BlackRock, Inc. (BLK) Q2 2012 Earnings Report, Transcript and Summary

Good morning. My name is Christie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock, Inc. First (sic) [Second] Quarter 2012 Earnings Teleconference. Our hosts for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Ann Marie Petach; President, Robert S. Kapito; and General Counsel, Matthew Mallow. [Operator Instructions] Thank you. Mr. Mallow, you may begin your conference.

Thank you very much. Good morning, all. This is Matt Mallow. I am the General Counsel of BlackRock. And before Larry and Ann Marie make their remarks, let me point out that during the course of this conference call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual future results may differ from these statements, and as you know, BlackRock has filed with the SEC reports which list some of the factors which may cause those future results to differ materially from what we say today. Finally, BlackRock assumes and you should understand that we assume no duty to and do not undertake to update any forward-looking statements. So with that, I'll get out of the way and turn it over to Ann Marie.

Thanks, Matt. Good morning, everyone. As we saw in this quarter, volatile markets, driven in part by political, policy and regulatory uncertainty, continued. Until confidence increases, investors are biased towards short-term defense [ph]. We saw this evidenced in the second quarter based on investor preferences for income products and liquid instruments such as ETF. World markets continued to fare worse than U.S. markets. Compared to the first quarter, the U.S. markets were, on average, relatively flat, while global, European and emerging markets were down 3% to 6%. Despite these market challenges, BlackRock delivered a strong 39.2% operating margin and delivered operating results that were up compared to the first quarter. Our financial performance highlights our strong focus on clients' needs and our ability to work with them, supported by the breadth of our product set, our global presence and our unmatched risk tools. BRS is continuing to grow as risk, insights and tools are in ever-increasing demand. Our commitment to our brand has helped us connect to our clients at a time when they need and want advice more than ever. Our cost discipline has supported our strong operating margins. We remain committed to long-term growth opportunities, and you saw this evidenced in our announced acquisition of Swiss Re's private equity fund of funds platform. The second quarter also allowed us to continue our journey of transforming the ownership of the firm. Post the May secondary offering of Barclays shares, the ownership of the firm is almost 80% broadly held, and that compares to 20% just 18 months ago. The Barclays secondary offering was a great opportunity to communicate with investors about our organic growth opportunities and to take advantage of the cash-generative nature of our business model. We participated in the Barclays sale via a $1 billion, 6.4 million share repurchase, which was incremental to our core repurchase program. After the secondary closed, we resumed our regular repurchase program and were able to purchase an additional 250,000 shares in the few remaining non-blackout days in the quarter. Going forward, returning cash to shareholders regularly remains a priority. We also took advantage of a robust debt market and the secondary investor roadshow to lock in $1.5 billion of term debt at historically attractive rates. The key takeaway for me is that our breadth and diversity have positioned us to perform well in various market environments and to consistently reward shareholders. I'm going to walk through the specific results now. As I make my comments, I'll refer to the slides in the earnings supplement, which you can find on our website. And I'm going to be talking primarily about as adjusted results. So if you look at the supplement, I'm going to start on Slide 3, second quarter earnings per share of $3.10 reflected year-over-year EPS growth of 3% and sequential operating income growth of 1%. I just want to contrast the as adjusted results to the GAAP results which are presented in the headlines of net income down 11% and remind people that in the second quarter of 2011, we benefited from a $52 million noncash tax benefit, really, the revaluation of our deferred tax liabilities. Because it was noncash, we never took credit for this benefit in our as adjusted results because we didn't think it really benefited our shareholders. So the way we look at it, it really is a 3% increase in net income. Moving to Slide 4, our second quarter operating margin was 39.2%. Cost discipline and seasonal factors allowed us to improve the margin 0.60 point sequentially despite the market-related revenue pressure and an increase in marketing expense associated with the commitment to our brand. Our cost-to-revenue ratio was 35.1%. That's exactly in line with the 35% we've been running for several years. The next slide, Slide 5, is something we pulled ahead that had been in the appendix last quarter. We think it's an important slide because it highlights the diversity of our business, as well as the dramatic difference in business mix as measured when you use revenue compared to when you use AUM. From a base fee perspective, we're an evenly balanced business, with about 1/3 of our revenue coming from institutional, 1/3 from retail and 1/3 from iShares, while the AUM view really distorts the business mix and be dominated by institutional. Slide 6 shows the decline in average global markets compared to both a year ago and to first quarter. While U.S. markets are up on average 2% compared to a year ago and flat compared to the first quarter, the global markets across various indices were down 7% to 17% compared to a year ago and 3% to 6% below the first quarter. Reflective of the diversity of our business, about half our equity AUM is tied to non-U.S. markets, so these markets obviously affected our revenues. I'll start with a comparison of our results compared to a year ago, and then I'll move on to the sequential results. On Slide 8, on the right-hand side, you can see that earnings per share of $3.10 included $3.27 of operating earnings and $0.17 of nonoperating expense. Operating EPS benefited from expense discipline and share repurchases offsetting market effects. Nonoperating results reflected a stable investment portfolio and higher interest expense. The year-to-date as adjusted tax rate was 30.4%. The improvement compared to the first quarter reflected the positive resolution of certain outstanding tax positions and reductions in our foreign tax rate. 31% is a good modeling level for the rest of the year based on what we know right now. Operating earnings of $832 million, which you can see on Slide 9, reflected expense discipline more than offset by market-related revenue declines, which we'll move on to on the next slide. Our business does benefit from the diversified set of revenues. Second quarter revenues were $2.2 billion. This includes $2 billion of base fees, $41 million of performance fees and $131 million of BRS revenues. Market factors drove the decline in long-dated base fees, which is that red bar. BlackRock Solutions and advisory revenues of $131 million were up 13%. That's driven by a 21% increase in our core Aladdin revenues. And as we've said in the past, Aladdin revenues represent the bulk, about 2/3, of the BRS revenues and are very sticky. Once people get on Aladdin, really, they stay. Our managed disposition of assets in Maiden Lane I and III has broadly benefited U.S. taxpayers as those funds have been fully paid with interest earlier than originally expected. This is the key driver of the $68 billion decrease in advisory assets compared to a year ago. The appetite for BRS remains very strong, allowing us to continue great dialogue with our clients, both regarding advisory, as well as Aladdin, and this is a global phenomenon at this point. Looking at base fees on Slide 11, revenues are benefiting from our balanced business model and product offerings. While the material declines in world equity markets more than explain the 11% decline in base fees on equity assets compared to 2011, this has been muted by an 8% revenue increase on fixed income and multi-asset class revenues. So you see the strength of the balanced business model coming through. Also compared to a year ago, we saw the revenue effect of withdrawals from really very low-yielding cash products. Now turning to Slide 12, expense discipline resulted in a 5% decrease in as adjusted expenses. G&A was down 6% as we reduced the occupancy cost associated with 2011 double rents and more than offset our branding investment. Our branding initiative resulted in only a 14% increase in marketing cost as other year-over-year marketing efficiencies offset a portion of the branding expense. We've been really encouraged by the client reaction to the campaign. We've gotten some great initial feedback on the number of people who really recognize our name post the campaign, and so we remain highly confident that this is a critical long-term investment in the business that's going to pay off over time. Compensation expense was down 3%. That's explained by decreases in incentive comp and temporary help. Larry's going to discuss our continued investment in and commitment to great talent. Moving on to sequential results and beginning on Slide 14 now, sequentially, EPS benefited from a $0.17 increase in operating EPS, but that was more than offset by a $0.23 decrease in nonoperating EPS. The nonoperating EPS reflected that the value of the investment portfolio was stable this quarter, whereas in the first quarter, the value of the investment portfolio actually increased. So it's a non-repeat of an increase in the first quarter. Operating income, improvements in sequential operating income were driven by the same themes really driving the year-over-year result plus seasonal factors, which I'm going to be getting into as I move on to Slide 16. If you look on the left side, starting with base fees, $46 million of the improvement in base fees was associated with the seasonal increase and securities lending associated with the European dividends season. So despite negative markets, we delivered a $13 million improvement in base fees. BRS revenues increased 7%, while performance fees declined, reflecting both a trend of lower performance fees in the second quarter compared to the first quarter and volatile performance in a volatile period. In these markets, we've got some funds performing very well, but also, we have funds that are volatile in a volatile market. Some of our larger hedge funds have moved up or down multiple percentage points over days or weeks, and this leaves us highly uncertain exactly where the funds will be relative to high watermarks on the last date. We can talk more about that next quarter as the vast majority, the biggest number of loss is in the fourth quarter, though some are in the third quarter. As discussed earlier, a strong appetite for income products led to a $25 million improvement in fixed income base fees, which you can see on Slide 17, while the seasonal factors we just talked about supported growth in equity index base fees. Expenses on Slide 18 are down 2% sequentially, reflecting the seasonal benefit of lower payroll taxes, which peaked in the first quarter, and lower incentive comp, offset partially by our brand initiative, which you can see in the G&A expense. Slide 20 shows our nonoperating expense of $43 million, which, in this quarter, reflected $44 million of net interest expense. Including the interest on the $1.5 billion of incremental debt that we issued in May, the value of the investment portfolio, as you can see, was completely stable, with gains offsetting losses. The purpose of the portfolio is for us to seed new product and co-invest with our clients. And just to give you some data on the benefits of those seedings, funds that we seeded since fourth quarter 2011, specifically, we seeded a multi-asset income fund, an emerging markets fund and a global long/short fund, have provided great new investment options for our clients and gathered over $800 million in new assets in this short period. So we're really seeing the fruits of the seeding. Our balance sheet remains small, with approximately $8 billion of economic tangible assets composed of cash, receivables and the seed and co-investment portfolio. Moving on to 21 and summing up, we delivered a healthy margin. We generated strong operating cash flow, returned a large amount of cash to shareholders and transformed the ownership of the firm. Looking ahead, we're extremely excited about opportunities we have to help our clients navigate this challenging environment and help them to balance between near-term unknowns and long-term opportunities. Our balanced business model, client focus and commitment to long-term growth are benefiting the business. Near term, we're well positioned to service clients' immediate needs, risk appetite and desire for liquidity and products such as ETF. We're also well positioned to work with our clients in the long term as risk appetite and the need for returns balance out. Our commitment to alternatives remains strong, as evidenced in our announced acquisition to private equity -- of the private equity fund of funds business, though you have to recognize in this environment and also in these asset classes that decision-making time frames have lengthened. These are long decision -- longer-term decisions for people. So this opportunity is going to play out over time. We think it's a very important opportunity which will generate strong results both for our clients and for our shareholders. With that, I'll turn it over to Larry, who will discuss the external environment, what we're seeing with our clients and our focus on performance.

