BlackRock, Inc. (BLK) Q3 2021 Earnings Call Transcript

BlackRock, Inc. (NYSE: BLK) Q3 2021 earnings call dated Oct. 13, 2021

Corporate Participants:

Christopher Meade — Chief Legal Officer

Gary Shedlin — Chief Financial Officer

Larry Fink — Chairman and Chief Executive Officer

Rob Kapito — President

Analysts:

Michael Cyprys — Morgan Stanley — Analyst

Alexander Blostein — Goldman Sachs — Analyst

Brian Bedell — Deutsche Bank — Analyst

William Katz — Citi — Analyst

Robert Lee — Keefe, Bruyette & Woods — Analyst

Presentation:

Operator

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 2021 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. [Operator Instructions]

Mr. Meade, you may begin your conference.

Christopher Meade — Chief Legal Officer

Thank you. Good morning, everyone. I’m Chris Meade, the General Counsel of BlackRock.

Before we begin, I’d like to remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock’s actual results may of course differ from these statements. As you know, BlackRock has filed reports with the SEC, which list some of the factors that may cause the results of BlackRock to differ materially from what we see today. BlackRock assumes no duty and does not undertake to update any forward-looking statements.

So with that, I’ll turn it over to Gary.

Gary Shedlin — Chief Financial Officer

Thanks, Chris, and good morning, everyone. It’s my pleasure to present results for the third quarter of 2021. 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 proven track record of delivering for stakeholders reflects our ongoing commitment to anticipate change before it happens and continually invest for the long-term. Our globally integrated investment and technology platform enables us to construct resilient whole portfolios for clients. We rely on thought leadership, global investment insights and state of the art risk management tools to help clients navigate ever-changing and increasingly volatile market environments.

Our approach is resonating more than ever, and is reflected in the continued strong momentum we are seeing across our entire platform. BlackRock generated total net inflows of $75 billion in the third quarter. $98 billion of long-term net inflows, representing approximately 4% annualized organic asset growth were partially offset by net outflows from lower fee cash and advisory AUM. In addition, strong net inflows from ETFs and our active franchise once again contributed to this quarter’s 9% annualized organic base fee growth.

Over the last 12 months, our differentiated investment management platform, which pairs active and index capabilities across the entire range of traditional and alternative products, has now generated over $450 billion of total net inflows, representing 13% organic base fee growth, well in excess of our 5% long-term target.

Third quarter revenue of $5.1 billion increased 16% year-over-year, while operating income of $1.9 billion rose 11% and reflected the impact of approximately $96 million of fund launch cost, primarily associated with the successful launch of a $2 billion closed-end fund in late September. Earnings per share of $10.95 was up 19% compared to a year ago, also reflecting significantly higher non-operating income in the current quarter. Non-operating results for the quarter included $298 million of net investment income, primarily driven by non-cash gains related to our strategic minority investments in iCapital and Scalable Capital as well as mark-to-market gains in our private equity co-investment portfolio.

Our as adjusted tax rate for the third quarter was approximately 24%. We continue to estimate that 24% is a reasonable projected tax run rate for the fourth quarter of 2021, though the actual effective tax rate may differ as a consequence of non-recurring or discrete items or potential changes in tax legislation. Third quarter base fee and securities lending revenue of $3.9 billion increased 22% year-over-year, reflecting the positive impact of market beta on average AUM and 13% organic base fee growth despite higher discretionary money market fee waivers and strategic pricing investments over the last year. Sequentially, base fee and securities lending revenue was up 5%.

Our third quarter annualized effective fee rate on a day count equivalent basis increased by two-tenths of a basis point from the second quarter as the positive impact of strong organic base fee growth driven by our higher fee active businesses and lower discretionary money market fee waivers more than offset the negative impact of divergent equity beta, primarily associated with the accelerating decline in emerging markets during the current quarter.

During the third quarter, we incurred approximately $130 million of gross discretionary yield support waivers. Lower discretionary yield support waivers in the current quarter were linked to the Fed’s technical adjustments to the IOER and RRP in June as well as outflows from U.S. government money market funds during the current quarter. Performance fees of $345 million reflected generally strong performance from our single-strategy hedge fund platform over the last year. The decline in year-over-year fees reflected lower revenue from a single hedge fund with an annual performance measurement period that ends in the third quarter and which delivered truly exceptional performance a year ago, partially offset by higher revenues from illiquid products.

Quarterly technology services revenue increased 13% from a year ago. Annual contract value or ACV increased 16% year-over-year and continued to reflect strong growth from the third quarter of 2020, which was impacted by slower sales and extended contracting in the early months of the pandemic. We remain committed to low-to-mid-teens growth in ACV over the long-term.

Total expense increased 19% versus the year ago quarter, driven primarily by higher G&A, compensation and direct fund expense. G&A expense was up $139 million or 30% year-over-year, primarily driven by higher technology and portfolio services expense in the current quarter. Third quarter G&A expense also included $96 million of fund launch costs, primarily associated with our first ESG-oriented closed-end fund, the $2 billion BlackRock ESG Capital Allocation Trust and $29 million of contingent consideration fair value adjustments related to the estimated final payment on our successful Citibanamex acquisition in 2018. Recall that we exclude the impact of product launch costs when reporting our as adjusted operating margin.

