BlackRock, Inc. (BLK) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Brent, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock, Inc. First Quarter 2013 Earnings Teleconference. Our host for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Ann Marie Petach; and General Counsel, Matthew Mallow. [Operator Instructions] Thank you. Mr. Mallow, you may begin your conference.

Thanks very much. Good morning, everyone. This is Matt Mallow, General Counsel of BlackRock. And before Larry and Ann Marie make their remarks, let me point out that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual results may differ from these statements. And as you know, BlackRock has filed reports with the SEC, which list some of the factors that may cause the results of BlackRock to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So with that, let's let the call begin.

Okay, thanks, Matt, and good morning, everyone. Just a very brief comment, a number of our shareholders, clients and employees are in Boston, so our thoughts are with all of you in Boston. But moving on to BlackRock, I'm happy to say that Gary Shedlin is joining us for today's call and will be assuming the CFO title and responsibilities after this quarter's 10-Q. I'm also pleased to be turning over the reins at a time when the business is doing well and when there is terrific momentum with our clients, our performance and markets. Gary has been a key adviser to the firm and, given his knowledge of the firm and the industry, has stepped in running. I'll provide some opening comments, point out a few highlights in the earnings supplement. And as usual, we'll be discussing primarily as-adjusted results. As I said on our January call, we began 2013 with great momentum. That has continued and is reflected in the first quarter results. We generated first quarter EPS of $3.65. That's up 16% compared to 2012, reflecting a 12% increase in operating income and a 9% increase in revenue compared to a year ago. The first quarter operating margin was 40%. That's up 1.4 points from a year ago, and this is our strongest first quarter margin since the acquisition of MLIM. We are demonstrating the leverage in the business while investing for top line growth and also investing to assure compliance with evolving regulatory requirement. These results are especially strong when you consider that the first quarter included $18 million of fund launch costs and $33 million of costs associated with about a 3% reduction in staff. The staff change is associated with an initiative to align our organization to present priorities and opportunities. We're hiring to support growth and expect to end the year with meaningfully more people than we began the year, though, of course, it does take time to make sure we're bringing in the right talent. To be clear, this was not a cost-savings exercise. It is an action to align talent and capability to what we believe are the most important opportunities for our clients. As the environment, needs and opportunities change, we will continue to change, evolve and innovate. Most importantly, first quarter earnings reflected organic revenue growth and positive momentum in net new business, as well as the benefits of strong performance. The themes for which we positioned ourselves last year continue to play out. Investors are seeking income and in the present low interest rate environment, are using lower volatility, higher-yielding equity investments to achieve these objectives. Investors are also using rotation across equity beta segments to produce alpha. Once again, index products, that's both ETFs and institutional, are the go-to tools for investors to achieve their objectives. Multi-asset class and income products continued to appeal to clients' needs for solutions, and barbelling strategies are driving flows into single-strategy hedge fund. Our capital policy remains consistent. The foundation of our strong dividend is supplemented by our ability and intention to repurchase shares consistently. We repurchased approximately $250 million worth of shares in the quarter. Our core quarterly repurchases have increased over the last 5 quarters as the secondary sales of our 2 large shareholders are now behind us. The strong cash generation of our business allows us to continue to invest in both organic opportunities and tactical accretive acquisitions. In the current environment, we expect to continue regularly with this repurchase activity. I'm going to move to the earnings supplement, which you can find on our website. I'm going to skip a number of slides and focus on just 6 slides that tell most of the story. I'm going to start out on Slide 8. As I mentioned previously, we produced a 16% increase in earnings per share compared to first quarter of 2012, driven by 17% growth in operating EPS, which I'll come back to in a minute. Nonoperating results reflected a $51 million increase in the market value of our co- and seed investment that was driven largely by positive marks on our co-investments both in private equity and distressed credit products. The first quarter as-adjusted tax rate was 31%. This is a little lower than I had estimated on the last call but is a rate that we now think is a good planning level for 2013 that's based on what we know as of today. The improvement from the prior estimate was driven largely by our geographic mix of earnings. Moving to Slide 10, first quarter revenues were $2.4 billion. That's up $200 million or 9% from a year ago and really about 3 quarters of that came from improvements in base fees. Exceptionally strong performance on a number of our single-strategy hedge funds contributed to our strongest first quarter performance fees since 2006. And I'd point out, 2006 was a bit of an anomaly because it was just a single real estate fund driving this, where this is solid performance across a number of hedge funds. The third and fourth quarters remain our peak performance measurement periods, and the second quarter has historically been our lowest quarter. We'll continue to update you on performance throughout the year. We delivered 11% growth in core Aladdin revenues, offset partially by a decline in the advisory revenues associated with the successfully managed wind-down in the Maiden Lane portfolio. The appetite for Aladdin remains strong. We had 5 successful implementations in the quarter. And Larry is going to talk more about our robust pipeline here and the ongoing client appetite for these tools and services. It is clear that our clients and the opportunities are increasingly diverse, including insurance companies, pension funds and other asset managers. Base fees, as seen on Slide 11, were up $152 million or 8% with growth across almost every asset class. In the first quarter, we generated about a 5% annualized organic growth in long dated assets, and that's both if you look at it including and excluding the lower fee institutional index assets. The strong flows in equity ETFs and retail really means that the organic revenue growth was well in excess of the AUM growth. The flows reflect a terrific response from our clients to the focus areas which we discussed earlier. We also entered 2012 with the benefit of our -- 2013 with the benefit of our 2012 flows and 2012 market improvements, both of which were positive contributors to the first quarter 9% revenue growth. We are not surprised by the year-over-year decline in active equity revenues. We are committed to improving performance in this area, and this is something we've been talking about. We made investments in new teams and talent in 2012, and we do have some great areas of success in European equities and the performance now on our quant equities. While we're not satisfied with the present results, particularly on U.S. equities, we are very confident in these new teams and pleased with some of their early successes. It's just going to take some time. Excluding fund launch costs -- and now moving on to expenses on Page 12 -- and also excluding the reorg costs, expenses were up $53 million or 4%. That 4% is compared to the 9% increase in revenue, again, reflecting leverage in the business. The expenses that went up were primarily driven by revenue-related compensation. The first quarter comp-to-revenue ratio was 36.5%. This is broadly in line with a year ago. The first quarter ratio for comps revenue generally runs higher than the full year. This is due to the seasonality of payroll taxes. And this year, also due to the reorg expenses, which affected the first quarter ratio. I'll talk a little more about expenses when I talk about sequential results. Broadly speaking, the majority of the themes we have discussed are playing out in our sequential results in a similar manner as in the year-over-year results but there are a couple of unique items I want to call to your attention. Beginning with revenues on Slide 16, and as we've already discussed, we're seeing the benefits of both flows and markets contributing to base fee growth. At the same time, we see the natural decline in performance fees associated with the seasonality of blocks. The small decline in BRS revenues was associated with the timing of recognition of revenues on those onetime advisory-type assignments in the fourth quarter of 2012 and not at all reflective of the momentum in the business or opportunity. With respect to expenses, on Slide 18, the $56 million decrease in G&A, that's excluding fund launch costs, was driven primarily, really, the big bulk, by the timing of our marketing spend. As I said last quarter, we will continue to invest in our brand. We've seen positive client reaction to the campaigns. We work very carefully to really spend the money when we think we've got important messages for our clients and when we think it will have the most meaningful impact. Thus, it may not be consistent from quarter-to-quarter but in aggregate, should remain broadly consistent with the full year 2012 spend. With respect to compensation, I've already mentioned the seasonality of payroll taxes. So to summarize. The first quarter, in many ways, is a continuation of the trends and results we saw in the fourth quarter of 2012. We delivered organic revenue growth driven by our strategic focus areas. We delivered performance, which drove performance fees. We delivered year-over-year margin improvement, and we continued to return cash to shareholders. Our success has been driven by our commitment to consistently run the business to serve our clients and deliver value to our shareholders. With that, I'm happy to be stepping into a role where I'm going to have a lot more time with our clients. Again, I think the timing of this transition is ideal given BlackRock's positioning relative to client needs and our ability and commitment to innovate and grow. I know that among Gary's priorities is to continue to raise the bar on the quality and depth of our conversation with our shareholders and analysts. With that, I'll turn it over to Larry, who will talk a lot more about what we're seeing with our clients, our continued investment in talent and some of the trends of accomplishments that we're excited and proud about.

