BlackRock Inc

NYSE:BLK

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is Jamie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated First Quarter 2018 Earnings Teleconference. Our host for today’s call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Gary S. Shedlin; President, Robert S. Kapito; and General Counsel, Christopher J. Meade. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] Thank you. Mr. Meade, you may begin your conference.

[Christopher Meade, General Counsel]

Good morning, everyone. I am Chris Meade, the General Counsel of BlackRock. Before we begin, I would 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 see today. BlackRock assumes no duty and does not undertake to update any forward-looking statements.

So with that, I will turn it over to Gary.

[Gary Shedlin, Chief Financial Officer]

Thanks, Chris. Good morning, everyone. It’s my pleasure to present results for the first quarter of 2018. Before I turn it over to Larry to offer his comments, I will review our financial performance and business results while our earnings release discloses both GAAP and as adjusted financial information, I will be focusing primarily on as-adjusted results.

In addition as we have previously discussed, our first quarter 2018 financials reflect a recent adoption of FASB’s new revenue recognition accounting standard which became effective on January 1. The only significant change relates to the presentation of certain distribution costs, which were previously netted against revenues and are now presented as an expense on a gross basis. For 2017, the new standard resulted in a net gross up of approximately $1.1 billion to BlackRock revenue, a corresponding process to expand and no material impact to as adjusted operating income or as adjusted operating margin. In order to simplify historical comparisons of current and future results, we adopted the new standard on a full retrospective basis and filed an 8-K in late March with recapped quarterly results for 2016 and 2017. All year-over-year and sequential financial comparisons referenced on this call will relate current quarter results to these recast financials.

After a strong start to the year driven by optimism related to U.S. tax reform and global economic growth, markets reversed in February and March at escalating trade tensions, inflationary concerns and a flattened yield curve cause investors to pull back. Despite this increased market volatility, BlackRock’s first quarter results once again demonstrate the value of the investments we have made to assemble the industry’s leading global investment and technology platform. The diversification and breadth of our business positions us to serve clients in a variety of market environments helping to drive consistent and differentiated organic growth. Paced by a strong January, BlackRock generated $55 billion of long-term net inflows in the first quarter representing 4% annualized organic asset growth and 5% annualized long-term organic base fee growth as quarterly organic asset growth reflected strong higher fee global retail flows.

First quarter revenue of $3.6 billion increased 16% year-over-year, while operating income of $1.4 billion rose 20%. Earnings per share of $6.70, was up 28% compared to a year ago driven by higher operating results and a lower effective tax rate in the current quarter. Non-operating results for the quarter reflected $10 million of net investment gains. Recall that net interest expense in the first quarter of 2017 included $14 million of call premium expense associated with a debt refinancing. Our as-adjusted tax rate for the first quarter was approximately 20% and included a $56 million discrete tax benefit related to stock-based compensation awards that vested during the quarter. We now estimate that 24% is a reasonable projected tax rate for the remainder of 2018. However, the actual effective tax rate may differ as a consequence of nonrecurring of discrete items and the issuance of additional guidance on or changes to our analysis of recently enacted tax reform legislation. First quarter base fees of $2.9 billion were up 17% year-over-year driven primarily by market appreciation and organic base fee growth of 7% over the last 12 months. Sequentially base fees were up 2% reflecting a lower day count compared to the fourth quarter.

Continued momentum in institutional Aladdin and expansion of our digital wealth and distribution technologies including Aladdin Risk for Wealth and Cachematrix resulted in 19% year-over-year growth in quarterly technology and risk management revenue. Demand remained strong for our full range of technology and risk management solutions which contributed again to both technology revenue and base fees. Today’s growth is a result of the investments we have made over time and we continued to invest in our business to create more opportunity for the future. Total expense increased 13% year-over-year driven by higher compensation, G&A and volume related expense. Employee compensation and benefit expense was up $101 million or 10% year-over-year driven primarily by higher headcount and increased incentive compensation associated with higher operating income, partially offset by approximately $20 million of severance and accelerated compensation expense associated with the repositioning of our active equity platform during the prior year period. Sequentially, compensation and benefit expense was down 2% due to lower incentive compensation primarily resulting from seasonally lower performance fees, partially offset by higher seasonal payroll taxes and an increase in stock based compensation expense related to new 2018 grants.

