BlackRock, Inc. (BLK) Q4 2010 Earnings Report, Transcript and Summary

Good morning. My name is Sarah, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock, Inc. Fourth Quarter 2010 Earnings Teleconference. Our hosts for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Ann Marie Petach; Vice Chairman, Susan L. Wagner; and General Counsel, Robert P. Connolly. [Operator Instructions] Mr. Connolly, you may begin your conference.

Good morning, everyone. This is Bob Connolly, I'm General Counsel of BlackRock. Before Larry, Ann Marie and Sue make their remarks, I want to point out that during the course of this conference call, we may make a number of forward-looking statements. We call to your attention the fact that BlackRock's actual results may differ from these statements. As you know, BlackRock has filed with the SEC reports, which lists some of the factors which may cause our results to differ materially from these statements. Finally, BlackRock assumes no duty to and does not undertake to update any of these forward-looking statements. I'll now turn it over to Ann Marie for her first comments. Thank you.

Good morning, everyone. This morning, we are reporting record as-adjusted fourth quarter earnings of $3.42 and record full-year earnings of $10.94. I'd also like to welcome to the call our new shareholders. In December, Bank of America and PNC sold about 59 million shares or about 30% of our total shares outstanding into market. As a result of that transaction, now over 50% of our shares are owned by shareholders other than our three strategic investors. Looking at our results, we had strong results. They reflect strong product performance, as well as strong markets. We're beginning 2011 with the merger-related issues and outflows largely behind us. Just a comment on that noise a little bit more, we do have $14 billion of merger-related outflows still sitting in the pipeline. The majority of those were in the prior pipeline. So what is reflected is more the timing of the withdrawals rather than the pipeline containing a lot of new notifications. We still have a handful of clients with known concentrations concerns. If those materialize, we'll call them out when they happen. But it's important to note of the concentration issues, those outflows have been at very low single-digit basis points, so have not had a material effect on revenue. With respect to our quantitative product, the performance on the scientific asset equity products have turned positive and competitive since Ken Kroner [ph] took over the leadership of that product. It'll take some time to fully repair the medium and longer-term track records. So it'll just be noise we have to watch there as we repair that track record. The total pipeline stands at $73 billion. That includes $61 billion in long-dated assets and that is net of the merger-related items. The rest of my remarks I'm going to walk through the supplemental slides. And I'll be talking about as-adjusted earnings. If you move to Slide 1, operating earnings in the fourth quarter were $962 million. That's up 31% compared to the third quarter. Net income was $670 million, and EPS was $3.42. Both of those are up 25% compared to the third quarter. Moving on to the full year, operating earnings of $3,167,000,000 and net income of $2.1 billion were both more than double 2009. EPS of $10.94 was up 53% compared to 2009. And if we look at the 2009 results and if the BGI transaction had taken place on January 1 and so on comparing them to pro forma results, our operating earnings were up 22%, and the net income was up 37%. Moving on to the third slide and taking a look at our operating margin. The full-year operating margin came in at 39.3%. That's up 1.1 points compared to a year ago. It's up 2.5 points compared to the pro forma 2009 results. The fourth quarter margin came in at 40.7%. That does reflect both the strong performance fees in the quarter, as well as the benefits of market flowing through into our margin. Not shown on the page, our compensation-to-revenue ratio came in at 34.8%. This is the low end of the range of what we've been running for the last several years with the money in the 35% zone. It is down almost a half a point from our 2009 margin and really is consistent with our focus of really the benefits of Beta flowing through to our shareholder. As we begin 2011, we were very confident in the ability to grow the top line as well as our confidence in our margins. We plan to continue to speak efficiencies in our business and to realize the benefits of scale. At the same time, we plan to invest in growth opportunities. We've got a lot of strength; the roadshow gave us the opportunity to get out and dialogue with our shareholders about the external environment and how our capabilities lined up with that environment to be able to really service our clients. With that, we are confident in our ability to grow iShares and retail platforms, Defined Contribution platforms, BlackRock Solutions, Asia, multi-asset class strategy and alternatives. On the next slide I'll talk about markets, which are also contributing to growth in margins. So moving on to Slide 4, you can see that average 2010 markets were up about 20% compared to average 2009 markets. 2010 year-end market actually were -- closed the year about 10% higher than the average 2010 market. That means we've got positive tailwind coming into 2011, and that's before considering the positive markets we've seen so far in January. Moving on to Slide 5. Our total earnings of $3.42 were composed of operating earnings of $3.35 and non-operating earnings of $0.07. The operating earnings improved $0.74 compared to the third quarter. The non-operating earnings included $45 million of positive marks on our co and seed investment portfolio. The level of those positive marks, however, was a little bit lower than the level of positive marks we had in the third quarter. The full year as-adjusted tax rate came in at 33%. That is down from the third quarter year-to-date tax rate of 33.5%. The half a point decrease in the tax rate reflects some international tax benefit associated with the late December extension of U.S. legislation, which had been due to expire. The half point benefit resulted in about an $0.08 improvement in earnings compared to if we had, had the 33.5% tax rate. We do expect the bulk of these benefits to carry into 2011. All other things being equal, that means we have the same mix of earnings, no other tax legislation changes and no big news on tax resolution. The 2011 tax rate will be likely a little bit higher than 2010 to in the same range. Moving on to Slide 6. Total revenues for the quarter came in at $2.5 billion. That was up 19% or $400 million from the third quarter. Important part of the increase came from performance fees, which were up $212 million from the third quarter. As with the stock, the fourth quarter is our primary quarter for loss even comparing to the fourth quarter of 2009, performance fees are still up $73 million, reflecting improving performance across a number of our funds. The absolute level of performance fees was $326 million and included a $128 million of fees really associated with relative performance, as well as $188 million of fees that we earned on our alternative products, reflecting strong absolute performance in those products, and that does include our really large hedge fund GMSP. I'll remind everyone that we have very few funds that have performance fee measurements in the first quarter. I'm going to talk about base fees later, so just to mention briefly on the BRS revenues that came in at $132 million for the quarter. The increase of $32 million from the prior quarter reflects the completion of 20 advisory assignments. We've got a lot of active interest in our BlackRock Solutions, the strongest interest that we've ever seen. We do have some interesting things in the pipeline, including the publicly noted assignment from the Central Bank of Ireland. Moving on to Slide 7, which outlines our expenses. Expenses of $1.5 billion for the quarter were up 9% or $176 million from the third quarter. Just want to put that in the context of the revenue increase of 19% and that’s even with expense increases we saw those improvements in margins that I talked about earlier. Now about $80 million of the expense increase related to AUM in revenues, the biggest single component there related to incentive comp, which closely links to revenue of course. We also had $96 million of increases in G&A expense. We did in the fourth quarter make a $20 million contribution to a charitable fund account for the first time. That's something we'd like to continue to do over time. Also in the fourth quarter, there was a one-time assessment to the U.K. asset management industry, our share of which was about $20 million. We did see some increases in marketing of about $17 million and professional fees of about $13 million, and the rest of the expenses are small movements across many items. Moving on to base fees on Slide #8. Base fees came in at $1.951 billion. That was up 9% compared to the third quarter. We saw improved revenues across all of our long-dated asset classes and was part driven by favorable markets. I would note that of our merger-related outflows, there was one outflow of $24 billion that was out about a half a basis point, so had very little effect on revenue. Whereas our $28 billion in net new, long-dated assets came in at closer to our average basis point realization across our whole portfolio, so it contributed positively to revenue. Moving on to Slide 9 and non-operating results. Non-operating results came in at $20 million. That is $45 million of investment gains on our co and seed that I mentioned earlier. Those were gains across all asset classes in the portfolio, offset partially by $25 million of interest expense on our debt that we put on associated with the BGI acquisition. The investment portfolio stands about at $1 billion. It's largely consistent with the third quarter. And just to remind everyone, we do not do any proprietary vesting. Those are all co and seed investment to be aligned with our clients. Moving on to Slide 10, we generate substantial cash flow. We used about $1 billion of our 2010 cash flow to repay short-term debt. In addition, we returned a meaningful amount of cash to shareholders. Our dividend represented about a 38% payout of our earnings. In addition, we repurchased about 900 million shares. That brought our total payout to about 44%. We still have 4.2 million shares of authorization for repurchase. However, we've sort of paused for a little while, at least for now, on those repurchases since the sale by Bank of America and PNC. The reason we’ve paused is we believe that we now meet all of the eligibility criteria to be included in the S&P 500 index. We think an important criterion within that is the degree of public float, and we just think protecting that public float is a important priority at this point in time. I just say we do always and regularly discuss our dividend policy with our board, and you can see our history of dividend across that slide. With that, I'd just like to conclude that 2010 ended up with a very strong year. We're entering 2011 with, again, those merger-related issues and outflows largely behind us and with strong momentum just both in terms of new business and markets. And with that, I'll turn it over to Larry.