Thanks, Ann Marie. Welcome, everyone. While the first 2 months of 2012 started with a lot of optimism, we, like the rest of the industry, witnessed the softening in our net new business beginning in March and lasting through the quarter end. I've discussed this quite a bit, the risk on and risk off, and I think the issues going on right now with all the uncertainty, which I'll talk about, has really created a change in attitude by investors as they are trying to redetermine how they should think about their portfolios, which I'll talk about quite a bit later. As Ann Marie suggested, global markets were down from the last quarter and down even more dramatically from a year ago, with the MSCI Barra World Index average in the second quarter down about 7.4% from a year ago. This uncertainty continues to be fueled by the fragility of the European banking sector, by the European sovereign debt issue and also the overall economic situation throughout the world today that includes China. This has put investors in a more of a defensive nature, and it is our job and we are spending a great deal of time with our clients in trying to help them think about how they should think about these issues. We all know where the safe haven assets are. They're in U.S. treasuries. They're in boons [ph]. U.S. treasuries today are trading below 1.5%. Boons [ph], at quarter end, ended at 1.58%. So we're talking about extraordinary low yield levels. We're talking about yield levels that are -- that cannot meet the long-term objectives of anybody. So the global growth -- so these safe havens over the long run may not be true safe havens. Global growth maintains muted. The most recent data from Bloomberg indicates that the real annualized GDP growth in the first quarter turned flat in the Eurozone, remained sluggish in the United States between 1.7% and 2.2% and fell to a level that people didn't think was going to happen in China, with China falling to a 7.6% growth rate, down from the first quarter of something close to 8.1%. This uncertain climate has shortened the horizons for decision-making and short -- and shaken the confidence of investors worldwide. But not only just investors have been shaken, I do believe CEO attitudes have been shaken by this. This is a big change from our perspective from 2011. Throughout 2011, despite similar type of volatility, certainly, the same type of issues we had to face, I do believe CEO behavior has changed much more this time than we've seen a year ago. I do believe CEOs have truncated their field of vision on top of all the truncated time horizons of investors. The issue that I think is really critical is that 1.5% in treasury yields equates to negative returns. 1.5% over 10 years as a return will not get you to a retirement. I do believe, and I was in Washington yesterday, I do believe the greatest crisis in America will be not health care in the next 10 to 20 years but the inadequacy of retirement throughout this country. Yesterday, a very large pension plan, public pension plan announced that their one year fiscal year return was 1%. They paid out their actuarial tables as 7 5/8%. Obviously, that type of mismatch cannot persist. As payout large numbers only destroys the corpus, creates a greater mismatch, and this crisis is only going to get worse if we don't find solutions to address it. Compounding the impact of low interest rates is the fact that people are living longer and longevity is accelerating. While longer life should be a good thing, people are going to have to work much longer to reach their needs as a retiree. This, in turn, will create issues for our younger generation wanting to enter the workforce. There will simply be fewer jobs, and our younger generation will likely have an increasing financial burden funding the retirement needs of their parents and families. I believe that in the future, this underfunded pension and retirement plans will be more significant for governments in the United States and other parts of the world. We believe at BlackRock, we have the tools and the ability to combat these issues. We are working with our clients in trying to have them focus on that. We believe it's important to start focusing on returns over long periods of times, which requires focus on what type of long-term investing, not investing in products but in outcome-oriented solutions. So this is not the traditional style box. And this is a much longer conversation, and we are having these types of very long but very exhaustive types of conversations with our clients in trying to help them navigate with these difficult situations. So for the remainder of 2012, unfortunately, all eyes are still going to be on politics and the economy. In the United States, we have elections in November, followed by the impending fiscal cliff and the sequester. This will likely create additional uncertainty and lead to more soft business sentiment and probably a reduction in consumer spending. The global regulatory environment will continue to be more difficult towards financial institutions, forcing more deleveraging, creating more compliant requirements. But let's be clear. Asset managers will share an increasing cost of this regulation. Europe will take, as I said earlier this year, anywhere between 5 to 8 years to sort out their issues. This is a long-term issue. There's no silver bullet. We are talking about transforming the social contract between government and their population. This cannot happen over a one-month, one-quarter, one-year situation. On top of that, the Europeans are going to have to find ways of growing in addition to these austerity plans. In the near term, as I said earlier this year, I expect the ECB to be more aggressive on rates to drive the euro close to parity with the dollar. This is one way that they could grow, find growth for Europe on top of these austerity programs by making them more competitive. This, on the other hand, is not a positive for the United States. If we have benefited, and our corporations certainly have benefited by having a weakening currency, and now our currency is becoming a more -- a valued currency, it will put some pressure on this country if the euro does indeed fall to a parity level. I think at this time, BlackRock assumes the euro is going to be falling to the $1.10, $1.15 area, but there are some people who believe it needs to fall lower. Let me talk about this. What does this all mean for BlackRock? Let me first start off in talking about people. As a global organization and a leader of our industry, we are committed to adapting our organization to meet the needs of our clients in this changing environment. As our clients' needs change, we have to change, or we will be less important for our clients. Change, when it is prescribed, when it is planned, is both necessary and healthy for an organization. That includes change to ensure that how we are delivering our performance to our client, that is also in our architecture and how we have discussions with our clients. We recently witnessed some turnover in our portfolio management group with the departures of Bob Doll and Dan Rice. We actually wish both of them well. While we endeavor to keep turnover low to assure consistency in our portfolio management teams, there will always be some level of turnover. We certainly will make changes whenever necessary to avoid even the appearance of conflict of interest. We use change to enhance our performance whenever that is an issue. Another change we saw this quarter which I'd like to highlight is totally unrelated to the portfolio management changes, was my good friend and partner's, Sue Wagner's decision to retire. This does not change anything within BlackRock. We are actually fortunate with Sue agreeing to joining the BlackRock board in October, and I am sure we will benefit from her insight, her intelligence going forward as a member of BlackRock's Board of Directors. Overall, our turnover at BlackRock remains to be very low, far lower than the rest of the industry. Our turnover rate at the MD level is under 1%. And turnover across the firm is also very low, approximately 4%, which is compared to an industry norm about 10% to 12%. BlackRock has always had a strong focus on talent development, including investing in our people, hiring top-tier talent with the ability to have immediate and a long-term impact on our company. As in the past, we are constantly attracting prudent