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

Okay. So good afternoon, everyone. Thanks so much for joining. Next up, it's my pleasure to introduce Gary Shedlin, CFO of BlackRock [Audio Gap] sustainable investing, alternative [Audio Gap] So Gary, over to you.

Thank you for joining us today. It's great to see all of you after a couple of years of Zoom meetings. So many of you are familiar with BlackRock's framework for shareholder value creation, which guides our managerial decisions to simultaneously optimize organic growth, operating leverage and capital management in order to generate differentiated earnings growth over the long term. We're committed to optimizing our organic growth in the most efficient way possible and making thoughtful decisions around resource allocation to ensure that we strategically invest in areas with the highest future of long-term growth potential. And I'd like to quickly step through each of these pillars this afternoon and update you on our progress. So as so many of you know, sustained organic growth is, by far, the most important driver of asset manager valuations. And BlackRock has been able to generate consistent industry-leading organic growth over the years, reflecting the breadth and the diversification of our global investment solutions and technology platform. Our differentiated platform and the stable growth that it generates enables us to better manage our business for the long term, both in terms of strategically investing for the future and optimizing our capital structure. And this has enabled us to command a premium valuation relative to our peers. And BlackRock [ remains ] intensely focused on continuing to generate industry-leading organic growth even as a $9-plus trillion asset manager. We have strong conviction in our ability to continue generating differentiated organic growth over the long term because we have built our platform to help clients meet their objectives, no matter the market environment or their risk appetite. And we've invested for years to develop industry-leading franchises in high-growth areas such as ETFs, private markets and technology and to strengthen our world-class active investment platform. And more recently, we've turned our attention to developing a best-in-class ESG capability. And these investments all are focused on a singular purpose, which is to help clients construct resilient whole portfolios. And we have strong momentum in these high-growth areas. For example, year-to-date, as you can see, the strategic category of our ETF business made up over 40% of iShares' net new base fees. Illiquid alternatives is generating over 20% organic base fee growth. And our technology business, Aladdin, continues to generate double-digit ACV growth. Furthermore, the success of these investments really can be seen in the changing mix of our overall business, specifically our net new base fee growth. Since 2018, when we were here with Alex, iShares was the primary contributor to organic base fee growth. iShares is obviously still an important growth engine, but the investments that we've made in active and illiquid alternatives and whole portfolio of solutions have both diversified our business and improved the quality of our growth. Year-to-date, iShares today is contributing a little over 1/3 of our net new base fee growth. Traditional active is contributing over 50%, and illiquid alternatives is contributing over 10% and growing extremely rapidly. And we accelerated our efforts 2 years ago in sustainability, which is embedded in everything you see across this slide. And today, ESG-related products are generating over 20%. Let me repeat that. Over 20% of our long-term organic base fee growth and our leadership in this area is increasingly a key differentiator in our client discussions especially in EMEA where demand is continuing to accelerate. So the diversification of our investment and technology platform, think of that as a distinct competitive advantage. It allows us to provide holistic whole portfolio solutions to our clients' most pressing challenges and positions us to deliver for a variety of stakeholders in almost any market environment. Now our strategy is paying off. And the important thing to note is that our strategy is constantly guided by our client needs. We are relentlessly focused on understanding how their needs will evolve over time, and we seek to invest ahead of changing industry trends and for the long term to ensure that we can swiftly pivot to embrace new market opportunities. And while we've been successful, we're certainly not resting on our laurels, we're continuing to invest aggressively. In fact, our budget for 2022 envisions our highest strategic investment ever and is designed to drive continuity of a multiyear plan to build on our successful strategy. Now we're going to drive differentiated organic growth through investment in all our growth engines, particularly our historic ones, iShares, Aladdin, private markets, but we're also going to make accelerated investments in Alpha and whole portfolio solutions in ESG and most recently, China. And we're going to scale our operating and our technology platforms to support growth and to ensure that we can increase resilience, and we're going to also responsibly invest in our most important and most critical asset, our people. So let's double-click on the results of some of these investments over the last few years. In iShares, we continue to win the #1 industry share of overall net base fees, and we are the market leader in the fastest-growing areas of the ETF industry, including fixed income, sustainable and factors. This strategic segment of iShares today represents over $1 trillion in AUM, up from just $400 billion 3 years ago. And in private markets or illiquid alternatives, we've seen tremendous acceleration over -- in our growth in over the last 3 to 5 years. We've invested both organically and inorganically to build a scaled and importantly, a diversified alternatives business, and we're