Good morning. My name is Jerome, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated Third 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 third 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. The third quarter was once again marked by significant market volatility associated with ongoing global trade tensions and geopolitical uncertainty around the world. While US equities finished the quarter up 1%, emerging market equities ended the quarter down 5% and the US dollar continued to appreciate against the euro and pound. As we have seen in previous periods of market volatility, industry flows slowed in the quarter and clients continued to rebalance and derisk favoring fixed income and cash over equities. Even within equities, investors demonstrated caution, shifting from momentum to value and favoring high dividend and low volatility funds. BlackRock's business model, however, continues to work as well as it ever has. Over the last 12 months, we have generated approximately $350 billion or 5% total organic growth. Our fully integrated One BlackRock business model was purposely built to bring together the entire firm to meet client needs in today's evolving ecosystem. Our globally diverse investment and technology platform, including our risk management and portfolio construction tools, is positioned to deliver not simply products, but comprehensive solutions to clients no matter the market environment. We remain focused on thoughtfully investing in our business for the long-term and capturing growth in areas of highest client demand. These include iShares, especially higher growth and higher fee segments like factors, fixed income, sustainable, and megatrend ETFs, illiquid alternatives, and technology where we continue to evolve Aladdin's multi-asset analytics and portfolio construction capabilities. These investments…

Thanks, Gary. Good morning, everyone, and thank you for joining the call. More than ever before, clients are looking for asset manager partners who understand their whole portfolio and investment goals. They want partners who can provide insight in the context of a complex and changing investment landscape. And rather than just sell products, they're looking for asset managers who can deliver solutions that meet their financial objectives. In the third quarter, a number of macroeconomic and geopolitical events drove global market volatility and heightened investor uncertainty. BlackRock's differentiated model continues to generate strong results. By always looking ahead to recognizing unmet client needs, we have positioned BlackRock with the diversity, scale and global full portfolio perspective to help our clients navigate their investments in all market environments. As Gary mentioned, we generated $84 billion of total net inflows, showing strength in many areas across the combined active and indexed platforms. We increased revenues by 3% and operating income by 7% year-over-year. During the third quarter, geopolitics were once again a primary driver of markets, impacting investor sentiment. Global market index sold off, had a tumultuous August as the US treasury yield curve inverted and trade tensions escalated. However, markets reversed course in September. And following a significant rotation out of momentum stocks and into value that had been building over the last year, US markets achieved their greatest year-to-date gains in more than two decades and averaged 3% higher sequentially in the third quarter. Meanwhile, even with a partial recovery in September, emerging market indexes averaged 3% lower for the quarter, a 6% divergence in these markets. Fixed income, the low and negative interest rate environment persists. In an effort to extend the economic expansion, we're seeing unprecedented synchronized signs of intervention by central banks globally. For the first…

[Operator Instructions]. Your first question comes from Craig Siegenthaler with Credit Suisse. You may ask your question.

Good morning, Craig.

Hey. Good morning, Larry. I wanted to get your perspective on how the commission cuts over the last two weeks at the e-brokers will impact both distribution and also the overall competitive dynamics on these US e-broker platforms. And also, any impact as we think about either flows or the underlying economics still?

I'm going to let Rob Kapito answer that question, but if you could see my face, I'm smiling at the opportunities.

So, Craig, the commission-free trends have been very positive for iShares. And as Larry mentioned in his opening remarks, the elimination of barriers to investing simply means that more and more investors are going to have the ability to use ETFs. And as the ETF market leader, this has got to be good for BlackRock. More clients than ever before have access to the value and quality of iShares funds to hopefully achieve their investment goals. So, commission-free trading is actually accelerating ETF flows in the two fastest growing US wealth channels. One is the US RIA and that represents a $5 trillion market that has grown at a 10% compound annual growth rate. The other area is the US direct investors, and they represent $7.5 trillion in market that has grown at a 10% compound annual growth rate. So, our share on the e-broker platform has expanded since the commission-free trends began, and these segments are becoming a larger growth engine for BlackRock overall. So, we're confident this will increase the number of investors using iShares as an essential part of their portfolios, and with our focus on quality exposures at very good value, we think that we will continue to lead the industry. As you know, global iShares generated $42 billion of net inflows, representing 8% annualized organic asset growth, and these flows were driven by growth in fixed income, core, factor, and sustainable ETFs. So, just to reiterate, because this is important, fixed income ETFs are a technology, and they're accelerating the modernization of bond markets and had a very good quarter with $24 billion of net inflows led by treasuries, mortgage-backed and high-yield corporate bond funds. We are also seeing clients increasingly adapting shorter duration fixed income ETFs as a substitute for cash in their portfolios. On the factor ETFs, we saw $9 billion of net inflows as investors sought resilience in their portfolios and defensive positioning; for example, in our min vol factor ETF. The sustainable ETFs saw $4 billion of net inflows as we see increasing client demand for achieving sustainable outcomes alongside financial returns. And as Larry mentioned, iShares captured the number one market share of global, European, core, fixed income, factor, and sustainable ETF flows in the third quarter. So, this is just another way that we think is going to increase interest and demand for ETFs for our investors.

