Good morning. My name is Maria, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated Second Quarter 2020 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. Mead. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] Thank you. Mr. Meade, you may begin your conference.

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 say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So, with that, I’ll turn it over to Gary.

Thank you, Chris and good morning everyone. It's my pleasure to present results for the second quarter of 2020. I hope everyone and their families are remaining safe and healthy in the current environment. Before I turn it over to Larry to offer his comments, I'll review our financial performance and business results. While our earnings release discloses both GAAP and as-adjusted financial results, I will be focusing primarily on as-adjusted results. BlackRock's ability to deliver for clients, employees, the communities in which we operate, and our shareholders, no matter the market environment, is a testament to the resilience of our differentiated business model, which has been purposely built with a mindset of consistently investing for the long-term. Our performance throughout the COVID-19 crisis, including the strength of these second quarter results, is a direct result of the scaled business model, supported by diverse global investment capabilities, best-in-class technology, and rigorous risk management. Our whole portfolio approach is fostering deeper partnerships, and now more than ever clients want to hear from BlackRock. BlackRock generated $100 billion of total net flows in the second quarter, reflecting 6% annualized organic asset growth and 10% organic base fee growth, as clients re-risk and once again turned to BlackRock for solutions-oriented advice to meet their long-term investment needs. Organic growth reflected record flows into iShares fixed income ETFs and Active Equity, fifth consecutive quarter of positive flows in this product category and continued leadership in cash management solutions. Momentum also continued in sustainable strategies and illiquid alternatives. Second quarter revenue of $3.6 billion increased 4% year-over-year and operating income of $1.4 billion rose by 10%. Earnings per share of $7.85 was up 22% compared to a year ago, also reflecting higher non-operating income, a lower effective tax rate, and a lower diluted share count…

Thank you, Gary. Good morning, everyone, and thank you for joining the call. I know this continues to be a difficult time for many people. So, first and foremost, I hope you all are staying healthy and safe. Our clients are turning to BlackRock more than ever as they face increasingly uncertainty about the future. Pensions, many of them already underfunded are having an even harder time meeting their liabilities in a persistent low-rate environment. Insurers are dealing with the dual impact of a sharp increase in payouts and declining asset values. Individuals are becoming even more dependent on their retirement savings, which are all the more challenging to build in this environment. People have now worked for months home, while also maintaining distance from their friends and loved ones. This prolonged isolation is increasingly many people's desire for connectivity. I feel this way. I see it across all our people at BlackRock. I'm hearing it from our clients worldwide. BlackRock's strong fiduciary culture and our unified operating and technology platform has allowed us to adapt to serve and connect with our clients through this period. Across all segments, all geographies, clients have sought timely, contextualized context to help them analyze economic indicators, understand policy actions, make sense of these turbulent markets and rebalance their portfolios accordingly. BlackRock's strategy has been centered around sharing the insights that meet this demand and delivering the comprehensive investment and technology solutions our clients need to build resilient portfolios. We are bringing together the entirety of the BlackRock platform for more clients in more ways than ever before. And as a result, clients are entrusting BlackRock with a greater share of their assets through deeper partnership. BlackRock generated a $100 billion in net inflows in the second quarter, representing 6% organic asset growth and…

Thank you. [Operator Instructions] Our first question comes from the line of Dan Fannon of Jefferies.

Thanks.

Good morning Dan.

Good morning. My question's around flows, if you could expand upon the strength of active equities and then also talk about multi-asset where you saw some outflows in the quarter?

