Categories Earnings Call Transcripts, Finance

BlackRock, Inc. (BLK) Q3 2020 Earnings Call Transcript

BLK Earnings Call - Final Transcript

BlackRock, Inc. (NYSE: BLK) Q3 2020 Earnings Call dated Oct. 13, 2020

Corporate Participants:

Christopher Meade — Chief Legal Officer

Gary Shedlin — Chief Financial Officer

Larry Fink — Chairman and Chief Executive Officer

Rob Kapito — President


Michael Carrier — Bank of America Merrill Lynch — Analyst

Craig Siegenthaler — Credit Suisse — Analyst

Brian Bedell — Deutsche Bank — Analyst

Michael Cyprys — Morgan Stanley — Analyst

Alexander Blostein — Goldman Sachs — Analyst

Dan Fannon — Jefferies — Analyst



Good morning. My name is Maria, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated Third Quarter 2020 Earnings Teleconference. Our hosts 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. [Operator Instructions]

Thank you. Mr. Meade, you may begin your conference.

Christopher Meade — Chief Legal Officer

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 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.

Gary Shedlin — Chief Financial Officer

Thanks, Chris, and good morning, everyone. It’s my pleasure to present results for the third quarter of 2020, and I hope everyone and their families are remaining safe and healthy in the current environment.

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. BlackRock’s steadfast focus on serving clients, employees, shareholders and the communities in which we operate continued in the third quarter. Our strong performance during the quarter and throughout the year amidst unprecedented market uncertainty is a testament to the investments we have made over time to build a diverse and resilient business model, the strength of our BlackRock brand and the commitment of our amazing employees to always deliver for clients.

Our broad-based platform pairing diverse investment capabilities with best-in-class technology and rigorous risk management has now generated almost $400 billion of total net inflows over the last 12 months, representing 7% organic base fee growth. Our voice is resonating with clients more than ever. And our ability to address their current challenges through whole portfolio solutions no matter the market environment is a direct result of a strategic vision we embraced well over a decade ago and grounded in the strength of our One BlackRock culture.

BlackRock generated $129 billion of total net inflows in the third quarter, representing 7% annualized organic asset growth and 9% annualized organic base fee growth. As market strengthened during the third quarter, BlackRock leveraged the entirety of its global platform to help clients meet long-term needs. Not only did we see positive flows across all asset classes, investment styles and regions for the quarter, we have also generated positive flows over the last 12 months across each product type on our Active platform, evidencing the strength of our alpha-generating capabilities.

Record third quarter revenue of $4.4 billion increased 18% year-over-year, while operating income of $1.8 billion rose 17% and reflected $83 million of costs associated with a successful closed-end fund launch in late September. Record earnings per share of $9.22 was up 29% compared to a year ago, also reflecting higher non-operating income and the lower effective tax rate and diluted share count in the current quarter. Non-operating results for the quarter included $116 million of net investment income, driven primarily by mark-to-market gains on our seed and co-investment capital, but also reflected incremental interest expense associated with our second quarter debt issuance to pre-refinance our May 2021 debt maturity.

Our as-adjusted tax rate for the third quarter was approximately 23%, which we estimate is a reasonable projected tax run rate for the fourth quarter of 2020. Third quarter base fees of $3.2 billion were up 8% year-over-year, primarily driven by 6% organic asset growth and the positive impact of market beta and foreign exchange movements on average AUM, partially offset by strategic pricing changes to certain products. Sequentially, base fees were up 9% from the second quarter, reflecting similar dynamics, but also the positive impact of one additional day in the quarter and the negative impact of lower securities lending revenue, which declined $57 million from record second quarter levels as cash spreads tightened in response to the Fed’s intervention in money markets. The impact of lower securities lending revenue during the quarter was the primary reason we saw a sequential decline of 0.2 basis points in our annualized effective fee rate despite the positive impact of strong organic base fee growth.

Record quarterly performance fees of $532 million increased significantly on a year-over-year and sequential basis, reflecting strong overall performance from our single strategy hedge fund platform. A significant portion of the year-over-year increase in performance fees was attributable to a single hedge fund that locks annually in the third quarter and once again delivered exceptional performance over the last 12 months.

Quarterly technology services revenue increased 9% year-over-year. While recent growth has been impacted by extended sales and contracting cycles in the current environment, we remain committed to low-to-mid-teens growth in technology services revenue over the long-term. Demand for integrated and Brazilian investment management technology to support effective risk management and operational efficiency has meaningfully accelerated in the complex remote work environment brought on by the COVID-19 pandemic.

Advisory and other revenue of $42 million was down $20 million year-over-year, primarily reflecting the absence of PennyMac equity method earnings following the charitable contribution of our remaining equity stake in the first quarter. Total expense for the third quarter was up 19% year-over-year, primarily driven by higher compensation and G&A expense. Employee compensation and benefit expense increased 27% from a year ago, driven in part by higher incentive compensation associated with higher performance fees and operating income. And G&A expense was up $76 million year-over-year, reflecting $80 million of closed-end fund launch costs associated with the successful close of the $2 billion BlackRock Capital Allocation Trust. Recall that we exclude the impact of these product launch costs when reporting our as-adjusted operating margin.

