BlackRock, Inc. (BLK) Q3 2016 Earnings Report, Transcript and Summary

Good morning. My name is Carmen, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock, Incorporated Third Quarter 2016 Earnings Teleconference. Our host for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Gary S. Shedlin; President; Robert S. Kapito, and General Counsel, Christopher J. Meade. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Meade, you may begin your conference.

Thank you. Good morning, everyone. I'm Chris Meade, the General Counsel of BlackRock. Before we begin, I'd like to remind you 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 of course, differ from these statements. 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 see today. BlackRock assumes no duty, and does not undertake to update any forward-looking statements. So with that, I'll turn it over to Gary.

Thanks Chris and good morning everyone. It's my pleasure to present results for the third quarter of 2016. Before I turn it over to Larry to offer his comments, I'll review our quarterly financial performance and business results. While our earnings release discloses both GAAP and as adjusted financial results, I will be focusing primarily on our as adjusted results. Our clients are facing significant challenges driven by increased regulation, market volatility, record low interest rates and disruptive technology and that's a result the asset management industry is changing rapidly. During these times as we've done in the past, we reexamined our strategic priorities and evolved our business model with the goal of better serving the needs of our clients and optimizing organic growth in the most efficient way possible for our shareholders. Financial results for the third quarter of 2016 demonstrate the diversification and stability of our global investment and technology platform and our commitment to investing for the future. We executed on each of the three components of our framework for shareholder value creation in this quarter delivering organic growth, demonstrating operating leverage and systematically returning capital to our shareholders. Third quarter revenue of $2.8 billion was 3% lower than a year ago. However on a constant currency basis, we estimate that quarterly revenue was down approximately 1% year-over-year. Operating income of $1.2 billion declined 1% while earnings per share of $5.14 increased 3% versus the prior year quarter. Non-operating results for the quarter reflected $29 million of net investment gains, primarily attributable to net gain on un-hedged or partially hedged multi-asset and fixed income seed investments. Our as adjusted tax rate for the third quarter was 29.7% reflecting the impact of several nonrecurring items. We continue to estimate that 31% remains a reasonable projected tax run rate for the fourth quarter of 2016, though the actual effective tax rate may differ as a consequence of nonrecurring items that could arise in the future. BlackRock generated $55 billion of long-term net inflows in the third quarter, representing an annualized organic growth rate of 5%. Flows were positive in our active and index franchises and across asset classes and regions increasing the value of our broad-based diversified business model. Third quarter base fees of $2.5 billion were up 4% year-over-year driven primarily by organic growth, positive beta and higher securities lending revenue which was positively impacted by widening asset spreads resulting from a rise in short-term interest rates. Sequentially base fees were up 2%. While we continue to deliver strong growth, base fee growth has recently lagged growth and average assets under management as client appetite and portfolio construction decisions impact our business mix. In the current environment, client mixed shift has favored index over active, fixed income and cash over equities and government funds over prime funds in the money market space. While mix change amongst and within asset classes won't impact our blended fee rate over time, we remain confident that our diverse business model is capable of generating differentiated organic growth in a variety of market environments and our scale enables us to prudently manage expense and defend our operating margin. Performance fees of $58 million declined 72% versus a year ago, driven by our single strategy hedge fund platform. Recall that performance fees in last year's third quarter benefited from a single European hedge fund that delivered exceptional full-year performance. BlackRock solutions revenue of $174 million increased 4% year-over-year and 1% sequentially. Our Aladdin business, which represented 87% of BRS revenue in the quarter up from 81% a year ago, grew to 13% year-over-year, driven by new clients and several sizable clients going live on the Aladdin platform over the last year. Strong market demand for Aladdin continues from institutional asset managers as well as retail intermediaries who are seeking sophisticated risk analytics and portfolio construction tools to better serve their wealth management clients in the current regulatory environment. Other revenue was down $16 million year-over-year, primarily related to lower transition management active in the current quarter. Total expense decreased 4% year-over-year and was flat sequentially, driven primarily by lower compensation expense. Employee compensation expense was down $56 million or 6% year-over-year, reflecting lower incentive compensation, primarily driven by lower performance fees versus a year ago. G&A expense decreased $7 million or 2% from a year ago and $4 million or 1% sequentially as we continue to exercise discipline over our discretionary spend in the current environment. At present we anticipate fourth quarter G&A expense to be moderately lower than last year's normalized levels after adjusting for $23 million of quarterly deal related costs incurred a year ago. Finally, distribution and servicing costs decreased 12% year-over-year and 5% sequentially, primarily related to the acquisition of BoA Global Capital Management in April of this year. Despite an overall decline in year-over-year revenues driven by a reduction in performance fees, we have delivered 3.5% organic growth over the last 12 months and expanded our as adjusted operating margin versus a year ago, evidencing our continued commitment to strike an appropriate balance between investing for future growth and practical discretionary expense management. In line with that commitment earlier this month, we reviewed prices on 15 U.S. iShares for ETFs and several actively managed U.S. bond funds. We chose to use our scale and leadership position to invest on behalf of clients and financial advisors as they adapt to the DOL's new fiduciary rule. In isolation, these price reductions will result in an estimated $85 million annualized revenue reduction for BlackRock, representing less than 1% of our total base fees. However over the mid-to-long term, we expect this investment to be accretive to organic growth and additives to overall shareholder value. During the third quarter, we continue to return excess cash to shareholders and we purchased an additional $275 million worth of BlackRock shares BlackRock generated $70 billion of total net inflows in the third quarter, including $55 billion of long-term net inflows and $15 billion of cash management and cash management inflows. Cash management inflows demonstrate the breath of our platform and strength of our client relationships in the lead up to U.S. money market reform. Since the beginning of the year, our platform has experienced a remarkable shift from prime to government funds. BlackRock is now the second largest 2A7 money fund provider in the United States and our diverse capabilities across set accounts, collective trusts and short duration products, position as well for continued future growth. Global iShares generated $51 billion of net inflows during the quarter, representing 18% annualized organic growth. Over the last 12 months, iShares has now generated over $140 billion in net inflows represent 15% organic growth. iShares equity inflows of $26 million for the quarter were driven by flows into U.S. and emerging markets as investors once again trying to iShares precision exposures at their preferred vehicle to de-risk following the Brexit vote. Importantly, our ETF product segmentation strategy, which tailored products to different client segments, continues to perform well. As an example, largest institutional clients who value liquidity and often use derivative strategies grew $6 billion of quarterly flows into EEM, our flagship iShares emerging markets financial instrument. Longer term investors who may be retail or institutional, but are more price sensitive added nearly $3 billion into IENG our iShares core emerging markets ETFs. Quarterly iShares fixed income inflows of $23 billion reflected ongoing adoption of ETFs as a means of rapidly accessing and investing in fixed income markets worldwide. Demand was particularly achieved in investment grade corporates and emerging markets as investors continue to search for services and higher yield. Our institutional client platform saw $6 billion of long-term net inflows during the quarter, driven by active net inflows of $8 billion as clients increasingly look to partner with Blackrock to build customized solutions or generate yield to meet their investment objectives. Inflows into multi-asset and solutions oriented strategies including our LifePath target-date series and active fixed income are partially offset by outflows from active equity. In addition we had another strong fund raising quarter for illiquid alternatives raising $1 million in new commitments. Illiquid alternatives remain a key area of growth for Blackrock as our institutional clients increasingly search for additional sources of income and uncorrelated returns. Blackrock's global retail franchise saw $2 billion of long-term net outflows, primarily due to outflows from equity and multi-asset funds in another challenging quarter for the active mutual fund industry. Outflows were concentrated in European and U.S. equities and world allocations strategies. Retail fixed income remained a pocket of strength with diversified flows across our top-performing platform including strong flows into emerging markets high yield, municipals and European and Asian fixed income. At September 30, 88% of taxable fixed income assets were at or above benchmark or peer medium for the trailing five year period. In particular our flagship total return fund continues to generate best-in-class performance and is performing in the top 5% of its peers for the trailing three and five year periods. Overall our third quarter results reflect the benefits of the investments we've made to build a diversified global business model. Diversification across investment style distribution channel, product and region, enables us to deliver differentiated organic growth in a variety of market environments while our scale allows us to make strategic investments, which deliver value for our clients and shareholders. With that I'll turn it over to Larry.