G&A expense was up $87 million year-over-year reflecting higher levels of planned investment across a variety of categories including costs associated with MiFID II, but was also impacted by higher acquisition related fair value adjustments, product launch costs and FX re-measurement expense versus a year ago. Sequentially, G&A expense decreased $67 million in the fourth quarter reflecting in part seasonally lower marketing and promotional expense and reduced professional fees. Beginning this quarter, we are providing additional detail on both G&A and distribution and servicing costs which can be found on Page 8 of our earnings release. Direct fund expenses was up $55 million or 27% year-over-year, primarily reflecting higher average AUM as a result of significant growth in our iShares franchise.

Our first quarter as adjusted operating margin of 44.1% was up 150 basis points versus the year ago quarter which included expense associated with our active equity platform repositioning. We continued to be margin aware and remain committed to optimizing organic growth in the most efficient way possible. We also remain committed to returning excess cash flow to our shareholders. We previously announced a 15% increase in our quarterly dividend to $2.88 per share of common stock and also repurchased an additional $335 million worth of common shares in the first quarter. As we finalize the impact of tax reform on BlackRock, we intend to review our capital management plans for the balance of 2018 with our Board of Directors in the coming months.

Quarterly long-term net inflows of $55 billion were positive in both index and active strategies including approximately $1 billion of active equity net inflows during the quarter. We achieved 5% or greater long-term organic base fee growth for the fifth consecutive quarter despite the challenging market environment. Global iShares generated quarterly net inflows of $35 billion driven by strong flows into core ETFs. During recent periods of elevated market volatility, iShares ETF once again offered price transparency and secondary market liquidity to investors, demonstrated by the highest weekly exchange volume ever in the U.S., trading approximately $285 billion on exchange during a single week in February. Retail net inflows of $17 billion representing 11% annualized organic growth continued to trend positively and have now increased for five consecutive quarters. Inflows were positive in the U.S. and internationally and were paid by $10 billion of flows into our top performing active fixed income platform or 93% of our U.S. active fixed income mutual fund assets of top quartile performance over the trailing 5-year period.

Equity inflows of $4 billion were driven by flows into active Asian and European equities while multi-asset flows were driven by $3 billion of flows into our multi-asset income fund. Institutional net inflows of $3 billion resulted from significant inflow and outflow activity during the quarter as various clients de-risked, rebalanced or saw liquidity in the current environment. Index flows of $10 billion driven by continued demand for LDI solutions more than offset active net outflows of $7 billion, which were impacted by a single multi-asset redemption related to client M&A activity and fixed income outflows linked to profit taking and cash repatriation planning. Despite overall flat organic asset growth, institutional clients drove 5% annualized organic base fee growth in the quarter driven in part by momentum in higher fee alternative products. Core alternatives, net inflows of nearly $2 billion reflected inflows into hedge funds, private equity solutions and infrastructure offerings. Illiquid alternative fundraising momentum continued into 2018 with an additional $2 billion in commitments raised during the first quarter.

Finally, despite typical seasonal outflows in the cash industry during the first quarter, the strength of BlackRock’s cash management platform drove $3 billion of net inflows as we continue to invest in our cash business and leverage scale for clients. Overall, our first quarter results reflect the benefits and the investments we have made to build a differentiated global business model, which can perform in various market environments. Our goal remains to exceed clients’ needs by optimizing investments in talent and technology and delivering consistent and differentiated organic growth over time.

With that, I will turn it over to Larry.

[Laurence Fink, Chairman and Chief Executive Officer]

Thanks, Gary. Good morning, everyone and thank you for joining the call. Driven by a strong January, BlackRock generated $55 billion of long-term net inflows in the first quarter representing a 4% annualized organic growth rate and a 5% annualized organic base fee growth in a volatile market environment. These results reflect our ability to deepen partnerships and manage holistic relationships with a more diverse and global set of clients than at any time in our history. Meeting with clients recently in Europe, in Asia and here in the United States, I believe we are positioned with clients has never been stronger. The quality of our discussions our people are having is more robust than ever. BlackRock’s technology and risk analytics and the diversity of our investment platform positions us to have a broader a deeper more robust conversations with our clients about their long-term needs.

Following a period of historically low volatility in 2017, the record high equity markets in the first month of 2018, investors experienced the spike in equity market volatility in February and March rising concerns over a trade war and headlines in the technology sector have tempered investment sentiment causing many clients to pause or pullback as it become more uncertain about the future. In addition, the yield curve has hit its flattest level since October 2007 as it spread between 10 and 2-year treasuries has shrunk to just 50 basis points.