Let me just add one other thing. Our board regularly reviews our dividend policy in the February board meeting. And it is scheduled, again, for us to work with our board to come up with a 2011 dividend policy. And so that's one of the opportunities we have going forward in 2011. First of all, let me welcome everybody. I need to apologize in advance. I may have a fit of coughing since I'm in the back end of a cold. It is no indication of my views of the future. So let me just begin and talk about Alpha. Our performance across most of our products were strong. Throughout our integration process, we needed to be assured that we're protecting our portfolio managers from the integration process. We needed to make sure our clients understood that, that our business with them is not going to change, that we are going to make first and foremost, our manufacturing platform or portfolio teams to be uninvolved in all the issues around integration, and I think 2010, looking now backwards, was a success. Our teams had very strong performance across our equity, our fixed income and our alternatives product area. I do believe that performance now will continue to drive business in 2011. And most importantly, good performance drives good performance fees. And I think some of the messaging that we said in the past few quarters, the importance of good performance, the importance of alternative products truly is now starting to become more apparent in our earnings related to these phenomenons. I would like to go back to early '06 and parts of '07 where we had as much as 30% of our earnings being driven by performance fees. And obviously, the market setbacks of '08 changed all that. I'm not suggesting our earnings model will ever have that type of strength. But I do believe as clients begin to re-risk, and clients are looking to move from Beta products or even core fixed income products to other products, they're going to entail products that may have some form of performance-oriented fees. And with that, we are going to have, hopefully, large-based performance fees. So we look at this as a great indication of our evolution of our platform. We believe our success in performance fees in the third quarter and in the fourth quarter indicative of that performance and the repositioning of our firm, and it is our strongest intention in 2011 to continue to build out our alternative space, to continue to be working with our clients as our clients are driving more risk positions whether that may be in emerging market product or it may be just a credit product, clients are looking to move away from core fixed income strategies and are looking to move away from some Beta strategies. And I'll get into that a little later, but I think it's important to really focus on that and once again, remind everyone we are going to make this a continuation of our focus for 2011 to continue to build out these alternative products. Let me also reflect on another component of our business, and that is scale. I think now looking backwards, we are now showing the investment world that scale is a virtue. It is a positive. We, obviously, have much negative noise related to concentration issues. As Ann Marie suggested, that is largely behind us, moving away from low-fee products into other types of products where we have greater ability to navigate with our client base. But most importantly, with our scale and as Ann Marie talked about our free cash flow, no investment firm is investing as much dollars as we are to build a bigger, stronger, more robust platform in which we could provide stronger based Alpha products for our clients and more solution-based relationship with our clients. And so some of the areas that we're really investing in, we're continuing to invest in our investment products, which we'll talk about a little later. We're expanding our platforms regionally in Asia and South America. We're continuing to build out in Europe. We talked about over the last few quarters the building out of our trading platform, which we believe will have huge benefits for our clients and already our build-out of our capital markets capabilities to win large assignments directly from issuers is very positive for us in terms of building out Alpha for our clients. I should also state very loud and clear as we build out these trading platforms and as we build out our capital markets capabilities, this is to enhance our connectivity with our clients. This is to find ways to get more product at higher net spreads to our investors. Our business model is not changing. 100% of our revenues will be client-centric business, and so we're building out this platform because we believe scale will be a virtue, and we believe throughout 2011, that will continue to differentiate us. And in scale, most importantly, we're building out our global footprint to provide more consistent and more varied Alpha and solution-based products. So over the course of 2011, we have a strong emphasis in building our products in Asia, both credit and in equities, emerging market equities. As I said earlier, we continue to build out our alternative products, and we believe that will be one of the drivers for us in 2012 and 2013. We continue to believe we are differentiated by our multi-asset class products, our BMAX products. Yesterday, we announced we hired Nancy Everett, who was a CEO of Promark, which was the General Motors pension plan. And prior to that, she was the Head of the Virginia retirement plan. She will be running our U.S. fiduciary business, a part of this multi-asset category platform. And so we believe this will continue to be an area where we invest. Another area of real growth for us in 2010 that is already been validated in our pipeline and wins already and that's the defined contribution area where we believe more and more money will be moving away from defined benefits and defined contributions. I do believe over the course of 2011, as state governments starting to tackle their tremendous deficit burdens, one of the outcomes will be most probably the restructuring of their plans for new employees that will be predominantly Defined Contribution plans. And so we believe DC will become a larger and larger driver. We also believe because of the retrenchment of costs, many more public plans, maybe the smaller ones, will be looking to do more fiduciary outsourcing, which is why we have Nancy here. So we do believe there's going to be quite a bit of changes as a result of public plas, public state plan, need to restructure because of the tremendous state burdens with their deficits. And we hope to be taking advantage of that because of our scale, because of our multi-asset class product and capabilities, because of our Beta capabilities