Thanks Gary. Good morning, everyone and thank you for joining the call. BlackRock's business model was built to thrive in all market environments and clients continue to trust Blackrock in an environment characterized by macroeconomic and political uncertainties, slow global growth and persistent low rates. In the third quarter even as industry-wide investor preferences continue to migrate from equities to fixed income and cash and away from active strategies the diversity of our platform drove nearly $70 billion of total net inflows. Our $55 billion of long-term net inflows was positive across both active and index strategies and across every asset class and every region. We're seeing ongoing divergence in global monetary policy. While the U.S. signals a slow path to tightening the U.K., Japan and other central banks continue with accommodative monetary policy, keeping yields at historical low levels and fueling widening asset liability gaps for both large institutions and also individual savers. As monetary policy reaches its limits in many regions, expansionary fiscal policy particularly in the form of infrastructure investments will be necessary to ignite economic growth. The lack of clarity around the outcomes of several upcoming political events including the path forward on Brexit, elections in the U.S. and the constitutional referendum in Italy is contributing to growing tail risk and investor caution. Despite underlying uncertainty, market volatility reached lows not seen since 1995 and equity markets rose in the quarter posting record highs in the United States and the United Kingdom. Many clients are turning to BlackRock to help them understand the risk at the intersection of policy, markets and economics as government actions continue to drive our markets. Both institutional and retail clients are increasingly utilizing Aladdin risk management technology and portfolio construction tools as well as turning the BlackRock for our insights as a thought leader. In the third quarter, the BlackRock Investment Institute hosted a call on the potential impact in financial markets on the upcoming U.S. election which had more than 1,000 participants. These differentiators and combined with our global active and indexed investment platform that Blackrock is built over time, enables us to have a deeper and more meaningful conversation with our clients and more than ever before client value BlackRock's diverse global business model. As Gary mentioned BlackRock generated $55 billion of long-term net inflows in the third quarter, representing a 5% organic asset growth and 5% organic based fee growth. The composition of our flow this quarter is representative of global market condition and investor sentiment. Across client segments, inflows were led by U.S. in emerging markets equities and debt as investors view the U.S. as a relatively safe haven and emerging markets have gained momentum as commodity prices stabilize. Meanwhile we saw outflows from European equities in the political and policy uncertainties both from the continent and the United Kingdom. Institutional investors are slowly regaining confidence and the third quarter was characterized by consistent diverse client flows rather than any one concentrated activity. Our institutional business saw $8 billion of active net inflows in the quarter driven by strong fixed income and multi-asset flows, primarily from defied contributions and insurance clients. Insurance clients face complex challenges as traditional asset allocation strategies are failing to support their business models. With expertise and understand the specific needs of insurance clients BlackRock's Financial Institution Group is putting the differentiated technology advantages on our Aladdin platform to work, constructing and delivering highly customized investment solutions, which incorporate both traditional and alternative asset classes across active and index strategies. Insurance companies are also increasingly employing fixed income ETFs in a broad range of applications. A recent study from Brennan's Associates found that ETF demand from insurers is likely to increase. Of insurance in the study -- insurers in the study, 52% of these companies expect to increase their use of fixed income ETFs in the next year and BlackRock is well-positioned to work with large insurers as our investment strategies and techniques evolve. Active fixed income flows from retail investors remain strong in the quarter at $5 billion, driven by flows in the high yield, emerging market data in Asia fixed income, again reflecting investors moving out of the risk curve in search of the income as a struggle with historical low rates. At the same time, retail investors continue to pull back from active equity investments driven by a combination of challenging long-term performance track records and also accelerating regulatory changes. 2016 U.S. active equity mutual funds has experienced more than $240 billion of year-to-date outflows. It's worth year-on record with more than $110 billion of outflows in the third quarter alone, the same time we've seen strong flows from this client segment across our iShares equity ETFs which I'll speak about in a moment. Regulatory changes having a material impact on the retail ecosystem the Department of Labor Fiduciary Rule RDR and MiFID are all impacting the way wealth managers serve their clients. We are likely to see a historical shift on how assets are being managed and invested as our distribution partners are changing both their product preferences and their use of technology to adapt to these rule changes. We've been working closely with our distribution partners in the U.S. in advance of the Department of Labor rule implementation. Aladdin for Wealth, our technology and risk management system designed specifically for wealth managers will be a key differentiator for