BlackRock's (BLK) CEO Laurence D. Fink on Q4 2016 Results - Earnings Call Transcript

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BlackRock, Inc. (NYSE:BLK) Q4 2016 Results Earnings Conference Call January 13, 2017 8:30 AM ET

Executives

Laurence D. Fink - Chairman and CEO

Gary S. Shedlin - CFO

Robert S. Kapito - President

Christopher J. Meade - General Counsel

Analysts

Craig Siegenthaler - Credit Suisse

Bill Katz - Citi

Ken Worthington - JP Morgan

Michael Cyprys - Morgan Stanley

Robert Lee - KBW

Patrick Davitt - Autonomous

Brian Bedell - Deutsche Bank

Michael Carrier - Bank of America

Operator

Good morning. My name is Brent, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated Fourth Quarter and Full Year 2016 Earnings Teleconference.

Our host for today’s call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Gary S. Shedlin; President; Robert S. Kapito, and General Counsel, Christopher J. Meade. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] Thank you.

Mr. Meade, you may begin your conference.

Christopher J. Meade

Thank you. Good morning, everyone. I’m Chris Meade, the General Counsel of BlackRock. Before we begin, I’d like to remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock’s actual results may of course differ from these statements. As you know, BlackRock has filed reports with the SEC which list some of the factors that may cause the results of BlackRock to differ materially from what we see today. BlackRock assumes no duty, and does not undertake to update any forward-looking statements.

With that, I’ll turn it over to Gary.

Gary S. Shedlin

Thanks, Chris. Good morning and happy New Year to everyone. It’s my pleasure to present results for the fourth quarter and full year 2016.

Before I turn it over to Larry to offer his comments, I’ll review our financial performance and business results. While our earnings release discloses, both GAAP and as adjusted financial results, I will be focusing primarily on as adjusted results.

The differentiation and strength of BlackRock’s diverse global investment and technology platform allowed us to continue to invest for growth during 2016 despite market volatility and macro-political uncertainty during the year. We saw strong results in our iShares, institutional and technology businesses and remain committed to investing in a variety of strategic initiatives that will further enhance our client proposition and generate long-term value for shareholders.

Against a challenging backdrop for the asset management industry, BlackRock once again executed on each components of our framework for shareholder value creation. BlackRock generated $202 billion of total net inflows in 2016, the strongest flows in our history including nearly $100 billion in the fourth quarter. We expanded our full year operating margin by 80 basis points to 43.7%. Finally, after investing for growth, we returned approximately $2.7 billion of capital to shareholders during the year.

In the fourth quarter, BlackRock generated operating income of $1.2 billion and earnings per share of $5.14, both up 8% from a year ago. Full year operating income of $4.7 billion was flat versus a year ago while earnings per share of $19.29 was down 2%, reflecting lower non-operating income and a higher tax rate in 2016. Non-operating results for the quarter included $6 million of net investment gains. Recall that non-operating results in last year’s fourth quarter included $35 million unrealized gain on a strategic private equity investment.

Our as adjusted tax rate for the quarter was 28.6%, reflecting the impact of several non-recurring items compared to a rate of 30% a year ago. We continue to estimate that 31% remains a reasonable projected tax run rate for 2017, though the actual effective tax rate may differ as a consequence of non-recurring or discrete items and potential tax reform. In an environment where growth in the asset management industry has been elusive, BlackRock’s diverse global platform is thriving, delivering outcomes for our clients and differentiated organic growth for our shareholders.

BlackRock’s fourth quarter total net inflows of $98 billion included $88 billion of long-term net inflows, representing an annualized organic asset growth rate of 7%, $18 billion of flows into our cash management business and $7 billion of advisory outflows related to crisis era portfolio liquidation assignments.

For the full year 2016, BlackRock generated record total net inflows of $202 billion including long-term net inflows of $181 billion, representing a 4% long-term organic growth rate. Fourth quarter base fees of $2.5 billion were up 1% year-over-year, driven by higher average AUM but offset by the impact of divergent beta, FX, and mix shift. For the full year, base fees were effectively flat. On a constant currency basis, base fees were up 3% versus last year’s fourth and 2% for the full year 2016. Sequentially, base fees were down 2% as the negative impact of fixed income data, divergent equity beta and continued DoLlar appreciation more than offset organic fee growth in the period.

While we delivered robust organic asset growth during the year, our blended fee rate has been impacted by a number of factors that we have repeatedly discussed with you, including divergent equity beta and DoLlar appreciation as well as recent client preferences for lower risk asset classes and index over active strategies. However, while these headwinds are pervasive in our industry, our broad based solutions focused investment platform is built to meet client preferences in any environment, whether risk on or risk off, and we remain confident that BlackRock can consistently grow client assets and base fees, both of which ended 2016 at record highs.

Fourth quarter performance fees of a $129 million were driven by our single strategy hedge fund and long-only equity products. Full year performance fees of $295 million decreased 52% from 2015, reflecting a challenging year for the hedge fund industry. BlackRock Solutions fourth quarter revenue of $197 million was up 15% year-over-year and 13% sequentially.