and our Alpha capabilities. And so our theme for 2011 continues to be Alpha generation. But Alpha generated connected with a solution-based relationship with our clients as more and more clients are going to be looking for help. As good as the equity markets were in 2010, the problem for most public plans and private plans was their liabilities because of rates being lower in most cases, if not all cases, the deficits for many of these plans were actually increased because liabilities changed more than even the nice asset growth that so many plans experienced. And so needs for solution-based relationships is becoming more and more a necessity and having the breadth and the depth that BlackRock has is very important. Let me just touch on as I reflect in 2010, the merger integration, largely completed. We spent a great deal of time in the early part of the year and in terms of evolving our culture, which is still a multiyear project but I think we've done a great job in that. In June, we refined our organizational structure, our governance model. And after we announced all that, I think it's no surprise to the leadership of BlackRock that's when we begin to see more and more momentum as you reflect backwards. And looking at our business opportunities we saw in the third quarter and most questionably the business opportunities we saw in the fourth quarter going into 2011, it has much to do with the enormity of restructuring the platform, of tackling the integration of our two great firms into one, building a strong unified culture worldwide, building that one BlackRock brand and culture. I think so much of that is behind us, and we're starting to see that in so many ways obviously, including in terms of our business momentum. I need to put a caveat on. We still have one more year left in terms of technology integration. We still have many redundancies because we are still operating in many cases in multiple platforms. We are on track to finishing the technology integration by end of this year. So we feel very strong about the opportunities we have related out in 2012 in terms of margins, but we still have many more milestones this year to accomplish and making sure that the full integration in terms of our technology, our infrastructure is complete. And I would like to also say this remains to be a burden. We just completed an employee survey where our employees still want to have more connection and until we have the technology conversion completed, having as much connection, multi-product connection across products, across regions is still not where we wanted to take it. And so the employees are listening. This is going to be a big milestone as we finish our technology conversion, and we'll have much greater connectivity amongst all our businesses and regions when we do that. One other thing I'd like to talk about because it's been an irritant to say the least and that is how so many of our competitors, possibly, some publications have talked about turnover at BlackRock over 2010, and I want to say change has been great. We are far better firm today than we were six months ago and most importantly, a year ago. The team in place is as powerful as any team we've ever had. We are very excited about the leadership teams. We are very excited about our product teams, our portfolio teams. And I do believe those changes has been predominantly very strong changes. I'd like to add one other thing that most people don't focus on. What differentiated BlackRock when we did the Merrill Lynch merger and certainly what's differentiating BlackRock with our BGI merger is we do not do mergers for massive cost take-outs, although we've had huge margin increases from the pro forma of last year, we actually added over 1,000 employees this past year on top of the merger. So we are not a firm in which we are looking to do a dramatic downsizing of people for accretion purposes. I look backwards and talking about the merger for revenue opportunities. And if you go back and reflect on where we thought we were going to be when we announced the merger in June '09 to where we ended up, when we talked about what we thought we could earn in 2010, we exceeded our expectations in the entire market in terms of revenues, in terms of net income. On top of hiring another 1,000 employees to build the platform. And so I just want to address change has been very positive. We've added many people. Overall, as a firm, we had about 6% turnover, which is below industry statistics, and so this is a very important issue that finally I wanted to be public about, but it's very hard to do that when the articles are trying to hurt us, not help us. I would like to talk about branding for a minute. Branding will continue to be a major priority as we expect a larger segment of revenues will be generated from our U.S. and international Mutual Fund business and our iShare business. So we believe our mix of business as our platform grows, as our brand recognition continues to grow, will be from the retail and iShares platforms worldwide. And we need to continue to build out that brand and that brand recognition. And importantly, as we continue to build out our platform in Defined Contribution, it is very important in that space too, in that theoretical institutional space that we drive our brand and this will be a very big priority for us. And just touching briefly on our flows in retail. I just like to highlight a few things. Our U.S. Mutual Fund business grew by $25 billion last year. Our international Mutual Fund business grew by $6.3 billion. Our iShares business grew by $43 billion. Our retail platform and iShares grew by $74 billion last year. I don't think we get enough attention about the power of our global platform in this space, and I want to congratulate all our teams, our iShares team and our global retail, global mutual fund teams worldwide in having an extraordinary performance. Let me just highlight a few things about iShares. Our business in Asia-Pacific grew by 33%. Our business in EMEA grew by 16%. Our U.S. business grew by 7%. So this is a Global business. This will continue to grow. We are emphasizing this business worldwide. We believe we have the leadership position. We will continue to have the leadership position, and we expect still very robust competition and some of it, in some cases, our competition's going to beat us. In many cases, we're going to beat our competition. The ETF business will continue to be a strong growth business worldwide, and we believe, especially if the SEC changes the model of the FA business and the Investment Counselor business to a fiduciary model, it's going to have a dramatic impact on the ETF business. It may put a drag on some Mutual Fund business, but