Blackrock (BLK) Q2 2016 Earnings

Blackrock (BLK) CFO Gary Shedlin said investors remain hesitant in this uncertain times 

“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.”

Declines in international equity markets hurt the company’s fees

“While the S&P 500 was down only 1% on average year-over-year, many markets linked to our higher fee equity products including emerging markets, Europe, Asia, natural resources and commodities experienced double-digit declines.  This environment is also resulting in lower revenue capture across the asset management industry.”

Brexit has had minimal impact on their business

“More recent market volatility associated with Brexit had a minimal impact on second quarter base fees. While the operational implications of Brexit will evolve over the coming quarters, we are well-positioned versus the industry as a function of our globally diversified manufacturing, distribution and operating platform.”

Blackrock (BLK) CEO Larry Fink said clients are pausing and reflecting on what to do next with their investment portfolios

“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.  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. 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.”

Blackrock (BLK) CEO Larry Fink said he doesn’t see the Fed easing monetary policy and easier than it already is

“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, 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 we’re going to live in this environment of low rate for a long time though.”

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

KKR (KKR) Chairmen Henry Kravis Interview

KKR (KKR) Chairmen Henry Kravis sees a compelling investing opportunity in the energy space

“Energy is an important focus of where we’re investing today at KKR.  The shale operators, they need capital.  We’ve found extremely good operators down in the Marcellus field in Pennsylvania and Eagleford shale in Texas.  If you don’t drill on a lease for shale within a short period of time, you lose that lease so they needed the capital in order to maintain their leases.  In one case, we made 8 times our money.  We think energy investing today is a good hedge against inflation.  We’re doing everything from buying non-core assets out of the major oil companies.  We have a 50 person operating team out of Tulsa who have engineering expertise.  There’s a need to operate these oil properties more efficiently.”

KKR (KKR) Chairmen Henry Kravis on investing in Asia

“Where we’re focusing our efforts in Asia is very much based on the consumer.  The consumer is moving up the socioeconomic ladder, in China in particular, more and more people are moving to the urban centers.  And they want what the west has.”

 

Source: Video Interview June 12, 2016 https://www.youtube.com/watch?v=JYt-pP5cgrQ

Franklin Resources (BEN) CEO Greg Johnson

Franklin Resources (BEN) CEO Greg Johnson on fee compression in the asset management industry 

“In any business where margins are under pressure, there will be consolidation as a way of making efficiencies, and that is being accelerated by the secular shift to passive investments”

 

 

 

Source: Financial Times Article titled “Franklin CEO says Asset Management industry to consolidate”

June 6th, 2016

Oaktree (OAK) Chief Investment Officer Howard Marks Video Interview

Oaktree (OAK) Chief Investment Officer Howard Marks said government is not the solution to all our problems 

“People need to understand economic reality and what that means is governments, politicians, and candidates can’t give people everything they want to give them and certain promises just can’t be kept.  There’s always a cost.”

Oaktree (OAK) Chief Investment Officer Howard Marks said government policy action can have consequences

“There’s little a country can do in terms of policy actions to improve its situation that (a) doesn’t have negative ramifications and (b) will enhance the long-run outlook in the absence of fundamental improvement in economic efficiency.”

Oaktree (OAK) Chief Investment Officer Howard Marks is not optimistic on any of the presidential candidates’ proposed policies

“I don’t think any of the candidates make much economic sense.”

 

 

Source: June 6, 2016 Video Interview

http://www.bloomberg.com/news/videos/2016-06-06/oaktree-s-marks-on-tariffs-and-minimum-wage

Brookfield Asset Management (BAM) Q1 2016 Earnings

Brookfield Asset Management (BAM) CEO Bruce Flatt categorized the market opportunity set as “good but not great” 
 
For all the noise you hear right now both the headwinds for stocks our view is that the markets are pretty good, not great but overall conditions are positive for most companies. Rates remain very low; North American banks have never been in better shape as a result liquidity is excellent with few exceptions in specific industry. Corporate balance sheets across North America again with a few exceptions are very strong and companies are expanding certain sectors.”
Low interest rates are forcing institutional investors to look to other asset classes outside of equities and bonds to invest
 
Turning to fund raising, as Brian mentioned against the backdrop of low interest rates and the volatility in stock markets we believe our real asset strategies have significant appeal in particular for institutional investors. Property, infrastructure and private equity are excellent places to commit capital for those investors with long liability such as pension plans and sovereign wealth funds. We spent the last decade building out our global scale in all of our businesses and has allowed us to be heading to close $30 billion of capital for our current round of funds.
Brookfield Asset Management (BAM) CFO Brian Lawson said they’ve raised a substantial amount of capital and thus have a lot of dry powder to deploy to buy assets
 