seeing the benefits of those investments today and our growth, having raised $25 billion of capital in the first 9 months of this year, more than we did in the entire year of 2020. Our deferred carried balance at September 30 was $1.4 billion, more than tripling from a year ago, and we have $30 billion of committed capital, which when deployed, will represent an additional $200 million of base fees and a significant source of additional performance fees. Our multi-decade investment into our Aladdin technology platform continues to differentiate us both as an asset manager and a fintech provider. We're generating today over $1.3 billion of annualized revenue from over 900 third-party clients, and our contract renewal rate there is approximately 95%. We're innovating and we're extending our capabilities into new and high demand areas of the ecosystem, including whole portfolio, wealth and importantly, sustainability. And the recent combination of Aladdin and eFront, which allows a client to bring together both their liquid and their illiquid portfolio into a whole portfolio view and customize it at scale, has already been embraced by over 2 dozens clients, and the pipeline is the strongest it's ever been and continuing to grow. And as part of BlackRock's relentless focus on continuing to evolve the Aladdin platform, we're currently migrating Aladdin from a SaaS offering hosted in BlackRock's managed data centers to the cloud. This partnership brings enhanced capabilities to BlackRock and our Aladdin clients and is about 2/3 complete, and we anticipate completing the balance of that in the next year. Our active franchise is significantly outperforming with investment performance as strong as it's ever been. We are driving growth well in excess of the industry because of our great performance, with 78% of our U.S. active mutual fund AUM being rated 4- and 5-star funds, and we are currently the #1 year-to-date asset manager in terms of asset gathering in the U.S. active equity mutual fund industry. We've now had 10 consecutive quarters of positive active inflows, and that compares to 9 out of 10 previous quarters of active outflows for the rest of the industry. And we've also invested in new vectors of growth, sustainability, whole portfolio and China. I've already touched on the contribution of sustainability to overall net new base fee growth, but let me put these numbers in a little bit more context for you. We outlined a goal to reach $1 trillion in assets under management just a year ago. We are now at $400 billion of asset management just 1 year into our journey. Our momentum in these relatively new areas of focus illustrates how quickly we can respond to new market opportunities; and be, importantly, first movers. And the success of that strategy is evident in our competitive positioning. Our investments are delivering deeper and broader relationships with our clients across almost every pillar of our business. And that, in turn, is resulting in increased market share in our strategic focus areas. And importantly, it's allowing us to steadily increase our competitive moat. Our organic base fee growth premium versus the industry has steadily grown even as a $9-plus trillion asset manager, reflecting the benefits of consistently and deliberately investing over time. We are able, by virtue of our business, to invest consistently. We can play offense almost all of the time when many in the industry have to pull back in more difficult times. And we've proven our ability to meet these organic growth targets, while at the same time, increasing our operating leverage. In fact, over the last 5 years, as you can see on this chart, we've generated organic base fee growth in excess of 6% and have expanded our as-adjusted operating margin by approximately 160 basis points. Beyond sustaining these differentiated levels of organic growth though, investors, many of you, analysts, people like Alex are continuing to ask us whether we can expand our margin even more. And I'm here to tell you, I believe we can. But in order to get a better picture of our historical and prospective margin dynamics, I think we need to make an important point about some of our disclosures. When we talk about our as-adjusted margin, we are really selective with our adjustments, particularly compared to many of our peers. While we make every effort to call out various items during our earnings call, we haven't specifically calculated our as-adjusted operating margin to add back various items related to acquisitions like retention payments or intangible amortization or contingent fair value adjustments or deal fees, or importantly, the mark-to-market impact of many of our deferred compensation funds, again, as many of our peers do. Our best guess is if we have called all of those things out to you over the last few years, on average, we actually could have reported an as-adjusted operating margin almost 200 basis points higher, and our result in margin expansion may have been even double what you see on this page. Now perhaps we could be more explicit, and we'll consider that. But in the meantime, I want to spend a few minutes with you, really focusing on a couple of expense areas that we manage much more carefully on a proactive basis. Asset management is a human capital business, and roughly half of our overall expense base is linked to our people who drive the success of our business. To support growth across our entire business, in the years ahead, we're going to continue to invest in our people, both in terms of increasing headcount but also in supporting our employees in what is an incredibly competitive talent market. Now while our overall compensation to net revenue, again, as you can see on this page, has trended modestly upwards in the last few years, the increase has really been entirely due to 2 things: One, higher performance fees, which have tripled over the last 3 years; and the mark-to-market impact of various performance-based compensation programs, including deferred