So, thank you, Dan. You know that we believe that all asset management decisions are active, and as clients focus more on outcomes, both alpha seeking and index are going to play a pretty big role in their portfolios to drive returns. And in a lower return environment, alpha generation is even more critical as active managers have the potential to deliver a much greater portion of total investment return. So, active strategies have a critical role in building efficient portfolios for clients, with strong performance after fees. Now, the type of volatile market that we've seen in 2020 created a lot of opportunities for alpha generation. And as Larry mentioned, our integrated platform is positioned to deliver investment solutions and portfolio construction, leveraging the industry's most comprehensive array of active and index strategies across equity, fixed income, multi-asset, alternatives, and cash. And the investments that we've made in our platform and our optimization of the unique assets that we have, our scale, access to relationships, and information globally, our data and technology, including Aladdin, and portfolio construction expertise have positioned us to capture client demand and drive investment performance. In equities, we have arrived. It's about performance. BlackRock has now seen five consecutive quarters of active equity inflows, including $8 billion in the second quarter and $18 billion over the last 12 months. The active equity net inflows in the first quarter were driven flows into several top performing franchises, where organic growth has been supported by a track record of consistent active equity outperformance, a differentiated offering at the right value and distribution partnerships included our health sciences with $3 billion of net inflows performing in the top quartile for three years and five years; technology with $3 billion of net inflows performing in the top decile for…

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

Hi, Craig.

Hey, good morning, Larry. Hope you guys all doing well. Starting with fixed income ETFs, we all saw the strong momentum in 2Q. But what do you see as the key drivers? Which client groups were the biggest buyers? And then how do you think about the addressable market relative to your $2 trillion target as we size the opportunity even longer term?

So, Craig, we obviously have big ambitions for fixed income ETFs. And this last quarter has validated that this is an important asset class, core fixed income going forward. In some of the previous comments, we mentioned that the industry has crossed $1 trillion mark in assets under management, and we predicted this would double by 2024. But today, the category is already over $1.3 trillion with over growth split evenly between the second half of last year and the first half of this year, and our conviction in iShares leadership has been strengthened as a result of the strong performance and market disruption that you saw in the first quarter, and record iShares fixed income flows of $57 billion in the second quarter. So, more directly, investors of all kinds have more confidence in fixed income ETFs than ever before following the extreme test in the first quarter. iShares Fixed income ETFs performed under extreme stress with better liquidity, price discovery, usage, tracking, and bid/ask spreads than the underlying markets and competitors. So, as a result, we've seen increased demand from both institutional and retail investors, including a notable acceleration in adoption coming from wealth managers, asset managers, pension funds, and insurance companies all around the world. We just published earlier this week a paper called Turning Point, which provides further facts around our performance and why investors are using fixed income ETFs. We have seen iShares attract over 60 new highly sophisticated pension plans, asset managers, and insurance clients to become first time fixed income ETF buyers and now hold $10 billion year-to-date. Even prior to the Federal Reserve purchase of fixed income ETFs, insurance companies were net buyers of fixed income ETFs throughout the volatile first quarter and more than $2 billion worth of LQD was purchased in the first three months by these institutional investors, with 83% occurring before the Federal Reserve announced plans to buy ETFs. So, today, we manage over $634 billion in fixed income ETF assets and that's up from 514 this time last year and 402 two years ago. So, iShares gathered 47% of the $118 billion of industry flows year-to-date into fixed income ETFs and this inflow into ETF contrast with the continuing outflows that the rest of the fixed income industry has faced over the first half of 2020. So, investors of all types are recognizing that fixed income ETFs are more efficient, more transparent, offer better performance and more convenient ways to access the bond market. So, we continue to believe that global fixed income ETFs can double to $2 trillion in the next three to four years, driven by the modernization of the $100 trillion bond market and from conversions of bond securities by institutions, central banks, and alpha managers into ETFs and we're going to continue to evangelize, and we will continue to work with clients on how these tools can provide them with good value in the fixed income market.

Our next question comes from the line of Ken Worthington of JPMorgan.

Hi Ken.

Hi, good morning. Good morning. Maybe taking fixed income from a slightly different direction. Interest rates have fallen to unprecedented lows in the U.S. and fixed income product yields are following. There's speculation that the ultra-low interest rate environment could alter traditional U.S. asset allocation, for example, the 60/40 model to the detriment of fixed income allocations. So, do you think there are longer term implications of lower or ultra-low yields on investor asset allocation to fixed income? If so, are the implications similar or different for retail versus institutional? And ultimately, what does this mean for the growth of BlackRock traditional fixed income assets?

