BlackRock's CEO Hosts Investor Day (Transcript)

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BlackRock, Inc. (NYSE:BLK) Investor Day June 18, 2013 8:00 AM ET


Patrick M. Olson - Managing Director

Matthew J. Mallow - Senior Managing Director and General Counsel

Robert S. Kapito - President, Director, Chairman of Operations Committee and Member of Executive Committee

Rich Kushel - Deputy Chief Operating Officer

Quintin Rupert Salter Price - Senior Managing Director and Head of Alpha Strategies Group

Amy Schioldager - Managing Director and Head of Equity Index Portfolio Management

Robert William Fairbairn - Senior Managing Director

Robert L. Goldstein - Senior Managing Director

Charles S. Hallac - Chief Operating Officer and Senior Managing Director

Mark Wiedman - Managing Director

Gary S. Shedlin - Chief Financial Officer and Senior Managing Director

Laurence Douglas Fink - Chairman, Chief Executive Officer and Chairman of Executive Committee

Barbara G. Novick - Vice Chairman

Ann Marie Petach - Former Senior Managing Director

Peter R. Fisher - Senior Managing Director and Senior Director of The Blackrock Investment Institute


William R. Katz - Citigroup Inc, Research Division

Douglas Sipkin - Susquehanna Financial Group, LLLP, Research Division

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

Patrick M. Olson

Hi. Well, good morning, everybody, and thanks for joining us for BlackRock's Investor Day. My name is Patrick Olson. I run BlackRock's Global Strategy and Planning. We have a full day planned, but before we begin, I want to run through some logistics. If everyone could just do me a favor and either switch off their cell phone or just turn it to vibrate, that would be very helpful. And for your convenience, we have a pop-up business center located near the registration desk in the Sturgis Room. Charge your iPhones, Bloomberg terminals, et cetera.

As you can see on the agenda, we have 4 presentations prior to taking a break right around 10:00 a.m., maybe a little bit before. After the break, we'll have another 4 presentations that will take us till lunch. We're not going to take questions after each presentation. If you have a question during the presentations, please submit it on your iPad. To do so, click on the questions icon on the left side, choose the relevant presentation, type in your question and then click on the submit form button.

We'll have a full hour of Q&A at the end of the day, with all of our presenters onstage, where we'll take questions both from the audience, so anybody that wants to ask one from the audience. We'll also mix in questions submitted on the iPads and via webcast, because we have a number of people on webcast. You'll also have time to ask questions at lunch. There will be a member of BlackRock sitting at each one of the tables, so you'll have an opportunity to ask questions of a senior member of the BlackRock team. And then following the Q&A with each of the presenters, Larry's going to have a few closing remarks, and he'll also make himself available for questions at that time.

So as we go through the presentations today, I'd ask you to listen to a couple of themes. One is growth; the other is differentiation. We believe we have ample opportunities in front of us for growth, and everyday we see opportunities to leverage the breadth of our product set, our geographic breadth and our technology to create a differentiated client experience. And hopefully, if you walk away with one thing today, it will be that growth and differentiation.

With that, let me turn it to Matt Mallow, our General Counsel, for a few remarks.

Matthew J. Mallow

Good morning, everyone. I'm Matt Mallow, the General Counsel of BlackRock. And of course no Investor Day would be complete without a preliminary warning from the General Counsel. So here it goes.

During the course of today, we will make -- 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. As you all know, we filed reports with the SEC, which list some of the factors that may cause the results of BlackRock to differ materially from what is said today. And we've also provided a list of some of these factors in today's materials. Finally, we assume no duty, and we will not undertake to update any of the forward-looking statements.

So thank you. I'll get out of the way, and enjoy the day. Pat?

Patrick M. Olson

Thanks, Matt. Now I'd like to introduce Rob Kapito. Rob is President and Director of BlackRock. Rob is responsible for the oversight of all of BlackRock's key operating businesses. Rob's been with the firm for 25 years. He's one of our founding partners. With that, I'll turn it over to Rob.

Robert S. Kapito

So good morning, everyone. Welcome and thank you for coming to BlackRock's inaugural investment day. I see a lot of friendly faces. As many of you know, over the past 2 years, BlackRock's shareholder base has gone through a significant transformation. So more than 2 years ago, we were tightly held, with 80% of our outstanding shares owned by 3 large financial institutions.

Today we have approximately 170 million shares outstanding, and 80% of those shares are held by institutional investors such as you. As our shareholder base evolved, we have learned to evolve with it. As we met with investors and prospective investors, we gained a better understanding of what you needed to know about the firm, and we have responded. We increased our outreach and engagement with the investment community, and Investor Day is an example of this, and we hope you find this to be a valuable event.

So with that, I'd like to kick off the event by covering our goals for today, our principles as a firm and how BlackRock is highly differentiated as an asset manager.

So our first goal is to deepen your understanding of BlackRock. Second, we want to provide you access to the senior leaders at the firm. Today you will hear from a very strong lineup of 9 senior leaders, all are members of our global Executive Committee, which meets on a weekly basis to ensure our businesses are aligned and working in line with the firm's principles. And our third goal, to communicate our long-term growth opportunities, how we are differentiated in the asset management space and how we plan to execute on these opportunities.

So let me begin with BlackRock's principles, which are critical in running our business and preserving our culture. They provide a shared understanding of who we are, what we stand for and how we conduct ourselves. We strive to abide by these principles and leading ourselves, leading each other, and of course, leading the firm.

So first and foremost, we are a fiduciary to our clients. Their trust and confidence in us is our most valuable asset, and we seek to earn it every single day. We listen and deeply understand our clients' businesses, their risks and challenges, so we can help them meet their investment goals. Whether it is to develop a strategy to preserve capital, create customized analytical packages or be a thought leader with regulators, we put our clients at the heart of everything that we do.

Second, we are passionate about performance. BlackRock's employees are passionate, dedicated and intensely focused on performing at the highest levels. We must keep our performance promises to our clients, our shareholders and our fellow employees. Our clients hire us for the performance of our products, strategies and solutions, and we take this responsibility very seriously. We never forget who we're working for, which reinforces the importance of delivering excellent performance across our active and passive strategies, especially as clients look for holistic solutions.

Thirdly, we are one BlackRock. The best solutions result from the ideas and contributions of a diverse team of partners. A great example of this principle is our daily global investment meeting, where over 1,600 professionals across asset classes and geographies discuss market activity and engage in vibrant investment debate. Our ability to share and compare this information across teams and time zones helps us translate local insight in one part of the world into foresight and action in another.

And finally, we are innovators. Introducing new and innovative approaches has been the foundation of our success. From the creation of BlackRock Solutions to the establishment of iShares and target date funds, we've always looked ahead and adapted our offering to meet the demands of our clients. We believe our diversified global platform positions us further to execute on these innovations.

And now about our platform and breadth of capabilities. BlackRock has the deepest and broadest product set in the industry, managing $3.9 trillion of investments on behalf of our clients. As noted in the chart on the left, which is by product, over half of our assets under management are in equities, over 1/3 of our assets are in fixed income strategies, and 11% in multi asset and alternative strategies. Our product diversification enables us to offer the full spectrum to clients and build comprehensive solutions. This diversified business mix also enables us to be a reliable partner in various market cycles. As noted by the chart in the center, by client type, approximately 2/3 of our client base is institutional, and we continue to increase our 22% base in iShares and 11% base in retail, which are 2 key growth areas for the firm. Whether it be helping to create a strategy for an underfunded pension plan or educating a financial advisor on model portfolios, servicing this diverse client base requires us to understand the intricacies of both the institutional and retail investor.

And finally, by region. 61% of our assets are from clients based in the Americas, with 31% from EMEA and a growing 8% opportunity in Asia-Pacific. So we are truly a global firm with clients in over 100 countries. Our global footprint requires us to have a deep understanding of local markets, industries and regulatory dynamics. We are differentiated in the asset management industry because of our unique ability to meet the evolving client needs through our unparalleled mix of active and passive strategies, where 64% of our assets are in passive and 36% are in active. Clients now own both styles in their portfolios and often reallocate funds from active into passive and vice versa. So being able to capture flows in both of these strategies is critically important to our business. We are differentiated through our ability to provide advice and outcome-oriented solutions. For some of our pension plan clients, they're looking for an outsourcing solution for their DB plan, and they need a partner to set an asset allocation strategy, to provide advice on the manager selection and deliver risk reporting on the entire plan.

For our retail relationships, financial advisors need product solutions built around key outcomes, such as income and inflation protection. We have the full spectrum of products and capabilities to create these custom solutions for our clients, and we are unique in our unwavering focus on risk management, where we provide risk analytics to over 170 institutions globally. These analytics provide institutions with an understanding of the securities they own, specifically how much they're worth, what the associated risks are and how they behave in different interest rate environments. This kind of analysis is becoming increasingly valuable for financial institutions managing large pools of money.

And finally, our commitment to innovation, where we're constantly looking for ways to create value for our clients, and a great example of this commitment is the development of our model portfolios, a product built around key client outcomes targeted to the repless PM [ph] or repless [ph] advisor segment, providing a combination of alpha/beta strategies, portfolio construction and risk management.

So to summarize, this differentiation has helped drive successful financial performance despite the market volatility over the past few years.

So with that, I'd like to move this along and introduce Rich Kushel, BlackRock's Deputy COO and Head of our Strategic Product Management Group. Rich is going to talk to you about optimizing our diverse platform through discipline, focus and innovation. Rich has been at BlackRock for 22 years and is a member of our Global Executive and Global Operating Committee. So let me turn it over to you, Rich. Thank you.

Rich Kushel

Thank you, Rob, and good morning, everyone. Strategic Product Management is a new function of BlackRock. We started it last year with the objective of really aligning our product offerings to our clients' needs and the market opportunities so that we can drive the firm's organic growth. Now we built this team last year by assembling a group of senior professionals really with a diverse set of skills, and we positioned the business to sit frankly between our investment teams and our client-facing businesses to make sure that we could create alignment.

Now when I think about SPM, as we call it, we think about it in terms of 3 themes, and that's discipline, focus and innovation. And I'll try to center my comments today around those 3 themes and let you know how we think about it. But discipline is really about making certain that we're making the right decisions for BlackRock as a whole and trying to optimize the result for BlackRock as a whole and our clients as opposed to that for any individual business within the firm. The sum of the right decisions for individual businesses won't necessarily be the right decision for BlackRock or our clients, and SPM's job is to try to make certain that we are in fact optimizing that.

We've also created a series of objective fact-based criteria that we can use to make our product decisions. And lastly, being disciplined is about being efficient with the firm's resources.

Now focus is about bringing our investment, our distribution, our marketing and our operational teams together around a limited set of priorities and gaining alignment. And this is really necessary because of the value of capacity. Capacity is a very dear resource in this business, and sometimes that's about investment capacity, but more often than not, it's about shelf space. There are incremental costs for each and every strategy we offer, and we have to carefully allocate our resources among them, because we recognize that investment management is in many ways a blockbuster business. And what I mean by that is that our results are really often driven by a very limited number of different products and offerings that we provide.

Innovation. Well, if you think about innovation, BlackRock and all of our legacy firms that we've brought together to form BlackRock have great histories of innovations to really help our clients. But we need to continue that, and I think we have an awareness that as a larger public company and one that frankly is expected to produce a certain amount of earnings every quarter, we could beat innovation out of the company, and we're determined not to let that happen. And we're taking a series of affirmative steps to make certain that we continue to foster that innovative spirit, which has really helped define BlackRock over our entire life.

So why do we need a function like Strategic Product Management? Rob gave you a sense for the size and scope of the strategies and styles that we manage. But you also have to consider this in terms of the number of different vehicle types and, frankly, the sheer number of portfolios that we offer. Now as you can see here, we're active across a wide variety of vehicles, whether it's mutual funds, ETFs, collective trusts, private funds, insurance funds and separate accounts, really across jurisdictions around the world. And the set of capabilities that we provide to clients is the result of a very conscious decision in order to be a solutions provider. But it's also the result, frankly, of mergers, of history, of law of inertia. And what we have to make certain is that we're managing the complexity that we have in that product lineup, and I'll address that in a couple more minutes.

And one of the key disciplines that we've built is a globally consistent product approvals process. Now we regionally implement this process, but we base that on a series of globally consistent criteria. And frankly, it's important to do it regionally, I think, as it keeps you close to your clients. It's also important from a regulatory standpoint. But we govern it globally. And the product executive committee, which sits above and oversees all these different functions, is really comprised of the most senior leaders of the firm to make certain that we have a top-down view of this. In fact, every person that you'll see speak today from BlackRock, save for Larry, is a member of the Product Executive Committee.

Now second is that we've really tried to make certain that the first thing we look for is a consistency with our client themes and the firm priorities. We realized that there are far more opportunities than we could possibly pursue. And that means we have to prioritize, which means saying no to good ideas. But we really have to stay focused on that limited set of priorities.

Third is we've changed the focus of the product development process from one that always sought to answer the question "Can we do this?" to one that's focused on the question "Should we do this?" For better or for worse, you take a well-resourced, highly motivated group of professionals, and the answer to the "can we" question almost always turned out to be yes. But the reality was, that wasn't the right question to be asking. So now we're very focused on basing that around, "Should we do that?"

And lastly, we've implemented a set of financial criteria, mainly around margins and materiality, in all of our product decisions before we launch a new product or pursue a new strategy. Materiality, frankly, is the biggest change that we've had before. And given what I said about our overall capacity to pursue different strategies, it's really important for us to focus on things that can frankly move the needle at a firm the size of BlackRock. So materiality is a critical thing for us to make certain that we're focusing on opportunities that are in fact scalable.

Now another discipline for SPM is rationalization. It's not the sexiest part of the business, but I think it's actually a really important one. And what I mean by rationalization is exiting assignments or businesses that no longer make sense either strategically or economically for us to continue to pursue. Now if you remember from the earlier slide, we manage over 7,000 different portfolios. If you focus just on the fund section of that, it's over 3,000 different fund vehicles. Now the reality is that there is a very long tail to those assignments and what I mean by that is the top 50% of those 3,000 fund vehicles represent 99% of the fund revenues. Said differently, the bottom 50% represent 1%. Now that's not as crazy as it sounds, and in fact, if you think about it, a lot of those things in the bottom half are critical for us to be able to provide true solutions for our clients. An example would be our Defined Contribution business with the LifePath funds. In the LifePath funds, we offer a fund for every year that someone might choose to retire, going out until their mid-60s. So we have between 45 and 50 funds for each LifePath series. And of course, some of those in the later years are going to be relatively small now, but that doesn't mean it doesn't make sense.

However, if you look at that bottom 50%, we concluded there was a lot of things that we could rationalize and really focus on. And so we began last year a process to go through them. To date, we've closed over 250 of them. And by the time we're finished with this batch, we will have shutted over 500 of them. That's 1/6 of the fund vehicles. What's that doing for us is creating a great amount of capacity, it's being very thoughtful about how we're utilizing expenses, and it's really helping us focus on what's truly important.

And as an example, if you look at our Australian business, Australia is a place where we've been very aggressive on this point. And we've already closed over 90 different portfolios in Australia. That's 50% of the different portfolios that we offer at in-country. And I can tell you today that I don't think we've ever been as well positioned in Australia to drive growth than we are today. It's amazing what focus that has brought to the business.

So rationalization is a real key function to create capacity and really reduced complexity in our business, which I think is very beneficial.

Our third core activity is being an objective arbiter of the health, broadly defined, of our product offerings. So we instituted a process, where SPM assesses the overall health of each product, including performance on a competitive, on an absolute and a relative basis; our positioning and appropriateness for the strategy in light of the current market; our operational readiness and soundness; and our sales results.

And we classify each of our offerings in 1 of 5 categories, either as performing, on watch, needing remediation or we have a provisional category for things that are too early to assess in their life cycle. And then we have when everything is going right, when we have performance, when we have client demand, when we have a great marketing story, we have our category killers. What this really helps us to do is focus our attention on either the things that can really drive organic growth or the things that we need to fix to serve our clients well.

Now perhaps the most important of SPM's functions is to help the firm set and align its key priorities. Now again because of the importance of focusing on a limited set of things, selecting them is truly critical. This isn't though about focusing on what's going to sell in the next 3 to 6 months, right. And certainly, we'll work to help our teams align around those opportunities. But it's really about having a 3 to 5-year forward view on what's going to lie at the intersection of our client needs, our market opportunities and the capabilities that BlackRock must have to really continue to be a market leader. We have to be looking ahead with that kind of a timeframe constantly, because when the opportunity arises and the client demand is there, the first thing that people are going to ask is, "What's your track record?" And so we're always out looking ahead. We publish an annual product strategy outlook. We'll do that in September. That will be used by the firm to help define and set our priorities and our planning and budgeting processes. And hopefully, you've in fact seen our client themes for 2013. That's income, ETFs, outcome investing, alternatives, emerging markets and retirement. And my colleagues throughout the day will talk about these and how they are important, but they are very much informed by the strategy work that we're doing in SPM.

So the last of our core activities is driving innovation. Now this isn't just about product innovation, but it's about new approaches to addressing client needs, whether that's through investment strategies, client service or operating platform or, frankly, expense discipline. But one of the risks that we have, and we're keenly aware of this, of being much more disciplined in terms of things like margin and materiality threshold and narrowing our focus list is, that you can beat innovation out of the business, and we all recognize that we can afford to do it. Being a fast follower of someone else's successful idea has a role in strategy. There's no denying that. But we can't rely on it if we're going to continue as the market leader.

So let me highlight an example of where I think we've been innovative and how we've tried to focus our efforts on a new idea, and that's our newly launched emerging markets allocation strategy. So if you think about the situation that we faced, over the last several years, there've been massive flows into emerging markets. About $760 billion flowed into EM strategies from 2010 to 2012. Now our view was that clients would both want to continue to have exposure here, but they would also be looking for a lower level of volatility. And our thought was, how can we create that?

We also looked around and saw that BlackRock has 12 different investment teams that focus on emerging markets. And each of them is known for what it does, but they were never brought together into an emerging market platform. And frankly, the firm wasn't really known for emerging markets, but the dirty little secret is we are actually the single largest player on emerging markets in terms of either AUM or revenue. Now that had been in large part driven by the success of our passive business, but we really weren't branded as an emerging market player. So what did we do about it? We brought together all the different investment capabilities under a single platform, that's headed by Jeff Shan, right. And we asked Jeff to develop and build out an emerging markets asset allocation capability.

And so what we've done is we've developed a strategy to do a few things around that. Firstly, it's a high-breadth strategy. If you look at the limited number of competitors in emerging market allocation strategies today, they basically run balance portfolio, stocks and bonds. We've tried to expand that set very dramatically. So in addition to equity and debt, we're using infrastructure, both projects and debt, we're using currencies, we're using commodities, we're using alternative strategies such as long/short, we're using private vehicles where we can. And what we're trying to do is create true diversification here rather than a simple 60/40 strategy.

Secondly, is we're trying to create a scenario where we can capture the upside with less downside. And what we're doing here is following on the very highly successful Global Allocation Fund -- I think many of you are familiar with that -- run by Dennis Stattman, where BlackRock has developed a real brand in the sector. And what we're doing there is seeking to provide equity-like returns with about 2/3 the volatility.

And lastly, we want to leverage the on-the-ground insights of the more than 100 different portfolio managers we have in the emerging markets, right. No other emerging market allocation capability has the access to 100 different portfolio managers, analysts and traders in-country. We think that's a tremendous source of information and advantage.

So our campaign around emerging market allocation is just beginning. We have high hopes for it. We think it has great commercial application and something that can really help our clients with one of the challenges they're facing today.

So let me wrap up. That's a summary of kind of what we do in SPM. But what we're really trying to do is optimize on some of the top paradoxes that we face as a firm, mainly, how do we continue to provide our clients with the broadest set of strategies and provide our shareholders with the diversified earnings stream while managing the complexity that's inherent in the high breadth approach that we have? Obviously, we use our technology as a critical element of that, and you'll hear more about that today.

But we have to make trade-offs. We make those trade-offs every day. And we're very focused on ensuring that those decisions, those trade-offs that we make, are the right ones for BlackRock as a whole.

Now I mentioned that discipline risks beating the innovation out of the firm if you're not vigilant. We're committed to see that, that doesn't happen. We need to balance kind of the notion of expense control and discipline and focus with the ability to try new things. And in doing so, we're going to fail from time to time. That's okay. We're failing from a commercial perspective. If we don't do that, the cost of not trying while it won't be apparent on Day 1, will catch up with us later. So we are trying new things. And yes, if we do fail on some of them, we will rationalize those efforts, and we'll move on.

So hopefully, I've given you a good sense for what SPM is trying to do. We think it gives us the opportunity to leverage the best thinking at the firm and to use those learnings to optimize the business, and we also think it differentiates us from what a lot of other people are doing in the asset management space.

So with that, I'd like to introduce the next 2 presenters. One of the best examples of bringing together the capabilities of BlackRock on one platform to help our clients is how we combine active and passive strategies. Our next 2 speakers run their respective investment teams, Quintin Price and Amy Schioldager. Quintin is Global Head of the Alpha Strategies team. Prior to taking on that role, he was our Chief Investment Officer for Fundamental Equities. Quintin joined BlackRock in 2006 as part of the merger with Merrill Lynch Investment Managers. And Amy is Global Head of our Beta Strategies Team, and she joined the firm in 2009 as part of our merger with Barclays Global Investors. At BGI, Amy held several different positions, including Head of U.S. Indexing and Head of our Domestic Equity Portfolio Management function. So with that, I'll turn you over to my colleagues, and thank you for your time. Thank you.

Quintin Rupert Salter Price

Well, thanks, Rich. May I just add my welcome to everybody here in the room. In case you haven't guessed, I'm Quintin, and that's Amy. So we are going to talk about the combined power of Alpha and Beta, and we see this as a continuum. We have clients who want no effective tracking error in their products. We have clients who want very high tracking errors in their products. We have clients who want a combination. So we are going to talk about Beta first, then Alpha, and then a combination of the 2.

But before we do that, just to level-set the situation that we're going to talk about. Essentially, about 2/3 of the combined assets of Alpha and Beta are Beta Strategies, run by Amy. And because of the different fee characteristics, it's a much more balanced picture in terms of revenues, 55%-45%. So these are both very big, very important businesses to us. But we will start with Beta, move through to Alpha, and talk about the combination at the end. So Amy, over to you.

Amy Schioldager

Thank you, Quintin. There's a myth in the industry that indexing is commoditized, and that all index managers are the same. Given that I head up the Beta's Strategies Team at BlackRock, I disagree with that statement, and I think there are differentiations, and I'm happy to share my views on what makes our business different than our competitors.

We were pioneers in index equity in 1971 with the first index fund that was launched. Now 40 years later, we manage $1.7 trillion in assets. So you might ask, what has defined success and longevity in this space? Well, one factor from my perspective is innovation and continuous evolution of our investment strategies. If you look on this chart, at the bottom, there's 2 things, 1 is the shaded area shows the assets under management over time. You can see where indexing really started taking off, which honestly was probably in the 2000s in terms of the big growth. But if you look back on the timeline, you'll see again the first fund that we launched in 1971, which was a U.S. equity fund, our developed market fund in 1981, and our emerging markets fund in 1991. Seems like every decade there were something new.

