BlackRock's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: BlackRock, Inc. (BLK)

BlackRock (NYSE:BLK)

Q1 2012 Earnings Call

April 18, 2012 9:00 am ET


Matthew J. Mallow - General Counsel and Senior Managing Director

Ann Marie Petach - Chief Financial Officer and Senior Managing Director

Laurence Douglas Fink - Executive Chairman, Chief Executive Officer, Senior Member of Operating Committee, Senior Member of Leadership Committee and Chairman of Executive Committee


Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

Matthew Kelley - Morgan Stanley, Research Division

Michael Carrier - Deutsche Bank AG, Research Division

Neil Stratton


Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the BlackRock Incorporated First Quarter 2012 Earnings Teleconference. Our hosts for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Ann Marie Petach; and General Counsel, Matthew Mallow. [Operator Instructions] Thank you. Mr. Mallow, you may begin your conference.

Matthew J. Mallow

Thanks very much. This is Matt Mallow. I am the General Counsel of BlackRock. And before Larry and Ann Marie make their remarks, let me point out that, during the course of this conference call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual results may differ from these statements.

BlackRock has filed with the SEC reports which list some of the factors that may cause our results to differ materially from any forward-looking statements we make today. And finally, BlackRock assumes no duty and you should not expect that we will undertake to update any forward-looking statements.

So with that, I'll turn it over to Ann Marie.

Ann Marie Petach

Thanks, Matt. Good morning, everyone.

Uncertain markets continue in 2012. Markets began the year strong globally, buoyed by hopes for stability in Europe and positive economic data in the U.S. However, the mood remains fragile, and some of those initial gains have sold off as confidence and mood vary with each new data point. You can see that just in the last 2 days. The initial market improvements and investor activity supported BlackRock's strong first quarter results, with EPS up 7% compared to a year ago and 3% compared to the fourth quarter. Our financial performance highlights our strong focus on our clients' needs and our ability to work with them, supported by the breadth of our product set, our global presence and our unmatched risk tools. These strengths uniquely position us to meet the diverse needs of clients in this complex and ever-evolving market.

As seen in our branding campaign, BlackRock is focusing on products and solutions that are especially important to investors in this environment, and this alignment with client needs is supporting our flows and our revenues. Our 5 client focus areas drove our net new revenue for the quarter. We expect them to be substantial contributors to organic revenue growth throughout 2012. At the same time, we saw the outflow of the previously identified $36 billion low-fee fixed income index mandate related to a single client who insourced the asset. The revenues associated with this mandate was about $4 million.

Despite starting the year behind on high-water marks, strong performance in the first quarter allowed us to maintain stable performance fees compared to the first quarter of 2011. Our cost base is benefiting from actions we took in 2011 and supporting our margin. Supported by strong cash flow, the board approved the 9% increase in our first quarter dividend and increased our share repurchase authorization back up to 5 million shares. In the first quarter, we repurchased 648,000 shares for about $125 million. The key takeaway for me is that our breadth and diversity have positioned us well for organic growth and the ability to perform well in various market environments. With that, let me quickly walk you through the results.

As I make my comments, I'll be referring to the slides in the supplement, which you can get from our website. And as usual, I'm going to be talking primarily about as-adjusted results. I've already talked about the trends, so I'm going to move us right ahead to Slide 3.

Our first quarter operating margin was 38.6%. The margin improved sequentially when you adjust for 2 items. First of all, we had seasonally high performance fees in the fourth quarter of 2011. And second of all, the first quarter had seasonally high employment taxes. Sequentially, the margin reflected the benefits of the lower base comp resulting from the restructuring we did last year, though this is partially offset by a sequential increase in marketing associated with our commitment to the brand. Our comp-to-revenue ratio of 36.2% was consistent with the long-term range of 35% when you normalize for the seasonal payroll taxes.

Taking a look at markets, as shown on Slide 4. The strong recovery in all global markets benefited every -- all asset classes since the fourth quarter, and you can see that on the right-hand column of the page. I'm focusing on average markets since the majority of our equity piece is priced daily. Then if you look at the second column in, although markets are up compared to the fourth quarter, compared to a year ago, the story is quite different. U.S. markets are up, on average, 3%, but world markets, as seen on MSCI, European markets, emerging markets, Asia markets are still between 4% and 9% below the first quarter 2011. As a result of the diversity of our equity business, about 1/2 of our equity AUM is tied to non-U.S. markets.

These mixed market results obviously impacted our revenues compared to a year ago, so it created headwinds for us coming into the year, though new business with clients and other revenue strengths helped to buffer the headwinds associated with these market effects. I'll start with a comparison of results to a year ago then discuss results compared to the prior quarter.

On Slide 6, you can see that earnings per share of $3.16 included $3.10 of operating earnings and $0.06 of nonoperating income. EPS benefited from growth in long-dated assets, expense discipline and share repurchases.

The first quarter as-adjusted tax rate was 31.5%. This sequentially is a 0.5 point improvement and this reflected the positive effect of state and local tax legislation. And those benefits will continue for us, going forward.

Operating earnings of $825 million, which you can see on Slide 7, reflected expense discipline and improvements in long-dated base fees. Our business model benefits from the first revenue sources. We've got a revenue slide laid out for you on Slide 8.

First quarter revenues were $2,249,000,000. This includes about $2 billion of base fees, $80 million of performance fees and $123 million of BRS revenues. Flows into most long-dated products helped to drive growth in long-dated base fees. At the same time, low rates and regulatory uncertainty have been a drag on our cash products. As I mentioned before, strong performance in the first quarter allowed us to generate performance fees that were comparable to 2011. And while our performance varies by fund, the gap to high-water marks for some funds was eliminated completely and for other funds was narrowed to a couple of percentage points. We also continued to benefit from strong performance on our traditional products, which generated $28 million of the total performance fees.

BlackRock Solutions and advisory revenues of $123 million were relatively stable compared to the first quarter of 2011. An almost 20% increase in our core line revenues was sufficient to offset, first of all, the non-recurrence of a larger segment in the first quarter of 2011 and, secondly, the successful disposition of assets from our advisory portfolios. The $49 billion decrease in advisory assets compared to a year ago was driven by dispositions, which have broadly benefited U.S. taxpayers. The appetite for BRS remains strong both on the lending and the advisory side, something Larry is going to talk more about.