While the prospects of rising rate tends to push investors away from long-dated fixed income, the flat curve is creating strong relative risk return opportunities in short duration funds and cash management strategies, which we saw clients take advantage of in the first quarter. While global economic growth prospects and expectations for corporate earnings remains strong in the quarter, the ongoing impact of U.S. tax reform and increased M&A activity influenced client behaviors and we saw a number of large inflows and a large amount of outflows as clients rebalanced and saw its liquidity to either fund future capital allocation or be more aggressive in share repurchases. Even with these various cross-currents retail and institutional clients turn to BlackRock over the quarter for both active and index strategies. Clients expressed demand across a diverse range of active and index fixed income strategies, including unconstrained short duration total return and emerging market debt funds. We also saw strong utilization of equity ETFs as simple and efficient tools for both taking on and deemphasizing market exposures.

Finally, increasing demand for risk on assets and performance drove flows into active equities and alternative strategies. For long-term strategy at BlackRock has been to create a diverse and integrated global investment in technology platform, one that serves clients in all market environments. We harness this platform to construct and manage risk aware holistic portfolios that help clients to achieve long-term outcomes. We also provide institutions and intermediary partners with risk management and portfolio construction technology to better operate on their own businesses. As I discussed in my letter to shareholders in our annual report, this focus on client needs forms the foundation of our long-term strategy, it will continue to drive future growth at BlackRock for our clients and our shareholders. Our strategy is simple, we will continue investing in our business to establish a clear market leadership in areas of the greatest growth in client demand and we will leverage those full capabilities of our platform to enhance the value for our clients.

In iShares, we have steadily invested over time and are the market leader today. We have generated over $900 billion of net inflows or a 22% annualized organic asset growth since we acquired the business in 2009. And in the first quarter, we once again captured the number one share year-to-date globally in the U.S. and European net inflows as well as a number one share of flows in the equity and smart beta categories. Demand is growing from clients who would utilize ETFs for efficient liquid market exposure through the secondary market. February’s volatile global equity markets drove heightened ETF trading volume and iShares performed as our clients have come to expect. During the week from February 5 through February 9 when the U.S. stock market had suffered its steepest declines in more than 2 years, U.S. listed ETFs traded more than $1 trillion on exchanges. With iShares creating a record $285 billion yet creates and redeem activity of iShares funds over that same period of time was very low at less than $3 billion, demonstrating the benefits of a robust secondary market to create additional liquidity in distressed markets.

Our iShares core products generated $32 billion in net inflows in the quarter as we continued to see increased adoption by ETFs by individuals. They increasingly are using ETFs at the core of their portfolios alongside cost efficient and high performing active. Institutions are engaging with BlackRock to create solutions that use ETFs in innovative ways to drive absolute return and positive outcomes. For example, this quarter we worked with a client seeking in term and liquid exposures to hedge fund beta. While they completed due diligence for their long-term hedge fund allocation, we designed an optimized basket of low cost iShares that closely replicated a hedge funds index, while maximizing liquidity and minimizing tracking year. This is a great example of how we harness our scale, our technology and our portfolio construction expertise to create unique solutions that will meet our client’s needs.

BlackRock’s top performing fixed income platform generated $27 billion of net inflows in the quarter. Capturing client demand in a rising rate environment, inflows were driven by a diverse range of strategies including unconstrained, total return, short duration strategies and our emerging market debt funds. We are also seeing early signs of progress since our active equity platform was revitalized a year ago when we segmented our product offerings across the risk return and value spectrum in the even more effectively harnessing the power of data science and technology to efficiently and consistently deliver investment performance. At the end of the quarter, 66% of our fundamental active funds and 84% of both systematic active equity products or above benchmark or peer mediums for the 1-year period. Illiquid alternatives also remained a strategic growth priority for BlackRock as clients search for diverse solutions, diverse sources of return. We raised $2 billion of new commitments in the quarter for a total of $18 billion of dry powder to invest on behalf of our clients as we continue to build out our platform. We currently are managing $49 billion across our illiquid alternative platform and including our illiquid strategies, our core alternative platform now has $102 billion in assets.

Finally, our cash management platform is strongly positioned for future growth. We have invested organically and inorganically to build scale and enhance our distribution reach of our cash management platform. Today, we managed nearly $460 billion in cash. We generated $3 billion in net inflows in the first quarter despite seasonal outflows for the cash industry and we are very well-positioned for additional organic growth opportunities laid into the prospects of a rising rate environment as corporations are repatriating their cash related to the U.S. tax reform.

