of the performance stuff that we've ever had before. And we believe we're going to see real inflows in 2012 if we use 2011 as a year to really building these products.
In cash, we've seen -- in the fourth quarter, we saw inflows for the first time in, I think, 6 quarters, and we'll see where the cash management business goes in this low-rate environment. But the one thing I could say related to the cash management that's somewhat connected, that's in security lending. That produced some very good returns for us and our clients in 2012 (sic) , especially in the fourth quarter. We're seeing more hedge funds looking to utilize stocks again, especially in the fourth quarter. And so if I could talk about cash management and sec lending, that was a very big pleasant surprise for us, and we continue to see utilization rates going up. And there is a -- despite how low rates are, there's a steep yield curve between 1-day and 90-day money. And so that's been helpful.
On the BlackRock Advisory business, where we are advising money for large clients, some are very well-known clients, we continue to be -- and I am pleased to say, we're continuing to liquidate these -- some of these portfolios, as our clients are achieving the objectives they needed to achieve in terms of giving us these advisory assignments as -- and now, they're starting to wind these down. So we're going to continue to see that side of our AUM going down. As you know, this is a -- just a very, very low fee basis. We were very pleased with the role that we have played in some of these large-scale public advisory assignments. And I do believe when there's a need for us to play those roles, we will be back playing those roles again.
Let me just touch on 2 other things, and that's the M&A environment. I have never seen a more asymmetric market, massive sellers in the asset management business. Obviously, the trends are very hostile for a lot of asset managers, and two, you're seeing, because of Basel III and capital needs, many institutions that are affiliated with financial institutions are -- that are looking to decouple their asset management businesses. As I said in the third quarter and I'll say it again, we are not looking at any large platform purchase at all worldwide. There's rumors that we are involved in some large-scale platforms. I will deny that now. We are not. But we are very active in looking at fill-in products. We see some very unique opportunities now, and we are very excited about the opportunities we will have in terms of fill-in products, either in product or a fill in, in country. And we are in the presence of some active dialogues right now, but they're not these large-scale platforms. We do not believe those will be fitting for BlackRock, and so I'll leave it at that related to M&A.
The regulatory environment will be upon us sometime this year. We still have -- this is very fluid. This will impact all of us in financial institutional land. It will have an impact on our clients. It will have an impact on BlackRock and other things. So we will see how all this plays out. We are very excited about the CFTC announcement and vote last week. This is a great example, whereby a regulator did the right thing for investors and assurance that we're going to have segregation of our collateral. So when people talk about regulation, some regulation is good for all of us. And I will be -- we will be very out-front in regulation, making sure that in the regulation, as it's being formulated, that it's good for our investors. And we will be vocal when it is. And so there are regulation that everyone should be proud of, that we are building a sounder, safer financial community. There is some regulation, though, I'm not going to get into that I'm worried about, that could have an impact on cost of doing business. And we will quietly discuss that with the regulators in how to minimize those costs to our clients.
Overall, I would say 2011 was a good year. I'm very, very bullish on our positioning for 2012. I don't believe we have ever been in a position to take advantage of our business platform, in dealing with clients, in navigating these troubled marketplaces to give us even a larger presence, a larger opportunity and, obviously, great growth opportunities for earnings for all of us, for all of our shareholders.
Let me open it for questions, and let me wish everyone a very healthy 2012.
[Operator Instructions] Your first question comes from the line of Alex Kramm with UBS.
Alex Kramm - UBS Investment Bank, Research Division
So I think the one thing you didn't really talk about much in your prepared remarks was the pipeline this quarter, which I think now for the second quarter in a row has declined. So hoping that you could give us a little bit more detail on the sales cycle and what else contributed to that. Obviously, there were some passive inflows this quarter. Maybe even touch a little bit upon what the mix is in terms of the business that you're seeing that could come online.
