BlackRock, Inc. (NYSE:BLK) Q3 2023 Earnings Call Transcript

BlackRock, Inc. (NYSE:BLK) Q3 2023 Earnings Call Transcript October 13, 2023

BlackRock, Inc. beats earnings expectations. Reported EPS is $10.91, expectations were $8.47.

Operator: Good morning. My name is Cynthia and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated Third Quarter 2023 Earnings Teleconference. Our host for today’s call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Martin S. Small; President, Robert S. Kapito; and General Counsel, Christopher J. Meade. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer period. [Operator Instructions] Thank you. Mr. Meade, you may begin your conference.

Christopher Meade: Good morning, everyone. I’m Chris Meade, the General Counsel of BlackRock. Before we begin, I’d like to remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock’s actual results may, of course, differ from these statements. As you know, BlackRock has filed reports with the SEC, which lists some of the factors that may cause the results of BlackRock to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So with that I’ll turn it over to Martin.

Martin Small: Thanks, Chris, and good morning, everyone. It’s my pleasure to present results for the third quarter of 2023. Before I turn it over to Larry, I’ll review our financial performance and business results. Our earnings release discloses both GAAP and as-adjusted financial results, I’ll be focusing primarily on our as-adjusted results. Rate hikes over the last 18 months mean that for the first time in nearly 20 years, clients can earn a real return in cash. In the short-term, this has benefited many portfolios. Investors have been able to generate positive returns while waiting for inflation to cool and for more policy certainty from central bankers. This weighting has weighed on industry flows, including here at BlackRock, consistent with prior periods of policy uncertainty like 2013, 2016 and 2018.

At September’s Federal Reserve meeting, central bankers decided to pause, keeping the policy rate steady, but communicated forward guidance that interest rates will stay higher for longer. We think this is good news. It begins to offer investors more clarity about time frames and entry points into fixed income and equities and a path to re-risking global investment portfolios. At BlackRock, we never pause. We’ve used this period of investor portfolio redesign to stay close to our clients. We’re providing insights, advice, and solutions to help clients prepare to deploy assets following greater certainty on markets, terminal rates, and the shape of the yield curve. Clients entrusted BlackRock with $193 billion of total net inflows in the first nine months of 2023, representing 3% annualized organic asset growth.

While our clients’ decisions to take advantage of safe haven cash as they redesign portfolios are reflected in our third quarter flows, clients are actively engaging to do more with BlackRock. We believe the long-term trend of clients consolidating business with fewer managers will be accelerated as a result of this period. Third quarter gross fund sales were 95% of average levels over the last 12 months, and flows would have been meaningfully positive excluding a $19 billion single client index redemption and $13 billion of market-related precision ETF net outflows, so client momentum remains strong. Today, we manage $9.1 trillion in assets for our clients. These units of trust are $1.1 trillion higher than a year ago. Revenue is 5% higher, operating income is up 7%, and earnings per share increased 14% over this time period.

Powering these numbers are clients’ increasing use of BlackRock as a platform and staying within our ecosystem of capabilities, combining investment, technology, and portfolio servicing to meet their specific business needs. This platform approach is driving our industry-leading organic growth over the long-term. Market fluctuations and client risk appetite may temporarily lift or lower our AUM and revenues. But our focus remains on delivering BlackRock’s platform to clients, through access to unique opportunities, expertise, and world-class client service. Our strategy is working, and clients are choosing to build bigger relationships with BlackRock. We’ve grown our asset base over the long-term with over $1 trillion of net inflows since the start of 2021 and over $300 billion of that in just the last 12 months.

We know our shareholders and clients have high expectations of BlackRock. We believe in our 5% organic base fee growth target over the long-term, and we challenge ourselves to envision what it takes to rise above that target. We’ve said before that we don’t strive to be the fastest grower in any given quarter, but we continue to drive durable, consistent organic growth, well above our peer group over the long-term. Third quarter total net inflows were $3 billion and included $49 billion of lower fee institutional index equity redemptions driven by client-specific index allocation changes. Institutional index equity represents less than 3% of BlackRock’s total base fees. These lower fee strategies are often only a portion of our clients’ overall relationships with BlackRock.