Last month, we have crossed 10 years since the start of the financial crisis. Over this time, we have seen many developments in the regulatory environments that have impacted our clients’ operations and increased their need for technology solutions to help manage risk. Since our founding 30 years ago, we have always focused on using technology to better understand risk in client’s portfolios. Aladdin risk analytics capabilities are what enabled us to be a trusted advisor of our clients during the financial crisis. And as we look ahead, we will remain steadfast in maintaining a high standard for risk management and continuing to use technology to enhance our own and our clients business. The movement to our fee-based advice in wealth management globally has continued to be strong even with some greater uncertainty around the fiduciary rule in the U.S.

We continue to view this as an important trend and will require wealth managers to put greater focus on the overall portfolio not just products. We will be more focused on risk management and most importantly there will be more focus on a repeatable scalable investment process. This fee-based trend in recent market volatility has increased demand for our capabilities such as Aladdin Risk for Wealth, our newly launched advisory center in the U.S., FutureAdvisor and iRetire, which helped advisors construct better portfolios and scaling there of their own businesses. Demand remains strong for institutional Aladdin business, especially in Europe where many of these of our clients are upgrading their technology infrastructure to support growth in a changing regulatory environment. We saw 19% year-over-year growth in our technology and risk management revenues in the first quarter and continue to expect double-digit growth going forward. In early 2018, we also established the BlackRock lab for artificial intelligence in Palo Alto. To advance how BlackRock uses artificial intelligence and associated disciplines, machine learning, data science, natural language processing to improve outcomes and to drive progress for our investors, for our clients and for the overall firm.

Another area where technology and analytics are becoming increasingly important is in sustainable investing or ESG related strategies. More and more clients, not only in Europe, but increasingly in the United States are seeking to understand their exposures to various environmental, social and governance related risk in their investments. From BlackRock’s perspective, business relevant sustainable issues can contribute to a company’s long-term financial performance. For this reason, we are increasingly integrating these considerations into our technology and risk platform for our investment research, for portfolio construction and the stewardship process that we do. In addition, BlackRock now manages over $430 billion in sustainable investment strategies and we see demand growing from institutions and retail clients alike in line with our strategic focus on technology and being a market leader in areas of greatest client demand. Last month we appointed three new Directors with combined expertise in technology, financial services and fast growing markets to join our Board of Directors Peggy Johnson, Bill Ford and Mark Wilson will bring a deep institutional industry knowledge with fresh perspectives on key areas of future growth for BlackRock.

The value BlackRock is delivering to clients and the growth we are generating for shareholders is driven by our talented employees living our principles and believing in our purpose every day. It’s our culture anchored in our principles that ensure we never forget who we are, who we serve even as the markets, our industry and even our firm experiences constant and sub times dramatic changes. Rob and I are focused on instilling this culture for a next generation with all of our 14,000 employees around the globe because that is what will position BlackRock to thrive and generate continued growth going forward in our next 30 years. We begin 2018 by maintaining our steadfast focus on the client’s needs. We continue to invest in and execute on our strategy for long-term growth leveraging the benefits of our technology and scale, reinvigorating our focus on institutionalizing our culture for our future.

With that let’s open it up for questions.

[Operator]

[Operator Instructions] Our first question is from Craig Siegenthaler with Credit Suisse.

[Laurence Fink, Chairman and Chief Executive Officer]

Hi Craig.

[Craig Siegenthaler, Credit Suisse]

Hi , good morning Larry. Gary, thanks for taking my question here. So over the last 2 years equity ETF flows have benefited from the implementation of the DOL [ph] role which is now vacated and also very strong equity market backdrop which triggered re-risking, I am just wondering how do you look for equity ETF flows to trend here, is there some deceleration as we have this evolving backdrop and also what’s the risk now to equity ETF outflows if we have a large pullback in the equity markets just given that the business is now more mature?

[Robert Kapito, President]

So we are going to be subject to the same cycles Craig that everyone else’s in our active equity flows. But today, we are in a much better position because we have performance and our products are priced properly should be the best value in their class. So as we see cycles move towards active equities when active equity managers can outperform the benchmark including their fees, you will expect to see some flows out of the index product into the active equity product and we should be the beneficiary of that. With the changes in the DOL rules a lot of the financial advisors have been using index like an ETF products to create model portfolios and build those model portfolios with the least expensive products. But as the cycle started to change they will start to incorporate more active products in that both active fixed income and active equities and we should be the beneficiary of that now more than we have been in the past.