Laurence Douglas Fink
I did not purposely talk about the pipeline, not that I'm trying to hide it. I'm trying to deemphasize it. As our business becomes more and more -- with more and more flows in retail, when we talk about pipeline, it was -- A, it was only institutional. It was -- because we have no pipeline retail. It's -- and so we're trying to deemphasize how one thinks about it. Two, in the pipeline, there is a lot of noise related to indexing, which confuses people. And so we have -- we purposely did not discuss it. We are still seeing, as I said in my prepared remarks, a great deal of interest in index types of products. We are in more dialogue with more clients, as I said, institutionally right now for strategies, but there's nothing translating into a pipeline yet. But -- so the pipeline is about $50-odd billion, and then you have this one outflow that we telegraphed in the third quarter, which a client is insourcing a bunch of indexing product. But I don't think our pipeline, by the way, is any different in terms of the feel, in terms of the flows, ins and outs than it is any other times. It's just what we are witnessing now, the pipeline is a very noisy statistic. And so that's why I did not discuss it in my prepared remarks. But I don't -- but we are not seeing any real massive change in the flow or the style. But we're seeing it in the mix, as you suggested. We continue to see more interest temporarily in index-like products. I talked about the $4.5 billion of flows in our -- in iShares year-to-date. I talked about we just won a $350 million flow in emerging fixed income today. So we're seeing a large breadth of inflows. We've actually have a great pipeline in alternatives, but obviously, it's a sheer number, that's quite small. And so I don't think there's much tonality difference, Alex, than other quarters. It's just noisier because of the ins and outs of index business.
Alex Kramm - UBS Investment Bank, Research Division
Okay. Great. And then just real quick. One of the things that you highlighted for this year was the whole defined retirement opportunity. Now there's some regulatory changes coming up on the DC side. I know you're not a big DC player in terms of record keeping or anything like that, but are there opportunities for you to capitalize in that? Or do you think it's going to be a non-event that is really going to go...
Laurence Douglas Fink
We're not a record keeper. So we don't do that. We continue to pick up large -- I would say, we're benefiting from the consolidation of ETF -- excuse me, DC players. And related to the regulatory issues you discussed, because we're investment only, it's a big advantage for us. We're -- because we're investment only, because we are -- we only manufacture and we don't compete with our distribution partners, we have advantages of working with many distribution platforms, and that has allowed us to continue to have, what I would say, double-digit growth rates for DC, which we think we will continue to do this year.
Your next question comes from the line of Dan Fannon with Jefferies & Company.
Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division
I guess in terms of your capital, if you could maybe talk about what a targeted payout ratio between the dividends and buybacks, and then obviously, bucketing in the talk around the fill-in products or potential acquisitions.
Laurence Douglas Fink
I'm going to let Ann Marie talk about it for a second. But hey, let me just talk about dividend policy as I think about it. I don't -- I think a dividend policy should hover between 40% and 50% payout ratio. I've said this for the last few years. We are not changing that. Depending on what we see in M&A opportunities or what we design the relative ability to buy stock back, we will navigate in that range. But we will continue to be active in stock repurchases. We continue to have growing cash flow, and I will continue to say I hate having a large balance sheet. I do not want to ever -- we will never compete with our clients. And so the best thing for our investors is having a very active constructive process of using our free cash flow for dividend, for stock repurchase. And if we see unique opportunities on the M&A side, we will do it that way. I will not buy a company if I think stock repurchase is so much more superior. Obviously, we are a revenue-growth story. So we're going to look for opportunities, and hopefully, we can find opportunities in companies where it is revenue positive and accretive at the same time. And that's what we're going to continue to do. And so, Ann Marie, do you have any other commentary on this?
Ann Marie Petach
No, I think that's really covered it.
Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division
Okay, that's helpful. And then I guess the follow-up on, in terms of the headcount reductions that we're talking about for the fourth quarter, and then I think there's also some commentary about ongoing focus to lower cost regions. I mean, how should we think about that with regards to 2012 expenses and potential margins?
Laurence Douglas Fink
Well, we have nothing -- we're -- the downsizing was done last year with the purpose of making sure we go into 2012 straight on. We have nothing in the plans in terms of any types of headcount reduction, in terms of expenses. We are navigating our expenses very aggressively. We are -- we still have growth opportunities. We will still have some headcount growth in 2012. And one should assume, as I said in other quarters, is our intention, and this is subject to markets and opportunities, we want to have margins above 40%, but it's going to be a balance over -- versus all these other issues. And maybe off-line, Ann Marie could give you more color, or Patrick and team, in terms of how we look at that.
