BlackRock, Inc.

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 Fourth Quarter and Full Year 2018 Earnings Teleconference. Our hosts for today's call will be Chairman and Chief Executive Officer Lawrence D. Fink, Chief Financial Officer Gary S. Shedlin, President Robert S. Capito, and General Counsel Christopher J. Mead. Onlines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. Mr. Meade, you may begin your conference.

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, 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 statement. With that, I'll turn it over to Gary.

Thanks, Chris. Good morning and Happy New Year to everyone. It's my pleasure to present results for the fourth quarter and full year 2018. Before I turn it over to Larry to offer his comments, I'll review our financial performance and business results. While our earnings release discloses both GAAP and As Adjusted financial results, I will be focusing primarily on As Adjusted results. As a reminder, For one last time, all year-over-year financial comparisons referenced on this call will relate current quarter and full-year results to recast financials reflecting the adoption of FASB's Revenue Recognition Accounting Standard, which became effective on January 1st, 2018. In 2018, BlackRock delivered positive organic asset and base fee growth, increased year-over-year revenue, and expanded our operating margin, while also maintaining an investment mindset and returning significant cash to shareholders. Our performance was sustained by the investments we have continuously made to leverage our scale and optimize our strategic positioning. We generated $123 billion of long-term net inflows during the year, representing 2% organic asset and 2% organic-based fee growth, and achieved these results despite $92 billion of low fee institutional index equity outflows associated with client de-risking in a volatile equity market. The stability of our operating model allowed us to continue to invest in high growth opportunities such as retirement, illiquid alternatives, ETFs and factors. We also continue to extend our leadership in technology and lead the industry's shift from product selection to portfolio construction, all while simultaneously expanding our full year operating margin by 20 basis points to 44.3%. And after investing for growth, we returned approximately $3.6 billion of cash to our shareholders during the year, an increase of over 30% from 2017. The strength of BlackRock's diversified global investment and technology platform enabled us to continue to execute against our framework for long-term growth, despite meaningful headwinds for the asset management industry. Global equity indices declined more than any year since the financial crisis, and almost every asset class but cash posted negative returns. U.S. and European ETF flows declined 38% in 2018, and global active mutual funds saw outflows accelerate to record levels by year end. As BlackRock has historically demonstrated, environments like this create opportunities for growth as long as we have the discipline to realize them. Executing on this vision, however, requires that we move decisively to focus more limited resources where the impact will be greatest and make difficult decisions to reallocate in challenging markets. We view our ability to continue playing offense as critical to positioning us to deliver differentiated organic growth for the future. With that in mind, we recently undertook a restructuring to free up investment capacity for our most important growth opportunities by modifying the size and shape of our workforce. This resulted in a fourth quarter restructuring charge of $60 million, primarily comprised of severance and accelerated amortization of previously granted deferred compensation awards for approximately 500 impacted employees, or 3% of our global workforce. This charge appears as a single line expense item on our 2018 GAAP income statement and has been excluded from our as-adjusted results. For the fourth quarter, BlackRock generated revenue of $3.4 billion and operating income of $1.3 billion, down 9% and 12% respectively from a year ago. Nonetheless, full-year revenue of $14.2 billion was up 4% versus 2017, and operating income of $5.5 billion increased 5%. Earnings per share of $26.93 was up 20% versus 2017, reflecting the impact of a lower effective tax rate in 2018. Non-operating expense for the quarter totaled $72 million, reflecting lower marks on unhedged seed capital investments. Our as-adjusted tax rate for the fourth quarter was approximately 21%. We currently estimate that 24% is a reasonable projected tax rate for 2019 though the actual effective tax rate may differ as a consequence of non-recurring or discrete items and issuance of additional guidance on tax legislation. Fourth quarter base fees of $2.8 billion were down 4% year over year, despite positive organic base fee growth over the period and the impact of recent acquisitions, reflecting the negative effects of beta and FX and lower borrowing demand for securities lending in the current quarter. Full year base fees were up 6% for 2018, but we entered 2019 with an annualized base fee run rate approximately 6% lower than last year as a result of significant global equity market declines, which reduced BlackRock's AUM by approximately $500 billion in the fourth quarter alone. Fourth quarter performance fees of $100 million declined 65% year over year, reflecting lower fees from liquid alternative and long-only products in a very challenging year for the hedge fund industry. Underperformance during the fourth quarter will also impact performance fees for 2019, as certain quarterly and annual locking funds are below high watermarks entering the year. While we're seeing significant growth in our illiquid alternatives business, performance fees from these products are generally not booked until capital is returned to clients and represent a source of meaningful longer-term future growth. Quarterly technology services revenue grew 15% year-over-year, driving record full-year technology services revenue of $735 million as an outsized number of new institutional Aladdin clients went live in 2018, and we expanded our range of digital wealth and distribution technologies. we continue to target low to mid-teens growth in technology services revenue over the longer term. Total expense increased 4% in 2018, driven primarily by higher G&A expense, volume-related expense, and compensation. Fourth quarter G&A expense was up 9% sequentially, primarily due to planned, seasonally higher levels of marketing and promotional spend. Similar to the third quarter, the current quarter also included $31 million of contingent consideration fair value adjustments. This was primarily related to improved expectations of achieving specified performance targets on prior acquisitions and lowered quarterly as-adjusted operating margin by approximately 100 basis points. G&A expense increased 13% in 2018, reflecting higher plan levels of technology, data, and