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.”

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.”

BlackRock’s (BLK) CEO Laurence Fink on Q3 2016 Results

Fiscal policy will be necessary to ignite economic growth

“As monetary policy reaches its limits in many regions, expansionary fiscal policy particularly in the form of infrastructure investments will be necessary to ignite economic growth. The lack of clarity around the outcomes of several upcoming political events including the path forward on Brexit, elections in the U.S. and the constitutional referendum in Italy is contributing to growing tail risk and investor caution.”

Retail investors continue to pull back from active equity investments

“retail investors continue to pull back from active equity investments driven by a combination of challenging long-term performance track records and also accelerating regulatory changes. 2016 U.S. active equity mutual funds has experienced more than $240 billion of year-to-date outflows. It’s worth year-on record with more than $110 billion of outflows in the third quarter alone, the same time we’ve seen strong flows from this client segment across our iShares equity ETFs which I’ll speak about in a moment.”

Regulatory changes are having a material impact on the retail ecosystem

“Regulatory changes having a material impact on the retail ecosystem the Department of Labor Fiduciary Rule RDR and MiFID are all impacting the way wealth managers serve their clients. We are likely to see a historical shift on how assets are being managed and invested as our distribution partners are changing both their product preferences and their use of technology to adapt to these rule changes.”

Technology is an essential component of adapting to regulatory changes

“I’ve emphasized the importance of technology many times today. Technology is an essential component of adapting to our regulatory changes and more broadly a changing investor landscape. As advisors take on greater portfolio construction responsibilities in a fee-based account they are increasingly using BlackRock solutions sophisticated tools and risk analytics to build better portfolios.”

DOL going to systematically move assets away from active

“we do believe, as it moves more towards managed portfolios, utilizing more of the centralization of models and corporate and asset allocation, it’s going to move quite a bit of money more towards passive strategies, utilization of ETFs. We do believe it’ll systematically move assets away from active, and so we’re trying to get prepared, but one thing we can say we’re certainty in our conversations though, it leads to greater need of risk management tools. ”

There is a need for more risk tools

“. I do believe one thing will be it’s going to be constant though the need for more risk tools they are going to be imperative to making sure that there is better oversight to protecting the firm making sure they are living under the new DOL rules.”

Gary Shedlin

Clients are facing significant challenges

“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.”

Robert Kapito

There’s a lot of cash 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.

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

Laurence D. Fink – Chairman & CEO

Smart beta is a priority

“The second priority is smart beta, BlackRock is investing in factors and factor products that we believe will become increasingly important as asset allocation tools and alternatives through traditional beta or lower outlook capture active strategies and BlackRock now manages more than $125 billion across a range of factor based solutions.”

DOL fiduciary rule will have an impact on our business

“Last week the Department of Labor published their Fiduciary rule which has implications for our clients and our own business. While we’re currently reviewing the final role to thoroughly assess its implications, we are likely to see changes in our distribution partners’ accounts and fee structures, their product preferences and importantly their use of technology, to both build portfolios for clients at the manager increased risk and most importantly their compliance needs.”

DOL rules may give investors more confidence which would be good because they’d invest more

“If they believe the DOL rules will give them better transparency, better certainty that we are treated like, and they invest more money for the long run. It’s better for the country, it’s better for their financial future and it’s really very good for the entire industry. And I think that message is totally lost in the conversation.”

The need for more technology to manage risk is greater than ever

“can’t underscore enough how the ecosystem is changing, that’s going to require more of capital market participants of your insurance company or asset managers, they are going to — the need for better risk management technology is slowly increasing. The need for better interfacing with clients is only going to be more and more important”

The utilization of fixed income ETFs is going to be larger and larger in the coming years

“As ecosystem of bonds and secondary bonds and liquidity continues to be changing and we are seeing phase of more illiquidity. The utilization of ETFs has a mechanism to find liquidity and to have the ability to navigate the factors that impact valuations of fixed income whether that’s duration or in subsidy or credit, a navigation with the utilization of ETFs is going to — it enhances the opportunities for returns and so we believe as I said in my prepared remark, the utilization, the implementation of fixed income as a fixed income ETFs as a component of the fixed income strategy that clients are employing are going to be larger and larger in the coming years.”

Gary S. Shedlin

Everyone focuses on adjusted results

“I’ll review our quarterly financial performance and business results. As usual, I will be focusing primarily on as adjusted results.”

Remain extremely expense aware in current environment

“we remain extremely expense aware in the current market environment, and we will continue to be prudent with our discretionary G&A spend.”

In challenging markets, need to be smarter about decisions

“we’re all mindful that in challenging markets as Larry and I both have said that we need to make tougher and smarter decisions especially when it comes to reallocating those invest dollars.”

Clients are not going to be able to meet their liability needs in this interest rate envrionment

“negative rates, if you think about 70% of our clients more, our pension funds, I was some form of retirement and insurance companies. We hear worldwide how negative interest rates or low interest rates have been impactful in how they are actually harming their objectives of attaining an asset base to meet their liability needs. In fact last week, we were with one of the largest New York State funds, a U.S. State funds, not in New York State funds, one of the largest U.S. State funds it happened to be in New York City after our meeting we had and they were in the top deciles of performance last year and because of lower negative interest rates and their discounting rate, they actually deteriorated their asset and liability gap. We’re hearing this worldwide, we’re hearing from savers worldwide they’re not going to meet the needs of building their pool of savings to meet the needs of retirement. We’re hearing some insurance companies that they’re going to have a really hard time meeting their liabilities.”

We need a fiscal policy response

“I believe a lower negative interest rates has served a great purpose in the short run. But I don’t believe lower negative interest rate was supposed to be a permitted feature of the investment landscape. We are now entering the eighth year, and I believe that we are going to have a stronger more robust economy and the IMS has lowered their forecast even more, all right. I think the fifth time in a row we are going to need a policy of responses by governments. And I think the dependency on Central Bank behavior is one of the problems that we have in the world and we need policy of response by governments related to fiscal policy.”

It’s incredible the amount of money that’s sitting in cash earning zero

“I think it’s actually quite incredible the amount of cash that’s sitting in banks today, earning zero and that money has typically vanished from the fixed income market. ”

Robert S. Kapito

Smart Beta is a way to add alpha

“Well when there are you know when we have this type volatility people are looking to add alpha in other ways. And the smart beta category is one of these ways. We have made some very substantial hires in this area. “