Core G&A expense for the third quarter, which excludes the impact of product launch and transaction-related costs, was up 3% from the second quarter. We have made no changes to the discretionary investment spending plans we have previously outlined, and would expect a sequential increase in our fourth quarter core G&A spend to be generally consistent with previous years, reflecting seasonal increases in marketing spend, additional costs related to return to office planning and ongoing technology costs associated with Aladdin cloud migrations.

Employee compensation and benefit expense was up $116 million or 8% from a year ago, primarily reflecting higher base compensation and higher deferred compensation related to the impact of grants associated with 2020 compensation. Direct fund expense increased 38% year-over-year, primarily reflecting higher average index AUM and intangible amortization expense increased $11 million year-over-year due to our Aperio acquisition.

Our third quarter as adjusted operating margin of 45.8% was down 120 basis points from a year ago as operating leverage was more than offset by the impact of lower performance fees, higher contingent consideration fair value adjustments and higher intangible amortization expense compared to a year ago. We’re seeing more opportunities to invest for growth than ever before. We reopened the closed-end fund market in 2019 by making it more efficient for investors to access products at NAV.

By synthetically seeding these new funds, we’ve now raised $14 billion in active AUM, representing over $170 million in new revenue. Our strategic minority investments in iCapital and Scalable Capital are reinforcing our tech-for-flow strategy and simultaneously generating very attractive returns for shareholders. And we continued to build our best-in-class ESG capabilities, most recently by acquiring Rhodium’s models related to the physical risks associated with climate change.

Effective use of our balance sheet to seed new products co-invest alongside clients were mixed strategic minority investments both supports our growth and drives value for our shareholders. And while our capital management strategy remains first to invest in our business, We also remain committed to returning excess cash to shareholders and repurchased an additional $300 million worth of shares in the third quarter.

As we discussed at Investor Day, we continued to invest in our highest growth franchises such as ETFs, private markets and technology, and we are accelerating investments to drive growth in our sustainable traditional active and solutions capabilities. Each of these areas once again delivered strong results in the third quarter.

Quarterly long-term net inflows of $98 billion were driven by continued momentum in our ETF and active platforms. Our ETFs generated net inflows of $58 billion in the third quarter, positive across each of our product categories, representing 7% annualized organic base fee growth. ETFs attributable to our strategic category drove over 50% of net inflows in the quarter, reflecting continued strength in fixed income and sustainable ETFs. Core equity and higher fee precision exposure ETFs saw net inflows of $16 billion and $9 billion respectively, led by U.S. equity exposures. Retail net inflows of $23 billion, representing 11% annualized organic base fee growth, were positive in both the U.S. and internationally and across all major asset classes. Retail multi-asset results included the impact of the previously mentioned $2 billion closed-end fund raised in late September.

Inflows continue to reflect broad-based strength across our active platform and remain well positioned to meet investor needs for risk-adjusted alpha and yield in the current market environment. BlackRock’s institutional active net inflows of $26 billion, representing 6% annualized organic base fee growth, were led by $25 billion of multi-asset net inflows. Growth included the impact of a significant outsourced CIO mandate from the Asia Pacific client, continuing our momentum in an important growth area where we are providing cost-effective whole portfolio solutions to the world’s most sophisticated institutional clients.

We also saw continued demand for our LifePath target date offerings, and Larry will update you about the recent milestones for our new LifePath Paycheck Retirement Solution. Institutional index net outflows of $8 billion broadly reflected equity net outflows, which were partially offset by fixed income net inflows as clients continued to rebalance portfolios after significant market — equity market gains or sort to immunized portfolios through LDI strategies. Overall, BlackRock generated approximately $45 billion in quarterly active net inflows across the platform, including our 10th consecutive quarter of positive active equity flows.

Demand for alternatives also continued with nearly $7 billion of net inflows into liquid and illiquid alternative strategies during the quarter, driven by single-strategy hedge funds, private credit, real assets and private equity solutions. Fundraising momentum remained strong, and we have approximately $29 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 experienced net outflows of $12 billion, driven primarily by redemptions from U.S. government and offshore sterling prime money market funds in line with the broader U.S. money market fund industry. BlackRock’s diverse cash management offerings position us well to serve clients’ needs, and you will hear more from Larry about how we are expanding our ESG cash offerings to enhance our competitive positioning even further.

Finally, third quarter advisory net outflows of $10 billion were primarily linked to the successful planned wind downs of portfolios managed by our financial markets advisory group on behalf of the Federal Reserve Bank of New York. Recall that revenue linked to these assignments is primarily reflected in the advisory and other revenue line item on our income statement.

BlackRock’s continued strong performance reflects our commitment to strategically invest in our business in anticipation of change and to lead the evolution of the asset management industry. Today we see even greater opportunity to invest in our employees and our clients and in the communities in which we operate to ensure that we will continue to optimize organic growth in the most efficient way possible.