marketing spend. Approximately 50% of the year-over-year increase in G&A expense was comprised of non-core items, such as deal, tax, and Brexit-related professional fees, contingent consideration fair value adjustments, product launch costs, and FX remeasurement expense. While we continually focus on managing our entire discretionary expense base, we would currently expect 2019 G&A expense to be essentially flat to our core level of spend in 2018. Direct fund expense was up $103 million, or 12%, in 2018, primarily reflecting higher average AUM as a result of growth in our iShares franchise. For the full year, compensation expense increased $68 million, or 2%, primarily reflecting higher headcount and higher operating income, offset by lower levels of performance fees. Our full year comp to revenue ratio of 34.4% declined 110 basis points versus 2017. The decline was primarily associated with lower performance fees, the impact of ongoing technology investment, and successful implementation of our IHUB strategy. Recall that year over year comparisons of fourth quarter compensation expense are less relevant because we determine compensation on a full year basis. We see significant opportunities to better serve clients in this environment, and BlackRock remains committed to investing in key growth areas. As evidenced by our recent restructuring, we are always margin aware and remain committed to optimizing organic growth in the most efficient way possible. Away from the P&L, we also prudently used our balance sheet to position the business for continued success. During 2018, we allocated $1.2 billion of new seed or co-investment capital to our products, resulting in a net increase to our total portfolio of approximately $500 million. We closed the strategic acquisitions of Citi Banamex Asset Management, furthering our goal to be a full solutions provider in Mexico, and TandemBan Capital Partners, enhancing our private credit capabilities. In addition, we continue to expand our technology portfolio with minority investments in Acorns, the country's fastest-growing micro-investing app, and InvestNet, a leading provider of intelligent systems for wealth management and financial wellness. And we remain committed to returning excess cash to shareholders through a combination of dividends and share repurchases. We repurchased approximately $1.7 billion worth of shares in 2018, including $525 million in the fourth quarter, as we sought to take advantage of attractive relative valuation opportunities in the current market environment. Since inception of our current capital management strategy in 2013, we have now repurchased almost $7 billion of BlackRock stock, reducing our outstanding total shares by 7%. At present, based on our capital spending plans for the year and subject to market conditions, including the relative valuation of our stock price, we would anticipate share repurchases aggregating at least $1.2 billion during 2019. In addition, Consistent with our predictable and balanced approach to capital management, our board of directors has declared a quarterly cash dividend of $3.30 per share, representing an increase of 5% over the current level. BlackRock is having deeper and more strategic conversations with a greater number of clients than ever before, even as many clients are deferring investment decisions and de-risking in the face of an uncertain market landscape. Fourth quarter long-term net inflows of $44 billion representing 3% annualized organic AUM and base fee growth, were led by flows into strategic focus areas including iShares, multi-asset strategies, and illiquid alternatives, partially offset by continued outflows from lower fee institutional index equities. Global iShares generated $168 billion of net inflows for the year, representing 10% organic growth for 2018. Importantly, We saw momentum into year-end as seasonal tax planning, growth in fee-based wealth management, and demand for efficient exposure supported by significant market liquidity generated back-to-back record net inflow months in November and December. Fourth quarter iShares net inflows of $81 billion represented our highest flow quarter on record and an annualized organic growth rate of 18%. 49 iShares ETFs had over $1 billion in net inflows in 2018, and we once again captured the number one industry share of global, US, European, equity, and fixed income ETF flows for the year. Strength in the iShares core continued in 2018 with $106 billion of net inflows, almost twice that of the next largest player, representing an approximately 45% share of industry core ETF flows. Equally important, during the fourth quarter, about 60% of iShares net flows were in higher fee ETFs, including financial instruments and precision exposures outside the core. BlackRock generated full-year retail net inflows of $21 billion in a challenging year for the mutual fund industry, which experienced historic outflows in December. BlackRock's inflows were led by our broad active fixed income range, our multi-asset income fund, and liquid alternatives. Retail outflows in the fourth quarter were driven by active fixed income, reflecting industry pressures in the unconstrained and high-yield categories where we have significant market share. Unconstrained products were impacted by the volatile rate environment as investors shifted into short-duration mutual funds and ETFs. High-yield and emerging market debt funds experienced outflows driven by risk-off sentiment in credit. BlackRock's institutional franchise generated 2% organic-based fee growth for the year, reflecting strength in illiquid alternatives, multi-asset solutions, and liability-driven investment strategies, despite almost $100 billion of low-fee index equity outflows and elevated active fixed income outflows, which reflected several large client redemptions associated with client M&A, cash repatriation, and manager consolidations. In a record year for our illiquid alternatives business, BlackRock now has approximately $23 billion of committed capital to deploy for institutional clients in a variety of illiquid strategies, representing almost $170 million in incremental base fees and the opportunity for significant performance fees over time. Finally, BlackRock's cash management platform continues to increase share by leveraging scale and delivering transformative distribution and risk management technology through both Cash Matrix and Aladdin. While for the year 2018, net inflows were impacted by two large planned redemptions totaling almost $40 billion, base fees grew 9%. In summary, our diversified business model once again delivered differentiated organic growth, record technology services revenue, operating leverage, and significant capital return in 2018. We are committed to continuously evolving, investing in, and disrupting our platform to benefit client needs. We believe BlackRock's platform is as well-positioned as ever to meet client needs and deliver long-term value for shareholders. With that, I'll turn it over to Larry.