leaders, who are excited to bring their deep expertise and client-centric philosophy to BlackRock. We highlighted Phil Hildebrand will be joining us October 1, formerly the head of the central bank in Switzerland, who will be taking a very important international role from our London office, working on solution-based relationships with our 100 most important clients. We noted earlier this year the hiring of Mark McCombe, who is now our Head of Asia Pacific and had a dramatic impact already on our business in Asia. We also have announced the hiring of many different investment teams, a number of investors in our fundamental equity team, where we were in need of upgrading due to performance issues. And we are very pleased with bringing onboard an entire emerging market debt team that will really enhance our position in global bonds and our positioning worldwide in the fixed income arena. So we are a organization which many people are seeking to join this organization, and I think we are in a very unique position unlike so many other financial services companies. And we are going to continue to find opportunities to bring in very high-talented people, high-talented portfolio managers to help us build and navigate together. I'm also proud to highlight that our incoming analyst class this year is over 200. It's filled with some of the best and brightest minds from the top schools globally. Providing oversight of our talent agenda and succession plannings, we are fortunate to have an extremely strong and active board that was recently recognized as one of the top 5 boards for strong corporate governance. I believe we were ranked 1 when I saw the analysis. They are highly engaged in guiding the firm's strategy overall. On an annual basis, our board conducts a comprehensive review of each of our core businesses, including results, strategy, outlook, succession and talent planning. Recognizing the importance of our human capital, each year, management and the board reviews our top talent across the firm, and we have complete review of succession plans at all levels. That meeting will occur in October like it's done for the last 5 years. So this is nothing unusual, nothing strange. This is what we believe. We need to have a high fiduciary standard, and this is what we believe working with our board to making sure that we review management succession issues across all our businesses, not just one business or one leader. We believe this planning makes a better and more resilient organization and differentiated organization among so many different firms that have had issues around talent. Let me talk about performance, which is the key to any investment management firm. We've had some notable performance in a wide variety of products supporting our key themes despite core global markets. We also recognize there are a few areas where we need to improve, and we are going to take action. I am pleased to say performance was strong across our fixed income, with our fundamental fixed income products demonstrating continued improvement and moving to the top quartile, with 71% and 81% of our active taxable fixed income AUM exceeding its benchmarks or peer median for the 1- and 3-year period. And particularly, our high-yield team, again, was very strong, with 80% of the AUM exceeding benchmark or peer median for a 3-year time period. And this was also were consistent with over 60% of the other assets benchmarked for a 1- and 3-year period of time. I am pleased to say our performance in our alternative products have been quite strong in some of the cases, reversing some weaker performance that we saw in 2011. Our fund of funds of hedge funds, BAA, has now had 13, I want to underline, 13 consecutive quarters of positive performance relative to the benchmarks and peers. Obsidian, our fixed income hedge fund, year-to-date is up over 20%, and it's clearly outperforming its benchmark and is now back to its high watermark or close to its high watermark going forward from last year. FIGA, our model-based fixed income product, is up 7% year-to-date and outperforming its benchmarks. And I'm even more pleased to say after -- now it has 14 consecutive quarters of positive absolute performance, not just relative performance, absolute performance. Our scientific active equity team, which as we were very public about 3 years ago, when it had some very poor 1- and 3-year performance numbers. Over the last few years, we've changed the leadership team. We've added many more portfolio members and also analysts to help us navigate this. And I'm pleased to say performance over its benchmark exceeds 67% for the 1-year and 85% for the 3-year. So we can now move from a defensive position, explaining what happened, to now going forward. We have the ability to focus on more positive opportunities for asset flow. The area where we still are not hitting as well as we need to, and that is fundamental equity. This is where we've had some -- where we hired new portfolio managers. We will be announcing other hires in the most recent months to come. We have less than 50% of our AUM above the one year. It's approximately around 44%. That is not acceptable, and we are working towards building that platform up and making sure those issues are addressed. We've also had a challenging year in parts of our multi-asset product area, Global Allocation, and it's a little under 50% in its benchmarks and its one-year period is actually in the 32% area right now. So we are working with that with Dennis Stattman, who's had a 10-year great track record. So Dennis, we have total confidence with he and his team, but these are the issues that we try to make sure that we stay on top of and address. Let me move on to regulatory. This uncertain regulatory environment and recent bank missteps in financial services will undoubtedly be called for even more regulation, and asset managers may be impacted. This is a new reality, and BlackRock is trying to stay ahead of the curve and preparing for increased global regulation. Let me just discuss money market funds. Being in Washington yesterday, I believe we are going to see the SEC finally come up for comment period a proposal. I don't know what the proposal is, but I think the gridlock within the SEC may be broken. I may be premature in talking about it, but that's the type of noise I heard in Washington. We have been publicly acknowledged -- we have publicly acknowledged the need to further reduce the systemic risk in the money market funds without undermining the money market funds' source of value to investors and funding to the short-term capital markets. We have remained -- we have maintained a constructive posture with the SEC, with the FSOC staff throughout this debate. SIFI designation. The Office of Financial Research is conducting a study of asset managers. We have encouraged them to try to be more transparent in their study. This study should be completed sometime in fall, and then there's going to be a likely comment period. So at this moment, I don't have any information what does that mean for BlackRock or any other nonbank organization that is being reviewed with the Office of Financial Research. So at this time, I can't give any more color on this, but we will learn the same time everyone else learns when the official proposal is introduced by the FSOC. Now turning to the business, our focus on our strategic themes continues to be to drive flows across ETFs, retirement, income and multi-asset solutions. So let me give you some of the highlights. Institutional investors generally remain to be in a holding pattern while the trend for active to passive continues. Globally, our institutional businesses experienced about a $4 billion net long-term outflows. However, they were strong pockets of growth momentum, including defined contribution and in official institutions. Our strategic focus on retirement solutions continues to gain momentum as our DC clients generated $7.8 billion of net inflows, slightly tilted towards passive strategies. Our Life Path offering saw significant net flows of $3.1 billion. In alternatives, there was a lot of noise this quarter. We actually redetermined what should be an alternative product and what should be just a normalized active product, and $2.4 billion of that number was the redefinition of the product. It was not an outflow, but on the net difference, it looks like an outflow. There was also $1 billion of capital