Despite the effects of negative world equity markets, first quarter base fees, which you can see on Slide 9, on long-dated assets are up compared to 2011. This is driven by clients putting assets into income, multi-asset and index products and to an improved sec lending environment.

Just to note a few highlights. Revenues on multi-asset class products are up 11% compared to a year ago. And to put the growth of iShares revenues into perspective: The revenues are up 7% from the first quarter of 2011 and up 28% from the first quarter of 2010. The only long-dated asset class with a notable revenue decline compared to a year ago is active equity, and that is explained by the flows of quant product over the past year. Given our strong performance on these products, and really on a 3 basis -- 3-year basis, we're now 80% above benchmark. We continue to believe that this trend will reverse itself. And as a matter of fact, the quant outflows were at their lowest level in a single quarter since the BGI merger. Compared to a year ago, we also saw about a 20% decline, a little more than that, from the exodus of cash products, low yields driving that.

Looking at expenses now on Slide 10. Our expense discipline continued, combined with an absence of closed-end launches, resulting in a 3% decrease in as-adjusted expenses. In addition to the reduced launch costs, G&A benefited from lower occupancy cost as we eliminated double rents books in Princeton and London when we were moving to new locations. We also maintained stable marketing cost. This is despite the launch of our major new brand campaign, which I hope and assume everyone has seen at this point. Keep in mind that the first quarter campaign launched in late February, so reflected only one month of our actual advertising expense. This is an important long-term investment already paying off in the volume and quality of dialogue with our clients, also something Larry is going to talk more about.

Compensation expense was more than explained by an increase in base term [ph]. We have invested in the business and added great talent over the past year. Our investments were focused around ETFs, income, retirement, solutions and alternatives. These are the same themes which have resonated with our clients and generated organic revenue growth. Further, as an -- as evidence of our investment in the business, in the first quarter we closed the Claymore transaction, that's our Canadian ETF platform, and we launched 44 new iShares product.

Moving on to sequential results. Operating results were relatively stable despite seasonal factors, aided by favorable markets and a strong client response. On Slide 12, EPS improved by $0.10 compared to the fourth quarter, including $0.14 associated with improved marks on our co- and seed investments.

Relatively stable operating income of $825 million, as seen on Slide 13, reflected strong markets and seasonal factors, which I'll talk about as we continue on Slide 14, looking at revenues. Organic growth and strong markets resulted in a $114 million sequential base fee improvement, shown in the green, offset by lower seasonal performance fees, $67 million. The fourth quarters are peak locked periods for performance fees. And recall that in the fourth quarter of 2011, we completed a very large advisory assignment in BRS, accounting for the decline in BRS revenues.

As discussed earlier, the combination of strong markets and flows benefited all asset classes. Base fees are shown on Slide 15. There was particular strength in iShares resulting in revenues of $594 million and now representing almost 1/3 of our total base fees. We did put a new slide in the supplement with the various breakouts of revenues that we thought would be beneficial to you.

We saw robust flows into both equity and fixed income iShares, specifically emerging markets and a large array of income-oriented products. Further, we saw continued strength in both asset class revenues and strength in first quarter defined contribution flows. It's encouraging to see the themes we believe to be so critical to our clients playing out in our flows and revenues as we begin the year.

I mentioned earlier, continued expense discipline. I'm now on Slide 16. The base comp benefits of our fourth quarter personnel reduction were more than offset by the seasonal effect of first quarter payroll taxes, driving that increase in comp and benefits sequentially. Direct fund and distribution expense increased with our strong asset growth. The $34 million reduction in G&A includes a $15 million increase in sequential marketing expense associated with our brand campaign that was more than offset by other cost reductions, including we had no fund launch costs in the quarter, lower occupancy expense and lower professional fees.

Non-operating income of $15 million is shown on Slide 18 and included $55 million of positive marks primarily, as you can see on our co-investments in private equity on the left-hand side and distressed credit in the middle bar. The value of the investment portfolio was up about 18%, closing the quarter at $1.2 billion, excluding hedges. The growth related primarily to seeding; included we seeded 2 new European income funds important for future growth and markets.

As a reminder, we invest alongside and align with our clients and seed new products as required for the base business, but we have no proprietary investments. Our revenues and business model are predicated on acting as fiduciaries on behalf of our client and receiving a fee for providing those services. Our balance sheet remains small, with less than $8 billion of economic tangible assets primarily composed of cash, receivables and the investment portfolio.

So wrapping up, summing up on Slide 19. We delivered a healthy margin and returned a large amount of cash to shareholders, resulting in over a 70% payout in the first quarter. Our cash flow generation allows us ample opportunity to reward shareholders consistently. Our operating cash flow in the quarter reflected both the strong operating results and also the fact that we make our annual incentive comp payments in the first quarter.

Looking ahead, we're extremely excited about 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 benefiting from our business model and client focus.

Our intense focus on delivering to clients' needs generated top line revenue growth across long-dated asset classes as clients responded to investment themes designed to benefit them in these times.

With that, I'll turn it over to Larry, who'll discuss the external environment, his dialogue and what we're seeing with our clients and the ways in which we can help them navigate these markets.

Laurence Douglas Fink

Good morning, everyone. Thank you, Ann Marie. Before I talk about 2012 and the first quarter and going forward, it probably makes sense for me to reflect on how we guided to 2012 and talk about 2011 a little bit.

The volatility we saw in 2011 really froze many, many clients worldwide. Cash buildup is -- grew up throughout 2011. Investing in bonds, short-term bonds, as a means to preserve wealth was a norm for most investors worldwide. And we saw, as an overall portfolio in 2011, pronounced derisking. Although the markets had risk on, risk off, risk on, risk off, I would say the preponderance of invested -- investors worldwide added more cash in short-term bonds over the course of 2011 than they did in some incremental investing in more risk-on products.

We certainly also saw in 2011 more barbelling strategies; going into beta products, index and ETFs; and going into alternatives. And it was the uncertainty of -- from the U.S. in terms of our management of our deficits and our fiscal discipline and which was essentially the lows from the latter part of the second quarter going into the third quarter. And then we had the European crisis really coming to a real crisis in the third and fourth quarter last year.

We began to see stability in the world as the U.S. economy started showing some rays of hope that there was stability. But more importantly, the actions from the ECB with their long-term financing vehicle, LTRO, that provided the necessary liquidity to stabilize Europe. And from that, we then began to see clients starting to focus on how derisked they were.