Full year Aladdin revenue of $594 million, which represented 83% of BlackRock Solutions revenue, was 13% year-over-year driven by a number of sizeable clients going live on the Aladdin platform in 2016. Aladdin is coming off a record year in terms of new client revenue and continues to benefit from strong market demand from both institutional asset managers as well as retail intermediaries. We’ve seen particularly high levels of demand for our newest product, Aladdin Risk for Wealth Management in a current regulatory environment and are actively implementing for clients in the United States, Europe and Asia.

Total expense declined 3% in 2016, reflecting lower compensation expense and continued G&A expense discipline. For the full year, compensation expense decreased $122 million or 3%, reflecting lower incentive compensation, primarily driven by lower performance fees. Recall that year-over-year comparisons of fourth quarter compensation expense are less relevant because we determine compensation on a full year basis.

Fourth quarter G&A expense decreased $55 million year-over-year or 13%, reflecting lower marketing and promotional spend in the current quarter and $23 million of deal related expense associated with strategic transactions executed in the year ago quarter. Sequentially, fourth quarter G&A expense increased $43 million, primarily reflected a planned uptick in the year-end marketing and promotional spend, and higher foreign exchange remeasurement expense. Full year G&A expense of $1.3 billion was 6% below 2015 levels, despite the impact of acquisitions on our run rate, reflecting expense awareness in the volatile market environment. Assuming stable markets, we would expect a modestly higher level of G&A expense in 2017.

Despite an overall decline in 2016 revenues driven by a reduction in performance fees, we delivered 4% organic asset growth over the last 12 months and expanded our as adjusted operating margin to 43.7% for the year. While we remain committed to realizing the benefits of our scale for clients and shareholders alike, we do not manage the business to a specific margin target either quarter-to-quarter or year-to-year. We do remain keenly focused on striking an appropriate balance between investing for future growth and practical discretionary expense management.

During 2016, we returned approximately $2.7 billion to shareholders through a combination of dividends and share repurchases. As we enter 2017, we remain committed to a predictable and balanced approach to capital management. Consistent with this, our Board of Directors has declared a quarterly cash dividend of $2.50 a share, representing an increase of 9% over the prior level. Since instituting our dividend in 2003, BlackRock has grown its annual dividend per share at a compound annual growth rate of approximately 21%.

We repurchased approximately $1.1 billion of shares in 2016 and now have repurchased over 13 million shares during the last four years, resulting in a 13% unlevered compounded annual return for our shareholders. We remain committed to returning excess cash flow to shareholders and anticipate a similar annual level of share repurchases in 2017. However, such amounts could vary based on potential changes to the relative valuation of our stock price.

In connection with this ongoing commitment, our Board has authorized an additional 6 million shares under our existing share repurchase program, giving us authorization to repurchase a total of 9 million shares including 3 million shares which are remaining under our prior program, announced in January 2015.

Our 2016 financial results reflected benefits of our differentiated global business model. Record full year total net inflows of $202 billion including nearly $100 billion of net inflows in the fourth quarter were diversified across asset classes and benefitted from significant flows into iShares as both institutional and retail clients use ETFs for core investments, precision exposures and financial instruments. Global iShares generated $49 billion of net inflows in the fourth quarter and a record $140 billion for the year, representing full year organic growth of 13%. Fourth quarter equity iShares inflows of $51 billion were driven by demand for U.S. market exposures as equity markets rallied following the U.S. elections. Notwithstanding flat fourth quarter fixed income iShares flows, which were impacted by the significant move in long-term yields during the quarter, we continue to see an acceleration in the adoption of fixed income ETFs. Full year 2016’s fixed income iShares in flows of $60 billion represented an organic growth rate of 24%.

BlackRock’s institutional franchise saw record long-term net inflows of $41 billion for the quarter and $51 billion for the year, positive across active and index strategies for both periods. Quarterly institutional active inflows of $6 billion were led by fixed income, multi-asset and alternatives as clients utilized BlackRock’s broad range of investment strategies and customized solutions to achieve their investment goals. Institutional index inflows of $35 billion in the fourth quarter were driven by fixed income inflows of $26 billion which reflected solutions based LDI activity, primarily in Europe.

We also ended 2016 with another strong fundraising quarter for illiquid alternatives, raising more than $1 billion in new commitments. Over the last four years, we’ve raised more than $22 billion in commitments for our fund of funds, real estate, infrastructure, opportunistic credit, and all solutions businesses and have nearly $11 billion of committed capital to deploy for institutional clients.

Blackrock’s global retail franchise saw fourth quarter outflows $2 billion and full year outflows of $11 billion, reflecting continued performance challenges in the active mutual fund industry as well as macro, political and regulatory uncertainty. Finally, BlackRock’s cash business generated $18 billion and $29 billion of net inflows in the fourth quarter and full year, respectively. Investments we’ve made to expand the scale of our cash management offerings drove strong flows in 2016 and we’re well-positioned for additional demand and market share gains in the coming year.