compensation, including the BlackRock Performance Incentive Plan, which is our main long-term incentive compensation program. Compensation expense associated with both of these items reflect the success of the investments that we have consistently made that we just talked about to drive differentiated alpha and increase our organic growth. And as you can see on this chart, excluding the impact of compensation related to performance fees and the mark-to-market component of certain of our deferred compensation programs, our managed compensation to net revenue ratio has actually declined by 140 basis points. And we've done that through 3 things. One, we generated efficiencies from investments in technology and automation. We've optimized our talent pyramid to become more junior. And we've grown our footprint in iHub innovation centers. And in fact, this decline would have been greater if we excluded M&A-related retention expense, which is included in the incentive category above, again, as most of our peers do. Our focus remains on hiring and retaining the best talent. Our strong results and deepening client relationships are because of our dedicated employees, and we're committed to a compensation framework over time that aligns the interest of our employees with those of our clients and our shareholders and as competitive with our peers. Our second largest discretionary expense category is G&A expense. And while our total level of G&A spend has been relatively stable as a percent of net revenues over the last 4 years, excluding the impact of noncore items, core G&A as a percentage of net revenue has actually declined by about 160 basis points. And while some of this is no -- is clearly driven by lower T&E over the last 18 months, we strongly believe that our scale delivers benefits to clients and shareholders alike. Noncore G&A expense on this chart includes such items as product launch costs linked to successful closed-end funds, transaction costs and contingent consideration fair value adjustments, that's a mouthful, FX remeasurement expense and certain onetime legal items. Our core G&A investments have largely centered on technology, data and portfolio services, all of which today are driving our revenue growth. Growth in technology and data spend has primarily been driven by our Aladdin cloud migration, increased need for market data to support our index and our ESG franchises and broader tech investment to support productivity improvements. We expect continued growth in tech spend as we complete our Aladdin cloud migration next year and bring enhanced capabilities to BlackRock and our Aladdin clients. In particular, this migration is going to enable us to accelerate innovation to improve Aladdin's overall resilience and performance to localize data hosting and to open Aladdin, so clients have the flexibility to more seamlessly create innovative, data-driven solutions. Portfolio services expense has also grown recently, driven in part by sub-advisory fees linked to our very significant and successful wins in our OCIO business. And it's important to note that these sub-advisory expenses are paid out of management fees we earn and appear effectively as a pass-through on our income statement. And we're investing in our business more broadly for effective use of our balance sheet. We're continuing to aggressively seed new products and co-invest alongside clients in illiquid alternatives in greater size than we ever had before. During 2021, we allocated approximately $400 million to these investments, and I anticipate that we'll be even more than that in the coming year. This is perhaps the most attractive use of our capital. It's critical to product innovation. It's critical to accelerating time to market and to fuel our future organic growth. And our estimated internal rates of return in this category are in excess of 25%. At times, we're also going to be opportunistic, and we're going to invest inorganically either through outright acquisition, or like Aperio or eFront, as an example, or through minority investments. Beyond their strategic value, many of these minority investments are delivering really attractive returns in their own right to our shareholders. And those returns today, we estimate on our overall strategic minority portfolio to be approximately 35%. And we've been doing all this while returning cash to our shareholders on a very consistent basis. We've grown our dividend at 12% compounded since the end of 2012, and we've repurchased over $11 billion in BlackRock stock over that same period, representing about a 20% IRR for our shareholders. So in summary, we believe that our differentiated business model is incredibly well positioned to sustain our industry-leading organic growth and deliver long-term shareholder value. BlackRock has invested and evolved over time to position ourselves to take advantage of key industry trends, doubling down on our strategic investments in Aladdin, in iShares and the liquid alternatives, making significant investments in sustainability, whole portfolio solutions and delivering strong, active performance, beginning the business of our onshore business in China as well as our ESG capabilities. Our unmatched global scale also allows us to continue investing in the future, again, whether in good markets or more challenging ones and when others may be forced to pull back. Our commitment remains to optimize organic growth in the most efficient way possible. And we will do that by responsibly managing our entire discretionary expense base, but not with a specific margin target in mind or at the expense of what we believe will benefit our clients over time. Today, we are growing organically at the fastest rate in our history and operating at the highest margins we ever have. And our unique culture drives emotional ownership at all levels and enables us to attract and retain the most talented professionals in the industry. So with that, I'll pause. Thanks for your interest in BlackRock, and happy to take some questions.

