BLK Stock | BlackRock Inc Q2 2021 Earnings Call

Thank you, Gary. Good morning everyone, and thank you for joining the call. We are once again reporting earnings today from our headquarters in New York City, and I'm happy to see more and more of our colleagues in the office in recent weeks. I remain cautiously optimistic for a gradual return to having people back in the office in a little more normal capacity after more than a year of virtual meetings. I've had the last few weeks meeting with clients in person again. I also spoke at the G20 in Venice on Sunday about sustainability and climate change, and it was great to be back on the road. Our business is built on listening to the people we serve and understanding their needs, and there is no substitute for meeting face-to-face with people to hear directly from them about their investment challenges, their opportunities, and what lies ahead for them.

It is through these conversations that we're able to build a deeper relationship with our clients across their whole portfolio, and to ensure BlackRock is always evolving, staying current, and staying in front of their needs. This long-standing client-centric approach is powering consistently strong results for the benefit of all our stakeholders.

Total net inflows of 81 billion in the second quarter, representing 10% organic base fee growth, were driven by continued momentum and strategic growth areas. We saw client demand in our ETFs and illiquid alternatives, our active and sustainable strategies, as well as our scaled cash management solutions. And we delivered 14% year-over-year growth in technology services revenues, as clients increasingly turn to Aladdin.

We have now delivered organic base fee growth in excess of our 5% target for five consecutive quarters, including 13% over the last 12 months from over 500 billion dollars of net inflows. This is driving strong financial performance, and I'm very confident that we have significant room to grow, as we are partnering with more clients on larger and more comprehensive mandates than ever before in our history.

The global economic restart continues to broaden in the second quarter as vaccinations were rolled out and some countries are gradually reopening. With significant amounts of cash still on the sidelines, markets are anticipating continued growth near term, despite the potential for various restrictions in certain countries due to the Delta variant. We have seen equity markets rally, with most indexes up over 10% for the first half of the year and hitting record highs.

We look ahead to the remainder of the year and beyond. Inflation concerns are top of mind for investors who need to assess the potential impact on their portfolios. Debate remains as to whether this inflation will be transitory or structural, and central banks will need to balance their monetary policy decisions alongside expansive fiscal policy by so many governments.

In this environment, clients are looking for skilled partners who have a deeper understanding of the global picture and a platform that can construct portfolios tailored for their needs and for their future goals. They are turning to BlackRock to help them navigate uncertainty, to invest more opportunistically, and to help them plan for their future. Our deliberate investment over many years to build a resilient and scaled asset management and technology platform is helping them in their needs, and we are delivering for them.

Building on what we laid out at Investor Day last month, we remain focused on consistently improving and investing ahead of our clients' needs in the biggest growth areas of the future. In ETFs, the benefit of our investments over time are showing up as accelerated momentum across the franchise. In June, client assets in our iShares ETFs passed three trillion dollars globally, driven by second quarter net inflows of 75 billion. It took 15 years for iShares to get to one trillion dollars in assets. It took iShares only five years to get to two trillion in assets, and it most recently took iShares only two years to get to three trillion.

Importantly, the vast majority of this growth at each milestone has been organic. More and more investors are using ETFs in more ways. They are using iShares to build whole portfolios, to invest beyond traditional market-cap-weighted indexes, and they are using iShares more than ever before to access the bond markets efficiently. Our ETFs grew across each of our core, strategic, and precision product categories, with more than half of our net inflows coming from our strategic categories led by fixed income and sustainable ETFs.

We saw more than 22 billion of net inflows into our fixed income ETFs as investors sought more efficient ways to access fixed income and turned to us for a broader range exposure, including Chinese bonds, multi-sector municipal bonds, and inflation-linked ETFs. We now manage more than 700 billion in fixed income ETFs and continue to believe that this category will grow to a trillion dollars by 2024, as fixed income ETFs modernize the hundred trillion dollar bond market.

Momentum in sustainable ETFs remains strong, with another 14 billion of net inflows in the second quarter, including the launches of our Low Carbon Transition Readiness ETF. We have seen 30 billion dollars in net inflows into sustainable ETFs in 2021, compared to 46 billion in all of 2020. With nearly 120 billion of sustainable ETF assets, BlackRock has four times the size of the next sustainable ETF player, and we are incredibly well positioned for the future for our clients' needs in this fast-growing category.