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 truly hope that all of you are staying healthy and safe. Fortunately, I’ve been traveling again in recent months to see clients worldwide. It’s great to be back on the road, meeting face-to-face with our clients, and I found our clients actually more engaged, more interested in our conversations than ever before.

As investors continue to navigate uncertainty in the markets and in the broader global economic outlook, BlackRock is partnering more closely with our clients to help them achieve long-term — their long-term goals and helping them seeking new opportunities. BlackRock is providing insights on the global economy, guidance on how to navigate the market’s volatility and providing solutions for their entire portfolio. Our comprehensive unified investment and technology platform, combined with our steadfast client-centric approach, is enabling us to deliver constantly and consistently strong results for our stakeholders.

Long-term net inflows of $8 billion in the third quarter represented 9% organic base fee growth were driven by continued strength in our strategic growth opportunities that we’ve spoken to you in the past. Our consecutive quarters of strong growth are the direct result of these investments that we’ve made over time to enhance and evolve our business and to be more prepared for the needs of our clients. We have now delivered organic base fee growth in excess of our 5% target for six consecutive quarters, including 13% growth over the last 12 months. And we also generated 13% year-over-year growth in technology services revenues as more clients are turning to Aladdin to execute on their growth aspirations and we’re helping them scale their business.

At the promising global economic restart earlier this year, we saw certain countries and markets take a step back in recent months as they are confronted with the economic — with virus variants and economic issues. Concerns around slowing economic growth are increasing, while policymakers are evaluating the timing and pace of easing whether it’s rate hikes or reduction in bond purchases. And with interest rates still at historically low levels, investors need solutions that can earn a real yield and be resilient in a higher inflationary world.

Inflationary trends are appearing more than transitory, reflecting structural changes, including a shift from consumerism to job creation, rising wage growth and the energy transition. As I said in the speech to the G20 in July, society needs to rapidly invest in innovation to offset inflationary pressures associated with the transition to a net-zero economy. We need to make sure that we are pushing just as hard on the demand side as we are on the supply side. Otherwise we risk supply issues that drive up the cost for consumers, especially for those who can least afford it.

Against this backdrop, clients are turning to BlackRock more than ever before, and we are using the full breadth of our capabilities to meet all our clients’ needs. BlackRock’s top-performing active platform continues to outpace the industry, generating $45 billion of net inflows in the quarter and nearly $200 billion over the last 12 months. Momentum in active equities continue, and BlackRock’s number one in year-to-date asset gathering in the U.S. active equity mutual fund industry, up from number three in 2020. These results reflect our investments over time to incorporate data science, integrate ESG considerations and enhancing portfolio construction capabilities across the entire active business, and we remain committed to continuous innovation so we can deliver strong and durable alpha for our clients over the long-term.

In addition to our traditional active strategies, we’re also seeing clients increased portfolio allocation to private markets. As they reach for yield, institutions are turning to BlackRock for private credit, real estate and private equity solutions. In wealth, we are seeing advisors excess private market through our record — our recent closed-end fund vehicle, which have up to 25% allocation to alternatives and are accredited investor solutions. In total, we raised about $5 billion of illiquid alternative flows and commitments in the quarter, and we continue to steadily deploy that capital for our clients.

Portfolio construction and asset allocation decisions are critical in achieving desired returns, and more clients are adapting our ETFs as a building block in their portfolios. We generated $58 billion of ETF net inflows in the third quarter with growth across each of our core, strategic precision product categories, including strong flows in fixed income as clients sought inflation protection and sources of income.

We crossed $200 billion in ETF inflows year-to-date, exceeding our 2020 full year flows. We are seeing this momentum across the entire ETF industry as more and more investors discovered the convenience, the efficiency and the transparency that the ETF vehicle has. We see opportunities well beyond the 30 million people who use our ETFs today and continue to believe in the long-term growth potential for ETFs. And we remain confident in our ability to deliver strong organic base fee growth and lead the industry.

In my conversations with clients I hear about how they are looking to focus on their core business and partner with select investment managers that have the expertise, the technology, the scale to navigate the increasingly complex markets. We see outsourcing a portfolio management through OCIO for institutions and for mono-portfolios for wealth managers, both of which are fast-growing areas of the industry.

BlackRock is well positioned to capture this opportunity and partner with our clients across our whole portfolio. Few asset managers have the scale and the diversity of offerings to do this. And the consolidation we have seen in the industry is a further validation of our business model that we have already built here at BlackRock.

We are also innovating to expand client options for how they participate in proxy voting decisions. Much like asset allocation and portfolio construction where some clients now can take an active role, while others outsource these decisions to us, more of our clients are interested in voting on their index holdings. This is another great example of one BlackRock effort to further democratize choice for our clients and is in line with our commitment to provide them with the broadest range of options.