Ann Marie Petach
Yes. I would just say, one important thing is we're going to always reallocate resources where we think they're most important for our clients and where we've got the greatest growth opportunities and, likewise, adjust our expenses on that. So part of 2012 was really positioning ourselves to take advantage of the right opportunities in 2012 for us and our clients.
Your next question comes from the line of Bill Katz with Citigroup.
William R. Katz - Citigroup Inc, Research Division
Larry, I'm sort of curious. I mean, you sort of talked about the low-rate backdrop and sort of the barbell on a couple of different businesses and sort of the trends overall, both U.S. and non-U.S. When you -- and you mentioned earlier about sort of the share erosion for U.S. to each of mutual fund companies. What do you think happens with the economics of the business? I mean, will there be a sort of a collective reaction, at some point in time, to try and stunt some of the growth in the ETF business? Or how do you sort of see the pricing element of the business?
Laurence Douglas Fink
Well, I would still say the majority -- 75% of ETF growth is not cannibalizing mutual funds. I still think most of it is cannibalizing stock purchases. It's still a very institutional product, where it, as I said, cannibalizes stock purchases. I think the biggest culprit of mutual fund outflows into -- in the U.S. was underperformance and just overall de-risking. So I'm not -- but there's no question, there's going to have to be some form of reckoning with the mutual fund industry if there's a persistent underperformance to really rebuild confidence with those managers. One should expect lower fees of some sort, because unquestionably, whether people believe me or not where ETF flows are being generated from, there is a perception that ETF flows are cannibalizing active equity management. And so the knee-jerk reaction for some people may be we're going to have to stop that and maybe you're going to see industry trend to lower fees. I will tell you, mutual fund boards are going to have to start asking those types of questions across all the different complexes.
William R. Katz - Citigroup Inc, Research Division
Okay. The second question is, and maybe you sort of talked about it in your comments about sort of dealing with the regulators behind the scenes. But you didn't really discuss the money market reform. Sort of curious where your thoughts are today, and what you think the most likely outcome will be for the industry given some of the dialogue between floating rate and NAV, capital buffers and redemption restrictions, if you will.
Laurence Douglas Fink
I think it's really fluid. We've had conversation with different regulators, and I don't think there's a consistent view from all the different regulators at the moment. But there is a consistent view that there must be some change. So I don't want to -- I think every regulator says we need to find ways to stabilize society from the risk of money market funds, and we can't have the same risks that we exhibited in 2008. How you implement, whether as you suggested variable NAV or capital or some form of restrictions, each, I would say there are biases by the different regulators. So I don't know where it's going to come out. We have been a strong advocate of having capital put aside for it. We believe we don't -- we believe no different than the Basel standards, whereby you have multi-years to build your capital standard. From our vantage point, the regulators should have allow managers to build capital associated with the money market fund business over many years, maybe reserving a component of the fees to build that capital buffer. I think it'll make the money market fund industry a stronger one. And so we have been, for 2, 3 years, a strong advocate of that. As you know, at this moment, FASB does not allow us to retain any of our fees for a capital buffer. So it is -- right now, under accounting standards, we can't do that. So we need changes in not only regulatory, but we need changes in accounting to get that done. And we have been fighting our -- this is one of the issues that I've always had with the accounting standard board related to why can't we have capital buffers. But we have not been permitted. So we'll see, Bill. I don't -- I really don't have a final view, but we are advocating for change.
Your next question comes from Jeff Hopson with Stifel, Nicolaus.
J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division
So as you pointed out, the iShares market share stabilized in the fourth quarter, are you thinking that this is sustainable from here? And then in terms of seasonality, fourth quarter stronger, typically first quarter weaker, obviously, you're not necessarily seeing that. But any thoughts on that potential trend?