Demand for sustainable strategies is accelerating from investors worldwide in both index and active. Within active sustainable strategies, we saw 4 billion in net inflows in the second quarter. Sustainable investments offer significant opportunities to generate alpha for clients, and we are focused on innovating ahead of their needs. For example, we announced last week the first close for the Climate Finance Partnership, which will invest in climate infrastructure across emerging markets. This strategy is a great example of how public and private sectors can come together to deliver positive environmental and social impact for communities and attractive risk-adjusted returns for clients, including global institutional investors, governments, and philanthropies.

BlackRock's broader active platform is playing an increasingly important role in our clients' portfolios, and we are seeing the benefits of our investment in our growth and our investment performance. We generated 63 billion of active net inflows in the second quarter across equities, fixed income, multi-asset, and alternative strategies. This growth is outpacing that of the 70 trillion dollar active management industry as we continue to capture active market share.

Long-term investment performance is strong, with over 85% of our fundamental active equities, systematic active equities, and taxable fixed income assets outperforming the benchmark or peer mediums over the past five years. By delivering durable alpha for clients, we remain well positioned to continue to generate growth in active strategies.

More clients are looking to outsource their entire portfolio as regulations intensify, operating costs rise, and investing grows more complex. They want customized solutions spanning active, index, and alternatives, powered by sophisticated technology and risk management. The breadth of BlackRock's investment platform, our portfolio construction expertise, and our Aladdin technology uniquely positions us to meet these clients' needs.

We are honored to be entrusted to manage over 30 billion dollars of pension assets for British Airways in the second quarter through the creation of a bespoke investment and service model. This partnership represents the largest of its kind in the UK pension fund, and we believe it will be a catalyst for more transformational change in the industry. We manage over 200 billion dollars in OCIO assets today and believe the trend towards outsourcing will only continue to accelerate.

We are also seeing demand for personalization growing more among financial advisors and our wealth clients. We're continuing to invest behind the democratization of tax-efficient, personalized portfolios at scale. BlackRock is partnering with financial intermediaries and providing model portfolios which utilize our broad range of iShares ETFs and actively managed funds, as well as separately managed account strategies across alpha, factor investing, and index investing.

Building on our acquisition of Aperio, we recently announced a minority investment in SpiderRock Advisors, which will further enhance our ability to provide wealth managers and financial advisors with tax-efficient, personalized portfolios and risk management solutions. This is another major step we are taking to advance our market-leading franchise in personalization of SMAs alongside ETFs. SMAs continue to see high growth rates as advisors add personalization and tax management to wealth client portfolios. BlackRock is the second largest SMA provider today with over 200 billion in assets, including Aperio, and we remain focused on investing in a comprehensive platform of solutions and customization capabilities for the wealth management market.

BlackRock's commitment to evolve and to meet our clients' needs is perhaps most evident in sustainability. As we adapt to the fundamental restructuring that the energy transition is driving across the economy, we are investing across products, data, and technology capabilities so we can help clients address the impact of sustainable factors on their portfolios and help them capture significant client demand for sustainable solutions.

Last year, we began developing Aladdin Climate to fill a need in climate risk analytics and to help investors better understand and act on climate risk. Aladdin Climate measures at both the asset and portfolio levels the impact of physical risk, like extreme weather events, and transition risks, such as policy changes, new technologies, and energy supply. In June, we further advanced Aladdin Climate through a new partnership with Baringa. The combination of Baringa's climate transition risk models and Aladdin's financial and physical risk models will provide investors with the ability to better understand and customize their climate risk exposures. This partnership is a significant milestone in the build-out of Aladdin Climate and will set a new bar in the industry for climate analytics and risk management tools.

We're also committed to bringing the benefits of our global platform to clients around the world by deepening our local infrastructure. We are investing in people who speak every language, understand local markets and regulations, and have insight into how the changing world intersects with each of our clients' goals. This includes investing to be the leading global asset manager in China.