Client demand for more holistic and flexible technology-driven solutions is also increasing. Technology services grew — revenues grew by 13% year-over-year as Aladdin’s capturing opportunity from industry shifts, and we are leveraging our user-provider model to further evolve Aladdin. The combination of Aladdin and eFront has been well received by clients and we now have over two dozen clients using both across their entire whole portfolios.

As we’ve done throughout our history, we continue to invest ahead of our clients’ needs and evolve BlackRock to lead in the biggest long-term opportunities of the future, and we are seeing meaningful progress in executing on these opportunities. In sustainability, momentum remained strong and we generated another $31 billion in net inflows across all regions. Active sustainable net inflows of $7 billion were led by the launch of our ESG Capital Allocation Trust closed-end fund, which Gary mentioned earlier.

As ETFs — in ETFs, iShares is leading sustainable — is a leading sustainable provider, capturing near nearly 50% of the industry category inflows year-to-date. In Europe, almost half of all industry flows are now going into sustainable ETFs, up from less than 10% just three years ago. Clients also want impact-oriented strategies that seek to deliver a targeted environmental or social outcome. We recently repurposed one of our money market funds to seek positive social outcomes by supporting a diverse trading ecosystem. BlackRock will also be contributing 5% of our management fees, net revenues from the funds that support students at Historically Black Colleges and Universities and predominantly Black Institutions. This fund has already grown more than 20% to $4.5 billion since its conversion in July, and we are proud to work together with our clients to help make a positive impact on the futures of many diverse students, on the futures of many diverse business owners and in their own communities.

BlackRock is also supporting clean energy solutions that change the demand curve for hydrocarbons, which is actually accelerating today and driving energy prices higher. The gap in cost between clean energy technologies and those that will emit greater amounts of greenhouse gases is still very large for most things, which is why BlackRock is supporting a range of initiatives to help bring down the green premium of clean energy.

Building on our partnership with Temasek earlier this year to advance a decarbonization solution the BlackRock Foundation announced last month, $100 million grant to Breakthrough Energy Catalyst program. This grant will help speed the development and commercialization of clean energy technologies, and BlackRock will provide our investment expertise as the program deploys its financing around the world.

We have a long history of innovating to help millions of people worldwide improve retirement readiness. And today we are the largest investment only defined contribution provider in the industry with over $1 trillion of assets under management on behalf of over 7,200 defined contribution plans — excuse me, 72,000 defined contribution plans. Our targeted franchise LifePath has seen $23 billion in net inflows so far this year, representing a 9% organic growth rate, far in excess and broader in the target date industry. And we continue to innovate ahead of the future needs of our clients.

We recently announced a significant milestone in our retirement income solutions, LifePath Paycheck. Five large plan sponsors whose plan together represents about $7.5 billion in target date investment have elected to work with BlackRock to implement our LifePath Paycheck solution as a default investment option in their investment retirement plans subject to necessary approvals and conditions. We remain committed to working alongside our clients and partners to help more people address the challenges of spending and income in retirement.

We believe that globally-integrated financial markets provide people, companies and governments with better and more efficient access to capital that supports economic growth around the world. This conviction drives our long-term strategy in China, as it has in every community, in every country where we operate. BlackRock’s clients have benefited from our focus on the long-term, and we will bring this perspective to help global clients invest in China, and importantly, to deliver investment solutions to Chinese investors.

After receiving our FMC and WMC license earlier this year, we launched our first two products in the third quarter, raising over $1 billion in two weeks for more than a 110,000 investors. This milestone demonstrates the value proposition of BlackRock’s platform and the strength of our partnerships. It also highlights the start of BlackRock’s living its purpose in China by helping more people secure in China a better future and investing in the long-term and retiring hopefully in dignity.

Just as we continue to evolve our business to meet client needs, we also evolve our entire organization. A key driver of BlackRock’s success over the years has been our focus and deliberate talent processes on delivering leaders with a broad range of expertise, a deep commitment to the firm and a one BlackRock mindset. This commitment to the evolution also extends to our board of directors. We recently elected two new directors to our board, Beth Ford, President and CEO of Land O’Lakes and Kristin Peck, CEO of Zoetis. Beth and Kristin are recognized leaders in their respective industries and they bring a wide range of valuable perspectives and experiences that will help BlackRock and the board navigate our future on behalf of all our shareholders.

Looking ahead, I am confident. The investments we are making today will enable us to capture greater opportunities and to deliver industry-leading growth in the years to come. More immediately, I’m very excited to welcome our colleagues back to BlackRock’s offices in certain parts of the world where we begin our Future of Work pilot. It’s our culture which can’t be built or maintained remotely over the long-term. That ensures we can never forget who we are, who we serve. It also helps us and our markets and our industry, and most importantly, helps us continue to evolve and experience the constant change of the world. Having togetherness in connection with all our employees is vital for our culture and vital for serving the needs of our clients.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Michael Cyprys — Morgan Stanley — Analyst

Hey, good morning. Thanks for taking the question. Just wanted to ask about alternatives. Given prospects here for rising yields and interest rates, there is some fear in the marketplace that this could soften flows into alternatives products. So just would be curious to hear your perspectives on how you see potential for investor allocations to alternatives products to evolve in a rising rate scenario. And then as you look across your alternatives franchise today, maybe you could just touch upon some of your recent initiatives on liquids. And just any sort of views which you think could be the largest contributor to growth at BlackRock amongst our illiquid products? Thanks.