Good morning, everyone, and thanks for joining the call today. I just want to pause again and talk about the incident in Boston yesterday. We are constantly reminded as investors of global markets that we live in uncertain times. The terrorist acts in Boston deteriorate confidence for investors, which is one of the major causes of problems related to our financial markets. But at this time, we should just all pause, and our prayers and wishes go out to the families of -- who are harmed and those who even witnessed this tragedy. It's just another reminder of the type of world we live in and it's a reminder as investors of -- in global markets that we have to be always cautious related to our outlooks because we live in these uncertain times. As Ann Marie covered in her report, we delivered strong first quarter financial results, including a 9% revenue growth, 16% EPS growth and a 40% operating margin. Importantly, we generated another quarter of consistent organic growth. Long-term AUM grew 5% on an annualized basis while base fees grew at an even higher rate, highlighting the positive mix shift that continues in our business towards our retail and iShares channels, which are having higher revenue profiles. During the quarter, we continued to reach new corporate milestones. We're at the highest AUM ever, $3.936 trillion, including record AUM levels in each of our client channels. We delivered record first quarter revenues and operating income. iShares crossed over $800 billion of AUM this quarter. We saw our strongest quarter for equities net flows at nearly $34 billion. And we saw exceptionally strong Aladdin growth in the quarter, where we added 7 new Aladdin clients. And we've added close to $1.3 trillion of new assets being implemented on Aladdin. This was a very strong quarter for BlackRock. And looking back, following our 25th anniversary as a firm, these results clearly demonstrate the tremendous value we've built, including our unique mix of capabilities, scale and global reach. Yet it is the next 25 years and the enormous potential in front of us that excite me. Last week, we completed our leadership off-site, where our focus is squarely on growth, growth through innovation and growth through focused execution. I believe we have the strongest management team in the industry focused on delivering unique client solutions. Couple that with our growing brand recognition and global presence, I can assure you we continue to see a long path for growth in the future. We've talked about in past calls the diversity of our platform, which has allowed us to capture flows across market cycles, and this quarter is no different. I just want to step back and say this is a platform that is unique in its scale, in its breadth, in the balance between passive and active, and it is because of that platform, we're able to achieve these type of results. We witnessed cash coming off the sidelines and being put to work largely in equities and multi-asset products. And while I don't believe this means we're seeing a great rotation out of fixed income -- in fact, we saw a strong growth in fixed income in different regions of the world -- we're witnessing investors searching for yield in a variety of asset classes including equities and higher-yielding fixed income. Investors want fixed income that look like equities and equities that look like fixed income. Even as investors move back into equities, they are cautious, emphasizing low volatility and emphasizing income. This trend will likely to continue for the foreseeable future for at least 2 reasons. Global demographics are evolving, and aging global populations continue to grow. We are living longer. As I mentioned before, longevity and the lack of preparedness for longer retirement is a significant global issue. And this issue is going to be with us for years to come. Global quantitative easing programs have reduced rates to its historic lows. Long-dated fixed income securities traditionally used to fund retirement obligations now carry asymmetric risk for investors looking to match retirement assets and liabilities. So for the foreseeable future, investors will be forced to find yield in other asset classes such as equities, alternatives and higher alpha fixed income. Let's jump into some details on the business and then open it up for questions. In global retail, we generated $8.8 billion in new flows, our strongest quarter in over 2 years. Our key themes continue to drive positive momentum across geographies, led by income, outcome-oriented solutions and alternatives. Investors are continuing to look for a variety of products to satisfy their needs for income in the current low-yield environment, and so -- and to do so in a way that protects them from this asymmetry in interest rates. Our SIO, strategic income opportunity, product and actively managed fixed income fund, designed to perform well in diverse interest rate environments, took in more than $1 billion in the quarter and crossed the $5 billion threshold. In the U.S., we launched a multi-sector fixed income closed-end fund generating more than $700 million in new assets. This fund will grow to over $1 billion once leverage is added. Internationally, we saw strong flows in our Euro Short Duration, our high-yield and global opportunity bond funds demonstrated the continued evolution and diversification of our global platform. On the Solutions fronts, we saw investor appetite for absolute return products, particularly in Asia and in Japan. We met this demand by raising over $1 billion in our Global Allocation product. Retail alternative strategies had a strong quarter globally with the strength of our 40 Act [ph] products in the U.S. and in single-strategy hedge funds in Europe. In the U.S., we saw flows of more than $700 million, driven by global long/short credit and emerging market long/short equity. The alternative mutual funds we've launched in the past 2 years are now over $1.5 billion in AUM. And we recently launched 3 new funds in this space to capitalize on growing demand for our expertise in this category. This will increasingly be an important theme in our global retail franchise. Fundamental equities is a mixed story in the quarter. We saw flow -- outflows in our U.S. franchise, and this not a surprise as we changed 4 of our investment teams over the last few quarters. We saw positive equity inflows into EMEA close to a $1 billion, led by our strong European equity product as investors added incremental risk. With nearly $5 billion in flows in the United States and nearly $4 billion internationally, I continue to be excited about the diversity of flows and the continued global potential of our global retail. Global iShares led the market with $25.6 billion in net inflows, representing more than 1/3 of the first quarter's industry flows, approximately 35%, driven primarily by strength in equity products. iShares continue to be a barometer for risk appetite as clients increase their equity exposure. Early in the quarter, we maintained a leadership position in global equity flows with broadly diversified net equity inflows of $26.3 billion. IShares' first quarter flows were diversified across regional businesses. U.S. iShares showed strong equity inflows of $20.4 billion, which was slightly offset by a fixed income outflows of $3.2 billion. Also, our Core Series product suite, which we launched last year to penetrate the buy-and-hold segment, gathered more than $3 billion in net inflows during the quarter. International iShares new business was driven by equities inflows of $5.9 billion and in fixed income inflows of $2.2 billion. We saw particularly strength in our single-country funds such as Mexico, where investors are using these vehicles to put money to work in local markets without having to build the infrastructure to support the individual security purchases. We remain totally committed to growing and innovating our iShares capabilities, both organically and through acquisitions or a few partnerships. We will continue to be aggressive in evaluating transactions that provide unique capabilities for accessing new markets. Last month, we announced the long-term exclusive alliance with Fidelity that enables Fidelity's 10 million customers to access ETFs, with a smaller marketing -- to access ETFs provided by iShares. We started this relationship 3 years ago with a