For example, results included in the $19 billion redemption from a single client, but the clients working with us to extend its mandates and active strategies. Total quarterly annualized organic base fee decay of 2% reflected net outflows from higher fee precision ETFs and redemptions in active equity and retail liquid alternatives offerings. Third quarter revenue of $4.5 billion was 5% higher year-over-year driven by organic growth, the impact of market and foreign exchange movements over the last 12 months on average AUM, and higher technology services revenue. Operating income of $1.7 billion was up 7% year-over-year. Earnings per share of $10.91, increased 14%, also reflecting a lower effective tax rate, partially offset by lower non-operating income compared to a year ago.

Our as-adjusted tax rate for the third quarter was approximately 12%, reflecting $215 million of discrete tax benefits associated with the resolution of certain outstanding tax matters. We continue to estimate that 25% is a reasonable projected tax run rate for the remainder of 2023. The actual effective tax rate may differ because of nonrecurring or discrete items, or potential changes in tax legislation. Non-operating results for the quarter included $127 million of net investment gains, driven primarily by non-cash mark-to-market gains in the value of our private equity co-investment portfolio. Third quarter base fee and securities lending revenue of $3.7 billion increased 4% year-over-year, reflecting the positive impact of market beta and foreign exchange movements on average AUM, positive organic base fee growth, and higher securities lending revenue.

Sequentially, base fee and securities lending revenue was up 2%. On an equivalent day count basis, our annualized effective fee rate was approximately two-tenths of one basis point lower compared to the second quarter. This was due to lower securities lending revenue, underperformance of non-US equity markets, and changing client risk preferences favoring risk off lower fee exposures. As a result of continued global equity and bond market depreciation toward the end of the third quarter, including the impact of FX-related dollar appreciation, we entered the fourth quarter with an estimated base fee run rate, approximately 3% lower than our total base fees for the third quarter. Performance fees of $70 million decreased from a year ago, primarily reflecting lower revenue from liquid alternatives.

Quarterly technology services revenue was up 20% compared to a year ago, driven by sustained demand for our technology offerings. Current quarter technology services revenue also benefited from the impact of several large client renewals of their eFront on-premises licenses, for which accounting treatment recognizes a majority of the revenue at time of renewal. Approximately half of the year-over-year technology services revenue increase resulted from these eFront contract renewals. Annual contract value, or ACV, increased 10% year-over-year. We remain committed to low- to mid-teens ACV growth over the long-term, driven by demand for Aladdin’s broadening technology capabilities and the growing value proposition it presents for clients. Total expense was 4% higher year-over-year.

Higher compensation and direct fund expenses were partially offset by lower distribution and servicing costs and G&A. At present, we expect full year 2023 core G&A to fall on the low end of our previously communicated guidance of a mid- to high-single-digit percentage increase. In line with this outlook, we would also expect fourth quarter core G&A to reflect seasonal increases in marketing spend and execution of planned technology investment spend. Our third quarter as-adjusted operating margin of 42.3% was up 30 basis points from a year ago, benefiting in part from the favorable impact of market movements on quarterly revenue over the last year. Our platform strategy has delivered scale and operating leverage through time, and we aim to be disciplined in driving profitable growth.

We’re prioritizing investments to propel our differentiated organic growth and drive operating leverage. We’ll look to find more opportunities to variabilize expenses, generate fixed cost scale through technology and automation, and align investment spend with organic revenue growth potential. Our capital management strategy remains consistent. We invest first, either to scale strategic growth initiatives or drive operational efficiency, and then return excess cash to our shareholders through a combination of dividends and share repurchases. During the third quarter, we closed our acquisition of Kreos Capital, adding venture debt capabilities to our credit and private markets franchises. And earlier this week, we announced a minority investment as part of a strategic partnership with Upvest.

Our M&A focus is on extending our capabilities in technology and private markets, tapping into revenue pools of adjacent industries, and building scale. We repurchased $375 million worth of common shares in the third quarter. At present, based on our capital spending plans for the year and subject to market conditions, we still anticipate repurchasing at least $375 million of shares in the fourth quarter, consistent with our previous guidance in January. BlackRock had $3 billion of total net inflows in the third quarter, which were impacted by $49 billion of low fee institutional index equity redemptions. BlackRock was not immune to an overall slowing of investor activity, but we once again outperformed in what has been a challenging industry environment.