I believe BlackRock will be very protected, and BlackRock will be more than enough differentiated even if the model change happens with the distribution channels. So let me just talk about some of our equity and fixed income in alternative products. We are seeing clients re-risk. I would like to just note that we, as a firm, have been more right than most firms in the prognostication of where the markets were going to go in 2010. We never believed in the "new normal." We were always caught talking about a market, a U.S. economy growing three-plus. It did. We were positioned for that, and we had very strong performance in many of our equity products. Our equity dividend product, as more and more people are looking to buy equity dividend products, as fixed income rates are so low. Global Opportunities, Dennis Stattman and team, that crossed the $75 billion mark. We are confident the team is ready for a bigger and larger future. Our European equity team has gone from strength to strength, bringing in the lion's share of flows internationally in Europe in terms of in the equity mutual fund space and our U.K. teams across the board had a lights-out year. Our fixed income team had a great year and performance with over 75% of our products outperforming their benchmarks. We're seeing strong flows in credit. We had to go anywhere, do anything, mutual fund that we launched mid-last year. It's over $1.2 billion and growing very rapidly with extraordinary good performance -- I think we are the single number one performer in that category. And also I would just like to highlight our strong performance in fixed income, our strong performance in equities, created good performance fees. So once again, there is a linkage between performance and performance fees, and performance fees are just a great indication of performance. Second of all, our alternative products where we continue to grow our fixed income alternative products, our equity performance products, our Global Allocation products, Global Asset had really extraordinary years and we continue to start seeing some real good flows into all those products. Let me just highlight BlackRock Solutions, which I cited in the third quarter as a business that is continuing to grow. We announced in the fourth quarter we had 20 new assignments. I think that's a record for any quarter. It has been highlighted by our recently announced engagement by the Central Bank of Ireland. This actually is the biggest assignment that we've ever received from any governmental. This is bigger than AIG with the Federal Reserve. This is bigger than what we did with the Bear Stearns. This is a gigantic assignment. We have teams in Dublin. It is a validation more than ever before that our product, our BlackRock Solutions space is world-class, and we are in conversations with other governments with other opportunities right now and helping them navigate the credit crisis and the crisises that we are seeing in the sovereign credit world of Europe. One highlight that I'd like to note also is a major milestone for Aladdin. We crossed the $10 trillion mark in terms of assets that we're analyzing. So if you add the $3.5 trillion of assets that we manage on behalf of clients and the $10 trillion of assets that we are advising on risk management, it is a $13.5 trillion platform. Ann Marie spoke about flows. Our pipeline is a good indication of where we believe our business is going. I'm very pleased with the mix of business going forward and the types of flows that we're seeing with the large preponderance of elongated flows. We continue to believe short-range will reign low and so we're going to have a messy and mixed flows in cash. But one day, rates will go higher. I'm not suggesting any time soon and that business will become even more robust. So let me just talk about margins real quickly. Ann Marie mentioned margins of 40.7 in the fourth quarter. This is something that we talked about over the last few quarters and especially in terms of our equity roadshow that we expected never to expense all Beta and that our shareholders going to benefit as Beta increases in terms of our margins. We showed that in our margins, we showed that in our comp ratios, which I believe is a huge differentiator versus so many financial institutions that have top ratios way in excess of 40%. We are trying to differentiate ourself on that component too. Regulatory reform is still in front of us. The Federal Reserve will have commentary periods related to systemically important institutions. It may encompass us, it may not encompass us. Whether we are determined a systemically important institution will not change our business model. We are at this moment, still one of the most regulated investment managers in the world by being regulated by the OCC, by the Federal Reserve, by the SEC, by the FSA. So whether we are designated as a systemically important institution or not does not change our business model, does not change our business mix, does not change who and what we are. However, I look forward to if the regulators determine BlackRock and other investment firms should be considered systemically important, we believe if that's what we need to do in our financial system, we welcome it. So it's something that we'll see over the next quarter. And so I just wanted to highlight that because that will be something that will probably be in the marketplace over the next quarter. Lastly, we remain constructive on equity markets. We believe confidence is growing. We believe people or CEOs are beginning to spend their huge backlog of cash. We need to see over the course of the first two quarters if that spend is in the form of hiring, if that spend is in the form of factories and plants and not in the form of stock repurchases and not in the form of mergers or investing outside the United States. Those are going to be important validators in terms of looking at our economy for 2011. We do believe Europe remains to be an area that's going to be in the news as Europe tries to manage their banks and [indiscernible] the sovereign credit issue, which I do believe is totally linked as we saw in Ireland, and I believe that it'll be linked in other countries too. BlackRock's in a great position to take advantage of the changes in the marketplace. We’re in a great position to take advantage of the opportunities on the global basis, and I welcome, in a very positive way, 2011. I want to thank all the employees for all the hard work. It is -- 2010 looking backwards was a really difficult year and yet the hard work and the perseverance and the teamwork really translated into a really phenomenal quarter, a phenomenal year and a great momentum into 2011. Let me open it up for questions.

[Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Credit Suisse. Craig Siegenthaler - Crédit Suisse AG: Larry, just a big-picture question here. As the merger-related flows start to subside here in 2011, how do you expect core organic growth to trend, given your view of investor flight back to risk here. And in prior cycles, I don't know if this is a good comparison but with BlackRock plus the MLIM combo in '06, '07, you're doing at least 5%. Is that a good run rate?

Yes. But here's where how I look at it. I'm spending less time, Craig, looking at absolute numbers and looking at composition of businesses. So if our business with some clients translates into products that have higher fees but less assets, I'm perfectly happy with that. With some clients, I know we're going to be doing some very large Beta types of products, and we welcome those too. So I must say, Craig, unlike when we did the MLIM transaction, the definition of flows in the absolute percent is less of a focus for me as the composition and the revenues associated with the composition. But I think 5% is a very good baseline to consider. Craig Siegenthaler - Crédit Suisse AG: And then in the pipeline guidance, $73 billion, that $13.6 billion kind of planned redemption, was that the same redemption you talked about last quarter where I believe it was a passive equity, very low fee?

That's it.

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

Larry, you talked about broadly the competition in ETF globally. Just wondering if you could maybe touch a moment on pricing trends. That's been a pretty big investor focus point in the last few weeks in particular.

I'll let Sue talk about it, give her some time. I got to clear my throat.

