Blackrock 3Q17 Earnings Call Notes

Laurence Fink – Chairman and Chief Executive Officer

market environment has improved

“Over the past year, the market environment has improved considerably. We’ve seen greater political stability in Europe. China is continuing to show economic strength, and after a long period of stagnation, we’re seeing consistent growth in Japan.

Overall, the world has become much more resilient. However, large cash balances remain on the sidelines, and many global institutions are invested in assets with return profiles that are not expected to meet their liabilities over time, which is creating significant demand for asset allocation and investment strategies across multiple asset classes.”

Shifts in wealth mgmt

“In the U.S., there are two major shifts converging in wealth management. First, in one of the largest asset movements, fee-based advisory assets are expected to double by 2020 in the shift from brokerage to fee-based accounts. The second digital technologies are disrupting traditional wealth advisory practices, which create competition for client assets and provides leverage for fast-growing advisory practices. These trends have several major implications for our entire industry.

Value for cost is critical to advisers and asset allocation decisions. Advisers are increasingly focused on managing risk and constructing portfolios. Chief Investment Officers are taking more control over asset allocation decisions. So there’s a heightened focus on repeatable systematized practices that can be scaled.

Against this backdrop, wealth managers are concentrating their business with fewer asset managers. Demand is increasingly for a strategic partnerships beyond anyone specific investment product. They’re looking for partnerships with BlackRock that we can have ability to bring tremendous value to our relationships to our clients.”

Scale is a competitive advantage

“And as Gary said, as our scale has increased, it gives us even a greater competitive advantage. And we do believe data, technology, risk management is going to continue to drive hopefully better financial literacy that gets back to my, once again, my whole concept of financial literacy for better outcome investing.”

Oaktree 2Q17 Earnings Call Notes

Jay Steven Wintrob – Oaktree Capital Group LLC

Investors remained in a bullish mood

“Investors remained in a bullish mood in the second quarter buoyed by a relatively resilient U.S. economy, low interest rates around the globe, a surfeit of liquidity driven by accommodative monetary policies and low, expected and actual levels of volatility. The S&P 500 MSCI World and MSCI Emerging Markets indices were up 3%, 4% and 6%, respectively in the quarter and have appreciated 18%, 19% and 24%, respectively over the last 12 months.”

Exercising a high degree of caution

“So in short, it’s been a risk on market for most of the year and relatively high prices for almost every asset class reflect that. In this environment we continue to focus on obtaining attractive financing for, or selling mature assets in our portfolios, while exercising a high degree of caution in our security selection and deployment of dry powder.”

Living in a low return high risk world

“Markets normally respond to elevated uncertainty with lower asset prices and compensatorily higher returns. But that’s not what we are encountering today. We are living in a low-return, high risk world and an environment where most investors are happy to bear risk. Against this backdrop, Oaktree will continue to follow its 2012 mantra, move forward but with caution, and given today’s conditions, with even more caution than in the recent past. If one is going to invest at times like this, investment professionalism, knowing how to bear risk intelligently, striving for return while keeping an eagle eye on the potential adverse consequences is the most important thing.”

Blackstone 2Q17 Earnings Call Notes

Steve Schwarzman – Chairman and Chief Executive Officer

Tony James

A lot of capital sloshing around the world

Okay. Well, it’s Tony. There is – it’s obviously been a good fundraising cycle and particularly for private equity, there is a lot of capital that’s being raised and has been raised. And in general, there is just a whole lot capital sloshing around the world, looking for returns. And I think we are more impacted frankly by the aggregate in the public markets than the amount of private equity capital. Our business is to find needles in haystacks. That’s what we do. We are not really chasing public market values and we are not really that impacted by them. And our business is once we find the needle, it would have to be an asset into which we can intervene and change the course of EBITDA. So we create our own values so to speak as opposed to being slaves to the public market valuations.

Blackrock 1Q17 Earnings Call Notes

Laurence Fink – Chairman and CEO

Investor confidence has partially changed

“Over the past year, global events have had a significant impact in markets and investor sentiment. Following the presidential election, US equity markets surged to an all-time high driven by expectations for fiscal stimulus and regulatory reform, and reflation expectations have been steadily increasing, although, there is still uncertainty about healthcare, uncertainty about tax and trade reform, when they will be ultimately be implemented in the United States and investor confidence has partially changed. There are significant issues related to tax reform, infrastructure spending, and so we need to see how this all evolves. We are still optimistic, but we have to see how these all evolve.”