And then going into 2012, we certainly saw large-scale clients moving from cash positions into longer-dated bonds, into credit type of products, into dividend-like equity products, all the types of themes that we are focused on in our campaign. And so overall, we saw some re-risking into the market. However, if you think about the internal generation of cash, I would still say the fears of the investor still is more overwhelming than the hope for a better future.

So we -- despite the rally in global equities from its lows, I would still qualify the market to be quite fragile. Attitudes are basically on the borderline of pessimism than optimism. And also, we are seeing this in -- from our perspective, with CEO behavior. We're still seeing most companies being very risk-adverse. I think we're going to see in the first quarter above-forecast earnings. Essentially, the reason for that is everybody is for -- is overlaying a overall view of pessimism, not optimism. And we are actually seeing performance better than that pessimistic view, and therefore, we're seeing in terms of corporate earnings, more exceeds than misses. But as we enter the second quarter, I still believe there's a great deal of uncertainty ahead of us. It is very hard for investors and CEOs and politicians to decipher between the good news and the bad news. It's very difficult for investors to have truly a long-term view. And so this growth in investing in bonds continues, cash buildup continues mostly through bank deposits, less than money market funds, as an industry. And so I don't believe that the future is much different than it has been, but it is remarkable to think about how strong equity markets were in the first quarter, with just some incremental investing in equities.

This is why, as I said October last year, as I said February this year, I still believe in equities more than ever before because we witnessed, with just some small investing, a pretty substantial rally in the equity markets. And that just is a great sign of how derisked people are. And as you look back in the first quarter, we saw large-scale repurchase of stocks from corporations, a very modest calendar of IPOs. And so as we enter the second quarter, the outstanding of equities in the world is less today than it was in January 1. And so it is -- so we're seeing CEO behavior purchasing shares back, raising dividends, all fundamentally strong foundations for a better equity market.

But let us be clear: We are not seeing major changes in investor behavior. We are seeing some re-risking. So incrementally versus the third and fourth quarter of last year, yes, we are seeing a lot more investing, but I don't believe it's to -- it's at a point where we could say the markets are going to be really strong because of a strong transition out of the cash, out of more bonds into equities. That's just not happening yet. Despite all that, BlackRock fared very well, which I'm going to talk about in a minute.

I think the U.S. economy will be and will continue to be a strength in the world economy. We believe the U.S. economy can grow between 2.5% and 2.8%. We are seeing stability in the employment market. We are seeing, incremental from the private sector, some job growth. We are still seeing some negative flow -- jobs created from the public sector. And I should remind everybody: If we ever do tackle our federal deficits, that is another way of saying we will have less jobs in our federal government as we tackle our deficits. And so we do need a robust private sector and we do need a robust job creator in the private sector. And that's going to be very important, going forward.

Volatility in the world will continue in the next few weeks. We have a serious important election in France. We have elections in the United States in November. And it's very important that everyone focus on the issues around the U.S. deficit.

We -- in our quest of trying to stabilize our fiscal discipline, we created this $1.2 trillion mandatory decline in spending beginning next year of which $700 billion will be for our military budget. This should start having an impact on our economy in the second and third quarter as, businesses that are chiefly doing business with our military and our defense, they're going to have to start focusing on what this decline in defense spending means for their companies.

And so I have spent time in watching, urging Congress to focus on this today because this is not an issue that they need to focus on in November as they think their back's against the wall. I'm trying to alert Congress today: Their back's against the wall this moment. Business behavior has to respond not as quickly as politicians but over a multi-quarter period of time, and I do believe you're going to see business behavior change as we head towards the ultimate decline in military spending if we don't address that.

One last thing, on the macro issues. I do believe oil is going to play a more significant role in terms of the outcomes in different parts of the world. I think that oil prices have a real influence on the ECB behavior. I do believe the ECB has to ease. And their interest rates are 1%, but because of oil playing a significant issue around inflation, the reluctance to ease in Europe is going to be very pronounced if we don't see a reduction in oil prices. If we can't see an oil price reduction of some magnitude, I do believe the ECB will ease, will ease aggressively, because it is our opinion that the euro has to fall in value for the southern-rim European countries to ever find growth. Right now, the southern rim politicians are constantly working on fiscal discipline, which erodes the economy, which creates greater strains on their population, greater strains on the issues of unemployment in the southern rim. And so we also need to find ways of growth in Europe and growth beyond the northern rim. If we don't find that growth, we will have more serious issues. And as I said earlier, the ECB issues is not a 3-year problem to work it out. It's a 4-, 5-, 6-, 7-year issue.

So what does this all mean for BlackRock, with all this noise? We have seen a great interest with our clients worldwide in working with BlackRock to help them in guidance with advice in terms of how they should navigate their liabilities, how they should invest in their -- to assets to meet those liabilities. So I do believe our business model today has been more valid -- never been more valid than today in terms of working with clients as they try to decipher the good news and the bad news, the push and pull of markets. And I believe we are witnessing a real large increase in this type of advice. We are certainly seeing this in the form of our BlackRock Solution area, but we are seeing this in our multi-asset class area, we're seeing that in BMACS, we are seeing that in other high-contribution business. Some of this is being manifest in increased performance in our ETF iShares platform; some of it in our, as I said, defined contribution; some of it in our alternatives business.

So excluding, as Ann Marie discussed, out this onetime previously announced outflow of a piece of index business that was out of our control, this was -- this organization portfolio was assumed by a government, and they internalized the assets.

We had approximately $25.7 billion of long-term flows, very diversified. And when I look at the environment of the world, we were very pleased with that type of organic growth across many spectrums. And it actually -- these long-term flows actually corresponded to our brand campaign, our focus areas of ETFs, retirement income, multi-asset strategy solutions and alternatives. So it validated our platform.

As our press release announced, we have approximately $3.685 trillion of assets. We witnessed over $200 billion of net growth in long-term assets to $3.34 trillion. And what I think is also interesting as we focus on BlackRock's mix: Our mix continues to increase in the multi-asset strategy area where we closed at $246 billion. We added more assets in alternatives to $110 billion. Fixed income ended the quarter with $1.244 trillion, and equities, $1.744 trillion. So once again, it's this business model of mix. It's a global business model. It's a solution-based business model that truly helped us navigate what I would call -- in a very uncertain time in the marketplace.

