BlackRock, Inc. (NYSE:BLK) 2023 Bank of America Securities Financial Services Conference February 16, 2023 8:00 AM ET
Company Participants
Rob Kapito - Co-Founder, President and Director
Conference Call Participants
Craig Siegenthaler - Bank of America
Craig Siegenthaler
So this is Craig Siegenthaler from Bank of America, and it's my pleasance to present Rob Kapito. Rob is Co-Founder, President and a Director of BlackRock. He is responsible for nan day-to-day oversight of each cardinal operating units including finance strategies, customer businesses, exertion and operations, and consequence and quantitative analysis.
Rob, convey you for joining america today.
Rob Kapito
My pleasure.
Craig Siegenthaler
So speedy inheritance of BlackRock, and I cognize you each cognize it, it's nan largest plus head successful nan world pinch $9 trillion successful assets nether management. More importantly, it's nan leader and first mover and scaled successful each nan awesome secular maturation verticals. This includes iShares and ETFs, Aladdin successful technology, ESG, status solutions and privates. Rob, let's commencement first pinch nan rebalancing opportunity successful fixed income.
Question-and-Answer Session
Q - Craig Siegenthaler
Yields astatine levels we haven't seen successful 20 years. Pension plans tin yet deed their liability hurdle rates without stretching, and nan babe boomers tin yet make a decent income. So what is your position connected nan imaginable for ample reallocations into fixed income successful 2023?
Rob Kapito
Well, great. So I'm going to talk little astir BlackRock coming and much astir these questions connected nan marketplace and past fto you determine who tin really prosper successful a marketplace for illustration we're going into. So I wrote down a bunch of small statistic because Craig is 1 of our champion coverage, and he likes numbers. So nan first point is nan backdrop here. Why is location going to beryllium repositioning? So we are coming disconnected nan highest ostentation successful 40 years. We're coming off of nan fastest summation successful liking rates successful 40 years. We person nan tail extremity of a pandemic. We person a warfare successful Europe. We person each nan geopolitical issues that you each know, and nan S&P was down 19%, and each of that spells B-O-N-D-S and added bonds.
And we're going to spell done a generational alteration successful nan enslaved market. So what does that mean? It intends that nan 10-year mean connected nan 1 to three, which utilized to beryllium called nan Merrill Lynch one-to-three index. The 10-year mean is astir 145, nan 20-year mean is astir 2 and change. And correct now, nan Merrill Lynch 1 to three, and I still telephone it nan Merrill Lynch, is astir 4.5%. That is simply a generational alteration successful rates. So what do we person to do? We person to return advantage of that, and why do we person to return advantage of this because this is what I'm going to telephone backmost to nan future.
So successful 1995, you tin person 100% of your clients' assets successful bonds and get that 7% return. Now you spell and that's a magic number, not only for individual clients, but for pension costs and institutions. Now you accelerated guardant 10 years and you cognize what, you request bonds and you request thing else, you request equities. And astatine that time, BlackRock was a enslaved manager, and we repositioned ourselves by buying 1 of nan champion institutions successful equities astatine that time, which is Merrill Lynch Investment Management.
And now we person nan equities to lead our clients. And you accelerated guardant 10 years later, and what do you need? Bonds, equities and you request thing called alternatives successful bid to get that 7% yield. And if I tin time off you pinch thing coming is that today, you tin beryllium 100% successful bonds and get that 7% return. And successful fact, you tin return nan slightest magnitude of in installments consequence and nan slightest magnitude of long of value consequence and get an 8% aliases 9% return successful nan shortest portion of nan curve earlier wherever rates are. Not taking advantage of this is not doing a work for your clients. Now for pension plans, you asked astir repositioning. Pension plans person done very akin to what everybody other has done.
They went very agelong equities, and they didn't person immoderate bonds because they are yielding zero, why would you person bonds. And everyone utilized equity ample headdress dividend stocks arsenic a surrogate for bonds, and past barbell into backstage equity, which you saw nan maturation successful this. Well, nan daze hit, beta goes down crossed nan board, equities, bonds, backstage equity. The telephone rings and everybody has to pony up to nan backstage equity companies to tie down nan money and they look what are they going to sell.