So turning to our asset management results, fee bearing capital was $104 billion at the end of the quarter, up $11 billion over the last 12 months. And subsequent quarter end capital raised in our private funds added an additional $10 billion of fee bearing capital bringing the total to $114 billion, and increased our annualized fee revenues and target carry to nearly $2 billion. The increases in fee bearing capital came from a final close on our $9 billion flagship property fund along with commitments of approximately $12 billion to our latest infrastructure fund and more than $3 billion to our private equity fund.”
Customers keep coming back to re-invest
 
We are targeting an additional $6 billion of capital on our marketing efforts which also include three niche fund. In our strategies we have seeing the vast majority of investors in the last generation of funds coming back as participants in our successor funds.”
Beginning to see attractive investment opportunities
 
And at the same time our capabilities to put this capital to work and manage the assets has never been stronger in terms of our global scale and operating capabilities and we are seeing a wide range of attractive opportunities. To that end we have already investor or committed more than half of the capital in that $9 billion property fund I mentioned that we just closed.”
Attracting more capital from Asia
 
And probably the second biggest change over the years has been Asian institutional investors have continue to put money into real assets and into funds and into investments outside of Asia. And so those commitments have been growing. Probably both because our name is known and our relationships are better, but also because there is more significant amounts of capital coming from those types of groups today.”
Brookfield Asset Management (BAM) CEO Bruce Flatt highlighted the company’s size and large asset base as a competitive advantage
 
We try to focus on transactions that we have a competitive advantage with and I guess we try to focus on three things, number one is and often people heard us say that it’s size of capital we have more money than most people to invest in transactions and that just allows us to do things, which a lot of others can’t do just because of the size of transaction and we bought the Columbian Hydro Company recently for $5 billion and they are just weren’t too many people that could fund $5 billion to do that transaction. So size just helps us to eliminate ourselves from the crowd or separate ourselves from the crowd.”
Seeing Chinese companies buying international assets should not fully be mistaken for a dash to get out of the Yuan currency
 
The one thing that we are seeing is very significant amounts of capital being invested from China to other more developed markets. And again the story gets confused because most people interpret that that as people taking money out of China and wanting to have it out of China. And that’s possible some of the money is that. But a lot of it is that the institutions in the country have been encouraged to invest outside of the country. And they’re starting to go from they initially where zero percent outside of the country for example in the insurance companies and over 3% now they’re allowed 15% foreign investment. China now is going from 0% to 15%. You may never see that 100%, but that will continue to increase overtime. And the size of the amounts of money is very, very significant in these institutions.”

 

Oaktree 1Q16 Earnings Call Notes

Jay Steven Wintrob – Chief Executive Officer & Director

Bruce Karsh – Co-Chairman and Chief Investment Officer

We think we are a big step closer to the next distressed debt opportunity

“While it proved to be a fleeting bargain buying opportunity, the credit markets’ panic attack from January through mid-February reminds us that market psychology is fragile, liquidity can suddenly become scarce, and capital markets can quickly shut. Moreover, we believe that signals that an upswing in defaults has finally started, and that we are a big step closer to the next expanded distressed debt opportunity.”

At the end of January 19% of the high yield index was trading at a 1000 bps spread over treasuries

“As you may know, the percentage of the high-yield bond that’s trading at yield spreads greater than 1,000 basis points over treasuries has historically been a reliable leading indicator of default rates. That is when there’s a greater supply of securities, more defaults are expected to occur. By the end of January, the percentage of the high-yield index trading at such high spreads had increased to 19%. Since mid-February, prices have snapped back and yield spreads have narrowed considerably. Nonetheless, a number of stressed securities are still trading at spreads over 1,000 basis points and not just in energy and commodity-related industries.”

Didn’t get everything that we wanted in Q1 but did a good job of putting money to work

“The window closed relatively quickly, and we didn’t get all that we had wanted when we were in the market looking for opportunities. But we felt that we did a reasonable job of putting money to work in Q1.”

Probably not going to deploy quite as much capital in Q2 and beyond

“And with respect to the rest of the year, it’s really going to be a function of what the environment is. We still think we’re going to continue to deploy, although what we were doing in Q1 is probably not as much of what we’re going to do in Q2 and beyond. We see some other opportunities outside of public U.S. corporate debt that looks interesting to us. And, of course, the energy sector is still interesting.”

There isn’t a lot of liquidity

“One of the hallmarks of the capital markets today is that there just isn’t a lot of liquidity. And when the sellers emerge, prices drop, in many cases, well below fundamental value.”

