Good morning. My name is Marcella and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the BlackRock Incorporated Second Quarter 2019 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 period. [Operator Instructions]. Thank you. Mr. Meade, you may begin your conference.

Good morning, everyone. I am 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 lists 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, I'll turn it over to Gary.

Thanks, Chris. And good morning, everyone. It's my pleasure to present results for the second quarter of 2019. Before I turn it over to Larry to offer his comments, I'll review our 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. Global trade tensions once again escalated in the second quarter and market volatility followed. US equities climbed to record highs, though domestic equity markets moved down 7% in May only to increase 7% in June, emerging markets remain challenged and the 10-year treasury bond traded below 2%. Clients accelerated rebalancing and derisking activity, shifting out of equities and into fixed income and cash. BlackRock's globally diverse investment platform, combined with industry-leading risk management and portfolio construction technology, was purposely designed to not only withstand today's market volatility, but thrive in it. Our strategic positioning fosters deeper partnerships with clients, enables us to meet their goals in a variety of market environments, and drives more consistent and differentiated organic growth. BlackRock generated a record $151 billion of total net inflows in the second quarter or 9% annualized organic asset growth as clients once again turned to BlackRock for solutions-oriented advice to meet their long-term investment needs. Lower total organic base fee growth of 3% reflected mix change favoring lower-fee fixed income and cash assets and the impact of volatility-driven outflows from higher-fee iShares financial instruments and precision exposures during the month of May. Second quarter revenue of $3.5 billion was 2% lower than a year ago, driven in part by lower securities lending revenue and lower performance fees in the current quarter. Including $61 million of costs associated with the successful launch of a closed-end fund, operating income of $1.3 billion was down 11%…

Thanks, Gary. Good morning, everyone, and thank you for joining the call. For several quarters, I've spoken about the increasing depth and breadth of conversations BlackRock is having with clients. And this quarter's results demonstrates how those conversations are resonating, leading to significant strategic wins. We generated $151 billion of total net inflows in the second quarter, representing 9% annualized organic growth. Inflows were driven by a record activity in fixed income and cash and were positive across all client types, asset classes, regions and both active and index strategies as clients assessed the full breadth of BlackRock's platform in a more volatile environment. The deliberate investments we have made in BlackRock's investment and technology platform are manifesting in the quality and quantity of our engagements with clients. While our financial results are not immune to market volatility, as Gary described, we are having comprehensive conversations with more clients globally than ever before about outcomes and solutions, asset allocation, portfolio construction and investment and risk management technology. The culmination of these capabilities and expertise into a one BlackRock approach gives us a distinct and unique global perspective and gives a distinct voice with so many clients around the world, and it's translating into a larger, deeper strategic mandates for BlackRock. Following improved investor sentiment and global equity market rally through the start of year, macro and geopolitical uncertainty once again returned. The US-China trade tensions flared, renewing concerns about a slowdown in global growth, emerging markets equities have been negatively impacted and are down for the quarter; at the same time, US equities have hit a record high. In Europe, while uncertainties around Brexit continued to weigh on investor sentiment, a focus on interest rate policy has also led to an unusual situation where a strong demand for safety has…

[Operator Instructions]. Your first question comes from the line of Ken Worthington from JP Morgan.

Good morning, Ken.

Hi. Good morning. Thank you for taking my question. So, really going after cash management and fixed-income sales, hoping you could talk about the pipeline for both. So, clearly, 2Q was huge. There was a sort of a change in the rate outlook, lots of repositioning. What portion of that repositioning might be left as we look forward there? And then, it seems like BlackRock was a disproportional winner in both fixed income and cash strategies. You did mention some of the drivers in your prepared remarks. But if you could, just maybe highlight the factors that you see which may have driven not only just good sales, but market share, win share as well.