return because of successful reasons when we paid off a product. We are seeing outflows in global ascent which offset some of the great momentum we had in other products, including our multi-strategy hedge fund, our emerging market hedge fund, our model-based fixed income hedge fund, FIGA, and our renewable energy fund achieved for our first closing this quarter. Internationally, flows were essentially flat as we witnessed again a mixed picture of clients' behavior. Obviously, in Europe, because of the situation in Europe, we've seen a real slowdown in client activity. Some clients are derisking their portfolios, worried about what this all means, and that's where we had an $8 billion active outflows, while others needed to add risk and we had $8 billion of passive inflows, largely index equities. So it really depends on the client, their situation, their liability. So there wasn't one dramatic trend. It was a mix of trends within Europe. Let me just turn to a pipeline. We are very pleased with our net new business pipeline totaling approximately $55 billion as of July 12, up $30 billion from first quarter. This pipeline includes $9.3 billion of mandates that were funded since quarter end and $45 billion of awards to be funded. While this increase of our pipeline is certainly positive, I should remind everyone it is important to note that much of the unfunded pipeline is in passive, and then two, this only reflects, I would underscore, only reflects our institutional business. The majority of that number is institutional business. I think we are reflecting our ETF flows quarter-to-date. But that said, the underlying momentum in a number of areas across the firm is being masked by the environment that we're living with. We have strong momentum in alternatives right now, both in the U.S. and Europe, which is creating increased diversification across our alternative platform. Similarly, performance across our EMEA fixed income products is leading to good opportunities in EMEA retail and with our financial institution platform. And I'm very excited to tell you that these investments that we made over the last few years are beginning to pay off. Let me move to retail, the U.S. institutional, then I'll move to iShares. Again, the industry flows were down significantly from the first quarter. Our retail franchise delivered strong results, with $1.6 billion in long-term net inflows globally, with particularly strength in U.S. fixed income. Again, most firms in mutual funds had outflows in the second quarter. In the U.S., retail and high net worth generated $2.9 billion of long-term net inflows across all asset classes. And we continue to deepen our relationships in the SMA business, or the Separately Managed Accounts space, yielding strong results with $1.6 billion of net inflows, largely into municipals, U.S. core and other fixed income products. BlackRock is the largest and most recognized SMA platform in the country, with now $55 billion of AUM. International retail, another example of risk-off in Europe. We had outflows of $1.3 billion, predominantly in equities, which is consistent across what we are seeing worldwide. Across our broad retail platform, though, we continue to innovate, we continue to bring new products to market. Internationally, we expect to capitalize in certain of our newer funds which are reaching their third anniversary with strong track records, principally our European credit fund and our high-yield funds in Europe. So once again, this rebirth, this renewal, this investment in investment teams, it doesn't happen overnight. We're getting assets, but you bring these teams in, you nurture them, they have good performance, and after 2 to 3 years, you start seeing inflows, and we expect that from those teams. Global iShares. Despite muted activity industry-wide, iShares captured $6.1 billion in net inflows. We captured over 50% of the market share of industry fixed income flows for the quarter, with $11.7 billion in net inflows, while derisking, which is impacting even ETFs, is impacting the flows in our international equity and emerging market funds. I would say organizationally, we have 250 ETFs, and when you see risk-off globally, BlackRock's ETF platform or iShares platform will probably be more harmed in outflows because we have a multitude of products that are international-based that they are, I would call, more aggressive type of strategies than the core, what I would call, the core index, the core fundamental strategies. So that is one of our explanations in terms of market share issue. I could talk about that later. This quarter, we started off strong because we did see some modest risk-on with $3.5 billion of net inflows so far this month, which is in line with our historical market share. Consistent with our culture of innovation and strategy into new markets, we launched 50 new iShare products and special emphasis on fixed income and local equity strategies, including our Green ETF launched in Brazil, which generated over $200 million in flows during the quarter. Let me move to BlackRock Solutions. BlackRock Solutions continues to be an industry leader. BlackRock Solutions continues to be in huge demand. The need for strong risk management and analytics made the second quarter a resilient quarter despite the market adversity. BlackRock Solutions revenues were up both for over-the-period-quarter and over a year-to-year basis. This is on top of a reduction of over $61 billion of Maiden Lane assets, so -- which I'll talk about in a second. So what is also important, we saw a 21% increase in growth in our Aladdin revenues, which now represents more than 2/3 of our BRS revenues. Just 3 years ago, Aladdin represented about 1/3 of the BRS revenues, and these are the long-dated, more sticky form of revenues as clients put Aladdin and other -- our Green package, our risk management tools onto their platform. The Aladdin pipeline continues to be very strong, and increasingly, we are having -- our clients are now adopting not just our fixed income platform, Aladdin, but our clients are now looking to integrate our equity platforms. So we are working on Aladdin conversions now on the equity side for some of our existing fixed income clients. And I do believe having now a full product array of equities and fixed income at Aladdin is going to make Aladdin even more robust. I just want to take a moment and say that because we're in a period of time that most positive is a negative and negative is a real negative in our atmosphere as of today, but there's one thing that I'm very proud of, and that is our successful payback of the asset disposition related to the Maiden Lane vehicles. People don't pause and think about this is money that the government gave to Bear Stearns to make the Bear Stearns merger work with JPMorgan and to stabilize AIG to a lot of negative press, a lot of uncertainty. The American taxpayers were paid back in full with interest, and there are still opportunities remaining for more profits with the remaining portfolio in these items. This is a pretty big success for our country, for our regulators in terms of what they are trying to attempt to do in stabilizing our economy back in 2008 and '09, and the results were very strong, and not enough success is being illuminated. We're spending more time focusing on failures. Let me talk about brand. Our investment in our recently launched Investing for a New World campaign continues to deliver results. Building our strong brand is an extremely important long-term commitment that we are looking to make retail and our name recognition in the retail side to become a much stronger platform branded name. This is not just in the United States but globally. We now have clients who have never spoken to us before, calling us and finding more about our offerings. We now have more hits to our internal website than ever before, and we're having more conversations with more FAs than ever before. Let me give a couple of final comments. In this climate, we're very proud of our platform. We are very proud of being a fiduciary, committed to always doing what is right for our clients' best interest. Once again, I'd like to really thank our employees for the continued discipline and diligence in serving our clients across the globe, and I want to extend my gratitude to all our clients who have trusted us with their financial future. With that, I'll open up for questions.