BlackRock in helping our clients adapt, as financial advisors sharpen their focus on the quality and cost efficiencies of funds. We also expect that they will use ETF more and more at the center of their portfolios. Advisors are using ETF alongside high conviction active funds and also they're using ETF as an active tool to manage their client's assets. Throughout BlackRock's history, we've anticipated a series of changes in the ecosystem and have taken strategic actions to adapt. This has included combining our active and index strategies on one platform through the BGI acquisition in 2009, continuously enhancing our Aladdin risk and investment management technology. Launching the iShares core series in 2012 which exceeded our expectations by growing at an average organic asset growth rate at 24% since inception and most recently acquiring future advisor. Each of the strategic actions represent an investment to better serve our clients and to drive growth in our business. As our ecosystem evolve further, asset managers can no longer rely on data to subsidize investment spending. BlackRock's diversified business and his history of successful execution, allows us to continue to invest when other firms may not be able to, well using our balance sheet to see new products, streamlining the organization to reallocate investments to strategic initiatives, making tactical technology or product acquisitions or leveraging our scale to re-price product for our clients, we are committed to seeking out the most efficient ways to growing our business. Earlier this month we made a strategic investment in our U.S. iShare core ETFs reducing prices to meet our client's needs for high quality long-term holdings. In doing so, we are taking steps to be the leader in the core segment by providing clients with the best quality and value of any ETF sponsor and maybe iShares a clear ETF choice for financial advisors, building portfolios under the new fiduciary standard. We are maximizing the benefit of our scale to drive the maximum value for our clients and our shareholders and we expect to see increased organic asset and revenue growth in the iShares' core series over time. We also expect this investment to drive growth across our broader range of iShares precision exposures where clients play significant value and characteristics like liquidity and tax efficiency. And finally we expect this investment to drive growth across our active business as we deepen our relationships with all our distribution partners. Our early results have been strong. Since the re-pricing action just last week, our U.S. core market share of net flows have grown by 25 points to 59% and our iShares outside the core have also been logging strong flows. iShare saw $51 billion of net inflows in the third quarter and year-to-date I'm speaking as of yesterday, close to $100 billion of inflows in 2016. Fixed income iShares continue to be a substantial growth opportunity for BlackRock and we achieved a significant milestone in the quarter by reaching $100 billion in our European fixed income ETF AUM. iShares is a world-leading ETF provider holding the number one share of U.S. European and global equity and fixed income ETF flows year-to-date. Going forward in a lower beta environment, alpha generation has the opportunity to drive greater percentage of overall investor returns. BlackRock saw a positive active net inflows $4 billion in the third quarter. Active flows were driven by our leading global fixed income platform where we have scale, product and diversity and strong long-term performance with 88% of our assets above benchmark or peer medium for the five-year period. The combination of active and index strategies will continue to play an important role in our client's portfolio and BlackRock has all the components unlike our peers as well as portfolio construction capabilities, risk technology and better portfolios. I've emphasized the importance of technology many times today. Technology is an essential component of adapting to our regulatory changes and more broadly a changing investor landscape. As advisors take on greater portfolio construction responsibilities in a fee-based account they are increasingly using BlackRock solutions sophisticated tools and risk analytics to build better portfolios. As a result we are seeing strong interest for our Aladdin for wealth our I retire platform and our future advisor offerings. Institutional client facing persistent low rates and searching for yield require a deeper look into their entire portfolio and BlackRock's technology can help them see clear and allocate more effectively. Aladdin continues to build momentum with institutional clients, and revenues grew over 13% year-over-year. We are committed to constantly innovating on our existing platform as well as thinking of new ways that we can serve our clients' needs with technology. This remains a key differentiator for BlackRock relative to any other firm in the asset management industry. In a time of significant change for the asset management industry, I believe BlackRock is better positioned than in any time in our history, and we've never had more opportunity working with the clients than we do today. We are at a pivotal point with uncertainty in politics, regulation in market likely to play out over the coming months. Our clients are apprehensive, but they are coming to BlackRock for advice, and our priorities remain helping them to meet their investment goals in all environments. We have a unique ability to use our scale, our breadth of active and index products, our global reach and our portfolio construction, our risk management expertise and technology advantages to meet our clients' needs, their evolving needs to drive their future growth and our future growth as a firm and future growth for our shareholders. Now let's open it up for questions.