smaller marketing arrangement. And this is the next step in a longer-term relationship that aims to meet the needs of self-directed investors on a major scale. Fidelity was already an important relationship for BlackRock, and I'm very excited about working with them in the years to come. Our global institutional business produced $5.1 billion in long-term net new business driven largely by a combination of continued shifts to passive and demand for multi-asset class solutions. Institutional flows were led by passive equity net inflows of $13.6 billion. As we talked about in past calls, more and more institutions have shifted to passive as part of a barbell strategy for tactical allocation as part of a core holding. And we see these trends continuing, particularly for passive equity where we saw our largest flows in more than 2 years. We saw outflows in our institutional active business, primarily in the United States. While a portion of the outflows in our active equity franchise was due to the weak historical performance, the preponderance of outflow activity in fixed income was episodic events such as M&A activities and clients reallocating portfolios. We are committed to continue to drive top-tier performance, which we have been achieving in active fixed income and in some of our new active equity positions. Especially in emerging markets, we continue to see very, very positive alpha, which I'll talk about in a second. Retirement continues to be a theme for us and we remain very, very well positioned. Our defined contribution clients generated $7.4 billion in net inflows in the quarter. And our defined contribution franchise has now crossed over $440 billion in AUM, up 19% year-over-year. Our key component of our retirement solution is our Life Path target date suite. Our Life Path assets have grown 40% over the year. Finally, we are seeing good momentum in parts of our alternative platform, particularly single-strategy hedge funds and alternative solutions as clients are rerisking and looking for customized alternative programs as clients are rerisking. In the U.S., we have had more than 10 new institution client funds alternative mandates with us in the quarter. Clients are also responding to the breadth of offerings on our platform with interest in our illiquid offerings. Due to the nature of some of these products, we will not realize revenues for some of these commitments immediately, but we'll see as a -- see the results as the capital is drawn down. This strength is also overshadowed by outflows from a single large hedge fund with challenged performance over the past few quarters, which I'm pleased to say this year that fund is up over 5% and it's back over the high-water mark. BlackRock Solutions continues to have a very strong momentum. BRS revenues were up 2% since the first quarter of 2012. And our Aladdin business posted very strong year-over-year growth of 11% due to multiple successful implementations and growing client base. So far this year, we've added 7 new Aladdin clients and we are in the process of implementing close to $1.3 trillion in new assets on to Aladdin. Our momentum in BRS and Aladdin is as strong as ever. We're seeing existing clients adding new capabilities and new clients recognizing the advantage of the Aladdin network. I still believe we are just beginning to unlock the full capabilities of our Aladdin business. My last comment on institutional is our pipeline, which remains very solid with approximately $35 billion across index and active mandates. Importantly, a lot of these active mandates are in our high-performing single-strategy hedge funds. Let me move on to performance. As I mentioned on previous calls, last year we made a number of investments to enhance our portfolio management teams to improve performance and add capabilities. Now we are building a track record in those product areas. We are confident that these results will yield into flows over time, which we're already beginning to see some in some of the areas. Our fixed income performance has been very solid. Approximately 79% and 81% of our active fixed AUM exceed benchmarks for peer mediums for 1 and 3 years. This has helped drive net new business in our retail fixed income products up to $5.4 billion this quarter. Our scientific active equity performance has been in the top tier for the past several quarters. At the end of the first quarter, 77% and 92% of our AUM was above benchmark or peer medium for the 1- and 3-year period. Our U.S. fundamental equity franchise is a work in progress, which we discussed quite extensively last year. We have our teams in place. And in most cases, our teams are outperforming their benchmarks. And we'd still need more time to demonstrate that performance, but I believe we have the right teams in place. In EMEA and Asia, we are seeing very strong performance, and it shows in our flows. In multi-asset, performance has been strong. Our global allocation funds, which makes up a large portion of our assets in this category, is at a record asset level as of a few days ago and has delivered a 12% annualized return over the past 10 years with 1/3 of the risk of global equity markets. This is exactly what we told our clients we would deliver, and our team is delivering those results. Alternatives continue to be -- continue to build great momentum. This is an area where I've been most pleased over the last quarter and it shows in our performance fees. As a firm, we remain totally committed to continue to build out our alternative space. We believe this is an area -- as we discussed, barbelling -- we believe this is an area where more and more clients are going to be seeking out BlackRock for advice. As Ann Marie discussed, as a firm, we remain very strongly committed to driving increased shareholder value, and our capital management decisions reflect that commitment. In January, we announced an additional 12% increase in our annual dividend of $6.72. And during the quarter, we also completed repurchase of approximately $250 million of our stock. 2013 will be our 10th year paying a dividend. On a compounded annualized basis, we increased our dividend by 24% since 2003. Over the past 2 years, we've continued to enhance our talent with a combination of external hires and elevating high-performing talent from within. Our external hires include Mark McCombe, who runs EMEA -- Asia Pacific; Philipp Hildebrand at EMEA; Hsueh-ming Wang from -- who is our Chairman of China; David Blumer, our new head of EMEA; Gary Shedlin, our new CFO; Gerardo Rodriguez joining in April to focus on emerging markets strategy. But in addition, which does not get enough highlighting, is our continuing elevated of our high-performing individuals internally. Adding new members to our global executive committee to continue to push for new perspective. Mark Wiedman has been added as Head of our Global iShares; Rob Goldstein, Head of our Aladdin and Institutional Business; Patrick Olson as our Head of Global Strategy and Planning; Quintin Price to run our active portfolio management capabilities worldwide. We continue to be pushing our internal team for more opportunities and pushing them into greater and greater leadership roles as we build out our platform. We live in a world that is continually changing, and our clients facing increasingly complex challenges. BlackRock will always be willing to change and adapt to our clients' needs and I'm committed to serving our clients with the best talent in the industry. I'd like to just close by taking a minute to recognize and thank Ann Marie for her help. She's a friend and she's been a terrific CFO, building a world-class finance capability over the past 6 years. She's going to do equally well in our client-serving opportunities and helping us navigate our complex client relationships in the future. And I know Gary will be able to take over for Ann Marie in a very swift manner. So let me just restate what I mentioned at the beginning of the call. This was a strong quarter for BlackRock and our shareholders. We remain diligently focused on consistency and execution, and we are not going to become complacent. In many ways, we have just begun to see the power of this platform. And I believe we have ample opportunity to maintain this growth and possibly accelerate the growth. With that, I'm happy to open it up to take your questions.

[Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Crédit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: I just wanted to dig a little deeper on the new alliance with Fidelity. I'm wondering if you guys know what the level of iShares' AUM was on the Fidelity platform as of quarter end. And then I'm wondering what are your longer-term penetration targets for this platform, and maybe if we can think about the speed that you expect to gain some share on this platform, too.

Well, that is not a public piece of information that I'm -- I can't be responsible for discussing that, so just bear with me on that. But our enthusiasm is quite great with the opportunity we have -- the opportunities we have with Fidelity. The first 3 years were a success and what our new announcement is to build from that success now by adding up to 65 ETFs, iShare ETFs onto the platform have given us much greater opportunity to build greater penetration with their clients and a deeper conversation with their client-serving team. I would also add though, Craig, this also enriches our relationship in a totality basis. Even as from their distribution side, it just gives us a better opportunity to sell our mutual funds and other products there. So we look at this as a comprehensive relationship. The working relationship with our teams is very strong. But importantly, I look at what we are doing with Fidelity to complement what we're doing on our core strategy ETFs. This is what we deemed as the most efficient way for us to target a buy-and-hold RIA channel. This is an area where we said over the last few quarters, we under-penetrated. When we announced our core strategy ETFs, we said this is the channel we're going to go after. But by enlarging our partnership and our relationship with Fidelity, it really enhances our ability to interact with the independent RIA channel. Craig Siegenthaler - Crédit Suisse AG, Research Division: Great. And then just one follow-up. You had $112 million of security lending fees in the first quarter. How should we think about the seasonal pickup in 2Q due to the timing of the European dividends? And I'm wondering will this be a similar year to 2012 when we think about the comparison, or are there some key differences?

Well, when I look at it, really the fourth quarter and the first quarter in sec lending both looked very similar to a year ago and look similar sequentially. And so I would continue to expect a seasonal pickup in the second quarter associated with the dividend fee sec.

But what we -- I would say in the first quarter, what we saw was greater -- we had more securities out on sec lending, and so the trend was good in terms of utilization. But because of the continued compression in rates, we saw less rates. So lending spreads was less. But more importantly, and this is an important characteristic -- we spend so much time, we have a huge team out there trying to look out across all the prime brokers and all the different organizations that are looking to barbell stock. We -- I look at not just at our, obviously, our -- the net interest spread. I think the most important characteristic in sec lending is the amount of securities out to borrow. And this is the one area that I'm pretty proud of our team in making sure that we have deeper penetration. And hopefully, that will continue. I'm not here to tell you the seasonals won't change, but we most certainly saw more demand.

Your next question comes from the line of Glenn Schorr with Nomura.

One quick one on the numbers. You mentioned 7 new clients for Aladdin, and I think it was $1.3 trillion in process of being brought on board. I don't -- I highly doubt that it's directional, but that would imply about a 10% bump to the current base fee run rate in Aladdin. Is that -- am I in the ballpark of new fees coming on board?

Well, it's certainly a 10% increase in possible assets in that, so that's what you're getting at. 10% -- no, it's less than that. It's -- I'm not going to get into the details, but it's -- one client is quite large, and has economies of scale and all that stuff. But it's -- you're in the range but not there without getting into much detail.