[Laurence Fink, Chairman and Chief Executive Officer]

Craig I would also add, we have witnessed a big shift from the big financial advisory firms more towards advice. I think that shift is moving more rapidly whether we are guided by a fiduciary rule or not next week, the SEC will be reviewing this. So we will hear from the SEC. But I do believe that changes that we have witnessed by the large platforms has changed how they sell products, I think it’s much more portfolio based. I believe it’s – we will continue to be more portfolio baseless product base, more solutions based, but I would also say they are in confusion as you suggested in U.S., but in Europe it’s moved. Europe has definitely moved especially with MiFID II much more towards advice and through a portfolio of solution. So I think this trend towards advice is global, it is not slowing down. And I do believe and I will reconfirm it the secular growth in ETFs will continue to be very strong we have said and we have not changed our opinions over the next 3 years to 5 years ETFs will double in size.

[Operator]

Our next question comes from the line of Glenn Schorr with Evercore ISI.

[Laurence Fink, Chairman and Chief Executive Officer]

Hi Glenn.

[Glenn Schorr, Evercore ISI]

Hi. Thanks very much. It can’t help, but try to ask you guys if the move up in LIBOR and LIBOR OIS, curious if you think it’s indicative of any future credit prompts just to move up in rates and rate expectations and some technical issues and then importantly how does that impact your fixed income platform flows activity levels things like that?

[Gary Shedlin, Chief Financial Officer]

So volatility in fixed income market was actually really good for us as you know Glenn. We are one of the largest players in the fixed income space and creating some more interest in higher rates is going to pull a significant amount of money out of the cash into products that have been fairly stable for quite a long period of time. So you know that there is a very big imbalance right now because of volatility where we estimate there is over $50 trillion of cash that’s sitting in bank accounts earning less than 1%, some places negative. So as rates go up especially in the short end that is going to attract a lot of this cash into the fixed income markets of which we can manage that money rather directly into the normal fixed income products or into ETF fixed income products which seem to be getting a lot of the new flows from rises in rates.

[Laurence Fink, Chairman and Chief Executive Officer]

I am going to also add Glenn, we did witness outflows in high yield as an industry, as a firm and so your statement related to LIBOR, there I think it’s a reflection on some fears of the credit markets are – have over I think the credit spreads have tightened way too much and are going to witness some possible widening of yes more of a directional of the equity markets more than anything else. I don’t believe it’s a systemic change, but I do believe the rise in LIBOR is an indicator of some poor positioning by some professionals, but I don’t think it’s anything of any significance at this time.

[Operator]

Our next question comes from Bill Katz with Citi.

[Laurence Fink, Chairman and Chief Executive Officer]

Hey Bill.

[Bill Katz, Citi]

Okay. Thank you very much. Good morning everyone and thank you for taking the question. Just coming back to expenses, so thank you very much for the added disclosure, that is helpful. As we look at the 383, particularly in the G&A line, $32 million how should we think about that going forward, Gary you mentioned a few things in there that sort of affected the year-to-year change, but I know you are spending a bit, I heard that the income through the commentary as well, is this a good base to run-off of or are there more seasonal pressures here that maybe changed up to basically get to the second half of the year?

[Gary Shedlin, Chief Financial Officer]

Good morning, Bill. Thanks for your questions. I think we tried to answer that question last quarter, we will continue to try and answer it again. I think that we need to continually focus on looking at the entirety of our discretionary expense base. There is definitely an interplay between our G&A line and compensation and as we continue to invest more across the platform some of those items will hit the G&A line like data, like technology, like occupancy, obviously MiFID II costs hit there as well. But we are also as we do that we are able to change the composition of our employee base. So, I think as we said before as we would expect G&A expense to increase in stable markets, we are also looking for compensation as a percent of revenue to decline primarily as a functional historical investment and scale in our business. So, the result when you look at the two of them again assuming that we have got fairly stable markets is continued upward bios in our margin and we intend to continue playing offense in this environment. We went into 2018 planning to basically invest as much in the business as we have in years. And I think for the moment really nothing is changing our view there. That being said, I think we have tried to call out and you will see obviously on some of the disclosures there, I mean, most of that was basically in our cue, we are moving it up a little bit. We have added a few lines. We have been calling out what we have called some more episodic, let’s call it non-core G&A lines that make that line item bump around a lot and we think hopefully with the incremental disclosure you will have better insight as to what the recurring investment through that category is.