[Operator Instructions] Your first question comes from the line of Marc Irizarry of Goldman Sachs.

Just digging a little deeper into performance of active equity and fundamental equity in particular. Can you talk just a little bit about some of the people changes? And then should we expect that there's sort of a go-forward replacement cycle? Because if you look at, I guess, the organic growth rate in active equities, it actually improved sequentially. So should we think about some of the people changes maybe pressuring where you are with consultants in fundamental equity and just maybe address the performance of people changes there?

That's such a good question, I'm going to give it to Rob.

We have continued to build investment teams that can weather the different cycles in the marketplace, and we're looking for teams to deliver a consistent long-term performance. And as you know, we spent a lot of time and money over the last few years investing in the right talent to build up the right teams needed to deliver performance. And you should expect that we are going to be very focused on this going forward, especially in areas where we see or feel that there has been underperformance. Let me give you a little bit of a broader answer to that beyond just fundamentals, and I'll touch on that. The first thing is that in our alternatives area, you see that we've expanded our product suite and addressing this with several new teams that are around infrastructure where we think a lot of investments will be made, private equity and real estate, and Ann Marie did cover a bit of that by announcing the addition of the new Swiss Re private equity team into our product suite. Larry mentioned a little bit about fixed income, where we are focused on the process to make sure our teams can deliver strong performance. He mentioned our fundamental fixed income products, which, we are very proud to say, have now moved back to top quartile performance, and the numbers are over 80% in active taxable fixed income, exceeding the benchmark. And then in iShares, continuing to innovate the product suite, where our index funds continue to deliver very strong results, over 95% are above their performance tolerance. And now finally, the equity area, which you highlight, we have brought in a brand-new emerging markets equity team to raise the bar. We hired a gentleman named Timothy Keith [ph] to head a new flexible equity team. We have Chris Leavy, who is a tremendous hire for us, who is focusing now on strengthening our performance in the Large Cap Series, in the fundamental large cap growth in energy and Global Opportunities products as well. So I can tell you that Larry and I are going to be less tolerant of performance that is not up to par with what we need to do to drive growth and raise assets. But when I look at performance, I also want to focus your attention on our focus areas and how this translates into areas of growth for our firm. So we have an income theme, and there, we have focused attention on our equity dividend product. It has not only had strong performance but is rated 5 stars by MorningStar and is the Lipper Leader for total return, and our global dividend income, which has produced really good income, and 85% of the holdings that they have, have increased their dividend. So here's an area where we have fundamental equity with good performance, and that translates into driving growth. Also, in the income area, investors are being served by the high-yield team that Larry cited, which is continuing to be in the top 14% of their peers and raising a significant amount of assets and driving because of the performance that they have. And I'll just mention a couple others. In alternatives, just to highlight a few that may not have been mentioned as well as it should have been, is our core appreciation composite, which is our alternatives flexible fund, hedge fund, has outperformed the target by a significant amount, and we continue to attract interest. And this global alpha product that we started in fixed income is up over 7% net of fees year-to-date. That's a very exciting product for us going forward. Within solutions, the one product Larry mentioned was the Global Allocation fund, and I would just say that this is a long-term team, and while the second quarter was a bit underwhelming, the absolute performance year-to-date is positive, and clients have focused on the good long-term performance and the ability of this team to generate a good alpha in very different environments. And lastly, in the retirement space, we created, as you know, the first target date fund, and 20 years later, we're very well positioned with our Life Path funds. They have outperformed on average 84% of their peers across all the vintages in 2011. And we also continue to see good flows in the ETFs and index product, with notable flows in the fixed income area. So I would say that performance can be described as very good in most areas. Turnaround, finally in a few areas that you've all focused on in the last few calls, but most especially, the strong performance in our 5 key focus areas and the continued investment in our portfolio teams are really driving the business at this point.

Okay, great. And then just on the alternative bucket, just -- I mean, it looks like -- clearly, some of the core products experienced volatility. The volatility that you're seeing, is it sort of in line with what you've seen historically? And are we moving to a new -- to sort of a new place with alternative allocations, where maybe manager selection is mattering more? And then is volatility becoming more important? I don't know if that's for you, Larry or Rob.

Let me give it to Rob.

It's really -- the only change has been the volatility in the risk on and risk off. We still rely upon the process that the individual managers have, which has really not changed, but I think that you may see more volatility in the numbers just because of this risk on/risk off situation, which is happening globally. But I believe the long-term performance in those and the current process that we have will bear out the right performance numbers for the team moving forward.

And you'd expect your flows to sort of follow that volatility pattern a bit more as well?

Yes. And I think that the highlight that I mentioned, the FIGA, some of these products, which are the go-anywhere product, giving flexibility to the managers, is going to help their returns. And we already see that attracting flows, and also the clients that are interested, the amount of visits and interests are up on those.