Indexing did take a long time to take off. The surprising thing for me is that most people think of this as a mature business, but most of the innovation has actually occurred in the last 10 years. You look at things like our income dividend fund in 2003, which was a response to President Bush's tax changes; frontier markets, we're one of the few if only managers of our Frontier Markets Fund that has a 5-year track record. Our commodities products, minimum volatility and fundamental equity funds round out the innovation, along with those that I didn't speak to on this chart.

In most cases, we've been first introduced these strategies. So why is innovation important? For us it, it's allowed ourselves to evolve over time to the market conditions and to our clients' changing investment guidelines. When clients are looking for a new exposure, take frontier markets for example, in many cases they look to Beta, given the ease of implementation.

Now I want to move on and talk about performance for a moment and pause. I think there is a misconception that because it's an index fund, it's easy to deliver on performance. I have to tell you, I'm very proud of our performance, and we work hard to deliver it. Indexing is a bit like a Swiss watch. We use technology and ingenuity to drive precision, and what seems de minimis adds up over time. A watch can be off for a few seconds and in any given hour, it doesn't matter. But over time, all of a sudden, your watch is 5 minutes early or late or 10 minutes.

Now with indexes, the index itself is frictionless. There are no transaction costs for transacting or impact of decision-making. We're making active decisions in our index funds every day, every month, every year, and those decisions add up over time. How do we invest cash? How do we think about this index change? What do we think about that corporate action? Decisions every day add up over time, and the delivery of index performance is hundreds of decisions over any given year. Every one of these decisions has impact. High-quality Swiss watch -- a high-quality Swiss watch consistently delivers a precise time with no drift. And just like a Swiss watch, we deliver reliable, consistent performance to our clients.

The feedback from my clients has been that our performance is superior to our competitors, and the benefit of good performance is that our clients sleep well at night. And if they're sleeping well at night, I'm sleeping well at night.

Before I finish off on this page, I just want to say that portfolio managers don't operate in a vacuum, and of course we're backed by BlackRock's best-in-class research and analytics group, our client servicing and broader research teams.

Now I want to talk a little bit more about client experience, but I'd like to tie that into our product breadth and depth. I believe that we have the ability to see and react to client trends faster than our competitors. We have a large book across our full suite of products with many clients, and we have conversations with those clients every single day. We're talking to them about what they're doing with their pension schemes, how they're thinking about their broader asset allocation, what they're thinking specifically about their equity exposures. And given those conversations, we're able to react with product offerings to solve our client problems, and I want to give a quick example of that.

In 2009, our clients started talking to us, no surprise given the 2008 crisis, about the volatility in their equity portfolios. We responded, worked with MSCI to create and then launched a full suite of minimum-volatility products. We have them across the full breadth U.S. developed, emerging markets and the [indiscernible] our global exposure.

Clients are using minimum volatility strategies today. In some cases, just in their emerging markets allocation given their increasing allocation to this segment of the market, and in other cases, globally. Today, we manage over 1,000 products from the well entrenched large cap, small cap products, our target date offering and niche solutions such as the investable market index, which goes deeper into the market in both developed and emerging market space. Our nontraditional products include commodities and real estate, but then non-cap-weighted products like minimum volatility, fundamental index and income products. We just recently launched our iShares risk factor products, and we're doing some work right now to understand how combining those risk factors could be an interesting solution for clients.

Additionally, we're looking into economic exposure indices, the idea that we can capture the emerging market growth story systematically via developed market equities. This would break down the barriers between the traditional definitions of emerging and developed market securities.

As I said before, many of these products are offered across market exposures, including U.S., developed, emerging and, of course, globally.

As you can see, our product depth, market leadership and the nature of the beta business puts us in a unique position to see nascent client trends sooner than many of our competitors.

Now what is the benefit of scale? I think everybody knows the index business, to some extent, is based on scale. Our scale allows us to commit resources in highly specialized functions. Those separation of duties serves as a risk mechanism or risk control feature, which, when you have $1.7 trillion in assets, is important.

Let's start with benchmark knowledge, which is the yellow arrow. Our benchmark knowledge is unparalleled. We have a group of analysts in my group that sit with the portfolio managers every single day, and they are creating forward-looking benchmarks. So many of you may notice, you received the index vendor data. It's current day data. We're always thinking further out, what does tomorrow look like? What does the following day look like? We also have a group of Ph.D. researchers that are housed within the index business and sit with the portfolio managers. They look at the impact of index changes over time, so that as portfolio managers, we can define trading strategy given the size and scale of our book. And I have to tell you, I know of no other index competitor who houses both these functions within their portfolio management team. Our knowledge of the benchmark enables us to be thought leaders in the industry, and we sit on the advisory teams of most of our index vendors.

From a portfolio management perspective, if you move around the circle, we established regional expertise in constructing our portfolios using a common technology platform and state-of-the-art technology solution, as well as risk models. Now I have to tell you, our portfolio managers spend a fair amount of time understanding trading strategies, again, given the size and scale of our book. There is an approach by my portfolio managers that incorporates big picture and small picture. We're constantly looking at macroeconomic conditions of the market. We're interpreting the market before we start our trades. We're looking at liquidity profiles and the industry expectations all factor into decisions around trading strategies. Then we bring that back to the portfolio. In many cases, we may be talking about impact which can be in basis points.

We're looking at things from a big world context, but we're relentless about the small world details. We work with our trading teams to execute those strategies and leverage their intelligence on the street in addition to our internal crossing network.

And lastly, if you come full circle, performance oversight. At the end of the day, we're looking at daily performance. We have an investment review committee that monitors on a monthly basis to understand performance relative to the benchmark and our client expectations. And I'm proud to say, we've delivered 96% of our assets under management are within client expectations.

For me, the summary of beta has key -- 3 key differentiators: innovation and continuous evolution of our strategies; performance, like that Swiss watch, reliable and consistent; and client experience. Our conversations with clients allow us to have insight into trends and react to those trends.

So I just spoke about our beta offering. However, we offer clients a broad spectrum of solutions from index to pure alpha. We have an unparalleled combination of active and passive strategies on a single platform under a single umbrella, and we deliver those solutions across our institutional clients, our retail clients and, of course, iShares has both. These products are not in conflict with each other but complement each other. It's interesting, our clients used to say active or passive. Today, they say active and passive.

And so with that, I'll hand it over to Quintin.

Quintin Rupert Salter Price

Thanks, Amy. The active business is, in many ways, very similar to the passive business, although clearly one of the issues is that Amy is in the business of replicating benchmarks. There's still a performance element to that, as she said, whereas we're in the business of beating them and beating our peer groups in retail, as well as beating benchmarks. And so there are essentially 3 things that will drive the success of our active business. The first of those is people. The second of those is products. And when I talk about performance, I don't just mean investment performance. What I also mean is the performance that leads to our shareholders. So having the right product lineup, as Rich Kushel was talking about earlier on, is absolutely critical to enabling us to not only run this business effectively but grow it in the most optimal way. And the third piece is having robust, consistent investment processes, which can deliver alpha. So I'll teach -- I'll take each of these in turn.

Just focus at the moment on the teams that generate alpha and the people within them. And this was our performance at the end of March over 3 years for our fixed income, scientific active equity and fundamental equity businesses that make up Alpha Strategies. And as you can see, performance and fixed income and scientific active equities extremely strong. In fixed income, a couple of years ago, we reorganized the business in a way that gave far greater accountability to a smaller number of teams. That's very much a canonical belief of ours that we want to drive accountability deep into the organization to enable people to control their destiny as much as possible. That -- the effect of that reorganization that happened a couple of years ago has been dramatic. And our 1- and 3-year track records in fixed income are very strong. Our 5-year numbers are just about to start being as strong as the 1- and 3-year numbers. So we're obviously very enthusiastic and optimistic about what we can do with that.

In scientific active equity, again, along with the rest of the industry, 2008, '09 was a challenge. We have survived and thrived as a result of a number of amendments and adjustments that we made to our investment processes. And in particular, we are blessed with very strong performance in emerging markets in our scientific active equity unit. And again, Rich Kushel mentioned that Jeff Shan, who's one of our colleagues who sits in scientific active equities, is now overseeing our emerging markets activities to make sure that we drive the best practices throughout that entire group. And Jeff is responsible for a lot of the very strong performance that we've had in the scientific active equity group's emerging markets products.

And then we have fundamental equities, which has some performance challenges, and I'll go into these in a lot more detail in a minute in the next couple of slides. There are really 2 places where we've been focused on improving performance there, parts of our emerging market proposition. As Rich also said, we are the biggest emerging markets investor in the world, but that's principally through Amy's group and we haven't competed effectively in that area in the active business and so we've made some changes there. And also in our Americas equities business, which suffered from some performance issues. So let's go into those and just explain the situation and our logic for what we did.

When you think about the active equity business, it is an extraordinarily competitive business, and through both regulation and technology, the price of our successes is essentially investing in talent, having processes that back up that talent and making sure that you deliver that performance consistently, robustly, repeatedly over time. And we have 18 teams in the fundamental equities area. So after all of the inorganic moves that we made over the past few years, we were left with an equities business which was a consequence of teams at PNC, teams at State Street Research Management teams at MLIM. And we took a look at every single one of those teams. Some had strong performance, some less so. Some of those we thought had very, very good processes, and we wanted to stick with them, make sure that we adjusted 1 or 2 analysts in the team. But we knew that we had a strong process, we knew that the performance blip was temporary, and there were others where we felt we simply could not compete in the sort of environment we're in today with the sort of competition we're facing unless we invested more heavily in talent. And so that's what we did, and these were the teams in which we made moves and these were the performance track records that we had when we made those moves. Everything below benchmark, a number of them also below peer group medians, and as a consequence of that, a large part of our business is either unsalable or in redemption.

Since we made those moves and there is a timeline on the x-axis, which shows you when we have recruited our new colleagues, and this really goes back to about 2 years ago after we'd really finished all of the consolidation post the latest integration, we recruited, and I'll start on the left-hand side, Andrew Swan. Andrew was a 17-year veteran at JPMorgan, joined as a graduate, moved into JPMorgan Investment Management shortly after joining, had run Asian equities for JPMorgan's business there very successfully for a long time. And we offered Andrew a platform and a possibility of building the next Aberdeen in Asia. He's a vastly talented investor. And since he's joined, which was nearly 2 years ago, not quite 2 years ago, we've obviously attracted flows and the performance has been very strong.

Also, in emerging markets, we recruited Luiz Soares. Luiz, based in New York, a Brazilian national, this is really an institutional proposition but we've put the retail peer group up there just for interest as well, joined us, has had very strong performance since he joined. We've won assets with him. We're building our process. We're rated by a number of the consultants. We feel very confident that we're leveraging that entire emerging markets platform for the benefit of the alpha in this team.

And then in Americas equities, we essentially addressed our Large Cap Value, our Large Cap Core and our Large Cap Growth propositions. Again, we had challenge performance. We felt that we needed to get on the front foot with teams where we had world-class processes, which we could represent as something that our clients would be delighted by, our shareholders would be happy with the consequential results that we delivered. And to that extent, we changed the managers of the Large Cap Core series. Chris Leavy and Peter Stournaras were partners in that. Some of you may have read over the last few days, Chris Leavy, unfortunately, is on medical leave now. He has a reversible but serious condition. And so Peter Stournaras, who we recruited about 2 years ago, will continue to run that team. Peter is a world-class investor. They've improved the performance of that team very substantially.

We also repurposed one of our other capabilities to create a call option on an emerging demand pool, a flexible equity. It's a sort of unconstrained, go anywhere, high tracking arrow product, which is run by Tim Keefe. Tim joined us a year ago. And I should add, that's about a $5 million revenue pool at the moment. We see that as a great call option on growth. And Tim is, again, a very talented investor, got off to a slow start, but we're very confident that the slow processes that he's employed over the last few years will come good over the 3-year periods that we're looking to sell that on.

And then more recently, literally in the last 6 months or so, we recruited Bart Geer to run our value product. Bob was a veteran of Putnam investments. He's got off to a flying start. And we've also recruited Lawrence Kemp, who was still reorganizing his portfolio. So in a sense, this performance after 3 months is somewhat academic.

But again, just to book end this, with the sort of talent that we've recruited. Lawrence was a 19-year veteran of UBS Asset Management. He's outperformed by over 300 basis points every year for the past 10 years. When we recruited Lawrence, we had the most substantial reverse inquiries from his clients asking if there was a possibility that he could manage money for them now that he'd moved to BlackRock. So we've hugely invested in the platform, and we're very, very confident that what we've done, the moves we've made, the people we've recruited are people that will deliver on the performance promise that we have to our clients over the next few years. And it's exciting because these are people who have brought energy and have brought a quality to some of the investment debates that hitherto we'd lacked and it's part of an evolution that started really about 6 years ago with our global equities team where we've made changes there. The revenues are up 250%. We've made changes in European equities going back 4 years. The revenues there are up over 400%. The assets are up $22 billion in a marketplace where European equities have seen net outflows. So in order to be in the game in active equities, we have to have the best talent, and that's what we've been doing.

In terms of what we're delivering with the best talent, we conceptualized the business really in 3 buckets. This is a business that's evolved quite a lot in the last 5 years, in particular, for various reasons. But clients, if they have a pension deficit, if they have a funding need, they can't only be satisfied by beta products or, indeed, that's too expensive to be satisfied by beta products in terms of the deficits they're trying to close and they need an active return. They may also want something that's scalable at the lower end of the active risk spectrum, but nonetheless gives them a bit of extra return in order to help them fund their liabilities. Those scalable exposure products, risk parity products, we have sovereign screens where we just screen on a scalable basis, say, quantitative screen for clients so it's a relatively low-cost product, but we don't have any real capacity constraints in a number of the products in that area.

In our outcome-orientated range, that's principally the income range, and there we are the dominant, if -- certainly one of the, if not, the dominant provider of income products globally in the asset management area, both in active space and in passive space.

And then in the traditional high alpha business, that's really the business, I think, people associate with active equities. That's the premium product to the premium price. That's the higher tracking error going right up to and including nearly $20 billion worth of AUM in long/short products, both in equity and in fixed income form. And all of those inform our Client Solutions, sometimes in combination, sometimes just singularly, but effectively they all go to delivering the investment capabilities we have to clients in the combinations that they want.

And with $1.5 trillion worth of active single strategy business, clearly one of the questions that maybe on a number of people's mind is, can we constantly generate alpha? And to that, I think the answers are very clear. We've got very strong performance in aggregate. Over 2/3 of our products are performing above their benchmarks or target median over 1 and 3 years at the moment. And we feel that with the sort of investments we've made in talent, that should improve further in fundamental equities.

And I just want to highlight a couple of things that I think really distinguish us as a firm in the alpha-generating businesses and one of those is our portfolio construction and risk analytics capability. And we have a very large risk analytics capability that serves a number of parts of the firm. We work extremely closely with them in the active business. And time and again, when we've been recruiting people into the firm and they've joined us, they've commented that they've never had the ability to precision engineer the sort of portfolio construction that they've wanted to in their portfolios because they've never had access to the sort of capabilities that we provide them with. And one of the ways that we've been able to attract that world-class talent is to get the people we're interviewing to talk to the people we've recruited over the previous couple of years and say, "Why didn't you just talk to people who have joined us and I'll explain the sort of platform that we offer?" And one of the things that they consistently said is they ought to enable us to construct portfolios the right way.

The other, I think, theological belief we have is that we really believe in focused accountable teams. We do not subscribe to the theory that central research is an effective tool for a firm of our size. I've run central research, both in a big sell side firm and in a big buy side firm in my career. It works fantastically well on the sell side. It does not work on the buy side for firms of this scale. You want the alpha generators to be sitting with our analysts in their teams, discussing the very risks they're taking, not calling up to somebody on a different floor who serves 17 different teams and who they can't get hold of on a particular day and who reports to somebody else. That, to us, is a core belief of what we do, and we think it's a big and important differentiator. It's very attractive to the people who join us. They get to control the alpha inputs. And while we've gotten many other things around it, I think it's important to just stress those 2 parts of our process as being critical differentiators.

So just to wrap all this up, Amy was talking about alpha and beta, and actually, here's one case study. This is from a fully funded client, so in one sense, it depends which way this goes because clients without full funding tend to want more active returns. Clients with full funding want to -- tend to want more passive returns because they're just protecting what they've got. But we have one very large global consumer electronics company where we've been managing their entire pension fund for many years now. And we've won this as an active mandate, and the shape of the mandate is on the left-hand side. A large part of this mandate was simply matching the liabilities that were already fully funded with a portfolio which was set to do that. And then there were other active sleeves, you can see in that pie charts, which were aimed at improving returns further so that either they could in the future consider taking a pension holiday or reducing the pension contributions or whatever. But they wanted, first and foremost, to protect their pension funding, and we ran this very successfully for a number of years with a series of our active capabilities. And as the institutional relationship managers were evolving, the discussions with this client, the client itself decided that over time, what they'd rather do is just move fully to a passive mandate. And had we been simply an active manager, we would have lost those assets. But because we could offer both capabilities, we introduced Amy and her team, we transitioned the assets, we extended the duration of the mandate and we successfully handed over, if you will, to this fully funded client, a very substantial and important mandate to the firm. And so Amy will take the story on from there.

Amy Schioldager

All right. Thanks, Quintin. So my team started managing this client's assets in developed market equities in 2010. Again, their decision was to change their investment objective and move from an active portfolio to a passive portfolio. Their emerging markets as of today are still active, but they're planning to move that towards passive as well. And interestingly enough, we also have clients who do the reverse of that. They come into the firm into the index business is where they start their relationship with BlackRock and then moving to the active strategy. So we see it both ways. This client happens to be one that came into active and then moved to passive, but we also have seen the reverse of that. And I think what really sums this up is the breadth of our platform and having alpha and beta on a single platform allows us to build a bigger relationship with our clients and being able to offer them both active and passive makes for very strong combination.

So in summary, the 3 key points of differentiation that I'd like to leave all of you with are, for beta, it's about the performance that we deliver each and every day, again, like that Swiss watch; the client experience and our conversations that we have with our clients allow us to create products, create investment solutions, I should say; and innovation, differentiate BlackRock's beta business. And for alpha, as you just heard Quintin speak to, it's about the people, it's about our products and it's about our investment process. And combined, BlackRock has an unmatched combination of active and passive on a single platform.

So next, I'd like to introduce to you Rob Fairbairn. Rob is the Head of BlackRock's Global Retail and iShares business and a member of the Global Executive Committee. Prior to his current role, Rob was Chairman of BlackRock's International Business. He joined BlackRock in 2006 as part of the merger with Merrill Lynch Investment Managers. And he's excited to speak to you today about our global opportunity in the retail space. So with that, I'll turn it over to Rob.

Robert William Fairbairn

Thanks, Amy. Thanks, Quintin, and I'd like to add my welcome to the previous speakers to all of you for spending time with us today. We're extremely grateful for the time you're allocating to learn more about our firm.

I do indeed have a great story to tell today. It's my job to talk to you about retail at BlackRock, global retail at BlackRock. And as you'll see, by the end of my presentation, if we execute well, if we combine the strong performance of the alpha teams and bring together the power of equities, fixed income, alternatives, multi-asset and cash to our retail clients, we have an opportunity to target a stronger, a bigger business than we have today. I'm going to demonstrate some of those open runways, if you like, and I'm also going to highlight how we're differentiating our business from the many competitors that we have around the world.

Before I get into looking forward though, I'd like to just level set as to what exactly is the retail business at BlackRock, its scale, its size, but perhaps as importantly, what we do because it may be a surprise for some of you to know that we're not actually in the B2C business at all. We're really very much a B2B business, placing our product, placing our investment solutions onto other's platforms, and that's obviously a very distinct business to some of our competitors who are in that direct marketplace.

So firstly, the scale of the business. Actually, in terms of the assets that we have under management, about $420 billion as at the end of the first quarter, definitely not the largest asset business at BlackRock. However, when you look at the revenues, because the nature of the fees that many of you are fully aware of, but typically the higher fees that are associated with retail investing through mutual funds and other vehicles, we actually represent almost exactly 1/3 of BlackRock's revenues, accounting for just short of $700 million of revenues in the first quarter. So a very important business for the firm.

If you look at the starting point going forward for growth, we're quite happy with where we are in terms of the diversification and the mix of the various elements of the business. You can see by asset, we're nicely diversified in terms of equities, fixed income. We have -- one of the fastest-growing areas of the firm is our multi-asset platform. That used to just be the Global Allocation franchise that Rich Kushel alluded to in his presentation. Today, we're supplementing that with other multi-asset solutions, one of which I'm going to come on to talk about. And then we have an increasingly important alternatives business. This is the '40 Act alternatives business or the UCITS III or UCITS IV platforms that, again, some of you will be aware of.

Now in terms of vehicles, going to peel back the onion a little more on vehicles in a minute because it's an important differentiator for us. The ability for us to take a single investment platform, a single investment strategy and place it in relevant vehicles around the world to get more leverage than just one market is very important for us, so we think about the power of being scaled.

Clearly, open-ended mutual funds represent the most important part of the business. That's well -- that's the '40 Act range here, whether it's the unit trust range we have in the U.K., the dedicated local range we have in Japan or Australia and soon-to-be our latest range in Hong Kong. But we supplement that with the closed-end fund business. At any one point in time, we're #1, 2 or 3 here in the U.S., depending on our latest launch. We have a very interesting investment trust business in the U.K. where we're one of the largest players there. That vehicle allows us to do a number of supplemental things to our investment strategies to make them even more powerful clients.

We're the #1 SMA player here in the U.S. Again, not a lot published about that area of the business, very important, much stickier money inside that SMA platform. And then we have a series of other vehicles that make up the balance.

Obviously, the U.S. market remains, by far, the most important market to us. Around 70% of the assets that we have today are represented by U.S. clients. Interestingly, as we look forward, it's the U.S. that's going to provide much of the growth because you'll see we're underpenetrated in some key fast-growing areas where we have real opportunity to invest and executing the growth.

EMEA, my colleague and partner for a long time, Alex Hoctor-Duncan, runs one of the largest retail businesses in Europe. We -- actually, we're the -- or we are the #1 gross selling player in the unit trust business this year which post RDR, which I'm going to come on to, it's a very important position for us. That's public information, obviously.

And then in Asia and Latin America, we have interesting positions, but we would be the first to say that there's more upside from here in terms of some of the competitors that are on the ground.

So looking forward, an interesting starting point for our story and for you to analyze.

In terms of what the business is, you can see we're kind of open for business every way you need to be. We've gone through the expense substantial, if you like operations, legal regulatory hurdles to get through to be open for business in 30 countries. We have people on the ground. In my team, about 570 people around the world talking to clients that would be one of the larger retail distribution forces in the world. And as I say, importantly, we're registered for business in 47 jurisdictions. Now this might appear a fairly undramatic statement, but for those of you in firms that are predominantly sitting in one region, you might have a very successful market share or position in 1 or 2 countries, this is really quite a barrier to entry. The process of not just providing foreign language support for your products but also all the regulatory hurdles, having the capital in place, again, we think it's a real differentiator.

I've talked about the vehicles on the left, I'm not going to go through all of these again, just highlight a couple that I didn't talk about in the last slide. We're obviously in the unit-linked market and the variable annuity market, both here in the U.S. and outside the U.S. That gives us an important insurance franchise and you're going to hear from my colleague, Rob Goldstein, a little bit about our insurance franchise later on. You're going to hear a lot from Mark Wiedman about the important position we have in retail and iShares, and I'm not going to talk about that business to a large extent in my presentation but obviously an incredibly important tool for our toolkit as we talk to our distribution partners, and my teams work very closely with Mark's teams in that areas.