[Operator]

Our next question is from the line of Michael Cyprys with Morgan Stanley.

[Michael Cyprys, Morgan Stanley]

Hi, good morning. Thanks for taking the question. Just wanted to ask about the BlackRock lab for artificial intelligence, just curious how you are thinking about the key objectives for this lab how you are betting it within the overall organization and what sort of metrics you are focused on in measuring the success of this lab and maybe you can share with us any sort of stats on the headcount and how you see that growing over the next couple of years?

[Laurence Fink, Chairman and Chief Executive Officer]

So, this is really quite important to us and it dovetails with the first area that we have built to assist portfolio managers, which is the BlackRock Investment Institute and this was getting all of our portfolio teams together with some of the best econometrics and people to talk about how we can structure portfolios better. Once we have that together and that’s a pretty significant group of people that meet 4 times a year and produce weekly commentaries and this is really for internal use. With the success of that, we wanted to take this further, because we believe that utilizing artificial intelligence and people, so man and machine is going to create a better result of man or machine. And so what we are doing is we are staffing up and we hired a number of technology-oriented people, we have hired someone from NASA, we have hired someone from the technology area out-west. And what we are doing is we are putting together a group to start to use the technology that we have already built to see how we can find some significance in that forward performance. So, this is the beginning of what everyone has been writing about. It’s more than just fin-tech. This is using data to try to pull it in first which is not easy to do. Yes, there is the technology to pull in the data of which most data has only been around for the last 5 years getting access to the data, pulling it in, analyzing it, seeing if there is any significance to it and then testing that in the portfolios of our performance. So, this is a real important effort that’s going on and we are investing quite a lot into this and it will dovetail into our investment institute, the internal research that we do, the portfolio manager’s capability and eventually all be able to be the throughput through Aladdin and our other technology.

[Robert Kapito, President]

Let me add one more thing Michael. As I have said in many quarterly updates and I just discussed that in my Chairman’s letter that is going to be released, I guess, Friday, Monday, I have it already. Technology continues to be one of our most important focuses as a firm. And this is a focus not just for the investment areas of focus across the entire firm. Clearly, using technology to give us better insights for investment performance is key, but we have historically have used technology to improve our operational scale, I think this is one of the reasons why our margins have improved over the last 5 years. We are using technology to enhance our connectivity with our clients in creating better distribution technology. And obviously we have historically viewed technology to enhance our risk analytics. So our scale and our global reach is allowing us to continue to invest and invest significantly for the future on behalf of our shareholders and our client. But there is I think our labs is just another step in this investment. The key for us to continue to drive our scale, our connectivity to our clients and better investment performance is pretty better operational efficiencies. So if you find this question about how many people we are going to be hiring and overall that’s significant whether the number is as we – that is our expectation that these investments as they have in the past is going to create more operational efficiencies over the longer. And I believe that’s how we continue to drive our business, are driving by creating better operating efficiencies, by creating more scale, especially as we expand globally and the needs for better risk analytics as we are investing more and more globally worldwide. So this is just a component, it’s pretty special as Rob suggested. And we believe we are going to get better, deeper insight on AI specifically with this one investment, but it is part of the whole strategy of investing related to technology.

[Operator]

Our next question is from the line of Brian Bedell with Deutsche Bank.

[Laurence Fink, Chairman and Chief Executive Officer]

Hi Brian.

[Brian Bedell, Deutsche Bank]

Hi. Thanks for taking my question. Maybe to shift back to the financial advisor sales effort that you guys have been obviously really printing up to the last few years and especially with Aladdin for Wealth, could you just mention the potential for a renewed sort of advisors revisiting active strategies, maybe if you can talk about that a little bit more and how you are positioning your ETF franchise versus your active franchise with advisors. And also on smart beta, obviously we have been more in a beta rally with the ETF flows over the last year or so, do you see a greater demand for smart beta products versus the beta with the certain new volatility regime in the markets?