Okay. I can live with that. Curious -- you've spoken in the past that the bond ETF penetration is literally about 1/10 the size of the penetration of the equity markets has enjoyed. Curious what you're seeing and expecting there. And then if you could talk towards what you spoken about recently in terms of the fixed income ETF and corporate bond lend, when we might expect that product to be coming out?

The iShare bond is going to be -- is momentarily, without getting into registration issues, we expect it soon. I'm getting kicked by my General Counsel. It is my view that this is a great opportunity for the market and for us. We've had many conversation with many potential investors in those products. The enthusiasm is great. But as we saw in most ETF products, it's a slow grind, and people are going to be looking for liquidity and opportunities. And if the liquidity and opportunities are there, then you start seeing a faster ramp-up. So it is momentarily when we're going to announce -- when we launch that. The overall view of ETFs and bonds is as robust as ever. We are very constructive on those products. And so my feelings haven't changed at all despite, obviously, a huge change in momentum from fixed income flows that we witnessed the first half of last year to 90% flows in equities. And so I guess it's a testimony to the products that these are efficient vehicles for investors when they are looking to rebalance, to restructure. And so we continue to be in front of clients with all types of ETF products, and we continue to be driving those flows on a global basis. You didn't ask this question, but if you look at ETF flows as an industry, some of the great flows as an industry are also when investors are under-invested. So you see great flows in Japan because of the changes in the economic future of Japan or the hope of the change of economic future. And so you're seeing it across the industry, larger flows in Japanese-oriented DK-oriented [ph] ETFs. And as I said, what we saw also at BlackRock, because a renewed interest in Mexico, we were -- we saw larger-than-historical flows into Mexico. And so this is exactly how we're trying to position ourself, having a suite of products that are global in nature and respond to it. This is one of the big reasons why we are so excited about our inclusion of the Crédit Suisse ETF platform. This will give us a great Swiss franc product as clients are going to look to diversify in currency and in asset categories.

Your next question comes from the line of Luke Montgomery with Bernstein. Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division: A quick question on the margin. You have unparalleled scale, a number of product categories that arguably have incremental margins in the 70% range or more. So without dismissing the progress you've been making on the margin, which is really encouraging, if you were pressed to explain why your margin isn't higher, can you point to any structural explanation for that in terms of business lines, product mix, geographic presence? And what is really preventing you at this point from having an industry-leading margin or actually the industry leading?

I'm going to -- let me give you my view and I'll let Ann Marie talk about it. A, I think our 40% first quarter margins are pretty impressive. Two, we did great investing in our new equity teams. When we launch our -- when we do win these Aladdin assignments, they actually, in the first year, drag our margins down because they're basically cost-related types of assignments until they're fully implemented. We continue to build and reinvest in the company. So as I've always said, I'm going to continue to invest to build a better company in the future with a mind of having increased margins. If I wanted to play the margin games, I certainly could ramp up margins dramatically, as you suggested. But at this time, because of all the opportunities I think we have as a firm, I'd be harming the overall company for future growth. So -- and the other thing is, let's not underscore the amount of spend I have related to regulatory inquiries and regulatory compliance. We are spending a great deal of time now putting all the requests in terms of information flow on to our systems. This will actually benefit our Aladdin clients one day, too, as we put these types of refinements for BlackRock onto the Aladdin system. But these costs are large and I suggested that last year, and I will continue to suggest that now. One of the outcomes of increased regulatory uncertainty, there is always a need for more lawyers, and so as my General Counsel raises his hand. And so I actually believe we are being judicious in the way we're managing margin. I have always claimed I expect to see higher margins in the future as we continue to build. And I agree with you, we do have some very high-margin businesses, but I'm not going to -- I'm going to continue to build for a better future. Ann Marie?

Yes. I just wanted to chime in that to remind people that the pro forma margin in 2009 of the combined BlackRock-BGI was 36.8%. And first quarter, and especially this first quarter, with the reorganization costs in it, was a very strong margin. So there's been enormous progress, and that's leveraging the business that we're committed to continuing. It's always going to be balanced with making sure that we're growing that top line, which is where the real value comes.

If you strip out the onetime expense of the reorganization, that would add over a 1 margin point to the quarter. I'm not suggesting we're going to continue to be at 41. I don't know where we're going to come out. But we all -- as I said before, we have an eye to continuing to build and grow our margins. Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division: Okay. That was really helpful. Second one for me. I know there were some hope that ESMA would clarify its guidelines for sec lending in Europe. But it looks like the document that was released in late March left some of the key issues kind of vague. And there's still a question, at least in my mind, whether you're allowed to profit from this activity. So could you just help us understand how binding the ESMA rules are, who has the final say on all this, and what your outlook on the regulation is? And then along with that, you earned about $500 million from sec lending in 2012, so what is the split between Europe and the U.S.?

Matt, do you want to go into that?

Yes, sure. The ESMA guidelines are still being reviewed and analyzed by all of us and haven't yet been finally determined. We know that everyone has these concerns about our ability to continue receiving sec lending fees. But let me just say that with the -- we do know that the guidelines have confirmed that we can charge fees and we're going to see where they wind up. But we support ESMA's efforts. And as fiduciaries, we already provide a high degree of transparency and disclosure, which is what some of this was about. And we're working with national regulators. National regulators have to implement a lot of this to preserve the benefits of securities lending for clients and the broader capital markets. So it's early days, and we'll be back and we'll see where this all goes.

Your next question comes from the line of Bill Katz with Citigroup.

First question, Larry, you didn't really talk about it in your prepared marks, but there was one SEC commissioner came out suggesting that there could be a money market proposal in the next month or so. So wondering what are you hearing in terms of what it might be and how you might be prepared to react if it's onerous?

I expect it's going to be some form of floating NAV. I mean, I see no evidence to think it would be anything but a floating NAV on the prime type of funds. I don't believe it will be any form of floating related to the government type of funds. So I think -- I don't -- we don't expect any surprise. We had a whole team in Washington this week. It's still pretty -- it's not -- it's a pretty dynamic situation, but I do believe now with the commissioner of the SEC being -- and the chairperson being finalized, I think we're going to see some type of announcement from the SEC shortly.