Unclear how social and political agendas will play out

“Strong first-quarter equity returns have been driven by a synchronized recovery in global economic growth with the sharpest recovery seen internationally. However, it is unclear how social and political agendas will play out, particularly in Europe ahead of several elections, which is creating even more market anxiety. Furthermore, if the dollar remained strong following a period of significant appreciation we could see further headwinds for dollar-based investors with global portfolios.”

Fee rates are coming down

“I mean, look Bill I think fee rates going down, I think as a reality of what’s happening some of that is mix shift some of that is changing regulation in terms of distribution. Some of that will ultimately, will all accrue to the benefits of the end client. I think ultimately this comes down to our ability to generate sustainable alpha I think if we can generate sustainable alpha in a way that in some ways kind of captures three to four time the fee overtime I think will be fine. If we are in a period of significantly lower returns and lower sustainable alpha then obviously I think the fee rates are going to have to come down accordingly.”

Long term returns are structurally lower

“long term return are structurally lower than they were 10 and 20 years ago. So if you have an expected long term return of let’s say 6% which many people think there might be high when you look at balance portfolio? Fees take up a lot of that return. And as long as we believe the world is going to be in a low return environment our clients are under a lot of pressure. And clients are looking for different ways of seeking those outcomes. And this is why I actually believe why more clients are coming to us now because they have the structural problem. Their liability or their actuarial needs are greater than they can earn with our asset base and so they are looking at them or they are looking to have less expensive product but they are looking for a much more holistic solution and I think the era where a manager sold a product a sole product that is what’s being threatened today.”

This is why hedge funds are closing

“I think this is one of the big issues around hedge funds and why we are constantly reading about some hedge funds closing some hedge funds are lowering their fees because the fee structures are just too large versus the returns on a risk adjusted basis that they are achieving so this is a broad based issue. It’s not just in the wealth management area. It’s across spectrum of clients. I know I am belaboring this point but I think it’s a very important point but this is the environment we all live in.”

Oaktree 4Q16 Earnings Call Notes

Howard Stanley Marks

Define a good year as high absolute or relative return

“I’ve traditionally defined a good year as one in which we achieve a return that is either high in the absolute or superior to the benchmark, or both. By that standard, for example, our 31-year-old record in high-yield bonds includes only one bad year, 2014, when the benchmark was up 1.9% and we were up 1.7% before fees, neither absolute high nor benchmark-beating. All the other years’ gross returns either exceeded 9% or beat the benchmark.”

The world is unusually uncertain

“Looking forward, our continuing view is that the world is unusually uncertain, and perhaps even more so given the regime change in Washington and the questions surrounding the administration’s proposed agenda. We still face some of the lowest prospective returns in history as well as asset prices that I generally describe as being, “on the high side of fair or the beginning of rich.” Lastly, we are still witnessing pro-risk behavior on the part of investors pursuing traditional returns in a low-return world. These four factors when combined with a generally sanguine economic environment result in the presence of lots of buyers and few sellers, an absence of desperate sellers, and thus a paucity of bargains.”

Corporate default rates will remain limited

‘As we begin 2017, it seems that corporate default rates in the U.S. will remain limited and the supply of public opportunities will be low relative to early 2016. As a result, our current distressed debt funds focus will likely continue to be on energy-related opportunities and buying bargains from European sellers.”

Interest deduct-ability isn’t the only reason that people use leverage

“Jay, I think that the comment about taxes and the implications for distressed debt supply suggest that if interest payments are not tax deductible, people won’t use as much debt and thus won’t overburden companies with leverage and the overburdened companies won’t as often fall into distress. I think that there’s probably some truth in that in the margin, but the most important thing is to remember that the deductibility of interest is not the only reason to use leverage. And I think that the private equity funds, for example, will still be doing highly leveraged buyouts because the supplier of debt capital does not participate in the gains. So regardless of the tax treatment, his capital will continue to leverage the returns on the equity capital, which is very important.”

Eventually there will be an uptick in defaults but the question is when

“We think and the reason we raise a lot of money for Xb was that we thought by 2017 or 2018 maybe we’d be seeing some increase in defaults. Every year that goes by logically increases the probability, but there are times, like today, when people say, oh, you know, we’re in a virtuous circle. We have an accommodative Fed, we have expanding – well, the Fed’s accommodative, but not too much, and the economy is expanding, but not too much that it has to be reined in, and corporations are doing well in piling up cash, and debt has been refinanced and paid down, and they’ll give you a hundred reasons why there’s not going to be another down cycle again, but invariably there is. And the question is does it come after 12 years, like the gap between 1991 and 2002 or does it come after six years like the gap between 2002 and 2008 or – these subjects are not subject to science and statistics.”