[Laurence Fink, Chairman and Chief Executive Officer]

So working backwards, we are seeing a huge demand for our smart beta product. And you know that in 2017 we saw about 15% organic growth in smart beta and we are really differentiating ourselves in that particular area. At the end of the first quarter, we managed about $190 billion in factor based products including 108 of smart beta ETFs which were the number one player. iShares now has a global lineup of 147 smart beta ETFs, so we have created that as we are seeing the demand. We did see factor based inflows of about $3 billion this quarter, representing so far 6% annualized organic growth rates. So we believe the fact that strategies are going to continue to grow and we are investing in people and technology in the states. We have a pretty good set of unique advantages in factors, a rich history of innovation and thought leadership. As we created the first smart beta equity yield fund in 1979, we have the full spectrum of strategies from smart beta whether it be multifactor, single factor min valve to enhance to long only factors which enable us to actually create solutions. The construction capabilities I believe that we have help our clients to construct what we call a factor aware model, that technology and analytics that we have powered by Aladdin really help our team isolate and monitor factors in our investment process and to perform the necessary risk and analysis for clients and lastly, our people which we have included Andrew Ang, who heads our factor-based strategies group and they bring significant portfolio construction experience and model-based investment skills for the clients. Now, when it comes to ETFs and financial advisors, financial advisors are being asked to do more, it’s not a stock picking or bond picking environment. What they need to do is they need to have the tools to be able to understand the risk behind the individual portfolios that they have, they need help in modeling portfolios. And a lot of this is going to be coming through technology. So, we have spent many, many years now building technology for large institutional clients and have had most recently the ability to use that technology to bring it to the financial advisor, where they could look at individual portfolios and understand the risk that they have in the returns and match it to the liabilities or the outcome that a client needs and not only individual, but they could do it in aggregate for all of the portfolios that they are overseeing. That gives them not only the ability to have better information, but it also gives them the ability to be much more efficient and they can handle many, many more clients.

So, by working to understand what they need for their clients, they need to grow their business. We are seeing a huge demand for that capability. And of course when you are modeling and the changes in compensation have taken place for financial advisors, they need to create portfolios based upon the lowest priced products that they could have, and that describes some of the movement between the alpha seeking strategies and the passive and ETF business. And part of the ETF business is driven by this need to have products to express precision ways to get returns in a portfolio that they have. So, it all dovetails in if you have now the analytics, the technology, the modeling capability, the portfolio construction experience and then the products to put in. And if you think about what Larry described in his opening session, it was developing these tools specifically for that and that’s been our mission and I think that’s what’s driving more financial advisors who want to work with BlackRock, because we can provide the full service that they need for their business going forward and achieve the desired result for their client.

[Operator]

Your next question comes from the line of Michael Carrier with Bank of America.

[Laurence Fink, Chairman and Chief Executive Officer]

Hi, Michael.

[Michael Carrier, Bank of America]

Hi, Larry. Thanks a lot. So just a question on the institutional channel and just two parts you mentioned lot of the inflows and outflows kind of the lumpy things in the quarter, has that mostly died down or do you expect more and the more important question is you highlighted the alternative platform. And specifically on the illiquids, I think you guys are around $50 billion, it’s definitely scale relative to some of the players in the industry, but some are at 150, 200 plus have relationships with most of the LPs out there. So, if you all fund-raising backdrops create, just wanted to get an update on your guys’ strategy, maybe ambitions for the illiquid alts and where you think that can be over the next couple of years?

[Laurence Fink, Chairman and Chief Executive Officer]

I think you are correct in saying we had a good quarter. We expect illiquid alts could be one of the more significant delta or net drivers for us in the next few years. We have spent since 2012 a long foundation in building our infrastructure business is up to $18 billion now we are out fund-raising now for another global alternative energy fund. We are in the process of raising long-term private capital fund. And so I think we are going to have a lot to talk about over the next few quarters related to the opportunities and the position that BlackRock has across our illiquid platform. I would also though suggest I think we are in very good position in our illiquid alts area too. So, we look at this as a important growth area for the firm. We believe this will be a continuing waiver in our net organic base fee column. And we purposely have been investing in these areas now for the last 5 years and I do believe we are just beginning to see the net positive flows into these strategies.