I guess a couple of things. There has been a lot of stories written about pricing trends, and I think our view is that the flows really reflect different issues than pricing. But that's sort of a simple way to talk about things but not really what's driving investor behavior. So from an investor’s perspective, it's more than about an expense ratio, it's about total performance. It's about transaction costs, commission costs, bid-ask spread and for many of the advisers also, about the support they get from an education and client service perspective. When you look at some of the trends in the market, we think that you can have scale benefits due to investors, and you can do some restructuring to improve efficiency and so, for example, we did that last year in gold. There was a recent article about price adjustments in a variety of iShares that was great scale benefits, right? We have scale fee structures, and so those go into effect in the normal course as the products get larger. And investor demand evolves over time and people move, for example, in emerging markets we've seen a pickup in people investing in one individual country fund rather than a broad emerging market. To give you an example of that, last year in the fourth quarter, we had $1.3 billion of net inflows into our Brazil iShares funds against $500 million of outflows in emerging markets. So like any other product, A, it's about performance, B, it's about service and C, investor appetites change from time-to-time, and those are the dominant factors.

You've taken over a few things around the G&A sequentially. Of that $96 million, if you back out say $44 million, the combined charitable gift plus the regulatory step up in the U.K., other residual $50-some-odd million, how much of that would point to sort of year-end cleanup versus a normalized run rate?

It was, clearly, a mix of both. So we probably had -- you know we may have had certainly a meaningful percent of that, that was some year-end cleanup, the things I talked about such as marketing. There was some occupancy. The consulting and professional fees were more ongoing in nature, but I would say of the remaining $50 million, there was certainly let's say half of it might have been items that we wouldn't see every quarter.

I would just like to add. We believe with the amount of monies we manage for retirement and pension plans, both public and private, and our position as a firm, we have a bigger obligation to be part of different communities worldwide, and this is one of the big reasons why we determined working with our board to start funding towards building a BlackRock Foundation. And this is an important position for us and I think, once again, will differentiate us versus a lot of the other money managers.

I think your discussion on free cash flow's pretty well said but just curious, I think the Barclays' percent of ownership unlocks in a month or so. I'm just sort of wondering if you could talk a little bit about contingencies, where would you stand in terms of buyback if that stock were to come up for sale?

Well, we have no indication as to Barclays' intentions. From all indications I have, they are very comfortable and happy with that position. Obviously, like the other banks, Basel III is a issue that all banks are going to have to conform and whether that has an impact on Barclays' ownership in BlackRock, you know as much as I do. If there is a change from what I believe there is related to Barclays and Barclays was seeking to sell a portion of it, I would say with our free cash flow, it'd be something that we would most probably purchase a part or all of what they would have for sale and retire it. But I don't want to leave any indication as to if there's anything that we know of in the future because, as I said, the last conversation I had with the leadership of Barclays, they're extremely happy with their ownership.

Your next question comes from the line of Robert Lee with KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc.: Larry, a question I have is on the alternative business. I know you’ve spoken of that a lot. In the past year, I mean, that new business there's been kind of flat and maybe against the backdrop where you've seen better capital formation in a lot of the different alternative managers and understanding you had one account less this quarter. But is there anything kind of going on underneath there that's kind of kept the organic growth of those businesses more subdued this year and that we should expect kind of has played out and can start to accelerate next year?

Yes, I think the biggest noise was real estate where we knew we were going to have some big outflows in real estate and that offset some big inflows in the other products. So in some of the real estate products, we were not having any really any fees associated. And so from our vantage point, obviously, you can't see it in the gross numbers. We actually had some very good flows. And looking forward, we see a huge book of new business going forward in that. And so we are very excited about our flows in our alternative area. We believe the movements in the real estate area, which in 2011 were in the midst of a whole rebuild is hidden in the noise around the grossing of all the business. Robert Lee - Keefe, Bruyette, & Woods, Inc.: And maybe another question on performance fees. I mean, you did mention that given the growing demand for Alpha products and you could see an increase in more and more product that has some type of performance fee component to them whether absolute or relative. If you were to look at that $70 billion -- the $60-odd billion pipeline, excluding Solutions, is it possible to characterize, I mean, would you see it in that pipeline that there's in the 10%, 20% performance fee type of thing?

No. It's lumpy. I mean, I don't know the exact number right now. I mean, Ann Marie could get it offline a little more. But in the pipeline, there is alternatives and global extent and some obsidian and a few other products where I know of some good flows there are going to be coming in the first quarter. So I don't know specifically which ones and where, but we could give you that information offline. Robert Lee - Keefe, Bruyette, & Woods, Inc.: One last question for Ann Marie. BlackRock Solutions the big jump in revenue I think you mentioned that there were 20 advisory mandates. How much of -- are those kind of ongoing relationships so that's kind of a good run rate? Was some of that kind of an advisory kind of a one-time fee that kind of may roll-off or...

No. Those that I mentioned were really the completion of assignments. So the timing of those revenues can be a little lumpy based on when assignments are completed. However, when you think about 2011 in total, what we saw in 2010 was a ramp-up in our ongoing recurring business, as well as we've got a lot of new interest in Advisory business. So we're going to see both in 2011 and from quarter-to-quarter, it may vary just because of when an assignment get completed. But I would [indiscernible] a strong mix of both types of revenues in 2011.

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

Just another one on the pipeline. Out of the $61 billion in long-dated business that you guys won, Larry, can you just give us a little color on the types of mandates, active versus passive, and also maybe by client type and geography?

Yes. Active, I’ve got to go across the board. Active is $23.5 million and passive is what, $37.6 million. And by region?