Rapid economic development and wealth accumulation in the world's second largest economy has propelled the growth of the nine trillion dollar Chinese domestic asset management industry. Earlier this year, we obtained our wealth management joint venture license, and last month we received our fund management company license. We are the first global asset manager firm to obtain this type of license. We are now well positioned to extend the breadth of our investment solutions and insights to all our client segments across China and help more people transition their savings to investments in China, including in preparation for their retirement.

With more than half of BlackRock's assets linked to retirement, we are incredibly focused on innovating and helping our clients address the retirement crisis around the world. Client demand for our LifePath target date funds remains strong, with 17 billion of net inflows year-to-date, representing 10% organic growth and outpacing the entire industry. The need for retirement income is also accelerating. A recent study BlackRock conducted found that nearly 90% of participants across every generation wants a retirement income solution, and 96% of plan sponsors feel responsibility for helping their participants generate and manage their income in retirement.

BlackRock is developing LifePath Paycheck to address this growing need, and we are already seeing strong commercial demand with several initial client commitments and support from institutional investment consultants.

The incredible momentum we are seeing across our entire platform is a direct result of our dedicated employee base. I have never been prouder of BlackRock's nearly 17,000 employees. I have seen their commitment to our clients and to each other in incredible ways throughout this pandemic. In recognition of this hard work and to have them share in BlackRock's growth and success, we are investing in our employees through an 8% raise in base salary compensation for all employees up to and including director levels, as of September 1, 2021. We strive to cultivate an environment at BlackRock where employees feel supported and have a diverse and inclusive environment where they can thrive and grow and build a career and life.

After a period like no other in the firm's history, BlackRock has never been better positioned for the future. My recent trips to Europe and the Middle East to meet with our clients have only further validated our differentiated positioning and our approach to building deeper, broader relationships with our clients. We have always led by listening to our clients and hearing what they want and what they need, and through that, through anticipation, embracing change, innovating, and staying in front of our clients' needs, that has driven us forward. Our fiduciary focus has guided our deliberateness in terms of investments we have made to build a more resilient asset manager and a more resilient technology platform by anticipating and staying in front of our clients' needs. We will continue to deliver industry-leading growth to benefit all our stakeholders for the long term. With that, let's open it up for questions.

Let me have Rob start off.

Good question, Craig. You know that we have said over and over that we see significant room for continued growth in ETFs, and the penetration of the equity and bond markets is still very low. We expect generational shifts to unlock a lot of new growth, especially whole portfolios where ETFs are used, and fee-based accounts around 11%. New investment capabilities like ESG and overall capital markets replacements, where we're seeing ETFs at about 5% of the total market and 1% of the bond market. We expect, to give you a number to throw out by 2025, that ETFs are going to more than double to 15 trillion, and even at that level, we would still be a small part of the markets in which we compete, which is why we think there are decades of growth ahead. We fully intend to be the market leader in revenue growth, in truly organic client-driven flows, and in total assets as this evolves. We recognize that we have to offer choice in the vehicles that we show clients, but ETFs are going to lead in that.

So there are some key client segments. One is Europe, which is adopting very, very quickly. The wealth area through model portfolios, of which we are a leader, is showing huge growth. Certainly, in institutional clients, primarily in fixed income, is showing growth. And then another segment is sustainable, which you heard about, which we are the leader, is also showing growth. So what makes our ETF platform unique relative to any competitor is its diversity and broad client base. For example, our global client base is made up of self-directed investors, wealth managers, pensions, insurers, and active managers. We have the most diversified platform with 2.3 trillion in the US and 650 billion in Europe, and 2.3 trillion in equity and 700 billion in fixed income. So you can see how this matches up against the client segments I talked about. And most importantly, which may be overlooked, we provide the most secondary market liquidity. So US iShares traded almost 9 trillion in 2020 versus 7 trillion in 2019, and iShares traded 1.2 trillion in 2020 versus 1 trillion in 2019. So this, along with our precision exposures which are often unique to us, while it has been a drag in prior years, is actually a driver of our strong revenue growth this quarter. So we're excited about the growth specifically in the segments that we are a leader in today.