We're supporting hedge funds here, and one of the interesting and faster-growing areas of our business, particularly driven by regulation in Europe, is our sub-advisory business. Very important, the ability to be able to manage sub-adviser accounts with all the associated regulation and oversight that comes with those in the modern world.

A number of you may have come here today thinking that this was effectively a U.S -- traditional U.S. retail business working with wholesalers, working with financial advisers around the world -- sorry, here in the U.S. We clearly are in that business. That's our largest business here in the U.S. Outside the U.S. though, it's much more of a gate-kept centralized function, a much more of an institutional structure, if you like. We find ourselves working with Mercer in -- the investment consultant in many of the, what we call, retail distributors here. Obviously, we're working with private bankers. We're working due diligence teams of other asset managers as we place product inside fund of funds that they run. So really a broad delivery system for the investment strategies that Quintin, Amy and Rich have highlighted.

So that finishes what I want to describe to you what the retail business is, it's current position in BlackRock. Let's turn our attention to how we believe it can drive growth for the firm.

So the coming years really falls into 3 broad buckets. You'll notice there's no investment performance on this slide. It's absolute given, it's table stakes. I'm not going to address investment performance, Quintin and Amy have done that. Clearly, to the extent that we are outperforming our peers, that we have a healthy investment platform, the goals that I talk about are going to be much easier to achieve. To the extent where we have issues such as U.S. equities, it's incredibly important that we work very closely with Quintin and his team to give those teams the best chance of performing and flourishing at BlackRock because if they do, everything I'm talking about is going to be a lot easier.

So evolving our product set, again, think about that strength across the asset base. BlackRock's ability to bring together different asset classes and to monetize the results, the need for us to outsource elements of multi-asset solutions is just substantially less than our competition. And we intend to evolve that product set to make it more and more relevant to clients in terms of the investment solutions that we're putting in front of our clients around the world.

Enhanced distribution. I'll bring that to light very quickly in a few sessions. We have very strong positions in a number of markets around the world. We have open goals in a number of other areas that we intend over the coming years to build our market share.

And then finally, unique to BlackRock, bringing this altogether, bringing together active and passive, bringing together the power of BlackRock Solutions and the risk analytics supporting those products, to really make ourselves a more complete partner to the retail customer is a mission we're on. This is complex. It's hard, an enormous amount of training required. If you think about the traditional wholesaler or asset management salesperson, this is absolutely not the traditional job. We are asking these people to do more, to represent more in a belief that if we can train and bring people to a point of being able to deliver the firm, we will just be a much more impactful partner and therefore do more business with our clients.

So let's seek each one of these in turn. Firstly, the product set. Rich highlighted what we see is the fast-flowing rivers of asset gathering over the coming year, certainly as they pertain to BlackRock: income, ETFs, outcome investing, alternatives, emerging markets and retirement. I'm just going to highlight 2 of these and talk a little bit about how we're approaching them.

Outcome investing, I've talk about our ability to really take the multi-asset platform and deliver a targeted return for clients. We think we're going to see more and more of this. McKinsey has stated that this will be a $2 trillion market in 2015. If we can execute well ahead, just to give you a sense, that will be 10x, 10x the size of the market in 2005. I'm sure this is an area for many of you in your own organizations that are looking at this.

Secondly, alternatives, the ability to take what was traditionally the prevail of high net worth clients, sovereign wealth funds, sophisticated pension funds and take those structures of hedge funds and put them into regulated entities suitable for the broad public, we think is a business that plays very strongly to BlackRock's strengths. We have the distribution and the understanding of the end client that we can marry it with what Quintin and the other investors of the group are bringing together in terms of trying to provide consistent volatility-reduced returns. Again, let's look at our progress in this area.

So what I'm showing you here are 2 examples of what I've talked about. On the left-hand side, we launched beginning of last year, our first 3 [indiscernible] funds in the U.S., and you can see the focus of putting those funds inside a theme aimed at solving a client need around an investment issue is really beginning to pay off. The first quarter, we had $515 million ahead of -- around these 3 products. Towards the end of the year, you're going to see us expand this range into more products, which, obviously, we're targeting to raise more money here.

Multi-asset income fund sits very comfortably alongside our global allocation product and some of the allocation products that we have. It's targeting a 5% return, as delivered just short of 7% this year. And as you can see, with returns like that offering, the ability to look around the world across all asset classes to generate income, very, very attractive to our clients. You can see the acceleration of the asset raising there. And again, you should anticipate more product in this multi-asset range of ours both here and internationally. And actually, this fund, we have just launched the international version in the last month. And again, we have -- we're targeting very much to accelerate where we are there.

Now in terms of the product set from a vehicle perspective, the growth that we're targeting is really from the open-ended mutual fund space here in the U.S. We have, I said talked about that strong position we have in SMAs and closed-end funds. We have a more diversified business than many of our competitors. But at times, the cost of that is being that we've raised less money in the open-ended mutual fund space.

So our rankings are not where we want to be. We're targeting a top 5 position over the coming years. Just to give you a sense of what that would mean, that would get us to up about a 3% market share of stocks. Today, we're 1.7%. Each 1% is another $100 billion of assets to manage. There's a short 20% of our existing business from an asset perspective just from that one opportunity. Talked about those other areas, I'm not going to linger on SMAs, closed-end funds. We will continue to target being in our current position there.

And then finally, as I've said, these 2 areas of alternatives in outcome investing, we really think BlackRock -- if we execute well, it's a great opportunity for us to bring together the scale of the organization for retail clients.

Now outside the states, some of you maybe aware, we have a very strong fundamental equity franchise. Quintin's talked about European equities, that team ran by Nigel Bolton has delivered strong growth in a not fast-growing river up until this year. At any one point in time, if assets are flowing into European equities in Europe, you should anticipate that we would take an outsize market share.

If you look at the cross-border space in the first quarter, we talked about a 48% share of flows into European equities, so a very strong franchise there. The natural resources franchise, the largest in the world run by ABN AMRO [ph] investing in gold, natural resources, mining, commodities, some of you may be aware of that, a very important part of our overall proposition.

However, when you look at how we've done in fixed income, in multi-asset, in passive and alternatives, we're really just beginning here. What we're trying to do over time is make the platform more weatherproof, make it less volatile, diversify the business and take the performance that Quintin and his team have given in some of the other asset classes alongside our successful equity platforms and diversify the business at the same time it's growing.

The report card, we've had this strategy in place now for about 18 months, we're pretty pleased with where we are. But again, this just a beginning, we're looking to build, as I say, a much more balanced business over time.

Let's turn our attention to distribution. And this is the area where I get fairly excited about what we've done so far, but far more importantly, where we can go from here. What I'm showing you here is the U.S. mutual fund market broken down into the 4 major categories of the wires. You can see the largest. You can see we're projecting it to grow between 2% or 3%. The market leader in that space has 7% to 8%, give you a sense of what's possible when everything comes together. And our market share is around 3%. And you can see the other channels going to the right.

I want to talk about 2 of these channels. So in the wires, the evolution of where we've got to here really started with the acquisition of Merrill Lynch Investment Managers. Merrill Lynch Investment Managers had around a 20%, 25% share of Merrill Lynch at that time in terms of assets. We've maintained that. There was nothing beyond that though, other than a closed-end fund business at Blackrock.

Obviously, we changed the brand very quickly and focused on building out our position with the wires, and we now are one of the top players in each of the wires in terms of gross and net flows, and we have a 3% market share of stocks. We're targeting to get that to 5%. Again, in terms of just -- giving you a sense of the scale, that would be around another $120 billion in terms of an opportunity. A very important channel to BlackRock. People talk about the maturity of the wires. We see a long runway for growth from where we are now.

Have a look at the RIA channel there. Obviously, the fastest-growing channel in the U.S., growing at 6% to 7% in terms of compound annual growth. You can see the market leader there, very strong position, 10%, and we are less than 1% today. This has not been an area that BlackRock has focused outside our ETF business and we're targeting 5%. Again, that would be another $100 billion, $120 billion opportunity to try and give you a sense of the scale for growth from here.

Now in the RIA space, BlackRock's ability to bring together risk analytics, tools that can help the RIAs grow their own business, plus the blending of active, passive, ETF, multi-asset solutions, the alternative space, we think, again, if we focus and execute around this space, there's a real opportunity for us to grow.

I'm going again to direct and private banks. Clearly, we have strategies there. You're going to hear from Goldie, Rob Goldstein, about the retail element of the defined contribution business, another, again, real opportunity for us to bring together what the platform has and grow from here.

Outside of the U.S., as we look at the markets, what I'm showing you here is the cross-border mutual fund range. This is Luxembourg and Ireland. You can see the assets in each of those markets. You can see Blackrock share of each of those markets and you can see where we rank. And really, when equities have been running hard in previous years, you would've seen BlackRock's rank in each one of those positions, #1, #2 or #3. That is where we are targeting with a more balanced platform. And again, I think we have the product in place to get to that 10% share in all of those markets.

Now, the exciting thing that's not on this page is, obviously, these products are competing very aggressively with domestic asset managers. Many of those have underperformed, many of those are under pressure and many there is a real desire to try and quest for better outperformance from some of the big international managers who've been doing well there.

We want to deepen our existing relationships. What that means in this context is if you take some of the large global banks that are operating around the world, many of them have asset raising that goes on inside their branches, much more like the U.S. here. To date, we don't really penetrate that market. We do a little bit in Italy, we want to invest to get more and more into that, more wholesaling structure, that sticky money, if you like, in terms of broadening the relationships that we have.

Penetrating new segments, that's all about new markets. It's all about getting into some of the Latin American markets, doing a better job in places like Australia where we've revamped the management team there and are targeting a return to growth that the business has been shrinking for us up until this year.

And finally, and you're going to hear a bit more about this from Mark Wiedman, because the changing landscape in Europe around what's called RDR, with the retail distribution reviews that have taken place in the U.K., in Holland, the latest just been announced in Sweden, there's been an element of it in Switzerland, this is a movie that is spreading across the mutual fund markets around the world. The Asian regulators in Taiwan, Hong Kong and Singapore are watching how distribution landscape, the asset management landscape is changing in a world where the regulators are forcing more transparency and abolishing the traditional method in which we reward distribution platforms namely [ph] retrocessions or fee sharing.

Now in a world where elements of the distribution market aren't allowed to share our fees or we aren't allowed to share our fees with them, a number of things happen. Firstly, the distributors that can all look at whether they should launch some advisory funds where they own the fund and therefore, they own the pricing. I'll come back to that importance of being set up to do that.

Secondly, they have to consider charging for advice if they haven't already. That plays incredibly strongly to the iShares business that we have, where you're trying to drive down the core cost of the portfolio and really make sure that the active management that you have is sweating hard and is going to at least give yourself a chance of adding real value to the portfolio.

The third is that core holding, the holding that sits at the center of the clients' portfolio. 9x out of 10 is going to be an multi-asset portfolio. And we want to manage that portfolio for our clients, blending, active and passive, and we have some great examples of that where this process has already led to multi-asset portfolios in a number of markets where RDRs come through. But you're going to hear more about that from Mark. He's very passionate about driving ETFs into that space. It's a very powerful vehicle, where ETFs so far have not succeeded to the extent that we've seen here.

Okay. Then the last part of my strategy or our strategy here is delivering the firm and you're going to hear about this from all of us today, the belief that we all have, that blending, the intellectual capital we have on the platform. If we can deliver it to clients, we just can be that more complete partner. And it's no different to the business that I have seen [ph] in retail, to whether it's Goldie's business, we're all trying to effectively become more efficient, bringing together everything that we have to solve the clients' investment challenge.

I'm going to talk about bringing distribution together in a few seconds. Just pick off 2 of these though. The consultative-themed approach, Rich outlined those fast-running rivers. If you drill into those and again, Rob's going to cover this, a good example of this in institutional, you'll see we have a series of packets, if you like, of [indiscernible] enables us to create the discussion where we can apply more of our product. But also, it just creates a far high-quality discussion where the salesperson is not just pushing one product, if you like.

Secondly, the only thing I want to touch on here is models and tools. This really [indiscernible] today is more about the U.S. and the repos PM marketplace. BlackRock has a number of proprietary roles -- asset [ph] and those are sitting on the platforms on some of the wire houses and clearly give us a great opportunity to provide content to FAs and therefore, hopefully over time, lead to more asset raising.

On this slide, I'd talk about that issue I've alluded to, the combining of our sales forces. I want to be very clear what this is. We will continue to have a specialist iShares sales force. However, what we've done is we put that sales force alongside in the same bracket as our generalist sales force. The benefits of that are more complete conversations, exposure to a whole series of the retail market here in the U.S. that have never dealt in ETFs before and the ability of our generalists to, if you like, sing the first 5 bars that the ETFs sung. We're not looking for our generalist to become ETF specialists. As you'll hear from Mark, that's a very particular sport, but we are looking for them to grow the market share and market here. We're also blending in DC solutions, we're blending in the models that we've talked about. We expect our people to have be able to have an active and passive multi-asset discussion.

Interestingly here, it's just a fact, I'm not sure yet we would declare victory, but you can see the potential here. BlackRock has more people talking to financial advisors in the U.S. than any other firm. We should be able to make that work for us in terms of a superior growth rate in retail.

Finally, the brand. As you know, Linda Robinson was on the board of BlackRock and became our Head of Marketing over the last 18 months. The impact of her and the reinvigorated marketing team on BlackRock's messaging into the world has received a lot of comments from clients and commentators in the industry.

We're trying to cut through the noise. We're trying to move beyond traditional asset management advertising to highlight the big issues of the day and try where we can to provide solutions for clients. You'll see that in every campaign that we run. We currently have the longevity campaign that you've all seen, rethinking fixed income. Each one of these is highlighting the big issue, trying to go beyond the traditional voice of the asset manager in the hope that we will become better known by our clients and create more pull for our products.

Too many people today, both here in the U.S. and around the world, still don't know who BlackRock is. That makes the job of when we appear on their client statement just that little bit harder and we believe investing here is really going to make a big difference over time. It already has in a number of spots. And clearly, the Retail business is the biggest beneficiary of this spend. So we're very, very linked in to what Linda and her team are trying to do for the firm.

So I'm going to wrap up just by trying to highlight, where Patrick started this morning, some of the differentiators that we have. I've talked, I think hopefully, clearly, about some of the open goals, the runway that we have, where we have yet to penetrate, and if we invest and execute well, we can grow our business. Just to summarize those some of the differentiation that we have.

Our ability to monetize, the intellectual content should be in a superior position to many of our competitors because it strengthen equities, fixed income alternatives, cash, active, passive, our ability to run the money in-house, particularly in the burgeoning multi-asset space, is unique. The global distribution opportunities we have and the fact that we're open for business today means that we should be able to capture a lot of these new opportunities without having to make major investments from here. So the RIA channel I showed where we're under 1%, we're going to leverage Mark's team's very powerful relationships that they have, selling ETFs into the RIA space. A real opportunity to leverage the knowledge that we have.

And then finally, complex, mission not accomplished yet, very focused on getting it done. The higher goal that everyone at BlackRock has, bringing all this content to clients in consumable way, we believe will differentiate the firm.

Ladies and gentlemen, that is the global retail business of BlackRock. Thank you very much. I've just broken the one law, I only had one instruction, which was to say you're free, coffee time, and that my colleague, Mr. Rob Goldstein, is going to be coming up. Could someone just shout, 15 minutes, I think?

Patrick M. Olson

Why don't we come back just before 10:00? We'll make an announcement. It was scheduled for 10:10, but we'll come back just before 10:00.

Robert William Fairbairn

Perfect. Thank you, Patrick.


Patrick M. Olson

We think retail is a growth story. Next, we're going to be talking about our Institutional Client Business and BlackRock Solutions. In BlackRock Solutions, again, listen to this presentation. Charlie Hallac will follow it with a demonstration of [indiscernible].

So I want to introduce to you Rob Goldstein, who is Head of BlackRock's Institutional Client Business, or ICB, as he'll refer to it, and the BlackRock Solutions business. Rob's been with the firm for 19 years and has played a key role in commercializing our BlackRock Solutions business, growing that business from a standing start to over $500 million per year in revenues. He's now leading the group that's responsible for providing investment and risk management solutions to our largest institutional clients around the world. Rob?

Robert L. Goldstein

Great. Thank you, Patrick. Good morning, everyone. And let me start out by trying to work through one potential point of confusion. So you'll notice, Rob is a quite common name within BlackRock, given it's 10:00 and I'm the third speaker named Rob at this conference. It's actually not the most common name. It's the second or third most common name within BlackRock. But as referring to Goldie, that's me. That's how we sort of keep track of everything that was happening.

And I'm incredibly excited to be here today to walk everyone through and provide further insights into both the Institutional Client Business, what we refer to as ICB; as well as BlackRock Solutions, which we often referred to as BRS. And my goal is actually quite simple, I want you to leave with a clear understanding of ICB as BlackRock's largest client business by AUM, as well as BlackRock Solutions as the analytical core of BlackRock.

I want you to know, we formulated institutional strategy to capitalize on a variety of very important industry dynamics that we're seeing. And lastly, we talk a lot about outcome-oriented investing. We talk a lot about solutions. I want to provide some more direct and practical definition of what that actually means and how we believe that bespoke-type solutions, outcome-oriented type solutions, actually provides a unique opportunity set for BlackRock.

ICB and BlackRock Solutions are distinct client businesses within the firm. They both report into my common leadership. My focus and the reason that they both report into my common leadership is very simple. We're trying to more seamlessly leverage both sets of capabilities for the goal of just solving more and more client problems. We view the world as becoming more complex. The challenges our clients face are becoming more complex and we have an opportunity to basically bridge that gap, leveraging both sets of capabilities ever more closely.

You'll notice this presentation is titled Focused Execution. That's not by accident. That's actually by design. I believe the core of our strategy and a very significant driver of our forward success is going to be driven by how well we could actually follow through on delivering the best of BlackRock to more and more of our institutional clients. When you look at the global institutional marketplace, it's estimated to be $32 trillion. And for those who've studied this marketplace, even getting the aggregate market size winds up being a combination of both art and science.

Our market share is approximately 8%, with $2.4 trillion in long-term assets. Broad brush strokes within BlackRock, our institutional business, is roughly 2/3 of our aggregate assets and 1/3 of our base fees, as you could see here in these charts from this quarter of 2013. On an annual basis, this business last year delivered $2.6 billion in base fees and continues to be year in, year out, a consistent and stable contributor of base fees for Blackrock.

Our clients, the solutions we provide to them, the entire business is very diverse. One thing that I'm continually looking at is if you look at the base fee chart there on the bottom right-hand corner, there's no single strategy that contributes more than 22% of our aggregate base fees.

We service over 4,000 distinct clients, and our broad platform allows us to meet our clients' ever-changing needs. Quintin and Amy earlier provided an example where our client went from active to passive. We have as many examples going from passive to active. But what you'll see is that, thankfully, our institutional relationships do not have to depend on a particular market sentiment. They don't have to depend on a preference for active versus index or for equities versus bonds or whatever the directionality of the risk appetite is. Our platform is so broad that it supports all of those diverse -- the entire spectrum of requirements that our clients may need.

There are over 600 professionals within the Institutional Client Business. They are located in 33 cities around the globe. We're organized by client type, so we have a team that focuses on defined benefit pensions. We have a team that focuses on financial institutions, official institutions, defined contribution, foundation and endowments as well as family offices. So we're specialized by client type with a very strong local presence in all of the major money centers globally.

The size and strength of the team allows us to have this client segmentation specialization model and particularly in the world that we live in where we view things getting more and more complicated, this client specialization model is absolutely key for us.

And when you think about our 4,000 clients, the spectrum is enormous in terms of who those clients are. So they'll range from several of the largest insurance companies and financial institutions and official institutions in the world, with tens of billions or hundreds of billions of dollars of investable assets, all the way through to the other end of the spectrum, small local unions, small family offices, small endowments that could have hundreds of millions of dollars in investable assets.

And our approach to clients is incredibly simple, it's to take the time to clearly understand their specific needs and challenges, which requires that we ask a lot of questions to provide them with either individual or bundled investment strategies in response and where appropriate, provide them with bespoke, outcome-oriented type solutions. And we leverage our analytical core and [indiscernible] all these client needs. That's a critical component of how we service this client base.

And when I speak about focused execution, in fact, I'd prefer to call it ruthless institution, but I was told that wouldn't make a good title, when we talk about focused execution, this is what I mean by that. There's a simple formula. We just need to continually stick with it and drive it through our entire organization.

So before I go further into the dynamics that we see in the institutional market and our strategy, let me just highlight a few important questions that I know we'll get, so I wanted to pre-address as part of my presentation. First, the Institutional Client Business, can it grow given its size and the headwinds facing the defined benefit part of the business? My short answer is yes. I'll explain some of the DB headwinds and I'll explain that -- although they're genuinely headwinds, we actually believe that they may also wind up creating significant opportunities for us.

Second, is concentration a concern within BlackRock's existing institutional client base? And today, I'll explain how we're focusing more resources than ever before on our largest clients and deepening those relationships and how we're effectively not only focused on deepening those relationships, but also leveraging what we learn from those large clients to apply to our broader institutional client base and that's core to our growth strategy.

And third, is what do we actually mean when we talk about providing outcome-oriented solutions to our institutional clients? And simply put, the way I like to think of it is that it means finding more and new ways of applying BlackRock's analytical capabilities and investment insights to get our clients to better outcomes. And to be really specific about it, it means changing the dialog with our clients from "What do you want?" to "What are you solving for?" And we believe that we could have much deeper relationships through doing that. But also and equally, if not more importantly, we could provide much better solutions for our clients if we have a much better understanding of what they're actually trying to accomplish.

So everything about the world is changing. Our markets are changing, our clients are changing, there's a lot that's changing in the marketplace today. I believe we're in an incredible spot to capitalize on the opportunities that these changes create. And the way we think about it is that there's a genuine, what we call 2-speed market going on in today's world. The traditional DB market, as we all know, faces real headwinds, lots of plants are closing and/or decumulating, just a statement of fact.

And DB assets as you could see here, are actually expected to experience a secular decline of roughly 2% per annum over the next 3 years. And the reality is that this process in terms of DB plans getting smaller will be a multi-decade process that will play out within the industry. However, I believe that this trend actually creates both short-term, as well as longer-term opportunities for BlackRock.

From a short-term perspective the overall fee pool is going to change dramatically as clients look to put more and more money to work through alternatives, which, obviously, have much higher revenue margins. And over the longer term, I believe that as these assets decline, the internal infrastructure that many of these clients have built and keep in mind, many of these clients manage large portions of these plans themselves also, in addition to using external asset managers, I believe as the asset pool continues to shrink at some point, the notion of having an internal team will no longer be cost-effective, coupled with the fact that people typically don't like to work in parts of the business that they know are going to go away. So that will create significant outsourcing opportunities, I believe, for us over time.

And in addition to the DB headwind, what's also important to recognize is that there are several specialty segments that will continue to grow. DC is expected to grow by 3% over the next 3 years. Insurance outsourcing is expected to grow by 5% and sovereign wealth funds and official institutions, you'll see there is expected to grow the fastest at 7% per annum over the next 3 years. BlackRock and its ICB business has significant relationships across each of these segments and we're seeking to capitalize on this growth, while simultaneously increasing our market share.