I'd just add one more thing. Rob said it and I said I think in my prepared talk. Having commission free for low duration makes ETFs a great alternative to bank deposits, a really good solution towards money market funds. And so, a commission free in the fixed-income realm – cash and fixed income is a real opener for so many more participants.

Your question comes from Alex Blostein with Goldman Sachs. You may ask your question.

Hi, Alex.

Hey, Larry. Good morning, everyone. Just building on the last question, so commission-free ETF trading accelerating growth into ETFs makes total sense. I was hoping that you guys could comment on some of the economics that could come out of this. In particular, I was curious how the payment and potential savings really from reinvestments maybe of some of the payments that you guys are currently making to some of the platforms could come through, whether or not that's a margin improvement dynamic for BlackRock or is that an area of additional spending for other platforms or lower management fees on some of the ETFs? So, maybe you could help us kind of flesh out the economics a little bit better. Thanks.

So, let me just say one thing. Our relationship with Fidelity, as I kind of alluded to it, is as strong as ever. Our relationship is way beyond ETFs. It's about education. It's about working with their platform. And so, our relationship with Fidelity is unchanged, if that's what you're trying to allude to, related to what we pay them and other things. We have a great relation with Fidelity. We have great opportunities looking forward with them too. And I'll let Rob – go ahead.

And we have other distribution agreements. They're not impacted by this. It really just simply gives us more access, and since we are already a very known commodity to these distribution groups, this really only enhances it, and it really is not impacting the fees that we are charging on our ETFs . This is a way for our clients to get in commission free to trade, which is very important as clients have moved more away from individual stock-picking to a portfolio construction and are using ETFs as a major tool in that portfolio construction. So, getting into it is where they're saving the money. It's not really impacting our fees. Maybe Gary wants to add to that.

I think you guys both got it. I don't think there's any question this is a great outcome for well-branded, scaled ETF providers. And we're going to continue to prosecute our strategy as we ever have. But I don't see that there's any impact on our pricing structure as it relates to ETFs from this move.

Your next question comes from the line of Mike Carrier with Bank of America. You may ask your question.

Good morning, Michael.

Good morning, Larry. Just given the strength in alternative flows this quarter, I wanted to get your view on the outlook and how you're positioned to grow, given rising allocations in the private markets. Maybe some of the near-term challenges we're seeing with private companies looking to go public.

Well, I think on one segment, private companies are having problems. And that's more growth-oriented, technology companies that are having problems going public. I don't see the overall market is in much trouble. But related to BlackRock and alternatives, as we said for a number of years now, alternatives is a strategic priority for BlackRock. We're now up to $126 billion in liquid and illiquid strategies. We manage now $71 billion of illiquid AUM across infrastructure, real estate, private credit and now LTPC. We raised $5 billion the last quarter between commitments and wins. And we raised over the last three years $46 billion, doubling our AUM in the category. I also believe, and this is one of the fundamental reasons why we think technology connects and helps us in flows, our acquisition in eFront, obviously, it's going to make the Aladdin system even more robust which I talked about, but eFront also gives us a greater ability to penetrate in terms of illiquid alternative sales. And so, we truly believe there is a deeper connection between what we're doing in technology and then the illiquid alternatives. And this is consistent with all our – with the entire BlackRock platform. We have consistently differentiated ourselves in the fixed-income universe for now 30-odd years by having risk technology. After the BGI transaction, we added all of the sleeves of technology for equities and that became a bigger component of what we're doing. And now, through the eFront acquisition. It really does help us having a unique perspective and a unique ability to integrate what we're trying to do in terms of illiquid alternatives. So, you're correct in saying, we're seeing more and more utilization of alternatives as an asset category. We know many clients are moving from 10% to 12%. Some…

Your next question comes from Bill Katz with Citi. You may ask your question.