Okay. So second question, so a two-part question. One is I want to verify, Ann Marie, did you say that G&A will be flat year-on-year despite some seasonal sort of quarterly trends? And then the second question is, part of that is, with the Fidelity arrangement, is that accretive to the overall margin of the company?

So the first question, what I said specifically was with respect to marketing, but that's a key component of our overall G&A. And absolutely on the second. I mean, we think this is going to be a real win-win.

On the -- we -- marketing is a variable expense. We will spend more money when we believe it's an -- there's a great opportunity. And if we believe that the business dynamics don't permit it, we will spend less. So it is something that we can adjust continuously, and so it is going to be fluid and we will continue to navigate around that. And I will affirm what Ann Marie said related to Fidelity; it is accretive immediately.

Your next question comes from the line of Marc Irizarry with Goldman Sachs.

Larry, just on the trends and flows this quarter. I'm curious if you can give us a sense of the -- maybe the more cyclical rotation that could happen. You mentioned that. I guess you don't really see this great rotation happening, but there's a search for yield. Do you -- did that sort of dynamic accelerate throughout the months this -- so far this year as sort of events unfolded in March? Did you see any change in sort of people maybe preparing to take on more risk? Just curious what clients are saying.

There's no question. We saw greater risk-taking worldwide, and so -- but that doesn't mean it's a great rotation. It just means people are looking to take risk in other forms. As I said, they're looking for equities that are more bond-like with high coupons, low vol. They're looking for fixed income that has higher yield that looks more like equity. I think those are the overall trends, and those trends continue. Obviously, we saw at the beginning of the first quarter, a huge rerisking. But the rerisking came from cash, not from bonds. Secondarily, as we've witnessed about a 40 basis point rally -- rates went down in late March and now April -- we saw probably a slowdown in some flows but in the last week, we've began to see a resurgence in flows again. But I would say, overall, Marc, clients are looking to add more risk. Clients are looking for that market setback to buy. I don't sense a market setback is going to have people running back into more bonds, but I think if we had a market setback, I think we would actually see more equity investments.

Okay, that's great. And then on the active equity business, I guess, there was some bigger -- an uptick in outflows. It looks like institutionally driven from fundamental equity. Do you have any sense of where we are maybe in the cycle of...

Recognize that, that's almost over. That was just a reaction in -- 2 clients, actually, did predominantly because we changed the portfolio managers. It is something we were not surprised at. We were disappointed. We were trying to have them stay in those -- with the new managers because we believe it's an improvement, but they had some -- they have these formulas of changing -- of moving on if there are some big changes. And this is -- these are the costs, and this is why so many firms are afraid of changing managers even with mediocre performance. And we made a conclusion mid-last year that we are going to rebuild for the future. We're going to spend the money in recruiting great teams, and we're going to take the short-term hits in terms of the potential outflows. But in the areas where we are seeing performance, some of our emerging market equity teams that have been here now 1.5 years with great performance, we have many dialogues worldwide. We continue to see some very strong flows, as I said in my prepared talks about -- in European equities where we have a world-class team. We continue to see flows in our dividend equity side. So I would say, the best way I can talk about the first quarter for me was a mixed picture. It wasn't as robust as we -- I would have liked to have seen it, but it certainly wasn't terribly bad and unexpected. But we're -- I think in terms of seasonality, in terms of those clients' decisions, that's behind us.

Your next question comes from the line of Eric Berg with RBC Capital Markets.

So you've talked at length about the growing interest by investors, both retail investors and institutions, in risk. But what about the choice of active versus passive? It's sort of hard to tell from the data, quite frankly, whether this surge into equities paired with continued strength in fixed income points to a resurgence in interest in active investing. Or whether the multi-decade trend that we've seen toward passive investing, both indexing and ETFs, continues unabated. What's going on?

That's a very good question. There's no question from our vantage point we saw more barbelling than ever, more interest in beta products, both ETFs and index products, across the board. We're actually witnessing some of the largest global institutions who were heavily, 5 years ago were 100% in active, they are now navigating the majority, their reinvestments and their new investments in beta. So there's no question, as you said, there is a very dominant trend towards greater and greater participation in beta. As I also said, one of the uniquenesses of ETFs and iShares, we are seeing more and more investors are driving ETF flows because they're using beta as alpha. And so I think that trend will continue. I am making a large, long-term bet, though, that there will be a time when investor behavior will move back into fundamental equities. I can tell you as in our case where we have really good performance, we've seen flows. I'm sure by looking at industry flows, other firms that had strong, consistent returns that beat the index after fees are still -- are seeing flows. And so I think what you're seeing is you're not seeing overall trends in active fundamental equities, but you're seeing it where there is good fundamental performance after fees. This is another reason why in our prepared conversation, I talked about why we continue to build our alternative strategies, whether it is the SIO and CIO types of products and fixed income and our single-strategy hedge funds. We continue to see very large momentum there as clients are looking to use beta and then barbelling by other types of strategy. So we are making a fundamental view that equity -- fundamental equities will be a place where investors want to go but overwhelmingly, the flows continue to be driven in the beta products.

My second and therefore my final question relates to your relationship with Fidelity. I'm very curious about the following. It seems to me that there are a handful of organizations in your industry, T. Rowe Price, the Capital Group and Fidelity, that literally stand for active management. This is their heritage, and this is what they grew up with. So I'm very curious to know when you were talking to Fidelity about why it's in Fidelity's interest, and presumably you had that conversation -- I'm not going to ask you to tell me what Fidelity was thinking. I want to know as the head of BlackRock what you were thinking and saying. When you were having that conversation with Fidelity about why it's in their interest for those guys to clone their active, industry-specific funds, for example, how did that conversation go?

Well, a, I think Fidelity is a tremendous firm. I think their fiduciary as strong as any firm that I know of. I think they believe in active management, as you suggested, and I think they understand that their clients are not only looking for active products, they're looking for passive products. And I believe that they have come to terms that if they are going to be as strong a fiduciary and looking out for their clients' interests that being in partnership with BlackRock iShares allows them to penetrate and continue to have that dialogue on the beta side, but also continue to be a fiduciary and drive also flows for their active products. So I think it's very consistent with a long-standing position of Fidelity of having fiduciary responsibility, first and foremost. And I would say all my conversations with the leadership of Fidelity has always been, they want to be known as a key long-term fiduciary for their clients. And I think this achieves that objective, and it also allows them to continue to build and drive their active flows.