Your next question comes from the line of Dan Fannon of Jefferies. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: On the alternatives, I mean, just thinking about the performance, the outlook, obviously, is very difficult to pinpoint or forecast. But can you give us a sense of how you think about performance fees today versus maybe this time a year ago or as we think about kind of even on a short-term basis next quarter and obviously, a big ramp potentially in the fourth quarter? But any guidance on how you're thinking about that outlook would be helpful.

Well, as I mentioned in my remarks, the volatility in the environment has made it difficult for me to pinpoint even my own internal forecast on performance fees because we've seen -- as I've been observing, where some of the biggest funds are relative to high watermarks, I see them above high watermarks one week, and the next week, below them. And it's so much a single point in time measurement that that's what makes the forecasting hard. Rob had the luxury of talking over time, and I fully agree, the performance over time is going to be strong. And I know the question you're asking is the performance on a single day, and that becomes challenged. Of course, last year also was not our most robust year ever in performance fees. And year-to-date, we've tracked broadly in line with last year. But that being said, this environment does make our...

But I would say things like Obsidian is now back to close to its high watermark is an opportunity now going forward. And we have other products that are doing quite well, like FIGA and R3 or BAA. So I think because of the volatility, it's hard to track actually what the amount of performance fees, but I would say we are in a better position at this moment than we were last year in terms of where we are in terms of high watermarks and other issues. So it's now up to the PMs to perform, but we're in a pretty good position. But the volatility is pretty extraordinary. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: Great. But that's helpful. And then I guess on the expenses, Ann Marie, you mentioned that there was a 14% increase in marketing within the broader kind of G&A line. I guess could you help us understand what kind of the dollar amount that is and maybe as we think about expenses going forward, how much -- where you are in that spending kind of marketing campaign and think about maybe the ramp, or is that a good run rate kind of thinking about the rest...

Let me just say one thing before Ann Marie discusses the specific here. Obviously, all our spend is a function of what our commitment to everybody is related to our margins. Not one expense is looked at separately from a total view of how you're tracking in our margins. Our margins are up about 0.5%. I think depending obviously where beta, I can give you a much better degree of where our margins will be. But I know -- one should not just lock in a spend on anything hard just because we are going to mitigate spend as we think about margins, as we think about going into 2013. But that said, we are very committed in this brand campaign. It is a long-term strategy and a major component of where we believe this firm needs to go. So that, Ann Marie will give you more of the -- can give you much more of the, I guess, the granularity of that.

Yes. So just to give you the specifics, sequentially, marketing expense was up a little more than $20 million. I would say that would be a reasonable rate at which we could run, but there will be some seasonality in our marketing. So you're not going to see -- like Larry said, we're going to spend it the way it makes sense. When everyone's in vacation in July and August, we're not going to be running the same amount of ads. We're going to spend less money, and you're going to see that come down. In the fourth quarter, when people are ready to invest, you're going to see it come up. So we're going to spend -- I think the important thing is we're going to spend the money in a way we think we're going to get a real return on it.

And versus the overall level of where the firm is.

Your next question comes from the line of Craig Siegenthaler of Crédit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: Just a question on the composition of the institutional pipeline. Can you talk about what was the largest mandate in the pipeline?

Well, it's multibillion. It's less than $10 billion. I think -- my guess is $6 billion or $7 billion. I mean, I think about $6 billion to $8 billion. It's in that range. I know the client, but I don't remember the exact dollar amount. And I must say these are not in the pipeline. I met with a client last week and we're looking at a portfolio -- I'm not here to tell you we're going to win it, but we're working on a strategic relationship with a client that is -- it's over $15 billion. We're working on other clients that are looking to outsource a large component. This is something that Rob's working on that may be possibly outsourcing a large component of the balance sheet. So we're not even close to winning these yet, so I don't want to put these in any models or businesses. But we are -- because of this uncertain environment, clients are looking for more, as I said earlier, more thoughtful, more strategic type of conversations, and some of the conversations we're having are really robust. But I think on a general basis, Craig, our pipeline makeup is really consistent with the past types of pipeline compositions. Craig Siegenthaler - Crédit Suisse AG, Research Division: Got it. And then just a follow-up on the new trading platform initiative. I was wondering if you could give us any update and also talk about -- is all the expense for this platform kind of really in the run rate today? And then also maybe talk about what's the opportunity to revenue from the trading effort in your solutions business.

Well, a, I learn about a lot of it from the press. They seem to know more than I do. So we did do a beta testing, which the press actually got, and we're not trying to hide from it. It was very successful. I'm not even going to talk about how many clients were on it, but it was successful. We all seem pleased about it. The run rate is probably appropriate with whatever is in our platform already, but if we start seeing it ramped up, we will have a higher run rate once we start really implementing, if we have tens and tens and tens of clients as part of it after we go from the beta testing. And then when you look at -- in terms of revenues, we haven't focused on the revenue model component of it yet because we're focused and making sure the functionality. And if the functionality is good, if we can show to clients that this is a better execution, the clients are aware that ultimately, this is going to be some form of a revenue model. Let me be very clear, though. As BlackRock as a participant, for our clients that we are navigating trades for our clients, we are charging no commission. So that has to be very clear. We cannot do that. That would be illegal. It would be against a lot of the Rissel [ph] laws and all the other things. So we are doing that flat and clear with the idea that we're a higher fiduciary and we're getting better execution. For clients who are on the Aladdin platform, there would be, obviously, a transaction cost fee. It could be cost plus something, which would be very de minimis. So I look at this not unlike when we first created Aladdin, when we all started offering risk management service for our clients. It was really meant to be a cost -- ability for us to fray some of our technology cost. Obviously, it transformed into something way beyond that. We are looking at this as if we could earn enough revenues to offset all our trading platform costs across BlackRock, that's a huge win. It helps our margins. So I don't want anyone to model out something that's going to be a massive transformational revenue area because I don't expect it'll ever be that, but it may. I never would have expected BlackRock Solutions' Aladdin to be as strong and robust as it is so -- but we are looking at it primarily to raise the bar as a fiduciary standard to minimize execution cost for our clients. And Craig, as I said to everybody over the last few years, we would not be upset if the market-makers of today make the most tightest market ever and that there's not a need for our trading platform. We are doing this only because of the issues surrounding Basel III, Volcker Rule, all the other issues, where we believe there's going to be less capital in the marketplace for the security firms to be making markets for. And so as a result of it, we believe there will be a long-term need for this type of platform to reduce our cost of execution.

Your next question comes from the line of Matt Kelley of Morgan Stanley.

So just taking what you said about -- and we see it too in the asset liability gap of some of your clients and how that's widened out versus your pipeline and where you're seeing new flows, what do you think stems the disconnect here? When do institutional clients take on more risk? What is needed to get them over the hump?