Momentum in our ETF business continued with $29 billion of net inflows in the third quarter, led by core equity and fixed income ETF net inflows of $34 billion and $12 billion, respectively. Overall, ETF flows were impacted by redemptions concentrated in certain market-driven precision and fixed income products. The fourth quarter has historically been the strongest quarter of ETF flows for BlackRock when we’ve seen on average 35% of our annual ETF net inflows. BlackRock typically has been a large beneficiary of ETF industry seasonality related to year-end rebalancing and tax planning. In line with these historical results, we’d expect to see an acceleration in iShares ETF flows as we get closer to the end of 2023. With safe haven cash providing positive returns, retail net outflows of $4 billion primarily reflected industry pressure in active equities and liquid alternatives, partially offset by continued strength in SMAs through Aperio.

Institutional index net outflows of $36 billion reflected the previously mentioned low fee index equity redemptions. Our institutional active franchise experienced $1 billion of net outflows, primarily from active fixed income, which was impacted by a handful of client-specific partial redemptions, including reinsurance activity. These outflows were partially offset by continued demand for our target date, illiquid alternatives, and outsourcing capabilities We’ve built our private markets capabilities across multiple years and we continue to see strong demand for our illiquid alternative strategies. We generated nearly $3 billion of net inflows in the third quarter, driven by infrastructure and private credit. We’re only seeing bigger and better private markets opportunities for BlackRock and for our clients.

BlackRock’s relationships across the world drive our differentiated deal flow. Deal flow alongside great teams with great tech and great data mean we can deliver differentiated investment performance and grow vintage over vintage. We’re investing as we scale our private markets platform by using our financial strength to bridge successor funds, facilitate growing co-investments activity and seeding new fund launches. These investments can unlock future revenue and earnings potential for our shareholders. Finally, cash management net inflows were $15 billion in the quarter. Money market funds have returned to earning yields not seen in nearly two decades. We’re leveraging our scale and integrated cash offerings to engage with clients who are using cash not only to manage liquidity, but also to earn attractive returns.

The current macro environment is causing some clients to pause, slowing overall activity in the asset management industry. Nevertheless, BlackRock has delivered positive organic asset and base fee growth over the last 12 months. We see significant opportunity to deepen relationships and consolidate our share with clients as they resume actively allocating assets. We’re staying connected with our clients and positioning for what we believe can be massive growth unlocks. Looking ahead, we believe our platform strategy will continue to deliver for both our clients and shareholders, resulting in sustained market-leading organic growth, differentiated operating leverage and earnings and multiple expansion over time. With that, I’ll turn it over to Larry.

Laurence Fink: Thank you, Martin. Good morning, and thank you, all, for joining the call. I’d like to begin saying that our thoughts are with everyone who has friends, family, or loved ones impacted by terrorist acts in Israel. The violence and the loss of innocent lives has been shocking and truly heartbreaking. We at BlackRock will continue to do everything we can to support our colleagues and all our clients in the region. Turning to our results. Clients have always been at the center of BlackRock’s growth strategy. I believe that BlackRock is better positioned today than ever before to help our clients achieve the long-term outcomes they need. We are having comprehensive conversations with clients globally on how we can partner with them to navigate on a new market regime and capitalize on investment opportunities.

BlackRock is uniquely positioned in this environment to serve our clients with an integrated advisory, investment management and technology expertise, something no other asset manager can provide. Sustained organic growth and market appreciation has led to a $1.1 trillion increase in BlackRock’s AUM, alongside margin improvement and 14% growth in earnings per share over the last 12 months. Clients have entrusted us with over $300 billion in net inflows over the same time period. Technology service revenues increased 20% year-over-year, reflecting sustained demand for Aladdin and eFront renewals from several large clients. We remain committed to delivering differentiated organic growth and margin. We’ve invested ahead of major opportunities for BlackRock in private markets, technology and whole portfolio solutions.

Through disciplined execution, we aim to both grow client assets and drive profitable growth, unleashing financial success for our clients alongside revenue and earnings power for our shareholders. Structural and secular changes in business models, technology and most of all monetary and fiscal policy have made the last two years extremely challenging for traditional asset management, with a majority of industry players seeing outflows. BlackRock’s differentiated business model has enabled us to grow consistently with our clients and maintain positive organic base fee growth since 2022. Investors face continued uncertainty. The S&P saw its best start to July in 26 years, but retreated in August and September. Central banks are being forced to keep policies tight as they lean against inflationary pressures.