The increase in year-over-year G&A expense also reflected higher technology expense, including certain costs related to COVID-19 and lower marketing and promotional expense, which is where we categorize our T&D expenditures. Core G&A expense for the third quarter, which among other items excludes product launch costs and certain incremental costs associated with COVID-19, was essentially flat with the second quarter and we would continue to expect core G&A expense for the year to be generally in line with the estimates we provided in July. Our third quarter as-adjusted operating margin of 47% was up 100 basis points from a year ago, benefiting from significant performance fees in the current quarter.

We remain margin aware in the current environment and committed to optimizing organic growth in the most efficient way possible. Our long-term strategic growth plan continues to focus on accelerating growth in the Aladdin, iShares and private markets, keeping alpha at the heart of BlackRock, delivering whole portfolio of solutions and becoming the global leader in sustainable investing. Our capital management strategy remains first to invest in our business and then to return excess cash to shareholders through a combination of dividends and share repurchases.

As a reminder, in the second quarter, we completed our targeted level of share repurchases for 2020, including the repurchase of $1.1 billion of common shares from PNC at $415 per share. While we did not repurchase any shares of common stock in the third quarter, we intend to be opportunistic should attractive relative valuation opportunities arise during the remainder of the year.

As you will hear more from Larry, BlackRock has never been better positioned to deliver for clients as we leverage our unique insights, guidance and solutions to help clients meet long-term investment needs. Third quarter organic asset growth of $129 billion reflected the diversity of our platform, with strong flows across the franchise, especially in iShares, active strategies and cash. iShares’ net inflows of $41 billion, representing 8% annualized organic asset growth and 7% organic base fee growth reflected continued momentum in fixed income and sustainable ETFs, two strategic product categories where we have leading market share and inflows into higher fee precision exposures as institutional buyers utilize these highly liquid trading instruments to express tactical market views.

Retail net inflows of $20 billion, representing 11% annualized organic asset growth and 12% annualized organic base fee growth were positive in both the U.S. and internationally and across all major asset classes. Inflows reflected broad-based strength in active fixed income, equity, liquid alternatives and multi-asset funds. As previously mentioned, retail multi-asset flows also included the successful close of the $2 billion BlackRock Capital Allocation Trust closed-end fund made possible by the top-decile performance of our global allocation investment team.

BlackRock’s institutional franchise generated approximately $37 billion of net inflows in the third quarter, reflecting demand for our top-performing active strategies and industry-leading index capabilities and renewed client interest in fixed income. Institutional active net inflows of $30 billion were also broad-based across all product categories and were led by $12 billion of active fixed income flows, reflecting strong activity among insurance clients. Multi-asset net inflows of $11 billion were driven by continued growth in our LifePath target date franchise and OCIO client wins where BlackRock’s global insights and unique ability to provide whole portfolio solutions enable us to be the partner of choice to clients.

Across our retail and institutional client segments, we generated a record $10 billion of active equity net inflows, representing our sixth consecutive quarter of positive flows in this product category. Flows were led by top-performing franchises in technology, health sciences and U.S. growth equities as well as quantitative strategies. We remained well positioned for future growth in our active businesses with over 80% of fundamental active equity, scientific active equity and taxable fixed income assets performing above their respective benchmarks or peer medians for the trailing five year period.

Overall demand for alternatives also continued with nearly $5 billion of net inflows into illiquid and liquid alternative strategies during the third quarter, driven by infrastructure, real estate and liquid alternatives. Momentum in fundraising remained strong as we have approximately $23 billion of committed capital to deploy for institutional clients in a variety of alternative strategies, representing a significant source of future base and performance fees.

BlackRock’s cash management platform continued to grow, even as the broader industry saw outflows, generating another $28 billion of net inflows in the third quarter. In September, as gross yields fell below relevant thresholds, we did begin to wave fees on select government funds. While there was a minimal impact of third quarter base fees given our proactive management of portfolios during the year, we would expect fee waivers to accelerate during the fourth quarter and into 2021.

Finally, third quarter advisory net inflows of $3 billion were primarily linked to asset purchases managed by our financial markets advisory group. Recall that revenue linked to these assignments is primarily reflected in the advisory and other revenue line item of our income statement. The continued strength of BlackRock’s results once again validates the resilience of our globally-integrated asset management and technology business model, which allows us to consistently and responsibly invest for the long-term, evolve ahead of client needs and serve all of our stakeholders no matter the market environment.

With that, I’ll turn it over to Larry.

Larry Fink — Chairman and Chief Executive Officer

Thanks, Gary. Good morning, everyone, and thank you for joining the call. I hope you and all your loved ones are staying healthy and safe. We’re reporting earnings this quarter from BlackRock’s New York office once again. I’ve been back in the office about three days a week — per week since last month. And it’s been very productive and incredibly energizing as we are working diligently to help more and more clients and more and more people, both in this environment and certainly over the long run.