Thank you, Gary. Good morning, everyone, and Happy New Year. BlackRock's performance in 2018 reflects the deeper partnerships we are building with clients through our solution-based approach. We have consistently and strategically invested to create the most diverse global asset management and technology services firm in the world. And we're having more comprehensive conversations with more clients today than any time in our history. Our ability to deliver investment strategies from ETFs to alternatives, to our industry leading portfolio construction and risk management technology, and our historic deep capital markets expertise through the BlackRock Investment Institute is what differentiates BlackRock and helps us with our clients worldwide. The diversity of our platform is reflected in our results. We generated 124 billion of net inflows in 2018. Despite, as Gary discussed, over $90 billion of low fee institutional index equity outflows, as some of our clients, many of them who are global, de-risked against the difficult market backdrop. Seven different countries and 59 different products, each generated more than a billion dollars of net inflows. And our Aladdin and digital wealth technologies are accessible to clients now in more than 50 different countries, including thousands of wealth advisors who serve millions of end investors. 2018 was marked by heightened uncertainty about the future. Political, economic, and social outlooks globally remain clouded and unclear, which resulted in extreme periods of volatility in the financial markets. Only for only the second time in nearly 30 years have annual market returns were negative in both global bonds and in equities. Throughout the year, and particularly in the fourth quarter, U.S. rate policy Tightening financial conditions and a deepened concern regarding economic growth and corporate profitability dragged down equity performance throughout all the world indexes. The impact of a weak growth backdrop on European markets was exasperated by concerns over the Italy budget deficits, the outlook for Brexit, the rising populism in France, and governmental changes in populism in Spain. And for most of the year, the emerging market was impacted by a stronger dollar, by trade tensions, a developing anxiety with slower growth in China. And other country-specific risks continued to put asset prices and currencies under pressure. Sediments shifted from cautious to negative, which impacted investor behaviors among institutions and individuals. And 2019 began with many clients de-risking and sitting in cash, waiting for greater market certainty. A year ago, rising market volatility and falling correlation suggested an environment where the investment industry's traditional active equity strategies were primed to deliver alpha. Not only did that not happen in 2018, but they were once again, the industry underperformed in their equity returns. And what we witnessed, especially in the fourth quarter, industry outflows hit a record level, especially as taxable investors took the opportunities to harvest losses. What we are seeing more than ever before, and we believe this trend is going to continue and this trend will continue to benefit BlackRock, we are seeing clients are fundamentally questioning the composition of their portfolios. The industry is shifting from approach of picking products or stocks to one of building portfolios. As a result, both clients' needs and our industry are changing rapidly. This all along has been BlackRock's approach, a focus on client outcomes and building better portfolios to help clients achieve better outcomes. And our strength in this area, driven by our diverse investment platform, our portfolio construction technology will lead to future organic growth for BlackRock. We're seeing an acceleration of barbelling in client portfolios with index and ETFs and factors on one hand and illiquid alternatives on the other hand. The demand has never been greater for technology to manage risk and build more resilient portfolios. BlackRock always has been willing to aggressively embrace change. We have strategically invested in our business over time to build strength in ETFs. In our alternative business, and our world-leading technology business. And the benefits of these investments are clear. In the fourth quarter, we saw record flows in iShares, record flows in the commitments of our illiquid alternatives, and record levels of technology services revenues. BlackRock generated $10 billion in net inflows in our core alternative business in 2018, more than a tenfold increase from the year before. Flows reflected strong fundraising and the successful deployment of capital. We now manage more than $80 billion in committed and invested capital for our clients across platforms of infrastructure, credit, real estate, and private equity strategies. Our institutional client rebalancing survey suggests that in 2019, institutions, including pensions and insurance companies, in particular, are anticipating allocating more assets to illiquid strategies. As demand increases, BlackRock is well positioned to generate differentiated growth in this strategic high growth asset class by leveraging the benefits of our technology, our global reach, and our scale. At the other end of the barbell, ETFs are playing an even greater role in client portfolios. and BlackRock is leading the industry. Fourth quarter was the strongest in iShares history with $81 billion in net inflows, driven by records in November and December. And we continue to see growth in January with about $13 billion of flows. More and more clients are choosing ETS as the preferred investment vehicles because of their superior structure relative to the mutual fund industry, including liquidity and most importantly, tax efficiency. Clients who faced large tax bills while their equity mutual funds delivered negative active returns experienced this firsthand and shifted to ETFs in the fourth quarter. Institutional clients are using ETFs to express risk-on, risk-off views, tactical asset allocation decisions, and our distribution partners also are recognizing iShares as a technology to white label as part of their broader solutions. We believe white labeling iShares, as we are doing this with RBC in Canada, will lead to much greater opportunities with more distribution partners going forward worldwide. Growth in iShares will continue to be driven by long-term secular tailwinds. The trends towards efficient, transparent, low-cost vehicles is accelerating the adoption of iShares core funds, as Gary mentioned. Three of the industry's top four ETFs in terms of net new assets this year were iShares core ETFs. Our IVV, our S&P fund, IEFA, it's a fund for developed international market exposures, and IEMG, our core emerging market fund. But this movement is to greater efficiencies, transparency, and simplicity in portfolios extends well beyond core. We extended our lead in fixed income ETFs with inflows into shorter duration strategies towards year end as clients took a more defensive posture. iShares factor ETFs have also had record inflows this year with client demand for minimum volatility funds increasing in the fourth quarter, making us a leader in the factor ETF and in the factor investing more broadly. And our