[Operator Instructions] Your first question is from the line of Alex Blostein with Goldman Sachs.

Hi, good morning everybody. Hi good morning. So first, maybe we'll just start off with a DOL question. It's been a couple of quarters, and I guess, the distribution networks and the platforms had a chance to kind of digest the rules. And Larry, you alluded to you guys are working closely with your distribution partners on helping them adapt to the changes. So, maybe a little bit more color from the perspective of what kind of changes are you anticipating? Obviously, we saw the announcement from Merrill and Edward Jones a couple of months ago. But more specifically, I guess, with respect to number of products, fee structures and any more granularity, I think, will be very helpful.

I don't know that much more than what you just said. We witnessed the changes from Merrill Lynch and Edward Jones. It is very clear though, that the fiduciary rule is teaching how our distribution partners manage their clients' accounts, as you suggested and more stated by these public announcements, it's moving more to a fee-based relationship, less commission-based relationship. We also believe it's going to move more to a model-based relationship too where you're going to see the CIO offices of the various distribution platforms coming up with asset allocation strategies. We certainly believe that in the DOL rules, it's going to mean fees are going to be very important and that's obviously one thing we can say with certainty. We don't know how that's going to play out. But we do believe, as it moves more towards managed portfolios, utilizing more of the centralization of models and corporate and asset allocation, it's going to move quite a bit of money more towards passive strategies, utilization of ETFs. We do believe it'll systematically move assets away from active, and so we're trying to get prepared, but one thing we can say we're certainty in our conversations though, it leads to greater need of risk management tools. This is one of the reasons why we have adapted Aladdin, which, historically, was an enterprise system for large institutional investment organizations. While we now -- have now adopted for Aladdin for wealth that we could go down to individual accounts and allowing the adviser and the organization to look at every relationship they have through the lens of risk management. And we believe under the DOL rules, having that oversight is going to be imperative and this is one of the reasons why we developed this technology. We're in dialogues with many, many distribution partners already related to Aladdin for Wealth. We have signed up one institution already for Aladdin For Wealth. And we're in dialog with many more utilizing the Aladdin system for the navigation of their clients' investment strategies. So we look at this as a huge opportunity for us. We're in great position to navigate. I should add, I don't think any other organization has those capabilities and so it puts us in a great position. By having that position it allows us to have more dialog, not just more dialog for passive strategies but more dialog in portfolio construction and models and active strategies. So having this opportunity to be working with these institutions, on the navigation of risk management on behalf of all their individual clients, gives us -- will give us a unique opportunity to be working with these institutions in a way that we never had been able to before.