As investors around the world continue to deal with the pandemic and the uncertainty about the future, BlackRock is doing everything we can to help clients navigate the challenges that come with it. Clients are looking for strategic insights on the economy and markets, including the impact of inflationary pressures and sustainability risk and opportunity across their entire portfolios. They want guidance on how to navigate markets rotation and volatility. They need solutions that make their portfolios more resilient for their long-term needs and their long-term aspirations. BlackRock is better positioned than ever before to deliver our comprehensive global investment platform. Across actives and index, across asset classes and geographies and across all exposures. All of this is unified by one culture and unified by one technology platform, all to serve our clients better.

We have purposely built our business model over the last 32 years, both organically and through historic transformational acquisitions to be centered around client needs. This positioning, coupled with our strong fiduciary culture, has differentiated BlackRock in the asset management industry. Clients are entrusting us with a greater share of their assets and developing deeper partnerships with BlackRock across our whole portfolios, and this has been reflected in our results.

We generated $129 billion of total net inflows in the third quarter, representing a 7% organic asset growth and 9% organic base fee growth. Our strong organic growth underscores the benefit of the diversity of our platform. We saw positive inflows across all client types, all asset classes, all investment styles and across our regions. We delivered 18% revenue, 17% operating income and 29% earnings growth, while at the same time expanding our as-adjusted operating margin year-over-year.

Consecutive quarters of strong growth through the pandemic are a testament to the flexibility and our resilience to our business model. Our ability to aggressively embraced change to evolve to meet our clients’ needs continues today and drives our strategy for long-term growth. And I am more convinced than ever before that our ability to meet the challenges of our clients will continue to drive future growth for BlackRock.

The global pandemic remains a key factor for investors over the near-term and long-term, while many individuals and companies are going through a painful period of readjustment as we enter the ninth month of COVID-19. Economic activity is beginning to restart around the world as fatalities and hospitalization rates per section are dropping. Despite renewed localized lockdowns to contain the virus clusters, the unprecedented and joint monetary fiscal policy respond by many governments, including the U.S., is providing a bridge for disrupted income streams and has so far surprised on the upside.

This improving macro backdrop is fueled and equity market rally over the past few months in a large part due to the mega-cap technology companies. Investors need to navigate growing risk in the coming months. However, including the different speed of economic restart across countries, a lag in stimulus, particularly in the U.S., and the upcoming U.S. election next month, which could have significant implications on policy and on markets. This pandemic is also accelerating key structural trends, including the fragmentation of the global economy, and what I’ve been repeatedly talking about the silent crisis of retirement.

We continue to use the full breadth of our capabilities to meet the needs of our diverse client base, including pensions, insurers and other institutions around the world as well as wealth managers who serve millions of individuals. The strength of BlackRock’s brand enables us to participate — able to participate in many of the critical conversations impacting our industry and society. We’re listening to our clients and bringing their voices to these conversations. None of this is more evident than in our sustainability strategy and ambitions. Investors are increasingly recognizing that sustainability considerations are central to investing and whole portfolio construction, and I firmly believe this move towards ESG is a Teutonic shift that will be playing out for the years to come. BlackRock is accelerating our efforts to ensure we remain uniquely positioned to serve clients with research, investment solutions and technology.

We’ve grown our sustainable solutions to more than 125 iShares ETFs and over 65 dedicated active strategies. And we’re now working on building new technology capabilities to help BlackRock and our clients quantify and measure factors such as the impact of climate change on companies and on our entire portfolios. Through our financial markets advisory group, we are leveraging our capital markets expertise, our industry-leading analytics and technology and fiduciary business model to serve governments around the world and the people they serve. We take on these mandates to fulfill our purpose of helping more and more people experience financial well-being. And we approached the great responsibility that comes with utmost fiduciary focus and professionalism.

We’re seeing clients increasingly look for alpha in their portfolios, and BlackRock’s top-performing $2 trillion in AUM and active management platform is well positioned to deliver when they need it most. I’m incredibly proud of the alpha our portfolio management teams across BlackRock are generating for our clients. Our ability to deliver differentiated returns is a result of our long-term investment to build an active platform, global reach, interconnectivity across teams and across regions, an unparalleled access for our teams to data and insights, integrated technology in risk management and a scalable processes that enable them to do their job and to deliver more consistent outcomes over the long-term. Our active investment teams value the benefit of BlackRock’s platform, and this is translating into some of the strongest performance we’ve seen across the platform. 80% of our fundamental active equities and 87% of our taxable fixed income assets are above benchmark or peer medium for the three year period, and this is driving flows across our active business. Our teams’ expertise is now being recognized. For example, our health science strategy was recently ranked number one for risk-adjusted returns on a more than 9,000 U.S. equity mutual funds that have a 15-year track record or more.

We generated $47 billion of active inflows in the third quarter; positive across equities, positive across fixed income and multi-asset strategies and positive across all our alternative strategies. This includes a record $10 billion of net inflows and active equity strategies and the successful launch of the BlackRock Capital Allocation Trust, which raised $2 billion, the second largest closed-end fund launch in our history and the industry since 2013.

