Blackrock 2Q15 Earnings Call Notes

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I believe that elevated volatility will be part of the market going forward

“Constrained liquidity conditions are further magnifying market stress and volatility, and I believe, this elevated volatility will be going forward, and I believe are part of the market.”

Outflows in index strategies

“In the second quarter, we saw sizable institutional index equity outflows driven by redemptions from international and official institutional clients due to a variety of cash needs and asset allocation decisions. A number of those outflows from institution clients, however, have been offset by inflows by the same clients into BlackRock’s active strategies.”

We are focused on becoming increasingly data focused

“The next step into the evolution of our business and ability to generate alpha is a further harnessing technology to create innovative investment strategies for our clients. Over the last few years, we have become increasingly focused on becoming a data-driven company. Available data is exploding for the financial services industry and the true winners will be the firms that can extract information and package it into innovative solutions that generate alpha and outcomes for our clients.”

There’s elevated focus on fixed income markets right now. Blackrock has spent time becoming a thought leader in this area

“there has been elevated focus on the state of the fixed-income markets. There are a variety of dynamics at play including extraordinary monetary policy, increased bond issuance and regulatory reform, which has contributed to reduced dealer inventories and lower turnover. While media attention has only spiked in recent months, BlackRock has been focusing on the issues for several years, how to enhance our trading capabilities, how to enhance our portfolio construction and risk management, as well as being a thought leader on the topic.”

Index outflows driven by rainy day issues in commodity based economies

“a lot of money that was, in terms of the outflows, was more cash need driven by our clients for rainy day issues and it’s raining in some of the commodity-based economies, and so they’re utilizing some of that.”

70% of our fixed income clients are trying to match a liability

“70% of our fixed income investors are pension and insurance companies. They’re not influenced by market moves. They’re trying to match a liability, and that’s the problem with the narrative, they’re not the players who’re going to whip around the interest rates. But the true component is, so many pension funds and insurance companies were so harmed by lower interest rates.”

A spike in rates would actually be good for a lot of these customers because their liabilities are longer duration than their assets

“many insurance companies have actually a wide gap – their liabilities are longer than their assets. So, if we actually saw a rising rate environment, this is actually quite additive to the balance sheets of insurance companies. If we saw a rise in interest rates, especially in the short end, the pension funds liabilities will look less onerous, because it’s all based on their funding rate and the capital rate they used for their short-term rates. In fact, many pension funds, if we saw a real spike in interest rates, would (36:39) a lot of their pension liabilities.”

People still don’t understand how much beta products are being utilized for alpha

“People use beta as a place holder of a tactical allocation, I mean that’s one thing that people still don’t understand how much beta products are being utilized now for alpha. And there are many enterprises are tactically allocating whether overweighting or underweighting using beta products.”

People are using ETFs to express their views on the market

“the exciting part of the ETF business is that as people become more aware of the benefits of ETFs, they’re coming up with other uses for ETF. So it’s become not only a way to express your view in the market, but you can express it in a much more precise way. So a lot of the flows that we’re seeing are coming from this new usage. One of the new usage is as you cite is that ETFs became cheaper to use than futures. So we’ve seen a lot of institutions now as they become aware of that and we know how to talk about it, they are coming to us and asking us how they can use ETFs to better express their views in the marketplace.”

We are behind but want to build out retail

“Three years ago, four years ago, we started talking about our building out of retail. Three years and four years ago we started talking about building a stronger brand in retail. Two years ago, we integrated our retail and our iShares teams to be – to offer more outcome-oriented solutions that are – instead of just product pushing. And I think this has all created a more elevated position with our distribution platform. And I believe we have much more to go. We are still way behind other firms related to the RIAs.”

We’re not sure we’re going to pursue the active ETF opportunity. We’re watching.

“we’re not sure that this is an opportunity we’re going to pursue. We’re thinking about it, and we’ll just see how the market continues to evolve. So, we’re not ruling it out, but right now, we’re not looking at that, and we view that as something that will compete more directly with mutual funds than it will with the normal ETFs.”

There’s way too much emphasis on active ETFs

“I think there’s way too much emphasis on this product. We have said that we believe the ETF industry is going to go from a $3 trillion to $6 trillion industry. Active ETFs will be a component of it, but it will be dwarfed by the industry’s growth in traditional beta products…If there is growth in it, it’s going to be growth that’s going to be taking away more growth from traditional mutual funds.”

ETFs are far more liquid than a mutual fund

“let’s just talk about market dynamics a little bit. So, ETFs are far more liquid and constructive versus a mutual fund. An ETF throughout the day has a buyer that matches with a seller. So every time you have a buyer matching a seller during the time, the underlying assets are not traded. And so, this is one of the – people don’t understand – when they talk about this, they just not talk about the market dynamics. So for every buyer, there’s a seller. You are not creating or redeeming the underlying assets. So for – during the market opening, the ETF is providing more liquidity. When you think about a mutual fund, a mutual fund in bonds is accumulating buys and sells throughout the day, and at the final – end of the day, they find out if they have to sell the underlying stocks or – excuse me, bonds at the end of the day or the next morning to get the cash. So, the ETF actually is, as Rob suggested, a provider of liquidity.”