Two and 10-year treasuries climbed to 16-year highs as investors anticipated rates remaining higher for longer. Rapid advancements in technology and artificial intelligence, the rewiring of globalization, the transition to a low-carbon economy, aging populations, and a fast-evolving financial system are all macro trends clients are evaluating. As market dynamics shift and uncertainty increases, clients are pausing to think about the future, assessing their options, and seeking out BlackRock to take action. BlackRock’s quarterly net inflows were not immune to an overall industry slowdown, as Martin discussed. Of course, I’m disappointed when we have softer flow quarters, but the long-term trends of clients consolidating more of their portfolio of BlackRock is only accelerating.

Rate hikes over the past year and a half, the fastest in the US since the early 1980s, have made cash not just a safe place, but now a very profitable place for investors to wait for the time being. In short, investors are being paid to wait, something we haven’t seen to this degree in years. Investors can earn 5% to 7% from conservative cash and bond portfolios. This dynamic reduces the near-term incentive to implement portfolio changes, resulting in temporarily slower client activity inflows. The degree to which investors have hunkered down in cash is shown by nearly $7 trillion in money market funds AUM across the industry. Investors will eventually put that money to work. We’ve seen this dynamic before, as recently as 2016 and 2018, when policy uncertainty and the ability to earn yields and cash resulted in temporarily slowing in activity.

Through these times, BlackRock stayed connected with our clients, connected across our businesses, and what immediately followed those periods in the past were new records for BlackRock client flows and organic base fee growth at or above 5% target. We expect that investors will begin redeploying assets once there’s a conviction in a terminal rate and the shape of the yield curve. We’ve seen that effect play out in prior cycles, most recently following the Fed pause in 2019, when flows rebounded, particularly in fixed income. BlackRock’s integrated platform and deep, long standing relationships with clients position us to be a major beneficiary once flows return. We are the only asset manager delivering our platform as a service. Clients entrust us with $9.1 trillion in assets and we are serving them with excellence.

We lead our industry in delivering accessibility, affordability and innovation. Times of uncertainty are often when transformational opportunities emerge. Moments in our history like this have led to new ideas, led to new partnerships and acquisitions. BlackRock has a strong track record of successful transformational M&A. Most people think of BGI and MLM when I say that, but I also think of acquisitions like eFront and Aperio. They have been smaller in size, but were also transformational in their own way. In both, we anticipated and delivered on our clients’ needs. We scaled strong existing technologies and built new revenue streams for our shareholders. Organic growth in Aperio has been over 20% since our acquisition, and eFront revenues have grown nearly 50%, while also strengthening our value proposition and positioning in Aladdin and private markets.

BlackRock has been a successful acquirer and today advancements in tech and AI, scaling of private markets and more attractive valuations means BlackRock is once again becoming increasingly engaged in M&A trend discussions. What made our acquisition so successful was our enduring commitment to fuse the best of the acquired companies into a stronger and faster-growing one BlackRock, fully connecting all parts of the firm to our clients. We have a proven history of realizing long-term benefits in areas of expansion. Today, we’re similarly connecting with our partners across markets to lay the groundwork for future growth. In July, we announced an agreement to form Jio BlackRock, a 50-50 joint venture with Jio Financial Services, an entity carved out of Reliance Industries.

India has been an integral part of the global platform and BlackRock is one of the largest international investors in India today. And almost 15% of our colleagues are located across multiple offices in the country. India offers enormous opportunities. Jio BlackRock represents a powerful new partnership in a fast-growing market where we see the potential to revolutionize India’s asset management industry. We look forward to expanding our footprint with the ambition to improve the financial futures for millions of investors in India. BlackRock is working in India and markets around the world to lower the barriers to investing through accessible, affordable and transparent solutions. Another example of the new growth opportunities is our partnership and agreement we announced last month for BlackRock to be the asset manager partner of Monzo.

Monzo is the UK’s leading digital bank and we are launching a new investment offering for their eight million customers. Since launch, more than 250,000 Monzo clients have joined the waiting list for this new offering. And just earlier this week, we announced our partnership with Upvest to drive innovation in how Europeans access markets and make it cheaper and simpler to start investing. What we have seen in the markets after markets is that we can make investing easier and more affordable and we could quickly attract new clients. For first-time investors, the preferred way of investing is often through ETFs, and specifically iShares. Through investment and innovation, we’ve evolved our iShares ETF franchise to meaningfully increase access to global markets.