In a current low interest rate environment clients are looking for yields in their portfolios. The industry saw strong client demand for fixed income strategy in the third quarter. And BlackRock’s diverse and comprehensive fixed income platform generated $70 billion of inflows across active and index strategies. We also saw continued demand for our cash management strategies and generated $28 billion in net inflows despite the low rate environment and even as the industry experienced redemptions in the quarter.

IShares’ net inflows of $41 billion were driven by client demand across multiple product areas. Fixed income and sustainable ETFs led the way with strong flows in core equities and precision exposures. The strong flows we are seeing across multiple product segments with iShares globally are a result of the strategic investments we made over time to support the adaptation of ETFs and the evolution of their many uses and to build the largest, the most diverse and the most liquid platform globally.

We saw a record momentum around fixed income ETFs, which continue to attract new users. iShares fixed income ETFs generated $20 billion of net inflows in the third quarter, and we have captured nearly 40% of industry flows year-to-date. As we said before, fixed income ETFs are one of the fast-growing categories in asset management. It cost $1 trillion in assets last summer and now over $1.4 trillion, and we think it can be a multi-trillion dollar market in the years ahead.

IShares’ market leadership, our liquidity and performance under the stress conditions early this year has met clients of all types globally, have been turning to iShares at greater scale. Our leadership is a result of our longstanding focus on modernizing the bond market and our long-term strategic commitment to the value, to the transparency, to the liquidity and performance that iShares fixed income ETFs can bring to clients.

Demand for sustainable products is accelerating as more investors embed ESG considerations in their portfolios. BlackRock generated another $8 billion in inflows in sustainable iShares ETFs in the third quarter and $25 billion year-to-date, more than two times the entirety of all of 2019. We also believe that sustainable indexing is helping to expand the market for sustainability overall by expanding access to more clients who want to invest in this way. A focus on sustainability can help make portfolios more resilient, and BlackRock remains committed to being the leader in this high growth strategic segment and making sustainable investing accessible to more people worldwide.

In addition to iShares, we are also innovating the tax-efficient product designs across our platform. The movement towards fee-based advice and client need for tax optimization in their portfolios create significant opportunity for BlackRock, and we are investing heavily in both ETFs and separately managed accounts or SMAs. We are the second largest provider of retail SMAs, and we recently launched our tax managed equity index SMA strategy in the Wire and RIA channels. This is an important addition to our $126 billion SMA business that has been strong growth over the past several years, particularly in fixed income where we are a market leader.

We are focused on expanding our capabilities and innovating both solutions and portfolio enablement technology to meet the needs of all our clients, all our financial advisors and also their own clients. Clients will increasingly need alternative return sources such as private market for portfolio diversification and resilience, particularly in down markets. Alternatives are playing a critical role in holistic portfolio construction and we have purposely invested over time to build a comprehensive, a diversified platform across infrastructure, private credit, real estate, private equity solutions, hedge funds and alternative solutions to meet client demand for this asset class.

The benefits of these investments are very clear. We generated $5 billion in net inflows across liquid and illiquid alternative strategy in the third quarter. And we deployed another $2 billion of client capital as we seek out opportunities for our clients. And as clients increase their alternative allocation within their portfolios, they are looking for a more sophisticated whole portfolio view of their entire asset base.

One of the biggest structural trends within our industry is a growing need for robust enterprise operating and risk management technology. The pandemic is accelerating the shift from fragmented technology system to a unified technology platforms like Aladdin that can support the increased need for risk transparency across asset classes and the construction of more resilient portfolios. It is also highlighting the importance of a better understanding sustainability risk and opportunities in portfolios.

BlackRock is expanding Aladdin’s ESG data analytics, and we recently released over 1,500 third-party ESG metrics to Aladdin clients. We’re developing new Aladdin products as well as to serve a growing demand and need for better tools to manage climate risk in investments. And we’re very excited to having early conversation with our clients about Aladdin Climate. BlackRock is a global company with employees in over 30 countries and clients in more than 100 countries. I’ve spoken before about the importance of being immersed in our local markets around the world so we can respond to the unique needs and objectives of these clients in their home market and effectively delivering all of BlackRock’s capabilities. We are seeing the benefits of that approach with clients in Europe and Asia entrusting us with more than $57 billion, a long-term net inflows in the third quarter, representing nearly half of our total organic growth during this period, and we continue to use our expertise to improve issues such as investor access and retirement for more people around the world.

In Brazil, we have worked with local regulators in exchanges across list ETFs on a local exchange, which will reduce barriers for Brazilians to access global markets. With rates at an all-time historical low of 2%, the current backdrop has never been more favorable for Brazilians to diversify their holdings, and BlackRock is well positioned to capture that opportunity. Clients are increasingly interested in emerging markets as long-term investments, including China, which is the world’s second largest economy and a key area for investment return opportunities and portfolio diversification. Many of our clients expects us to both understand and invest in this market on their behalf because it’s an important component in achieving their long-term financial goals. Having a local presence in China will help us better serve clients globally. We also believe that we can apply our global expertise in China as the country seeks to reform and opened its financial markets and address its own retirement needs.