In the summary, in a year marked by periods of market volatility, divergent beta and significant currency movements, our diversified business model once again delivered industry-leading organic growth and consistent financial results that allowed us to continue investing for the future. We are committed to continuously evolving our platform as our clients’ needs change and believe our platform is well-positioned as it’s ever been to meet those needs and to deliver long term value for our shareholders.

And with that, I’ll turn it over to Larry.

Laurence D. Fink

Thanks Gary. Happy New Year, everyone, and good morning, everyone, and thanks for joining our call.

In the year dominated by extraordinary macro and geopolitical uncertainty, BlackRock continues to earn our clients’ trust by delivering strong results. BlackRock’s fourth quarter and 2016 results reflect the benefits of continuously investing in our business to better serve our clients. We’re building out our investment teams and resources, we’re expanding our technology footprint and we’re evolving our risk management capabilities as we continue to anticipate change in the world, in our economies and most importantly, in our industry. As a result, more and more investors are turning to BlackRock to design, to deliver investment solutions that will help them achieve their long term financial goals.

2016 was a turbulent year for investors, whether institutions or individual investors, one that no one fully predicted. Global political events like Brexit, the U.S. political -- U.S. presidential election and the Italian referendum have forced many of our clients and also our self to rethink our assumptions and our perceptions of the world. Even with some political surprises, the global economy began to show signs of optimism throughout 2016.

The U.S. equity market surged to all-time high as expectations for fiscal stimulus, reflation, and tax and regulatory reform has sparked investor optimism and enthusiasm. The Fed’s decision to raise rates in December and the signal of additional hikes in 2017 suggest that the long period of accommodative monitory policy in the U.S. may finally subside at a faster rate that many have had anticipated.

However, uncertainty and the wave of populism upending the political status quo persist. And despite the rally in U.S. for domestic equities since we’ve had our U.S. election, many of our investors are seeing a very different performance in their other markets. As Gary suggested, we see negative fixed income markets. We see underperforming international equities and a very strong DoLlar, which means for the DoLlar based investors with broad global asset allocation such as pension funds, the fourth quarter was more challenging than the market perception.

We don’t know exactly how the next two years will unfold but we do know that in a challenging and changing environment, investors will look to BlackRock more than ever before. And our responsibility that we feel for our clients has never been greater. Throughout our history, BlackRock has always been focused on thinking ahead of our clients and repositioning our firm in advance of those perceived changes.

Our results this year in a difficult environment for asset managers reflect the benefits of our deeper relationships that we’ve built with our clients worldwide in areas where we’ve invested in our business over time. As Gary said, BlackRock saw total net inflows of $202 billion for the full year of 2016, including nearly a $100 billion in our fourth quarter.

We generated record annual institutional and iShares flow of $51 billion institutionally and $140 billion in iShares. We actually grew net assets in 15 countries greater than $1 billion. We had more than 53 products in retail and iShares that generated more than $1 billion in net inflows. I think those two statistics alone identify the breadth of our platform.

In 2016, the BlackRock Investment Institute reached more clients, regulators and policy makers than ever before, providing a forum for deep, timely and relevant dialog on all macro issues. The institute hosted calls after Brexit and the U.S. election, each time reaching nearly 5,000 external participants. This type of engagement has created tremendous value for our clients and built a deeper and more direct relationship with our clients.

We acquired BGI and iShares franchise more than six years ago when iShares had $385 billion in AUM. Since then, we invested in the future of ETFs, building the market, expanding its presence, building a fixed income presence, a global presence, building products in anticipation of change of demand, whether its factors or smart beta and launched innovative news. We’ve grown our iShares AUM now to $1.3 trillion as more clients than ever before are using ETFs for transparent, liquid and efficient exposures, and we will continue and very aggressively in the growth and evolution of this market.

iShares generated $49 billion of net inflows in the fourth quarter and a record $140 billion in inflows for the full year, earning the number one market share of global U.S., European equities and fixed income ETF flows for 2016. ETFs are being used by a diversified, growing set of institutional and retail clients. We are experiencing -- as I’ve said in many of these conferences that we’re seeing more and more investors using ETFs actively, not just for a passive exposure but using them actively to try to get exposures where they think those exposures will outperform. We believe that will continue to be a great, great growth area for these products. And importantly, the expansion -- the diversification of the ETF ecosystem is creating a deeper, more dynamic market for ETF trading; it is also enhancing liquidity for all investors worldwide.

In 2016, we made a strategic investment in our U.S. core franchise to deliver the highest quality product at the best value to our clients at a time when they needed it most. We received very positive feedback from our clients on this move and iShares gathered $29 billion of flows in our global core products in this quarter alone.