The other thing that I think is important to relate, especially relative to the S&P: We entered this year with below-market level of revenues because of the performance of global equities outside the U.S. in the third and fourth quarter. And so when everyone focused on the S&P, the S&P was flat. And yet, as Ann Marie discussed earlier, there were some obviously very negative market performance numbers overseas in the third and fourth quarter. We had that big hole to overcome. We did. And so this is another reason why I'm particularly proud of how we navigated in this quarter.

Before I get into some of the business highlights, let me just discuss some of the investments we made. Obviously, we're making investment in our brand. We believe our brand is becoming more and more important. It is significant for us to expand our brand. Our retail distribution partners have told us, "You need to expand your brand." We need to have some demand pull instead of sell push. And we are accomplishing that. The brand recognition is growing. The types of inquiries we receive globally in terms of our brand initiative has been quite strong. It is that brand campaign that has helped us to distinguish and help our clients decipher some of the noise. It is helping them understand where they should be focusing in these uncertain times and how they can navigate higher returns and mitigate some of the associated risk.

We had more inquiry than we've ever had with our website. We had more inquiry with our telephone operators than we've ever had before, not just in the U.S. but worldwide. And so the impact is immediate. And we expect that impact to transform into sales over the course of the next few quarters and years.

So we continue to believe in this. We believe it is differentiating us. We believe we're being thoughtful, helpful. And most importantly, we want to come across as a solution provider to all our clients: from our retail clients to our largest institutional client.

The other area that we continue to invest and we will continue to invest and that is investing in our people as we see more and more opportunity to expand our platform.

As I said over multiple quarters, we are not actively looking at large-scale acquisitions. I can tell you today we are continue to not looking at large-scale acquisitions. I've never seen an environment with more companies for sale, but we have not shown any interest in doing that.

What we are doing, though, is looking for talented teams to augment our platform already. We added a emerging market debt team in Europe. We added a new head of one of our emerging market equity teams. We're adding more people across our capital markets, trading platform, marketings, communication. We're adding heavily in technology, which I'll get into in a minute, and risk in our quantitative analysis group.

The one thing that I think the world doesn't understand in terms of cost, and that's the regulatory environment. The regulatory environment continues to take shape. I don't know what this totally means for BlackRock, but we're investing large sums of money to become compliant and stay ahead of regulation. This regulation will be required for all asset managers, all hedge funds, all private equity firms. We are talking about regulations such as Form PF, which is going to be requiring reporting derivative holdings to the CFTC and to the SEC. This is a large-scale need. We all -- and this is client-by-client reporting that has to be done on a continuum. We have FACTA, which we are going to have to report. This is a big issue for our EMEA area. We have a AIFMD, the alternative investment fund management directive, in EMEA.

This is all requiring a buildup of technology. This is requiring building up more -- a larger team with our regulators. This is not just a BlackRock phenomenon. This is an industry phenomenon. This is going to be a large-scale need worldwide. One of the reasons why -- which I'll talk about it later on, why we are seeing more and more interest in Aladdin and BlackRock Solutions is because of the need for better technology, better systems. This is not just for our risk management reason, it is for reporting purposes too. Having a single technology platform is going to be imperative to properly submit all your necessary regulatory requirements to all the regulators worldwide.

And so we are trying to stay ahead of this. We are investing money and time for this, and I do believe this is going to be a very large component of how other asset managers are going to have to respond. This is -- and I just want to underscore it: This is not a BlackRock-only situation. It is an industry-wide issue. Society is looking for greater transparency, greater information. And we are staying ahead of that, making sure we are compliant with all our clients worldwide. And we do believe, because of our position, we have a higher fiduciary standard in making sure we do this as properly as possible.

Let me discuss quickly some of the businesses things. Ann Marie did a very good summary of a lot of the business issues.

Our iShares business was a standout in the quarter, with $18.2 billion in net new business, which was remarkable. This is in line with our growth in the fourth quarter. Traditionally, in the first quarter, we have sometimes outflows, as you saw big inflows in the fourth quarter and outflows in the first quarter. The whole industry saw a very large increase in the utilizations of ETFs. As I said, I think a lot of the ETF flows was related to this modest risk on client -- added risk, added beta. As they were probably mismatched and too much concentration in cash and in bonds, they added more exposure, more beta, whether it's long-term bond beta or high-yield beta or beta in equities or commodities. They did it through ETFs.

We are seeing a trend, though, of more and more investors using beta products as alpha. We are seeing more and more investors tactically allocating, using ETFs to get greater exposure to an asset category to a region, and ETFs are playing a more demonstrable role in that. I believe that will become a larger and larger component, and this is why we believe ETFs will continue to drive more and more growth.

We are still not seeing ETF's cannibalizing of the mutual fund business. The mutual fund business is slow because people are not adding risk. I'll get into ours in a minute, but it is -- I don't believe much of this is cannibalization. I believe most of the growth in ETFs are new participants in these products. Much of it is institutional, as they use beta for alpha.

The band across the ETF platform was oriented towards fixed income. For us, we had $9.4 billion of net flows. We captured 46% of the fixed income flows for the quarter. Particularly great were our U.S. and Canada iShares products growing about $14.5 billion. That was -- a lot of it was driven into emerging markets and more of our high-yield products.

Our emphasis in dividends was rewarded also in -- because we saw equity income grow. We saw high yield grow to about $8.2 billion in inflows. We also saw, as people went back into the emerging market, markets after huge outflows. In the third and fourth quarter, we had $2.7 billion of inflows in our emerging market ETF products, and now it stands to be about $40 billion.

Ann Marie suggested we closed the Claymore transaction. It was a wonderful time that it closed on and we had good flows in Canada. And more importantly, we have the dominant position both institutionally and retail in the ETF market in Canada, which we are very happy with. BlackRock -- legacy BlackRock was much stronger institutionally in Canada. The Claymore transaction really helped us on the retail side, so we cannot be more pleased with our position in Canada today. And as I said earlier, we will be looking to do in-market types of transactions like that if we could find opportunities to augment our position in different products, such as ETFs.

International iShares, we grew by $3.7 billion. We had 59% of the EMEA market, much of that was -- had to do with a lot of market participants. We're leaving the note-related or the derivative types of ETN products and moving into the physical-based products. We have the large beneficiary of that as we have aggressively discussed the attributes of physical-based ETFs versus derivative-based ETFs: the credit exposure that investors have with derivative-based ETFs.