This includes access for tens of millions of new investors. It also includes access for our most seasoned clients to use our ETF technology to actively allocate across all types of markets. BlackRock’s ETF platform delivers industry-leading performance, choice and scale. With growing use cases, diversification and customization, ETFs and indexes are often and increasingly an important component of active management. Across our ETFs, BlackRock generated net inflows of $29 billion in the third quarter and nearly $100 billion year-to-date. Flows in core equity and fixing ETFs were partially offset by redemptions in precision ETFs in August and September, something we expect and have seen before in risk-off environments as clients use our ETF to actively manage their portfolios.

These tactical allocation tools are unique to BlackRock, and their high utilization reinforces the value proposition associated with iShares’ strong secondary market liquidity, its unique options, and lending markets. BlackRock’s market-driven, long-duration fixed income product were also an important tool for investors to rotate at a longer duration position. The breadth of our ETF platform enables us to capture changes in client demand, keeping investors within BlackRock. For example, iShares treasury funds were three of the top-five grossing bond ETFs in the industry as investors shifted duration preferences in the quarter. Our market-leading levels of performance and liquidity helped our clients nimbly reposition as market conditions evolved.

As we approach peak interest rates, we expect a resurgence in fixed-income flows, with clients capitalizing on higher yields. BlackRock is well-positioned to benefit from this reallocation with our comprehensive $2.6 trillion fixed-income platform. Going back to the periods immediately following the taper tantrum in 2013, or the Fed pause in early 2019, the industry saw a quick rebound in fixed income flows following rate stability. Both BlackRock ETFs and our active fixed income funds were large beneficiaries at that time. Our conversations with clients aren’t about just active and just index, we work with clients to understand their investment challenges, helping them shape and execute strategic portfolio construction decisions. BlackRock is the only asset manager that can deliver outcomes in the context of clients’ whole portfolios across market classes, asset classes, investment styles and in public and in private markets.

Organizations are turning to the private markets with greater frequency for their capital and financing needs, leading to bigger and better investment opportunities for BlackRock and our clients. BlackRock’s worldwide network of relationships with corporations and governments sourcing capabilities and a rigorous selection process helps us deliver unique solutions and drive performance for our clients across private market asset classes. In the third quarter, we announced that BlackRock is partnering with the New Zealand government to launch an over $1 billion climate infrastructure strategy. BlackRock’s Decarbonization Partners joint venture also reached $1 billion in committed capital for its first round and has now invested in five portfolio companies.

These initiatives are a real example of BlackRock’s long-standing relationship with clients and how we deliver the entirety of our platform to pioneer solutions and meet our clients’ evolving needs. We’re also effectively scaling successor funds in private markets, delivering larger funds through raises of subsequent fund vintages. For example, we’re on the 10th vintage of our flagship US Private Lending Fund. And we’re in the market with a fourth vintage of our global diversified infrastructure equity fund series. Infra IV already raised $4.5 billion in initial investor commitments at close — at the first close last year, achieving over half its targeted size. This is the next phase of successful scaling of the franchise. In 2020, our third fund in the series raised a total of $5 billion, surpassing the total assets of vintages one and two combined.

Strong investment performance is critical to this momentum. Our flagship private equity fund currently stands at more than a 35% net IRR. We’ve seen double-digit net returns this year in our flagship private credit strategies. BlackRock’s proprietary differentiated deal flow is what drives long-term investment performance and outcomes for clients. BlackRock’s global network of relationships, data and analytics, and flexible, adaptable capital needs we get sourced a unique deal for our clients, and we are increasingly finding that opportunity seek us as much as we seek opportunities. Companies want BlackRock as an investor and a partner, recognizing the uniqueness of our global reach, our brand, and our expertise across markets and industries.

Our growing profile from investments around the world in the US and Europe and Asia is leading to more and larger deal opportunities. BlackRock’s global relationships and expertise in sourcing and underwriting, portfolio and risk management and technology and analytics allow us to unlock unique deals for clients. At the same time, our growing momentum in private markets is delivering value for our shareholders through organic growth and less beta-sensitive revenues. Years ago, we anticipated how clients would benefit from alternative investments being evaluated inside a portfolio level of risk management framework. This led to the combination of eFront and Aladdin, which has set a new standard in investment and risk management technology. The acquisition of eFront opened up a new segment of alternative GPs and asset services, and most importantly, enabled us to help clients across their whole portfolio.

