BlackRock, Inc. (BLK) Earnings Call Transcript & Summary

Good afternoon, everybody. Next, it is my pleasure to welcome Gary Shedlin, CFO of BlackRock. With nearly $8 trillion in assets under management, BlackRock is the largest asset manager in the world, with an industry-leading 6% organic asset growth over the last 12 months, and more impressively, a 7% organic fee-based growth over the same time period. In addition to its leading ETF business, BlackRock's organic growth success has been very broad-based this year across a number of asset classes and geographies, including flows in active equities and accelerated momentum in private markets. The firm momentum is further supported by its differentiated technology and a focus on ESG investing. So plenty to cover, lots to talk about. Gary, thank you for being here. It's always...

Thanks for having me. After that introduction, I don't know what else we got to do, Alex. I think that's pretty good.

I can have another sip of coffee. You can obviously have your coffee. Okay, well, look, we -- I have a bunch of questions for you. I'm sure there's going to be some questions coming in on the webcast as well. But I wanted to kick things off with just a broader question around client asset allocation trends. Over the course of 2020, the market has seen a significant shift away from risk asset at first. Things are starting to obviously come back. For BlackRock specifically, I think fixed income and cash management strategies accounted for something like $200 billion of net inflows on a year-to-date basis. That's over 70% of current line flows. How are you guys expecting client asset allocation discussions to evolve into '21, given where we are from a macro perspective? How do you think about BlackRock's ability to retain some of these assets as hopefully, some of them will start to shift into riskier kind of risker assets as people move off the curve?

So thanks, Alex, and hello to everybody. I hope everybody is safe and healthy and hanging in there. So look, there's no question that you're right, institutional wealth clients are facing really complex challenges, especially in this low interest rate environment. And we're seeing a number of client themes. We're definitely seeing clients rethinking strategic asset allocation to satisfy return targets. We're clearly seeing a search for yield with increasing allocations to both private markets and higher risk fixed income assets, especially amongst insurers and pension clients who are having their own challenges in terms of the rate environment. We're seeing a growing shift towards ESG strategies. We'll talk a little bit, I'm sure, throughout the day about the recent survey that we did around sustainability, which we just put out late last week. In that, about 55% of respondents consider sustainable investing to really be at the heart of their investment processes and outcomes over the next 5 years. We're seeing opportunities in emerging markets. China, which I think is, again, tying back to that reach for yields and moving out a little bit on the risk spectrum. And there's no doubt that we're seeing a shift towards models in OCIO, especially in U.S. and EMEA wealth markets. But you know, Alex, our client conversation these days are really less about specific products, and we've talked a lot about that at BlackRock. We're really focusing on clients' whole portfolios today. And that's a critical part of what we're doing. We purposely built this business today to serve clients really no matter the market environment. We're really not reliant on any one particular product at any point in time. We have global reach. We have a full range of investment strategies that goes from index to active. And within active, we've got traditional alternative and cash. We wrap that in an integrated risk management and world-class technology platform. And frankly, even beyond that today, certainly in my tenure as CFO, I don't think we've ever been better positioned in terms of investment performance. We have some of the strongest investment performance across the platform today that we've ever had. Roughly 80% of our assets today are above pure median or benchmarked in active fixed income, fundamental active equities and scientific active equities or systematic active equity. So we feel really well positioned. And those -- these conversations in light of our platform are really leading to deeper partnerships with clients than ever before. Not only are clients entrusting us with a larger portion of their assets than ever before, but we're having even broader discussions with them about things like technology, risk management, securities, lending, transition investment management as well as portfolio advisory capabilities. Now you mentioned this concept of the 70% in cash and fixed income over the year-to-date, last 12 months. But the reality is if you actually go back even longer about 5 years, you'll see that basically about 70% of our net new business has actually come from fixed income and cash. I mean that's -- it's just a longer time frame. And we've been in this low rate environment, although it keeps getting lower for some time. But I think the important thing is even over that period of time with a large portion of client risk preference being stated towards fixed income cash, we generated almost 5% organic base fee growth. So that is our aspirational target, notwithstanding that. And I think that's been differentiated, that's been across market cycles. I think we've shown an ability to grow organically and in many cases, strength of organic growth across different markets, whether it's risk on or risk off. If you look at years like '16 and '18, we were moderately positive. If you look at years like '17 and '19, we were significantly above 5%. And frankly, as you've mentioned, the last 12 months have been pretty good, we're expecting 2020 to be a really good year. So our goal here is really to support clients across their whole portfolio, no matter their risk preference, by basically kind of continuing to do what we're doing, which is investing for the future and trying to stay ahead of their client needs.