As another example of our culture of innovation, we continue to build out more products. We added 44 new iShares products, as Ann Marie discussed, and those products have attracted already in the first quarter $700 million of new flows. And we continue to try to be as innovative as any organization.

On the retail side, we continue to see strength in the U.S. and we continue to build our presence in the U.S. So we have many participants that had outflows in the retail mutual funds. We actually in the U.S. had $1.2 billion of net long-term flows. Another example how we are building our brand, we're building our presence in the retail area.

In our European mutual funds, we had a modest $100 million of outflows. That is an example of the uncertainty in Europe and some of the uncertainty in Asia. We -- hopefully, we can stabilize our -- the businesses in Europe, but I think the European mutual fund business is going through this transition as the marketplace tries to understand what it means with the sovereign debt crisis of Europe.

In terms of institutional business, we are still seeing clients being very, very cautious. Most of our clients institutionally are -- if they're adding beta, they're adding beta mostly in passive strategies to gain that market exposure. But we are seeing some inflows in our active products. In our Americas institutional business, we had $7.7 billion of growth, which was driven $5.7 billion in our active products. A lot of that was in our multi-asset class solutions. We also had a $1 billion award of a very large international client. That is a best idea strategy for BlackRock: a huge award with a very large international client.

Our defined contribution continues to grow nicely. We had close to $10 billion of growth split evenly between active and passive strategies of which $3 billion was in our Life Path multi-asset strategy offering.

And as we discussed in our branding campaign and as we discussed in many other forums, we believe a focus on longevity is essential. We do not believe so many Americans are adequately investing for their retirement properly. We believe they are miscalculating how long they are going to live. And we have a serious growing crisis in this country in terms of meeting the needs of longevity of life. As I said in many forums, we spend so much time focusing on health. We are -- as humans are trying to find new ways of extending a life, but we're spending so little time how to afford that longevity. This is something that -- where BlackRock is trying to provide answers, solutions, hope, and I think we are beginning that dialogue with many people on trying to find that solution. But it is essential that we all -- all of us in our industry focus on the needs of financing longevity in this country. This is not, I should state, this country. This is a worldwide problem. It's just as dire in other parts of the world, too, in making sure that we are saving enough.

In EMEA, institutionally generated about $1.5 billion in inflows despite all this caution and de-risking. Particularly, that was for a large defined benefit plan. And we continue to see growth in our index strategies. But we lost about $3 billion in some of the active strategies in Europe, predominantly in U.K. equities as people de-risked in the U.K. and some of the credit strategies.

I'm particularly pleased with the first quarter growth in alternatives. We had about $800 million of net new business during the quarter, but we are involved with so much dialogue. We've never had more dialogue with our alternative strategies than we've ever had before. This is what we've been talking about over the last year or so as we are seeing clients barbelling, using beta and using more alternatives of strategy. That is persisting, that is continuing to grow. That is not just a U.S. phenomenon, that is a worldwide phenomenon.

And in Asia-Pac, we had one -- some outflows in Japan, particularly. We had $3 billion of outflows. We actually are seeing some very good inquiries in Japan right now and more opportunities, so I don't believe there's anything that is systemic about what happened in Asia.

Let me talk about BlackRock Solutions. The need for strong risk management analytics continues to drive demand for our Aladdin-based services. What's particularly encouraging: While BRS revenues were down year-over-year by $5 million, we saw a 19% growth in Aladdin revenues. So we transformed the onetime wins into long-dated, sticky revenues. So this 19% growth in Aladdin was one of the biggest growth rates we've had in the last few years. It's indicative of what we see and the opportunities we have in Aladdin. You have to remember, we had, as Ann Marie discussed, some large dispositions in our advisory business, which reduced our fees. And as we -- we also had one very large governmental assignment, onetime advisory assignment, the first quarter of last year that we obviously -- it was a onetime assignment.

So if you look at our -- the consistency of growth in the Aladdin side, this really encourage us to believe that we have huge growth opportunities going forward as we are becoming more and more as a percent of revenues being Aladdin versus the onetime advisory revenues. I'm not trying to suggest that the advisory revenues aren't good. They're wonderful, they actually -- in many cases, the onetime advisory revenues translates into an Aladdin contract. So it is a very, very important component of the BlackRock Solutions business.

The momentum is strong, as I said, in Aladdin. We won a very large assignment in Japan, another example, as we are becoming more global in this platform. We now have $12.3 trillion in the Aladdin platform that we are navigating risk for clients and providing an operating system. And that is a record level.

There has been quite a bit of noise related to the BlackRock-Aladdin trading network. Let me try to give a little more clarity about this. We are responding to the regulatory regime that is transforming the future ways of -- the sell side does business. Under Basel III, banks are going to really require you to have higher capital. Because of the Volcker Rule, banks are going to have more inhibition and some prohibition in doing principal trading. The natural outcome of that will be probably wider bid-ask spreads, and I want to underline "probably."

Well, last, if we could see a narrowing in bid-ask spreads, quite frankly we don't need the Aladdin trading platform. We are doing this with the idea that we want to be the most and highest level of fiduciary to our clients. And if we are seeing a persistent widening in spreads, we believe this system will continue to be -- will flourish and grow.

And so we are doing this with our sales right now where we are trying to cross more and more trades. And through our Aladdin clients' wishes, they ask to come onto this platform. And so we are beginning the process in which we are going to be adding some clients to this platform. And what -- let me underscore it: It will only be Aladdin-based clients that are going to be permitted to go on to this platform.

For BlackRock trades, there is no commissions on this. We are not going to make -- we're not trying to become a broker-dealer. We are trying to be a fiduciary in minimizing our friction cost of trades. For our clients that are on the Aladdin system, we are going to try to charge a fee that overcomes our cost, and that is it. It is our intention through this platform in terms of revenues, hopefully, this will be another mechanism, another reason why clients want to go into Aladdin system. And if they are allowed -- if they are on the Aladdin system for risk management, they'll have access to this platform. That will be the revenue model as we design this.

But this is not going to transform BlackRock in anyway. This is not going to change our behavior, our relations with the sell side. They are going to be powerful counterparties and powerful partners for us. And so I just want to diminish this noise around this: We look at this as raising the bar as fiduciary standard. Hopefully, this will augment more Aladdin-like revenues over the course of the next few years. But let's be clear: This is a long-term, multiyear strategy. This is not unlike when we've launched the Aladdin trading -- Aladdin technology platform as a mechanism to expand our relationships with our clients.