Thank you, Ken. So, I would say, what we are seeing more than ever before, our clients are finding the management of fixed income more difficult if they in-house manage it. They're looking for deeper relationships, to have either windows to the market by employing firms like BlackRock to manage part of their portfolios in fixed-income and, in some cases, now they're looking to outsource their entire platform of fixed income. And they are looking for more of a technology solution as a component of that. And it just leads to what I've been saying each quarter, Ken, having this holistic outcome orientation with our clients is leading to these type of broad conversations. We have many deep broad conversations ongoing now and we don't see that type of behavior dissipating in terms of these types of big types of opportunities. But a part of that also is just a systematic approach to fixed income where we're able to provide both index or ETF solutions alongside active solutions. And I do believe they coexist together. We are seeing more clients who employing ETF solutions for fixed income alongside active solutions. And so, having that comprehensive conversation, having the ability to source more product – and that's obviously in this environment now, smaller organizations are having a harder time sourcing, whether it's in the private credit markets or even in the public credit markets. And so, this is where scale is becoming even more important and also having that global footprint in terms of relationships is building these types of flows. I'll let Rob talk about the cash side, but we've been saying this is a huge competitive opportunity for us and we think much of this has started to manifest in this quarter and we believe in the quarters to come.

So, let me just accent Larry's comments. So, the depth and the breadth of the conversations that we are having with clients is really resonating now and leading to these large strategic wins because clients are looking for a long-term strategic partner. So, these conversations are about understanding the investment challenges they have and helping them execute strategic portfolio construction decisions. And we have now the unique ability to offer a holistic solution. And this has to include technology, portfolio construction, modeling capabilities, have various asset allocation strategies that involve both passive and active strategies and includes trading and includes analyzing credits and it also includes balance sheet management. So, all of these things have been more significant to get the strategic fundings than ever before, and I think the result you saw in this quarter really reflect this. And our clients are putting out an even greater premium on this differentiated value proposition that we offer. Part of this is also cash. We saw $26 billion of cash management net inflows in the second quarter and we are now number three globally as a money market provider. And these flows come from both large separate accounts wins and strong flows into our institutional money market funds as we continue to innovate, leverage scale and deliver digital distribution and risk management solutions. So, as a reminder, more than 95% of BlackRock's cash assets under management is institutional where we are differentiated with our scale, risk management and technology. So, we believe this differentiated set of cash offerings, including money market funds, separate accounts, CTFs, ETFs and other short duration strategies help us to serve our clients. And lastly, I would say, in cash, we are transforming our cash management business by delivering distribution and risk management technology through a portal that we have called Cachematrix and also through Aladdin. So, we are creating a technology-first distribution strategy, and this is driving our success in cash as well as holistic approaches to get these large strategic wins.

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

Hi, Bill.

Good morning, everyone. Thank you very much for your comments and taking the question this morning. So, Larry, just want to step back a little bit and I was wondering if you could sort of help sort of frame out what gets the active equity market going again. And within that – at least from a flow perspective. And from within that, how does products like Precidian with ActiveShares play into that and then what might be the risk to the passive business, if any?

Let me talk about active equities and I'll let Gary talk about Precidian, but I wanted to say one comment about what does it do to passive ETFs. We had active positive flows in our equity business last quarter. It was in the form of a closed-end fund where we raised $1.6 billion and we saw good inflows in our scientific active equity team where we had great performance. Where you see with other assets manager where they have flows, it's all performance-based. You have to prove, over time, value for their money. This is one of the big things we've always been talking about. If you cannot show the value or the fees for their return, you're going to continue to see inflows in other types of products. You're going to continue to see more flows into alternatives because of the inability of getting active alpha in equities. And so, when you think about a holistic approach, pension funds or insurance companies, they allocate their active risk across a whole spectrum of investment. If they don't believe they could get the value for their money in active equities, they're going to move that where they could get active alpha into more illiquids. So, that's the trend you're seeing. And so, you're seeing more of a transformation in the alternative space where they're getting more active alpha and you're seeing that's been barbelled by a predominance in ETFs. So, if more and more managers can provide value for their money in terms of active alpha returns after fees, then we're going to see systematic more flows back into active in the equity side. And so, I'm not here to project that the whole industry active is going to have active returns. I think it's harder and harder as I've been…

So, Bill, I'll say just two things and then we'll move on. One is, obviously, BlackRock is a strong proponent of industry innovation and anything that basically enhances investor access to the markets, we're all for that. And, secondly, I would say that our goal for the future is to be wrapper agnostic. So, to the point Larry made, if an investor wants a passive product, a retail investor, they can choose between an index mutual fund or an ETF. If it's an institutional account, whether it's a co-mingle trust fund or a separate account. And I think similarly, to the extent an investor chooses they want an active product, we similarly think, if the future holds, that they can choose between a traditional mutual fund or an ETF. And that's good for investors, then we'll, obviously, make sure that we position ourselves to be part of that industry growth. Early signs I think are still out. There are some benefits versus a traditional mutual fund for an active ETF in the concept. There's maybe more tax efficiency and less cash drag, but, obviously, there are still some complications as it relates to transparency, the implications that transparency has for creates and redeems and bid/ask spreads and how that instrument is going to trade. And so, I think it's early days. We're going to continue to watch the development of the product itself and how it relates to the ecosystem around it and we will, ultimately, make the best decision for our investors going forward.