Right. Well, speaking of organic base fee growth, you guys have built, obviously, a very successful business. You talked about a handful of structural tailwinds that are at your back right now. To your point, 5% has been kind of a longer-term aspirational target. Nobody wants to make too much out of 1 quarter, but you guys did 9. Last quarter, you guys did over 7-or-so on a trailing 12-month basis. Can we talk a little bit about sustainability of that sort of above your longer-term target growth rates recently? And how are you guys thinking about that over the near term?

Yes. Well, look, I think you hit the nail in the head. I mean the reality is we try not to measure progress 1 quarter at a time. We're all about long term. And the third quarter was no doubt a great quarter. It was in excess of our aspirational growth targets, 7% asset growth, 9% fee growth. It actually was the second best organic base fee growth quarter we've ever had, narrowly beating the second quarter, which previously was the second best quarter that we have ever had. And actually, if you look, as you mentioned in the last 12 months, actually 3 or 4 of those quarters, with the exception of the first quarter of this year, I think our organic base fee growth was in the 9% to 10% range. And frankly, the fourth quarter is looking quite strong as well. Notwithstanding that, I mean, I think 5% does remain our target across market cycles. Some quarters will do better, some quarters will do worse, but we really try to measure ourselves across market cycles. And we think that, that's reasonable given our product breadth, our solutions orientation and our broader technology and this platform. And let me break that down, why we feel comfortable with that. I'm going to start with both ends of the barbells, which is kind of ETFs and core alternatives. That, today, represents about 50% of our base fees, and we feel very comfortable that both of those ends of the barbells will be growing above our -- not only our own aspirational target of 5%, but clearly above the broader market, which last estimates I've seen are around 2%. In core overall, just a reminder, we're managing close to $150 billion today. We've got another $23-or-so billion of what we call committed but uninvested capital. That represents another source of about $150 million of management fees as those assets are put to work. And we've raised, in terms of gross capital, which is kind of net new business plus committed capital, over $50 billion over the last 3 years. We've done about $14 billion year-to-date, and we feel really comfortable about our growth prospects there. We've talked a lot about iShares, especially with you in the past. 2 years ago, I think we -- you and I were sitting in person downtown, and we talked about growth across 3 growth segments. Our core segment, our strategic segment, which is really 4 specific areas: fixed income, sustainable factors and megatrends as well as precision exposures. And we've seen strong growth, sticky assets clearly in the core and strategic buckets. And while the precision tends to be a little bit more volatile, reacting to kind of risk-on and risk-off markets, the fourth quarter so far, the numbers I saw this morning, I think iShares flows are about $60 billion already. And frankly, November, which obviously was a strong risk-on environment, represented our second best iShares month ever. And from an organic base fee perspective, again, coming back to those precision exposures, which are higher fee, represented the best organic base fee growth month in iShares history. And we continue to believe that we're going to double, and we've talked a lot about that, our iShares assets. It's going to come from strong growth in fixed income, sustainable core and will obviously benefit over time from those precision exposures and more risk on market. The real question has always been that more traditional active categories. But again, going back to what we just talked about. I think a combination of our very strong investment performance, our differentiation in terms of technology, scale, ability to basically play in things like factors that are growing much quicker, we believe we can actually grow faster than the industry. Actually, last quarter, I'm pretty sure no one would have thought that we could put up more traditional active flows in the quarter than we did ETF flows. So we're going to continue to focus on our existing strategy, continue to basically invest in areas like ETFs, our iShares franchise, technology, private markets. We're going to deliver whole portfolio solutions. We're going to keep active at the heart of alpha and try and be a leader in sustainability. And we think with all of those things, we feel pretty good about our aspirational growth target.

Right. That's very helpful. Maybe shifting gears a little bit. I was hoping to touch on some of the recent dynamics and some of the recent news flows for you guys, really around the acquisition you recently announced with Aperio. Can you talk, I guess, a little bit about the strategic rationale for making that acquisition? Obviously, it's a provider of custom index equity SMAs. I've covered you guys for a while, and obviously, whenever BlackRock does a deal, there is a notion that, look, you could really sort of supercharge the growth of what you're buying, and that's sort of why you choose sort of not to build it and why you'd rather buy something like that. Can you help us understand how this fits into this framework? And does this change anything at all with respect to further M&A plans for BlackRock?