We also observe the very clear evolution of investor behavior. Barbelling is becoming more common, multi-asset and rethinking traditional style boxes in favor of more of a risk factor approach is clearly where the industry is heading. Many of my colleagues this morning spoke about themes, we follow a very similar approach. We don't go in and talk about a specific product. We go in and talk about themes that we believe are important for our clients' portfolios.

These are our key institutional themes for 2013. We create them by combining a variety of different components. We look at what our clients need, we look at their challenges, we look at the market and market drivers and then we overlay our investment, our risk and our analytical capabilities. The #1 theme that we see today amongst our clients is the asymmetry in fixed income, which we're all quite familiar with: low yields, duration, how does it alter the risk return profiles, that is top of mind and it's getting more and more clients thinking about unconstrained type of approaches with regard to fixed income investing.

And what we found is that this themes based dialogue really helps deepen relationships, it helps to build trust with our clients and it's much better served in terms of providing our clients with more access to the resources and depth of capabilities and solutions that we could provide them. So this would be an example of our solutions orientation and what we mean when we talk about focused execution.

We've also leveraged our understanding of the industry and market trends and our familiarity with our clients and their interests to form what I would consider to be a very simple three-part strategy. First, is to grow our market share among our key client types. Financial institutions, official institutions, defined contribution, are all obviously higher growth segments of the marketplace and we need to continue to penetrate those segments. But also an exciting opportunity for us winds up being smaller family offices and smaller institutions of any flavor, typically $1.5 billion and below where historically, we haven't fully covered those organizations and that's a significant opportunity pocket for us.

Second, we're looking to deepen our existing relationships across all of our client types, including DB pensions by leveraging what we've learned by partnering with our largest clients to date and we know that there are significant cross-selling opportunities within our existing book of business, the whole concept of outcome oriented client solutions. This is built on the foundation of BlackRock's incredibly comprehensive investment risk but also advisory and analytical capabilities. And personally, I spend a lot of my time and I'm very focused on creating more scale in providing these solutions, which I believe will greatly accelerate the significant competitive advantage that BlackRock already holds.

So now, let's spend a few minutes going through each of these strategies in a bit more detail. So you'll see here financial institutions, official institutions and defined contribution plans represent an addressable market of $15 trillion. All together, there's an expectation that they'll grow 4% per annum over the next 3 years reaching over $17 trillion and representing over 50% of institutional investment assets worldwide in that 3-year period. BlackRock is very fortunate. It already has an incredibly sizable presence in these markets with over $800 billion of client assets and we've successfully grown at an 11% rate from 2010 to 2012. And again, this is a combination of leveraging the specialized and dedicated teams by client type, working in close partnership with our global platform to help differentiate BlackRock and to provide effectively bespoke solutions across each of these client segments.

One thing that's important to recognize, and I know many of the people in this room are other asset managers so I'm sure many of you have actually lived this experience, quite often, financial institutions, as well as official institutions are really hard, complicated, analytically intensive clients. Quite often, they require a significant amount of bespoke and customized reporting and we are able to leverage BlackRock Solutions and the deep comprehensive analytics and reporting capabilities, which we'll talk about later how we offer that as a standalone service, but we're able to leverage them here as a very strong competitive advantage for the firm.

Serving the defined contribution marketplace is also a significant strength of BlackRock and also an opportunity that deserves a couple of minutes of discussion. So you'll see here, the U.S. DC market, we view as a $30 billion revenue pool and BlackRock only has a share of 1.5% of the revenue today. Still, with over $400 billion in long-term defined contribution AUM, we're the largest DC player that a lot of people have never heard of and they don't talk about too often. And that's due largely to our investment-only platform. We expect a continued market shift in DC from equities to target-date investing, so again that outcome orientation, and increased importance of passive index investing and lastly, moderate growth in fixed income over time.

This positions BlackRock again, to leverage its differentiated target date and index capabilities to continue to further penetrate what we view as a very highly attractive market segment. Having invented literally the target date fund 20 years ago, our methodology and approach has been tested and proven across a very wide variety of market environments and we continue to evolve and enhance it day in and day out. Our focus on innovating in the DC market has enabled double-digit growth over the past 3 years and continues to enable us to gain market share as we believe going forward. Our life path brands in particular is very, very important to BlackRock's both positioning as well as trajectory in this market as evidenced by our $80 billion life path target date funds.

And going forward, our focus, again, is reasonably simple. One, it's to continue to lead with life path as the core of our DC offering; two, it's to increase our penetration of fixed income due to the strong relative performance that Quintin highlighted earlier and lastly, to increase our focus on mid-market plans to basically go down market where again, we haven't historically been as focused uncovering that market segment.

And on a solutions basis, going back to the outcome orientation, we're continuing to see a lot more of this market move towards providing custom target date and open architecture type implementation plans for clients. And this is again, an example where our risk and analytic capabilities serve as a key differentiator for us and another great example of outcome-oriented solutions in action.

Now let's talk a little bit about cross-selling. When you look at our top 50 institutional clients, 83% invest in 3 or more strat with BlackRock. So how do you become a top 50 client? You buy lots of things for the firm, it's pretty straightforward. But there is significant opportunity to deepen our relationships as evidenced by the fact that roughly 1/3 of our top 500 clients only buy one investment strategy from BlackRock. This is our #1 prospect list within the entire organization. That list of 175 companies, plans, official institutions, what have you.

One of the things that we did in 2012 is we launched something that we call our strategic client program. And the goal of the strategic client program is very simple, to make sure we're properly organized and focused on our 50 largest clients, make sure they have access to the most senior leaders at BlackRock. And these clients are not just the largest, many of them are our longest standing relationships, an amazing fact is that the average tenure of these clients is 13-plus years. We obviously take great pride in that but we also don't take that for granted at all. We realize we need to re-earn their trust day in and day out. But what we do is we look towards this block of clients and how we innovate with them as the learning ground to figure out what we need to take out to our broader institutional client base.

Another thing that we did in terms of taking advantage of the significant cross-selling opportunity that we see is we actually even extended further our specialist-to-specialist model to create a team of people focused exclusively on selling alternatives to the largest buyers of alternatives in the world for whom we don't have an existing alternatives relationship. And that focus, specialist-to-specialist, we believe is really important and obviously, our scale gives us the ability to do that. We have many examples of it already but one example, a fixed income hedge fund at BlackRock's, over the past roughly year, we've raised well over $1 billion in support of that fund. And while a number of our strategic clients, a number of those top 50 clients, wound up investing, we also found 53 new relationships for the firm who came into that fund.

So those 53 organizations, by definition, now were added to that prospect list, they buy 1 product from us. And our goal has to be to give them an incredible investment and client experience. And then, we believe that will very naturally lead to the second product from us and the third and so on and so forth.

So when you look at solutions, it's our mission to match the needs of our clients with our investment risk and advisory capabilities. One of the other things that we've done is we've recently reorganized a team of very talented professionals who have a deep expertise in analytics, asset allocation and then concepts like liability driven investing, fiduciary outsourcing. We sort of took them from throughout the firm and we put them in 1 group that we call client solutions and we organized it within BRS, within BlackRock Solutions. And the goal of this team is to provide support for some of the most complex client needs that we have and what they do is they get involved as the experts in situations that require integrating multiple investment strategies or situations that require looking at a variety of bundled things to effectively fulfill a client outcome oriented objective.

And very often in those relationships, there's significant customized reporting, there's significant analytics and other advisory type support that you need to provide and the ability to group all of these things together within BlackRock Solutions we found to be very, very powerful. And let me touch upon, just 1 or 2 quick case studies here, and then move on to BlackRock Solutions.

So what we found is that quite often, our clients participate in the development of their solutions. It's a dialogue. It really winds up being, this is what I'm solving for, let's work together. So here is one specific example, just very quickly, a client corporate plan, global company, U.S.-based, one of their European plans, greatly underfunded. they found themselves in a position where they were under enormous regulatory pressures to very quickly come up with an investment approach that was more focused on LDI, more focused on liability driven investing. They had a problem, they had incredibly tight deadlines. They were our client for a long period of time. They called us. We were able to match our local relationship team who had effectively translate the local regulation into English so that way our specialist could then understand it from the perspective of how do we leverage the broad investment platform that we have to most fully create a robust solution for the client.

And the net result, and you could see here, is that we combined an LDI portfolio with a variety of different passive index mandates. We had to wrap it all with very customized reporting and we had to provide very specific training sessions to their client, it's board and in this case, it even extended to their regulator. Being able to bring all that together, the net result winds up being, you managed 100% of the client's assets. So in this circumstance, this is a client, it's much bigger because it's global but this specific component of their plan was $450 million and the net result was we managed 100% of it today.

Another quick example that I wanted to highlight because I think it will provide more insight into this outcome orientation is I recently had a meeting, it was 2 weeks ago with a very large public pension in the U.S. and as we were talking with them, their #1 concern is their fixed income portfolio. They managed their fixed income portfolio exclusively internally. They have 6 people. It's a tens of billions of dollar portfolio and we have a large relationship with them on the equity side.

As we were having a dialogue with them, they said their #1 concern is their fixed income portfolio, what do you do? So the way I'm programmed and the way I'm training my team to be programmed is immediately upon hearing something like that, the first response, the Pavlovian response is send me your portfolio, send me your portfolio, Thursday of this week and demonstrate the portfolio to them through our BlackRock Solutions green package, which Charlie will provide a demonstration of in a few minutes. And the outcome of that, I don't know. Maybe they'd be interested in more risk transparency through BlackRock Solutions, maybe they'd be interested in having BlackRock advise them, maybe they'd be interested in BlackRock effectively taking over a large portion of the fixed income portfolio. I don't know what the net outcome is going to be but I have experienced that typically, the client is not only quite impressed but also quite eager to expand the dialogue as soon as they see the risk transparency that our BlackRock Solutions tools provide.

So now changing hats, let me talk about BlackRock Solutions. The way I've always thought of BlackRock Solutions is very simple, it's the analytical core for BlackRock. And we leverage that analytical core several ways, we leverage it to be better investors, we directly monetize that analytical core through Aladdin and our financial markets advisory business where we've converted an expense center into a fast-growing revenue center and much more aggressively now, we leverage that analytical core in support of our Institutional Client Business to differentiate ourselves and to build deeper relationships with our institutional clients.

BlackRock Solutions as a business is made up of 2 key components. The first is our Aladdin business, which is roughly 70% of our aggregate revenue. It's comprised of our Aladdin platform, that complete enterprise investment platform and operating platform. And then certain sub components, our risk analytics, what we call our green package, as well as we provide investment accounting on a bundled basis for many of our risk analytics or Aladdin clients.

And the second business component of BlackRock Solutions is our financial markets advisory business, what we call FMA, which represents 30% of our BlackRock Solutions revenue. And this business is a highly intense service business that we formed during 2007 in the midst of the financial crisis when our capabilities were incredibly high demand and today as you've looked at how this business has transformed, back then it was severe and acute crisis, which was what generated many of our headline type relationships from an advisory perspective. Today, a lot of this business has actually shifted to the risk transparency that's being driven and fueled by the changing regulatory environment that we live in.

The Aladdin business is typically very long duration, recurring sticky type relationships. The advisory business quite often is more onetime project orientation and we've actually been quite successful over the years converting several advisory clients into ongoing Aladdin or risk clients. And you'll see here the Aladdin business has actually been one of the key organic growth drivers of the firm. It's experienced a 17% CAGR over the past 5 years. And this business growth is driven quite simply by just a continued global focus on both risk transparency and operating efficiency, both things that Aladdin has an incredibly strong and proven track record with.

And the way this business works is that all clients have access to the same core Aladdin functionality that BlackRock uses. It's a user and provider model, as well as the continual enhancements that we're investing in the platform each and everyday. And when you look at this, this ability [ph] to growth over the past year or 2, we've been highly successful in scaling the platform. It started as fixed income, it expanded to equities and now we're aggressively expanding to alternatives, as well as from a geography perspective, this business started as a U.S. business and we're very aggressively expanding the businesses globally.

One of the interesting components of the Aladdin business today is that at this point, we go through a process, as I'm sure many of you do, where you try to segment what region the client is from, it's become hard to even figure out what region to assign clients because of how globally they're leveraging the platform. And BlackRock Solutions, very similar to the ICB business, is continually focused on themes and leveraging them in terms of an understanding with our clients as to the problems we're trying to solve. And you'll see here that the themes are very closely aligned with regard to things like an outcome orientation in terms of investing, the way the regulatory environment is changing to a variety of commonality across the broader institutional client base.

So with that, let me wrap up my discussion of ICB and BlackRock Solutions and I just want to reiterate a couple of key takeaways. First is that both of these businesses are sizable and consistent contributors to BlackRock's financial results. [indiscernible] Solutions are separate businesses but quite often, they're brought together to collaborate on solving client problems, particularly in this outcome-oriented world that we're moving more heavily into.

Our institutional strategy is reasonably simple but at the same time, it requires a significant amount of execution and it's about leveraging the unique capabilities that BlackRock provides, particularly from an analytics perspective.

Our strategy is oriented to be always client first in our thinking and it starts with changing the dialogue from what do you want to what are you solving for with our clients.

And for our next session, I will hand things over to Charlie Hallac. Charlie is BlackRock's Chief Operating Officer and Charlie is going to provide an inside look at the Aladdin platform. Charlie is a co-founder of BlackRock Solutions and was the head of BlackRock Solutions until 2009 and Charlie was the initial architect of Aladdin and many of BlackRock's operating processes. He remains very heavily involved in the evolution of Aladdin and BlackRock's centralized business processes that we employ today.

So with that, I'll hand it over to Charlie to provide an inside look on the Aladdin platform.

Charles S. Hallac

Thank you, Goldie. Aladdin is the net result of about 25 years of work from the collective of portfolio managers, investors, risk people, operations people, compliance people. So we didn't start off BlackRock trying to build the platform, we just build as we need it and the net result was Aladdin.

Today, I don't think we could really run our operations as smoothly without the platform like this. So we have just under $4 trillion of assets under management. There are over 10,000 portfolios being actively managed at BlackRock with about 1,600 investment professionals out of 10,500 employees. Now everybody at BlackRock uses Aladdin to do parts of their job. You log in to it, you use it for a lot of different functions, and the blue dots represents all the places around the world where we're actually managing money on it.

What Aladdin does for us is it allows us to take all the products that we manage at BlackRock, all the investment products that we manage at BlackRock anywhere around the world and have a consistent process around it. So every dollar from the moment the client gives it to us, to the point where it gets to an investor, they sprinkle their magic dust in the form of their investment process back to the investor is consistent and identical anywhere around the world, anywhere across products. This allows us scale, leverage and flexibility. It also allows us to take any particular investment strategy and offer it in mutual funds, use it, hedge funds, separate account format or collective trust format without a lot of complexity.

it's keyed around 1 source of data in a very consistent process around the world. Let me talk about the process. This is the basic investment process that we think take place in some shape or form in every investment management operation around the world. It might be familiar to some of you. It starts on the upper left-hand box with portfolio management and risk management. Every investor comes in, in the morning, takes a look at their risk, takes a look at their exposures, what the market has done to their portfolios and reevaluates.

At some point they decide to make a trade and they place orders and they structure the trades in the portfolio, including hedges across any product. It goes to the trading desk for execution and in an operation like ours and in many of the Aladdin clients, that trading execution is a very important part of the value chain. Once the trades are executed, it goes to an operations and data control spot. This data control spot is unique to Aladdin here because we know that investors, traders, they're not the best data people in the world, so we follow-up quickly with data professionals who clean up every piece of data. So once it gets in to the system it's consistent and it works for everybody.

That moves on to administration, which produces the returns, the NAVs, and then attributes performance back again to the risk professional who produces the analysis that we start all over again. Because everybody's using the same bits of data, we can all rely on it, because it error-corrects very quickly, and that's the principle behind Aladdin, and that's what we've tried to accomplish here. So in a typical investment operation, you'd see the picture on the left, it's called the best of breed. I think of it as the weakest link. It's generally lots of systems strung together with a bunch of Excel spreadsheets where the weakest system defines what you can accomplish as an environment. On the right, it's Aladdin. We spent a lot of time engineering the relationships between all the functionality that the system needs to provide as an investment manager and it's a much cleaner picture, much easier to operate. When you add the Aladdin clients, the 54 clients who use Aladdin outside of BlackRock and the other 90 clients who use part of Aladdin, the green package part of Aladdin, you can see that our footprint is quite global, as Rob mentioned. So let me go through some statistics. There are 54 Aladdin clients that use the entire system. It's the same system that we use at BlackRock because we spend no energy with multiple copies. It's the same everywhere. All of our energy goes into enhancing the application. There are about 30,000 portfolios that run on Aladdin, 10,000 of which are at BlackRock. There are 17,000 users of Aladdin who log into it everyday, 10,000 at BlackRock. And there's just under $14 trillion of managed on the platform around the world. Now, my favorite statistic is that we run 100 million Monte Carlo simulations on the platform every day. We have this 5,000 strong cloud. We've been doing it since the early '90s. So it's not new to BlackRock, it might be new to the industry. And we have various types of very unique technologies that we've built in the company over the last few years. This system runs 24/7, and it always runs hot where everybody's got 2 locations so that it's highly redundant, and there are about 700 programmers who work on it around world.

So now, let me give you a brief demo of Aladdin. And this is going to be focused from the perspective of an equity investor. The first thing people do is they log in, all 17,000 of them. Type in their username and their password, and they get the Genie. It's a bar with a bunch of icons. So think about them as apps. You can use the apps that you need to use and it gets attached to the icon bar. I am going to click on the green package. And that takes me to the green package. You've heard us talk about it. This is the risk reporting system. So that risk reporting is sort of structured in a way to represent our business. BlackRock is organized in 5 investment centers, alpha, beta, multi-asset, alternative and liquidity strategies. I'm going to go into the alpha strategies piece and click on fundamental equity and go into the Princeton team and go to large-cap series. I now get a landing page for a piece of business, and this is what the large-cap team might look at. They have portfolio reports, returns, risks, fundamental characteristics. Up to this point, this is a live BlackRock site. And I'm not going to -- we changed the link so that it goes to a demo site because we can't show you the real holdings. So I'm going to click on one of those, and this is actually the green package. Sure how readable it is, but these are different -- [indiscernible] in the large-cap series. It tells me some information. So I'm going to focus on the U.S. equity bit, and I'm going to select the first portfolio, the VaR, 11.36. The tracking error, 6.17. Then these are the weights by sector of that particular portfolio, and you could see on the -- above the yellow line is the aggregate, the weighted average of the line of business. Below the line is each individual portfolio. Now, you might ask why would they differ? Well, you said rules are different than mutual fund rules, except for hedge funds might have different allocations, et cetera, et cetera. So there's lots of reasons for the difference. This allows the investors to run their finger up and down to see the allocations. Okay.

So now I'm going to look at the -- I'm going to take this particular report, and I'm going to switch it. I've just asked it to show me active returns only. So net it out against the benchmark and you could see that what -- I'll go back. What was a 34.72% to consumer staples and a 6% allocation to financials is now a 10% underweight to financials and a 24% overweight to consumer staples. And that's the type of analysis that you can do on this portfolio. Additionally, I can select a -- I can add colors to it because if I don't like numbers and I like color, I can see 1, 2, 3 standard deviation away from the benchmark and this just makes the long and the short. Anything in blue I can click on. I just clicked on the tracking error report and this takes my 617 basis points of tracking error and decompose it into sector, style and stock-specific risks. You'll notice each of them, in this particular column, has the measure individually for that sector, and then in the last column, it says that, that 617 basis points of tracking error, 275 basis points come from sector selection, 240 comes from style-specific and 94 comes from stocks specific. If I click on the sector like everything else where you see a link, it decomposes it further. And so here, it shows you that the biggest risk in this portfolio comes from this pharmaceutical sector.

Now, let me go to another report. This is a fundamental equity report. This is a fundamental factor report. So these are the same exact portfolios. It just shows me things like dividend yield, P/E ratio, price-to-book, long-term debt to capital, debt-to-capital 3-year ROE, 1-year ROE and a variety of comp. All of these stuff gets config-ed to the investment team, how they want to look at it, and it's all available to them in a variety of different factors.

Now, I'm going to take a look at the liquidity report, slightly different versions. These are like 3 examples, to give you a sense. I could spend all afternoon here talking to you about the reporting capabilities. In this case, we take the portfolio and we try to compare it against the 30-day average daily volume and we see how fast can you liquidate the portfolio. So on this particular portfolio, again, you see we can get rid of 28% -- I can't really read that -- in the first 2 hours of the day and -- but you can get rid of the whole portfolio in 1 day. Obviously, that's small-cap portfolio, and you've got an oversized weighting that takes longer. So this is the green package. I've only shown it for stocks. We do it for stocks, bonds, multi-asset, every type of investment portfolio. You can actually click into the portfolio and see the holdings and a variety of different analysis on the holdings, but I'm going to stop there and I'll take you to a live Aladdin system. So when I go to Aladdin, I'm going to go into a platform -- portable add-on or an icon called Impact. This is an active screen for an equity portfolio manager. On the -- in the middle is the stock holdings, divided by sector at the top and conviction along the Y access. Here, you have style boxes. You can click on any of this. So this is Johnson & Johnson. It gives me some fundamental data and some stock history price. Click on it twice, and I can actually see analyst research, when there are buy recommendation, when there are sell recommendation, and track the quality of the recommendation. What this shows me is it breaks down my risk decomposition on that portfolio. So green means this is how much risk comes from your industry or sector bets, yellow is active risk, blue is a style box, and red is stock specific risk. And as you can see down from this page -- I don't know if you can see it or not. I can't. The top provider of tracking error is Johnson & Johnson. If I go down and I say, show me my conviction score, it puts the analyst's conviction score relative to the stocks tracking error. So if you've seen the first case, we have high conviction, high tracking error, but in this particular example, we have low conviction and it's relatively neutral. So just some examples of what you can do with this.

Down below, similarly, is an attribution analysis. So this is our 1 day, 1 week, 1 month, up to 3 year returns. The blue box is the asset return. The pink box is the sector bet, and the red box here is the residual, and then the black line is the actual return of the portfolio. So you could see that there's things that are positive and negative to the portfolio. And similarly, you can click on the box and get a decomposition by sector, et cetera, or by company, if you want.

Now, since we're here for the BlackRock analyst -- Stock Analyst Day, let's say we want to buy -- we like the story, we want to buy a 1% exposure to BlackRock. You go down here and you type in the stock that you want and 1%. It shows up in the portfolio, and I believe this says, in this particular portfolio, it will generate an order that will cost $27 million to buy. The share price is not on that screen. Number shares is not on the screen. The problem -- now, I can execute an order from here. But I want to show you one other bit of functionality. No one. Almost no one at BlackRock executes an order in one portfolio. Everybody executes an order in multiple portfolios and the computers help them do that. So I'm going to construct the portfolio in portfolio construction. This is another application that allows you to models trades and create orders. In this particular case, I have the portfolios at the top and sectors on the left. So I click open my financial sector, I put in BlackRock, I say 1%, it increases my weight in the financial sector, and you'll notice that it loaded on the right. This is every order it needed, by portfolio, in order to actually get to a 1% allocation at BlackRock. I will send the order in, and it'll ask me, do you want to run compliance? This is always a requirement. And do we want to post orders? So we say, yes. What happens is it checks all the rules in the system, and it comes up and says, by the way, you have a set of exceptions. So here, you have too much of a weight in that stock according to the guidelines. Now, I am going to override it because it's an investor day presentation, and it's a test portfolio, so it doesn't really matter. But sometimes, you do have the -- you do want to override those rules and we do have the ability to bypass those rules, and this is how we provide streamlined functionality.