Our acquisition and integration of eFront continues to be transformational for clients. And we’re seeing strong demand both as a stand-alone basis and for whole portfolio solutions across public and private assets. We now have a data platform and business that covers 13,000 funds and over 150,000 assets, a significant portion of the private market fund universe. We’re redefining the industry expectations of transparency in private markets. Nearly half of Aladdin’s clients are leveraging our newer offerings, including eFront, which is a true competitive advantage in the tech market. And as Martin spoke to, you saw eFront’s contribution reflecting in this quarter’s tech results. Investors and advisors are increasingly choosing a small number of scale technology platforms that offer everything in their ecosystem in one place.

Aladdin worked seamlessly alongside other aspects of client investment processes and tech stack, serving as a foundation while enabling clients to create custom solutions to meet their specific needs. To get here, we also have developed deep integration with custodial banks, with fund accountants, broker-dealers, and other leading ecosystem partners. This flexibility and choice are just some of the reasons clients are entrusting us with the growing numbers of their portfolios. Going forward, we are confident that clients will continue to turn to Aladdin to unify their investment management process. BlackRock’s willingness to reimagine our business, our ambition to partner comprehensively with our clients, and our drive to innovate ahead of their needs is translating into broader, into deeper relationships, and we see an incredible opportunity for us in front of us.

We remain intensely focused on staying close to our clients, especially, during periods of market volatility and rising uncertainty. Clients are coming to us for advice, for solutions tailored to this macroeconomic environment, wanting to do more with BlackRock. Horizontal connectivity is critical. And our leadership team and an entire organization are coming together to differentiate ourselves in delivering for clients today and preparing to capture the money in motion we anticipate in the near future. As I’ve always done, I’m challenging our teams to continue to innovate and stay perpetually neurotic about staying in front of our clients. BlackRock will continue to lead in creating more access and connections between long-term investors, capital markets and the real economy.

I’m incredibly excited about the opportunities I see for our clients, and especially for BlackRock, which will then lead especially for you, our stakeholders. Let us now open it up for questions.

Operator: [Operator Instructions] Your first question comes from Craig Siegenthaler with Bank of America. Please go ahead.

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Q&A Session

Laurence Fink: Hello, Craig.

Craig Siegenthaler: Hey, good morning, Larry. Hope everyone is doing well.

Laurence Fink: Absolutely.

Craig Siegenthaler: So my question is on the organic growth outlook. There were several low fee redemptions in the quarter. And also given that we’re in year three of a bond bear market, your flows are arguably depressed versus a longer-term run rate. So, how do you think about the four organic growth trajectory and the potential money in motion? And specifically, do you expect to see a pickup in fixed income flows once the Fed is done raising, which could be very soon here?

Martin Small: Thanks, Craig. It’s Martin. Let me just say a few things about organic growth and the outlook. So, just last 12 months, we’ve delivered positive organic asset and revenue growth, $300 billion in flows over the last year, $193 billion year-to-date. We, as I mentioned, have conviction in our 5% base fee target over the long-term. We’ve reached it on average over the last five years and met or exceeded it in seven out of the last 10. Our 5% organic growth target is better than 3% industry estimates. And we still feel we underwrite that number all the time together. We feel it’s reasonable, it’s attainable based on our product breadth, our solutions orientation, our technology capabilities. And when the management team looks at our client engagement and sales measures, we really do — we see good momentum.

As I mentioned in my comments, our Q3 gross fund sales were at 95% at average levels over the last 12 months. So we see those as good measures of engagement and our activity with clients. On the flows, we see them as just marked by this offsetting activity across our platform with some very specific client moves. The way I look at it, Craig, is, on the one hand, we had a combined $60 billion in net inflows. That’s $29 billion from ETFs, it’s over $13 billion in institutional multi-asset and target date in OCIO and it’s $50 billion of cash. That right there, I think, is sort of right at a lot of the consensus or higher numbers. On the other hand, this was offset by the $50 billion of institutional index equity redemptions, with $19 billion from one non-US client.