Well, you're really not going to waste nan equity that went down 50%. You're going to waste thing that you didn't make arsenic overmuch of a nonaccomplishment on, you waste it -- immoderate equities, you salary nan tie downs. And now you look astatine your portfolio and you person backstage equity astatine nan max that you tin have, you person a banal portfolio that's much risky because you sold nan stocks, it didn't spell down that overmuch because they're much unchangeable and you person nary bonds.
So what tin you do successful nan adjacent respective months going forward? You sewage to adhd to nan enslaved portfolio. So you're going to spot a immense travel into bonds, and this is not thing to watch. This is thing that you person to participate in. So we person $3.2 trillion now successful nan fixed income and successful cash. And successful 2022, we added a grounds $123 cardinal of nett flows into enslaved ETFs and $6 cardinal into backstage credit. And conscionable to verify what I'm saying successful lawsuit you want to, I'll prevention you time, successful nan first 2 weeks of nan year, we added $12 cardinal into iShare enslaved ETFs.
So location is simply a immense magnitude of money that's successful mobility and it's very, very focused connected nan enslaved market. Don't miss this. This is not thing to watch because this is simply a life change, short duration, two-year type paper, you tin get 6% direct. And if you person a small spot of spirit successful it, you tin get to nan 8% to 9% and past we tin watch and spot wherever ostentation goes, wherever nan system goes.
And astatine immoderate constituent successful time, nan output curve will change, you'll beryllium capable to widen that retired and you'll position your customer and unthinkable service. So we deliberation we're going to prosper from that because there's cipher that has much flavors of bonds and much ways to get into bonds and much enslaved EPS than anybody else, immoderate different plus manager. And if it's 1 point that we do cognize complete nan past 35 years, is really to manipulate nan enslaved market.
Craig Siegenthaler
[Technical Difficulty] very ample rebalancing into fixed income. BlackRock arguably is champion positioned for that. Now wrong that, nan past 10 years, we've seen a very beardown migration successful nan equity broadside from progressive to passive. We really didn't spot that successful nan fixed income broadside until past year. Last year, passive fixed income is successful and progressive fixed income is out. Going forward, what percent -- aliases do you deliberation passive fixed income will beryllium a ample portion of nan infill for illustration we saw past year?
Rob Kapito
So, this is different important question, Craig, and this is about... [Technical Difficulty] really we look astatine nan markets. So a batch of you person access. Let's talk astir nan enslaved marketplace done individual bonds and done communal funds. But during nan past respective years, this caller merchandise called ETFs person been created, which conscionable are a amended mousetrap, a amended building for your clients because it offers diversification, it offers transparency and it offers liquidity that individual bonds do not person and it's very important to salary attraction to because you tin besides building a enslaved portfolio that will springiness you themes that you tin accentuate for immoderate your customer is looking to do.
So that's nan first portion of utilizing what we would telephone aliases you would telephone passive, but group are being progressive pinch their passive. Where they're doing this is another... [Technical Difficulty] is that successful this marketplace building change, we person different issue, which is facing everyone, which is exemplary portfolios. And this is really important for each of your clients because a batch of group are looking for a portfolio that correspond their objectives, their future, their age, their clip erstwhile they're going to request to tie down money, and they're creating models. And I cognize that you each person models successful your offices arsenic well. We person models, and 1 of nan champion products to usage successful a model, nan slightest costly exemplary and to get exposures that you want is utilizing ETFs.
So wherever BlackRock is participating, successful not only creating ETFs that correspond a batch of nan needs that your clients and besides institutions have, but what they're trying -- what we're trying to do is build a larger and larger opportunity guidelines and worth proposition for nan clients. Where we participate is not only successful nan models that we person for nan client, but we participate successful models that different group are building moreover different competitors, who are going to usage ETFs successful those models. And truthful our maturation complaint successful ETFs will beryllium higher than anyone else's maturation complaint because of nan usage of that.
But don't look astatine passive is not -- is giving up connected nan market. You tin adhd a batch of alpha utilizing ETFs and utilizing scale depending upon really you do it, and it's not going to beryllium conscionable passive aliases conscionable active. The astir blase models and nan returns that group are getting for their clients who usage some progressive and passive strategies successful what they're trying to do for their clients.
Craig Siegenthaler
So Rob, let's talk astir 1 business that's been generating immense mandates recently, your outsourced CIO business. Recently, you've won a ample instruction from AIG and they conscionable really support coming at. So possibly update america connected why they've been turning to BlackRock? And what's nan pipeline look for illustration successful this business?