[Gary Shedlin, Chief Financial Officer]

Michael, I would just remind people that a couple of things on the illiquid alts business. First of all, when we talk about the so-called committed, but un-invested capital that there is about an $18 billion incremental pipeline for that $50 billion number that you mentioned, which frankly is across the board both in terms of private equity solutions and private credit, which is a big focus for us. Larry mentioned both real estate infrastructure and obviously by virtue of the fact that we are a solutions oriented firm we actually have a fairly significant effort and time together solutions of alternatives, which has got another couple billion of commitments that are outstanding. Secondly and that not creates as you know for us, because we call it committed capital and not net new business, it’s because we don’t earn fees on the committed capital, so if that committed capital basically gets put into the ground that becomes a future bank of net new business for us going forward. And then secondarily just because the performance fee line gets a lot of attention now and then remember, we also don’t account for our performance fees in illiquids the same way as some of those pure-plays do. We are basically waiting until the end of the cycle of those funds once the capital is returned and no longer subject to claw-back and we are not marking to market that across the board. We do try to provide some incremental disclosure for you in some of our annual filings on that, so you have an idea of what the built-in bank there is. But I think as we think about it, we are very bullish on the future growth prospects of that sector.

[Operator]

Our next question comes from the line of Chris Harris with Wells Fargo.

[Chris Harris, Wells Fargo]

Thanks. Hey, guys. Wondering if you can give us an update on the actives business outside the U.S. really just helping you guys could maybe give us a little bit incremental color on where you see the biggest opportunities and what you are most optimistic about outside the U.S.?

[Laurence Fink, Chairman and Chief Executive Officer]

So, the area that we are seeing the most interest right now is in Asian equity franchise. A lot of people are looking for exposure there and lucky for us we have some very large products that have excellent performance. Those where we saw some of the inflows this quarter and expect that to continue as we are hearing more and more people are trying to figure out how to get exposure into those areas. The second area is the European equity and European equity hedge fund that we have, both have significant demand primarily because of their long-term track record and performance and you find the cycle here of what we are saying. When you have good products at the right price with good performance, people find out and want to invest but the two I think growth areas for us outside of the U.S. have been European equities, primarily in the large cap side and Asian equities really across the stack.

[Operator]

Our last question comes from the line of Patrick Davitt with Autonomous Research.

[Laurence Fink, Chairman and Chief Executive Officer]

Hi, Pat.

[Patrick Davitt, Autonomous Research]

Hey, good morning. So, we are starting to see UK pension mandate consolidation enough if you press or accelerate and we would expect the upcoming consult and anti-competition review to push that along. As one of the largest pension managers there, I imagine you could be a consolidator through this theme. So, could you speak to how that’s playing out from a flow and fee perspective and how you see BlackRock positioned as a net winner or a loser as it plays out?

[Laurence Fink, Chairman and Chief Executive Officer]

Well, right now, I would say considering the things that we are working on we will be a beneficiary of money that’s going to be in motion, because of the changes in regulation and the movement of money out of some of the pension plans. So that’s on the good side. On the negative side of that, there is nobody that wants to pay increased fees, I can assure you that. So this is where the scale and size and efficiency that a manager have is going to put them added advantage. And that’s really what the key advantage is for us to be able to go in and take a large size at fee levels that are within the context of what they are willing to pay. So I think we will be a beneficiary, but it’s going to be a lot of work and the revenue opportunities are not going to be as large as one might think.

[Laurence Fink, Chairman and Chief Executive Officer]

I will just add one more point to that before going to my closing remarks. The consultant community because you suggested has been a heavy winner in some of the OCIO businesses. I think that’s where the opportunities will be for us and as Rob suggested those are the lower fee businesses. But I do believe there we can be a consolidator and we don’t have any apparent conflicts that are being investigated in the UK pension community.

With that, let me just thank you all for joining us this morning and having continued interest in BlackRock. BlackRock’s first quarter results reflect the value that our diverse investment platform, investments we made, our risk management capabilities, our technology what we provide to our clients as they are trying to invest to achieve their long-term goals. We have continuously evolved our platform to deliver the outcomes for our clients through a changing market backdrop and today we are better positioned. We are having deeper dialogues. We are having more consistent meetings with our clients than ever before. In these higher volatility moments this is when BlackRock over 30 years have differentiated ourselves. The anomaly of low volatility in 2017 is now over, we are back to more volatile world, different inputs, different issues and this is where BlackRock is – has historically done quite well and I believe we are well-positioned for that. We are focused on delivering growth and scale advantages to both our clients and our shareholders in 2018. And I think the first quarter was a good start to that and I expect a continuation of that throughout 2018. So have a good quarter. And we will talk to everybody sometimes in July.

[Operator]

Ladies and gentlemen, this concludes today’s teleconference. You may now disconnect.