Blackrock 2Q16 Earnings Call Notes

BlackRock’s (BLK) CEO Laurence D. Fink on Q2 2016 Results

Uncertainty is leading clients to pause

“Political and macroeconomic uncertainty including Brexit, the upcoming elections in France and the United States, historically low yields and elevated market volatility, regulatory pressure including the DOL, Solvency II, these factors and others are leading clients of all types to pause, as they assess both their own needs and their investment options available for them.”

Low interest rates are causing all sorts of problems

“Our pension clients with 7%-plus return expectations are facing an ever-expanding liability gap. Our insurance clients with significant regulatory constraints cannot make their business models work in a zero yield environment. Sovereign wealth funds have been forced to focus on liquidity and funding needs after years of rapid growth, and individual savers are wrestling with a choice of too much risk versus too little return, as they face the prospects of their own underfunded retirement plans.”

Clients do not know what to do with their money

“Clients do not know what to do with their money. They are afraid and they are pulling back, as evidenced by more than $55 trillion in bank deposits sitting in the United States, China, and Japan alone. And even as markets have rallied recently, many clients have missed that upside, and find themselves feeling even further behind.”

Investing to develop solutions that will meet client needs in the future

” today we’re investing to develop the solutions that will meet our clients needs in the future, including infrastructure, sustainable investing, big data, machine learning, factors, and smart beta, and also critically in technology, from our Aladdin franchise to our presence in digital wealth management with FutureAdvisor”

Most of the inflows are institutional

“clients want to put money to work. They’re pausing, that’s certainly true. I think we’re seeing an anomaly right now. We’re seeing – if you look at our ETF flows since Brexit, I would say the majority of those inflows are probably are institutional. Because at the same time, I’m sure you’re looking at the data, there’s still outflows in mutual funds which tells you, obviously retail are still selling, but that the divergence is quite stark, and shocking to see that type of differential.”

There is huge pent up demand

“I can’t predict one quarter over another. But what I can say, over a long period of time, there is huge pent-up demand, and I believe we will be more involved than ever before. I can’t say that about the industry though.”

Active will still play a role in the future

“I am a big believer that active will play a role in the future, so let’s be clear about it. We believe whether it is – alternative is an active product. We are a big believer that and in some categories like in Asian equities and components and European equities and in some areas in the U.S. equity market where active returns can and shall outperform it’s over index. But I think what you’re seeing also is a trend that iShares are taking some share away of people buying individual stocks.”

More investors are talking about asset allocation

“That’s one thing that I think – and maybe iShares is taking away from buying individual bonds. These are things that the dynamics that are changing, we are seeing more investors talk about asset allocation instead of individual stocks, and I think probably the most – more than I want to just allude to, obviously the last four months we’ve seen some really accelerated outflows, we, the industry, in active equities, I would not write it off over a long cycle and I would just give you a better perspective on BlackRock.”

I don’t necessarily see the Fed as a central bank that is going to start aggressively easing

“we’ve had it in that 25 basis point increase in the United States, so actually money market funds in many cases are in a better position today than they were a year ago. You’re seeing, as you suggested, a flattening of the yield curve. I actually don’t believe, I mean, we saw the 10 year go down to as low as what, 1.35%, and we’re at 1.47% right now at I last looked, 1.46%. The two year note is still trading at 66 basis points, or approximately around that area. If the U.S. goes down that path, and we’re reversing that increase, and indeed the Federal Reserve needs to ease, that’s a whole different issue.

I don’t see that as an outcome at this moment. I believe the U.S. economy is growing – not as well as we want it to be, but I think we will see a 2% economy this year, which would tell – and we still have plus or minus, a 5% unemployment rate in this country. So despite all of the headwinds and uncertainties, I don’t see at this time, a Federal Reserve that turns itself into a central bank that has to aggressively ease. And so, it may delay their path towards normalizing of interest rates, but I don’t see any possibility at this moment that they will be forced to going back into an easing mode. I think the actions of the Bank of England today is another good example. Marketplace anticipated an easing. They suggested in their commentary, that they are going to possibly ease in August, and looking for more data.”

Gary S. Shedlin

Incredibly difficult investment landscape

“Clients are struggling to navigate an incredibly difficult investment landscape. Notwithstanding the recent market rally over the last 12 months, many global equity markets were down double-digits and interest rates touched historic lows worldwide. The current macro environment including negative yields in many jurisdictions, Brexit and U.S. election uncertainty is causing clients to defer investment decisions resulting in significant increases in global cash balances, lower active flows, and a shift from equity to fixed income assets.”

Lower revenue capture across the industry

“This environment is also resulting in lower revenue capture across the asset management industry. In times like this, growing and evolving our business are critically important, as client needs for our investment advice and risk management capabilities are greater than ever. ”

Seen particular strength in our European iShares since Brexit

“Since the UK’s decision to exit the EU, we have seen particular strength in our European iShares range across asset classes, capturing over 70% market share over the past several weeks, as clients leverage our industry-leading product breadth and liquidity