Your next question comes from the line of Ken Worthington with JPMorgan. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: First on maybe Solutions outside of Aladdin. To what extent are you seeing more pension and sovereign wealth funds stepping up their interest in outsourcing asset allocation to BlackRock? And does a risk-on world weaken demand to outsource or does a low interest rate environment sustain that interest? And ultimately what gets these big entities to pull the trigger?

Well, we asked Craig Phillips, who is driving our FMA business, to drive that solution-based business. Ann Marie, in a few weeks, will be a leader of that business. So I'm going to let Ann Marie talk about that a little bit and I'll add, so...

What I would say is there's a lot of different types of opportunities there. And it's not just a pure outsourcing of asset allocation, which is part of it, but it can be thinking about asset allocation for a portion of your portfolio. It's modeling assets next to liabilities and planning your asset strategy next to your liability strategy as you're thinking of that including your cap contribution strategy. I think that asset allocation in the present environment has been a key contributor to beta. And I mentioned that in my remarks because we are seeing people using ETFs as a tool to asset allocate. And we can help people to use these tools to get there, combined with the risk pools to actually understanding what they're doing, where the returns are coming from and where the risks are coming from. What's interesting, when you look at a number of clients, including very big sophisticated clients, they don't actually understand that combination of risk analysis with return analysis.

So, Ken, I don't believe -- we're having more dialogues with more large clients than ever before on the solution fiduciary type of businesses. So the dialogue, whether it's a low rate environment or risk-on or a combination of both, we're seeing more and more clients interested in it. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay. And what gets them to pull the trigger? When do we start to see more of these conversations actually turn into mandates?

Well, we won -- we just won a $1.5 billion mandate this past week. And it was a multi-asset category with many alternatives. It was a great team-wide win. We are -- we had another dialogue with another client about a $10 billion possible assignment. I would like them to pull the trigger on this $10 billion one as soon as possible, but we are in dialogue with many different clients right now on this. What I have witnessed in these types of conversations, though, there are long gestation period to get the clients comfortable on these type of assignments. But when they pull the trigger, it's generally a big event here at BlackRock. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay. And in terms of investment, you really backed income products and that was really the right decision. As we think about alternatives, what are the alternative solutions that you want to emphasize over the next 5 years? And is there an analogous situation in the income products like in the alternative world, is there something that is really just going to be a hit that you want to scale up and build and...

Probably the biggest area that I can think of is, and I talked about this in my prepared remarks, I believe more and more investors are very worried about the asymmetry in long-duration fixed income. And so they are looking for alternative products that have -- doesn't have a duration benchmark and it's trying to navigate around that. So our SIO product, which I suggested, raised another $1 billion. And I believe with our performance, we should be at $15 billion, $20 billion. This is in the top quartile product. It is beating our 2 largest competitors by a significant amount in this product, and we should be growing this dramatically. The other area that I believe over, as you suggested, a 5-year period, 10-year period of time, it is going to have to be -- continue investing in the emerging world, whether it's Mexico or Southeast Asia, in different categories, whether it's going to be in debt products or in equity-like products. So it's going to be a combination of multi-asset strategy and a continue to investing in the emerging world, where we're making equally large investments.

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

Just 2 quick ones, actually. First, I just wanted to ask about the success thus far in merging the iShares and retail sales forces, how you're seeing that play out and success on non-Merrill platforms?

It's too early to making some grandiose comment. I could tell you my teams are telling me it's quite successful. There is great enthusiasm there. But we -- whether we are seeing any short-term milestones, I think what's important, what we're -- and our messaging to all our clients by doing this -- and this gets back to some other questions we had earlier. And this is related to -- we have to be in front of our clients providing them information both on beta and alpha products. If we cannot do that, then nobody can. We should be the organization that's getting in front of the FAs, the RIAs in a open form of talking about the attributes of alpha and beta. And they should not be -- it should not be inconsistent or it should not be communication through 2 different voices. Our whole idea was because we believe if we are truly a fiduciary to our clients is providing a wholesome conversation on the attributes of beta and alpha, the combination of passive products and active products and how can they fit in a portfolio. And so we needed to re-engineer our own firm to making sure that we are -- we're telling the story in a proper way. So I believe in the long run, it's going to generate increased penetration. It may mean continue investing in our teams, it may mean more investing in our technology to provide better information for our teams to sell those products in a holistic way, but I am truly committed on the idea of providing a wholesome client relationship on beta and alpha.

Okay. And then just one -- a little bit more kind of granular housekeeping question is just in terms of comp. There are a number of moving pieces. You have the seasonality in the first quarter. You have the $33 million severance and you have the fact that you guys are saying you're going to end the year with higher headcounts. So I'm just wondering, first of all, with the new hires you have, is there a full run rate in the first quarter? And the incremental heads that you're adding over the course of the year, should we be thinking about that as lower cost per head than you have right now or in line, or how should we be thinking about that?

As you recall, we're not going to add a lot of costs in base comp. And I think our key comp driver is going to continue to be our variable comp, which is going to be dependent on the performance of our portfolio managers, as well as the performance of the firm overall. While we've added people, we have also made significant moves in our footprint over the last 2 years that has dampened the fact relative to the number of people that have been added to the firm.

We'll be very aggressive in managing those expenses.

Your next question comes from the line of Mike Carrier with Bank of America Merrill Lynch.

Just on the iShares, in the past, there's been some seasonality. I know last quarter, you mentioned that you're not seeing it as much or some of the structural growth is offsetting that. So just wanted to get your view on that. And then one topic that sometimes will pop up is when you look at the 2 series that you have with iShares and the 1 on the kind of the old series, there's different fee rates and you've always mentioned that part of that is because of the liquidity. Just wondering, over time, if you're really successful on the new series and if those new assets get to a certain level, is there anything that stops clients from moving within the different products? I mean, are there any nuances among the different series that would prohibit that?