Now, it's going to go into the OMS. It's called the Aladdin dashboard. There's about 50 different workflows, only one of which is the OMS that actually gets managed around the world from here. I am going to acknowledge that this order can come in. This screen is divided in the top by the line-by-line portfolio orders created. In the middle is the block order capability, and below is orders being sent to market. And you will notice this little bar chart here, which tells you how much of that order is actually executed. So what I'm going to do is I'm going to go and I'm going to place the whole order into the market right now, and you will see, it is actually getting filled in our test network, not the real network. So that run-up is not because of this demo, somebody else in the room must be tweeting. So what this is, is this is the OMS. This is how it works. It's pretty simple. You've seen it all. It's all in one place. What's relevant about this? On a typical day at BlackRock, if you look up here, this is a snapshot from yesterday, we did -- oops -- we did 60,000 orders. That's not a peak day. The peak day is somewhere in the order of 0.5 million orders. That's a [indiscernible] design, and the system is designed to be able to take over a couple of million orders on any given day. In 16 locations, that's what the -- these are the locations then it's aggregated. And so that's what we might use the workflow for. Now, the Aladdin workflow tool or the dashboard allows us to have people sitting anywhere in the world and picking up and watching what's going on. So when we talk about passing the book at BlackRock for order management, there is no such thing as passing the book. The book is just live everywhere at the world at the same time, and it's got all the technology bells and whistles to make sure that it is resilient. Now, I'm going to take you to one other part of the system, which I think is unique and near and dear to the hearts of many investors. This is called the cash board. Now every one of us has to manage portfolio, we have to manage our cash exposure. This is that same group of 21 portfolios I showed you earlier. And what you have is a ladder, a cash walk board ladder that tells you how much cash you have in the portfolio every day going out, S plus 4, S plus 5, S plus 10. Now, if I click it open, I can actually see it by portfolio, and this is where I actually did that trade. And you will notice that on the third business day, there is some negative numbers, which are in red. All the bad stuff is in red and good stuff is green. That's the way we color code it. And blue is neutral. So in this particular case, I'm going to click on it, it says, you did 3 equity orders. If I want to see what exactly the trades were, I can click and it says, those are the 3 BlackRock fills that you got that caused you to have an overdraft in the account. So while we're managing, constructing orders, you can manage cash, you can manage compliance, it sort of directs you on everything that you might want to do. And that's how it works.

So in a nutshell, I showed you the green package. I showed you impact, which is this one. I showed you the dashboard. And I showed you the cash ladder. And -- oops. So what you see here are the icons that go into every part of the process. Now so what's the concept? Well, the concept is people hire us to manage money and to solve their problems, and we have to generate a whole lot of complexity that we don't have to do. There is a whole lot of complexity taking clients' problems all over the world, reallocating it, managing it, moving it to investment teams all over the world. So what Aladdin does is it allows us to manage the part in the middle, because clients don't hire us for the operational complexity. They hire us to generate an investment product or an investment return and to solve their problem. What Aladdin does is it allows us to take this piece as a share of our time and make it a smaller piece of our time, so we can spend more money on -- spend more time and effort on generating investment performance and solving clients' problems. Similarly, a little bit tangential, is what's interesting is we're in a world with a lot of regulatory compliance, a lot of new rules all over the world and we're dealing with a lot of them. And Aladdin's turned out to be a major differentiator for us because while I can spend a lot of money to solve the problem, I can solve it universally across every product that BlackRock's in, we have to do a kid document or a Form PF or Dodd-Frank. We build it into the system once, it applies across thousands of portfolios. It allows us to manufacture those, respond to those in a way that is more definitive and, ultimately, cheaper to operate than any alternative capability.

Let me talk briefly, I got 1 minute left, about ATM. This is what a typical trader's desk looks like. You see the Aladdin dashboard in the middle, but they have all kind of the market venues. The bond market is quite fragmented. And what we were looking to do originally was to bring everybody together to a marketplace. We discovered it was more efficient to just link them in electronically so that the actual -- the systems can figure out which is the best venue and allocate your trades appropriately without having that human interference. This is something that was done in the equity markets now for many, many years, and we see sort of a transformation of the bond market into those type of electronic trading in the same way the equity markets. So if you look at the announcement we made with market access, it's very much along the veins of providing more access to clients using the Aladdin platform, so that they don't actually have to go and touch and move to another application and another venue, and spend more -- and they spend more time in Aladdin. So that is our Aladdin demo. Thank you very much.

The next speaker is Mark Wiedman, who joined BlackRock in 2004 in the advisory business. He was instrumental in helping us respond to the financial crisis and was in the middle of many of the assignments that took place during 2008 and 2009 where BlackRock was actively participating in the resolution of some of our -- some of the big institutions we advised. After that, he ran the corporate strategy group that was instrumental in the post -- pre-merger integration of BGI, and now he has the pleasure of running iShares. And here you go, Mark.

Mark Wiedman

Thank you. Good morning. Thank you all for being here. My goal today is to answer a series of questions about how we will achieve growth from here. But before I dig into that, I want to start with a premise. And the premise is I would like you to not think about the ETF as just a product, but rather, as a technology. It's a technology for taking capital markets exposures, putting them up on exchange, where they have intraday pricing and secondary liquidity. That's the key concept that's going to run through everything I'm going to say today. It's going to explain flows, it's going to our explain long-term growth prospects. So I want to come back to that point over and over again.

As others have, let me just remind you of the role of iShares within the firm. It's about 22% of our assets, long-term assets. It's approximately 35% of our long -- of our revenue base and long-term fees.

So the question in your mind is, how is this business going to grow? And so I'm going to break it into 4 pieces. First, how we performed. Second, what is the growth outlook for ETFs. Third, what are our competitive advantages. And then last, how will we deploy those advantages -- how are we deploying those advantages to win?

So let me go by into the first question, how we performed. This is a look at our 2012 organic growth. If you see on the left, 2011 started at $593 million, CLO [ph] for 2012, $753 million for the year, 27% growth rate. That is exactly the same growth rate as the industry. 27% globally in 2012. Half of that is due to organic growth. On the right, you'll see the consequence, which is our first quarter for 2013 was our record quarter, $710 million, powered by that growth in 2012. The industry is growing fast, and so are we. We also measure our success not just on organic growth and revenue growth, but actually, on market share. So let's take a look at that.

On the left, you'll see our global market share of flows. On the right, you see our global market share of stock. On the left, you'll see the orange-ish line as iShares, and what you'll see is something that shifted up but has some choppiness around that. And I want to speak about that for a moment before I turn to the stock. I started with the premise that the ETF is a capital markets instrument. One of the reasons that our clients buy our ETFs is that they are buying options for intraday liquidity, the option to get out quickly if they wish. And last month, starting May 27 with Bernanke's speech, we saw clients actually exercising that option. We, in terms of our outflows, hit an air pocket or a speed bump, and we had $13 billion come out over the last 3.5 weeks. The net for the year is still up 23, but that $13 billion illustrates actually the point of the product. The reason these clients were buying their product was the ability to get in and out of those exposures. Let's look at where the money was. Half of it, $6.6 billion was in our flagship hyper liquid EEM. This is the emerging markets vehicle of choice for anybody who cares about liquidity. It has a massive derivative psychology around it, massive shortselling, hand longs, [ph] hedge funds use it. The point is, the client -- our clients, global institutions, sovereign wealth funds were able to move $6.6 billion out of those positions without any disruption. Fixed income was the other half, and we saw outflows in spread and duration products in high-yield and investment grade in the United States and in long treasury -- long-duration treasury products. Again, what is happening is the clients are using our ETFs as a tool for adjusting their portfolios, for getting those capital markets exposures with access to those secondary markets and intraday pricing. And I'll give you an illustration of how these products delivered what we promised to our clients.

HYG last week had its first, then its second, then its third day of $1 billion secondary trading. That was unimaginable 4 or 5 years ago. On the right, you see the stock. And I think the point here is the market share, quarter-to-quarter, may have a certain choppiness, but long-term, the market share is actually remarkably stable and the industry structure is remarkably stable. We grow with the industry, so where is the industry growing?

I would say the #2 question I get in frequency around the world is, is this basically this growth story ending for the ETF? Is it really a mature industry? Are we saturated? And I think it's a reasonable question because if you look at the growth since 2009, over the last 4.5 years, the industry has tripled in size. So again, powered somewhat by beta, but a lot of it has been organic growth. You can see us as being the kind of light green and the kind of darker green is, on top, as the aggregate for the rest of the industry. As I mentioned, we grew 27% in 2012. Is that a sustainable -- is that -- is this long-term trajectory a sustainable path? Well, I want us to come back again to the question of, what is the ETF? ETFs compete with multiple forms of financial exposure. They compete with, as is often reported on the press, active mutual funds. But clearly, for our big institutional buyers, hedge funds, sovereign wealth funds, central banks, they weren't thinking about an active mutual fund as the substitute. What they were instead would have been thinking of is derivatives or individual securities. Let me give you an example of that. In October of 2012, a trade came through that somewhat surprised me. $400 million trade from an insurance company in Europe that put on a $400 million position in short-duration treasuries. Now, that's really quite interesting because it's pretty clear what the substitute was. They could have gone out and bought, in the most liquid underlying market in the planet, U.S. treasuries, or they could have simply gotten a swap. But they chose the ETF. And the reason they did it was operational simplicity. They wanted to put on with 1 trade of position, and then eventually, they'll take that position off. So my point about inflows and outflows as the part of what this product offers to our clients. Index funds were another piece for a longer-term horizon. Somebody has a core position, for example, they might think of it going through separate accounts. As for example, what Amy's business is that -- showed [ph] earlier. So if you think about it that way, it's not just a product, but rather as competing with all these other forms of financial exposures. Then the question is, what's the size of that market? Now, the U.S. market is by far the most mature and deepest of the ETF markets around the planet. On the left, you'll see a little red and a little yellow. That's U.S. ETF market. The retail is the orange, and the institution -- I'm a little colorblind. Apologies. The orange is the retail, and the red is institutional. Can you see the difference? That's kind of the point, okay? If you look at the $10.2 trillion U.S. mutual fund business to the right. It so overshadows the size of retail holdings of ETFs in the United States. Approximately about half of U.S. ETFs are actually, maybe slightly more in retail, so we're up [ph] versus using our ETFs, as an example of a substitution. And then, again, our aspirations are bigger. One of the things we compete against, and this is specially true for large institutions, is we compete against the individual purchases securities, and the market in the United States, $58 trillion. So that's the scope of the universe that we see. And if you buy the thesis, then it's a technology, just not a product. Not just a product. We see a lot of expansion for growth. I'll talk later about how our business needs to evolve and the new products we need to launch to take advantage of that opportunity.

Third question. What are our competitive advantages? So if the industry is promising, we've had some growth, how do we continue to win? There are 4 competitive advantages that I'm going to walk through, and the key point is, they're all global in nature. Our brand, product breadth, quality and liquidity, the product's work, as promised, our global footprint of our teams and our clients, our operating scale, and the result is truly global growth. And I'm going to try to take the veil up on where our assets are actually coming from. So let's take the first one, which is our global brand. As Charlie mentioned, my background is a little bit more institutional in nature, and balance sheets and such things So this is somewhat unfamiliar territory, but it's absolutely essential to our growth. And the reason is we have somewhere around 17 million shareholders around the planet. We're obviously not talking to each of them individually. So how do we communicate with them? And the answer is, that brand and marketing and PR is central to our growth. It's the only way for us to reach all these clients. And that brand needs to be global and it needs to be unified because our securities trade all around the world, and our clients sitting in China will go to the U.S. website. No one else has this. I want you to just look at how [indiscernible], it came back in October, building our brand again in the U.S. with, primarily, retail and investors. That's our retiree. On the right, you see a taxicab. They're ubiquitous in London. In the middle is an ad for the RMB bond ETF we launched yesterday in Hong Kong. This is the first Asia-based RMB bond fund for offshore, so called dim sum bonds. If you take again the thesis that we're trying to deliver the capital markets in new packages, more liquid packages, more available to global investors, that central piece is an example of the next-generation. All around the world, if you go to our websites, our ads, our products, you'll see the same basic brand and basic value proposition being emphasized. There's something else that no one else has.


That's the iShares ringtone, and I'm sure you're all going to download it today. But I swear, about 3 weeks ago, I was in a barbershop on the Upper West Side at 89th Street, and there's a guy getting his haircut next to me, he does not work at BlackRock, and it goes off. And the iShares ringtone was there, and I thought, wow, that really is the power of marketing. Somebody asked whether I'd said anything to him, I said, no, it's my weekend. I need a little time off. Okay. So that's our global brand. Number two is our product lines. Again, no one else has this. We have 2 global product brands -- let me step back, sorry. We have about $800 billion around the planet. This is what we call a client view of our assets, where the money is being held. Not exactly the legal domicile. So you'll see $50 billion in Canada; Latin America, $50 billion, Asia around $37 billion and Europe, about $170 billion, and then the biggest pool of assets here in the United States at almost $500 million. What are the underpinnings of that asset base? The first and most important underpinning is the U.S. product line. 282 funds, they trade around the world, they are the most liquid. But increasingly is, our European product line is becoming a global product line. Why? The product line has gotten to be quite large while the liquidity is not quite at U.S. levels, it's got much more liquid than it used to be, and it has a huge advantage. They're not U.S. vehicles. And increasingly, Europe -- certainly European, but Asian and Latin American buyers are less and less interested in U.S. vehicles and more and more interested in new sets [ph] European vehicles for 2 reasons. They're more familiar with the use of structure, and they don't like tangling with the United States treasury. They much prefer to get their exposures in a u-sets [ph] European domiciled vehicle. So we see our product lines as becoming increasingly into 2 global product lines, meeting different segment's needs. We also have local product lines in Canada, in Latin America, in Columbia and in Mexico and Brazil and in Asia, where we have lines in Singapore, Australia and Hong Kong. Again, no one else has this. The point is allowing clients to benefit from our global scale but also get these products packaged in ways that meet specific local retailer needs.

The third is our global footprint. This is where our staff are. This is where our people are. 300 people in the U.S. but we have almost 60 in Asia, 60 in Latin America, about 30 in Toronto and about 137 in Europe. These are the iShares-only staff. This doesn't even count the many thousands of BlackRock broad staff who are in those markets, who are out talking with clients, making our global strengths locally relevant. Again, no one else has this.

And the last piece I want to emphasize is our operating scale. We are, far and away, the largest operator in what is a scale business. In fact, if you looked at our European business alone, it would be the fourth largest provider. And if you look in a revenue basis, this is assets, it would be #3. So why does size matter? Well, the first part is, as I mentioned, economies of scale, allowing us to invest in that global footprint, in new products and the new businesses. The other part is, it is a benefit for clients. There are network effects in ETFs, liquidity begets liquidity. No one else has this. What is the result? Truly, growth.

Let me show you the numbers that you see, these are global, public product-specific growth. So you're looking actually at how the vehicles are domiciled. Now, that's not how we think about it. We think about where the clients are, but that is how the industry tends to report it. And you can see the bluish color on the top is market growth, and the bottom is organic growth. It looks like Latin America is a flat market, and it looks like the United States is -- despite the fact it's much larger than the rest of the world, growing -- effectively in the middle of the pack. That's not how we see it. How we see it is through our clients' eyes. And this is where our clients are and where the organic end market growth is coming from for us. The United States in 2012, healthy growth at 11%. But as you would expect, and this is more logical, I think, the x U.S. world, where the penetration levels for ETFs are much lower, is actually where the real growth is. Latin America, where we have a very strong footprint, represented 39% organic growth in 2012 for us, off of the prior base. You can see Europe growing at 15%, which is faster than the industry, as we continue to gain share in Europe. And Asia-Pac and Canada, you can see there. The relevance of that is, given that we have these global advantages, given that x U.S. growth will -- faster than inside the United States, long term, this is a major driver of our franchise.

The fourth question is, what's our strategy to win? How are we going to deploy, how are we deploying these competitive advantages? We have 5 global growth themes. There's been a lot of coverage of our acquisitions that play more in the Crédit Suisse business. I'm going to focus instead on the top 4. U.S. market share. This is our toughest market. You can see, on the left, our market share of the stock and in the flows again, the choppiness but at a lower aggregate level than in the global level. It's the most mature, and we face in the U.S. a particularly challenging competitor in Vanguard. But our aspiration is to be #1, not just in assets, that, we clearly are. Not just in revenues. But actually, inflows. So how do we aim to get there? We launched in October the iShares Core Series. I'm going to explain the logic for that. Our strategic alliance with Fidelity, I'll do a refresh on that. And then 2 more that I'm going to briefly touch on. The integration of the wealth advisory sales force, giving us the largest retail sales force in the United States that Rob Fairbairn mentioned earlier, and then last, marketing and brand, which I've spoken about it, as all of you were downloading your ringtone. It is the price of lunch, to see whether or not it's on your phone.

U.S. market share, the pricing story. This is the question -- I said before, the #2 questions I get is, are we reaching the limits of growth? This is the #1 question I get, especially in the United States, which is, what's the pricing story? I think this chart will surprise you. That is the average price of United States ETFs. It has been flat since 2007. That's the price of domestic equity and fixed income. It's been going up. And that's the price of international equity. It's been slightly coming down. So what's going on here? Is price irrelevant? No. It's about segments, and you need to look into which segments are more price-sensitive and which ones value other features, in addition to price, when they choose to buy. Some segments are not priced -- are not hyper price-sensitive. They favor specialty exposures. For example, Brazilian small-cap.

They favor specialty exposures, for example, Brazilian small cap. They're hypersensitive to meeting liquidity. EEM buyers are very much in that category. People who want to put on derivatives trades around our ETFs. Somebody is looking for niche investments or is influenced by the general brand value. Those are all important drivers and segments.

The one that people -- that is price-sensitive is buy and hold, long-term buy-and-hold investors. That segment, which is both retail and institutional, it's not just retail, is price-sensitive because they're going to be holding for longer-term horizons. And they are -- actually, prices have fallen since 2009, you can see, from 23 basis points on average for what we call core basic building blocks of clients' portfolios down to about 20 in 2012, something we contributed to.

So what's our response? Again, the answer is a segmentation and differentiation. We launched the iShares Core Series in October 2012, approximately 8 months ago. 10 building blocks, little picture, got the blocks, meant for long-term positions for retail and institutional investors around the world. And the flow since then, as you can see on the right, have been extremely healthy. We also measure, as I mentioned, the market share of flows. Part of the reason we were triggered to action is we only got 12% of these Core flows in the United States prior to the Core launch, and that was not satisfying -- not satisfactory. Since then, since the launch, our market share flows has tripled to 36%, which is much more satisfactory.

Another leg of our strategy in the U.S. is the deal we announced in March with the world's leading distributor to self-directed advisor, to self-directed. We have a major hole -- as we looked at our strategy, we had a major hole, which is we have no way of reaching those millions of individuals in the United States who actually buy ETFs with their own portfolio self-directed. We had no way of connecting with them directly. And so we had started in 2010 on this journey with Fidelity with a more limited deal. And in March, we renewed and expanded that. And the basic logic is simple, two industry leaders coming together, we bring the ETFs, they bring the clients, 10 million plus individual clients self-directed. Where they're in-house beta provider, we'll be providing ETF solutions to them. We'll be actually working with them on the launch of some of their own ETFs and with more to come.

That's the United States, which, again, is the most mature market. x U.S., it's a story. And including some segments in the U.S., it's a story about growing the market. On the left, institutions. These are some examples of expansion segments that we are working on: sovereign wealth funds, insurance, asset managers. Let me just give you a couple of stories. Global pension plans, let's take 2 cases there. As I was coming here this morning, I got an email from London saying that a client -- a pension plan in Holland, had just had their first purchase of an ETF. We get those notes all the time. Clients are just learning how to experiment with ETFs around the world, pension plans around world, in the United States and outside.

I'll give you an example of a really interesting usage. We had a client about 1.5 months ago in the United States take a $1.5 billion book of individual bonds and convert the whole thing into just 2 iShares. Now why did they do that? They did it for liquidity, they did it for operational simplicity and they did it basically to get either out of the exposure or into the exposure to adjust those positions much more simply than buying all those individual securities. That to me is exactly what I mean by competing with the markets for individual securities. I mentioned that European insurer who used the treasury product. These are institutions who are experimenting with new tools. I'll come back to banks in a moment. Right now, banks on their balance sheets hold, I think, exactly 0 ETFs. That is something we will change.

On the right is retail around the world, and this is a tale of 2 cities. Let me actually go back for a moment. Pretty simple principle. If you can't get paid to sell something, you tend not to sell it. So most of the world is dominated by retrocession arrangements between asset managers and distributors. That's the primary way that distributors get paid is by the asset manager paying back some of the management fee. That's a very uncomfortable business model for ETFs because we don't pay retrocessions and our management fees are very low. So there is no real way in that arrangement for a financial advisor or a distributor to actually profit from providing financial advice to clients.

Now the world now is split into 2 parts. On the bottom is the retrocession world, which is Asia, Latin America, Southern Europe, France. It's actually about half the United States as well, although not where the growth is happening in retail. And on top is the post-retrocession world, which is really just the U.S. for that part that's growing in the retail world; Canada, again, where it's growing; and then in Northern Europe, in the U.K. and Holland, in particular, but to a lesser extent, in Germany and Switzerland. And what's happening in these markets is the clients are shifting whether by regulatory pressure or by their own market forces toward fee-based accounts with the clients. And the moment that happens, there's a way for the advisor to get paid, which is that there's a general wrap fee on the account and the client can actually buy and sell ETFs and the advisor has a way of making money.

The U.K. and Holland outlawed retrocessions as of January 1, and I would say there's universal agreement in those markets that it will lead to rapid growth in ETF over time. So the plumbing has to be put in place for their clients to actually hold ETFs over time and other passive products to grow. To give you a sense right now, direct holdings by retail in Europe are probably single-digit percentages of the aggregate for ETFs in Europe. In the United States, it's probably 55% or 60%. That giant gap is explained by these pricing differences. So we're going to see rapid growth in Northern Europe, continued growth in the United States in retail as they penetrate -- ETFs continue to penetrate into client portfolios. And then last, in retrocession. There, in retrocession world, clients want ETFs, too. They ask those banks and insurance companies for ETFs. The problem is how to make money. And the solution that we're seeing players come up with, distributors, is create asset allocation wraps themselves, and then they plug the ETFs inside. So we've already signed 10 deals like that in Europe this year, which are effective ways of packaging our products inside of somebody else's asset allocation vehicle. And that's how they get paid.

Last 2 themes. Fixed income. The fixed income markets, we think, are the great unexplored frontier for ETFs. On the left is the global equity market, $53 trillion, but notice, about 3% of all equities globally sit inside of ETF. On the right is the fixed income market, $100 trillion, 0.3%. And I would suggest that the logic for the fixed income ETF is actually more compelling than it is for the equity ETF. Why? Because the equity markets don't have the problem of investment banks and their intermediation function shrinking. Basel III, the Volcker Rule and financing costs have all made investment banks' balance sheets shrink. And the way that the bond market traditionally works is you go through an investment bank and their inventory. Investment bank's ability to do that is shrinking. Bid/ask spreads are widening. And that is what is driving the liquidity into our fixed income ETFs. When I talk about $1 billion of liquidity last week secondary in HYG, that's all money that didn't have to go through a balance sheet, and that's why we are so bullish on the fixed income ETF market beyond even just these low penetration numbers. But if we're going to reach it, we actually, probably need new structures, new products to reach those segments.