We also continue to invest in fixed income ETFs. BlackRock has long seen the value in fixed income ETFs and has invested for years in building this market, even as many of our industry -- many of our industry question this opportunity. 2016, the fixed income ETF industry reached a milestone, crossing $600 billion in assets with BlackRock’s managing a large component of that. During heightened market movements after the U.S. election, trading volumes in the U.S. fixed income ETFs surged to the highest level of the year. Fixed income ETFs or iShares once again performed under stress in line with what our clients expected when they bought iShares, offering investors substantial on exchange liquidity. Fixed income ETFs remain a strategic priority and a significant growth opportunity for BlackRock and our clients.

Smart beta ETFs are another area of strategic investment for Black Rock where we are the number one player in AUM, growing at a 37% organic growth rate in 2016. We all know that in 2016 we saw a retail investor shipping away from traditional active funds, with the U.S. active equity mutual fund industry experiencing $280 billion of outflows, representing the industry’s worst year on record. And we at BlackRock experienced some of the same headwinds across our traditional active mutual funds. But because the way we’re positioned, because how we’re trying to help our clients by having both passive and active, we’re working with the clients as they navigate the need between active and passive.

I believe investors are going to continue to rethink their approach to active benefit; they may now move more towards factor-based strategies; they may have asset allocation or portfolio construction, but I do believe, we’re going to continue to see a drive using ETFs for active returns. We’ve been purposely investing in our platform to provide our clients with a full spectrum of offerings and to enhance alpha generating active strategies.

We ended this quarter with 88% of our taxable fixed income, 91% of our scientific active equity, and 65% of our fundamental active equity assets above benchmark, or peer median for the five-year period. We’re confident that our top performing franchise like Asian Equities and our unconstrained fixed income, which are proven to thrive in a rising rate environment, are well-positioned for 2017.

Factor-based investing helps bridge the gap between active and index, and it’s been an area of significant focus for BlackRock and our clients in 2016. BlackRock manages over a $150 billion in factor-based strategies including smart beta ETFs and our factor-based AUM grew at an organic growth rate in 2016 of 17%. We have a responsibility to provide our clients with the ability to focus on environmental and social issues, while simultaneously generating strong financial returns. We launched BlackRock’s sustainable investing platform a year ago and have since built a range of equity and fixed income strategies that target positive environmental and social impact.

We have frequently advocated for the benefits of infrastructure investing. And within the U.S. alone, markets are anticipating up to $1 trillion of domestic infrastructure investments over the next few years. And we all know, we desperately need those investments. BlackRock has built infrastructure and broader real estate platforms, both organically and inorganically over time, and we currently manage $29 billion in real asset AUM.

We invested in our global cash management business in anticipation of regulatory reform and a rising rate environment. BlackRock is now positioned as a skilled player with the broadest range of solutions. At a time when we anticipated an uptick in demand, we saw $18 billion of flows in our fourth quarter alone, and now we have a cash management business that’s over $400 billion.

Over the past year, we have spoken to the increasing depth and quality of the solution orientation and solution oriented conversations that BlackRock is having with our institutional clients in face of this global uncertainty. Even as these clients pause to assess the changing investment landscape, growth in 2016 was driven particularly by our financial institution business, as insurance clients looked to BlackRock for highly customized portfolio. Our institutional business saw a record fourth quarter and full year net inflows, cross both active and passive.

We have the right pieces on our platform but the key to designing and delivering a robust solution that targets specific outcomes for our clients is technology, which has always been at BlackRock’s core. We see strong and growing demand for BlackRock’s technology offerings.

More and more asset managers, asset owners, banks, wealth managers, insurance companies are valuing the differentiating ability of our Aladdin platform and other technology offerings at BlackRock to help them achieve their goals. We’re constantly enhancing our existing technology as well as coming up with new ways to use Aladdin to serve our clients.

In 2016, we launched our Aladdin Risk for Wealth platform which empowers wealth managers’ home offices to better understand risk. We also introduced Aladdin Portfolio Builder which provides financial advisors with highly intuitive portfolio construction tools. We continue to see robust client interest in FutureAdvisor and iRetire offerings. We also recently announced a minority investment and partnership with iCapital, the leading technology enabled illiquid alternatives distribution platform for retail investors.

In addition to technology, our people enable us to differentiate ourselves for our clients. Every year together with our Board of Directors, we take a fresh look at our organization which includes developing talent and positioning our leaders in role that can broaden their experiences and maximize their potential for BlackRock and our clients.

2016, we unified our active equity platform. We unified our beta platform and we globalized our fixed income platform, all of which will help us benefit from the potential -- full potential of our global investment scale. At the same time, they create more tailored client experience in each geography where we operate. We strengthened our regional management of our clients and marketing activities in line with our commitment to be global with a local identity and a local footprint.

It is the quality and dedication of our teams across the globe that positions us well for 2017. There are reasons that we have forged such trusting and trusted relationships with our clients and why our clients turn to BlackRock to solve the biggest financial challenges. I’m really proud of the depth of the talent of the firm and leadership we have today. We’ve never had a more talented group of men and women than we have today, and we’ve the finest leadership in the history of the firm today.