So, just in assessing how we’re doing, the conversations with our clients, the momentum we have, we think the flows would have obviously been very positive, but for these re-balancings. As Larry mentioned, they happen from time to time, and they have very little impact to base fees. It’s a low-single-digit point basis business. It’s sub-3% of our revenue. But what I’d say is we managed close to $2 trillion of institutional index equity. We think it’s a good business. These large AUM index relationships, they have meaningful franchise value for us beyond fee rates. A large mandate of index assets, Larry mentioned, it’s typically only part of our overall relationship with a client, which has active alternatives, ETFs or advisory. And you’ve got to be a scaled player to be in this large index market.

So, this is the business we’re in, and from time to time, it can impact the flow number, and that’s something that we don’t manage quarter-to-quarter. We look at over the long-term. On organic base fee growth, I also think it’s good to simplify this, Craig. Q3 base fees were impacted by mix. And I think those really come from two areas. We had $13 billion of redemptions from precision ETFs, which Larry mentioned, are unique to BlackRock and important vehicles for clients and also part of our platform strategy in terms of how clients stay with iShares and move from EM to DM to high yield to treasuries, and we had $2.5 billion of outflows from retail liquid alternatives. And you’ll remember, Craig, because I know you love the page, from our Investor Day that we showed the average fee rates across different segments of our products and services.

And if you were to take those average fee rates and the fee rates available on our public website for ’40 Act alternatives, just for illustration purposes, the order of magnitude of base fee decay would be $60-plus million. So, I hope that gives you a sense of what weighed on base fee growth this quarter. It’s largely in those things that we know have long-term franchise value, have grown over time and added to earnings. But in any quarter-to-quarter, they may weigh on the fee rate and on the base fee growth. Over a cycle, Craig, we still see a really clear path to 5% plus organic base fee growth with our platform strategy. We keep growing and scaling private markets, the re-risking of global investment portfolios. We’re continuing to see high-teens growth in tax-managed direct indexing with Aperio.

Rob will talk a little bit, hopefully, when I’m done, about the generational opportunity in active fixed income and bond ETFs, model portfolios and iShares, where we think half our ETF growth will come through models. So, we still see big opportunities to continue to hit those targets and beyond. Rob, do you want to say a couple of things about fixed income?

Robert Kapito: So I think most of the questions are going to concern the why, the where, and the when. And so, the yield curve is the most inverted that it’s been since the 1980s. So, maybe, Larry and I can add a little value since we were there at that time. And investors are really getting paid to wait. And money market funds have nearly $7 trillion in assets under management. So that’s $7 trillion. And as we approach the peak in interest rates, we expect that there are going to be some very, very large allocations to fixed income. And I’m sure someone will call it the great reallocation. And the reason is, today, there are better opportunities to invest in bonds than have been in the years. Over 80% of the bond market is yielding over 40%, enabling investors to derive a large part of their liability needs from owning bonds and access returns with less risk.

So, as Martin just said, we are so well-positioned to benefit from this reallocation with our comprehensive $2.6 trillion fixed income platform, which spans unconstrained total return, municipals, and actually the entire yield curve. So with more money in motion, and it will be in motion, BlackRock will benefit as clients build fixed income allocations with higher-performing active, alongside of ETFs and private market strategies. In particular, right now, clients are focusing their opportunity in the short end of the curve, and of course, in private credit. So when? Well, we have historically seen a rebound in fixed income following rate stability. And this year’s yield spikes have been mostly from market re-pricing and policy rate expectations.

There is a lot of concern over US debt levels and large treasury issuance, and investors are demanding a higher premium. So, if we go back to the periods immediately following the taper tantrum in 2013 that Larry mentioned, or the Fed pause in early 2019, the industry saw a very quick rebound in fixed income flows. Both ETFs and active fixed income funds were the beneficiaries. So when? Well, once there’s more certainty on a terminal rate and the shape of the yield curve, then we expect more deployment into fixed income. And I’ll recap it. A slowdown in short-term issuance and more balanced term structure of interest rates are the indicators we’re looking for in anticipation of accelerating demand for immediate and longer duration fixed income.

Operator: Your next question comes from Michael Cyprys with Morgan Stanley. Please go ahead.

Laurence Fink: Good morning, Michael.

Michael Cyprys: Hey, good morning. Question on M&A. Larry, you’ve suggested that you’re open to large transformational M&A. I was just hoping you can articulate why that is the case. What’s changed versus a couple of years ago, as I don’t recall you mentioning large transformational M&A couple of years ago? Maybe you could talk about some of your objectives and aspirations there. And if you could help clarify what might be the focus area versus maybe what’s off the list completely.