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Hi Craig.

Hi Larry. Good morning everyone. Good morning, Gary. So I just wanted to follow up the last DOL question. I'm wondering, have you tried to size up the potential money that could be in motion U.S. retail? And you're seeing a lot of money in motion outside of U.S. retirement, which is supposed to be the focus of the DOL rule, so really in traditional brokerage?

Let me give to Rob to answer.

So we have found there is such a significant amount of cash that's on the sidelines because rates are so low and equities have not returned what people have expected that the money that is potentially in motion is probably the largest. We've done studies to show that globally there's 50 plus trillion that's sitting in cash. And I don't think anybody knows how big that can be relative to the size of the markets. So depending upon changes in interest rates and changes in equity volatility, a lot of that money can come into motion. So it's not only coming into areas of retirement. It's overall. And the studies that we show range anywhere from 38% to 60% of clients' portfolios are now sitting in cash. So we think that a lot of that money will start to move once people, once we get through the election and once we get through the next decision on where interest rates are going to be.

Your next question is from the line of Dan Fannon with Jefferies.

Thanks, good morning.

Good morning.

I guess just to follow up on the pricing changes. Can you discuss the process of kind of the product selection and how we can think about your active product portfolio and potential pricing changes going forward to be more competitive as you highlighted in the DOL rule?

So that's a very large question. So first of all, on the ETF side, this is a strategic investment that we're making in the future growth of BlackRock. So where we focused and reduced our prices were in the U.S. iShares core ETF and that was to meet specific demand by [indiscernible] one of the high-quality. They're long-term holders and a lot of them will be purchasing these either directly or through models because of what you have just mentioned with Larry in the DOL opportunity. We want to be a leader in this segment, in the core segment. We want to provide the clients with the best quality and value of any ETF sponsor and making sure that iShares is the clear ETF choice for financial advisers that are looking to build their portfolios under the new fiduciary standard. Now when we talk about that in particular, 90% of our iShares, we have not changed the price on. This is really targeted at this specific segment that is very fee-sensitive. And as Larry mentioned in his opening remarks, we know that people like the brand. And now price is becoming in that segment something that's very important to be included in the models and focused on. So we responded directly to our clients in that specific segment. When it comes to the mutual funds, we have a pretty large array of mutual funds. We have lowered the pricing in some of our bond fund platform. We have 23 funds there. We took a look and we wanted to make sure that especially in this low interest rate environment, we are being responsive to our clients and our adjustments were in 14 of those funds, eight taxable and six municipals, which is about $23 billion in assets and we want to make sure that we continue to be top quartile manger, but also top quartile as far as expenses. So, we are watching what clients need in this environment and we are responding the specific segment that they were requiring us to.

Your next question is from the line of Brian Bedell with Deutsche Bank.

Hey, Brian

Hi. How are you doing?

Good.

Great. Just want to circle back on DOL maybe sort of the tempo of the changes that we'll be seeing over the next couple of quarters with implementation happening largely before April. And do you sense advisors are ready to make these changes right now from mutual fund to ETF, or do you think they really still in preparation mode in terms of those education and then understanding allocation better. Maybe you can link that in with Aladdin for wealth, distraction with your distribution partners and whether you think Larry how this going to develop around sort of robo platforms? Thanks.