BlackRock has been adept at repositioning our investment platform and technology capabilities in advance of change. I promise you, we’ll continue to be in front of those needs and we’ll continue to change with the needs of our clients. As paradigm shift, we’ll have an even greater responsibility to help our clients navigate the markets and plan for their retirements. We’ve a responsibility to continue to invest in broadening and deepening our investment platform. We have a responsibility to be a thought and opinion leader worldwide, globally and locally to every one of our clients. And throughout BlackRock’s history, we have demonstrated the ability to invest in our business for growth like no other firm while expanding our margins, raising our dividend rates and prudently returning capital to our shareholders.

As we enter 2017, we will continue to make investments in BlackRock’s future to grow our technology footprint, to expand our investment capabilities and to further enhance our talent level, all to meet our daily responsibility to every client whether that client has awarded us a $1,000 or if that client awarded us $10 billion, we have a responsibility to every client. And we are building a firm to meet those responsibilities every day.

With that, let me open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler

Thanks, good morning. I just wanted to see if you could provide an update on U.S. retail product demand trends including iShares as brokers modernize their business models for implementation of the U.S. DOL rule?

Laurence D. Fink

Yes. We’re being very responsive to potential changes that the DOL announced, recognize that different distribution firm have decided to go in various different ways to respond to the DOL changes. So, you’re going to see from some of them a shift from brokerage to advisory accounts; you’re going to see some of the index funds grow, particularly the ETFs. So, there is going to be an increased focus on the performance there and of course the cost. And also, what we’re responding to is a growth in portfolio construction services and the need for greater sophistication and scalable technologies where we are responding with tools like Aladdin wealth.

So, many of this is going to be model driven. We’re responding by making sure that we are priced correctly in the products that we’re offering, so that we will be included in the models at the appropriate price, that we’re also providing the technology for those institutions that need model driven solutions, and we’re also utilizing a lot of the analytics we have to help those firms. So, it’s products; it’s appropriate pricing; it’s technology; and it’s portfolio solutions. And depending upon the distribution center, we’re focusing on the appropriate ones for each one of those.

Operator

Your next question comes from the line of Bill Katz with Citi. Please go ahead.

Bill Katz

Good morning, everyone. Thank you very much for taking the question. I ask this quite a bit, but I’m going to ask it again anyway. I guess if I look at the quarter, tremendous flows, little bit of a fee give-up, some of it mix, some of it macro, very good margins underneath that; appreciate your guidance on M&A obviously and G&A. As you look at the 2017, how do you think about that interplay between fee rates and margins assuming the markets are relatively consistent and not a lot of volatility in currency, which I know is asking [ph] a lot but just trying to get an understanding of the volume versus margin dynamic for the Company, looking ahead.

Laurence D. Fink

Let me go over some of the headwind issues that we all faced and we can get into the specifics. I think we have to understand the context of 2016. First and foremost, the last quarter of 2015, obviously the equity markets fell; we had equity markets down 12% of one time in the first quarter. And so, we had huge headwinds in the first half of the year. The other big headwind that we had all year and actually accelerated in the fourth quarter was the strength of the DoLlar. And so, those are two of the big macro issues that we had to face.

One of the great statistics that I think about going forward into next year, our average assets in 2016 were up 2%, our spot close is up 11%, and that just gives you a color of some of the issues that we had. And I think that’s a big macro context of thinking about how you should think about our business. Obviously I am going to have Gary go into the specificity of the fee rates, but I would just say from the top of the house, I think you said it pretty well because of the margin. I think scale is a driver that is so important how we look at it. When we look at lowering fees for market share opportunities for delivering the needs to our clients and having higher margins, this is how we think about doing this, working and focusing on the clients’ needs, doing what we think is best, building market share but also driving margin. But, let me have Gary go into the specificity of your question.

Gary S. Shedlin

Good morning, Bill and thanks for asking the question. So, look, let’s deal with them separately. I think in terms of fee rate, there is really four primary reasons that you’ve seen a decline in our fee rate, whether year-over-year, quarter-over-quarter or sequentially. First obviously is FX. We saw DoLlar appreciation, primarily versus the euro and the pound, roughly 4% on the euro, 16% against the pound during the year and that obviously relative to the stock of our business increases the relative weighting of our DoLlar denominated FX, which tends to have lower fees then our non-U.S. DoLlar denominated product.

In many cases, you’re seeing a little bit of the same phenomenon in terms of equity beta. We’ve talked about divergent equity beta but this year in particular you saw various higher fee international markets, whether it be Europe, Asia X or Japan. Underperforming domestic U.S. markets; and as with the FX that also increases the relative weighting of our lower fee DoLlar denominated assets under management.

We saw mix shift. When we talked about mix shift, we really talk about that as a client preference issue. So, during 2016, we saw clients favoring index over active, we saw clients favoring fixed income over equity and multi-asset, and even within our cash business, we saw a huge preference for government over prime funds. And in each of those instances, you’re seeing changes in fee rates from what was traditionally higher fee product to at least in this year, lower fee product. And then finally, we actually took some of our own action in terms of price reductions with certain iShares core and fixed income that was later in the year, but again with that what I would call investment, we’ve been very clear that we think that would be accretive to shareholder value over time and I think as you heard, we’ve had strong progress today in terms of our core performance so far.