Blackstone 4Q16 Earnings Call Notes

Stephen Allen Schwarzman

Really extraordinary that the S&P finished last year up

“The fact that the S&P ended up 9.5% on the year with positive momentum and surging investment confidence, in fact the highest confidence level in 15 years, is really extraordinary. Needless to say, many active managers didn’t participate in this 9.5% gain.”

Clearly there’s anxiety

“I’ve spent a great deal of time recently traveling and meeting with different heads of state, business and political leaders from around the world, who are looking for insights into the new administration. It’s clear there is a good deal of anxiety both inside and outside of the country around potential changes in U.S. policy.”

But there are policies designed to create GDP growth

“Major changes that are underway are designed to create significantly higher GDP growth in the United States, targeting a rate of growth as high as double the average of the past eight years. Higher growth should drive higher employment and wages as well as greater labor force participation. And we believe this will also extend the business cycle.”

Chairing a committee for the administration

“Well, actually, my wife has asked me the same question because you just pack more stuff in and you sleep less. And it’s very interesting type of position to have because you touch a lot of people in the administration. And the whole administration is in a startup phase. And, as you know, most of the cabinet heads aren’t even confirmed yet. So there is a startup element of it in terms of my role which is I’m not a member in the administration. I am chairing a committee. I’m like a full-time person of Blackstone that’s getting sort of sucked into a lot of interesting things that are happening, because, as I said in my remarks, a lot of people around the world are sort of observing all these changes that seem to come out every day and are looking for some type of interpretation of what that means or might mean. And so that’s created, I think, a short-term bubble for me to do a lot of stuff. But I don’t think that that will continue at the same level for a sustained period of time once they stand up all the cabinet heads. We will have regular meetings with the President and supposed to be every month. And so that’s a very interesting thing in a rapidly changing environment. But my full-time job is at Blackstone and I’m shoehorning all this other stuff in.”

The one thing that Steve Schwarzman wants from the administration is to improve retail access to alts

“One thing I’d say, this is Steve, at the risk of prolonging this answer is that in life you have to have a dream. And one of the dreams is our desire and the market’s need to have more access at retail to alternative asset products. As I said in my prepared remarks, if you look at those returns, those are really stunning. And at the moment, a lot of people are not allowed to put those into retirement vehicles and other types. One of the interesting issues when you have a new government is whether they want to continue that type of prohibition or not because what it’s doing is denying people sort of a better retirement. And if there is a change in that area, that becomes a huge opportunity for the firm. We already have lots of white space that Joan was talking about. So we’re not defective in terms of things to do every day to increase sort of penetration, but there is ability for something to get changed that could be really, really impactful.”

You’ll get tax reform out of the house, but Senate is not as up to date

” this would be the biggest tax reform in certainly 75 years, maybe 100 years. So it all fits together and it’s meant to fit together, not to just have take one piece out and say, well, this is unfavorable. You have to look at it all which is the way the people are putting the law together, are looking at it. On the other hand, you have to get a law passed and this is not the easiest lift with all these new concepts. And my guess is that you’ll get it out of the House because it’s got enormous momentum in the house, but then it has to go through the Senate, which is not nearly as up-to-date on what’s going to be coming at them and then you have to go to confidence and make it work.”

Blackrock 4Q16 Earnings Call Notes

BlackRock’s (BLK) CEO Laurence D. Fink on Q4 2016 Results

The global economy began to show signs of optimism

“2016 was a turbulent year for investors, whether institutions or individual investors, one that no one fully predicted. Global political events like Brexit, the U.S. political — U.S. presidential election and the Italian referendum have forced many of our clients and also our self to rethink our assumptions and our perceptions of the world. Even with some political surprises, the global economy began to show signs of optimism throughout 2016. The U.S. equity market surged to all-time high as expectations for fiscal stimulus, reflation, and tax and regulatory reform has sparked investor optimism and enthusiasm.

Accomodative monetary policy may subside faster than many have anticipated

“The Fed’s decision to raise rates in December and the signal of additional hikes in 2017 suggest that the long period of accommodative monitory policy in the U.S. may finally subside at a faster rate that many have had anticipated.”