Laurence Douglas Fink
Our weakness in the latter part of 2010 and the early part of 2011 in terms of our flows in our North American ETF platform, a lot of it was self-inflicted, as I said. We had -- our largest outflow product was our emerging market ETF product. And we -- I think by the second quarter of last year, we stabilized it, and we actually have had very, very good positive tracking. And we saw $4 billion of positive inflows in that fund as a result of that. Once again, it validates our view that tracking is a very important component how people look at ETFs, and our experience of that really validated that. And so this is why we are so forceful in terms of making sure we perform in terms of what the indexes that we're going to perform as the index or in many cases, hopefully, outperform. But I do believe we will continue to have a strong position in the industry going forward. So I do like our position in the industry. I continue to believe we have great opportunities there, both in North America and in Europe. So whether it's sustainable, I would -- my bias would say yes. But it's a function of the whims of the marketplace. Clearly, if there's a view that everyone's going to be re-risking, you may see more flows in the QQQs or the -- or more flows into a S&P product. So you -- if you -- it really depends on where the market is. And if we are the strongest, most liquid product in those areas, a positive side about how we're positioned, we have more breadth than any other ETF player in the market. I would say one last thing that I should have said. I do believe, despite my views, I do -- we are still seeing great evidence that many people are putting more and more money into bond ETFs, and we are benefiting from that.
Your next question comes from the line of Matt Kelly with Morgan Stanley.
Matthew Kelley - Morgan Stanley, Research Division
So Larry, you mentioned that you have strong dialogue in the alternative space. So just curious, which clients are -- you're having the most discussions with and how diverse the strategies are looking for and when you think that could actually start to take hold.
Laurence Douglas Fink
We're having, as I said, more dialogue than ever before. We actually have a lot of pipeline of small little wins. We've had a couple of number of wins so far this year. We are in some finals of some very large wins. We see, at the moment, interest globally, U.S. and Asia and Europe. So we are in -- I know of a number of big dialogues that we have internationally right now. We have had -- in one of our products that we're trying to wrap up a close, we have strong interest in Europe, and we are just trying to wind it up. So it's not concentrated in one region or in -- it's certainly not concentrated in one style of client.
Matthew Kelley - Morgan Stanley, Research Division
Okay. And just a little bit more color on multi-asset. So obviously, you have a big stake in that space rapidly growing. Are there any products that you're not currently offering or additional strategies that you think you can branch out into that would help you grow even faster in that space?
Laurence Douglas Fink
No. I mean, look at -- we need to continue to build out our reputation in LDI, in fiduciary. These are the areas where you're seeing a lot of growth in the -- of the 2 product areas. Those are probably the 2 biggest growth areas, especially in Europe. Our view is we're going to see more fiduciary in the United States. That's one of our big bets. We've had 1 or 2 wins in the fiduciary business in the United States. We are having a lot of conversations, and we believe this is where there are going to be some changes. It's very expensive for a lot of small pension funds to run their pension funds. And so we are in lot of quite a bit of dialogue in the fiduciary. The other 2 areas that I would say that we -- in my mind, we have a strong presence, that's the Global Allocation products where we still have a strong position, and the area which interfaces not only in multi-strategy, multi-asset but also intersects with the Defined Contribution business, and that's the target date products that is -- that has really fueled to our growth and will continue to fuel our growth in 2012.
Your next question comes from Michael Carrier with Deutsche Bank.
Michael Carrier - Deutsche Bank AG, Research Division
Just one follow-up on the pipeline. It seems like from a conversation standpoint, you guys have been pretty active. So when you look at the environment and then maybe any seasonality, is there anything unusual when you look at the level of the pipeline versus how active you feel, meaning in terms of the conversations with clients and like the momentum going forward?
Laurence Douglas Fink
I would say -- when we talk about the barbell, I would say, if one trend is you're seeing more barbelling, you're see more indexing and more conversations on alternatives. I think this is an industry trend, and that you're seeing that in the flows, whether it is flows with us or flows with every other asset manager. Lot of people are still de-risking despite -- no one listens to me -- or not no one, but I mean, I really do believe people should be taking on risk, and I've been saying this for months. But our pipeline by asset class is generally the same, but our alternatives, we're starting to get some momentum. A lot of it is just the investments we made in 2011 in terms of having our client team focusing more alternatives and building up the alternative manufacturing platform. But it does feel like more barbelling is going on, and so it is consistent with my themes that I discussed it. I'm very -- I wish more investors started focusing on long-term strategies, because I think some of the de-risking is -- could be, long term, very harmful for the institutions, if they're focusing on the next new cycle.