During the quarter, we received regulatory approval that allows us to take the next steps towards forming a wholly-owned fund management company and a wealth management company joint venture. To anticipate what client needs and evolve our platform to meet these changing needs, BlackRock is continuously working to ensure our senior most leaders represent the breadth of our business, the depth of our talent and diversity of our clients we serve. We recently added three new members to our global executive committee. I’m more excited about our BlackRock organization, our people and the strength of our leadership bench than at any time in our 32-year history. I continue to be incredibly proud of our 16,000 employees who partner with clients, they uphold our culture, they love our purpose each and every day. Together we have helped a lot of people navigate this crisis. We are helping people invest for their future. And we’re helping governments get their economies back on track.

Our employees are earning our clients’ trust because of the high standards we hold ourselves to. We are true to who we are. We are living with purpose. We have a voice that’s resonating with more clients than ever before. I see a tremendous opportunity ahead, and BlackRock remains focused on the long-term on aggressively embracing change and evolving so we can best serve our clients over time. I look forward to extending on our ambitious plans in the year ahead.

With that, let’s open it up for questions.

Questions and Answers:


Thank you. [Operator Instructions] Your first question comes from Mike Carrier of Bank of America.

Larry Fink — Chairman and Chief Executive Officer

Hello, Mike.

Michael Carrier — Bank of America Merrill Lynch — Analyst

Hi, Larry. Good morning, everyone. Hope you’re all well, and thanks for taking the question. The strength in active flows was better than expected and better than what you are seeing industry-wide. I’m just curious, what are you seeing as maybe the drivers specific to BlackRock? Whether it’s client, product specific? And then based on conversations, either you see more follow through for this demand going forward? Thanks.

Larry Fink — Chairman and Chief Executive Officer

Let me have Rob answer that question, and I may do a color backdrop after that.

Rob Kapito — President

So Mike, I think that you would agree that the environment that we are experiencing this year, every single bit of alpha generation is critical to our clients. I think Larry said it well, we’re very proud of the strong active performance that we have across all asset classes. And I think this is a result of our investments to build a platform. And this platform now has global reach, the interconnectivity across the teams and regions, unparalleled access to data and insights through the creation of the BlackRock Investment Institute. We have now fully integrated our technology and risk management, and we have very scalable processes. So this platform is really enabling our teams, and I would say our strong teams, to deliver much more consistent outcomes over the long-term for our clients when they need it the most. And if we generate alpha and we have that performance then assets will come in because the clients need them.

Anything to add, Larry?

Larry Fink — Chairman and Chief Executive Officer

Yeah. Let me just add another thing. Obviously, the performance matters. But I believe the most important characteristic of our active inflows, both in fixed income and equities, is a function of our whole portfolio approach as more and more retail moves to fee-based. It is much more of a solution orientation. It’s much more about a whole portfolio approach. And under COVID now, with the connection with the financial advisor and RIAs to their clients is now done remotely, the need for investment technology like Aladdin for Wealth is even more important.

And so having BlackRock play a role in building deeper relationships between the advisor and their clients, providing better risk analytics, it allows us to have in our models our products in front of that too. And it’s a combination of performance, but also over a 15-year horizon of building this enterprise to be that connectedness by then using that enterprise and all the culture of interconnectedness among the portfolio teams I believe is driving better alpha and driving a better connectivity with — that is leading towards more consistent inflows across active and index type of strategies.

Christopher Meade — Chief Legal Officer

Operator, you can go to the next question.


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

Larry Fink — Chairman and Chief Executive Officer

Hey, Craig.

Craig Siegenthaler — Credit Suisse — Analyst

Hey, good morning, Larry. I want to circle back on the strong flows across all client segments in fixed income. And I think we know part of this is driven by overall risk aversion and also heavy rebalancing. But just given where rates are today, do you think some of this strong fixed income migration is eventually diverted into other areas like alternatives and equities and then within fixed income maybe into more higher yielding segments like structured credit, loans and high yield?

Rob Kapito — President

So Craig, even in the face of sustained low rates, clients are going to need fixed income in their portfolios to meet their long-term goals, to match their liabilities. And I think in a period like this, what you might find is people stretching for yield, and we try to make sure that they’re not overextending and taking too much risk for that yield. But I think clearly what you will see is a migration from low-yielding government securities to corporates and high yield, which took place to private credit, which is taking place and for alternatives, which have become less alternative to have a stronger and larger percentage of a client’s portfolio.

So that is why Larry has mentioned it’s important to have the breadth of products that we have across fixed income so that people can migrate to capture that higher yields and it extends from cash to short duration fixed income to a liquid alternative allocations and it really is the full spectrum. It also will move into multi-asset flows. And that’s why our business in creating multi-asset products are helping those clients to capture that additional yield, which is so critical right now without taking too much risk.

Larry Fink — Chairman and Chief Executive Officer

I would just add. There is no question, Craig. Government bonds are going to play less and less of a role for most retirement portfolios. It still play a big role in bank portfolios and other regulated institutions. But unquestionably you would own government bonds for liquidity purposes, you certainly would not use government bonds for income purposes. And so you are going to have a migration across different asset classes and different asset categories.