So, in each of these cases, all of these items are going to impact fee rates over time, but I think the key issue is, those set of circumstances, whether they are market driven or client driven, will also change over time. And I think the key issue for BlackRock is that we have a broad-based enough platform to be able to meet client preferences in any market and to basically deliver solutions base and outcomes to them that basically makes sense. So, that’s the fee rate piece of it.

In terms of margins, I think what I would say as we think about margins, I’ll give the standard statement that we don’t manage to a margin target, I think you’ve all heard that long enough but I think that in a year where we obviously saw a difference, i.e. 4% asset growth versus less organic base fee growth, I think we were able to demonstrate that we can basically mange the business in that environment and in fact notwithstanding an overall decline in our revenues which was fundamentally driven by performance fees, we were still able to deliver not only 80 basis points of margin improvement but record flows during the year. So, again that interplay between revenue growth and margin, I think we’re pretty well-established in terms of our ability to operate in most environments.

Operator

Your next question comes from the line of Ken Worthington with JP Morgan. Please go ahead.

Ken Worthington

So, to continue with the fee rate discussion, what has been the reaction to your announced lowering of fees on active products announced last quarter? And maybe, given the reaction, what are your thoughts about broadening or expanding that investment to other asset classes and other products?

Laurence D. Fink

So, the response actually has been good. And without lowering the fees, we might not be included in some of the models that a lot of the clients are now using and distribution centers are using. But what’s important to us is not only performance as one of the levers that we look to go out and use to get clients to buy our products but also our competitive position and where we stand in price and most of our mutual funds have boards that we also have to respond to as well. So, since we made the changes, four of our funds have been upgraded by Morningstar, three of the government funds and one of the high yield funds, and they’ve all now become middle [ph] rated. And so that’s important to us, so that they are included in a lot of what our distribution forces can sell and how they’re evaluated. So, beyond performance, we also want to strive to be in at least the top quartile of expenses. And of course in a very low rate environment that also helps to drive performance. So, the response has been very good by those that evaluate us, the response has been good by the distribution centers, and the response has been shown in creating and getting more assets. So, over time, we’re going to be responsive to the competitive environment to make sure that we’re included in the sales of these and we expect that sales will continue.

Operator

Your next question comes from the line of Michael Cyprys with Morgan Stanley. Please go ahead.

Michael Cyprys

Just getting back to G&A, it looks like it’s down about 8% year-on-year, if you back out the one-time deal costs from a year ago. So, just can you talk to what’s driving that reduction in G&A, how much of that relates to tech projects rolling off versus say more sustainable cost reduction? And then just as you think about G&A over the next couple of years, what level do you think is sustainable to or required to your sustainable 5% organic growth?

Gary S. Shedlin

So, this year, I think obviously the G&A delta was as we talked about, there was some non-recurring items that basically were tied to our M&A activity last year, which rolled off. And frankly, this year, the big -- I would say the big delta as you think about G&A, obviously the biggest manageable component of that is our marketing budget. And I think that one is one that we tried to manage appropriately in a year where we’re seeing lots of clients delay their investment allocation decisions with a lot of volatility. We’ll be obviously looking at that pretty carefully in the context of the current environment as we get into this year. We also, as you probably noticed, just also hired a new Chief Marketing Officer, Frank Cooper who will be taking his own look at our marketing and our spending strategies that we’ll clearly be taking a careful look at.

There is also some other items that I think you have to be vary worry [ph] of where FX gets in the way [ph] and also G&A impacts training, I think it has recruiting, it has a bunch of things that are obviously tied to broader growth objectives as we grow the Company. We kept our headcount pretty flat last year and that was even after our first quarter reduction that we talked about. I think Larry communicated that we needed to be in growth mode during the year and we were. So, I think frankly, the big drivers of G&A spend going forward will clearly be our ability to right size our marketing budget in the context of the current environment and will be tied obviously to our desire to grow headcount as we see opportunities for growth going forward.

The final item is obviously leveraging our scale. So, there is technology, there is real estate, some of -- is more step function as opposed to overall growth. And I think that will be important to keep in mind. I think those are really the big issues. I think that this year was clearly in the context of the environment, a lower year for us, and we would expect numbers to me modestly higher from the next year.

Operator

Your next question comes from the line of Robert Lee with KBW. Please go ahead.

Robert Lee

I was curious with the capital management and your dividend increase, and maybe the signal from that, and maybe year ago you increased the dividend 5% and as you mentioned, it was coming off of a tougher fourth quarter 2015 and a rough start to 2016, this year it’s 9%, pick back up, just getting a sense of assuming we should read that to be the year certainly has an improved outlook for your earnings, your earnings profile over the coming year and next several years. I just want to get some color on that.