Many markets haven’t fared quite as well as US equity markets

“However, uncertainty and the wave of populism upending the political status quo persist. And despite the rally in U.S. for domestic equities since we’ve had our U.S. election, many of our investors are seeing a very different performance in their other markets. As Gary suggested, we see negative fixed income markets. We see underperforming international equities and a very strong dollar, which means for the dollar based investors with broad global asset allocation such as pension funds, the fourth quarter was more challenging than the market perception.”

I think you’re going to see more clients using ETFs for active returns

“I believe investors are going to continue to rethink their approach to active benefit; they may now move more towards factor-based strategies; they may have asset allocation or portfolio construction, but I do believe, we’re going to continue to see a drive using ETFs for active returns. We’ve been purposely investing in our platform to provide our clients with a full spectrum of offerings and to enhance alpha generating active strategies.”

Institutions were pausing but they put some money back to work in the fourth quarter

“In terms of institutions, I think into the fourth — we said in the third quarter, institutions are pausing. They put some money to work in the fourth quarter; they put a lot of money to work at BlackRock in the fourth quarter. We’re having deeper dialog with more institutions today than we ever had. The dialogs we’re having with some very large insurance companies, pension funds worldwide are very encouraging whether they act in the first quarter, the second quarter of 2017, we’ll see. But I do believe clients are reassessing their liabilities in the form of pension funds, clients are really looking at what their liability rates and the terms of insurance companies, they’re looking at their asset allocations accordingly now and how they’re going to do it, for insurance companies rise of interest rates, steepening of the yield curve is very positive and many insurance companies, I think we talked about early last year were short their liabilities, they were anticipating higher rates, and now with higher rates, some of them are putting some money to work.”

People are using passive strategies that are very liquid so that they can navigate around markets to take active exposures

“”In terms of the asset allocation, we are having dialogs with some clients right now; we’re talking more about alternatives. Rob Kapito has had two conversations with two large states in the last week about a bigger allocation in alternatives. So, I don’t want to suggest there’s one macro trend and one way of looking at asset allocation but I can say we’re involved in a lot of very deep conversations. And I do believe the market is still misunderstanding how people are using passive strategies. They’re not just using it because they want to be indexed; they’re using passive strategies that are very liquid that they can navigate around markets to take active exposures.”

We’re talking about outcomes rather than specific products

“I’m always disappointed of how much money is sitting in the sideline. And I believe at the end of every year, we talk about this that we need to have more of our clients, more of our investors to focus on the outcome investing and not whether the market’s rich or cheap, because that gets caught up and getting in out of the market and therefore missing big market movements, and this is a big issue. I believe this is one of the reasons why we’re having deeper dialog with our clients because we are talking about outcomes, we’re not talking about a specific product; we’re not talking active or passive. We’re allowing our clients to make those decisions, whether they should have a bigger allocation and passive or active. We’re making our clients determine whether they should be in high yield or unconstrained bond plan. We’re allowing our clients to work on how to navigate; we’ll give them input about what we think. But I do believe the fourth quarter of 2016 positioned us well because of how we’re constantly, repeatingly talking about solution-based relationship.”

Blackstone 3Q16 Earnings Call Notes

The Blackstone Group LP (BX) Q3 2016 Results
Stephen A. Schwarzman

Real estate remains an attractive asset class

“Real Estate remains an attractive asset class globally, although there is less distress today. We expect fundamentals to remain solid for the foreseeable future. In most markets, supply remains constrained. Demand for high-quality real estate is strong. Debt levels are not excessive and bank competition is diminished.”

Continue to invest capital at discounts to replacement cost

“We’ve been expecting interest rates to increase for some time and have baked that into our underwriting assumptions for new deals. Historically, when rates have increased, it’s generally been reflective of greater economic activity which in that scenario is good for our business. Against this backdrop, we continue to invest large-scale capital at discounts to physical replacement cost.”

Michael S. Chae – The Blackstone Group LP

There are some big winners in the hedge fund space

I guess, I’ll take that one. There’s a lot of activity in hedge funds and – but it’s not so much like the whole industry is under duress despite what you might read is, there are some big winners. There’re some sectors losing but there’re some big winners too. And what you’re really seeing is you’re seeing assets flowing from the sectors that have struggled to or distinguish themselves on returns to the sectors that are actually doing quite well. And I think your pricing power is kind of a function of where you are in that equation.”