We are going to continue to invest in our Aladdin system. I am very pleased to say that we are now winning more assignments in equities. So Aladdin system used to be only bonds, it's now in equities. So we are now having great opportunities across all our existing clients to offer the Aladdin system across all the different asset categories.

Our SMA business, although we had those onetime wins from last year and we had some dispositions for our clients, continues to generate strong returns. And we are -- we have been awarded another country assignment, which I am not going to divulge, so we're working with another European country right now. It is public that we work for Ireland, and it's been public that we've been reengaged by Ireland this quarter. It is public that we are working on behalf of the Greek central bank. It is not public related to another Central Bank assignment in Europe. So we continue to be a firm that institutions are looking for advice and help. And it's -- and it continues to drive and differentiate BlackRock for the future.

Let me just talk about some notable performance. We had very good performance at our hedge funds. We overcome some of our high-water mark hurdles in products like Obsidian. Our FIGA product continues to differentiate itself. R3 had a very good first quarter. Our Equity Dividend Fund continues to grow and continues to differentiate it. European equities, year after year, quarter after quarter, they have done an amazing job. Global allocations outperformed our benchmarks in the first quarter. That's our $8 billion go-anywhere product that Dennis Stattman runs.

Our fixed income mortgage operation had a very good quarter performance. Global Bond continues to do well. Municipal retail has had another good quarter. So overall, I would say it was a very good quarter in terms of our products, our performance and the performance in the products that we are really pushing.

Ann Marie discussed quite a bit about capital management. We are committed in increasing shareholder value through capital management decisions. We increased our dividend by 9%. We are -- we continue to repurchase shares. We have authority for a 5-million share repurchase. We continue to think and believe that we have great opportunity. We do have about $3-plus billion of free cash flow. As I said earlier in this talk, I am not here thinking that we're going to ever do a large merger again, so I would suggest that our position about using -- utilizing our free cash flow for dividend and for capital management through shares is going to be a position that we're going to take over the course of the next few years. We are very interested in, as I said, doing fill-in mergers, but we are -- with the opportunity that we have in lift-outs of teams, as we showed that we were able to do that in the first quarter, we will continue to do that too.

So overall, the first quarter was a good one. I am very proud of how we positioned ourself going forward this year. I'm remarkably excited about where we are and where we're going. I am -- I really do believe we are as well positioned as any asset manager in the world as -- we are as well positioned at BlackRock as we've been in the last 6 years with our -- we don't have mergers to worry about, we don't have a world collapse to worry about. We're focused on clients, we're focused on providing solutions for clients, and we're well positioned globally worldwide with our team to provide those solutions.

Once again, thank you. We can open it up for questions.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Glenn Schorr of Nomura.

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

I guess the first question I have is -- Larry just mentioned the $3 billion or plus of free cash flow. The 72% payout was bigger than where you had been running the last, call it, 2 years. And just curious on if that's a high level of payout that we should expect or if 50 is your best guesstimate going forward, as you'd indicated in the past.

Laurence Douglas Fink

No. Well, no. What -- the 70-odd percent is a combination of stock repurchases and dividend. Our payout ratio of dividend is going to be between 40% and 50%. I don't want it ever to be higher. But last year, I think we paid out 120-something percent. I don't want to -- yes, it's in terms of -- so I expect it to -- I think, to be very frank, we expect to use our free cash flow opportunistically up to the board approval in terms of utilizing that free cash flow to do whatever is necessary to support a robust stock.

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Fair enough. On the trading system, just curious on the basic principles of it. Is it a similar crossing network that you see in some of the equity markets where trades get done when there are same security, same price at the same time, trades crossing at the same time? And can you pre-load pre-existing trades and underneath the covers, so to speak, and wait for them to be hit? Just curious on how it's going to actually work.

Laurence Douglas Fink

I believe that is the design. That is the design of the platform. Right now, it is obviously crossing and all that as we get more and more players on it. There is going to be some transparency where the underlying desires of sellers and buyers will be.

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Got it. One other question on -- the new product pipeline has been good, and you've been able to consistently launch new funds. I think you launched 4 new fixed income ETFs in April. So I guess the question is -- there's been some attention in the press to credit ETFs in terms of providing -- of promoting volatility in the markets. I'm just curious if it's gotten any regulator attention and how you feel about that because it's obviously a big growth business.

Laurence Douglas Fink

There's certainly regulatories -- reviews on all things related to ETFs at the moment. Much of it in the Europe has to do with router-based [ph] ETFs. There is obviously reviews by the FCC in the freeze in terms of leverage ETFs. They're not allowing new ETFs with any leverage to be created until they have a full review. Specifically in terms of credit ETFs, I'm not aware of any inquiry from any specific regulator. Matt?

Matthew J. Mallow

No, I'm not aware of any, either.

Laurence Douglas Fink

So look, I believe there is greater and greater demand for credit. Whether you see that in separate accounts with -- or you see it in -- or you see that in ETFs, ETFs just gives you more transparency and clarity where the market's going. But I don't think ETFs are adding any more volatility than when you see large-scale demand in any one product, whether it is a -- in physical-based securities separate account or through a publicly traded vehicle like an ETF. I cannot understand why somebody would say the ETF creates more volatility than demand than any other physical-based separate account. So I don't understand that noise, if there is such noise, and I'll just leave it at that.

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Okay. And here's a last one, it's just on margin. There's always a bunch of moving parts, and obviously, the first quarter has the performance fee give back. But given higher asset levels and what's clear, expense control, even in the face of the marketing campaign. Any reason to think that margins won't be in and around that 39% level that you've been in for a long time?

Laurence Douglas Fink

I see no reason why, over the course of the year, margins will be consistent as they were last year. 39% is a good benchmark, 39.5%. Whatever that comes in, it should be a good benchmark. I just want to overlay the issue around regulatory issues, I was trying to be very specific on that. Regulation costs a lot of money. And so I don't want to -- I'm not here to tell you we're lowering our margin expectations, so I'm not saying that, but I am saying that we are spending a great deal of time on making sure we're compliant. And I don't believe this could be a onetime cost that's going to be very large. Once we get it routinized onto the system, it will certainly -- certainly, once we get it on the system, costs will be less. But it really depends on how we are going to be regulated and how many more people do we need to interface with regulators as regulation of asset managers increases across the board. But at this moment, I am not saying it's going to have any major impact on margins.