Gary S. Shedlin

I will jump in and then Larry can add on his views. Look, our predictable and balanced approach to capital management really has not changed. I think we remain first committed to investing in our business; we then try to target a dividend payout ratio of around 40% to 50% on a full year basis, that’s a target, that’s not a policy; and then, we effectively look to return any additional cash to our shareholders in the form of share repurchases.

The total payout ratio is really an output of how we see opportunities for the next year; it’s not an input to our budgeting or financial planning process. And over the last few years, I think you’ve probably seen that our share repurchases broadly have been fairly constant, in terms of DoLlar amounts. Obviously as the share price has gone up, the number of shares that we’re purchasing is going down slightly. And we’ve been fairly consistent in trying to increase our dividend.

So, this year, the dividend is obviously up 9% to $2.50 a share. We’ve obviously reloaded our share repurchase authorization and expect that next year’s share repurchases from a DoLlar perspective would be broadly consistent with what we did in 2015. And we think frankly that combination has been very effective for shareholders. The dividend has now gone up at a compounded annual rate of about 11% over the last five years. We’ve got 13 million shares repurchased; I think we mentioned about a 13% unlevered return, and I think that’s obviously good. And our share count is down roughly about 4% since we began this, and that’s after issuing shares for deferred compensation while at the same time reinvesting in the business and effectively delevering as EBITDA has grown relative to our constant amount of long-term debt.

So, I think it’s a balance and I think we felt as we -- given the stability and diversification of our model and our ability to deliver more consistent and predictable results that we just support that dividend going into this year.

Laurence D. Fink

Robert, I think you framed the macro setting well. We went into last year with a pretty harsh market in the fourth quarter 2015 and first quarter 2016. We now are seeing more conservative dividend. As I said, our average assets are up 11% this year from a spot rate -- I mean spot rate assets are up 11% from average asset, up 2 during the year. And we’re following the same type of formula that as Gary suggested in terms of our dividend policy. I would say -- in absolute though, we wanted to show the enthusiasm to our shareholders of announcing a 9% dividend increase.

Gary S. Shedlin

And I will just end with this, which as I know all you guys have incredibly sophisticated earnings model, so I certainly would look to project your earnings per share based off the dividend that we basically declare each year.

Operator

Your next question comes from the line of Patrick Davitt with Autonomous. Please go ahead.

Patrick Davitt

On the comment you just made about institutional delay, is that backward looking or ongoing? And within that same, you obviously saw a big uptick in institutional index flows. Do you get the sense that that’s just institution kind of meeting equity exposure, rolling into index with the intention of maybe reallocating that to more active strategy at same point?

Laurence D. Fink

No, I don’t think there has been any -- as I said, we are seeing more institutions using index and the allocation to these various exposures as the active strategy. And I think this is one of the key characteristics of the market, is not taking into the full context.

In terms of institutions, I think into the fourth -- we said in the third quarter, institutions are pausing. They put some money to work in the fourth quarter; they put a lot of money to work at BlackRock in the fourth quarter. We’re having deeper dialog with more institutions today than we ever had. The dialogs we’re having with some very large insurance companies, pension funds worldwide are very encouraging whether they act in the first quarter, the second quarter of 2017, we’ll see. But I do believe clients are reassessing their liabilities in the form of pension funds, clients are really looking at what their liability rates and the terms of insurance companies, they’re looking at their asset allocations accordingly now and how they’re going to do it, for insurance companies rise of interest rates, steepening of the yield curve is very positive and many insurance companies, I think we talked about early last year were short their liabilities, they were anticipating higher rates, and now with higher rates, some of them are putting some money to work.

So, I don’t want to -- I think it’d be unfair to say that we’re going to expect these types of flows institutionally at BlackRock quarter-by-quarter-by-quarter but we do feel very good about our positioning and working with our global institutions. In terms of the asset allocation, we are having dialogs with some clients right now; we’re talking more about alternatives. Rob Kapito has had two conversations with two large states in the last week about a bigger allocation in alternatives. So, I don’t want to suggest there’s one macro trend and one way of looking at asset allocation but I can say we’re involved in a lot of very deep conversations. And I do believe the market is still misunderstanding how people are using passive strategies. They’re not just using it because they want to be indexed; they’re using passive strategies that are very liquid that they can navigate around markets to take active exposures.

Operator

Your next question comes from the line of Brian Bedell with Deutsche Bank. Please go ahead.

Brian Bedell

Larry, last quarter, you talked -- we talked about the pace of Depart of Labor fiduciary rule implementation and advisor behavior. I think you mentioned that you did think it was going to be fairly rapid shift towards passive from active products within the retail channels. Has your view changed on that, post the Trump win, in terms of again I guess what are you hearing from your wholesalers on advisor behavior and then allocation and implementation right into the deadline? And maybe just longer term, what’s your view on how you think the Department of Labor’s fiduciary rule might change with any kind of administrative changes?

Laurence D. Fink

Well, A, I don’t know how it’s going to change. Obviously, there is a lot of talk about it’ll be modified, some conversations about it, that’ll be totally eliminated. We believe the DoL rule has some very great components to it. I mean, as you know what we’ve spoken for years-and-years-and-years that we have done a very bad job in our country in helping people navigate to the outcome of retirement.