So, with low interest rates, there is still a room for a significant allocation to fixed income. We see it in the asset allocation models and we see it in specifically in the models that we are building both for the RIA channels and also for other institutions. BlackRock generated $60 billion of fixed income inflows across both the active and index platforms and this was meeting new demand and new client appetite for fixed income. So, investor confidence in both the active fixed income funds and the fixed income ETFs actually grew. And following the strong performance and the liquidity management needed amid this market stress in the first quarter and second quarter, we were pretty well-positioned. So, even though interest rates were lower, we saw that people needed an alternative to cash. And what we saw is incredible demand into both the high-yield and the investment-grade credit area. So, we saw a $13 billion of active fixed income net inflows, and that reflected $8 billion and $5 billion of net inflows from both retail and institutional clients, respectively. Institutional flows were pretty broad based, so even through rates were low; the retail flows were led by the high-yield franchise with about $8 billion of net inflows and where our flagship high-yield bond is performing in the 17th percentile. Now, the other point about low interest rates is note that when it comes to ETFs, we're the number one global franchise player. So, rates seem low in the U.S. today, but they have been lower outside of the U.S. So, we are seeing a huge demand for U.S. fixed income from Asia and from Europe. So, even with low rates, it's all relative. I still think that the fixed income market is going to continue to grow. You also saw the volatility in the markets, which is going to lead to people needing to execute in a more efficient way. So, I understand where you're going in that. But people will be still looking for fixed income. It just may move from treasuries to credit, to alternative structures.

Our next question comes from the line of Glenn Schorr of Evercore.

Hi, Glenn.

Hello, there. How are you?

Very well.

So, I want to talk about illiquid. Thank you. Good. Good to hear. But I want to talk about illiquid build. Clearly, it's happening. I heard your comments about both infrastructure and private equity, and I see you $75 billion now. Where do you still need to build maybe focus a little more on the private credit side? And just wanted to, in conjunction with that, get your opinion on the recent DOL ruling for inclusion in 401(k) and Target Date Funds? Thanks.

Great question. So, we continue to emphasize and grow our illiquid alternatives. We're seeing growth across the world in every area of the world and across all their different distribution channels. I believe we continue to have very large and real opportunities. As I said earlier, we are going to continue to be driving great growth in our -- in the infrastructure area, and we’re going to continue to see real opportunities in some of our credit opportunities and even in some of the private equity areas. We're going to continue to build this out organically by building out our teams. Our hedge funds actually across the board have done exceedingly well in these very volatile times. Our European hedge fund is, once again, a double-digit performance. Our health science products continue to be doing exceedingly well. And so, I think, what is really happening overall is I think five years ago, we were not as recognized as being a participant in the illiquid alternative space, and today, we are. We are in the top five in terms of asset growth and we continue to be driving even more accelerated growth in these areas. And related to the DOL rule, related to Target Date Funds, this is a positive development. It will increase access for individuals, the benefit in the private markets and we're very well-positioned with the relationships in that area. And obviously, because our LifePath Target Date franchise of being more than $260 billion, we have great opportunities to present different asset categories into these strategies. And so, we are very well-positioned. It's very early days. We have to see how this implementation will work, what type of disclosure is going to be necessary. But we're excited about these opportunities, for us to have an accelerated position in the illiquid area, because of our strength and positioning in our Target Date business. And so, I'm quite excited about this opportunity. But how this is going to be implemented, the type of disclosures we need to do, we need to make sure that the investors know what they're investing, and they know the associated risk in it. We're talking about retirement assets and as a fiduciary, we have to ensure that our clients' retirement assets are protected and they understand fully the risks associated with the investments. And so, as investors move their retirement assets across different investment spectrum, a great need for risk analytics. And this is only going to mean more opportunity for eFront and Aladdin, as more and more clients are starting to look at illiquids and there's going to be a great need for technology and technology utilization to help them understand the risk. And I believe the need for technology and risk management in these areas is going to be required as -- for all of us as a fiduciary to all our clients' retirement assets.

Our next comes from the line of Alex Blostein of Goldman Sachs.