sustainable strategies are seeing new demand from investors from around the world. Fixed income factors and sustainable iShares saw a record of 68 billion of net inflows in 2018, representing organic growth of 16%. And I believe we are at the early stages of growth in each of those categories. We estimate ESG ETFs assets globally will grow by $400 billion in the next decade. And we are investing in our product range, our portfolio tools, and data disclosures to lead in that category. We generated $3 billion of net inflows into our sustainable iShares funds globally in 2018, more than double our results from 2017. And during the fourth quarter, BlackRock launched the iShares Sustainable Core to enable investors to combine purpose and performance at the core of their portfolios. We are also making iShares more accessible, especially in the wealth management landscape. We announced last week the strategic alliance with RBC Global Asset Management to offer Canadian investors 150 ETFs under the RBC iShares brand. This alliance enhances BlackRock's ability to serve the Canadian wealth management through RBC's distribution strength, and innovation in index, factors, and active ETFs. One of the main drivers of ETF flows among wealth clients has been the adoption of managed portfolios. We expect this to continue, but we actually expect this to be growing and providing greater force and also providing much more global scale. Managed portfolios provide advisors with asset allocation solutions across the risk spectrum, populated with transparent, low-cost, tax-efficient funds, which help them scale their practice while meeting their clients' goals. This is increasing the need for strategic asset management partnerships that can offer a range of investment, portfolio construction, and technology solutions. And as I've said repeatedly over the many quarters, no organization can provide that to the wealth management sector of having investment, portfolio construction, and technology solutions all together. And it is that uniqueness that gives us the opportunity to build our relationship with more and more wealth management organizations. BlackRock is the most comprehensive partner for wealth managers looking to build better, more resilient portfolios for investors. We have the building blocks, the portfolio construction expertise, the digital capabilities including Aladdin Wealth and Advisor Center. We launched Aladdin Wealth at Morgan Stanley in the fourth quarter, reaching 16,000 financial advisors. We also announced a strategic partnership with InvestNet connecting BlackRock to more than 93,000 independent financial advisors on their platform. BlackRock's differentiated ability to provide wealth management with sophisticated technology drove retail inflows of $21 billion for the year, in contrast to the broad, large-scale outflows that the mutual fund industry saw. Our focus on technology is benefiting us in other areas of our business, like cash management, with cash becoming a more attractive asset class as rates rise. BlackRock's cash management strategies are becoming an increasingly important part of our client's portfolio. Our technology-first distribution strategy is resonating, and we saw a 9% increase year-over-year in growth in our base fees. BlackRock's cash platform is differentiated by our scale, our integrated cash matrix technology, our risk management, and our unique ability to create tailored liquidity solutions. Aladdin and Wealth technology not only is driving accelerated flows for investment products, but also consistent technology services revenues for the firm. 19% annual growth was driven by a strong year of institutional Aladdin implementations. Industry consolidation, regulatory requirements, among other trends, are driving more demand for more holistic, flexible technology solutions, and BlackRock's technology platform is very well positioned to capitalize on the growing needs by more institutions seeking this type of technology. We recently announced an exciting collaboration with Microsoft to address the growing retirement challenges in the U.S. We are combining Microsoft's technology strengths with BlackRock's investment capabilities to jointly explore next generation retirement solutions. Our goal is simplifying the saving process and enabling people to make better investment decisions that lead to secure financial futures. And there'll be much more to talk about in the future. We believe we will be able to grow considerably in our retirement solution business going forward with this partnership that we have with Microsoft and the new types of digital solutions that we're going to be able to provide. Everything we are doing reflects our focus on the long term. This focus helps us keep us ahead of the changes in the market, staying in front of the needs of our clients, and making sure that we're staying in front of our industry. It helps us prepare to solve our clients' most pressing investment challenges. It guides our investments in our own business so that we are efficiently providing the full breadth of BlackRock's capabilities, our scale for our clients, for our employees, and for our shareholders. It is this focus on the long term that drives us to reshape our organization and make difficult but necessary decisions about the position us for the best possible path forward. As Gary mentioned, our restructuring effort resulted in a number of valued colleagues and friends leaving the firm, and we greatly appreciate the contributions they had made to BlackRock. BlackRock's focus remains on the long term and how we can best serve our clients over time. And we see tremendous opportunities for our firm and industry that will require us to aggressively embrace change and continue to evolve as an organization. We're looking at every aspect of how we operate and how we manage the organization. We are moving people into new roles to fully leverage their talents, We are leveraging our technology in new ways, and we are making sure that our scale, which is a key competitive advantage, remains a benefit and gives us that unique ability to work with our clients. BlackRock's differentiated platforms showed resilience. We generated net inflows and increased revenues and increased operating income while investing for our future growth, which is essential in creating long-term value for our clients and our long-term value for our shareholders. We will continue to strategically invest in BlackRock. We will target those areas related where we see the highest future growth potential. The ecosystem that we operate in is shifting from product selection to a whole portfolio approach. The digitization of asset management and achieving scale and high growth markets around the world so that we could better deliver outcomes for our clients, opportunities for our employees, and strong, consistent returns for our shareholders. With that, let me open it up for questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. If you do ask a question, please take your phone off of its speaker setting and use your handset to avoid any potential feedback. Please limit yourselves to one question. If you have a follow-up, please re-enter the queue. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Alex Blostein with Goldman Sachs.