Larry Fink — Chairman and Chief Executive Officer

Well, first of all, hi, Michael. I’m going to let Rob Kapito answer that question.

Rob Kapito — President

So Michael, as you know that we have been involved in the alternatives business in one way or another for a pretty long time, especially in the retail sector since 1988. And our goal has been to access the retail area for alternatives by keeping our promises over a long period of time on performance.

So to start with the growth in retail alternatives is certainly compelling as part of our strategy to serve advisors’ whole portfolios. And what we chose to do is bring a diversified product line-up to the retail alternative investor. So our job is to bring the appropriate wrappers for those products that provide the solutions to help reshape their portfolio at a period of time when rates and returns have been very low. And what we have seen them do is move from 1% to 2% of their portfolio to allocations up to 20%.

So year-to-date, just in that sector, we’ve raised over $24 billion of net inflows, and that’s at approximately 85 basis point average fee rate across what we’ll call our retail liquid alternatives and credit vehicles and our public private closed-end fund offerings. So our recent launch of alternatives portfolio analytics for financial advisors on the web-based BlackRock Advisor Center and the continued product expansion is going to help us grow with those clients. And in the recent years, we expanded our retail alternatives to include private credit and private equity, pre-IPO access to growth equity through closed-end funds, and we’re working to expand our retail alternatives offerings now across real assets, sustainable and co-investment opportunities.

So just in the closed-end funds alone, we provide a wrapper that will enable us to provide up to $3 billion in alternatives to them. And just in a summary form, in total, we manage about $180 billion across liquid and alternative — illiquid alts, $29 billion right now in dry powder to invest and deploy approximately $210 million of future annual base fees. And including liquid and liquid credit, our platform is now over $310 billion, we’re the top five manager in that. And we’ve built out alternatives platforms and raised another $100 billion of gross capital over the last five years, and we expect to raise $100 billion more in the next three years.

So just for September year-to-date, we have raised $25 billion of gross capital and deployed $10 billion. And because there is some expectation that rates can rise, still these are longer term investments that have enough spread in it that I believe that the demand is going to continue for quite a long period of time. And I think Larry’s rate scenario, which he said in the beginning, as rates low for longer will only enhance the ability for people to want more alternatives.

Operator

And your next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Larry Fink — Chairman and Chief Executive Officer

Hi, Alex.

Alexander Blostein — Goldman Sachs — Analyst

Great. Good morning. Hey, Larry. Thank you for taking the question. So inflation concerns are clearly everywhere. And Larry, as you highlighted in your prepared remarks, that’s something you guys are clearly focused on as well. So maybe a two-part question here. So one, when it comes to BlackRock’s own cost structure, where you’re seeing expense growth and margins heading into ’22? Obviously you make changes on the salary from last quarter, but curious if this is becoming a bigger issue for sort of total comp and G&A as you think forward? And then secondly, from a product perspective, what are the strategies you’re advising clients to lean into more aggressively into 2022 to protect their portfolios against the upside inflation risk? Thank you.

Gary Shedlin — Chief Financial Officer

I’ll take the expense first. Hey, Alex, it’s Gary. How are you? So we’re obviously — we have seen some expense growth, which I think is expected in the context of the outsized organic-based fee growth that we’re delivering on the top-line. For the third quarter, our margin obviously was down about a 120 basis points versus a year ago. And I’d say there were a couple of things there that kind of clouded what would have been some operating leverage in the business.

Really three things in particular. One was lower performance fees year-over-year. If you recall, we had this discussion last year that performance fees in general hit the P&L at a much higher margin than the rest of the business because there’s only really compensation associated with it and no other operating cost in the business. And so when we see performance fees decline, as they did year-over-year, that has an impact on the margin. Secondly, we had higher contingent consideration fair value adjustments or non-core expense this quarter, which was related to the Citibanamex final payment. And we have higher intangible amortization. So if you look at those three things, those three things really more than offset our margin on a year-over-year basis where you would have seen some operating leverage improvement.

In terms of just looking at those individual costs, I mean, when you look at comp, comp is up about 8% year-over-year. Again, that was highly driven by base salaries, but not just the mid-year that you saw. And remember, comparing it to a year ago, we have normal base salary increases at the beginning of the year. We have the mid-year headcounts a little higher. We obviously have Aperio this year versus when we didn’t have it last year. And FX has basically increased the dollar cost of some of that compensation also. So that’s really the main driver was the base salary, but the mid-year salary increase really didn’t have that much to do on a year-over-year basis.

On the G&A side, that was up about 30%, but again, a bunch of components there. Technology expense increased year-over-year, and you will still continue to see that going forward. The primary driver there obviously is technology infrastructure, primarily the ongoing migration of Aladdin to the cloud, which we’re probably about halfway through, but we’ll be accelerating into next year. You’re also seeing higher portfolio services costs, which again, is part of our success story in OCIO.