Rob Kapito
So nan business is getting much analyzable arsenic we each see. Different type of structures, different type of ways and study to adhd alpha into nan portfolios, and a batch of institutions don't person nan expertise to bargain that technology, to person nan unit to do it, to person nan standard and size that they request to beryllium applicable successful nan marketplace and besides to root assets successful nan marketplace. So they're turning to america and OCIO, outsourced CIO, and they're bringing very, very ample blocks of assets to america to enactment arsenic their portfolio guidance group and their exertion group.
And nan truth that we person nan ample sheet of products that we person and that we person nan exertion to necktie it each together that is up to day makes america a large advantage to them. And we person positioned ourselves very good complete nan past galore years pinch each of these products. So they move to us, and we just, this year, won a $38 cardinal instruction from Central States. We conscionable won an $11 cardinal lb instruction from nan Royal Mail. So these are nan type of institutions, and you did mention AIG, which is $140 billion. There are not that galore managers that tin do this and supply each of those services. So erstwhile you're looking astatine BlackRock, they're looking astatine america arsenic an institution that tin run successful each these markets, run pinch nan exertion they request to supply nan reports they need, and past to create nan -- each of nan alpha that they're looking for.
And immoderate of these clients are very complicated. So they request liability matching. They request accounting arsenic well, and each of these things complete nan years, we person built into our exertion called Aladdin, and past we tin connection them this afloat service. So this is thing wherever location are not galore group for illustration to do this. It's already successful, and we are seeing a pipeline of these, which should really adhd worth to BlackRock arsenic an entity.
Craig Siegenthaler
Great. So BlackRock has besides built 1 of nan largest alt managers. There are a bid of smaller acquisitions, besides immoderate integrated investments. When you look astatine this business today, do you spot immoderate important merchandise gaps successful privates? And besides crossed this business, what are your astir charismatic scaling opportunities?
Rob Kapito
So we don't make a scatter successful nan insubstantial astir being an replacement head versus galore that really attraction only connected alternatives because I spot it arsenic conscionable different plus people that we request to have. And I besides personally deliberation that nan connection alternatives is going to vanish because there's really not overmuch that's replacement astir immoderate of these markets that merit a overmuch amended name. So our level is astir $320 billion. So we are successful nan apical 10, and wherever we are focused is connected opportunities successful nan marketplace that we spot chiefly successful credit, again, focused connected nan enslaved marketplace and nan long-term, long-duration merchandise wherever we tin get yield.
And nan 2nd 1 is very absorbing to deliberation astir is infrastructure. Around nan globe, there's a rebuilding of infrastructure. And what does nan infrastructure merchandise springiness you? Long-duration assets for nan output and immoderate upside that person a societal impact. So we person been investing, particularly successful section communities alongside of companies for illustration we conscionable announced Gigapower pinch BlackRock doing nan financing for AT&T to spell retired and we're successful a unsocial position because we person these relationships pinch corporations astir nan globe, who are going to beryllium building infrastructure. And we could spell alongside arsenic a partner otherwise than galore different institutions go.
So I wrote down a fewer numbers. This is simply a world power and powerfulness fund. We raised $5 cardinal successful 2020. We person done now our 4th infrastructure fund, $4.5 cardinal adjacent successful 2022. That will get america to our target of $7.5 cardinal and -- but it's portion of a overmuch bigger level that we have. And what we're doing pinch these alternatives is we're adding nan expertise to analyse these successful Aladdin. So we person a institution that we book called eFront. So we will beryllium 1 of nan only providers that tin springiness a customer a image of nan full portfolio, and we deliberation this is simply a very ample maturation area for america arsenic well. We grew 30% successful Aladdin past year. We person a queue of group that want it, but we're adding much worth into it.
So successful nan alts business, we're approaching it nan aforesaid measurement that we approached nan equity business and nan enslaved business by building nan analytics and nan devices that we request to put successful it properly, and past we are besides building retired a sourcing area truthful that we tin telephone Bank of America and spell retired and say, "We person financing to do for your firm clients and others who are making different transitions, and we would for illustration to beryllium introduced and finance them and Bank of America is acting arsenic a awesome root for america for these clients." But we're building an alternatives level methodically successful a measurement wherever we judge that we tin adhd important worth and bring alpha to our clients for nan agelong term.