Hey, Bill.

Good morning, everybody. Thank you for taking the questions. So, maybe a two-part question if I could. I guess, the first part of it is, as you think about your spending outlook into the new year, you highlighted three different areas – alternatives, technology and passive – where are you in the respective growth cycles as you sort of think about year-on-year increase? And then, secondly, Gary, you mentioned that you step into the stock in August when you thought about relative value. Can you sort of clarify, when you say relative value, how are you thinking about that, what would be the multiples to the group to the market? I'm sort of curious of your – at present to which you're seeing that opportunity.

Sure, Bill. So, in terms of your spending question, was it a question as we're thinking about the New Year, is that how you're thinking about it?

He can't answer that.

Okay. Well, I'll just assume it's a question. So, yeah. I think – look, we're, obviously, very mindful that we're in a market environment that makes predicting beta or counting on beta in a lower return world, given where volatility is, getting where divergent beta is, where fixed income markets are more complicated. So, we are obviously more aware than ever that we need to basically continue to invest in our major engines of growth. We highlighted alternatives. We highlighted technology. We highlighted ETFs. There's obviously much more beyond that, but those are the three that are incredibly critical priorities for the year and we are going to seek to get as much investment dollars into those businesses as we can going forward, which means, given our commitment to continue to be margin aware that we're going to reallocate as aggressively as we can to make sure that we are being mindful of both margin and long-term value creation for our shareholders. In terms of the second question, which was – what was the second part of the question? Oh, the capital return. Thank you. In terms of capital return, I think you mentioned a number of them. We look at value relative to our peers. We look at value relative to the market overall. We look at value relative to what we believe our growth prospects are and we're constantly trying to basically see where we think it makes sense just given some of the – the market goes down and sell asset manager mentality comes from, where were we think there's some of valuation opportunities that make sense for our shareholders going forward. So, we look at all three investments. Absolutely relative.

Your next question comes from Michael Cyprys with Morgan Stanley. You may ask your question.

Hi, Mike.

Hey. Good morning. Hey, thanks for taking the question. Just wanted to dig in a little bit more on low and negative rates. With rates so low and going lower across the world and negative rates in some parts, I guess as we look out over the next couple of years, how do you see that impacting the asset management industry just in terms of how you're managing the business, how you structure portfolios, the impact this could have to fees and asset allocations as well. And just maybe a second part related to the asset allocation, we've seen a lot of flows into fixed income, but with rates so low, at what point do you see an influx of flows into equities, just given return rates are so low? What's the catalyst for equity inflows?

Let me just start off. We built the model of BlackRock really to be able to work with our clients in risk-on, risk-off environments, low vol, high vol, and the key is working on their long-term solutions. And all the ins and outs of markets, let's be clear, it's on the margin for most investors. It's not big giant changes. They may reallocate 4%, 5%, 6% of their portfolio and navigate around that. At the same time, much of the flows, maybe they're outsourcing more and more of their portfolio. They may be looking for – they may be consolidating managers. But I'd say the most important thing that – how we've designed the organization is to make sure that we have the diversity in the platform, so we could be the best we can as a solution provider to our clients. The other thing that we're try to drive is making sure that not one asset class drives our business. And so, in answering your question about low or negative interest rates, it appears they're going to be with us longer than I think we all expected at the beginning of the year. And with that, I think client trends have been to move still to de-risking until they have some sign as to where they should navigate. At the same time, clients on the margin are still as a de-risk in some categories. They're looking to put some of that money to work in higher risk or less liquid strategies like illiquid alternatives to try to get as much return as they possibly can. As I said in an earlier conversation that there are some areas that look rich to us already in the private area, but there are a lot of opportunities in other areas. I don't see persistence in low rates being a major cause for clients looking for lower fees. In fact, 2019, I would not qualify as a year of massive fee pressure. But when clients are looking to do big, giant restructurings or are looking to do major reallocation out of many managers into one manager, they're certainly looking for fee reductions if you're able to have a majority of those assets. So, you offer that type of scale and it doesn't really impact our margins as much. But I don't know that it really matters for us where are clients going, when do they pivot back into equities. We're not seeing any indication at the moment that clients are asking more and more questions about when do they jump back in. As I said, I think we get – clients are heavily in equities now. What we see every quarter is marginal changes in their portfolio allocation. It's not dramatic changes. Rob, did you want to add…?