Hi Alex, good morning.

Hey Larry, good morning everybody. The first question around just the strength in the iShares business, and particularly I was hoping to kind of zone in on the events of kind of late December. You guys have seen considerable strength there in light of, despite I should say, I guess de-risking and substantial outflows from mutual funds. Any additional color to provide there would be helpful just to think about how the customer base reacted and the utilization of the product in what I would imagine would have been more of a risk-off scenario.

Sure. I'll let Rob start it off, and I may conclude that answer.

So we saw, obviously, you heard Larry say, strong iShares flows in the fourth quarter. But this year, the activity was very high because of people that wanted to take risk off, do more tax-efficient trades, and what they look to do is to move out of their current products into a more defensive product. And it made a lot of sense. And they moved primarily into short duration product. And more importantly, they moved into precision products that are of course higher fee, like EEM and HYG. So this was done in a larger volume than I think anyone had expected. $81 billion in flows is the highest flow quarter in iShares history. And it was broad. $61 billion went into equities. Even as the equity market fell dramatically, which should answer questions about how ETFs will perform in a volatile and bear market. We had no instances of any issues or anybody had any issues with liquidity. $19 billion in fixed income, and $2 billion in multi-asset and alternative ETFs. So this was an important way for our clients to get defensive very quickly, to utilize the tax efficiency, which is a very important feature of this wrapper versus a mutual fund, and to quickly use the liquidity in the market when, as you know, in the equity markets, there was a lot of issue with liquidity, especially in late December. So they performed as we would have expected and as we predicted. The use of them was some of the best features of iShares, and we were the beneficiary of that volatility. And even though we may have had outflows in other areas, the benefit of having such a diversified portfolio is that we were able to capture the outflows back in inflows in different areas and different products. And as Gary mentioned, a lot of those went to actually the higher fee ETFs that we have.