I talked a bit about some of the applications, including an insurance company with a tricolor, I guess, that's France, pension funds converting. Let me talk about new products and the point that they tie to new segments. I would suggest that the first generation of ETFs is over. Capture the flag, get out there with a plain vanilla, market cap index and get that liquidity pool, that's kind of behind us. Those spots have been taken. The next generation of products are going to be much more tailored. They'll be much more segment-specific. And I want to give you an example of how we can grow the market with a new product type. iSharesBonds. The simple idea here is that if you want that $100 trillion of fixed income money, you better find a way that it looks and smells a lot more like a bond to a fixed income buyer. And the fundamental barrier that our ETFs have is that they are perpetual life securities. They don't cash flow like a bond. They cash flow like an equity. And that's an unnatural thing for most fixed income buyers. We have -- most of our fixed income ETF holders today are actually asset allocators and wealth managers who might flip between equities and fixed income. But to have the $100 trillion, you have to go into people who are just thinking about fixed income vehicles. So we launched iSharesBonds just a few months ago, which are finite life vehicles. They cash flow like a bond. A colleague called them bonds of bonds. And we think these are going to unlock over time new segments, like bank and corporate treasurers. I mentioned, they don't hold any ETFs today. In the future, as we trade vehicles that actually help solve their problem, which is aggregating corporate bonds, for example, we think they'll use these vehicles as part of their liquidity sleeves or possibly part of their buy-and-hold portfolios as we've priced them fairly cheaply so that clients could hold them to maturity. This is the kind of thing -- they also -- and if you look inside the iSharesBond, you would find that those analytics that Charlie showed before, the BlackRock Solutions analytics, are in there. We do line-by-line analysis of the credit of all of the underlying bonds so that banks can submit to the regulator, see what we hold, [indiscernible] treatment, same thing with Solvency II in Europe. No other firm, certainly no other ETF provider, could possibly do that.

So let me close with the answers to the 4 questions. iShares business performance, strong organic growth from global clients, strong market share globally with our toughest challenges in the United States and volatility and quarter-to-quarter flows but fairly stable industry structure and AUM from year-to-year. The growth outlook, we think, is very bright, and there's a lot more miles to go in the growth of this industry. Competitive advantages. I mentioned 4 unique strengths. They're unique to us, and they're all global in nature. And strategy, 5 parts: U.S. market share; global market expansion; fixed income; innovation, new ways of using ETF; and then last, acquisitions and joint ventures.

So with that, I'm excited to introduce to you our new Chief Financial Officer, Gary Shedlin. Gary has been a long-time strategic and financial advisor to BlackRock. Prior to joining us earlier this year, Gary was Vice Chairman in -- of Investment Banking at Morgan Stanley and in the Financial Institutions group, and he is excited to talk to you today about how BlackRock delivers value for our shareholders. Gary, let me hand it over to you.

Gary S. Shedlin

Mark, thank you very much. So I bring no ringtones, I bring no product demos, but I am the closer. And I am the last thing that stands between you and lunch today. So with that, let's get going.

So good afternoon. As many of you know, I joined the company this past March after a long career, as Mark said, as an investment banker. And I had the honor of being a strategic and financial advisor of BlackRock for almost 20 years. And I couldn't be more excited to be here today and have the opportunity to speak with you firsthand about delivering shareholder value at BlackRock. I've had the chance to speak with many of you over the last few months, and I look forward to meeting all of you over the quarters to come. So let's get started by reviewing what we have accomplished today.

BlackRock, as you've all heard today for the last few hours, is a very differentiated asset manager, with a history of strong performance and a commitment to delivering attractive return to our shareholders. As you can see, since going public in 1999, we have generated a compound annual total return to shareholders in excess of 25%, significantly higher than the broader Financial Services Index and the S&P 500. We've delivered these outside to returns in part through 2 transformational and accretive acquisitions: MLIM in 2006 and BGI in 2009, but also by means of strong organic growth and tactical capital management. Today, you've heard from the heads of our businesses, my colleagues, my new partners, who explained their respective plans for organic growth. And while past performance is clearly no guarantee of future results, I'd like to walk you through how the sum total of those opportunities, in conjunction with the actions we're going to take at the corporate level, will deliver financial results.

To help frame the question -- to help frame the answer to that question, let's focus on the 3 key drivers of shareholder value creation: first, delivering organic growth through a commitment to alpha generation, product innovation and broad-based distribution; second, demonstrating the benefits of scale through operating leverage and improving margins; and finally, implementing a consistent and predictable capital management policy that will return excess cash flow to shareholders. If we can deliver on each of these drivers through market cycles, we will successfully generate earnings growth. If we can differentiate ourselves relative to our peers, especially in the context of organic growth, we believe that should afford us a premium multiple and ultimately drive outsized total returns and shareholder value creation. So let's examine each one of these drivers in a little bit more detail.

Since closing the BGI acquisition in late 2009, BlackRock has delivered solid organic growth in excess of industry averages. During this period, we experienced, as you've heard today, strong growth in our iShares and Retail businesses and moderate growth in our Institutional channel. While we see an uptick in volatility in recent weeks, markets have experienced a period of relative calm over the past several quarters as macroeconomic conditions globally seem to have stabilized. Consistent with this, we have generated annualized, adjusted net new business growth of 5% in the first quarter of 2013. Let's put this in a little bit of context. Our 5% annualized organic growth in the first quarter represented approximately $40 billion of net new business. That's larger than the 2013 first quarter net flows of our 3 largest publicly traded competitors combined. In stable markets, we continue to believe this level of organic growth is both achievable and sustainable. So how will we achieve this? We will execute on the various plans you've heard here today. In Retail, as Robbie Fairbairn outlined, we will turbocharge growth by broadening our product set and increasing penetration of high-growth distribution channels, especially RIAs. In Institutional, in BlackRock Solutions, Goldstein spoke incredibly passionately. We will capitalize on our leadership positions in specialty areas such as financial institutions, official institutions and define contribution and deepen our existing client relationships through cross-selling opportunities. And in iShares, as Mark Wiedman just finished, we will grow U.S. market share, we will expand the global market, we will penetrate fixed income markets and continue to innovate. And finally, as you heard from both Quintin and Amy, we will continue our relentless focus on performance and drive outsized flows and priority products across our strategic themes that most of my colleagues have talked about today: income, alternatives, outcome-oriented solutions, retirement, strategic beta and emerging markets.

However, organic AUM growth only tells one part of the story. BlackRock's value proposition spans the gamut from high alpha active management to cost-efficient beta linked by asset allocation experience in between. The breadth and depth of our product line is unmatched. While the average fee rate of our total book of business is approximately 20 basis points, we offer everything from alternatives at 2 and 20 to index mandates with mid single-digit fees and plenty in between. The conclusion, not all net new business is of equal value. And if you look at our organic growth based solely on net new assets raised, you will be missing a large part of our story because our changing revenue mix is just as important as our diversification.

As you can see on this slide and you've heard from numerous speakers today, 2 of our business channels, iShares and Retail, account for 34% of our AUM, both represents 66% of our base fees. The reason for this, these channels have effective average fee rates of approximately 30 basis points and 60 basis points, respectively, compared to an effective average fee rate of 10 basis points in our Institutional channel. Our expectation is that both growth in iShares and Retail will outpace the Institutional channel, thereby driving continued mix change. That will result in higher fee products, which will ultimately result in organic revenue growth exceeding our organic AUM growth.

This brings us to the second [indiscernible] the strength and stability of our business model and financial results are attributable to a diverse platform, the benefits of scale and disciplined expense management. The BGI acquisition doubled the size of the firm at the end of 2009. On a pro forma full year basis for 2009, the margin for the combined firm would have been 36.9%. We were able to grow margins by 240 basis points in the first year to north of 39% and have achieved another 100 basis points of margin expansion in the past 2 years with further momentum in the first quarter. And we've done that while making healthy investments in the business.

Scale is an important driver of this margin improvement, especially in passive, leveraging the substantial investment in our new brand campaign and in our ability to absorb the increased costs of regulation and compliance that is impacting all financial service companies, including asset managers. We demonstrated continued expense discipline in the first quarter, with year-over-year revenues up 9%, while expenses were up 4%, excluding costs related to our talent management initiative and closed-end fund launch. Many of you asked how high can the margin go, is 40% of floor. In stable market conditions, we would not expect to see a margin below 40%. Our business diversity and scale generates stable and significant cash flow that affords us the opportunity to invest for growth in both attractive and challenging markets. You heard this from Larry in the past, and the story hasn't changed. While we appreciate the benefits of higher margins, we do not manage the firm to a specific margin target, and we'll not forgo growth opportunities in that regard. We are committed to dual objectives: running the firm as efficiently as possible while also investing for future growth.

Finally, let's discuss the last driver of shareholder value: capital management. Let's start with our balance sheet, which is obviously critical to an understanding of our overall capital needs. Our balance sheet total some $200 billion in assets. However, approximately $160 billion are separate account assets and securities lending collateral related to our U.K. Life company, which handles our pensions business. Another $3 billion relates to consolidated assets of VIEs and sponsored investment funds. These are all segregated client assets which generate advisory fees for BlackRock. However, they are not available to our creditors, and we have no economic interest in them. After excluding $30 billion in goodwill and other intangible assets, we're left with approximately $9 billion of economic assets, predominantly cash, receivables and seed and co-investment capital to support our future product growth. Bottom line, unlike many financial services firms, we are asset lite.

We're currently generating around $3 billion of operating cash flow annually. Because we are asset lite, our growth is not predicated on significant capital retention. A strong and consistent cash flow model that is not capital-intensive is incredibly differentiated within today's financial services industry. We are committed to using our cash flow to optimize shareholder value. We will prioritize our use of cash to first grow the business and then return the balance to shareholders. Our capital repatriation strategy will be balanced between consistent and predictable dividend policy and share repurchases. We will not accumulate excess cash on our balance sheet.

Let's examine our capital management strategy in a bit more detail. As previously mentioned, our first priority will be to invest in our business, either to drive outright growth or to optimize our operational infrastructure and regulatory and compliance readiness. Notwithstanding 2 transformational deals, we have successfully grown the firm organically through prudent and targeted investments. These expenditures have helped us drive our client businesses, enhance our talent, especially around our investment capabilities, support product innovation and strengthen the BlackRock and iShares brands. Each of these investments is critical for us to execute on the plans outlied -- outlined, excuse me, by my colleagues today. Investment in our infrastructure is critical to maintaining our unique strengths and competitive advantage, especially as it relates to Aladdin and optimizing the client experience of BlackRock. While our peers have alluded to spending more on technology and compliance, we are advantaged in 2 key ways: our BlackRock Solutions capability that Charlie walked you through means that technology spending actually helps drive high-margin revenue and enhance client service; and our scale helps us absorb compliance costs with a reduced relative impact to our bottom line.

At times, we will also invest in our business through acquisitions. However, these will not be transformational or large scale. They will be tactical and disciplined. Any transaction will be supported by a strong strategic rationale, and we'll enhance or complement our current capabilities. We will utilize stringent financial targets and be very mindful of hurdle rates associated with the risk-free return from share repurchases.

As I mentioned earlier, after investing in our business, we are committed to returning the balance of our cash flow to shareholders. Depending on market conditions, we anticipate our dividend payout ratio will remain in the range of 40% to 50%. Since 2006, this policy has driven a 22% compound annual growth rate in our per share dividend.

As Bank of America and Barclays have exited their strategic shareholdings, our public float now affords us the opportunity to be more consistent and predictable with respect to share repurchases. We do not intend to be market timers. We repurchased $250 million in the first quarter and, in the current environment, see that as a good planning rate going forward. In total, the aggregate level of our dividends and share repurchases will be funded out of operating cash flow. We do not have trapped cash overseas and have no need to lever the balance sheet to achieve these objectives.

We've reviewed each of the key drivers critical to shareholder value creation: organic growth, operating leverage and a consistent and predictable capital management policy. So how will this translate into earnings growth in the coming years? While we don't provide earnings guidance, I'd like to propose a framework that will help define a range of outcomes. In this chart, for illustrative purposes, we've made a few assumptions around beta, BlackRock Solutions revenue growth and performance fees that are broadly consistent with Street estimates. We have also assumed a future level of share repurchases, consistent with current payout ratios. The sensitivity table calculates an annualized level of EPS growth by varying 2 inputs: organic AUM growth and operating margin. For organic growth, we've shown a range centered around our 5% target. For operating margin, the range of outcomes is consistent with a view that a 40% margin is sustainable in a stable market environment. No doubt, each of you will obviously have your own opinions and assumptions. But if we can hit our organic AUM growth targets, benefit from higher organic revenue growth due to anticipated mix change from our faster-growing Retail and iShares businesses and leverage our scale to drive operating margin expansion, we would realize double-digit earnings growth through market cycles even as a $4 trillion asset manager. No doubt, beta will play a huge role in the outcome in any 1 year, and our actual results in a given period will not necessarily follow these assumptions. But through market cycles, if we execute on the growth strategy that we have outlined today, we are confident that we can continue to deliver attractive shareholder returns in the coming years much as we have since the last 14 years since our IPO.

So this concludes, I'm happy to say, our formal presentations. I'd like to invite everyone to join us on the first floor for lunch, remarks from our CEO, Larry Fink, and an audience discussion. The table seating for lunch is assigned and can be found in the mobile app by clicking information or do what I do, just ask someone when you get upstairs. Event management will also be at the lunch room to assist you if you can't find your table. Please don't forget to take your materials with you as the event will conclude from lunch upstairs. And if you're using a BlackRock iPad, we ask you that you please leave it for your seat. Patrick?

Patrick M. Olson

Yes. Just one other thing, we're running a little bit ahead of schedule. So we have about 250 people in the webcast. And for you, we will likely pick back up at around 12:30. We're going to assemble the presenters on a stage downstairs for questions that should last 45 minutes to 1 hour. So that will start somewhere around 12:30.

Gary S. Shedlin

Okay. Thank you all very much for being here today.


Patrick M. Olson

All right. All right, everybody, we're going to start again with the Q&A, so if I could ask my colleagues to come up and join me. So while everyone is assembling on the stage, just a couple of thoughts. If you have any questions that are sort of macro-focused, remember, Larry is going to speak for a few minutes after the presenters take questions. So macro, just sort of macro environment, those types of questions might be better at that point.

As I had mentioned, we have a number of people that are on webcast, so I've got pages of questions that have come in via webcast. So what we'll do is we'll take a couple of questions from the audience, and I'll leave in some questions that we're getting via the webcast.

Question-and-Answer Session

Patrick M. Olson

So why don't I start with one of the webcast questions first, though, just so people can get their thoughts together. And Rob Fairbairn, maybe this is for you. And I'm reading verbatim here. So you spoke about increased market share goals in the wirehouse and RIA channels. Can you flesh out the process you're undergoing to get your market share to the goals that you've laid out?

Robert William Fairbairn

Yes. So just as a reminder, I've talked about moving our active business to a 5% market share from 3% in the wirehouses and targeting a long-term position of 5% in RIAs, where, really -- where we're effectively a start-up build [ph] on the iShares business. And it's really quite simple, Patrick. The execution is all about products in the wires, with a few exceptions, I will literally call it a sprinkling of additional wholesalers, internal wholesalers, really, not word move the dial for everything that you look at. We're in very good shape. You've seen that distribution [indiscernible] that I showed. So it's really about how do we get more products through the pipes, more investment solutions through the pipes. And I highlighted those 2 areas: alternatives, multi-asset income. If you look at our strategic income opportunities in fixed income, if you look at the continuing success, the Global Allocation range, it's just taking that to more FAs. And we are looking successful players around those levels. We'd have 5 products grossing substantial billions each year in the wires. We're currently operating at that level up from 2 years ago. That's how we're going to get to that number. In the RIA, it's a combination of 2: taking those products and more into the RIA channel, but clearly, we've got to built our distribution there; and we're going to be a lot more thoughtful than simply just hiring wholesalers into that channel. If you think about the RIA space, it's very segmented. You literally have almost competing asset managers, we call them TPMs, third-party managers, at the top, right down to individual mom-and-pop, x FAs, who set up on their own. Our proposition to them would be very different. So very segmented, clearly not trying to cover the bulk of detail of the RIA space with anything other than a technological solution.

Patrick M. Olson

Yes. One follow-on question from there, Robbie. And I think, Craig, you had this, as we were sitting at lunch, which was, overall cost of distribution, maybe you can comment on that.

Robert William Fairbairn

Yes. I mean, there's much written and talked about in terms of cost of distribution to us, the asset manager. I have to say, at BlackRock, we really haven't seen dramatic pressure on the cost of distribution, particularly here in the U.S. And we hear a lot about it from our competitors, particularly medium-size, active-only, 1, 2 powerful product competitors of ours, but just we haven't seen that. If I was to hazard a guess, I think it's because we offer so much as a partner to these big wirehouses beyond an individual product that makes us, frankly, very valuable to have as a partner alongside any 1 product. Outside the States, I talked about this, Mark talked about this, there's a changing shape in the distribution landscape. It's not so much our fees for distribution to the asset manager going up, it's the fact the distributors can't receive those fees anymore. And right now, there are a lot of asset managers that think that's the game, it's over, it's great, we don't have to share that portion of the revenue with the distributor anymore, and are expecting the distributor to sort of roll over and just accept that, that revenue is gone forever. That's clearly not going to happen. So the pressure on fees outside the States in markets where you're getting this regulatory change is the shape of what we are positioning the plan, is moving to sub-advisory, is moving to ETFs, is moving to passive, is moving to multi-asset. And those will have very different fee [indiscernible].

Patrick M. Olson

Okay, good. Let me open up to the audience. Yes?

Unknown Attendee

For the integration of iShares and the BlackRock distribution, how will you measure, track, gauge the success of that integration? And what's the time frame for reasonable expectation of when that will have some effect?

Robert William Fairbairn

Do you want me to...

Patrick M. Olson

I think you and Mark could probably have...

Robert William Fairbairn

So I'll start, Mark. I mean, I think it's -- time frame is about 18 months. This is a complex, bringing together of 2 forces that traditionally have been asked to do different things. We've been going for 3 months. So we've already seen early wins, but I wouldn't call them institutionalized. So 18 months is what we have set ourselves for real results. Real results should be measured as increased market share in the Core space that Mark talked about in iShares and then everything I talked about in terms of increased market share, moving up the open-ended mutual fund rankings and becoming a more powerful player in the broad business. But those will be the 2 that you will see and be able to see publicly. But the number of other measures are within it. But those are the 2 that really drive our sense of success.

Patrick M. Olson

Yes, Craig? I think there is going to be one right here.

Unknown Analyst

Thank you, Pat. This is probably for Mark or Gary. But maybe you could provide some color on what are the incremental returns that you're generating on future revenue in the iShares business, so in terms of incremental margins?

Gary S. Shedlin

I would say the following. I mean -- and again, I'll take this as a question related to margins overall. I mean, I think we are cognizant of the fact that on the passive side in a non-capacity, broadly [indiscernible] constrained product, you can correct me on that, Mark. I think we would basically view the margins as incrementally higher than other parts of the business and we will probably see a natural bias if there is a true mixed shift over time to more passive and the margin inching up as it relates to that. I don't think we want to necessarily define exactly what that is. But it's again consistent with the messaging I think that we've said before. We're cognizant that that's going to basically lift margin over time in a consistent beta environment. But we have other investments to make around the firm at the same time.

Patrick M. Olson

Charlie, this is probably a good question for you. One of the questions that came in on indexing. Given the need for innovation in indexing, do you need to eventually get into the index building business? Or do you have a close enough partnerships with your outside index graders?

Charles S. Hallac

I -- we don't feel the need to get into the index business thing. Index business, per se, we have good relationships with our partners. They provide a lot of product support. And naturally, we replicate every calculation. And we can it model everything ourselves so we have our own sets of opinion. But we feel like there is some value in the differentiation between an index provider and a provider of the beta as a particular type of exposure.

Patrick M. Olson


Unknown Analyst

So, a question for Gary. We heard a change of tone about PNC and how they view the holding in BlackRock. So is there any color that you can give on discussions that you guys have had with PNC and maybe what you would do if they decided to come to market, how much flexibility you have there?

Gary S. Shedlin

So I would say couple of things around PNC. First of all, they've been a great partner of ours for 2 decades. And I think we embrace them in that regard. As it relates to what PNC is thinking about their own equity stake, I think that's probably a question better asked to PNC. As it relates to how we might or might not participate, I mean, I don't really want to speculate because it has so much to do with macro -- the macro environment at the time a decision is made, other than to say, obviously we are going to do what's in the best interest of our shareholders, in terms of thinking about participating if it ever came to that. And two, I think we're obviously going to be mindful of our comment on obviously the regulatory environment and the unknowns. And I think until basically we actually know the outcome of that, we're going to be very mindful and aware of our tangible equity and ensuring that they basically remain positive.

Patrick M. Olson

We have a question over here.

William R. Katz - Citigroup Inc, Research Division

Bill Katz. It's a question actually for maybe several people on the panel there. It seems to be a theme that came to each of the presentations and overall. But you laid out this map of runway for growth in iShares and the retail business and global, what have you. I'm just a little curious. Can you handle both the ability to grow the business and deliver on margin improvement at the same time?

Patrick M. Olson

Gary, it's probably...

Gary S. Shedlin

I'm sorry, I didn't hear the..

William R. Katz - Citigroup Inc, Research Division

Can you handle the ability to generate growth and expand margin at the same time?

Gary S. Shedlin

We have. I mean, I think we have already demonstrated that over the past 2 years that we've been able to grow margin and invest in the business over time. And I would hope that we can continue to do that.

Patrick M. Olson

Bill, the other thing is -- and we've talked about this, the natural mix shift that's happening in the business. So you got the retail and the iShares business carrying overall higher basis points and margin relative to institutional just growing faster, right? So that book of business is just growing faster.

Unknown Analyst

Thanks. So I'll just -- anyone who wants to take this question is great. Recurring theme today seem to be how do you get different parts of the organization to work together to really bring to these clients another breadth of products? And just in general experience, trying to take people who are used to selling kind of to their market or their product sometimes hard to get them to think about the products, to work with other people. So what have you done or changed, whether it's in terms of incentives or how you compensate people or how they advance to kind of get them to work together to really bring the full firm to solutions?

Patrick M. Olson

Yes, let me have Rob Kapito. It's best for you.