So where you see us winning large outsourced wealth solution mandates either in Europe or institutional mandates like the BA pension fund or the significant win that we just announced this quarter in APAC and New Zealand, you’re going to see higher portfolio services costs because not all of those mandates are managed in-house. We use third-party advisors. And when we use third-party advisors, you’re seeing those expenses reflected in that line item of the P&L. It’s grossed up on revenues, but we also have to bear the expense. And obviously, there’s always still some noise that we see year-over-year in our non-core. Here, we talked about the Citibanamex and Hunter Fund launch costs, which again, in both cases, associated with higher revenue.

Finally, on the direct fund expense side, I think that is purely variable. That is obviously tied in most part to our growth in our index AUM, which is fundamentally driven by our success in iShares. That number was up roughly 38% year-over-year, but there’s always going to be some noise in that number as we try to effectively manage that expense on behalf of the fund shareholders. So in this case, this year, while there are always some timing issues, it did reflect some one-time expenses associated with moving indexes from one provider to the next to try and basically get those at lower costs. And when you exclude a little bit of noise, that number was probably up about 31% year-over-year versus average iShares AUM increased of close to 34%.

So I would say, yes, there are some expense increase. I would say it’s less tied to inflation for us than other players. It’s really more tied to continuing to invest for growth. And obviously, if we’re able to continue to deliver organic base fee growth well in excess of our 5% target, which we’ve done for the last six quarters in a row to 9% clip, 13% over the last 12 months, we’re going to see some elevated expenses to be able to drive that success.

Larry Fink — Chairman and Chief Executive Officer

And on the products in a more inflationary environment, I would just clearly tell you that our platform is large, it’s diverse. We’re having conversations with clients globally where they should be allocating. I do believe you’re seeing higher allocation towards equities over the last year across our clients’ portfolios. As equities rally, they did less in terms of rebalancing.

The bigger question is, how do you allocate across equities? What is a roll-up of emerging markets? But I don’t think inflation is playing a dominant role in the conversations. Even in fixed income, we’re obviously — it’s very obvious, long-duration assets are going to be impacted the most. And so those clients in fixed income who are worried about their duration risk that could go down into a low-duration product, they could go into various different products with less convexity and less issues. They could go in some type of inflationary protected type of notes too. That’s not going to be that large. But the resiliency of our platform really allows us to have that conversation, whether it’s in a deflationary world or in an inflationary world. And I do believe the — if you look at the geographic dispersion of our growth, the conversations worldwide represent these types of conversation, when should we think about inflation? What role should we play? What is the role of alternatives in an inflationary environment? What is the role of equities across fixed income?

So I actually believe it’s the volatility of the global economy is allowing us to have these robust deep conversations. And I don’t think there’s one global trend going in and out of one product because inflationary fears and some clients don’t believe in that, some people actually believe it’s transitory. That’s the — I would look at this — when there is uncertainty and when we’re in a transition period, more clients come to BlackRock than ever before because they are asking those questions. And I think because of the robustness of our platform, whether it’s an index-oriented strategies or active strategies across the spectrum, we have the ability to work with them across all economic environments.

Operator

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

Brian Bedell — Deutsche Bank — Analyst

Great. Thanks.

Larry Fink — Chairman and Chief Executive Officer

Hey, Brian.

Brian Bedell — Deutsche Bank — Analyst

Hey, good morning. Good morning, everyone. Maybe just switching gears to the sustainable investing growth. I think, Larry, you made some comments at a conference on the path to net-zero that at the current rate we’re not there yet. Maybe if you can talk about how you think the demand and the capacity for BlackRock to offer impact fund products, more impact fund products where we have readiness and the time to fix GV going forward? And is that going to be — should we be thinking of that as a pretty strong organic growth path going forward?

Larry Fink — Chairman and Chief Executive Officer

The flows in this COVID world had accelerated into sustainable products. Let me give you the context. I think, with global capital markets, public institutions are moving very rapidly to adapt more disclosures related to sustainability. More clients, including our hydrocarbon clients, are looking to adapt how to continue to provide hydrocarbons to fit the needs of — the current needs of our society, but also to slowly adapt in a more sustainable platform too.

So across the board, we are having very deep conversations. And I must say, the conversations we’re having with our hydrocarbon companies and the hydrocarbon, from chemicals to oil, they are more robust than ever. They’re deeper, they’re broader than any other time. And — but our flows continued to grow and dominate. We continue to be a dominant leader. Year-to-date we had about $80 billion of sustainable inflows. We had $32 billion of those inflows in the third quarter. When I talked about the shift in finance, we’re seeing that.

Now, specifically on your question related to impact, this is one of the reasons why we wanted to be a partner in Breakthrough Energy. We want to learn more of the science and the new technology. This is why we’ve partnered in our decarbonization fund with Temasek. The demand is growing precipitously in terms of clients interested in finding new — being part of this transition. And so the capital is there. What is not as prevalent are the projects or the opportunities.