Hamilton James

Drop in base rates was never fully passed on through cap rates

As rates rise, obviously, cap rates will sneak up but the drop in rates was not fully passed through on cap rates. In other words, a spread over base rates came up. So as rates rise, some of that will be absorbed we think by a return to more normal spreads. And we are not really in the business of betting on cap rates staying where they are. Usually, we buy something and we expect on exit cap rates to be higher anyway. That’s what we underwrite to. So that’s our premise and we think that as long as the environment stays healthy, it doesn’t have to be hot by any means. It just has to stay healthy the way it is today then rising rates are what we are expecting and we’re going to get our return

Working on applications of tech to drive new products

“we’re working on some interesting applications of technology to drive new products, and I think those would be some interesting products there which will probably be lower fee products per dollar of AUM, but quite profitable because of the cost structures, and could be very, very large in terms of AUM.”

Cohen and Steers 3Q16 Earnings Call Notes

Cohen & Steers’ (CNS) CEO Robert Steers on Q3 2016 Results

Active managers are battling significant headwinds

“most active managers are battling significant headwinds. Disruptive innovation, waves of new regulations and unprecedented market interventions are adversely affecting broad swath of active only, active long only and alternative managers. This has manifested itself in persistent organic decay and fee pressures for a majority of these managers, but especially for those that are focused on core style boxes. We are anticipating that going forward these trends will intensify rather than abate.”

Wirehouses are looking for big brands

“Philosophically, I think you’re either an active manager or you’re a passive manager. We obviously have a viewpoint. We think that the supermarket approach no longer will be effective because when partners like the wires and our partners abroad are looking to fulfill asset allocations, they’re going to go with the industry leaders or the category killers and the brands and the folks who are delivering.”

Active managers are not prepared to win the race to zero

“Passive, as you all know as well or better than us, is just a very different business, and we and I think most active managers are not prepared or equipped to win the race to zero, and fees are going to go to zero in many passive strategies and we’re not equipped and we’re not interested in competing in that business.”

Blackrock (BLK) Q3 Earnings Call

Blackrock (BLK) CFO Gary Sheldon said this is a challenging environment for all asset managers as the business is changing 

“Our clients are facing significant challenges driven by increased regulation, market volatility, record low interest rates and disruptive technology and that’s a result the asset management industry is changing rapidly. During these times as we’ve done in the past, we reexamined our strategic priorities and evolved our business model with the goal of better serving the needs of our clients and optimizing organic growth in the most efficient way possible for our shareholders.”

The client shift in favor of passive investing has hurt their asset management fee revenue

“While we continue to deliver strong growth, base fee growth has recently lagged growth and average assets under management as client appetite and portfolio construction decisions impact our business mix. In the current environment, client mixed shift has favored index over active, fixed income and cash over equities and government funds over prime funds in the money market space.”

Blackrock (BLK) CEO Larry Fink said he witnessed outflows in their products which focus on the European equities markets

“Across client segments, inflows were led by U.S. in emerging markets equities and debt as investors view the U.S. as a relatively safe haven and emerging markets have gained momentum as commodity prices stabilize. Meanwhile we saw outflows from European equities in the political and policy uncertainties both from the continent and the United Kingdom.”

And he says that insurance companies are becoming more and more comfortable utilizing fixed income ETF’s in their portfolio

“Insurance companies are also increasingly employing fixed income ETFs in a broad range of applications. A recent study from Brennan’s Associates found that ETF demand from insurers is likely to increase. Of insurers in the study, 52% of these companies expect to increase their use of fixed income ETFs in the next year and BlackRock is well-positioned to work with large insurers as our investment strategies and techniques evolve.”

Blackrock (BLK) President Rob Kapito says there is $50 trillion of cash globally sitting on the sidelines

“So we have found there is such a significant amount of cash that’s on the sidelines because rates are so low and equities have not returned what people have expected that the money that is potentially in motion is probably the largest. We’ve done studies to show that globally there’s 50 plus trillion that’s sitting in cash. And I don’t think anybody knows how big that can be relative to the size of the markets. So depending upon changes in interest rates and changes in equity volatility, a lot of that money can come into motion.  So it’s not only coming into areas of retirement. It’s overall. And the studies that we show range anywhere from 38% to 60% of clients’ portfolios are now sitting in cash. So we think that a lot of that money will start to move once people, once we get through the election and once we get through the next decision on where interest rates are going to be.”