Great. Well, thank you, Gary. So why don't I jump in? First question -- and thanks, by the way, for all the incremental disclosure, that was really helpful. So first question I have for you is around private markets and retail. Earlier this year at the Investor Day, you guys outlined a bit of a new framework, I guess, to say, look, the typical 60-40 portfolio equity-fixed income has to evolve into kind of 50-30-20, 20 being the private markets piece. And it sort of has to happen because, obviously, the return opportunities are just not the same in the public markets today. Given BlackRock's scope and scale, it feels like you guys could get significantly larger in this retail alts marketplace versus where you are today. What's sort of the path of getting there? Does it have to be an organic build? Or is that an area where you could see yourself doing acquisitions?

So there's a lot there. Thanks for the question. I would say that growth in retail alts is very compelling, as you mentioned. There's no question about it. But I think it's important when people look to compare us to the pure players, let's call it for a moment, that we are really trying to service the intermediary and their end clients from a whole portfolio perspective. And everything we're talking about is trying to bring both traditional and alternative, active and passive, rapid in a technology that is easy for both the adviser and the end client to understand, and make sure that we can be everything to that adviser, and at the end of the day, the end client. And as a result of basically that approach, we've been -- I think we've been successful on both ends of the curve or the spectrum, not necessarily in the same size that we are hearing from some of the pure plays today. And if you think about it, where we are today in traditional active, and again, a few years ago, you would have not believed it if I had said it, but that we will end this year -- again, at least through September and hopefully, the last quarter shows it, we will end the year #1 in active equity in the retail channel, right? Okay? Let me repeat that. BlackRock will be #1 in active equity in the retail channel. In overall alpha, we'll be something like #3, where we're probably 5 in multi-asset, maybe top 10 in terms of fixed income. So that's -- I think that's #1 to think about. But that being said, we are focused on alternatives, we're just doing it a little bit differently. So our focus has been primarily around liquid alts, where we've been very successful in delivering hedge funds in many respects to the end retail client. We have a very sizable global event business. Our European hedge fund, our office strategy in Europe, we've been very successful with. And so we've been very successful in terms of liquid hedge funds. Secondly, we've been focusing on both private debt and private equity to the retail channel, but we've been primarily driving that through distribution of our closed-end funds. In our closed-end funds -- and we've done about $14 billion of those over the last 2.5 years, the closed-end funds that we're doing now, we can actually allocate up to 25% of those assets into private asset classes, again, primarily pre-IPO emerging growth equity as well as private debt. And that's incredibly important because in many cases, we're trying to democratize alternatives. We can just think about that where you're paying a management fee, but there's no carry paid on those types of assets. Year-to-date, that strategy has delivered about $24 billion of flows for us. Average fee rate, incredibly attractive at around 85 basis points. But we're not stopping. We're trying to work more about creating product opportunities in real assets and sustainable and ultimately, co-investments. And I want to make sure that we also highlight the point that it's not just about product, but it's also about technology, right? So we want to basically give the adviser an opportunity, again, with alternative analytics that we're distributing through our adviser center to help the end client be able to look again at that whole portfolio, both liquid and illiquid, from a risk and return standpoint.

Great. Another important theme for the industry and of course, as you highlighted today, is around ESG and sustainable investing. Big numbers from you guys. Obviously, $434 billion in ESG assets, 20% of long-term net flows this year -- or long-term, rather, fee-based growth this year. As you think about the evolution of ESG and sustainable investing, how much is the active going to play a role in that? You guys have been very successful in some of the ETFs, of course, which, by the way, have really nice fees attached to them as well. But if you think about active versus passive under the ESG contract, does that look different than what we're used to seeing in the kind of traditional asset process?

Well, I think it's still emerging. I mean you've hit some of the numbers. I mean $400-plus billion. Again, that is across the entire spectrum of everything we do. So it's equity, it's fixed income, it's multi-asset, it's alternatives, it's cash, it's active, it's passive. And so I think there's no question that, that is a huge opportunity. We're really trying to hit it 2 ways, again, both on the data and analytics side, which is part of Aladdin Climate, a lot of the analytics we're trying to do, but also in terms of driving investment product for the end client. We've got about $64 billion today of year-to-date flows. I would say if I think about that in terms of how we would break that up, it's probably about 2/3 ETFs. I'm going to look to Caroline for kind of confirmation. The balance of that, I would call, generally active with some cash outflows and some fixed income inflows. But again, the important piece of that is that 20% of our net new base fees, and that's probably going up to closer to 1/4 next year, are going to be coming from sustainable strategies. And so it is really -- when we talk about our guiding principles, One BlackRock, as many of you have heard, we're not a multi-boutique firm. We are basically a fully integrated technology and asset management firm. ESG brings the entire firm together. Whether it's in terms of active management, passive management or technology, it's something that's really, really important. And we think there are huge opportunities for us in terms of that growth, again, primarily anemia, where we're seeing it really explode, but I think it's only a matter of time before we start to see that opportunity move here to [ the U.S. ]

Right. Sticking with some of the investment themes, the commentary throughout the day today, and I'm sure we'll hear more of that tomorrow, is just the macro backdrop is getting a little bit more uncertain. We obviously see an increased volatility. There's inflation. There's worry about higher interest rates. And obviously, the path of the pandemic remains sort of uncertain. So if you think about some of the asset allocation trends that are going to be informed by what you're seeing today in the marketplace, what do you guys hear from clients? And I know it's hard to generalize, but best you can in terms of what that means for 2022 asset allocation trends.