Michael Carrier - Deutsche Bank AG, Research Division
Okay, that makes sense. And then maybe just on the -- a little bit on the regulatory side. So you guys, I think, you have the trading platform coming up sometime maybe over the next couple of months or quarters. But just when you look at the regulation, you said there's some areas that you might be concerned about. Obviously, for, at least, on the broker side or the sell side, the Volcker Rule continues to be some uncertainty around that. When you guys look at it in terms of what you can offer on the trading platform versus how that ultimately gets implemented, are there scenarios where you're concerned in terms of liquidity in the fixed income markets, and how that can impact pricing in the markets for your investors?
Laurence Douglas Fink
We've been very noisy about the Volcker Rule. We think the Volcker Rule role is not just bad for the sell side. We think it's bad for all investors. As you suggested, it's going to reduce liquidity worldwide. And I mean, when I travel overseas, I hear more and more institutions complain about the possible impact in the Volcker Rule. Without getting into any detail, let me just be very clear. We are creating this trading platform, or hope to create this trading platform, because we're frightened of the Volcker Rule and the impact of liquidity and the impact of bid-ask spreads. We are doing this only for the betterment of our clients to reduce friction cost and trading cost in doing this. If we -- when we create this, this is not meant to be a -- we're not meant to be us becoming a broker-dealer and competing with Wall Street. It's meant for us to be a better fiduciary for our clients. My greatest hope, that we don't have to do this, that the bids, the liquidity in Wall Street is greater than ever before, the bid-ask spread is tighter than ever before, and I'm spending a lot of money for nothing. Obviously, I'm spending a lot of money because I'm more -- we're more frightened about the impact of this and the impact on all of -- all investors worldwide. And as a result of it, we're creating this as a mechanism, so we could offer a better solution to our investors who invest with us.
Your next question comes from Robert Lee with KBW.
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division
Just a question, maybe more for Ann Marie. But -- I guess one of the issues, unfortunately, some investors have with ETFs and betas kind of the growth -- the fee structure and maybe not giving as much focus on the higher margins there. Is there any way of getting a sense of, to the extent you guys have been very successful in improving your margins over the past year, is there any kind of analysis you've done or color you can give us on how much of that may be driven by this somewhat of a mix shift towards what may be lower fee but higher-margin products like index and ETFs or anything you can provide on that?
Ann Marie Petach
I would say it's been balanced, because we've had strong flows into all different types of indexed products, the lower fee, institutional as well as our good liquid ETFs that carry with them other benefits, liquidity and tax efficiency. So I think we don't try and digest it quite the way you've said, is it the mix of business benefiting the margin. Because we run the platform and the support to support the whole business, not just one segment. So I really feel like it's been margin improvement coming from the underlying way we're running the firm rather than the mix of business per se.
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division
Okay, fair enough. And then maybe one question for Larry. Obviously, a lot of regulatory uncertainty out there and just kind of any update you can provide on your thoughts or your -- based in your conversations with the treasury, about SIFI designation and if you think that's really not going to be much of an issue for -- not going to be an overhang for you or the latest thoughts on that?
Laurence Douglas Fink
My latest thoughts, I know nothing more today than I did 4 months ago. I don't believe -- I think the regulators asked for a comment -- ask to comments related to asset managers and SIFI designation. I think that was delayed, if I'm correct, in terms of submitting our letter. I don't believe regulators have come to terms as to how they should think about asset managers for SIFI designation, and so I don't think there has been much movement towards that. And so we are equating to work and have a dialogue with our regulators about how they should think about all asset managers, or specifically, BlackRock, should be included or not included in the definition of SIFI regulation. So without digging myself into a deep hole, I'm going to conclude it with that.
Ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, do you have any closing remarks?
Laurence Douglas Fink
No, I think I said it all. Thank you for everyone for your time. I know it's a busy time. And thanks to all of BlackRock employees for working really hard and enduring difficult markets but coming through this quite successfully. Thank you, everyone.
This concludes today's teleconference. You may now disconnect.
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