Robert S. Kapito

Sure. Look, this is a -- we're a complicated business. So I'd say that we have a lot products, historically different salespeople or different coverage people would sell 1 specific product and not understand the other. We tend to look at it from a client's perspective. So the type of people that we -- the type of people that we have to have that go out have to speak from the client's perspective and from the portfolio perspective. I think this is a really an important differentiator in our approach in product. So I don't want -- because we used the word product so many times today, I think we're product pushers. And remember, it's not necessarily what we want to sell the client. It's what the client needs to meet their financial objectives. So Rob Goldstein covers a lot of the institutional business, of course. And Robbie Fairbairn has to look at it from the client's portfolio. Here's what they're looking to do. And we have to send out people that understand portfolio management, structuring and getting the desired result. This requires a lot of training and a different type of training than just having a specific product sales force. So we'll be doing a lot more of training as the marketing changes. And it was one of the main reasons why when Rob Goldstein spoke today that we're combining the institutional group and BlackRock Solutions more because those pitches really go together as the clients not only wants to know what products he needs to buy, what asset allocation he needs but also the risk management and the technology needed. So it's a really different type of sale that our business is going to experience going forward, and that's what we're working on doing.

Patrick M. Olson

Rob, one more question that came in via webcast and sort of goes along with this. BlackRock has expanded dramatically globally and through acquisition. How do you maintain or build -- maintain the one BlackRock culture?

Robert S. Kapito

So this really starts at the top. And we have our board members here today. It starts with them. I don't think you've been to a lot of investor days where many members of the board come to be part of it. It starts at the top with Larry. And I try to help a little bit. The first part is that recognizing and making sure everyone is aware that we are a fiduciary first. That's the business that we are in. And we need to create a culture where everyone recognizes that our compasses always pointed at our client. The second thing is that as a management group, and you see the longevity of this group, so we must be doing something right is that we are not afraid to reinvent ourselves. And through each of the mergers that we have done, we had to be willing to go best in class and -- culturally and in many other ways. And we are always willing to change in order to bring best in class to our client. So those are the 2 important things. And of course, the third thing, which creates a good culture, is keeping our promises. And as management and all of us here, we keep our promise to our employees and we keep our promise to our clients. And we want you to know that we are keeping our promise to our shareholders as well. All of this creates a culture, which has to be emphasized every day in every discussion that we have, in every meeting that we have, and how we interact together as 1 BlackRock and 1 team on behalf of our clients.

Unknown Analyst

Thanks. I guess this one is for Mark. Mark, you talked about fixed income ETFs. And one of the areas where you think you'll see increased penetration is the investment banks holding less of the inventory I'm just curious in your conversations with clients now, how much have a shift from active to passive are you seeing -- or are focused on fees, given what's going on in the fixed income markets? And how big of a component do you think that is when you think about growth in that industry long term for the ETFs?

Mark Wiedman

Good question. I think actually, if you look at flows, the flow data would suggest that active fixed income managers have been accumulating many billions globally in mutual funds. So actually, I don't think that the real opportunity is competing directly with active fixed income managers. It is more about the substitution of bonds and derivatives and the use within portfolios, within bond portfolios, of fixed income ETFs is where I think we'll see the biggest growth. You do see growth in terms of ultimate retail holdings and asset allocation products, where clients are using fixed income ETFs alongside other forms of exposure products, other, for example, equity ETFs. But it's not really a substitution of fixed income active to fixed income ETFs. That is actually a fairly unfamiliar trade. That's not where we see the growth.

Patrick M. Olson

Okay. Yes? Back here.

Douglas Sipkin - Susquehanna Financial Group, LLLP, Research Division

Good afternoon. Douglas Sipkin. Just a question for really anyone on the panel. The active franchise obviously, the quantitative investing you've seen some real good performance. And obviously, you've made some changes on the active equity side. How long should we expect to see turns and flows in those respective categories? I sense with the quant, it's more a function of investor appetite. But with the fundamental, assuming all goes well, how long do you expect that we could start to see a turn in the flow dynamic there?

Laurence Douglas Fink

So the immediate aftermath of any change is that a lot of clients will crystallize their view, especially when their strategy remains struggling, so you tend to front load the outflows when you make those changes. But then clients have a series of meetings and so their own internal processes, which probably lasts between something north in 12 months, depending on the clients, when they make a decision whether they'd stick with that strategy or not, when you've offered them the new managers. So in that sense, I think you can probably take a 12-month view from any change and say, at the end of that 12 months, you're probably done with the changes, and then you are in the position where the merits of the new team are apparent and they will start having an impact. So there's a timeline. We made a series of changes in our Asian equities and global emerging markets franchise. Essentially, I didn't anticipate anything coming now as a constant search to the changes we made over a year ago. With some of the more recent changes, we have to wait and see what the clients conclude. And that will play out over the next 6 to 12 months.

Patrick M. Olson

There's an interesting follow-on question to that that did come in. While investment performance is key, doesn't the development of multi-asset products or certain outcome-oriented products ease performance pressures, specifically, their strategies if the overall product objective is outcome?

Unknown Executive

I'm happy to take that question. The answer is I think it changes the time horizon. So I think it eases the investment performance in terms of the measurement cycle becomes much longer. People aren't looking at quarterly or annual performance numbers. They're looking over a much longer time period. Obviously, if 3 to 5 years forward, it doesn't look like you're achieving the outcome, you would have a performance problem, which ultimately you've been hired to do something and you're not delivering on it. One thing probably worth noting is that the whole outcome orientation definitely increases the degree of reporting and complexity of reporting the client typically expects. So in many ways, it extends the time frame that the client would give you in terms of achieving the outcome. But simultaneous with that, it typically requires a bespoked reporting package, allowing them to get that degree of transparency.

Patrick M. Olson

Okay. Yes?

Unknown Analyst

Thank you, I have a question regarding Aladdin. Are all the Aladdin customers -- do all of them have all of their money managed by BlackRock? Or are there instances in which customers avail themselves of your analytic techniques but go elsewhere to have the money managed, and presumably that's not okay with you? And then my related question would be, in those instances is Aladdin by itself profitable?

Unknown Executive

So if you looked at the asset -- half the mics don't work, the other half are too sensitive. If you look at Aladdin as a platform, there's almost $14 trillion of assets that are currently processed on it. But at the same time, if you look at BlackRock, the asset manager, we only manage $4 trillion of that $14 trillion. So the bulk of the clients actually are managing their own assets. And many of them we may have a relationship with on the asset management side. But that's by no means a given or a requirement. Typically, the clients who are buying Aladdin are doing it because they have a large internal asset management capability. If you look at the past couple of years, the Aladdin growth has been primarily fueled from other very large asset managers buying the platform. In fact, many of BlackRock on the asset management side, many of its strongest competitors have actually become Aladdin clients over the past few years.

Patrick M. Olson

Great. Any questions around this side? No? I've been favoring the right side. Yes?

Unknown Analyst

You commented before on distribution costs and how you're not seeing an increase. I'm just wondering if there's sort of a more -- less obvious rise in cost of distribution coming from greater service levels required by distributors, and whether BlackRock, particularly with either it's Aladdin product or some of its solutions based offerings, can be more competitive in that environment? And then my follow-up question would just be where you see active ETFs side on the equity side going and whether they portend negative outcomes for mutual funds down the road?

Patrick M. Olson

Yes, first one. And then Mark, yes.

Unknown Executive

It's a great point. And a good example of that -- so I agree, the associated costs are gently rising. But for us, they mostly include leveraging the intellectual capital we already have. So a good example would be the provision of models where we provide model portfolios up against income, decreasing volatility, et cetera. We do that both in the iShares world and we do it in a combination of active and passive. And there is clearly a cost in supporting those models, getting up on the system, operating them, et cetera. So those associated costs and the huge thirst for intellectual capital created by BlackRock and other asset managers into these distribution platforms, as they look to reduce their own in-house cost of producing market views, et cetera, is definitely on the rise. But again, I come back to the points that have been made by many people on the platform here. It's kind of a sum cost, a lot of that already at BlackRock. It's just how we leverage that intellectual capital and deliver it. The other cost would be brand. As you know, we've increased our brand spend as a firm over the last 2 or 3 years. We think we are at a relatively sustainable level now. But as we go into more markets, we'll be looking to support what we're doing in the retail and institutional marketplace with potentially more brand spend. So, Mark?

Mark Wiedman

The question is active ETFs. Let me first define the term active ETFs. Under the SEC in the United States, an active ETF is basically anything that is not an indexed ETF. Okay? So that's the broad definition. That's not what the question is about. The question is really I think about the subset of stock picking active ETFs. So you could see non-indexed base, exposure-based products. I believe there's an opportunity there, for example, the short end of the yield curve, the fixed income, other more exposure-based opportunities, which we actually have been launching recently. The question about stock picking. Individual -- alpha generated from individual security selection bottled inside of an ETF. And I can offer a personal view. I don't think --first thing is we don't know. My personal view is I don't see a bright future. And the reason is the value proposition is very unclear for anybody involved. The investment bank is probably hedging it. The portfolio manager is now disclosing his or her positions to the universe. The client -- the pricing is actually not going to be that different in an institutional share cost and open a mutual fund. To me, it's a little bit like -- do you like your diet coke in a can or a bottle? Most people are indifferent. And there is not a compelling value proposition for 1 distribution vehicle or the other. But one thing that could -- the theory of the case for growth is that the distribution disruption play, effectively going around home offices and centralized platforms as a security and effectively sidestepping the retrocession universe. Again, I don't really see much momentum around that. But that is a possible lever for growth for active ETFs and I'd say we don't know. If we launch one that are stockpicking, please no one say that hey, you said you wouldn't do that. I would say that we're a little sceptical of the long term growth, but maybe we'll experiment.

Patrick M. Olson

Great. Just to balance here a little bit, Rich Kushel, this probably is for you. How much rationalization of product is taking place in active equity versus iShares?

Rich Kushel

Okay. So if you look at the rationalization that's happened to-date, it's actually been pretty broad-based. There's stuff that you can see to be apparent, in terms of our registered mutual funds. And you would have seen some mergers and closures there on both the open and enclosed end side. The iShares business is one where, despite having 650, 660 different iShares out there, up until about 6 weeks ago, we had never actually closed on iShares, and we did it 6 weeks ago. I would say that there was some concern that that would be very disruptive for the market or brand. You owe me $1, by the way, I won the bet. The -- I don't think it proved to be -- and because of that, I think what you'll see more, as a regular part of the platform hygiene, is a more critical look at the iShares. I would just say that in terms of rationalizing iShares, keep in mind that actually the ratio of cost to keeping it open versus the cost of closing isn't super compelling. They are actually hard to close and they're less expensive to keep open. So I think the pressing concern there is less. On the other platform, to-date, the rationalization activity has been pretty broad-based. In share numbers, it will have affected actually more the fixed-income portfolios. That reflects just a lot of smaller fixed income portfolios relative to the equities. But we've certainly been active there. And I would expect we'll continue to do that and really get the product line focused.

Unknown Analyst

Just a question on the institutional side in terms of the growth opportunity. I think you guys pointed out that there was like 35% of the clients that only had 1 product at the top 500. So when you look at that opportunity, in terms of moving that number up, is it a product offering? Is it a performance issue? Do you just have to ask? But just -- what's going to drive that? And then the only other question is you mentioned some of the examples that you gave, it was -- in some relationships, you had the opportunity to manage like the entire portfolio for the client. And in others, you have some capacity restrictions. So just some ballpark in terms of the number of clients where you're near that capacity restriction versus the clients where there isn't. So you have kind of an open field in terms of the size of the asset opportunity.

Unknown Executive

Let me start with the back end of the question first, with regard to capacity among the institutional client base. If you look at the top 500, the vast majority of those, we would not have any capacity issues with. When you look at the top 50, there would be some that we have capacity issues with. Although even when you look at the top 50, I think there's more room for growth in terms of just total numbers of clients relative to clients that we're at capacity issues with. When you look at the first part of the question about why don't we have more than one strategy with those 35% of the 500 clients, is it about investment performance? Is it that we simply need to ask? Is it just how we've covered them historically? I think the answer is all of the above. So I don't believe there's any 1 reason. I think there's a variety of reasons. My observation is twofold. One is that number is growing. So if anything, we're bringing on a lot of new clients, and second that we just need to continue to fulfill our poor attendance in servicing these clients. And as long as we continue to have sustained or improved investment performance, we should be able to grow those relationships. One of the questions at Table 3 during lunch was, what am I most excited about in my job? And what's most exciting to me is there continues to be a lot of pockets of the institutional universe that historically we haven't covered or where we just have 1 component of our relationship. And there's just enormous growth opportunity. We just need to spend time with the client and effectively demonstrate our value proposition and ask. So that's actually quite exciting to me.

Patrick M. Olson


Unknown Analyst

Within ETFs, you showed a chart about the fee rate generally being stable outside of 1 product. Do you have the ability to maintain that, as you think about going forward or 1 subsector, I guess the way to think about it? But as you look at the fee rates or the pressures in that business, how should we see that evolving in the years to come?

Unknown Executive

I'm not sure we know. We'll see what happens over time. To-date, what I argue is that price pressures are confined to those core exposures. And that's in the -- and in the United States, outside those core exposures and outside of the United States, price is just not a prime concern for clients when they're choosing an ETF. Obviously price always matters. But there's other concerns, whether it be liquidity or specific exposure or the brand, the provider or in some cases, the structure of the product, that are all relevant. So there's a certain economic logic that over time one would expect to see in the industry. It's price compression. But the truth is, we haven't seen much evidence of it. And if you look at the asset management business overall, that thesis has been repeated for 15 or 20 years and honestly hasn't really realized. So I'd say let's leave that as a question mark for the future. But for today I think it's pretty clear there's that segmentation that I outlined.

Patrick M. Olson

So let me take 2 more, and then I'll read one from the webcast.

Unknown Analyst

Can one of you just give us an update on the non-bank SIFI issue?

Patrick M. Olson

That was the one from the webcast. I should've introduced -- I'm sorry. Barbara Novick, one of the founders, original founders of BlackRock is up on the stage. She runs our government relationships group here to answer just that question.

Barbara G. Novick

Good afternoon. I think on the SIFI question we really are seeing 3 questions. The first is will asset managers as a group be designated? The second is if they are, what would be the metrics that are used to designate them. The third is what would it mean? So let me just go through all 3 of those. The first one, Gary I think outlined pretty well before our balance sheet. They were very different than other financial institutions, that's true of all asset managers. Capital is not a big part of what we do. We are not leveraged. We're not using wholesale funding. All the things that you would look for really don't apply to asset managers as a group. On the second is what metrics -- and because of the difference of asset managers, the FSOC back in April last year, when they gave out guidance on metrics for banks and other financial institutions, specifically said asset managers are different. And they asked the Office of Financial Research to conduct a study. So that study has been ongoing over a year. It has not yet been concluded. So we don't really have any metrics yet to even look at or comment on. Now the third part is well, if somebody was designated, what would it mean? And again, very hard to say. Does it mean capital? Does it mean new reporting, what does it mean? And without anything to look at and assess, our view is it's just too speculative today at all 3 levels and something that we'll continue to talk to people and work through, if we were to come.

Unknown Analyst

Thanks again for taking my question. One thing we haven't heard too much today, except maybe in reference to the retail business a little bit and multi-asset class was your alternatives platform. And my sense is you've spent a lot of time and money the last several years, building that up and building that out, maybe as much as the equity business in some ways. So maybe just the deposits, maybe you got a brief update on kind of where you think that part of your business stands today? Are you comfortable with kind of your product set? How does that play into some of your growth expectations?

Patrick M. Olson

Rob, do you want to...?

Robert S. Kapito

Fixed income is what you're...?

Patrick M. Olson


Robert S. Kapito

Alternatives, okay. Obviously, one of the reasons for the BGI acquisition was we saw this barbelling occur between passive, the alpha and beta separations. So we didn't have a big enough passive business and that really fit us well. And while people were getting their beta from the passive business, they were getting their alpha from the alternatives business. And there's no question how large the alternatives business has been growing. Just look at the growth of hedge funds and private equity and other type of products. And we have been a player in there, We haven't been -- it's not advertised as much. But we do have a significant amount of hedge fund alternatives at the firm that have performed very well over the years. And we also have a very large fund to funds that has performed very well, which was from an acquisition of Quellos as you know. And then we have a private equity fund to funds as well. And those continue to grow and have very good performance for us and most of those are institutional products. We have recently cracked the code for a better wrapper for retail. And we are now using our strong distribution base for retail to bring in alternative products in an appropriate wrapper for them. And this has been very successful. And we have been raising billions of dollars in the alternatives platform for retail. We haven't advertised it that much because it's a very competitive market. And how we're doing it and how we're utilizing these distribution systems is something that is proprietary to BlackRock. But we believe this will be a significant growth business. We believe that because we believe that the retail investor needs access to those higher alpha products that are in alternative products. And these are things that may mirror a hedge fund but may have less volatility than the hedge funds that you read about in the paper all the time. So we have various alternative-type products going into these wrappers, some of them with less volatility and some of them giving exposure to the retail investor in areas that they have not been able to get exposure to. So this is a very big growth area. It's very important on our agenda. And I will tell you so far, to-date, and I got a review last night. I'm very, very pleased with the success of this. And you'll be hearing more about that as it becomes a bigger part of our product platform.

Patrick M. Olson

Very good. So I thank our presenters at their first Investor Day. So a lot of effort has gone into putting this together. And I appreciate all the work I'm going to have Larry come up, do some closing remarks, take some questions. And we're going to let you get out here, probably a little bit early. Thanks very much.

Laurence Douglas Fink

So first of all, I would like to thank you again for taking your time at our first Investor Day. Also, as Rob noted, we do have 4 board members here, another example of the commitment from the top down of our organization -- throughout the organization. The one thing that was very important to me when we went public, 1999, that we had a board that we could learn from, a board that would had much greater experience than we had and a board that if necessary, could put us in the right category if necessary and disciplined us. We have a great working relationship with our board. And I'm proud to say that we have as good a board as any firm in the world. We were noted in Fortune Magazine this year as having one of the top boards in the world. And we were recently ranked by some publication as being the number one Board in America. So a lot of notoriety. We have Jimmy Grosfeld, we have Ivan Seidenberg, Sue Wagner and Deryck Maughan. So 4 board members. And this is good example of the organization.

So we styled today with the idea that we're going to show you the depth of the firm, the depth of the leadership team, a leadership team that can really take this organization much further than we have. And hopefully you came away with that feeling.

So I'm going to try step back up for a second and talk about some of the big picture issues. One big picture question that people ask, but I didn't hear that question today. Maybe we're getting that story out, and I don't need to do this. But one question we were asked years ago, after the BGI transaction, is BlackRock too big to grow. And hopefully, you all came away today with a short answer of, no. We can continue to grow. We are working on the concept that we could grow organically, at least 5%, in terms of net assets. Gary walked -- Gary Shedlin walked you through how we're going to do this. It's going to be a combination of assets but also mixed shift. So the combination of new -- net new assets, mixed shifts and then obviously capital management, we're going to be able to achieve double-digit EPS growth. That's the objective and that's how all the leadership team thinks about when they think about the business.

Rob Goldstein showed you why we are trying to bring everything together. We do believe institutionally that if we could bring our Aladdin business with our institutional business, we have a business that no other firm can have. But more importantly, we have a business that can really connect all our products with our clients with the overlay of risk management. And this is really important for us to go the next step with our clients. There's so many conversations, so many articles written about solutions. Obviously, we talked about solutions way before people used that word, when we created the word BlackRock Solutions years ago. But it is now heavily used. Almost every competitor talks about solutions. But indeed, no firm has the technological platform of what Aladdin can bring and overlay that with our institutional business. So we can overlay that business and then emphasize some of the great growth opportunities we have institutionally, that's in the defined contribution area, in the financial institution area and the official institution group. These are 3 areas where we still see great growth opportunities.

Obviously, we are all aware that the DB business is shrinking worldwide. And it's now -- the DB business is just a function of share. So if we could bring this technology and bring this to our institutional client, we could become that true solution provider which would create much greater organic growth.

You heard from Charlie Hallac, our COO, about the power of Aladdin. Hopefully, you saw what it can do. And as I said earlier, hopefully, you're interested in talking to the team about whether you should adapt it. As one of the questions -- we were asked a question, majority of our growth in Aladdin in the last year has been with other asset managers. And so, I would welcome you to a demo at your shop and see if that has any opportunity for you.

But Aladdin, even without -- without even changing our model, has been growing 17% a year, in terms of revenues. And I do believe we have a greater opportunity to grow that even faster if we just -- if we continue to apply ourselves and we continue to develop modules for all different types of products.

So this is going to be a great opportunity for us. But hopefully that you saw it too, intersecting all the different conversations how the Aladdin fabric has intertwined all our businesses at BlackRock. It is one of the core foundational cultural issues of BlackRock, that we think about risk management, we think about having 1 technology platform. I heard a question earlier about -- talking about how do we make sure we have 1 culture? Well, if you don't have 1 technology platform, it's very hard to implement 1 culture. And so even these soft issues, having a strong technology platform really embellishes and empowers a 1-culture firm. Having retail institutional, DC, DB, official institutions, all our clients' activities on one common technology platform, having fixed income, alternatives, cash, equities on one common platform, it allows our portfolio managers to understand more what's going on in our business, as you saw by looking at it. But more importantly, it allows us to have more thematic sort of clients. And it provides us to be in a better fiduciary for our clients. So we showed you the application of it. But I wanted to just emphasize how empowering having technology on 1 common platform throughout the firm empowers the culture of the organization.

Robert Fairbairn walked you through our global growth plans for retail. Obviously, this is going to be one of the major changes of the organization in the future. I talked about this in many of the quarterly calls. We have a very strong position in the wires. We actually have done quite a bit over the last 5 years because after we bought Merrill Lynch Investment Management, we really only had a strong position at Merrill Lynch. And we had -- we were ranked 10th and 12th and 14th with the other firms. As Rob showed you, we're fifth with so many different organizations now. In some care organizations, we moved up to third. And our objective over the long run with the wires is even to get to be into a stronger position. And that's something that we are all committed in doing.

But where we need to continue to grow, where the emphasis is, the reason why we built and organized our 2 platforms, our 2 retail platforms onto 1, is to really start impacting the RIA channel and other channels that have a comprehensive distribution model of offering both beta products and alpha products.

So we are also actively involved in new opportunities. Rob talked about it. Rob Kapito just talked about it. We're spending a lot of time, a lot of investing in the alternative space, a lot of time, a lot of investing in the multi-asset space. We believe these will be differential products for us in the retail products -- the platform. And now it's up to us to really continue to penetrate these -- our clients in those platforms.

So Mark Wiedman showed you about iShares. And hopefully you came away at really understanding the differentiated business model we have for iShares. It is not just a retail platform. It is going to be a platform that penetrates in other institutional products across the board.

We've experienced more than double-digit growth engine for the firm. And we expect iShares to continue to develop a double-digit growth pattern for the firm. It's going to be done by being innovative. It's going to be done by breaking new ground such us our core series products and our direct deal with Fidelity.

But hopefully, you came away that iShares is not just a U.S. business. The growth potential we have in Latin America, the growth potential we have in Europe and Asia are pretty large, as we believe adaptation of ETFs in those areas of the world will continue to grow. And we do believe that having the positions we have globally will allow us to be even -- in the future more differentiated. It's the reason why we've been very aggressive in buying like Claymore in Canada, having a leading position in Canada, and another reason why we -- we're going to close the next month, acquiring the Credit Suisse ETF platform. So when a client is looking for Swiss franc products, they're going to be thinking about iShares. But the one other thing that you look at where the flows are going in terms of ETFs and the innovation in terms of ETFs, it requires a very strong investment in a product development group. And I think we have a stronger product development

group as anybody. And also more importantly, is having a strong capital markets group, making sure clients are utilizing ETFs. And if they want to move from one ETF to another ETF, they could work with Mark's team and try to execute the trend for -- into 1 product, into another product, working alongside the dealer depth of the street. So it's about innovation. It's about creating products that will allow clients to move around the world and navigate beta in all different areas.