And so as Rob suggested, I believe our comprehensive platform within fixed income of having a strong purposeful ETF platform in fixed income, which we’ve been advocating since 2012, a historical strong fixed income organization since the beginning of our firm has allowed us to have a differentiation in flows. And as I said, I certainly believe fixed income ETFs are going to play a bigger and a larger component over the entire fixed income market. And with our positioning and with our constant educating clients worldwide on how can they use fixed income ETFs for their portfolio composition needs in fixed income is going to continue to drive our, I would say, above industry trends in fixed income.

Craig Siegenthaler — Credit Suisse — Analyst

All right. Thanks.


Our next question comes from the line of Brian Bedell of Deutsche Bank.

Brian Bedell — Deutsche Bank — Analyst

Great, thanks.

Larry Fink — Chairman and Chief Executive Officer

Good morning, Brian.

Brian Bedell — Deutsche Bank — Analyst

Good morning. Larry, just to focus on your comments on sustainable investing a little bit more deeply. Obviously, you’re seeing a lot of leadership here with the $125 billion in AUM, and you said the iShares franchise gets over $50 billion AUM, if I’m not mistaken, with $8 billion inflows. Could you possibly update us on what you think flows were in sustainable product outside of the iShares in the quarter? And then as you — I think the goal is to get to $1 trillion eventually by the end of the decade, maybe just thoughts on how active management can play a role in your product line-up? In addition, if you can comment on that on the web and Aladdin for as well?

Larry Fink — Chairman and Chief Executive Officer

Yeah. Great question. As I said in my 2020 CEO letter, we believe climate risk is investment risk. And I do believe — when I wrote the letter, obviously, the pandemic was not top of mind at all, it was some virus that was in China that we didn’t really understand as much, and obviously now it changed the course of world. The pandemic in many cases have created an existential health risk. And I do believe at the same time we are seeing more and more climate change impact and that is an existential risk.

So I think what we are witnessing and what we’re hearing from clients, COVID has made climate change more top of mind. We’re having more dialogs worldwide than ever before and more dialogs here even in the United States. In the United States, we have to operate as a fiduciary in the law of this land. Our labor department has required in all investments as a fiduciary to ensure that everything you do is about maximization of return. So as — we need to continue to drive technology and information to show how climate change is investment risk. And this is why we are so focused on Aladdinizing data for climate change.

And as I said earlier, we are creating Aladdin Climate as one of the components of Aladdin, and we hope to be rolling that out. We’re working with many different sustainable data providers to put that on Aladdin. And so as a result of it, we need to as a fiduciary to show why climate risk for risk accounts, why it is investment risk. But we’re seeing across the board whether it’s individual investors, whether it is family offices that they don’t need as much data or documentation that they’re — they believe that climate change is investment risk.

I would say in Europe, more than ever before, if you do not have a climate overlay on everything you do, you will not see any real flows. It is now a requirement in Europe to have a sustainable lens if you’re investing across all the countries of Europe. And now at the beginning we even have conversations in Asia. And most recently, we’ve had conversations in China about the role of climate change on long-term retirement assets and how to actually play it.

So getting into some of the details, we currently have about $127 billion in sustainable products. We are reaffirming the trillion dollars. We believe that is — that we will be able to reach that. As you framed the question, obviously, we talk much about the index-related or the ETF-related sustainable products. I did note that we have about 67 different active strategies related to sustainability. But let’s be clear, it is our ambition in our fundamental equities, it is our ambition in our fundamental fixed income to have sustainability as an overlay in everything we do. And we are not there yet. And we said in our client letter that we’ll be getting there within a year, and we believe we’ll meet that objective.

So we do believe that we can provide that information to our clients who are seeking it out, and we are working with our clients. Let me be clear. Some clients still do not believe in climate change, and we’re working with them. We’re trying to show them why we believe it is. But if a client is still seeking to invest in an index that happens to have hydrocarbons, as a fiduciary, we’re going to continue to invest for them on their behalf. It is their money and not our money.


Our next question comes from the line of Michael Cyprys of Morgan Stanley.

Larry Fink — Chairman and Chief Executive Officer

Hi, Michael.

Michael Cyprys — Morgan Stanley — Analyst

Hey, Larry, good morning. Thanks for taking the question. Just on consolidation, it seems to be picking up across the industry. And if that does continue and if we see larger mergers and mergers across the value chain, I guess how do you think this could impact the competitive dynamics and industry structure? And in what scenario would BlackRock participate and what could make sense for BlackRock here?

Larry Fink — Chairman and Chief Executive Officer

Well, since my CFO was an investment banker who is responsible for a lot of historical M&A in the industry, let’s have Gary respond.

Gary Shedlin — Chief Financial Officer

Thank you, Larry. Transformed investment banker. So Michael, thanks for the question. Maybe just a few observations on what we’re seeing today. I think I would characterize that there is very little surprise from our standpoint by the recent acceleration and consolidation in the industry. I mean, if you think a couple of the trends that are out there, we’re seeing obviously revenue and expense pressures increasing, and that was even before the pandemic. We’ve talked about the importance of multi-asset investment capabilities and how critical they are to addressing whole portfolio solutions. We’ve talked about technology expertise, whether it’s a support operational infrastructure, risk management portfolio, construction or even digital distribution, that is really becoming a need to have and not a nice to have. And whether or not you are a global firm or not, you need to have global insights to be able to give your clients the best advice.