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

Craig Siegenthaler - Crédit Suisse AG, Research Division

Larry, if we look at the core institutional pipeline, the sequential change there, I'm wondering if you can just comment on kind of what drove the decline there if we back out the $36 billion mandate. And also, are you seeing a mix shift in your institutional clients into ETFs out of passive mandates?

Laurence Douglas Fink

There's no question. You're seeing, for those institutions who are adding beta for tactical purposes they're doing -- a lot of institutions are using ETFs. A couple of sovereign wealth funds who historically used index funds are now using ETFs. And so yes, there is a change in mix, but it's not entirely. And our pipeline, I don't think it's sequentially that much lower, what, $24 billion. But we -- keep in mind, we are not forecasting ETFs, as you suggested, or retail in those flows and -- but there are -- you're seeing behavior change with some institutions going in using ETFs because they value liquidity more than the cost of the -- than the asset management fee. Obviously, for those clients who believe that they're going to be sitting with a beta exposure over a period of time, they will go into index funds with lower fees. But to get that liquidity, we are seeing, as I said, like, some sovereign wealth funds are using ETFs more extensively.

Craig Siegenthaler - Crédit Suisse AG, Research Division

And then on sec lending fees, the second quarter is always your seasonally strong quarter for these fees. So if we think about the changes in rates over the last year and really kind of what hedge fund activity is doing, which it seems to be another driver, how should we think about the step-up in sec lending fees, which flows through management fees in the second quarter?

Laurence Douglas Fink

Well, we had obviously a very good first quarter on this. We are seeing more hedged fund shorting stocks, looking for shares. So utilization was up in the first quarter, we -- and we still see utilization strong in the second quarter. And quite frankly, in a very short end of the curve, there's a yield curve. It's only a few basis points, but there is a yield curve at the very shortest period, a point of the -- and so a combination of utilization rates and then some yield curve. And the very shortest point of the yield curve has allowed sec lending fees to grow. Ann Marie, do you have any comments related to the first or second quarter?

Ann Marie Petach

I think that's good. We see both the seasonal effect and then some of those hopefully more secular trends both helping those revenues.


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

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Maybe you guys can talk about just the insourcing this quarter. When you look across your AUM, is there some more of that low-fee index-oriented mandates that might be at risk as you look forward?

Laurence Douglas Fink

No, we don't know of any.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

And then on -- Larry, on the world of fixed income in terms of the barbelling between alpha and beta strategies, if you will, can you just talk a little bit about what's happening in core and core plus and just how important credit is becoming in institutional allocations?

Laurence Douglas Fink

Well, you're -- it's very hard for extension pension liabilities to meet their liability needs with -- without having some type of income in credit strategies. But they're not going to -- they're certainly not going to do it in duration anymore with even long end being just so low in yields. So we are seeing across the board a very strong interest in credit types of strategies. We're seeing increased interest in hedge fund-like strategies in fixed income and in credit. But your -- core strategies with the treasury market being so dominant in core strategies, you're seeing more core plus interest and more credit-oriented strategies across the board, more strategies that are global in nature, emerging markets in nature. So you're seeing institutions really reflect on how they are going to maneuver out of core strategies over the course of the next 2 years. Now obviously, for those who have the luxury of having their assets and liabilities pretty matched, owning bonds is a very sensible thing to do. And that -- and so I'm not trying to suggest across the board owning fixed income or owning in treasuries is not a thing to do. Unfortunately, so many of our pension funds are sitting with very large underfunded liabilities, and they're all addressing it. And this is another reason why we're seeing more interest in dividend-related strategies, too. So it's not -- we're looking for other strategies that can produce income and, obviously, try to reduce as much beta exposure as you can. But I think, Marc, we're going to be living with this for a couple of years, in this low-rate environment. And unfortunately, this low-rate environment is a real tax on savers, on pension funds. And it's a real question, can these organizations tolerate for a couple more years? And to sit in bonds and core strategies for the next few years, is that the sensible thing to do? Obviously, your -- if you're incredibly risk-adverse, that might be the sensible thing to do, but it comes at a cost. And we are trying to identify to our clients, at -- what type of cost this is going to have on these organizations. As we heard earlier this -- in the first quarter, the average pension fund had greater mismatches as a result of market performance last year, as we saw lower rates, also their liabilities went up and their -- the value of their assets went down. So it's not a pretty picture.


Your next question comes from the line of Cynthia Mayer of Bank of America Merrill Lynch.

Cynthia Mayer - BofA Merrill Lynch, Research Division

I apologize if you’ve mentioned this, but are you guys still targeting a comp-to-revenues ratio around 34.5% or 35%?

Ann Marie Petach

Yes, we're still in that 35% range. It's a little higher in the first quarter because you get your annual bonus payment-related payroll taxes all hitting you there. So it's always a little higher in the first quarter.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Got it, okay. And then on the move to the physically backed ETFs overseas, do you feel as though that still has room to go, that you could still gain more share there? Or has that pretty much run its course at this point?

Laurence Douglas Fink

I'm not sure we’re going to gain more share, but I don't think it's run its course. I think more and more people are looking at physical-based ETFs there. There is -- and we even saw one of our -- one of the derivative-based ETF players translate its business into physical base. And so I don't think it's run its course because I do believe most buyers are going to be looking for physical-based products. And I think that awareness has been getting more apparent. Obviously, we have 55% market share in Europe and so the last thing I'm going to do is forecast a higher market share.


Your next question comes from the line of Matt Kelly of Morgan Stanley.

Matthew Kelley - Morgan Stanley, Research Division

So Larry, you'd mentioned that the discussions you were having with clients on alternative products has never been stronger. I think you said a kind of similar commentary to prior quarter and showing up in your flows a little bit more this quarter. So just wondering if you could segment your client base a little bit for the alternative interest. So which institutional clients are most interested, least interested? And how are they thinking about barbelling?