No. I mean, if we have great success in our core strategy and the assets grow dramatically there and liquidity grows there, you would see some form of arbitrage over the long run. But I would also add, though, when you talk about total costs, and one of the reasons why we were very successful in some of our higher management fee products has been our great success in providing higher and more efficient tracking than our competitors. And so once again, I have to remind all investors who -- and I wish our -- I wish the agencies that we viewed alternative -- all ETF products look at not just management fees but they look at tracking error and look at bid-ask spread. So you calculate those 3 characteristics of the total experience of an ETF. In some of our higher fee products that you were talking about, actually, because of positive tracking, we actually outperformed. And so you have to look at it in a total cost experience, and that's an -- that's an important characteristic to look at it. This is one of the reasons why I don't expect to see the arbitrage anytime soon. You have to look at it on the total client experience. And that's important to understand why you're not seeing massive changes in clients' demand in different products.

Okay, that makes sense. And then just maybe on the seasonality and then probably just bigger picture. When you look at the iShares opportunity and when you look at the amount that you guys, when you see it, the different distribution channels and where you're at versus where you could be over the next 3 to 5 years, like what inning are you in that build-out or in that penetration and that could be both on the equity and obviously on the fixed income it's much, much earlier?

I actually believe we're in the third inning. I actually believe there's huge upside opportunities. I think people are miscalculating the continued growth, both institutionally and somewhat retail on utilizing ETFs as beta as alpha. We're seeing even the traditional index players, clients who were looking to add ETFs to provide a little greater liquidity in their index portfolios. We're at the first inning, second inning, and fixed income as ETFs will continue to play a bigger role. But I can't -- I think the first quarter, when you think about where the industry flows are, it would really, in my mind, really shows how dynamic ETFs are. When you see the huge increase in equities because clients were underweighted in equities, they're overweighted in cash and so you saw large purchasing of equity ETFs. In addition, just by the growth of ETFs in Japan and Mexico, it really highlights that this is not just a domestic U.S. phenomenon. It's a global phenomenon that clients are using ETFs not just to get beta exposure but to also get exposure in region and exposure in categories. And this is the whole story of what we're trying to do with iShares that we can provide beta exposure across regions, across countries, across products. And if we can provide that consistently, more and more clients will come to iShares.

Your next question comes from the line of Dan Fannon with Jeffries. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: I guess just to follow up on the fixed income, I think you mentioned some outflows that were specific to certain clients in the active segment this quarter. If you could rehash that, please. And then the other -- the opportunity within the ETF category for fixed income, you said there's been dialogue and demand, is that coming from your core base of active customers or is that from a new -- is that incremental to what you guys -- who you're already touching?

So in terms of outflow, and this is a merger-related client that had large sums of money in short-duration products that took the money out and bought a company. And one of them was just a restructuring from fixed income to another asset category. That was -- those are the 2 dominant themes in the fundamental fixed income side. In terms of our forthcoming announcement, we believe it will be new classes of investors in bond ETFs.

Your next question comes from the line of Jeff Hopson with Stifel. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division: So 2 questions real quick. On ETFs, I realize, we're kind of slicing and dicing. But the most recent trends seem to be a little bit of movement away from the biggest plain vanilla product into really slicing and dicing, whether that's the Japan hedged products, whatever. You think that's just a short-term trend, number one? And depending on your answer, does that make you need to slice and dice even more? And then on margins, so the improvement year-over-year in the quarter was 140 basis points and there's some extra costs. So is there any reason why if the market gains hold that you couldn't show a 150, 250 basis point improvement in adjusted margins on a year-over-year basis?

So in terms of the rotation of ETFs and the slicing -- I think you're talking about the slicing and dicing. I think, as I said earlier, I'm repeating myself, but I really do believe if you look at the overall trends, we saw huge investing in the U.S. equities as the world started believing in the U.S. economic story. And we saw a huge investing in Mexico and Japan. As to Japan was obviously a country in which, historically, investors underweighted for years. And I think people were under -- we needed to get equity beta-ed in Japan. And Mexico was just the continuation of a great economic story. I think -- I don't think there's any grand story about mixing and matching. It just illuminates how people are adapting to use more and more ETFs as beta as alpha. And I think that's a very important component. I don't believe -- this does not lead me to believe that we have to mix and match and create more smaller and more divisible types of products. I think clients are looking for big macro-theme products. I don't believe investing in Japan alone is a macro -- is a mix and match or investing in Mexico is a mix and match. What we are seeing is sometimes, some clients don't want to invest in a global index like an MSCI. Some investors want to say, "I want to highlight by owning 7 countries in that index," and they could do that with ETFs and iShares. So you have some clients who are saying, "I would like to just invest in North America," so they could buy a Canadian and a U.S. and a Mexican ETF. So we're seeing various different ways that you could use ETFs and the simplicity of that. And I think that's the major story. It's not a story that we have to divide them up into many more categories. Lastly, in terms of margins, there is no question, as I said earlier, if you take out the onetime charge, our margins would be 100 to 140 basis points higher than it was -- than we announced. I don't like showing -- giving too much granularity on margin. I've always said we expect to see higher margins consistently year after year. Obviously, margins are beta dependent. They're performance or fee dependent. But we will continue to navigate and monitor our expenses. I can control expenses, and that's my commitment to you. I can't control beta. I do believe we'll have higher markets over the course of this coming year. So we will be very disciplined in terms of managing those expenses related to what goes on in performance fees and beta. So what I'm suggesting, you should assume pricing margins predicated on beta. But this is something that we are committed on, and we believe we have great opportunities to expand the margin without harming the future growth of the company. And that's how I'm trying to manage it. We will continue to make sure we are making investments. We will continue to make sure that we have the best investment teams. I will be relentless in making sure we have a firm that is based on performance, and that's my commitment to all of you.

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

No. Great quarter. I want to thank all the employees. Once again, our hearts and wishes are out to all those who experienced this -- the problems associated with the Boston terrorist act. We live in these uncertain times. We live in times of -- that are really tough to reconcile at times. And it is our job to provide some consistency to our investors to overcome, once again, a lack of confidence that terrorist acts like this presents to us and our entire country. So with that, let's continue to hope for a great second quarter, and I will be talking to you shortly. Thank you, everyone.

This concludes today's teleconference. You may now disconnect.