Your next question comes from the line of Patrick Davitt from Autonomous. Your line is open.

Good morning, Patrick.

Good morning, guys. I think, last quarter, you mentioned nine clients ramping up on Aladdin for Wealth and that it was still kind of early days in terms of seeing meaningful, identifiable, incremental organic growth from that. Could you update us on that number and maybe to what extent you're seeing more line of sight to increased adoption of BlackRock product through that ramp up process?

So, the biggest opportunity for Aladdin is to make it the language of portfolio construction for wealth managers, for financial advisors and also for individual investors. So, Aladdin is currently live with 11 clients globally. This is Aladdin for Wealth. We continue to see very strong client interest. I would caution you to say that, when we get an Aladdin assignment, there is sometimes three, could be as long as six-month implementation part of that before they come alive. And there's also, of course, ramp up fees that we have until they get large and they start to grow. So, we are seeing more and more demand. And, quite frankly, for every one client that takes on Aladdin or Aladdin for Wealth, it creates demand to become the standard in how people are going to look at technology. And what this does is simply brings risk transparency and portfolio construction capabilities, both in the institutional market and in the wealth market. And also, when we're having conversations about our risk technology, it also piques their interest in what we can do with their portfolios and balance sheets and adds on to other business that we might do with them and, quite frankly, vice versa. So, when it comes to Aladdin for Wealth, there is a whole education process for advisors to use the technology and you can have any app you want, but you actually have to use it. And we're finding the increased interest is not only because of the risk technology it provides, it's becoming an asset gathering tool for these advisors. So, our expectation is it's going to grow. We have more client interest in it and it's, I think, going to continue to grow as it's been growing in the past for us.

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

Great. Thanks very much for taking the question. If you could just guide into the nature of the active fixed income institutional mandate, I know you touched a lot about this on this, Larry. But if you can talk about maybe what do you think has changed for BlackRock in offering holistic solutions. Obviously, you guys have been well-positioned for that for quite some time, but you seem more optimistic on those types of mandates going forward. So, is it the technology that's linking in that's actually generating this growth or is it something else? And then, just added to that is the fixed income iShares usage as substitutes for bonds. Are you seeing that as a fairly permanent secular trend that should help the fixed income grow quarter-in, quarter-out?

Thanks, Brian. I'm going to let Rob answer most of it, but this really is just a very vivid example of our positioning as an organization globally where our scale is bringing the ability to source assets, our consistency in performance, our agnostic ability to provide passive and active in fixed income. And so, it's really manifesting now as a deeper product conversation. But, Rob, why don't you…?

Yeah, I think the quick and dirty answer is just that they need a strategic partner. It's not about just filling or checking a box with one particular product. So, when you can go and you can provide the technology to them, you can provide opportunities for modeling portfolios, portfolio construction, when you can give that answer and have the products in-house to give them the appropriate asset allocation, whether it be passive and active, whether you can actually trade and get the allocations to provide them the products that they need, whether you can do the credit work on their current portfolio and improve it, then whether you can actually look holistically depending upon what type of client it is and help them with balance sheet management because, in a period of low interest rate, every basis point counts. And that's were also cash comes in to be able to provide the appropriate allocations in that balance sheet to improve it or the portfolio itself. Really makes a difference in a low interest environment. So, that's where we're seeing the interest in having more dialogue with us because I think this approach is unique in our industry. The second part is really what's driving fixed income to go more and more into an ETF structure. And you're going to hear a lot from BlackRock about this because there's really four or five different reasons. One is, there is an evolution in portfolio construction and millions of people are actively using fixed income ETFs in new and innovative ways to achieve a variety of outcomes. So, keep in mind, it is still a great way to derisk your portfolios. It is a good way to have more liquidity, more transparency, more diversification and better tax. It's just a better wrapper.…

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

Hi, Craig.