Yeah, I was going to say, and dovetailing a report that you did, Michael, that we read that was very good, our survey shows something very similar that clients are not adding into their equity portfolios. They're using that portion to go into alternatives. And it's getting back to the original barbell trade where they're using short-term fixed income, so that they're keeping the risk the same and then allocating more to alternatives. Actually, I think this is a benefit for us for two reasons. One, in portfolio construction, they need to use the cheapest products and we are offering the passive and the ETFs which are growing in that way. Two, we are also offering the alternatives. But, three, more importantly, is sourcing assets. And it's become very difficult for clients to source assets by themselves and, therefore, they're putting out more money for people that can actually find these particular assets, which dovetails into what Larry is saying, into new asset classes being real assets like infrastructure and others which they would have a very difficult time sourcing themselves. So, it's actually fitting in to the strategy that we have, both having the passive and lower-priced product and now offering the higher-priced source assets, whether it be private credit which you saw grew dramatically last quarter here and the real asset and other alternatives which we agree with you are going to continue to grow.

Your next question comes from Patrick Davitt with Autonomous Research. You may ask your question.

Good morning, Patrick.

Hey. Good morning, guys. Could you dig in a bit more on the client-specific institutional bond outflows against what still looks like pretty robust flows broadly? And through that lens, are you still seeing a big institutional mandate pipeline, I guess, outsourcing the bond management capability like we talked about last quarter?

Sure, Patrick. It's Gary. So, again, if you think about some of the trends that we've had, we've talked about during the year, I think we've seen broad-based strong performance and flows in our active fixed income business. That's come from a combination of some of the market environment that we've talked about, but also really strong performance across the platform, candidly. If you recall last quarter, we called out a number of very significant large, strategic client wins and we actually had about $65 billion of positive flows in the second quarter. This quarter, we had a couple of clients that went the other way and we had, I think, in the average [ph] about $7 billion of outflows in the quarter. Again, I would call those more client-specific, lumpy redemptions. But it's hard to look at this in any three-month period of time. I think, more broadly, you need to look at the longer-term trend. And on a trailing 12-month basis, we're running right now at about $55 billion of active fixed income inflows, which is representative of about 7% organic asset growth rate. So, I think we will have timing issues, but the clear trend here is very positive in terms of the strategic positioning of this business.

Your final question comes from Kent Worthington with JP Morgan. You may ask your question.

Hey, Ken.

Hi. Good morning. Thank you for squeezing me in. One follow-up on the earlier questions on e-brokerage. Do you think the move to zero commissions in e-brokerage might impact pricing in the wealth management industry more broadly, either in full service brokerage or advisory where pricing seems to have been pretty resilient thus far? And if so, are there opportunities for BlackRock to adjust its approach to distribution in the wealth management industry? You highlighted cash ETFs and e-brokerage, are there similar examples sort of for change in wealth management? Thank you.

There's no question, the resiliency of the overall fees for wealth management is pretty inelastic so far. We're starting to see some of the e-brokers charge much lower fees than the traditional wealth management platforms in terms of the overall advisory fee. But, unquestionably, when commissions are free, the investor is going to have to make a choice. Is the value proposition of having that advice worthwhile versus having a commission to your relationship? And every client is going to have to make that assertion. But I do believe, just like we've seen in ETFs, we see now in e-brokerage, there is more and more fee pressure across different segments of financial services. Quite frankly, through technology, distribution is a better connection too. So, I believe where we are going to benefit, with the evolution of what's going on in wealth, though, is models and portfolio construction. And I do believe a portion of that is going to be factors and ESG. I think those will be the added products like we said how cash and short-term duration bonds will be lifted by that. But we also believe the utilization of models and portfolio constructions is going to be a major component of that value proposition for advice. And through that advice, we are absolutely confident that factors and ESG will play a larger role and it will accelerate adaption of those products.

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

I'd just like to thank all of you for joining this morning and for your great questions and your continued interest in BlackRock. Our third quarter results are directly linked to our deliberate investments we made over time, but, more importantly, our results speak loudly about the deep partnerships we're making globally with our clients. I said it time and time again, clients are looking for solutions. They're not looking for an asset manager who's talking about a product. Clients are looking for asset managers who are helping them with their purpose, not the asset manager's purpose. The client is looking for organizations that can help them in risk-off periods, in periods of risk-on. And I believe if you look at our $350 billion of flows over the last 12 months, our model is working. And we are continuing to be excited about the opportunities we have for BlackRock in the future. Thank you.

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