Well, let me just tell you a funny story I had. This is not an institutional client -- let me restate. This is not a pension fund client. I was having dinner with one of the large sovereign wealth funds, which clearly is multigenerational tools for capital, and all our conversations over dinner were about talking about long-dated solutions. And by dessert, though, they said, "But we are still measured quarterly." That's the dilemma. And that's the dilemma that everyone's facing. We are -- clients are frightened of short-term volatility, and so they have derisked. And as you cited and what we have said in the past, derisking is actually causing much greater pain over a longer period of time that -- and importantly, if you are -- even if you are an individual retiree, one of our defined contribution client, if they're 35 years old and they've been sitting in bonds for 5 years during the era where you're supposed to start ramping up the compounding of your return to get an adequate retirement, you were really harmed. And I don't believe in our country today, in other countries, we do enough to focus on how does one get to the nest egg that is necessary to live comfortably during the retirement ages. We spend so much time focusing on health care. We spend so much time focusing on how to live an extra day, week, month or year, and yet we spend so little time focusing on how can we build the appropriate nest egg to have that life during retirement. I think in the short run, what we have seen, we talked about this over quarters and quarters, we're seeing more barbelling. We're seeing clients barbelling, going into beta products and then going into alts. Some of it, unfortunately, is not -- they're going into alts. Why? Because of accounting. Because in some, like in some private equity areas of beta, the accounting is longer-dated, and therefore, they have less volatility. And so I hope those are fewer and fewer clients who are doing alts only for accounting reasons. Obviously, another reason why clients are going into alts and barbelling is because they're looking more for absolute return strategies not relative to return strategy, and they're absolutely looking for return strategies that meet -- that exceed at least 7 5/8% return. So they can meet their liabilities. So I would say what we are seeing now -- I mentioned this $15 billion client. This client is worried about low interest rates and how it's impairing, and they have given us this ability to relook and recreate what they should do with this $15 billion. And we're going to be looking at it over a multi-period of time. And so what I do believe clients are beginning to do, they're asking the question how should we frame this out? We're actually spending more time talking to the boards of some of the pension plan, trying to help the board understand this. Their fiduciary responsibility for retirees and for current employees is a very difficult one. So these are very hard questions to answer. And if we continue to have low rates and if some of these plans only earn 1%, these issues become even more enlarged. So I really do believe our platform has proven to be a differentiator in these conversations. So not only do we have the breadth of products, but we have the risk management tools that help them think about it. And this is what gives me a great amount of comfort about what we're doing and how we're positioned.

Okay, great. And then one follow-up from me on the opposite end of your barbell strategy then, there's been a lot of talk lately about your iShares strategy and the low-cost competitors gaining share. So just curious where you think for your business specifically you'll see the most growth going forward both by asset class and by product -- sorry, by region, not by asset class.

Well, as I said earlier, when there's a risk-on in the world with our breadth of products that are worldwide, we will have more than our market share. As I said in the beginning of the third quarter, we've had more of our industry type of market share because there was a little risk-on in the first week or so of July. But when we are head to head in a commodity-based product, I think you're correct in saying when a commodity-based product at one of the core strategies where price becomes more dominant because competitors have equal liquidity, equal tracking air, price is a more dominant issue. Without going into much detail, we believe we have a plan to address it over the next coming months. And it is a big issue. I have to give a lot of credit for Vanguard. They are a trustworthy brand, and they've taken market share from BlackRock in the U.S. core type of equity products. We're holding our own. Obviously, worldwide, we're holding our own in fixed income, but I am not pleased in our positioning to date in the core commoditized products in the United States.

Your next question comes from the line of Michael Carrier of Deutsche Bank.

First question, just on the fee rate, usually in the second quarter, there's the sec lending fees, so it's a little tough to try to measure. But if we just look sequentially, it's an unusual quarter because your average core AUM x advisory, the assets would be up a little over 1%. But if you look at the fee rate, it's down, and if you strip out the incremental sec lending fees, it would be down a decent amount. So I was just wondering, you mentioned some of the weight on, like, international equity markets. But if you look at it on an average basis, they weren't down as much. And so I guess I'm just trying to figure out, did you really see a lot of, like, core fee rate pressure, or when we just take the period-end AUM numbers given the value of the market in June, it's just a bad kind of average AUM number.

Mike, I think the number one issue is a mix of business. We saw flows out of equity, flows into fixed income, different margins. So on top of the beta -- out of some active strategies and the beta strategies, the key -- and this is an industry issue, much more outflows in equity globally and much more inflows in fixed income. The risk-off trade.

Okay, all right. That's helpful.

No, I was going to say there are no fee issues. It's all …

Yes, we had no fee issues. That's what I'm...

But even within equity, it's a mix issue going from what I would call the higher-risk areas to the more core areas, and those tend to be higher fee to lower fee. So it's all mixed...

But also if you look at where markets degraded the most, those are some of the higher fee areas, the emerging market products, the energy products, that's where the greatest degradation of actual returns were, where we had these larger negative returns, and those are the higher-fee products.

Right. Okay, that makes sense. And then maybe just on the succession that you mentioned just in terms of the overall firm. Yes, it's really the most asset managers that the firms tend to be run for the investors, and that's where a lot of the focus is on. And so from the investor's side, we don't see the full bench. So with Sue retiring, what's your outlook -- who's on the bench? I mean, obviously, Rob, but like what's -- how do you kind of see BlackRock going forward over the next couple of years?

Yes, Sue was visible, working alongside with me, but the bench actually has increased over the last few years. We have a robust executive committee of men and women, part of it. As you said, Rob is the President, actively working on the firm's issues every day, alongside Charlie Hallac, who's our Chief Operating Officer and has been the Chief Operating Officer for 2 years. We have Rich Kushel. We have -- our bench is actually growing, not decreasing, and adding the Mark McCombes and the Phil Hildebrands has enlarged our bench. And we have some young men and women in our firm who are really taking on much more of the responsibility. You're going to hear more and more as investors about Rob Goldstein. He is the individual who runs BlackRock Solutions. He's done a fabulous job. He's been at the firm 20-ish, 18 years to be exact. And he's done an incredible job. And so the bench is growing. And I'm forgetting some of the names or I'm not mentioning all the names. But I would tell you the bench is strong. It's robust. And I'm very proud of the process in which we are engaged in elevating our team and making sure we have a robust team. Rob, do you have any comments on that?

No, I think the board goes through succession planning, and we have just done an exhaustive review that's going to be presented. And that's part of our goal is to make sure that we are bringing up individuals, giving them more responsibility and having a very broad bench. And we're -- we'll continue to do that. And I think the focus has been on several people that have left the firm. Unfortunately, no one is talking about all the people that we've recently brought into the firm. And we'll continue to do that and raise the bar for talent. I agree with Larry. We have a very strong bench that's been built over many, many years.

But we've heard the investors ask for more transparency with -- having more visibility with more of our team, and we're planning to do that. And in fact, we have thought about doing investor days at BlackRock. I think we are planning to do that later this year or next year.

June.

June of next year.

June of next year.

Okay. So I was -- so that's already on the schedule. So we have much more transparency and visibility with our leaders of the firm.