Let me add a little bit more, Alex. I truly believe it's becoming more recognized the superior nature of the ETF structure versus a mutual fund. We heard many instances in which where many mutual funds who had negative NAV at the end of the year, but they also had capital gains taxes that we were identifying to their clients, and the clients, I think, in many cases, just got quite aggravated by paying taxes with a negative NAV. Obviously, with an ETF, you control your tax basis. And I think this is becoming a bigger and bigger issue. You know, navigating for the long term your tax position for taxable individuals and institutions is very important. We also believe the movement in the wealth management space away from stocks and products navigating more towards models and portfolio construction, we are seeing elevated and continually elevated flows into ETFs. We think that trend is beginning. It wasn't something that was short in nature. We believe that will continue throughout 2019 and maybe 20. And this is one of the reasons why we continue to believe the ETF industry is going to continue to grow very largely, and I think the big surprise in the fourth quarter, as you suggest, was in a very volatile, negative marketplace, you're seeing portfolio reallocations being done out of mutual funds, because we had elevated mutual fund outflows as an industry, and into ETFs. I also believe People are starting to think about ETFs more as a technology, not just a product. If you think about what makes companies really good, a lot of people write on convenience. And the convenience of ETFs versus other instruments far outweighs the other instruments. And I do believe the key towards ETFs and the convenience is now becoming an accelerant.

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Hi, Craig.

Hey, good morning, Larry. I wanted to see if you could share any additional color on the large redemptions in Asia and also the institutional equity index in just the fourth quarter, because it looks like they both could be related. And I wanted to see if it included maybe one or two very large client outflows. And also just kind of as a little follow-up here, if you can share any fee rate color on the outflows in Asia or institutional equity index, that would be a helpful tip.

I'll let Gary begin with that and I'll follow up. Good morning, Craig. So we clearly have been seeing accelerated activity redemptions in our institutional index equity book. I think a couple things are important there. One is to remember that this is really a scaled offering for some of our largest institutional clients. And while Institutional index equity represents roughly a quarter of our assets under management. It only accounts for 6% of our base fees. And when you strip out the impact of securities lending, the average effective fee rate on that book is around three basis points. As you correctly identified, we had fourth quarter outflows there. I would say that they were almost entirely driven by one, on a net basis, by one large institutional client in APAC. And when you look at this on a full-year basis, I think there were some broader trends really primarily linked to de-risking, asset allocation, and cash needs by official institutions primarily outside of the U.S., as well as DV plans in the U.S. And given the outflows in many cases are really from our more significant scaled clients, you know, the average fee rates on those outflows are in fact generally lower than the overall three basis point fee rate that I quoted on the general book. But again, keeping it into broader perspective, you know, we look at the institutional business as a broad-based business. We saw continued demand for clients for our higher fee products, illiquid alternatives, multi-asset solutions, OCIO, LDI strategies, to name a few. And in fact, notwithstanding those low fee institutional outflows for the year, which made the net flows go negative for the year, we actually generated 2% organic-based fee growth in the institutional business overall.

Your next question comes from Robert Lee with KBW.

Thanks. Good morning, and Happy New Year. Happy New Year. Hi. Thank you. Larry, I'm just curious. I mean, as you – and maybe you hinted at this a little bit, but as you survey and think about the kind of changing landscape out there in terms of distribution and products and how you access clients and maybe the Microsoft – partnership is an example of this, but do you think it's imperative or need that you have direct access to the end retail investor at some point as opposed to obviously institutions? I mean, is that part of how you're thinking about this Microsoft partnership is that you may be able to develop some solutions that can get you directly to the end investor instead of through intermediaries?