Laurence Douglas Fink

It's -- I don't -- we are winning guys with the retail platforms in -- within your organization. We have a couple of alternative strategies through the Morgan Stanley Smith Barney platform. But institutionally, really it's across the board where we're having dialogue. I would say, our penetration with foundation endowments is growing. We're seeing more participation there. We are seeing more asset opportunities with pension plans, especially in Europe. EMEA has been a very strong growth area. Hopefully, we're going to be closing one of our private equity types of strategies, a lot of participation in that in Europe. And so it is growing worldwide, our penetration is particularly strong with smaller institutions. And -- but there's not one area or one type of client that I could suggest to you that is looking to add alternatives with BlackRock. But it's -- I can say, geographically, Europe has been a particularly large area of growth for us.

Matthew Kelley - Morgan Stanley, Research Division

So one follow-up from me. Just curious to get your thoughts on what we need for retail investors to truly reengage in equity mutual funds. I know you said that the markets are still skittish, and I'm sure you feel like -- the clients feel like they've been burned a couple of times in the market. So what do you think we really need?

Laurence Douglas Fink

Oh my gosh. Look, I think we -- it's all a confidence game. It's a confidence game from our politicians, we need leadership. It's a confidence game with our CEOs, we need leadership. It's confidence from the FAs to give people more confidence. In the United States, I think, as we see a stabilization in housing, which we expect to see next year, that will be a foundation for growing confidence. But the issues of trying to navigate this European situation, I think it's frightening for a lot of people just don't understand. As we are trying to show in our branding initiative that there is a huge cost of doing nothing, and we have to educate more and more people, by doing nothing and market timing, that is not a good answer. And we need to really engage everybody in talking about what type of -- in terms of individuals, what type of pool money do you need upon retirement? And how are you going to achieve that, earning very little sustaining cash? And the question is, does -- the noise of today, does that have any impact on a 30-year objective? And unfortunately, as we watch financial news on television and listening to it on the radio and reading it in print, through blogs, it's all about minutia and day-to-day strategies. And so it actually accelerates the short term-ism, but as advisors, we have to focus on focusing what the -- what your needs are, and that's what we're trying to do not with just retail -- with mutual fund buyers but we're trying to do that institutionally worldwide. And it's very important for us to do that.


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

Michael Carrier - Deutsche Bank AG, Research Division

Ann Marie, just on the expenses, so G&A, a bit lower. You mentioned the marketing. I think you said, this quarter it's around $15 million. And I just want to make sure we had that right. So if we run rate that, would it be another $30 million for the second quarter? And then, I guess, on the flip side, when I look at the comp, any way to size up the payroll tax impact? Because that will obviously moderate and provide some offset there.

Ann Marie Petach

Yes. I can take those all offline, but the payroll was broadly about 27 and the marketing is directionally correct. I'll talk to you more.

Michael Carrier - Deutsche Bank AG, Research Division

Okay. And then, Larry, if you look at recent, like, trends in the institutional part of the business and you compare that to, say, like, the past 10 years, like, what is the level of activity, meaning engagement, making decisions? Because it seems like the flows are improving but it still seems like, industry-wide, there's still a lot of uncertainty. And then just one follow-up on that trading platform. Just, if we do go the route where Volcker is more draconian, then in a good scenario for you guys and your clients, what do you guys anticipate being, like, the max of your ability to internalize, like, meaning the percentage of the volume?

Laurence Douglas Fink

To answer your first part of the question related to the activity of dialogue. Dialogue has never been stronger, but it takes a lot more time to try to get clients to move. So their behavior is more of -- one of reluctance, of fear, trepidation. But the dialogue is probably more unique than ever before. But more importantly, the dialogue is different. 10 years ago, dialogue was on a core strategy: a core fixed income strategy, a large cap strategy. Those conversations don't happen anymore. The conversations today are more about multi-asset strategy. It's about alternatives. It's about overlaying assets versus liabilities. It is much more complex. So the dialogue is longer, the timing in which people commit is much longer. Trepidation is large. And so -- and that's what I'm trying to say at the beginning. Although we have some nice market movements, we've seen some nice, long-term flows at BlackRock, there is still an overwhelming amount of reluctance. It's not a reluctance because they don't want to do something, it's a reluctance overlaying fear. Will this cost my job? How do I respond? And what we're trying to hit hard to everybody: Well, doing nothing could cost your job even more. You've got to -- we have to respond to these open issues, so -- but I think the key is the dialogue is different. It's more comprehensive: multi-asset strategy, alternative, barbelling. Much different. And I should also state, as well, if you’ve looked at our pipeline, our pipeline speaks about that. Our pipeline is much heavily oriented to multi-asset strategy and a lot more alternatives. And so when you see our pipeline, you'll see more of that type of behavior and those types of dialogues. In terms of our trading platform, if Volcker Rule is more draconian, I hope it's not. That's not in our interest as investors. It may be in the interest of society. But there is a fundamental cost with that and investors are going to have to pay for that. Right now, I think we're crossing about 6% of our trades. Our hope is if we could get it up to 30%, that would be magnificent. That's a big -- a very high bar to achieve, so let's go at 1% at a time, from 6% to 7% to 8%. And obviously, we don't know the magnitude of how many clients from Aladdin will go on to it. If we ever achieve those objectives of 20% or 30% of crossing, it's going to have to mean a lot more participation with many more clients. And so -- but if it is more draconian, if markets are much wider, I think more clients will want to be part of this platform, and that will accelerate the utilization rate of the trading platform.


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

Neil Stratton

This is actually Neil, filling in. Larry, I was wondering if you could give us your thoughts today on money market reform and the likely outcomes.

Laurence Douglas Fink

We believe money market reform should be a fire way [ph]. We believe the industry has been reluctant to change. We need to be working with the SEC on money market reform. I've had dialogues with some of our fellow asset managers to work together on money market reform, working with the SEC. It is our position that if we do not work together with the SEC on money market reform, the FSOC committee will make it for us. And so we have been much more aggressive on addressing money market reform. We believe it's necessary for this industry to begin growing again. As we witness, the industry is shrinking every quarter. We have been isolated, though, with that opinion. We have been remarkably one of the only firms to aggressively believe that we need money market reform, working with the SEC to a sensible industry- and client-oriented solution. And so -- but I must say, in recent weeks, we have, through our dialogue, offline dialogues, with other firms, I believe there's a good opportunity in front of us to work with the SEC for money market reform. Hence, we avoid the FSOC telling us what money market reform will do to us.

That's it? Good. Thanks, everyone. Thanks for a good quarter, everyone at the firm. I look forward to talking to you at the next quarter. Talk to you later.


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

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