If you think about those last three trends, in particular, BlackRock really identified those last three trends well over a decade ago and we began the evolution to really purposely built the firm to what it is today and in many cases see today’s consolidation activity as a validation of the strength of the business model that we’ve created. And so while we see the industry continue to consolidate really in the hopes of creating what we already have, think about global reach, scale, best-in-class technology and risk management, diverse investment capabilities from passive to active, the ability to build whole portfolio solutions. Our intention is really to maintain our focus on our existing strategy and effectively to just be a beacon of stability in a world that’s going to be ever consolidating.

And as consolidation accelerates, I think we feel more strongly than ever that we’re going to benefit from the disruption that it’s going to create and we’ll likely to continue to gain share. Large scale integrations are not easy especially when today’s deals are really driven by a need to cut costs quickly, which means you have to combine disparity operating cultures, you have to rationalize investment teams with different processes and you have to take advantage of distribution relationships that overlap, and in many cases are not unique across the industry.

So from our standpoint, our M&A strategy has not changed. We will consider inorganic opportunities only if they are accretive to our long-term organic growth. We are not looking to take advantage of cost efficiencies to drive EPS accretion. We are much more focused on thinking about tactical M&A that will broaden our technology capabilities, expand our global distribution reach and potentially scale certain parts of our private markets franchise, but really are much less focused on the pursuit of traditional investment management consolidation,

And I think as many of you’ve seen, we’re also looking to more aggressively use our balance sheet to take minority investments where control deals may not make sense. And I think we’ve had great success in things like Envestnet and iCapital and Scalable Capital which are much more focused on digital distribution and really trying to utilize technology for flow as opposed to necessarily technology to drive revenue growth of the technology line itself.

Larry Fink — Chairman and Chief Executive Officer

Very good. I like that word beacon.


Your next question comes from the line of Alex Blostein of Goldman Sachs.

Larry Fink — Chairman and Chief Executive Officer

Good morning, Alex.

Alexander Blostein — Goldman Sachs — Analyst

Great. Good morning, everybody. Thanks for taking the question. I wanted to ask you guys around some of the operational lessons learned from the COVID environment for the last, call it, six months or so. So on the one hand, it sounds like opportunities for Aladdin could accelerate given the challenges faced by the financial advisor community. But also, I was curious if you guys are rethinking some of your own G&A footprint and how that could sort of evolve once the world normalizes? Thanks.

Gary Shedlin — Chief Financial Officer

So thanks for the question, Alex. Look, I think the biggest lesson learned, obviously was that, we were able to very quickly migrate from 16,000 people and 60 offices to 16,000 people and 16,000 offices. And I think, obviously, our commitment to a single technology operating system was absolutely crucial to our ability to migrate that way. Obviously, we had some early bumps in terms of just trying to get people the technology they necessarily did atone, but I think we transitioned seamlessly into that environment. And I think, frankly, the performance whether financially or operationally over the last six plus months is certainly evidence for that.

I think as it relates to the broader pandemic, I mean, I think that we have seen frankly an acceleration in almost every single strategic trend that we were guiding the business towards pre-pandemic, post-pandemic. And so I think the pandemic has really accelerated our growth opportunities in everything that we were focused on before. If you think about it, whether it was ETFs and the performance of fixed income ETFs through the pandemic, we talked about technology. Larry mentioned how important it’s going to be to get private assets into whole portfolio solutions. We were investing there whole portfolio solutions more broadly, sustainability, which we kicked off before the pandemic was a reality, has obviously been accelerating incredibly strongly. And so I think in many cases the pandemic has really driven for us many more of the themes that we were pointing the business towards and we feel will clearly accelerate growth as a result.

As it relates to getting back to the office, I’ll Larry jump back in there. I mean, I think that we are doing the call from the New York office today. There is no question, an employee well being remains our priority and we’ll be following all the official guidance in putting the health and safety of our employees first always as we look to return to the office. And we are continuing to operate on a split operations basis. But look, we’re still operating with only about 6% to 7% of our employees back in the office. And I think over — well, I think we can get through that today operationally. I think over time I think the culture of BlackRock is still is in-office type of culture where innovation has always been driven by having people working together. And I think longer term, we’re going to hope that we get back there as quickly as we can.

Larry Fink — Chairman and Chief Executive Officer

I would just add more in a sustainable way. There are many lessons that we’re learning from the horrificness of the pandemic and the health concerns. I don’t think any of us thought we could operate as efficiently remotely. As Gary said, now we’re operating in 16,000 offices. I think we know it’s one of the great fears that could we actually accomplish that and can we have the operational efficiencies working remotely? And by and large, many large companies, including BlackRock, have learned that yes, we can work remotely without much in terms of degradation of operation efficiencies.

