In the second quarter of 2023 earnings teleconference, the BlackRock Incorporated team welcomed the attendees and the host of the call, Laurence D. Fink, Chief Financial Officer Martin S. Small, President Robert S. Kapito, and General Counsel Christopher J. Meade. Chris Meade reminded the attendees of the potential for forward-looking statements to differ from actual results. Martin Small then presented the financial performance and business results, focusing primarily on as adjusted results which excluded the compensation expense impact of mark-to-market volatility and the non-operating impact of an economic hedge. BlackRock saw an industry-leading $190 billion of net inflows in the first half of 2023.

BlackRock has seen an increase of $830 billion in their assets since the end of the year, due to strong organic growth and client confidence in their performance. Clients are choosing BlackRock for their portfolio goals and are consolidating more of their portfolios with them, leading to $80 billion in net inflows in the second quarter. Second quarter revenue of $4.5 billion was 1% lower year-over-year, primarily due to market movements.

BlackRock reported operating income of $1.7 billion, a 3% decrease from the previous year, but earnings per share of $9.28, a 26% increase. Non-operating income included $158 million of net investment gains. Base fee and securities lending revenue was down 2% year-over-year, but up 3% sequentially. Performance fees increased from a year ago, primarily due to higher revenue from illiquid alternatives. Clients are increasingly partnering with BlackRock for integrated technology solutions.

Aladdin's quarterly technology services revenue was up 8% compared to a year ago, due to successful integrations for large clients and higher ACV. Total expenses were modestly lower year-over-year, with employee compensation and benefit expense remaining flat due to lower incentive compensation and higher direct fund expense. The operating margin of 42.5% was down 120 basis points from a year ago, but the platform strategy has delivered scale and operating leverage over time. Aladdin is expecting headcount to remain flat in 2023, with a mid-to-high single-digit percentage increase in core G&A expense.

BlackRock's capital management strategy involves investing in their business, returning excess cash to shareholders through dividends and share repurchases, and making inorganic investments to accelerate growth. In the second quarter, they repurchased $375 million worth of common shares and issued $1.25 billion of 10-year debt at a coupon of 4.75%. Their ambition is to be the cloud of investment management and technology, and their platform strategy drove $80 billion of total net inflows in the second quarter.

In the second quarter, iShares ETFs saw net inflows of $48 billion, led by fixed income ETFs. Retail investors showed strong demand for index SMAs and active fixed income, while institutional investors invested $9 billion in customized LifePath Target-date mandates and illiquid alternatives. Private markets saw net inflows of $3 billion in the quarter, while cash management net inflows of $23 billion were led by U.S. government money market funds. BlackRock is actively working with clients to grow their market share and provide platform as a service, which they believe will result in sustained market-leading organic growth and differentiated operating leverage.

BlackRock has been serving clients for many years, and is now building a platform strategy in asset management to bring together product, services, and technology to meet their needs. This has allowed them to generate strong net inflows and grow technology services revenues and ACV, resulting in an increase of over $830 billion in AUM in the first six months of 2023. Clients are expecting more from asset managers, leading them to do more business with fewer managers.

BlackRock offers a range of integrated services and investment strategies across public and private markets, which helps clients achieve their desired outcomes. Clients are now looking for more than just products, but portfolios and platforms that can help them address the needs of their stakeholders. This year, the US equity market rally has been driven by a few tech firms and the potential of AI to improve productivity and margins across sectors.

BlackRock has seen significant success in its ETF platform, capturing the number one share of ETF industry flows in the second quarter of 2023 and generating $48 billion of net inflows. BlackRock is continuing to drive bond ETF innovation and growth, with its recent ETF launch being the largest global ETF launch in history with two transition focus ETFs. This launch was nearly $3 billion in seed capital, demonstrating BlackRock's commitment to providing choice and access to its clients through its transition and ETF capabilities.

BlackRock offers multiple dimensions of performance to its clients, including investment performance, client service and operational excellence. The company has seen strong active net inflows in the first half of 2023 and is expanding its private markets capabilities through organic and inorganic transactions. It recently announced the acquisition of Kreos Capital, a leading provider of venture debt financing in Europe, and clients are looking for managers with proprietary and differentiated deal flow.

BlackRock has a strong global network of relationships, data and analytics, and capital, which enables them to source unique deals for their clients. An example of this is their acquisition of Creed in May 2020, which was sold last month to a strategic buyer, Kering Beaute, and is expected to realize significant returns for clients. Companies value BlackRock's global reach, brand, and expertise, and this allows them to access proprietary origination. Additionally, their investments in infrastructure are strengthening their profile in local markets.