So not really. I mean, look, maybe that is one of the reasons that Rob continually talks about the personalization customization of tax-efficient strategies. I think across the board, the awareness of after-tax returns is becoming more dominant in the RIA channels. But I don't think it's exciting. I don't think it's reflective yet, and I don't think people are motivated or seeing any real changes in behaviors related to the potentiality of these changes in taxes. But I think there is just a much greater awareness of, and the ability now to create customized personalized tax-efficient portfolios, and I think that's what's going to drive. Rob, do you have anything to add? It's another reason why people are moving towards ETFs, which are much more a tax-efficient tool than the typical mutual funds that they are in. So actually, it's another growth area for ETFs.

Yeah, well, you're right, we don't do that, and we're not going to do that on this call. But I think when you think about... and when I referenced the British Airways OCIO mandate, we believe this is just the beginning of more focus on the virtues and the value proposition for these pension funds to rethink how they are organized. Should it be done under a platform like BlackRock? And then we create the efficiencies, and most importantly, can we have a better fiduciary outcome on behalf of their participants? All of this is about the participants, and can we provide a better outcome for the participants? I really do believe we are doing that. We have had some very large wins with a few other clients in the last few quarters. We are in large dialogue with many more, but I want to underscore what the transformation of LifePath Paycheck could be too. These could be some very large opportunities too, and the defined contribution business being reimagined. We thought and that is how we framed it: how can we reimagine and provide better certainty to the participants? How can we provide better outcomes, and how can that lead to a better closeness between the employer and employees, and how can they build deeper bonds when the employees retire during the decumulation period of time? These are the broad-based solutions that we've been focusing on, no different than the broad-based solutions we focus on the needs of focusing on climate and portfolios across the board. So I believe what you are seeing in the past, related to above trend-line growth above 5% organic growth, is because of these deepening relationships across the board. And as I concluded in my speech, I do believe we are going to continue to see this type of elevated opportunity. It is because we are so relentlessly focused on how to think about our clients and help them become better at what they are doing. I truly believe whatever the outcome of British Air and the other measures we talked about, and I would say with the strong performance that we've had in our active platform, flows generally follow. No firm can have this: when you can have a dialogue where you are agnostic about the role of index assets like ETFs and active assets, and then focusing on whether it's tax-efficient portfolio strategies or focusing on a sustainability overlay, or focusing on outcomes related to more certainty during the accumulation periods of time, this is what's driving the flows and this is what I think is differentiating BlackRock. We are spending more time, we are investing, as Gary talked about, our investments in the future. These are the type of investments we're making, making sure that we are staying in front of the needs of clients and providing something unique and differentiated. I do believe that is resonating more and more. Let me just leave it at that.

I'm going to let Gary answer that because Gary, as a CFO, is the one who really is the tethering of our platform, and he also provides the balance between me and him, so I love him.

I would just add one thing, two things. One is, and there's a lot of this from meetings in Europe last week, the demand for data and analytics on sustainability is going to grow exponentially. This is why we've been so aggressive in terms of building out analytics and data across the board. I do believe this is going to be a major sleeve, a major opportunity for Aladdin. Aladdin Climate is going to be a major component of Aladdin. We believe having the differentiating data and analytics is going to be further why clients are going to be looking to add on Aladdin across their portfolio. What we've witnessed since the acquisition of eFront is the need for data and analytics related to alternatives, and across all the alternative space, integrated into a comprehensive data and risk analytic environment is really, really important. So if you overlay the movement in the capital markets and client demand in alternatives, if you overlay the demand for clients related to sustainability and climate, that's going to be a major change and that's going to be a major component of it. That's why Sarah Matthews is now having that role and helping us drive Aladdin Climate, so as she moves away from our client relationships, I'll leave it at that.

Thank you, operator. I want to thank everybody for joining the call this morning and for your continued interest in BlackRock. Our second quarter results again are a result of the steadfast commitment of focusing on our clients first, and importantly, thinking and investing and anticipating their needs in the future. I see a tremendous opportunity ahead, and BlackRock's focus remains on the long-term fiduciary commitment to all our clients worldwide. We will continue to invest in our business so we can deliver that long-term value for our stakeholders and lead the asset management industry in the many, many years ahead. Thank you again and have a great remainder part of the summer. And unless everybody, hope to have a great third quarter. Talk to you then. Bye-bye.