Our business model is not changing at all. And where we believe our retirement solution business, especially with Microsoft, is going to go is working with our institutional clients through their DC plans and providing technology to assist our DC plan clients to provide the technology for them to better serve their employees. And so it is not for us to go direct. It is providing technology to help the companies have deeper, better connections with their employees. And one thing that we have seen, there has been a separation between the employer and the employee as defined contributions have become the dominant form of retirement. Historically, when you had a defined benefit plan, there was an emotional, legal connection between the employer and the employee. And in an era now of 3-ish percent unemployment, whatever the level is, 3.7, more and more companies are trying to find better connectivity with their employees to have better retention. But also, I believe going forward, corporations are going to have greater responsibility and needs in terms of working with their employees to have their employees have more confidence in their retirement plans. And so this is, we are developing the technology for our, we're developing the technology and I should say the pipes to tech enable our clients, not for us to go direct ourselves, but to have deeper connections and we believe having that type of pipe and technology is going to be a way that we can enhance our value chain. It certainly is going to build more opportunities to build deeper relationships and then ultimately more flows. It also can connect what we're doing with Aladdin for Wealth, where I believe is going to be transformational for BlackRock over the next 10 years. that is going to allow us to have deeper connection with a financial advisor. We have already heard examples where those wealth advisors are using Aladdin for Wealth. They've been able to secure bigger assignments from their clients because they're providing their clients with better transparency of their portfolio, better risk analytics for their portfolio. So our job is to enable our distribution platforms. Our job is to enable our institutional clients with better pipes and technology. And that's how we believe we could generate robust opportunities, which will entail better flows, but most importantly, deeper and better connected relationships that will sustain ourselves over many years to come.

Your next question comes from the line of Bill Katz with Citi. Hey, Bill. Happy New Year.

Hi. Good morning. This is Brian Wu. I'm for Bill Katz. Thank you for taking my question. Regarding the cost saving initiatives, could you provide some color on areas of potential reallocation or reinvestment of those savings? and what geographies, business lines, or areas of technology you would likely focus on? Thank you.

Sure, I'll take that. So I think the goal of this restructuring, as it was a couple years ago when we last took a similar approach, is in a market where we've seen beta take – over $500 billion off of our assets and obviously significant amount of revenue off of our entry rate for the year, we continue to believe that the model that we have here really affords us the opportunity to continue to play offense. We see some amazing opportunities for growth. Our desire is to really take advantage of a marketplace where a number of participants in the industry are being forced to cut back more than they would like. And so we are doing everything we can to be as disciplined and as smart as possible to continue our growth standpoint. So that obviously takes some challenges. We've got to basically move decisively to make sure we're focusing those more limited resources where the impacts will be greatest and that's why we took the recent steps to modify the size and shape of the organization. Recall that we're global so I think really everything that we're talking about and the areas that we're focused on are all entirely global so it's less really about a geographic targeting and in fact some of the areas that we've identified for growth are in fact geographic in nature like APAC and China in particular. But the key areas for us that we're focused on making sure we continue to invest in are ETFs, multi-asset solutions, illiquids, and technology. And when we talk about technology, that's broad-based technology. That's technology in terms of Aladdin and Aladdin Wealth in particular. It's technology to continue to help drive better investment decisions. It's technology to leverage our distribution capabilities and obviously to continue to invest in the infrastructure and the operational efficiency of the firm.

Your next question comes from the line of Ken Worthington with J.P. Morgan.

Good morning, Ken. Hi, good morning. Good morning. Just on the active franchise, so active equity sales seem to hold up really well this quarter. I think you even had retail active equity inflows despite what we all saw was a terrible fund flow quarter for the industry. You've clearly made various changes to the active equity product, both in terms of distribution and pricing. So at least on the equity side, what do you think is resonating or why did both the institutional and retail active equity businesses hold up so well? And then on the other side, active fixed income, saw that sort of same challenging market or environment in credit that we saw in equities, and retail and institutional investors stepped up the active fixed income outflows. And I think you mentioned high yield and unconstrained on the retail side. Right, right. But given the same challenging environment for both credit and equities, why did equities hold up so much better than fixed income on the active side?

Well, first I'm going to let Gary answer most of the questions because But let me, I think what we did in our U.S. domestic equity platform resonated. We actually had good returns in many of our U.S. equity platform. That certainly created a stability that we didn't see in 2017, and so just the relative nature and the results of that change. We did see outflows, though, in some of our European products and where we actually had poor returns. We are seeing evidence of our portfolio team changes having an impact where we make changes. We still have more work to do. On the fixed income side, I think we saw elevated outflows, predominantly because of the huge rally in fixed income rates in December when we saw rates go from as high as on the tenure of 320 to the 260 range, and I think many people were just taking profits. We saw some people get out of some fixed income active funds to go into our low duration ETFs, and so we saw asset allocation, some cannibalization. As Rob suggested, though, we actually picked up share in the fixed income side through our ETF platform. I don't think there was one single trend that we could give specifics other than we're starting to see positive response by the client base related to our restructuring of our U.S. equity team that Mark Wiseman did, and we had positive returns. I mean, Rob or Gary, do you want to fill in any more?