Hey, good morning, Larry. So, I wanted to see which of your recent investments in digital tools are providing BlackRock the biggest competitive advantages in our clients? And also, when you take a step back and look at your major competitors in financial services and firms that also have the ETF businesses like the Vanguard, Schwabs, JP Morgans with digital direct-to-consumer distribution platforms, what are your thoughts in entering the wealth management space at some point?

Gary?

I'll give you an update on our investments. I think, obviously, we've made a number of minority investments, Craig, which are definitely part of our capital management strategy. I think we are looking to use our balance sheet and the stable cash flow that our business generates more aggressively to basically position us to effectively learn and partner with a number of very innovative companies without necessarily having to take full control day one. I think it basically helps us add value to their business and, ultimately, derisks our strategy of ultimately having the option to combine with those companies over time where, frankly, they may benefit from their unique culture and basically our broader reach. So, today, we've basically got a number of them. Obviously, iCapital and Scalable are most well-known. Again, I think Scalable kind of expands our global advisor capabilities and what we've done with FutureAdvisor into Europe, which I think is very successful. iCapital, obviously, is more on the front end of the alternative strategy and will at some point really, whether we own it or not, will basically pair very nicely with what we're doing on an eFront-Aladdin technology combination. We've, obviously, done other things even more unique and our minority investment into Envestnet, I think, has been incredibly beneficial, not only in terms of the fact that the stock has gone up significant since we bought it, but, more importantly, it offers an opportunity to get Aladdin on the desktops of thousands and thousands of RIAs in a way that effectively helps them not only benefit their own practices, but helps distribution of our underlying asset capabilities. And then, there's a number of smaller issues, smaller companies, whether it's Embark or Acorns, again, which gives us an opportunity to learn about the evolution of distribution in a more technological way and to basically help these companies drive more value. As it relates to the issue of going direct, we have no intention of going direct. We are an intermediated model. We partner with lots of companies who distribute our products. And, frankly, all of the investments that we're making are intended to basically be beneficial to our shareholders and to clients, but, frankly, respecting the fact that we are an intermediated model going forward. Larry?

And I would just say one on a more holistic basis. When I write my CEO letters, I focus on the societal changes. And we are seeing huge societal changes with more millennials and more Gen X and they are much more adept in using technology and we need to be at the forefront of helping them. I do believe the retirement crisis in America is a component of lack of financial literacy. And so, anybody – it is all our respective jobs is to use technology to improve financial literacy and improve better transparency for people who are investing. We need to take the fear out of managing of money for most people. If we could reduce that fear of management of money, I think the outcome will be leading to more people putting their money to work, and that's one of the structural problems we see in Europe and other parts of the world. And so, to me, it is only – it's going to have to be through better and more unique technology, and that is what's driving us to try to provide leading technology, Aladdin for Wealth, to create more transparency. When you think about the movement, especially on the advisor side with more and more movement toward illiquids, when you think about iCapital and then eFront, if we could provide better transparency and information on the illiquid side alongside Aladdin for Wealth, it will lead to better financial literacy towards investing in illiquids. But it will probably lead to better outcome investing for everybody. And so, when you think about how we are trying to design our technology and our technology offerings, it is all – the foundation is some of the things that I write about and how we can then take this and really build a unique position in all those societies we work in in terms of trying to provide better financial literacy, better financial outcomes. And so, that's the entire foundation of what we're trying to do.

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

I want to thank everybody for joining us this morning and for the continued interest at BlackRock. Our strong second quarter results is really linked to really these deliberate investments we've made over time. And what I've been continuously talking about, our deep partnerships we've built with clients globally, being footprinted globally by providing a deeper purpose in all the communities we operate. We see meaningful opportunities that continue to leverage our differentiating scale. BlackRock's purpose of trying to help people having and achieve better financial outcomes. We're trying to use our leverage to invest in our investments and technology capabilities for the ultimate value creation for our clients. And through the value creation for our clients is going to lead to longer-term deeper value for our shareholders going forward. Everyone, have a good summer. Hopefully, people have some time to take off and we'll talk to you in fall.

This concludes today's conference call. You may now disconnect.