There wasn’t much supply so we didn’t get everything we wanted and then buyers came in and prices shot up again because of lack of liquidity. Prices went to levels we thought overvalued

“In some cases, we were stymied, because there wasn’t as much supply as we would have liked of the companies that we found attractive, but we bought all we could. Then, when the recovery came, again, some of these securities traded up 20 points or 30 points, again because of the lack of liquidity. So, when the buyer showed up, there wasn’t as much supply as I’d mentioned, and they drove prices up a lot. And we took the opportunity to sell. So, it was an unusual period where, for a short window, we were able to really enjoy the bargain we saw. And then very quickly, we saw prices go up to levels that we thought fundamentally overvalued some of these companies and thus we sold.”

Jeff Gundlach Finanz und Wirtschaft interview April 2016 Notes

Recessions don’t drive financial markets it’s the other way around

“We will be on watch for that in the coming months. But it doesn’t really matter. Recessions don’t drive financial markets. It’s the other way around. People are so focused on this «recession-yes-or-no-question». What really matters is that we are in a low nominal growth environment and global growth keeps getting marked down. It is going to be slower in 2016 than in 2015.”

Yellen capitulated on rate increases on March 29

“I have been waiting for about two years for the Fed to capitulate on their interest rate increase dreams. Now, I think they did. Federal Reserve Chair Janet Yellen basically capitulated on March 29th.”

The Fed keeps saying we’ll get two rate hikes but it’s never going to happen

“The Fed has already reduced its forecast to two rate hikes. And that’s going to turn into one hike pretty quickly because we’re getting close to mid-year and I really doubt that they are going to do a rate hike in June. But what they are going to do is a rolling twelve month two hikes type of thing. So in June they will signal two hikes by June 2017 and then they will just keep pushing it forward. That’s a movie we’ve seen before. The Fed has pushed forward such decisions for years. We were always going to get to a Federal Funds Rate of 3% and it was always going to be starting in six months. But it never happened.”

The markets have humiliated the Fed

“The markets have humiliated the Fed into abandoning their pretty idiotic forecast.”

There is mounting evidence that negative rates do the opposite of what central bankers were hoping for

” I think the next big thing will be that at some point central bankers in Japan and in Europe will have to realize that they need to give up on negative interest rates. Negative interest rates are the dumbest idea ever. It’s horrible. Look at how badly it’s been working. The day that the Bank of Japan went negative the Yen started strengthening like crazy and the stock market is down. That’s exactly the opposite of what they wanted. The same thing happened with the ECB. Around a year ago, the consensus recommendation was to sell US equities and to buy European stocks because of negative interest rates in Europe. That turned out to be the most common mistake that was made in 2015. It’s been a horrible outcome. So there is mounting evidence that negative interest rates do the opposite of what the central bankers were hoping for.”

Negative interest rates are themselves deflationary

“Negative interest rates are designed to fight deflation. But they are the very definition of deflation: Your money is disappearing. As an investor, you are going to have less money in the future than you have today with negative interest rates. That’s deflation! So negative interest rates are deflationary and they are tremendously negative for monetary velocity. ”

This is all about capital preservation right now

“It’s all about capital preservation. If you can get a few percent return in a deflationary environment you’re doing fine. Because if you invest in European government bonds your base case is that you are going to have a negative return. The same applies if you invest in Japanese government bonds. So gold is a high yielding investment. You are getting zero yield versus negative yields in the case of short term European bonds and most Japanese bonds. Gold (Gold 1266.15 1.65%) is doing fine. It’s preserving capital in the US, it’s been making money over the last couple of years for European investors. That’s why I own gold. Because in a negative return environment anything that holds its value or makes a little is good.”

The stock market seems egregiously overvalued versus other stock markets

“The US stock market seems egregiously overvalued versus other stock markets. Emerging markets look vastly better, Japan looks better and Europe does too. That’s because they’re all down. It’s remarkable that the US stock market is within about 2% of its all-time high and every other significant stock market is down substantially. Also fundamentally, it’s very hard to believe in US stocks. Earnings and profit margins are dropping and companies basically are borrowing money to pay dividends and to buy back shares”

I think the rally is basically over, the default rate in the next five years could be the highest in the history of the high yield bond market

“Just like oil, the high yield market has enjoyed the easy rally. I think it’s basically over. I don’t see how you are supposed to be all fond off high yield bonds, since they are facing enormous fundamental problems. I thought people would learn their lesson but the issuance in the years 2013/14 was vastly worse than the issuance in 2006/07. Also, in the bank loan market covenant lite issuance rose to 40% in 2006/07. In this cycle it climbed to 75%. The leverage in the high yield bond market is enormous and you’re about to have a substantial increase in defaults. I wouldn’t be surprised if the cumulative default rate in the next five years were going to be the highest in the history of the high yield bond market.”