Your next question comes from the line of Robert Lee of KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Question on the -- I appreciate that you're highlighting the kind of different revenue characteristics of the different asset mix, iShares and whatnot. But maybe be helpful also to -- if you can provide some incremental color on the margin variance. I mean, my general sense is maybe iShares and index, even though clearly, lower fee realization rates may actually be higher margins, I mean, if there's any kind of color you can provide on how we should think of the variance and probably...

I'm going to have Ann Marie to really get into it. But once again, I would say twofold. A, the mix really does have a strong impact on the margin. You're absolutely correct. The margin specifically in index and ETFs are higher. But obviously, the equities have a higher margin than fixed income. And so you take into the mix, you take into -- as I said, where do you have the greatest market declines, those are the highest fee type of products. And I think it's just -- it's heavily into the mix, but Ann Marie, help me.

I think the margin, you're absolutely right with the ETFs and index, both being -- because there's low incremental cost with managing those assets. You can put on a lot of volume. It's the beauty of that part of the business model. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, appreciate that. And Larry, understanding that we really don't know what the FSOC will come up with, whether it relates to naming you or others a SIFI and what that even means from a capital perspective or otherwise, but how is kind of that uncertainty playing into your thoughts over the next coming quarters or year about capital management? Is it kind of at the margin making you a little -- your appetite for, say, share repurchase a little less robust? I mean, how should we kind of think about it?

There's no question that it's an element of our process of thinking. It's not a major element. I think if it was an element, I would not have bought $1 billion of shares back in May. We intend to continue our share repurchase. In our conversation with our board, we believe that will be an essential component. I think you should consider share repurchase as a continuation. We believe that with our huge free cash flow, that is just going to be a continuation of our business model. So we don't -- once again, I don't believe we're going to do any large-scale acquisitions. However, we are going to -- we continue to see small fill-ins, whether it was the Claymore transaction in ETFs or what we did in the fund of funds, which really fulfilled our needs because we have a very strong U.S. fund of funds of private equity. The Swiss Re transaction makes it a global fund of funds of private equity platform, and it actually enlarges our products and infrastructure also. We are actually looking at a couple of fill-ins right now, one exclusively, and we hope that is something that makes sense once we do some due diligence. So we are in the market of making sure we have the best platform and taking advantage and being opportunistic in terms of fill-ins, as I suggested, as part of our business strategy. But I will make it very clear. Utilization of our free cash flow for share repurchases and dividends is also a major component of our plans for the future. Whether we are a SIFI or not, as you said, we don't know what that means for capital. We already have approximately, what, $1.2 billion of capital set aside because of regulators' request as a result of the BGI transaction. So we, unlike most asset managers, we already have capital set aside. We are -- and another thing, you're aware of it, but I need to remind everyone, we're already regulated by the OCC, the Federal Reserve, the FSAs, the SECs. And so I'm not sure how that translates if we are one and what does that mean. It probably will have bigger impact if there are other firms who are not regulated by these entities who will have a more pronounced impact than it would on us. And possibly, and I'm not saying it's going to happen, there's a possibility that if you're designated a SIFI, it might be a good thing. Maybe you are because you're so properly reviewed and scrutinized, you have a higher fiduciary standard and people -- investors want that. The mood is changing dramatically. It was always suggested for banks who are designated SIFIs, and I think this is going to be true, that their liability costs are going to be less because they're going to have more associated capital. And I do believe in efficient markets their liability costs should be less than other firms. Now since we don't have those types of capital needs and debt, it doesn't have that type of impact, but we'll see. We'll see how this all plays out. What I can say is we are trying to be as constructive and helpful when asked by regulators on helping them what it means to be an asset manager. We have spent time educating them on asset managers. So we've had requests from regulators, can we educate them? Obviously, one component of Dodd-Frank, I have to remind everybody, we are not allowed to have conversations to the regulators about this or it becomes a public disclosure item. This is very different than most other forms of regulation or potential regulation. And so let me be clear about it. We are not going to regulators and trying to lobby or try to go against it. We are trying to be cooperative when asked, and so that's why we are still in the dark somewhat about how this all plays out.

Your final question comes from the line of Alex Kramm of UBS.

Just wanted to come back to the ETF business and the equity side, in particular. Obviously, we saw the outflows, and you gave some good color, and obviously, emerging markets and other business also, you guys were a little bit weak, so I hear that. But just the idea that we had outflows and in general, I'm wondering if that means anything to you in terms of the maturity of the business, not just your iShares business but equity and ETFs as a whole. Do you think the access to passage is slowing down or is it just really a risk on/risk off kind of a move we're seeing here?

I've asked my team that specific question because obviously, that would have a meaningful impact on the future. So we believe it is entirely a risk-on/risk-off type of transaction. As I said, we've had $3.5 billion of inflows so far in July. Those are more of the non-core type of ETF. They're more in what I would call the risk-on type of products. And so more than ever before, I think if you think about it, what area has done some of the worst performances are areas like emerging markets. It is Europe and it is energy product, it is mining, some of the ETFs that were very big winners a year ago. And one thing I think is very important to note, as I suggested in other quarterly calls, we see very large, active institutional participation in ETFs when they are searching for equity exposures, whether it's in Europe or emerging markets. So you have to also think this is not outflows from retail. It was more of the institutional managers worldwide who use ETFs for beta exposures. They are -- they took off risk, and so it's just a -- to me, using this flow information is a great indicator of mood. And when -- I don't believe it is an indicator of a transition into a new pattern of growth. I think it's a real indicator of mood, which is consistent what we are seeing across our other products.

Okay, fair enough. And then I guess just lastly, switching to the active side, I think you mentioned a little bit about the quants, the scientific equity product, and how you finally have the better performance. But I feel like you've talked about the better performance already for a couple of quarters now. So what is changing now that you think you have a better conversation with clients to actually turn this into inflows?

Inflow products?

Yes.

We are having better conversations. Those conversations have not transformed yet into flows, but we are having better conversation or actually having some clients who had us on watch list before who have now taken us off watch list. And one client actually gave us more money. Now that was one example. It is -- so as you know, this area had severe underperformance 3, 4, 5 years ago, and now we've proven that over the 3 years, we actually have consistent performance, a couple hundred basis points over most indexes. And it's just time, but the conversations are more robust. The conversations are better. And I would just say the outflows in that area are the lowest levels that we've seen in the past 6 quarters. So it's -- the conversations are more frequent. I could tell you the consultant conversations are totally changed from one that "What's going on?" to "Tell us more." And so it's just time. I wish I could tell you time is today. I don't have that understanding yet, but generally, we see -- after 3 year anniversaries, you begin to see a slow and modest uptick, and then you start seeing some real flows.

All right. Very, very good. I guess it's something to look forward to.

Yes, and I am looking forward to it, too. Thank you, everyone. Thank you, all the employees. I look forward to talking to everybody with a report at the end of the third quarter with a risk-on mood. But we'll see. Have a good quarter, everyone.

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