Yes, please.

So Americas is $23 million, EMEA is $26.5 million, Asia-Pacific is $5 million and advisory is $12 million. That’s all net.

And then just a little bit broader question I guess on the operating leverage of the model, Larry, in the past, you talked about the 40% being kind of top-end of the range...

No. I stopped saying that a quarter ago.

So should we think about I guess with a lot of the integration already coming through at the end of this year 2012 being in a 41%, 42% type of range or?

But that's where I don't go any further. I don't like shoring myself in margin. I could promise you margins will have upward bias. If I'm right on where equity Beta will go, our margins will improve accordingly, and it's true. After we do the technology integration there should be step up in margins, but we pay close attention to margins. Margins will have upward bias, whether it's 40.7 or 41.7 or 42.7, I'm not going to hold that to a target because I think we need to see the dynamics in the marketplace. We need to see the competitive pressure related to comp and employment and keeping people. So margins to me are a function that we need to pay attention to obviously, and we do believe there is upward bias to our margin, but I need to look at it in a complete way related to compensation and connecting that with our need for investing, investing in Asia, investing in other areas. So it's pretty complex. And so that's why I don't like being targeted or benchmarked at over a certain margin over the course of the next 12 or 24 months.

Your next question comes from the line of Michael Carrier with Deutsche Bank.

Larry, one question on the Institutional business, just in terms of the outlook. When you are talking to all the clients and even some of the consultants, at what percent did you expect in the industry you'd be shifting out of some of the lower return products in fixed income in cash going into some of the alternative equity spaces? And then for BlackRock, when you look at your product set up, I guess where do you expect to see the most traction and are there any holes, particularly on the alternative side that you can fill in?

I really think it's client specific. I don't want to talk about one industry. There is no question clients -- the real issue is where will interest rates be in 12 months. That's going to be an important component as to how clients think about re-risking. With rates being this low, clients and with where liabilities are that's why where interest rates are, that changes their liability, it changes their forecasting in terms of how much re-risking are they going to do, and so I think it's pretty complex to understand it. It's not just where equity markets are going and other products, it’s a function of where will be their liabilities at the end of the year in terms of where the average 10-year corporate rate is. So there is a bias worldwide. These clients, in my mind, are over-weighted in fixed income, over-weighted in cash and in many cases, clients have a systematically under-invested in equity-like products. I believe that there is greater and greater comfort clients are going to start re-risking. But that re-risking could be in the form of some type of multi-asset class strategy that encompasses some Beta but some alternatives. It may encompass utilization of maybe some of our global iShares product and it may be some hedge fund products, and it may be a combination of all that overlaying our Solutions and Aladdin products. So I don't think there's one strategy, and I don't think there's one solution. It really is a function of each client risk needs versus their liabilities.

And just within fixed income, are there any products given that outlook that can still do relatively well or clients will kind of reallocate to and exit some of the more obvious ones?

Well, I think as an industry, we're seeing more and more flows into these go-any-way type of products like our equity Global Allocation product, which is now $75 billion. We're seeing more and more money going, like what we saw equities then, going into fixed income. Some of our competitors have $10 billion, $12 billion products in that. As I said earlier, ours is probably the number one performing product and it just crossed about $1.2 billion and growing very rapidly. So that's where we see movement moving towards. We still believe credit is going to be a good place to be. We actually love mortgages at this level. And so there's many opportunities to make, better returns in treasuries, in fixed income. So whether -- so it really is a function of how much capabilities these institutions have in re-risking. Some re-risking may be just moving from treasuries to credit. Some of them may be moving from maybe Beta strategies to more fundamental active strategies, and many of them will be a combination of all of that plus probably a greater investing in alternatives and more investing outside the United States.

Just one follow-up on the margin. When we think about the flow mix and where you get business, any way that you can kind of, I don't know, put some color around if monies going into more some of the past products in line with just the stronger growth in the industry, how the incremental cost is in a product like an ETF, like an Index product and...

We didn't have it in our slides, but we had a big slide in our roadshow talking about the mix. There's no question on ETF and index products, our margins are huge. It’s the highest margin business for us or it's one of the high margin business for us. And so it's a high margins, low fees. The margins on alternative products actually are lower margin for us because the PM share in some of the performance. And so that mix changes dramatically, but no question as money moves into indexes as evidence we saw [indiscernible] would be good flow into indexing in the first quarter in our pipeline, this is very high-margin business for us.

Your next question comes from the line of Jeff Hopson with Stifel. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc.: So the first question in retail and ETFs. If there's a shift out of fixed income into equities, given your market shares and the perspective fees how will that mix shift change? And then...

In the mutual fund space? J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc.: That's right.

One of the greatest failures of BlackRock has been our fixed income mutual fund flows in the last few years compared to our great competitors. We did not benefit like some of our great competitors did in the fixed income flows. And it was a disappointment, and obviously, our performance in 2008 was a chief cause of that. But in the last two years, our performance has been very strong, beating most of our competitors. And so I don't believe if there was a dramatic turnaround out of fixed income into equities would be damaging. We have a much stronger presence in the mutual fund space in our equity products. And so I believe we'd be a net benefit if that happened. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc.: And then on the institutional side, obviously, over the past few years, even the last year, institutional clients a lot of problems and they don't seem to be sure of what they need or want to do. Would you say that they're more engaged right now and potentially more active in taking action whatever that action might be?