Well, I think everybody still at wait and see attitude and yes we haven't seen they are doing incredible amount of preparation for this. I don’t think anyone wants to get ahead of this. This is one who have -- they have to make serious changes to the relationship with their FAs and their clients, they don’t want to be at competitive disadvantage with their FAs, one for another. So I think you are going to see a lot of [Kabuki] in which lot of people are going to be shadow dancing until they have to come up with the strategy. But I do -- behind the scenes, all are looking at many of the different possible outcomes could be a slow transition to more, what I would say managed portfolios or it's going to be sudden. I am under the view that the changes are going to be more rapid. I think most of my team believe those changes are going to be more evolutionary. And so I think there is even a debate here at BlackRock related to how these changes are going to be. But I do believe the legal responsibilities -- the legal responsibilities of each firm has under the DOL is going to probably move towards these changes. But let me be clear these are not our decisions; these are our distribution partner's decisions, each firm has to do whatever is the right strategy for them, under the new rules and new laws on behalf of the client. So and I am sure they're all going to be working on behalf of their client, I'm not trying to suggest they are focusing on their own specific needs. What we are trying to do with our scale and our platform and the ability to have a dialog using our active and passive strategy, but more importantly introducing a lot in for wealth we are helping our distribution platform to focus on what should they be doing in towards their implementation in the new DOL rule. I do believe one thing will be it's going to be constant though the need for more risk tools they are going to be imperative to making sure that there is better oversight to protecting the firm making sure they are living under the new DOL rules. I do believe you are going to see as you saw from Merlin, Edward Jones more managed accounts, but the key question that you asked Brian in the composition of the managed accounts, how little portfolio allocation be? Quite frankly we heard a whole ray of that I do believe overall cycle is going to be a much greater utilization in a passive strategies in ETF than active strategies, and I think that's where it's going. So, we believe because of our positioning Aladdin for Wealth and because of our ability to work with our distribution platforms and the utilization of beta and active strategies, we're in a very good position and that's how we're trying to position. Let me be clear. That's not our decision. We're responding to the ecosystem changes of our distribution partners. And we're trying to be additive. We have to be a partner with them. And what I can say is, at this time, we're in extensive dialogues with these institutions in terms of how they navigate it, and we believe we'll be able to play a role in their ultimate outcomes.

Your next question is from the line of Glenn Schorr with Evercore ISI.

Hi there.

Good morning.

Good morning. Maybe a quick follow-up. On this front, I don't -- I agree with you. I don't think anyone has done more or has more to offer the distributors than BlackRock. But at its core, the offshoot of all this, I think is distribution is harder to come by. There's tighter rules around it and distributors lose some revenues along the way. And the likely reaction is to ask for more from their asset management partners, whether it be commissions, revenue share, marketing support payments. So I'm curious if you agree with that comment that asset managers in general will be need to pay more to access the key distribution channels?

Yes, I think that's going to be pretty obvious going forward. When you have periods like this, everybody goes to their vendors, distributors and ask for some sort of big concessions. So with the DoL rule, certainly, there's more to be pressure on all of the vendors and all the expenses that people have. So for us, I don't think it means less distribution. I just think it means more efficient distribution and that pricing is going to be an issue. I expect that we, as a firm, are going to go to our vendors as well and expect some fee concessions. And then also as a company, we have to watch our own expenses. And I think you've seen that over the last couple of quarters that we're making sure that we're much more efficient. And there I feel very confident for our future, and this is because of our technology, we can be much more efficient than any other asset managers out there. So I think you're right on the mark. This is going to be a very good for the clients. And we have found in the history of BlackRock, when it's good for the clients, it's also good for us.

Let me just echo that. I think it's very important. If clients believe they have a fair opportunity to be in the market to build a better financial future for themselves, if they believe the Department of Labor rules gives them that security that people are working on their behalves, and they put more money to work and keep getting, moving money out of all this cash into bank deposits into the financial markets, we will be the best-positioned firm for that. So we welcome these changes. We welcome better, a better environment to allow our clients a just and fair and being involved in the global capital markets to help their financial future.

Your next question is from the line of Bill Katz with Citi.

Good morning Bill. I think we lost Bill.

Bill you line is open. Please go ahead with you question.

I was wondering if you could talk on the cash management side for a moment just in terms of now we have new rules in place, a lot of money motion coming into that. Can you talk a little bit about where you think the products ultimately land and the kind of pricing associated with that?