We are having conversations with universities. We’re having conversations with governments across the board on how can we provide capital? And one of the more dynamic conversations we’re having with the traditional hydrocarbon companies across the board is, how can we partner with them in terms of moving — helping them move forward on their sustainable strategies, on their decarbonization strategies, on their strategies around sequestering of their own carbons. I mean, so many of the big multi-national hydrocarbon companies are building new dynamic technology so they can be the leaders in the sequestering of hydrocarbons, of carbons. At the same time, they may be using that to produce more energy at this time. But these are the types of solutions we’re having across the board.

You’ve heard the questions that what my view is, we’re not moving fast enough, yes. I think that movement towards sustainability is very fast and rapid related to public companies. I think regulators worldwide are asking public companies and banks to do more disclosure. My greatest fear, and I spoke about this in my Venice speech three months ago is, we’re creating a hybrid world, a bifurcated world. The pressure on public companies and banks and asset managers are enormous. We’re not putting any pressure on private companies. And there was a great story today in one of the newspapers about as hydrocarbon companies divested some of their hydrocarbons, the buyers are private equity firms. That doesn’t change the net-zero world. And that’s why I’m saying, we’re never going to get to a net-zero world if we’re not moving holistically together, public and private.

And then I spoke about obviously — in an editorial today related about the need to invest in the emerging world. There is huge pools of capital standing by, but they are — we are not able to evaluate the first lost piece in so many of the brownfield investing in the emerging world. And it is estimated the emerging world needs a trillion dollars a year to become more sustainable. As a backdrop, the emerging world minus China represents 34% of the hydrocarbon output.

And so if we are going to continue at the pace of $150 billion of investments when there’s a need of a trillion dollars, we’re fooling ourselves, we’re going to get to a net-zero world. We’re going to be fooling ourselves to getting to a net-zero world if we’re only asking public companies. We are fooling ourselves if we believe by restricting supply with our traditional hydrocarbon companies, that only raises energy costs, which we’re witnessing now. And that is creating not a just transition, which I spoke about in my last 2 CEO letters.

So we have to be vocal. We have to be forceful about it. BlackRock is a leader in this, and we’re seeing the flows. And I continue to see this big shift in investor portfolios as they move away from traditional indexes to more sustainable types of indexes, as they’re moving away from different types of strategies and they’re moving into these other strategies. We need to accelerate this. We need to accelerate in a way that we’re working with our great hydrocarbon companies, not against them.

Operator

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

William Katz — Citi — Analyst

Okay. Thank you very much.

Larry Fink — Chairman and Chief Executive Officer

Hey, Bill.

William Katz — Citi — Analyst

Good morning, everybody, and thank you so much for taking the questions today. I appreciate all the discussion. Maybe a two-part question, just keeping the line with that. One is, can you maybe peel back a little bit on why you’re so successful in the retirement business? And where do you sort of see the paycheck’s opportunity gaining scale and share? And then completely unrelated, maybe for Gary, how do you think about the exit fee rate, base fee rate, just given the divergent beta versus the very strong flow mix dynamics? Thank you.

Rob Kapito — President

So Bill, the story is, we’re able to look at a client’s portfolio holistic over the long-term and the focus is to have our clients be able to retire in dignity. It’s not a one-off situation. It’s a constant look at a portfolio over a period of interest rates and solve the problem with the appropriate wrappers and products. We have the scale of products, we have the performance, we have the wrappers. So honestly, it is the focus. A significant portion of all of BlackRock’s assets are dedicated to retirement. This is what we do. And when we dovetail that into the analytics that we could provide, we really can fulfill the entire gamut of retirement. So it’s product, performance and technology and focus on what we think is the most important business that there is in the world is keeping our promises to clients so they can retire in dignity.

Larry Fink — Chairman and Chief Executive Officer

So Bill, I would add one more thing that Rob is talking about, I think our consistency of messaging to our clients across many, many years, and we’ve developed — built a deep relationship with the clients. And I don’t believe our 9% growth rate is a one-time thing. I think we continue to be growing our presence in this market. We continue to try to be an innovator, whether it’s the LifePath Paycheck or anything which now LifePath Paycheck is about $340 billion. I’m sorry, that’s our target date, and LifePath Paycheck, our most recent growth.

So I look — I think conversations have never been broader, more robust and we continue to drive these conversations. I believe more and more of the large clients are looking to BlackRock for that type of advice, that type of hand-holding. And I believe more than ever before, especially in this world of need for more employees, the need to build deeper relationship with the employees, I believe the conversations that every corporation now in how to create better connectivity with their employees is becoming a broader conversation than we’ve ever seen in the last 20 years. I think the companies that have deeper connections, a better retirement plan, better healthcare plans are the companies that are driving more consistency with their employees, led to higher retention rates.

So I truly believe this is going — this is one of those transitory things that are happening. And I think it’s catching a lot of organizations by surprise now, the fluidity of employees moving from one economy to another economy, moving to one business to another business. And I truly believe this refocus on the needs of the employees and retirement is a major component of that refocus is going to be a larger and more dominant theme. And I think this is the — when I talk about this — we’re in this transition now, I think many corporations are surprised at this. I think COVID and how we work remotely, people feel — many people want to work remotely. They feel differently about their work-life balance.