Craig Siegenthaler
So Rob, arsenic you standard this business complete a term, there's a guidance interest component, but there's besides a capacity interest component. How overmuch opportunity is location to turn that realized capacity interest constituent because galore of these businesses are small, mid size? They're not really astatine afloat imaginable yet. So location could beryllium a bully net near arsenic its capacity interest scale.
Rob Kapito
So I cognize you're going to spell location and effort to fig retired really this is going to effect BlackRock. So I did bring a mates of numbers for you. So nan backstage markets, which we tin telephone it, nan -- it represented complete 50% of our wide capacity fee. So you tin spot really important alternatives are going to beryllium for nan early of BlackRock. We person already, what we'll telephone unrecognized deferred transportation of astir $1.4 billion, which has doubled since 2020. And truthful what does that mean to nan early of nan net of nan firm? Well, we person now $34 cardinal successful barren powder, and erstwhile I put that money, that should adhd astir $260 cardinal of early yearly guidelines fees.
And I know, Craig, you for illustration guidelines fees erstwhile we deploy that capital, and nan opportunities to deploy it are correct successful beforehand of america correct now. So we are coming evaluating respective very ample opportunities. So this helps america to deploy that money. So alternatives are going to beryllium a very important portion of our early growth, and I besides deliberation it's going to really thief nan returns of our clients' portfolios arsenic well.
Craig Siegenthaler
So BlackRock has a awesome exertion solutions level pinch Aladdin. It helps security companies, plus guidance competitors, spot banks, financial advisers, but I want to understand much of nan strategical benefits of having Aladdin adjacent twelvemonth plus guidance business. How does it thief nan plus guidance business make amended flows?
Rob Kapito
So you tin deliberation of this arsenic nan eventual fintech for plus managers, and nan first point is knowing what you own, and galore plus managers are bifurcated into equities bonds, who is sitting location and really understands nan full consequence of a client's portfolio. So that's why we built it to cognize what you ain and what nan consequence is and past being capable to enactment quickly to mitigate risk, but besides to return advantage of opportunities successful nan market. But arsenic we started utilizing it and installing it successful different organizations, nan first point it does is it really unifies nan civilization of nan patient because everybody is operating pinch nan aforesaid information pinch nan aforesaid number and speaks nan aforesaid connection astir risk.
And arsenic you know, galore companies person been built and different areas came connected and everybody has their ain measurement of looking astatine things and analytics, that could origin a batch of risk. So it unifies nan culture. The 2nd point is it increases nan operational leverage. If you cognize wherever everything is, past you tin beryllium overmuch much businesslike successful whether you're buying aliases trading aliases moving your consequence astir to a mates of different places.
It empowers nan finance squad because they person nan accusation astatine their fingertips to make quicker and amended decisions. It besides unlocks nan powerfulness of data. You've heard astir AI. How are you going to incorporated AI into your finance process? So what we for illustration to telephone Aladdin successful immoderate statement is simply a azygous root of truth for finance data. And past you look astatine nan scalability that a patient would person successful trading and different opportunities, each from Aladdin. So what we intend to do pinch that erstwhile an institution is connected Aladdin is we're going to adhd successful tons of worth propositions. So we've now added successful Aladdin for accounting, truthful firms that are looking for accounting. We've added successful Aladdin provider.
So now you tin beryllium much businesslike by sending assets straight to your custodians. So we person little imaginable for operational issues. So location are conscionable truthful galore opportunities that we're finding, and you cognize what's interesting. There's a full Aladdin organization now. All of nan firms that usage it are calling and saying, wouldn't it beryllium bully if you do this aliases do this. So we person complete 3,000 programmers that are sitting and modeling each information truthful that we tin person nan due analytics group we need. So it's been very difficult complete nan past respective years to put successful exertion if you're an plus guidance institution and an security institution trying to watch your expenses. And nan systems support getting amended and amended and nan attraction becomes very expensive. So we move this into a existent business and it's unfastened root truthful that each of nan clients are not depending upon what our models are saying, they tin build their models connected apical of this.
So cardinal spot for data, cardinal spot to unify civilization to get faster, amended efficiencies. All of these things person created 1 of nan largest fintech companies wrong BlackRock.