Yes. So we are really excited about the Aperio transaction. Aperio is one of the -- as you mentioned, one of the largest independent providers of personalized index SMAs. They specialize in what we like to call hyper customization of direct indexing SMAs, they're tax optimized solutions for clients. But they also have the ability to take into account a client's broader risk preferences, their tax position and also their ESG preferences. About $36 billion in AUM. But really what was -- what drove us to them is their very strong organic growth. They've had annual organic growth over the last 5 years in the 15% to 20% range, which we think is incredibly impressive. We ourselves our leading provider of SMAs. But our focus, as you know, has traditionally been active. That's much more of the old Merrill business that we acquired back in 2006. And frankly, even within that, it's been much more fixed income focused. So Aperio really allows us to come back to that whole portfolio approach. It allows us effectively to take active and index and equity and fixed income and really try to basically layer on it alpha generation factors as well as broader customization for wealth clients. Now we were building an equity-oriented direct indexing product for the wealth market. And in fact, you saw we actually did launch our first tax-managed index equity SMA recently. But we really saw the chance here to acquire a market leader with a proven brand with great talent and with critical mass in terms of both assets and revenue, who was growing incredibly quickly. And we think much as we saw in eFront to be perfectly in. We saw an opportunity, and again, remember in eFront, we were on our way to building, if you will, Aladdin for the private markets. But we saw this opportunity with a proven brand to effectively accelerate our own ambition. When you see about how quickly this market is growing, and if you look at the retail wealth SMA market, it's a $1.7 trillion market. It's growing at roughly 15%. And frankly, in the RIA space, which is where Aperio's strength is, it's growing close to 35%. So again, we thought we could basically accelerate our positioning there. And frankly, with that, we think we're in a pretty unique position now because we can provide solutions to the wealth market that is almost wrapper-agnostic now. We're one of the few people who can provide ETFs, clean shares of mutual funds as well as SMAs, and we think that positions us really well to grow in that market, especially if we can wrap it in best-in-class technology and risk management. In terms of our broader M&A strategy, Alex, nothing has changed. I actually think this reinforces it. We are absolutely not going to do any defensive consolidation-type deals predicated on cost-cutting. We'll only consider transactions that effectively accelerate our organic growth. And as we talked about, I think Aperio will do that in its own right. And to your point, use the term supercharged. I actually think we'll be able to take that product and not only re-enhance their distribution to the RIA world but also ultimately sale their product offering to bring it to the broader wealth market over the next 3 to 5 years. We remain focused very much on tactical M&A in those 3 areas that we've always talked about, broadening our technology capabilities, broadening our global reach And if selective opportunities present themselves to scale up some of our private market capabilities.

Got it. That makes a lot of sense. Why don't we talk a little bit about ESG? You mentioned that in your earlier comment as well. But I guess relative to all the challenges that we've seen so far this year, the one -- one of the few bright spots has obviously been accelerating focus on ESG initiatives in the U.S. You guys have made earlier very public comments around your views around ESG already. But curious if you can kind of walk us through, again, how is BlackRock altering the opportunity related to ESG across the platform?

So we are definitely seeing an increased awareness that incorporating ESG resilience can have a material financial impact on portfolios. And I think we're really at the beginning stages of a long-term reallocation of existing capital into sustainable strategies, but more importantly, really growth coming from new capital into these strategies. Clients are increasingly asking for differentiated strategies that align their own capital with sustainable outcomes. And again, coming back to that survey, we talked about -- the survey also told us that respondents planned to basically double their allocation to sustainable AUM over the next 5 years, taking portfolios from roughly, let's call it, 15% to 17% to over 1/3 of their portfolios. And very simply, we are all-in on sustainability. Larry has obviously been incredibly outspoken. He kind of kicked our own efforts off, supercharging them about a year ago with his broader letter, and we want to be the market leader in sustainability. And we think that we can accelerate efforts to provide clients with both better outcomes and more choice in kind of 3 different ways. The first one will be increasing access to sustainable investing. Today, we have about $152 billion of assets under management. We are publicly committed to a target of $1 trillion in sustainable assets by the end of this decade. And we're seeing huge momentum. I mean sustainable iShares is just one example of that, where year-to-date, we've got about $40 billion in sustainable flows into our iShares ETFs. And that was already triple what we did in 2019. Coming out of the pandemic, we've seen a massive acceleration in ESG demand. Our second commitment is to build more sustainable portfolios. And we're doing that by developing tools and integrating ESG data into our investment processes so our active managers can manage that risk and opportunity and take sustainability factors into their alpha decisions every day. And I'm really proud to say that at this moment in time, we're now 100% ESG integrated across about 5,600 active portfolios at BlackRock, which represents over $2.7 trillion of AUM. And the third piece is really putting ESG at the heart of Aladdin. So Aladdin Sustainability provides, again, data and tools not only to our own portfolio managers, but to the Aladdin community and with -- by providing access to something like 1,200 third-party ESG metrics. And late last week, we announced the launch of Aladdin Climate, which is another add-on capability, but it provides climate-adjusted security valuations and risk metrics to provide analysis for both physical risk of climate change, but also importantly, the transition risk to a low-carbon economy. So we are all-in on sustainability. And again, I think you're going to continue to hear a lot more from us about that. And for sure, keep your eyes peeled for Larry's letter in January, which will have some more to say on that.