Well, Bill, we saw leading up to the October ruling, about a $1 trillion of money moving. I think this has been underreported, but $1 trillion of money has moved from prime funds to government funds. This is an incredible amount of money by one government change. I mean this is one of the great examples where government actions can truly change an ecosystem. And so we saw this huge movement out of prime funds to government funds. We were very well positioned to accommodate our clients on that. We saw about $60 billion in our own prime funds going into government funds, but the key thing for us was we actually picked up little more than 1% market share in these events and we had $15 billion in net inflows. We look at the money market fund industry as a great business. Obviously, we are earning lower fees in government funds than we did in the prime funds. And I think that's obviously a circumstance that everybody will be facing. But I do believe as clients feel more comfortable and as they navigate with their risk committees the whole idea of what is a prime fund, I think you will see money eventually move back into prime, not the same -- not the whole $1 trillion but I think as clients understand what prime funds are and that they can pick up more return with quite a bit less risk than they ever would have had in a prime fund because prime funds rules have changed quite considerably, too. How we report our NAV, how we report our positioning -- our position. So they're far less risky than they were in the 2000 to 2007 and 2008 environment. So I do believe it's going to take some time as clients become a little bit more circumspect about the difference of the two funds. In many cases, they're going to have to go to their risk committees to get a change because the fact that there is no certainty about a dollar NAV, some clients just can't do it unless they changed their rules. We are working with many clients right now on that, helping clients understand the trade-offs, but the knee-jerk reaction was very clear. People did not have time to focus on how to work with risk committee in terms of getting these changes. But I do believe, over time, clients will do that. We are working once again, this is one of the great characteristics of BlackRock. We have worked with our clients and helping them assess those types of risks and the opportunities. But clearly, from our opinion, when you start seeing changes in central bank behavior, when you start seeing widening credit spreads, the advantage of a prime fund versus a government fund may be quite large enough, which will accelerate more people seeking the differences and getting the changes from their boards, risk committee boards, and being able to invest their liquidity in a prime fund even without the constant dollar NAV.

Your next question is from the line of Brennan Hawken with UBS.

Good morning. Thanks for taking the question. So first, just a follow-up on Gary's point on the price cuts and the core ETFs being long-term accretive. Maybe, is there a time line or AUM threshold that allows you to cross into that accretion level? And then more broadly speaking, could you help us think about the profitability trade-off within BlackRock, right? Because generally, most folks agree that you'll gain share in your iShares and likely fixed income business but see pressure in Active Equity. And so is there a growth ratio in the AUM in between that iShares business and the Active Equity business that we could think about that represents a DMZ or breakeven line? Because I'm sure it's not just about revenue growth. It seems more complicated than that. Thanks a lot.

Sure, Brennan. So it's -- I would think it's there's a lot going on. I mean, we've literally spent the last five of the first six questions around change that's basically drive -- being driven by regulatory change and a whole host of other things in terms of the current environment. And I think that we look at the business in its totality more broadly. We're not really looking at a product-by-product analysis and a breakeven on a product-by-product analysis. It's really about the diversification and the breadth of the entire platform and how all of the products fit together at the end of the day into a set of solutions for the clients. We're constantly making decisions in the best interest of the clients and we're trying to basically bring forth the benefits of the platform, whether its breadth, its globality, or its scale to basically drive better outcomes for clients and at the end of the day, better outcomes for our shareholders. So while we are mindful when we talk about see a radically breakevens, which look you can calculate those as well, you know what the change in the fees are and can basically do the math, to see how quickly we can capture the incremental revenue. It’s really much more importantly about balancing everything that the firm has offer -- our top ten manager and active top ten manager and possibly top ten manager in ops are all wrapped up with the differentiation of a laden and the technology platform, really to drive a much more comprehensive set of solutions ultimately for the clients and to leverage the scale not only on behalf of those clients but also on the behalf of our shareholders at the end of the day.

Your next question is from the line of Michael Cyprys with Morgan Stanley.

Good morning.

Good morning. Thanks for taking the question. Just wanted to shift gears a little bit and can you just talk a little bit about seed capital how are you deploying that today versus say one to two years ago? And just given some of the limited resources that you in the industry have on seed capital just curious how are you thinking about maximizing that value and what are you prioritizing today?

So our seed capital portfolio today is in excess of $1 billion. We continue to grow that as we think about our commitment to invest in the business first, that’s a significant part of our store leveraging, our goal is stability of our cash flow to invest in products that we think are going to drive again better outcomes for our clients and growth in the future. I would say that we do believe that -- if you look where we are receiving money, it’s basically again today significantly more on multi asset, significantly more on fixed income trying to be smarter around cash solutions that may basically change in future. Obviously, our liquid business which fits the formal co-invest that appose to what we call seed. But we are really trying to basically think two, three years down the road to trying figure out where the new blockbuster opportunities are, in a way that can really differentiate the strengths that we have obviously factors, smart-data in terms of our style advantaged products and the like we are also giving a lot of seed capital. We really want to try and leverage again back to scale and stability. You know we think that we can seed in significantly larger amounts than the potentially our competitors as a function of our very stable cash flow which is in access of $3.5 billion a year. And we think our ability to seed more frequently and in larger scale, allows us to show greater commitments of the product and reduce to time to market in a way that allows us to leverage market opportunity significantly quicker.

The next question is from a line of Michael Carrier with Bank of America.

Good morning, Michael.

Good morning, thanks guys. Larry we spend a decent amount of time on DOL, I just wanted to shift over to some of the SEC proposals when we got the liquidity rule? and then also in Europe MiFID II just wanted to get your updated thoughts any I guess hurdles that you see for BlackRock and the industry, I know some EPS got exemptions on the liquidity rule, but just your thoughts on the liquidity rule and then also on where MiFID II is headed?