Craig Siegenthaler
So Rob, wrong of Aladdin correct now, there's a batch of newer businesses, there's nan operating system, which is benignant of nan bequest business. Which 1 aliases 2 are you astir excited astir for nan future?
Rob Kapito
Well, I deliberation nan 1 that's nan astir breathtaking is nan full portfolio look. And this is really absorbing because you cognize that clients and institutions, if you talk astir unit clients, you person accounts astatine much than 1 spot for possibly different types of investments you have. Don't we each want to look astatine our investments connected 1 portion of insubstantial and spot what nan consequence is and what we have? So we've built thing called Aladdin for wealth, wherever a customer tin really spot everything they own. So nan full portfolio, and nan 1 portion that's really difficult to get successful immoderate analytics package is alternatives. It's very difficult to look done and spot what group ain and spot what nan consequence is successful these, and arsenic nan marketplace becomes much volatile, we person a batch of governmental issues and each these things, you really request to cognize what nan customer owns earlier it's excessively late.
So nan 1 connected astir breathtaking is nan full portfolio look, and I did what different group did. We built Aladdin from scratch and we look to spot really agelong it would return america to build successful nan alternatives platform, and it would return 4 aliases 5 years for america to do that. And alternatively than wait, we went retired and bought a institution called eFront, which already had truthful galore of nan alternatives that you each cognize connected that platform. And what we did is we bought that company, and we're incorporating it together pinch Aladdin to beryllium capable to look astatine nan full portfolio. And I will show you, successful immoderate of these, it's been an asset-gathering instrumentality because erstwhile a customer sees that look astatine nan full portfolio, if there's thing that's not connected Aladdin, they bring it in. So for a batch of finance advisers, it's been an asset-gathering instrumentality to beryllium capable to spot everything connected 1 portion of paper. So that's really nan astir breathtaking portion to maine is seeing it. I'd for illustration to spot what I ain connected 1 portion of paper, and truthful I presume a batch of group want nan same.
Craig Siegenthaler
So BlackRock generated really beardown integrated maturation complete nan past five-plus years. Although sometimes nan AUM integrated maturation complaint and nan gross integrated maturation rate, they diverge, and they're driven by operation shift. And if you look astatine nan full maturation rates, things for illustration information and rate tin besides benignant of thrust that. So arsenic you look successful nan early and deliberation astir ETFs driving a batch of growth, OCIO astir apt driving a batch of growth. How do you deliberation astir nan delta betwixt nan AUM integrated maturation complaint and nan gross integrated maturation rate?
Rob Kapito
We've been capable to turn consistently complete nan past 35 years, and we're a maturation company. So we're looking for opportunities to proceed to grow. So past year, erstwhile group saw outflows and everyone was panicking, what is nan maturation rate? We raised $300 cardinal of assets. That's $1 billion. And I don't deliberation we should get mislaid and really important and really large those numbers are. So I wrote down for you, Craig, that we've delivered integrated guidelines interest maturation complaint supra our 5% target successful 7 of nan past 10 years. Last year, successful nan past quarter, we had a 3% maturation rate. So we're going to beryllium consistent. We're saying 5%, and I for illustration being capable to get connected nan telephone pinch Craig and opportunity we did amended than that. And we're consistently building successful maturation devices truthful that we tin proceed to connection you products that nan customer needs.
So I'm going to show you 5% and we're going to beryllium consistent. I deliberation we tin do that, but I'm an optimistic person, and now erstwhile I spot nan money successful mobility from each this repositioning, and it's successful mobility and an area that we are experts and person nan widest sheet of products to use, I deliberation we tin do amended than that. So I'm very excited for nan future, and we cannot neglect present arsenic a group. Many, galore of our clients, a bully mostly are retirees. Failure is not an action for group to unrecorded successful dignity. So we person a beautiful awesome work present to find opportunities to get them nan biggest returns, and we beryllium connected nan aforesaid broadside of nan array connected that successful trying to bring bully opportunities to our clients.
Craig Siegenthaler
Well, pinch that, we're retired of questions and bully luck grabbing each those enslaved flows this year, and congrats connected a beardown 2022.
And Rob, convey you very overmuch for joining us. On behalf of each this successful Bank of America, we admit your time.
Rob Kapito
Thank you very much.
Craig Siegenthaler
Thank you.