We still have some of the cultural issues that I’m particularly worried about. But let’s be clear, I don’t believe we will have 100% back in office even when we have 100% solutions related to the virus. I believe this will become a blessing, I believe this is going to be considered a benefit. If we could have — won’t take 30%, 40% of our workforce that we can work remotely at periods of time during the year. Can you imagine how each city will have reduced congestion. Think about what that would do to the environment. Think about if your average employee commutes on average an hour each way. I think we freed up a portion of their year, two hours of their day. They can spend their two hours doing more work, they can spend two hours improving their health by exercising, they can spend two hours more in building a deeper, stronger, more resilient family.

And so there are many blessings through this, and I think we’re all going to be adapting in doing this. And I do believe society will be better off in these processes. And so this is what we are talking about related to BlackRock. We have to stay in front of our clients’ needs. We have to adapt. And I think one of the great adaptations that we’re going to learn from the horrificness of COVID is, working remotely and having — but having still some core part of your enterprise working in office. And I think this is all going to be a real positive lesson and it will create another guidance for all our economies. And so I look at this as a great learning experience. We’re benefiting from this and our clients can benefit from this also.


Your next question comes from Dan Fannon of Jefferies.

Dan Fannon — Jefferies — Analyst

Thanks. Good morning.

Larry Fink — Chairman and Chief Executive Officer

Good morning.

Dan Fannon — Jefferies — Analyst

A question on flows, the 50% of flows coming from Europe and Asia. Just curious if that’s a record and whether that was reflective of a surge in gross sales, lower redemptions or any kind of outsized mandate wins? And then just thinking about the momentum in that business, how we should think about the contribution from these regions going forward?

Gary Shedlin — Chief Financial Officer

Dan, great question. Obviously, one quarter is always hard to basically make any significant trends. And so I think we always have to think about this more broadly. I mean, obviously, we’re seeing institutional wealth clients facing a variety of complex challenges. We’re seeing pensions are underfunded. We’re seeing insurance — insurers dealing with obviously sharp increases in payouts and declining asset values. We’re seeing financial advisors adapt to new ways of interacting with their clients and obviously individuals who are more retire — more dependent on retirement savings, which obviously are more challenging.

Clients globally are reacting to all of those things and they’re allocating to a variety of different countries and sectors and growth areas, whether it’s U.S. tech or underappreciated areas like emerging markets, and everybody is considering their own specific challenges at one point in time. But I think the more broad point for us is that while there is unique issues related to each of those geographic areas, clients in all the regions and all types are really turning to us. And we’ve talked about the positive flows we’ve seen across the board, delivering alpha and the fact that we had in this particular quarter a number of flows coming from clients in Europe and Asia. But I think we are obviously a global firm, we’re investing globally, we’re spending a lot of time and energy investing in our European franchise as well as our Asian franchise. Larry has talked before about our commitment to becoming local in each of the countries in which we operate, which I think is reinforcing the commonality and the uniqueness of BlackRock brand, but trying to be specifically local to each of those countries and basically pushing a lot of the decision-making closer to where the clients are more broadly as a firm. And I think trends around sustainability as well are obviously critically important as we see countries outside of U.S. adopting to that much more quicker than we are. So I think it’s just — it’s indicative of our global footprint and the fact that we’re trying to basically invest all around the world to make sure that we can deliver for our clients.

Larry Fink — Chairman and Chief Executive Officer

Dan, I would just add to what Gary said. I think it speaks very loudly of our comprehensive platform worldwide and our commitment to be local in every community we operate. I would say the other thing that us really helping clients understand the utilization of ETFs. U.S. was years ahead of Europe and Asia, and Europe is slowly catching up. ETF adaptation in Europe and Asia is accelerating. And I would also say we are seeing more consistent retail flows in EMEA across all products.

And so I think this is — some of it is a new trend, but I think the trend towards ETFs is just the beginning of a big macro trend. I also believe as more financial advisors worldwide are moving to fee-based and are moving to more of fiduciary relationship, it means more portfolio solutions and no firm is better positioned because of our emphasis of being local, our comprehensiveness and our ability to work with our clients worldwide on the adaptation of more products and different products.


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

Larry Fink — Chairman and Chief Executive Officer

Thank you, operator. I want to thank all of you for joining us this morning and for your continued interest in BlackRock. Hopefully you could hear from all of us. We’re very proud of the progress we made to help our clients navigate this turbulent investment landscape and building our clients — for our clients a more resilient portfolio. I am more convinced than ever before that BlackRock’s ability to meet our clients’ challenges will continue to drive our growth in the future.

I’ve always said that companies with long-term visions and purpose at the center of their strategies are those that will succeed over the long run. BlackRock’s long-term vision to build a platform that is centered around our clients is resonating. Our focus on the long-term is fueling our investments in BlackRock’s people and all the communities where we operate and in our platform as we continue to evolve ahead of our clients’ needs.

I’m going to assure you we will continue to invest and innovate in the years to come and to serve all our stakeholders, our clients, our employees, our communities and obviously our shareholders to fulfill our purpose in helping more and more people experience financial well being and a better hope for a better future. And I wish all of you a safe and healthy fourth quarter. Thank you.


[Operator Closing Remarks]


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