Well, always in the first quarter there are always much more action or at least hope of potential for action. We're doing a number of roadshows, seeing our U.S. clients and trying to talk to them. I saw our largest institutional state plans last week. And as they think about what they're planning to do in 2011 later this week, I'm seeing two of the largest state plans. Again, we're trying to get in front of our clients. I'm spending more time with our institutional clients here in the states to find out what they're trying to do. I don't think clients are necessarily confused as much as -- it's not just the asset side they're struggling with. They're also struggling with are they getting funding from their corporation? Are they getting funding from their state? How much is their drawdown? So one of the clients, the clients I saw earlier this week. They have a 12% or 13% increase in their plan, but their state did not fund them. And because of demographics, they had more outflows than they had in terms of performance and participant contribution. So the corpus actually shrunk. And so this is a dilemma that we think we're going to see more and more of. This is one of the reasons why these plans are going to have to say “should we be re-risking now or should we -- how do we address this issue of a depleting corpus?”. These are serious issues, and so I think it's going to be very individualistic depending on the issue related to their funding sources as to how they are going to restructure their balance sheet, their assets. So it's not just uncertainty around the global competent markets, it is also the uncertainty around their funding sources.

Your next question comes from the line of Chris Spahr with CLSA. Chris Spahr - Credit Agricole Securities (USA) Inc.: Given your change in AUM mix, actually, let me take a step back. Can you tell me what your AUM mix by region is as of year-end?

Yes. Why don't we get that offline with Ann Marie? I mean, we have all that stuff. Chris Spahr - Credit Agricole Securities (USA) Inc.: In that context, I mean, what do you think the effective tax rate will be, say, in 2012 and beyond then?

That's Ann Marie.

Yes, it's hard to say 2012 and beyond because, I mean, it's hard to give you a good sense of 2011. I think if we were to use cards to forecast geographic mix of earnings as well as what will happen and perhaps with inflation, but I mean I think we're trying to give you a pretty good confidence around a reasonable tax rate for 2011, and we don't know where we are, maybe up a little but in that zone. Chris Spahr - Credit Agricole Securities (USA) Inc.: And then regarding expenses, do you guys expect any pickup in IT spending this year or is that going to be leveling off?

We are going to continue to spend like we did last year, and a lot of it, because we have redundancies in some of the positions as we roll everything onto Aladdin, which will be completed by this year. So there’s no change from what we said in our third quarter. Chris Spahr - Credit Agricole Securities (USA) Inc.: And then finally, I think you touched upon this before but just again, reducing friction within the trading platforms say the broker relationships, I mean, is there any way we can kind of crack that as investors and analyst and how is that going to fall to the bottom line? Is it just going to show up in greater market share and...

It hopefully shows in performance by reducing friction cost. That's the objective. Hopefully, clients will appreciate that. Clients do measure our friction cost, so if we can find ways to reduce our friction cost and differentiate ourselves, hopefully that shows up not just in Alpha but it shows up in flows. Chris Spahr - Credit Agricole Securities (USA) Inc.: And is that already working or when do you expect that timing?

No, that's being rolled out sometime this year. I mean, we're spending a lot of money that's in our G&A right now, so we're spending a great deal of money in building that because we do believe this will be a good differentiator in the future. Chris Spahr - Credit Agricole Securities (USA) Inc.: So sometime in the second half or so?

Yes, I would say the second half. Certainly not the first half.

Your next question comes from the line of Roger Smith with Macquarie.

The first question, how often do you speak to Barclays?

I'm sure my trading guy does it hourly. How often I personally speak to leaders at Barclays, I would say it's very periodic and sometimes quite often. I actually had a nice conversation with Bob yesterday. But Bob Diamond is on our board. So I update him as a board member. And so it's a very positive strong relationship, and we are confident we are going to have a strong robust relationship in 2011.

And then I guess I want to make sure I understood when you were talking about the pricing pressure in ETFs where as they grow there's bigger break points. Should I then naturally think that over time that the fee per AUM in that business will come down? Or is there really different products in there that are growing and offsetting those break points?

Yes, and yes.

Exactly. If we reach those break points, it’s good news. Revenues are going up, and we're delivering scale benefits to clients. In addition, there are a lot of platform that are smaller sized but [indiscernible] very nicely. So revenue makes it attractive, and our revenue share as opposed to our market share at AUM those are very, very strong industry leaders but keep an eye on both.

I would also argue if we saw a change in investor appetites in fixed income to equities, our ETF platform was a very strong leader in ETFs, fixed income ETFs as a leader of equity ETFs, I think that would change the fee make-up too.

At this time, ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, Ms. Petach, do you have any closing remarks?

No. I just want to thank everybody, and welcome all our new investors. And I would like to also welcome our new board member, Adam Soderbergh, to the BlackRock family. Thank you, everyone. Talk to you in a few months.

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