We are in a culture of default

“We are now in a culture of default. There is no stigma about defaulting anymore. During the housing crash, homeowners walked away from their mortgages. That was the beginning of a massive tolerance of default. Today, people talk about Puerto Rico defaulting like it’s nothing.”

The next election will be more tansformative than this one because we’re on the verge of generational change

” The next election is going to be much more transformative than this one. Because in this election, both parties are kind of clinging to the belief that they can keep the genie in the bottle. But we’re on the cusp of big change and, unfortunately, it’s all wrapped up in generational problems. The big problem that is coming, of course, is the unfunded liabilities that have been promised to the baby boomers.”

Trump is going to win

“Trump is going to win. I think Clinton and Sanders are both very poor candidates. I know the polls are signaling the opposite. But the polls said the opposite four years ago, too.”

Blackrock Annual Report quote and JP Morgan Annual Report Quote

Source: Blackrock 2015 Annual Report
 
Blackrock (BLK) CEO Larry Fink warns investors of the consequences of negative interest rates
 
Investors today are facing tremendous uncertainty fueled by slowing economic growth, technological disruption and social and geopolitical instability. Particularly worrying is the adoption of negative interest rates by central banks attempting to spark economic

growth. These actions are severely punishing the world’s savers and creating incentives to reach for yield, pushing investors into less liquid asset classes and increased levels of risk, with potentially dangerous financial and economic consequences.”

 

 

 

 

Source: JP Morgan 2015 Annual Report
 
JPMorgan (JPM) COO Matt Zames says the bank is really a technology company in disguise
 
“We are a Technology Company.  Technology is the lifeblood of our organization, and it drives the deliv- ery of the secure products, platforms and services our customers and clients value and trust. We serve nearly 40 million digital customers and process $1 trillion in merchant transactions annually. Each day, we process $5 trillion of payments, as well as trade and settle $1.5 trillion of securities. We see technology as an essential core competency and a key differentiator to drive future growth in all of our businesses.”

 

Lazard (LAZ) Q1 2016 Earnings Call

Lazard (LAZ) CEO Ken Jacobs said the company benefits from an environment where cross-border mergers and acquisitions are prevalent 
 
We’re advising on four of the 10 largest M&A transactions announced in the first quarter of 2016. We continue to advice on four of the 10 largest transactions announced last year, and about half of our announcements in the quarter were cross-border.  Lazard’s market share of the largest global transactions reflect our competitive advantage, which is the breadth and depth of our business, our high concentration to the senior level advisory bankers and our unrivaled global network relationships with key decision makers in business, government and investing institutions. We continue to be active across our advisory practices.”
 
Thinks the M&A environment will get better towards the end of the year
 
Regarding the M&A market environment, volatility in the first quarter was contributed to a general slowdown in new transaction announcements. But we know from experience that M&A cycles never go up in a straight line. The fundamentals for continued activity remain in place. We are in excellent competitive position to maintain a significant share of the large, complex and cross-border transactions that characterize this cycle.  We are advising on a record level of transactions and we expect M&A advisory revenue to be back-end loaded with a higher level of closings during the second half of the year.”
Their corporate restructuring and bankruptcy advisory business for oil & gas companies is picking up steam
 
The restructuring activity really picked up, starting to pick up last summer or last fall with the significant drop in the oil price. It tends to have kind of a soft start, because people, generally speaking, are always kind of reluctant to take the first steps around restructuring until they have a certain view of the longer-term environment. So it takes a little while to kick-in.  I think we are seeing now in the first quarter the beginnings of the revenue ramp-up from this new activity. It feels more like the dotcom bubble than it does, the ’08, ’09 period. The ’08, ’09 period spread across the entire economy, starting with financial sector, but was much broader. The cycle around dotcoms during last decade in 2001, 2002, 2003, was more concentrated in the TMT sector like this cycle is, which is likely to be heavily concentrated in the energy commodity sector. So I think I’d probably look back at that cycle.”
M&A is an opportunity for corporations to reset expectations and drive costs out of the business
“But generally speaking the catalyst behind this cycle is pretty powerful, which is this disinflationary, deflationary trend. And M&A becomes a important tool for boards and companies to have in their toolbox to address difficulties or challenges around organic growth and challenges around driving earnings through additional efficiencies in the business, and that catalyst is an important factor in what’s happened and what’s likely to happen in the M&A markets going forward.”