BlackRock is expanding its global investments through partnerships with AT&T and GigaPower JV, Jupiter Power, FirstAir in South Korea, and Akaysha Energy in Australia. Its portfolio investments in technology, such as eFront and Aladdin, are helping to create the portfolio of the future. Aladdin's integrated end-to-end technology platform is being used by clients to consolidate their portfolios and manage risk. Over the last 12 months, 40% of BlackRock's new annual contract value came from existing clients expanding their use of Aladdin, and its retention rates remain high at 98%.

BlackRock is creating deep integration with ecosystem providers and third-party technology solutions, such as their partnership with Avaloq. They are working to provide greater agility to clients in order to generate higher recurring revenues for shareholders. They have seen success in a number of outsource solutions, and are now working with clients of all sizes, including pension funds, insurers, wealth managers, charities, endowments, and family offices. Clients are turning to BlackRock for performance and platform services, and BlackRock has invested in their business model to be at the forefront of this trend. All of this is thanks to the dedicated employees and leadership team at BlackRock.

BlackRock has had success over the last 35 years due to its commitment to operate on one platform, with one culture, and one technology. The company is focused on developing its next generation of leaders and has recently issued a one-time long-term equity incentive grant to a small group of leaders in order to promote a collaborative long-term performance culture. This is part of the shift towards a more comprehensive platform in order to meet the technology requirements of clients and other investment managers.

BlackRock is at the forefront of transitioning from in-house investment in technology models to BlackRock, with integrated services and strong performance. Laurence Fink and Robert Kapito are energized by the new examples they see every day and how BlackRock is delivering value to stakeholders. Craig Siegenthaler asked if bond ETFs and money market funds will be the most dominant drivers of flows and if investors are waiting for the Fed to raise rates. Rob answered both questions with a 'yes', as yields are currently back but expected to rise, leading to a generational change in the fixed income market.

Fixed income investments have seen a resurgence in demand due to their ability to yield over 4%, which is a once-in-a-generation opportunity. There is $7 trillion in money market accounts ready to be invested when investors feel that rates have peaked. Investment performance has been strong with 90% of taxable fixed-income AUM above the benchmark or peer median for the five-year period. Bond ETFs are being used alongside of active fixed-income offerings, with $12 billion in active fixed-income net inflows and $68 billion from bond ETFs in the first half of the year.

Martin Small states that the need for income and uncorrelated returns in a higher inflation world with more volatile public equities will drive demand for alternatives, which is why iShares plans to double their base fees in private markets over the next five years. They also plan to introduce new products and scale up existing strategies to capture these opportunities.

BlackRock's Global Private Market survey found that over half of clients plan to increase their allocations to private markets and alternatives. BlackRock has a comprehensive platform of over $150 billion in private markets, and saw 10% organic growth in the second quarter. The company has raised $85 billion of gross capital and is well-positioned in private credit and infrastructure. Low-interest rates and government stimulus and tax incentives are expected to provide strong tailwinds for infrastructure in the next three to five years.

BlackRock has been investing in decarbonization, private credit, real-estate debt, and 40 Act private equity to launch non-traded products across retail and wealth channels. They are looking to integrate these products into model portfolios that are public, private, digital, and tax managed. BlackRock has a strong track record of making disciplined investments and delivering a differentiated operating margin.

The SEC launched updated money market rules this week, and Laurence Fink was asked to comment on the implications for the U.S. Money Fund business. He mentioned the strong cash management flows this quarter and spoke about investing for growth in the most efficient way possible, such as driving more fixed-cost scale through technology and systematized and efficient differentiated sourcing. He also mentioned technology integrations that can drive scale and investments that will drive differentiated operating organic growth. He concluded by stating that they have no change in their expense guidance and expect to finish the year broadly flat in headcount and with G&A up mid-to-high single-digits.

Laurence Fink and Robert Kapito discussed the growth prospects for cash management. They noted that the majority of their business comes from U.S. government funds and separate accounts, but they also offer money market funds, ETFs, and other short-duration strategies. They will work with their clients to find the best tools for their liquidity management and will review the regulatory rules to see what impact they could have on their business. They believe that they will be a beneficiary of the long-term assets and will be able to attract corporations and treasury management due to their high-quality and brand.

Robert Kapito explains that transition investing is a great opportunity for governments and companies worldwide. BlackRock is having conversations with governments about energy and power, and is seeing a lot of interest in the United States in particular due to the IRA, which offers elevated returns.

BlackRock has a unique opportunity to partner with governments and corporations to invest in decarbonization and carbon sequestration projects. They have already started conversations with traditional energy companies about their platform related to decarbonization and have one of the largest sequestration projects in the US. However, some shareholders are questioning if corporations should move forward in this area.

BlackRock is in a unique position to lead the transition to a more sustainable future due to its relationships with companies and governments. At the end of the call, Laurence Fink thanked the participants and expressed his pride in the firm's accomplishments, as well as its ability to deliver value for shareholders. He concluded by wishing everyone a pleasant summer and a great quarter.

This summary was generated with AI and may contain some inaccuracies.