Yeah, I think – well, look, on the active equity side, you know, when you look at – both fundamental and systematic. I think on the institutional side, we definitely saw some lower levels of outflows for the quarter. On the retail side, I think we've seen some benefit from our Advantage series, which was part of our restructuring of our equity business about 18 months ago, which was a recognition of trying to migrate to a lower fee, more quantitative model. I think that's actually benefited us and has done very well. We've recently launched that as well. I think on the retail side more generally, though, on equities, keep in mind that there is some seasonal impact of capital gains reinvestment that we see in the quarter that always helps the fourth quarter a little bit. On the fixed income side, I think on the retail side, I think we talked about some industry-wide outflows in both unconstrained and high-yield migration to the shorter-duration product, as well as just risk-off sentiment in high-yield. that basically impacted the entire industry. And obviously we have very significant market share in both of those products.

But I'm pleased to say in high yield, we actually had really good performance. And so I think it was, as Gary just said, it was a risk-off situation. But as long as we continue to drive good performance, when there's risk on again, we'll benefit.

Your last question comes from the line of Mike Carrier with Bank of America.

Good morning, Mike. Good morning. Gary, just, you know, one question for you, just on, you know, the expense side. So maybe just a few, like, clarifications. So just on the GNA, given that throughout 2018, you know, there were some, like, items in that line. When you're talking about, like, keeping that kind of flat, you know, in this environment, you know, for 2019, just wanted to try to get a sense of what base, you know, you're thinking that comes off of. And then just from an environmental standpoint, I think in 2018, you mentioned if the environment continues as you kind of expect, then the comp ratio would trend lower. So when we think about the comp ratio in 2019 and beyond, given some of the restructuring plus some of the investments that you guys are making, just wanted to get an update there on how you're thinking about navigating that. Sure.

So on the G&A side, you know, the way I would think about it is, you know, we referenced the fact that our G&A went up year over year about $200 million. I would say that, in our view, about half of that are kind of what we would consider kind of non-budgetable slash manageable items. So, you know, we have FX-free measurement. We have the purchase price contingencies that are obviously more one-time in nature and have revenue hopefully associated with that going forward. We tend to have some product launch costs tied to booking costs on closed end funds that may launch in any given year. And then last year in particular, we had a number, we had some elevated professional fees as it related to some M&A deals, obviously Brexit preparations as well as tax planning across the organization. About 50% of that increase, effectively, of that 200, I would attribute to kind of those non-core items. So hopefully that gives you a sense when we talk about looking at last year, my sense is that 100 million, to the extent we don't have to see that again this year, is something that we would expect to decline year over year. So kind of, if you're looking at it more on a full year basis of stated last year to what we would hopefully expect this year on a more core basis, My guess is it's down in the 3% to 4% type of area. On the compensation, you asked a good question on compensation. And we did see a decline year over year of roughly 110 basis points in compter revenue. And as we mentioned, obviously, that's driven in part by a continued strategy to embrace technology more broadly and to leverage our iHubs. When I talk about iHubs, we now have one in India, we have Budapest, and as you know, we're planning on getting more ramped up in Atlanta. So as we continue to leverage that, that changes the shape of the organization, and obviously, hopefully, scale benefits do the same, which tends to drive our comp to revenue down. This year, we did have lower performance fees, Lower performance fees tend on the margin to have higher comp associated with them because teams get paid and then the rest of the employees get the benefit of that. So I would say that in stable markets and over the long term, we would clearly expect our compensation as a percent of revenue to decline as a function of continued investment and increased scale in our business. We've talked about that resulting in an upward bias. You know, in the near term, I think we could see some lumpiness in that trend. Obviously, beta has declined fairly significantly. We talked about going into the year with a lower, with a 6% lower run rate than last year. We're obviously going to have to make sure that we protect our most important assets, which are our human capital. And, you know, we've been making some recent growth initiatives and things like, obviously, acquisitions around TCP or Tenenbaum. and trying to get our long-term LTPC in place, which is gonna require us to basically make some one-time investments of deferred comp that could run off over the next few years. So I think with that being said, I don't think there's any change in our long-term trend, but we could see a little bit of lumpiness in the near term.

Ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, do you have any closing remarks?

Thank you, operator. Thanks again for everyone joining us this morning and your continued interest in BlackRock. I believe our 2018 results are directly linked to the investments we made over time. The results are deeply connected to our deep partnerships we have developed and built with our clients globally through our solution-based approach. And we are going to continue to leverage our differentiated scale. We're going to continue to invest in the investment in technology capabilities. And I believe it is those investments, those investments in technology, those investments in working with our clients worldwide is going to continue to deliver value to our clients, but just as importantly, value and opportunities for our shareholders. Have a good start of the year. It started off okay, and... Let's hope everyone have a very good 2019. Thanks.

This concludes today's teleconference. You may now disconnect.