And having better outcome oriented strategies whether we have a DoL or not is imperative or we’re going to have more and more people angry that they’re close to retirement with adequate pools of money to retire. That anger then does not go away.

So, we believe the DoL rule has quite a bit of merit but I know as much as you do in terms of how that would change, if it’s going to change. Does it get totally eliminated? We’ll see. What we see in terms of behaviors, and this is the important thing. And Rob said it very well; we have not seen much change in behaviors from the large distribution platforms. As Rob suggested, they are moving from a brokerage relationship to advisor relationship. They are moving ahead with doing more model based structuring. In fact, we won a biggest -- we were a part of a big award in terms of how models are going to be created in terms of are they going to be using our products or not.

So, in terms of behaviors, most firms are moving forward that some component, if not all of the components of DoL will be moving forward. We are very active in helping whether the DoL rule happens or not, more and more of the distribution houses are saying, we need better technology to help us navigate our clients’ relationships and their portfolios. And that is why Aladdin for Wealth is growing very rapidly and has a potential for even more substantial growth in the future. So, in terms of our relationships with most of our advisors, we are seeing very little in terms of behavior changes.

Now, I am not here to tell you, on April 1st this year everything is going to change. Could it be elongated? Sure. But I do believe in most cases, most large advisory firms believe there is a -- this is a good thing for their clients and a good thing for them. And I believe we will see some form of DoL in the future but I know as good as you what this -- what specifically does that mean.

Operator

Your final question comes from the line of Michael Carrier with Bank of America. Please go ahead.

Michael Carrier

Hi. How are you doing? I guess the question, another one on the institutional side. And I hear what you’re saying in terms of you saw a lot of money moving in index but there is demand for alternatives. Just I guess, there has been a lot of cash that’s been on sidelines for a while now. I mean, just trying to get a sense, and I know it’s one quarter but based on those discussions, are you starting to see more interest to put that money to work, and could this be a trend that we’re going to see follow-through over the next few years as institutions have more confidence, I mean if rates are rising and things are starting to move forward?

Laurence D. Fink

I think I said this earlier today on television, I think if you reflect back to the end of 2016, for those who have panicked the first quarter of 2016 and stayed underinvested or out of the market entirely, they’ve been hurt. If you think back to those investors who ran away from the market in 2008, 2009, they’ve been really hurt. We are working with all our clients to try to help them be more invested. So, let’s be clear, we believe it’s a mistake the amount of cash is sitting on the sidelines worldwide.

The problem is clients say, I just missed the last 10% or 15%, maybe I should stay in the sidelines longer. Our job is to be helping our clients worldwide and helping them think about markets, thinking about exposures and helping them build an asset base to meet their liabilities. I don’t believe -- as you said, one quarter versus another is going to really determine whether we are seeing a renewed interest in putting the money to work; certainly in the fourth quarter we did. Our dialogs that we’re having worldwide indicate that we may see more money put to work. But I don’t want to forecast that.

I’m always disappointed of how much money is sitting in the sideline. And I believe at the end of every year, we talk about this that we need to have more of our clients, more of our investors to focus on the outcome investing and not whether the market’s rich or cheap, because that gets caught up and getting in out of the market and therefore missing big market movements, and this is a big issue. I believe this is one of the reasons why we’re having deeper dialog with our clients because we are talking about outcomes, we’re not talking about a specific product; we’re not talking active or passive. We’re allowing our clients to make those decisions, whether they should have a bigger allocation and passive or active. We’re making our clients determine whether they should be in high yield or unconstrained bond plan. We’re allowing our clients to work on how to navigate; we’ll give them input about what we think. But I do believe the fourth quarter of 2016 positioned us well because of how we’re constantly, repeatingly talking about solution-based relationship.

Operator

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

Laurence D. Fink

Let me just add on to what I just said. So, we believe that 2016 results again highlighted our benefits of BlackRock’s differentiated investment position, our technology positioning, our risk management platform and positioning, and the impact of our investments we made over the last five years are the biggest growth products at BlackRock. And so, when I reflect on our 2016, it is about those investments we made 2, 3, 4 years ago that is really now creating the volume of growth that we have. It is the scale of our operation, the global footprint of our operation that has given us broader, deeper conversations with more clients throughout the world and we’ll continue to drive deeper and broader conversations with our client in 2017.

Our stable financial results allow us to continue to pursue that long-term view. Investing in these future growth areas is when you adapt to stay ahead of our clients, and that’s key. Staying ahead of our clients’ needs is imperative. Not responding to the question; if we’re responding to the question at the moment and we are not prepared, that question will be answered somewhere else. So, I believe it is that philosophy that is carrying BlackRock, that is differentiating BlackRock, and I think it is that positioning that is going to build momentum into 2017.

I want to thank everybody for joining us this morning and having continued interest in BlackRock. And let’s have a good year.

Operator

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

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