Well this is consistent math and we consider everything else we see with some of the regulatory changes. If the regulatory changes and had clients really needs to invest where big beneficiary of it. So we have been very supportive over the rules that has this investor protection. We had circumstances earlier past few years related to liquidity and the impact of some of the mutual funds where there had be -- that would be frozen. Obviously it hurts all industry, it raises questions of uncertainty. So the SEC try to find a solution. I think it found a pretty good solution under the circumstances. I also do believe we welcome the SECs role in this. We think the SEC needs to a play a larger role and hope ensure the sanctity of the capital markets as more and more money moves to this capital markets, the need for safety and the capital markets always increase. So we work very closely with the all regulators in Europe related to MiFID and MiFID II and we are -- we work very closely -- we provided comment letter. I can’t. So we work closely -- that would be a little bit probably the wrong way of putting it, but we provided our input in helping the regulatory agencies to come up with their solution. We believe MiFID II liquidity rules of the SEC, as I said earlier is going to lead for greater needs for risk management tools. And clearly, if we have rules like liquidity rule, as I said, it increases the need for risk management, which is pointing up to BlackRock's strength. We built this organization technology with all these things in mind, making sure that we focus on the protection of our clients. I don't think it changes that much in terms of investment management behaviors in terms of how we invest. We have never been on the edge of investing in illiquid products in our 40 products or use products. And so it doesn't change our behaviors at BlackRock at all. It may change some investors' behaviors. Obviously, some of who were emphasizing very illiquid buckets in their platform. But both we're MiFID II is going, where the liquidity risk rules are going with the SEC, these are just a work in progress. I believe we are going to see more and more regulatory oversight of our capital markets, ensuring that we have the proper safeguards for investors to invest. And then that's critical. I can't say enough about the need to making sure we have the proper safeguards. If we have the proper safeguards, all of the money that Rob Kapito was talking about sitting in the sidelines would be implemented. I don't believe that people are sitting there because they're just worried about the next event. A lot of people just don't feel like investing has been that fair to them. And by putting these rules in place, it allows more retail investors to feel that they are protected. They have more safety. And through that safety, they probably have a little bit more security, which probably will lead to greater investing into the capital markets. And we'll all be benefited by it. The -- but the details related to the SEC liquidity rules; obviously, it's a 1,000 page rule. It's going to take our lawyers and every lawyer a long time to make sure we understand of all the intricacies of how we're going to implement it and how we're going to manage it. It is very clear, and I brief reading it means a lot more risk management needs, making sure that you can live under these new liquidity rules day to day and abide by them. So it requires greater risk tools, which we have. Even about a year ago, we added a lot of liquidity components to the Aladdin risk models to helping our portfolio managers navigate this. And then in terms of MiFID, this is going to take time working with European regulators. This is scheduled for 2018. So we do have some time before it's implemented. And hopefully we'll have better clarity on making sure that we're living up under these new rules. So as I think I've said earlier all of this will lead for the asset management industry probably a greater need for reliance on risk tools, which will lead for some of the asset managers a greater expenses to build those tools. I think I'm losing my voice now. So I'll end it there.

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

Yes, please. I think our third quarter results once again highlights the benefits of our scale. It certainly benefits why you need diverse -- diversity of product and also I think it also speaks quite loudly why you need a global platform. And I think BlackRock has that platform of scale, diversity of products and global nature. I would say probably the biggest theme that I could think about in terms of the third quarter was we're seeing an impact on the strategic investments we made in our platform over the last few years. I think it is because of those investments we made, the investments we made from BGI acquisition, the investments we made in the Core Series in 2012, the investments we made in our infrastructure products, our ESG products, our investments now in Big Data and factors, our investment now in technology related to Aladdin, Aladdin for wealth, our investment in FutureAdvisor, I believe it all speaks loudly that we're staying ahead of the needs of our clients, trying to anticipate the needs. And I do believe the third quarter, when you think about how we handle this adversity of the markets, that we've been able to position ourselves quite well in this environment. I could certainly say again these investments we made and the investments we're going to continue to make, it's allowing us to have a deeper, broader relationship with our clients in retail and a deeper and broader relationship with the client institutionally. We need to continue to stay ahead of our clients' needs or we're not going to provide the service to our clients. So that's the paranoia that BlackRock possesses, staying in front of our clients' needs and trying to respond to our clients needs. And I think that is the key characteristic and the key differentiator that has positioned BlackRock so well in the past and why I think it's going to be a key characteristic, why we're so well positioned for our future. With that, I want to thank everybody for joining us this morning and your continued interest in BlackRock.

Thank you. This does conclude today's teleconference. You may now disconnect.