So we've spent a lot of time talking about our distribution model, how both Rob and Rob and Mark talked about how they're going to deliver. But what also differentiates us with our competition is what Rich Kushel talked about, and having a strict and precise Strategic Product Group that's going to be forcing a lot more discipline internally, a lot more focus and a lot more innovation. Rich talked about how we are downsizing some of the products that just haven't sold, and -- or products that were redundant. Some of these products were a result of, maybe the state's research merger or maybe it was the MLIM merger. There was a lot of just orphan products that we're trying to reduce so we have more focus. But at the same time, we're trying to be in front of the needs of our clients, and try to help them. And in terms of strategy, we have to be continuing cutting edge and new products.

And so the Strategic Product Group areas, probably the most important change at BlackRock, of making sure we're disciplined in our product range, but also disciplined in managing some of the products that we're just not successful, or products that we're not just -- that we were not successful in building into a larger product. So we need to -- and importantly, having the Strategic Product Group, it also helps us innovate in terms of what's going on in the market. A component of Rich's platform is the BlackRock Institute. And this is the think tank where all our portfolio managers come together, and we're going to be having our, I guess a release of our most recent get-together -- Peter, next week? End of this week or next week, on our most recent piece on where we believe the world's going. But it is this group that we all come together as an investment team, talking about themes, talking about opportunities, but also talking about the opportunities of -- for new product development. And so it's a critical component of what we're doing. But it's also expensive. As I said, we were being much more forceful in winding down products, closing them, giving back the money. We're doing that with the idea that it's going to create more opportunities in the future. So we're trying to become a lot more disciplined than we've ever been before, in terms of how we navigate this.

When Amy gave you a look of our business, obviously, Quintin has been spending a great deal of time in rebooting our U.S. equity team. And in a very short period of time, we've been quite successful. Now in some areas, we haven't. But there are more portfolio managers who are above their targets, than portfolio managers who are below their target. We're very pleased with portfolio managers like Andrew Swan, who Quintin discussed, who is exceeding his benchmarks by quite a bit. He has been with us for 18 months now. So we're almost near the point where we're going to start seeing some real flows. And there's many other examples of that.

The one thing that Quintin did not emphasize enough, he showed it on a slide, is our great success in fixed income. The whole legacy of BlackRock was a fixed income firm, and we were as proud as any firm in our abilities of fixed income. And then we failed to deliver Alpha in 2008, and we had actually negative returns. And we totally restructured our whole fixed income team. Obviously, many of you who had been investors of BlackRock over the years, are aware of all this. We've spent a great deal of time with Peter Fisher, really working towards this, and Quintin, of building and rebuilding our fixed income team, to the point now, where 78% of all our products in more than 3 years or are above the benchmarks. We had some category killers for fixed income. And one of the big areas where I believe fixed income can navigate, forget about the growth -- great rotation. I actually think the great rotation is going be within the fixed income universe. You're going to see billions and billions of dollars moving out of the core fixed income products, the Barclay/AG-type of products, into the products -- fixed income products that are not targeted to 1 duration. And we have a leading product SIO that's one of the top -- I think it's #1 for a 3-year track record in terms of that. This is where I believe you're going to see great opportunities in flows. And this is something that -- where we believe we're well-positioned. And this is because of years of hard work from Peter and Quintin, and building our fixed income team. So we spent a lot of time investing, our scientific active equity team, we did a lot of investing, and now we have the performance. I hope the same thing will occur in our U.S. fundamental equity team.

Amy talked about why beta is not just beta. There's a lot of alpha in beta. And also, as boring people think about indexing, it requires a lot more than just replicating beta. It requires making sure she talked about the clock, needed to be on time. But one of the great things that I think I'm so proud of Amy's team, is how we deal with index rebalancing. And there's so many instances where her team has outperformed in terms of the actual beta, by making sure we have a strong -- of a capital markets team in our beta team. So it requires a lot of work. We're very innovative. The low-vol ETFs is a good example of innovation from our beta teams.

So we're taking advantage of all these different products. We're taking advantage of these opportunities, and we're taking advantage of the needs of our clients. But we're also leveraging our scale. Rob Goldstein runs the largest institutional business in the world. Mark Wiedman runs the largest ETF business in the world. And a lot of the benefits that come from scale. We have more resources than any firm to reinvest, and on top of that, keeping very high margins. And I've always said, we are going to continue to reinvest, if we can, if we see a need. I will continue to say we will do that. But I will also say, as Gary Shedlin said very well, we're very mindful of our margins and we expect to see margins to be stable to rising. And that is our commitment to ourselves and to our clients. Obviously, that's all beta-dependent. So if the market fell dramatically, we'll all have those issues.

But you're seeing the BlackRock and iShares brand continue to be built. This is an area where we are reinvesting. We believe it's imperative for us to go to the next step as an organization, it's to continue to build our brand. And we're committed to do that. But most importantly, Linda Robinson has done a very good job, I guess, indoctrinating all of us and telling us what to do. Because what we have learned through Linda and her team is most firms fail in brand because they lack consistency. They're in the market with a brand campaign, they are out of the market. They're in the -- what do you they tell the ultimate client, when you're in and out? But you want to talk about the strong brands of the world that are continuously in the market promoting the brand. It is what we hope to do at BlackRock, that we're continually embellishing our brand everyday.

You've met Barbara Novick today, talking and really showing our interaction with Washington. I believe it's imperative today, not just because of our scale but as a leading asset manager, to have a dialogue with our regulators and with our politicians. This is not just a U.S. commitment, this is a global commitment, as the world becomes more complex, as the world still continues to think about regulation. But as the world struggles with their economies and they're trying to find ways to reboot their economies, more and more regulators, more and more politicians are coming to BlackRock and talking to us, whether it's issues -- around regulatory issues, but in many cases issues around how that -- how we could help them in thinking about their own economy.

So the final question we have to ask ourselves. Do I think we have the right team? Hopefully you saw that. But now, can we execute? I think it's fair to say over the last 1.5 years, we have done that. I think it was fair to say that we were working on a huge integration 2 years ago, which took a lot more time. I believe we have the team to execute. We are as performance-driven as we've ever had. We have a leadership team that I've never felt better about in helping Rob and I navigate the organization. Everybody in the organization knows we need to get -- we need to have strong, consistent investment performance. And I could tell you, we are all committed in doing this. This is why we've been so strong in making sure we upgrade our portfolio team if necessary, and there's a lot that -- we talk about the external hires. What I'm most proud of is not the external hires, I'm most proud of the young men and women portfolio managers, who were trainees at the firm, who were able to build up their careers within the firm. And that's a key of success as we navigate and build our team internally.

The majority of upgrades in our fixed income area and our performance is almost -- Peter, 90%? 90% internally grown talent. And we don't emphasize that enough. So it's a combination of external hire and internal growth.

The other thing that we need to focus on if we're going to execute, and that's making sure we have the best platform in the world. And I do believe our platform, our global footprint, is as well-positioned as any firm in the world, to take advantage of the opportunities in the world.

And then most importantly, as a firm to execute, we need to make sure we live our core principles everyday, that everybody in the firm talks with one voice, one BlackRock. The best ideas we come -- that are generated at BlackRock are ideas that are generated by a group of people contributing different ideas and different opportunities. It is not generally one individual who is coming up with some key idea. It is a team of people interacting, talking about ideas.

And finally, to make sure that we have the ability to execute is a continued relentless pursuit of talent. That's training internally. But that's also continue -- when we have opportunities to bring people in, who had great careers elsewhere, to come and join us.

I am proud to say, with our 25th anniversary, that we do at this time, as large as we are, we're a very integrated, collegial organization. We're passionate about what we're doing everyday. I think all of us are excited about living the one BlackRock model. There's a true sense of ownership and a true commitment by everybody of that fiduciary platform and standard.

I believe, as investors, you're seeing your very first glimpse of what we can do in the future, and I believe we do have a differentiated model. I think we have a differentiated leadership team. And I'm very confident, going forward, that we have an opportunity to continue to make a difference in the world of investing and making sure that we make a difference to all our investors, who give us their money. It's very important, as large as we are, I have to tell everyone of our employees at BlackRock. It doesn't matter how big we are. If we are not living the BlackRock fiduciary culture for every single client, whether it's that mutual fund owner who has $1,000 in her fund, or a sovereign wealth fund that has $50 billion with us, we have to treat every client the same way. And if we live that life everyday, in every country we are actively involved in, we will have a brighter and better future for our shareholders and for ourselves.

Once again, thank you for taking the time and learning more about BlackRock. And I'm here to answer any questions.

Patrick M. Olson

That was quick.

Unknown Analyst

Larry, in terms of the outsourced CIO or fiduciary management business, seemingly that would be a place where you could bring the overlay and the rest of your capabilities. And you've talked about that for a while. But it's been somewhat slower, I think, in terms of the flows and the growth. So why has it been that way and why would that change in the future?

Laurence Douglas Fink

We'll, I'm going to ask Ann Marie, our new head of fiduciary, to come up and speak. You all know her as our CFO -- or past CFO. And now Ann Marie is co-head of our fiduciary business. And we've got to show another proud leader of our firm. So Ann Marie, why don't you answer that?

Ann Marie Petach

Okay. I -- the way I'd answer that is, I think when we looked at that initially, we actually looked at it too narrowly, relative to the real opportunity. Because someone doesn't want to necessarily give you 100% of their assets, but they want people that can provide a set of capabilities, ranging from governments to risk management, to asset management, to asset selection. And what we've done, I think, in rebooting this, is think much more broadly, about what is the combination, including thinking about sponsor concern. So if you're a pension fund sponsor, what are the other balance sheet risks you're facing? And really offer this as a set of capabilities that some may want to take. And I think with that approach, we're seeing the dialogue really step-up, from people who just want the risk tools and are thinking, look, I really need Green package or Aladdin to help me manage the things I'm managing internally, to people who want to outsource multi-asset parts to people who want to outsource the strategy. So the richness and the variety of the dialogue right now with states, with sovereign wealth funds and with pension funds, because we're combining really -- you don't have to give us everything, but you can really leverage our capabilities to achieve your objectives. So I think the opportunities are as exciting as -- I'm looking at Rob here. But really, an exciting set of dialogues and opportunities underway.

Laurence Douglas Fink

And I do believe having Ann Marie, with a huge background in treasury and as a CFO, can bring a whole level of dialogue, a whole issue, a much more comprehensive review, working alongside the CEO and the CFO suite on these fiduciary mandates. And we've already seen a big impact in the dialogue. And we're waiting to hear 1 or 2 large possible assignments, and we'll know in the next few weeks. So I won't go into any more detail on that. Please? Is that Marc? I think it is Marc.

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

Great. Larry, can you just give us some perspective on the global executive committee? Maybe some of the new folks who are joining, what you're learning from them? And then also how is decision-making changing, as the firm evolves from sort of the days of the founders to where it is today? And how is the decision-making changing throughout the organization?

Laurence Douglas Fink

Well, the global executive community is twofold: A, it's information-sharing, the one BlackRock platform, so one component of our GEC, which is about a 3-hour meeting every Monday, for about an hour, we all go around the room talking about what's going on specifically in our businesses. And so it's a sharing of information, and then the other 2 hours that is organized with Patrick on a day-to-day basis. So strategy is working alongside Rob and I on reviewing different businesses. So each day -- each week, we have a whole forward calendar. We're scrutinizing and reviewing every -- different businesses, and then obviously, we have time for special situations that we need to discuss. But it's -- so it's a combination of information-sharing but also decision-making within the GEC. There is very few times -- and I'd let Rob answer this question, too. I think there's very few times where Rob or I are playing the dictator in terms of where we're going with the decision. It's generally a pretty comprehensive review. It's done in a democratic way. We don't do votes. But you could sense the tonality of it -- of everything. And importantly, the GEC reviews this. But the true committee that really navigates and manages it and gets the betting done before it goes to the GEC is the committee that Rob runs. And that's our operating committee. So we have different committees going through the process of getting things embedded and reviewed. And as they said, it's a process in which to cross-fertilize ideas across the different leadership team, but also for the leadership team to learn in and hear what's on Rob's mind, what's on my mind, what's on Charlie's mind, to hear -- this is the forum in which they hear from Gary in terms of what's going on with the financials. So it's a combination of decision and review of the business. And it's a much more broad-based process than just a few guys sitting in my office making decisions. I could promise you that. And that's the biggest evolution in our organization. Rob and I really make those decisions. We help guide decisions. How about that? At the back?

Unknown Analyst

Thank you, again, for hosting us today. I appreciate the whole venue. I guess with your experience, I wanted to as if you could comment on the risk from leverage in the fixed income market currently. I guess as we think about the Fed exiting at some point, are you -- could you just comment on the danger of an event like 1994 and feedbacks you're getting from clients and your portfolio managers?

Laurence Douglas Fink

So I'm going to let Peter Fisher come up and talk about it. Come on, Peter. Since Peter was at the investment. He is part of the Investment Institute and needs to discuss this. So we got a lot of talent here. So I only have to be the spokesman.

Peter R. Fisher

Lookay, there are 3 stages to every turn in the monetary cycle. The first stage is when the Fed stops easing and rates will back up then. We've anticipated that, already 5 or 6 times in the last 2 years. But that's the least enduring vol-shock the system takes. Eventually, once they stop easing, everyone looks around and says, are they starting to tighten yet. The answer is no, not yet. I mean, Frank Fornari has been very clear that he thinks there's like a two-year lag between when they stopped easing and when they start tightening. The second phase is when they start taking accommodation out of the system, by trying to raise the Fed funds rate, but they're not trying to slow the economy down yet. Now the market will anticipate that the yield core will already have steepened a lot. The third vol-shock is like November '94, when the Fed raised rates, 75 basis points. The Feds tried to slow the economy down, and it's the only tool that they would have to punch the bottom market in the nose.

Laurence Douglas Fink

That's when Peter was at the Feds.

Peter R. Fisher

And I was running the open market then. I think the market's conflating these 3 episodes right now, as it usually does. I think it's all going to happen at once. Sure, vol has been suppressed in both equities and fixed income for the last couple of years, so vol is going higher. We get that. I don't think we're seeing the same kind of leverage in the system excess as we saw in '05, '06. It's starting to pick up. Governor Jeremy Stein is clearly on the case, and telling his colleagues on the FOMC to watch out for it. So, yes, there will be a vol-shock. But I think this one will be the buying opportunity, once it settles down. And the big insurance company balance sheets will come in and stabilize the market at a higher coupon. The next 2 are a lot harder. So that's how I see it. Yes. It's one thing we just have to adjust to is, monetary policy works by making financial assets the shock absorber. That's just a fact of life. They want a stabilized the real economy and we take it on the chin on the upside and the downside. And we better all be braced for that. And I think the markets have started to brace themselves for that.

Unknown Analyst

But as you said, higher interest rates is also great for insurance companies, spectacular for savers. It's not good for leverage institutions.

Peter R. Fisher

We had it at one of our first BlackRock Institute events we had. We discussed sovereign risks. We brought in 2 insurance company CIOs. Our equity portfolio managers kept asking them, weren't they afraid of higher rates? And they kept saying they couldn't wait for higher rates. And the equity portfolio managers kept scratching their heads until the CIOs really explained, we're dying for that higher coupon. So I don't mean to be sanguine. I'm pretty candid about the vol. I think it's out there. But it's not the end of the world.

Laurence Douglas Fink

And we've seen, in the last few weeks, a lot of deleveraging from a lot of those leverage institutions. That's why we've had the backup. Any other questions?

William R. Katz - Citigroup Inc, Research Division

Thanks very much for hosting as well. 2 separate questions. Just -- as you'd expand on one of the Q&A earlier, the early question was the enclosure of active ETF within ETF overall. I wonder if you can just sort back up and talk about the dynamic between active versus passive, in general, particularly since you have the business of iShares? And then second, a totally separate question, is what gives you updated thoughts on money market reform now that we've had sort of next generation out of the SEC?

Laurence Douglas Fink

I'm going to ask Barbara to answer the money market reform in a second. My view is that we're in a very special position of having both active and passive. And I actually believe we have better dialogue with clients in talking about active and passive. And so when we go talk to a client, we're pretty agnostic about in what area are they going to be emphasizing. As Rob talked about it, we're seeing more and more clients using beta products. But they are also then using more high-alpha products. And so they're very interested in alternative products, infrastructure, fund of funds, of private equity. We just had a huge, huge win in that recently, on that area. So we're seeing clients -- and that's a client that we know has used index in the past. So we're seeing clients mix and match. I do believe what we've seen, though, and Mark -- what Mark Wiedman talked about a little bit, we're seeing whole new classes of investors using beta as alpha. So with the ease of using ETFs, there's a whole cottage industry of these investment managers that all the uses of ETFs and trader on ETFs, to get alpha. And I think that's going to become a larger and larger component of the entire asset management business. And so, depending on the moment, depending on the time, we're seeing a mix and match, it's clients' desires and needs. But I would say the trend continues to be a greater and greater use of beta products across the board. It is my long-term view, and Quintin and I have talked about it, that as more and more money goes into beta, it only will mean, ultimately, a better opportunity for the alpha managers. And this is why we're making this investment today. So we believe there's going to be a great opportunity for alpha managers. And quite frankly, there's great opportunity even at this moment. For those alpha managers who've had great performance, they're not complaining today. They are seeing flows. And so it's truly a misnomer as saying, though so much money is moving out of alpha products into beta. It's happening on the margin, because on the margin, the majority of asset managers are after fees or underperforming their index. And that's why you're seeing more money moving into beta. And so our job, like we've done in European equities, if we could continue to drive excess returns after fees, and which we've done that now with our whole European equity team, we're getting 45% of the votes. Those who have great -- a great, repeatable consistent performance in U.S. equities, they're growing today. But the majority of firms are not. And so our job is to continue making sure that we are delivering after fees, excess returns. So we have products that we could talk to our clients, not only just beta products, but a whole suite of different alpha products. And that's where it's going to lead. Barb, you want to talk about money market reform?

Robert L. Goldstein

I can, but I want to showcase my team.

Barbara G. Novick

Just, I think it's helpful to step back for a second and have a little context. Obviously, money market funds are under a lot of pressure in the crisis. As you kind of roll forward in 2010, the SEC introduced a whole series of reforms around money market funds, let's say at the portfolio level, so credit quality, maturity, creating liquidity buckets, things like that. But if you watched the money market debates closely, at the end of the meeting where they announced the final rules, the chair of the SEC said very clearly, that's Phase I. We're going to be back with structural reforms, specifically to address run risk. So now you've seen, over the last several years, quite a raging debate, many twists and turns. 2 weeks ago, the SEC put out a proposed rule, which would have 3 choices. One is floating the NAV. One is putting in liquidity gates and redemption fees. The other is combining A and B. We are in the process of having a very active dialogue with our clients to understand what their preferences would be, what their actions would be, if these reforms go forward. And very importantly, the reforms are focused only on prime funds. So one of the things we like about where it is right now, is it provides customer choice. That's a good thing. Some people will clearly need a constant NAV. They will opt into a government fund. Some people will able to have a floating NAV or gates or something. And they will have a different choice. So I think we're at a better spot than we've been. A number of people have asked us what does it mean to our business from a financial perspective? And my answer has been throughout these debates, it's an interesting question, but at the same point, people need their cash managed. They're going to look to providers like BlackRock that have the kind of platform, and while we didn't talk about cash today, all the same things you saw on the other asset classes, we have an amazing platform of cash alternatives that would enable people to have choice and to find something that suited their needs.

Laurence Douglas Fink

I would also say one thing. It is very clear that the regulators are at it, that they're not going to ensure anything beyond the insurance premium for deposits. So as a result, investors need a differentiated product. Investors actually need money market funds. And the reality is, these regulatory changes actually empower these products to be safer for the clients. So I believe in the long run, the money market fund industry will see, actually, more inflows after we go through all the rebalance and restructuring. More inflows because it's very clear, regulators are going to -- if they have to put a bank into receivership, and you have -- you're above the limit in terms of insurable liabilities, you're going to lose money alongside other creditors. And in that case -- and if you -- if that is more firmly understood in the world, you're going to see investors look through money market funds as one of the options and alternatives to put their money.

Barbara G. Novick

And so I just end by saying I'd be remissed if I didn't touch on the Europe component because clearly, money market perform is being addressed there as well. One of the most interesting aspects is, they never did that 2010 types of reforms at the portfolio level that the SEC did. So when you read their proposals, a good portion of it is just catching up and getting to an even playing field. And because the SEC proposal's out, they've also now delayed coming to a final rule in Europe. So I think you'll see a lot of activity. The commit period is 90 days. Some place, late September, people will turn in letters. You'll see some more dialogue. But it's possible we'll even see a final rule by year end or early next year.

Laurence Douglas Fink

Any other questions? We have time for one more. Yes? Right here.

Unknown Analyst

Thanks, Larry. Question on ETF. I was just curious. In the past, you've been pretty vocal about things like swap-based ETFs and derivatives and leverage ETFs. I'm just curious, what you think of the industry at this point? Is there anything out there that is closely concern that can kind of kill the golden goose, so to speak, from a regulatory perspective?

Laurence Douglas Fink

Where is Mark? I'll let Mark answer that question. The answer is we're going to continue to be mindful of those types of products and risks. And obviously, as the largest ETF player, we have to be mindful of the overall industry and protection of the overall industry. So historically, I've had a much more sporadic view on those products. But I'll let the manager of that area talk about it.

Mark Wiedman

Sure. Well, on a -- what I want the final note for the day to be is somewhat dark. But our biggest -- we said this publicly. Our biggest concern about the growth of the ETF industry is that some product somewhere is disrupted, failed, and the whole category gets a bad name. I would say that risk has significantly receded over the last couple of years due to 2 changes. One is we thought for a while that this levered and inversed products were going to keep expanding, and they really have. They've kind of stayed in the niche product. So that reduces the risk of the headline from products that have inherent and key characteristics that many clients don't understand. And the issue is, ETFs should deliver what it promises to deliver. In Europe, where there's been much more discussion around structure of ETFs than here in the United States, because of the competition in synthetic and physical, that contest is over. It's unequivocally in favor of physical. All the synthetic providers have launched physical products. There are exposures to which synthetic actually does make more sense because you can't get it in a physical form. But overall, clients are voting with their feet. And you can see it in the flows and you can see it in the actions of the synthetic providers who shift to more of a physical basis. So I think that risk has decreased. The last part is -- and I would say, this is a question of understanding less than anxiety, which is people have to understand that the liquidity of the ETF, let's say a fixed income ETF, the ETF I mentioned, in some sense -- not in some sense. In the end, it has to depend on buyers and sellers meeting in a marketplace. If there are no buyers, the liquidity of the ETF could be suppressed, kind of -- we can't -- we don't stand in the middle to take on that risk. And so one of the things is that, I meant, while I do think that ETFs are additive to the liquidity, especially for these less liquid exposures and put them in package form, one thing we have to make sure our clients understand is, it's not a guarantee. In markets where there are no buyers, we need to make sure that they reputationally understand that you could see significant discounts open up. Now the question is, are they performing better than the alternatives, which could be, let's say, underlying securities? Usually, they are. But they still can have the high profile effect. Thanks.

Laurence Douglas Fink

Thank you, everyone. Have a good day.

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