Good morning Alex. : Good morning everybody. A question for you guys around Aladdin and specifically, I wanted to talk about provider Aladdin. We haven't gotten an update on that in a little while, but it looked like Citi, I think joined the platform. I think you guys are already partnered with BK and a handful of others. So, maybe talk a little bit about where the build-out stands, whether or not BlackRock is still kind of the of the primary customer of -- provider of Aladdin and when do you guys would anticipate other asset managers potentially joining the service?

So, Aladdin provider, as you know, was created as a response to the industry's desire for closer integration along the investment lifecycle to drive efficiency. And as a leading investment management platform used by 90-plus asset managers globally, Aladdin is uniquely positioned to drive increased standardization across the ecosystem. So, by working directly with asset servicers to streamline the operating model, Aladdin provider leverages Aladdin's proprietary data interfaces and workflows to drive this connectivity and the transparency and the information symmetry between the asset manager and the asset servicer. So, through provider Aladdin, we have the capability now to enable custodians and middle office outsourcers to service client assets directly on Aladdin and this allows a further refinement and reduction of friction in our clients' operating models, improving the data quality and streamlining the workflows. So, more broadly, we are seeing the demand for what we're going to call interoperability with asset managers, trading venues, and the market data providers as they continue to grow as clients they want to increase straight-through processing. And this will consolidate the number of systems that they have to do their jobs and maintain optionality in their counterparty relationships. So, we're continuing to build this out. This is part of BlackRock's long-term technology strategy to provide technology for as much of the asset management value chain as possible. So, we are continuing to build this out, lots of interest and I think it will improve the ecosystem going forward.

Our last question comes from the line of Bill Katz of Citigroup.

Hi Bill.

Good morning everybody. Thank you so much for taking the call this morning. So, maybe a big picture question for you just given all the moving parts, I appreciate that the market beta is probably the biggest variable test. But assuming sort of a neutral view of that, how do you sort of see the fee rate evolving from here? And then, Gary, you had mentioned the potential for some money market fee waivers in the second half. Just wondering if you could help potentially quantify that? Thank you.

Sure, Bill. Good to hear your voice. So, I don't think anything has really changed with regard to our views on fee rates. As you know, we talk a lot about what we can control and what we can't control. And so as we've talked before, our fee rates are, obviously, in many respects, tied to beta, in particular, divergent beta, what's going on in FX, client risk preferences and the like. And I think as we mentioned last quarter, as we entered the quarter with a fee rate that was obviously down as a result of what was happening in the market. I think the good news is a combination of strong markets and organic growth and the second quarter has almost entirely eliminated the headwind that we had talked about last quarter. And while Q2 AUM, as you said, is up 13% since the first quarter, it's obviously still down. So, we estimate we're entering the third quarter at a run rate that's essentially equal to our first quarter base fees. We're probably about 4% higher entering the third quarter than we were over the second quarter. But on an equivalent day count basis, our base fees were still down sequentially. And as you know, that was despite higher security lending revenue as well. The impact of negative divergent beta NFX was also the primary reason we saw that decline 0.2 basis points in our second quarter effective fee rate, which will obviously impact us going forward. So, we're still -- there's still some beta issues. The good news is this quarter, we obviously saw a positive difference in our organic base fee growth relative to organic asset growth, and that's because we saw some significant success in some of our higher fee products. Rob's talked a lot…

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

I want to thank everybody for joining us this morning and for continued interest in BlackRock. I am proud of the progress we made and helping our clients through that uncertainty in the first half of 2020. We will continue to invest and innovate in the years to come, so we can better meet our clients' needs. That's what we're all about. We're going to continue to generate growth and importantly, fulfill our purpose in helping more and more people experience financial well-being. That is our purpose. That is what differentiates us. It is our fiduciary culture of building strong, deep, long-term partnerships with our clients, with our communities where we work with governments, and we will continue to do so. I wish all of you to have a safe and healthy start to the third quarter, and let's hope for all humanity that we find a solution quickly for this dreaded disease. Thank you, everyone, have a good quarter.

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