This is all transforming our society in many ways, in a great way, but we’re in this transition. And some industries are going to be huge winners in this and some industries are going to be losers of this. But most importantly, I think the common thing those companies that are working with their employees with purpose, building a deeper, broader connectivity with their employees, they retain their employees with greater regularity, and importantly, they are able to attract the best and the brightest, and we’re seeing that more and more.

And our conversations about business purpose and stakeholder capitalism, I think it resonates with our corporate clients who have these defined contribution plans and they are asking us how to create that greater depth of robustness. And then you have overlay, what we’re trying to do related to innovation. I think it really is a compelling story, why BlackRock?

Gary Shedlin — Chief Financial Officer

And Bill, on your second question, which I think was about fee rate going into the fourth quarter. We generally don’t provide a lot of guidance on that; we’ll leave that to you guys. But I will say a couple of things on that. Obviously, you will see that the spot rate entering the fourth quarter was moderately lower, but not a big deal in average assets for the third quarter. So I think we’re probably about the same.

But I would direct you towards Page 5 of our supplement. I think obviously a lot of things go into the fee rate. And in fact, I would say that from an organic growth perspective, every month of the third quarter was generally — was very consistent. So it wasn’t like we saw a lot of volatility in terms of our organic growth. But clearly, you do see some differences in the spot rates in terms of markets relative to the average rates. And you’ll clearly see there that as we’ve talked about in terms of diversion equity beta, we did see an acceleration in terms of the decline of certain emerging markets as we got to the end of the third quarter.

And I think you’ll see that on the supplement where some of our higher fee markets in Asia, the emerging markets and commodities in particular are all down roughly somewhere around mid-to-high single-digits with actually the BlackRock equity index on the spot basis down about 3%. So no question that we did see diversion beta accelerate into the end of the quarter. But again, given some of the other stuff, I think that might have a moderate, very moderate impact on the fee rate, but I don’t think anything significant.

Operator

Thank you. And last question comes from Robert Lee with KBW. Your line is open.

Larry Fink — Chairman and Chief Executive Officer

Hey, Robert.

Robert Lee — Keefe, Bruyette & Woods — Analyst

Good morning, everyone. Hope everyone is doing well. Maybe if we could just go back to maybe alternatives business, and I was interested on the [Indecipherable] obviously about the strategy, but a big win. But can you maybe talk about what you’re seeing and how you feel about the acquisition, insurance market in terms of [Indecipherable] big clients where you see more CIOs are building their exposures. And did you feel you have the right products set as the insurance industry, as they look to expand their infrastructure and credit and whatnot. Just trying to get a better feel for how you’re tapping into that?

Rob Kapito — President

So Gary and I will barbell this. We’re seeing that insurance portfolios have always had an allocation to what we’re all calling alternatives. But as the alternative packages have become much more complicated, certainly the technology and the management of those has not really caught up. So we’re being asked by insurance companies who have determined that in many cases, it would be better, cheaper, faster with the technology to outsource many of those investments. And of course, that’s a very, very big part of our platform.

And we are being called in more and more to be a partner with insurance companies on their portfolio overall and it’s a huge growth area for us with Aladdin because the technology has not kept place. So we’re seeing a lot of interest from the insurance companies. And it spans the growth from private credit, especially real estate and infrastructure, and those are three areas that we’ve spent a lot of time developing. And certainly in Aladdin, our ability there is second to none. So it’s become a bigger opportunity for us in the last year or so.

Gary Shedlin — Chief Financial Officer

I couldn’t agree more. So our fee business today obviously is in excess of $450-plus billion. You mentioned AEL, which is — which we’ll fund in the fourth quarter, very significant mandate. And I think Rob is right, portfolio resilience, diversification, portfolio construction, which takes advantage of our great performance in core fixed income are increasing momentum and capabilities across the breadth of private markets and leveraging technology. So I think there’s no question.

I would say it’s resonating well beyond just insurance companies because we’re seeing yet — obviously, we’ve seen the British Air Pension, we’ve seen a number of outsourced wealth solutions in Europe where I think all of these things has strong applicability and we’re seeing them obviously increased momentum in our broad-based multi-asset capabilities that you’re seeing come through in our quarterly results. So thanks for the question, Robert.

Operator

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 interest at BlackRock. Our third quarter results, again, is a direct result of our steadfast commitment in serving our clients, listening to our clients, responding to our clients and hopefully staying in front of our clients’ needs so we could be with them as they evolve and change. I see a large opportunity ahead of BlackRock than ever. And BlackRock’s focus remains on investing in our people, on our communities where we operate across the world and in our platform. Most importantly, as we continue to stay ahead of our client future needs, we will continue to be driving excellence on behalf of all of our shareholders.

With that, thank you. Hopefully, everyone have a safe and healthy fourth quarter.

Operator

[Operator Closing Remarks]