Yes, I'm sure it will. So you mentioned Aladdin, so let's talk about Aladdin and BlackRock's technology platform. So maybe a little bit of an update, but I guess, for background, you've talked about obviously a little bit of a near-term slowdown because implementation processes take a little bit longer in the Comet environment or perhaps it's making a little bit longer to make some of these larger decisions. So that all makes sense. How do you think about momentum in technology revenues in Aladdin entering '21? And importantly, how do you think about the composition of that revenue growth evolving over time now that you have things like eFront and you mentioned Aladdin Climate sort of more embedded in the overall offering?

Yes. So I actually -- it follows -- it's a great follow-up question to sustainability because I think the pandemic has clearly accelerated the trends that we're seeing in terms of technology. The asset management industry and frankly, the broader ecosystem is definitely in a period of technological transformation. The crisis has accelerated those trends, kind of amplifying the need for robust operating and risk management technology more broadly. And we believe that asset owners, asset managers, asset servicers really need to fully integrate technology for a couple of reasons. Well, actually, 2 or 3 reasons. One is to better connect with our clients and stakeholders; two is to generate better investment insights; and three, is really to generate operational efficiencies, especially today. And as a result of that, our technology strategy really provide is really focused on 2 things right now. One was being able to kind of monitor the whole portfolio. And as we said, as we're seeing increased allocations to private markets, trying to bring the liquid and illiquid together to give our clients complete insight from a risk perspective in terms of their entire portfolio. And I think we've kind of filled that hole through eFront. And secondly is really building Aladdin as a platform, really to address this demand for interoperability that we're getting between asset servicers, between trading venues, data providers because everyone is really looking through a -- to the goals to basically have straight-through processing. And so we're really focusing on that, again, it's a big part of the provider strategy. Now the vast majority of revenue in our technology services line item, that's kind of where it all fits, is still definitely coming from what we're calling institutional Aladdin, and that includes eFront today. But we're also diversifying that source of revenue. You mentioned a couple, but Aladdin Wealth, Aladdin providing -- Aladdin Provider, excuse me, too much of an alliteration there, and Aladdin Climate, as you talked about it. And we expect those to be much more significant contributors over time. Coming out of the pandemic, it feels like a long time ago when we had our first quarter earnings call. But you mentioned that we kind of gave a little bit of a warning on lower revenue growth this year. And at the time, I think we basically felt that it was really going to be driven by 2 main areas: one was implementation slowing down and the other, as you said, was extending both sales and contract cycles. And I think as we got through a number of months, we actually surprised ourselves. Actually, our implementation capabilities were right where needed to be. There was really no slowdown. We were able to be incredibly resilient and get those done. But we did definitely see some impact in terms of notwithstanding what we feel is an incredibly strong pipeline today. It's just taking a little bit longer in terms of sales and contracting. But one other item that I did want to mention while we're on this topic is post the acquisition of eFront. We've been shifting their service model a little bit, and that is going to have a little bit of an impact on revenue recognition, specifically at eFront. eFront, as you may know or you may recall, was historically an on-prem license model, an on-premises license model. And we're now shifting to a more hosted license model, which is much more consistent with the way we service the broader Aladdin community. On-prem license revenues are basically recognized upfront. As you move to a hosting environment, they're recognized over the life of the contract. And so that transition will actually start to impact the optics of our GAAP revenue growth in technology services. And so as we make that transition, we're going to start to talk about beginning when we talked to you guys in January, we're going to start to talk a little bit about ACV, or annual contract value growth, which represents much more of a run rate contract, which takes out some of these issues around sales contracting, implementation, the transition. And it really is much more consistent with the way other fintech providers really talk about their business. So a combination of that extended contract and sales cycles, the transition from on-prem to host is going to basically impact our stated revenue growth this year. It will be a little bit lower than our low, if you will, low to mid-teens target. But on a full ACV growth perspective, it's right where we want it to be. And we're still very comfortable with that as a long-term target, really, again, from 3 ways. We're going to gain new clients. And as I mentioned, the pipeline is very strong. We're going to expand our relationships with existing clients and some of these new products that we talked about. And we're going to basically work with our clients as they continue to grow.