Earnings Call Transcript
BlackRock, Inc. (BLK)
Earnings Call Transcript - BLK Q3 2023
Operator, Operator
Good morning. My name is Cynthia, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated Third Quarter 2023 Earnings Teleconference. Our host for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Martin S. Small; President, Robert S. Kapito; and General Counsel, Christopher J. Meade. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. Thank you. Mr. Meade, you may begin your conference.
Christopher Meade, General Counsel
Good morning, everyone. I'm Chris Meade, the General Counsel of BlackRock. Before we begin, I'd like to remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual results may, of course, differ from these statements. As you know, BlackRock has filed reports with the SEC, which list some of the factors that may cause the results of BlackRock to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So with that I'll turn it over to Martin.
Martin Small, CFO
Thanks, Chris, and good morning, everyone. It's my pleasure to present results for the third quarter of 2023. Before I turn it over to Larry, I'll review our financial performance and business results. Our earnings release discloses both GAAP and adjusted financial results. I'll be focusing primarily on our adjusted results. Rate hikes over the last 18 months mean that for the first time in nearly 20 years, clients can earn a real return on cash. In the short term, this has benefited many portfolios. Investors have been able to generate positive returns while waiting for inflation to cool and for more policy certainty from central bankers. This environment has weighed on industry flows, including here at BlackRock, consistent with prior periods of policy uncertainty like 2013, 2016, and 2018. At September's Federal Reserve meeting, central bankers decided to pause, keeping the policy rate steady, but communicated forward guidance that interest rates will stay higher for longer. We think this is good news. It begins to offer investors more clarity about time frames and entry points into fixed income and equities and a path to re-risking global investment portfolios. At BlackRock, we never pause. We've used this period of investor portfolio redesign to stay close to our clients. We're providing insights, advice, and solutions to help clients prepare to deploy assets following greater certainty in markets, terminal rates, and the shape of the yield curve. Clients entrusted BlackRock with $193 billion of total net inflows in the first nine months of 2023, representing 3% annualized organic asset growth. While our clients' decisions to take advantage of safe haven cash as they redesign portfolios are reflected in our third quarter flows, clients are actively engaging to do more with BlackRock. We believe the long-term trend of clients consolidating business with fewer managers will be accelerated as a result of this period. Third quarter gross fund sales were 95% of average levels over the last 12 months, and flows would have been meaningfully positive excluding a $19 billion single client index redemption and $13 billion of market-related precision ETF net outflows, so client momentum remains strong. Today, we manage $9.1 trillion in assets for our clients. These units of trust are $1.1 trillion higher than a year ago. Revenue is 5% higher, operating income is up 7%, and earnings per share increased 14% over this time period. Powering these numbers are clients' increasing use of BlackRock as a platform and staying within our ecosystem of capabilities, combining investment, technology, and portfolio servicing to meet their specific business needs. This platform approach is driving our industry-leading organic growth over the long term. Market fluctuations and client risk appetite may temporarily lift or lower our AUM and revenues. But our focus remains on delivering BlackRock's platform to clients, through access to unique opportunities, expertise, and world-class client service. Our strategy is working, and clients are choosing to build bigger relationships with BlackRock. We've grown our asset base over the long term with over $1 trillion of net inflows since the start of 2021 and over $300 billion of that in just the last 12 months. We know our shareholders and clients have high expectations of BlackRock. We believe in our 5% organic base fee growth target over the long term, and we challenge ourselves to envision what it takes to rise above that target. We've said before that we don't strive to be the fastest grower in any given quarter, but we continue to drive durable, consistent organic growth, well above our peer group over the long term. Third quarter total net inflows were $3 billion and included $49 billion of lower fee institutional index equity redemptions driven by client-specific index allocation changes. Institutional index equity represents less than 3% of BlackRock's total base fees. These lower fee strategies are often only a portion of our clients' overall relationships with BlackRock. For example, results included in the $19 billion redemption from a single client, but the clients are working with us to extend their mandates and active strategies. Total quarterly annualized organic base fee decay of 2% reflected net outflows from higher fee precision ETFs and redemptions in active equity and retail liquid alternatives offerings. Third quarter revenue of $4.5 billion was 5% higher year-over-year driven by organic growth, the impact of market and foreign exchange movements over the last 12 months on average AUM, and higher technology services revenue. Operating income of $1.7 billion was up 7% year-over-year. Earnings per share of $10.91 increased 14%, also reflecting a lower effective tax rate, partially offset by lower non-operating income compared to a year ago. Our as-adjusted tax rate for the third quarter was approximately 12%, reflecting $215 million of discrete tax benefits associated with the resolution of certain outstanding tax matters. We continue to estimate that 25% is a reasonable projected tax run rate for the remainder of 2023. The actual effective tax rate may differ because of nonrecurring or discrete items, or potential changes in tax legislation. Non-operating results for the quarter included $127 million of net investment gains, driven primarily by non-cash mark-to-market gains in the value of our private equity co-investment portfolio. Third quarter base fee and securities lending revenue of $3.7 billion increased 4% year-over-year, reflecting the positive impact of market beta and foreign exchange movements on average AUM, positive organic base fee growth, and higher securities lending revenue. Sequentially, base fee and securities lending revenue was up 2%. On an equivalent day count basis, our annualized effective fee rate was approximately two-tenths of one basis point lower compared to the second quarter. This was due to lower securities lending revenue, underperformance of non-US equity markets, and changing client risk preferences favoring risk-off lower fee exposures. As a result of continued global equity and bond market depreciation toward the end of the third quarter, including the impact of FX-related dollar appreciation, we entered the fourth quarter with an estimated base fee run rate approximately 3% lower than our total base fees for the third quarter. Performance fees of $70 million decreased from a year ago, primarily reflecting lower revenue from liquid alternatives. Quarterly technology services revenue was up 20% compared to a year ago, driven by sustained demand for our technology offerings. Current quarter technology services revenue also benefited from the impact of several large client renewals of their eFront on-premises licenses, for which accounting treatment recognizes a majority of the revenue at time of renewal. Approximately half of the year-over-year technology services revenue increase resulted from these eFront contract renewals. Annual contract value, or ACV, increased 10% year-over-year. We remain committed to low- to mid-teens ACV growth over the long term, driven by demand for Aladdin's broadening technology capabilities and the growing value proposition it presents for clients. Total expense was 4% higher year-over-year. Higher compensation and direct fund expenses were partially offset by lower distribution and servicing costs and G&A. At present, we expect full year 2023 core G&A to fall on the low end of our previously communicated guidance of a mid- to high-single-digit percentage increase. In line with this outlook, we would also expect fourth quarter core G&A to reflect seasonal increases in marketing spend and execution of planned technology investment spend. Our third quarter as-adjusted operating margin of 42.3% was up 30 basis points from a year ago, benefiting in part from the favorable impact of market movements on quarterly revenue over the last year. Our platform strategy has delivered scale and operating leverage through time, and we aim to be disciplined in driving profitable growth. We're prioritizing investments to propel our differentiated organic growth and drive operating leverage. We'll look to find more opportunities to variabilize expenses, generate fixed cost scale through technology and automation, and align investment spend with organic revenue growth potential. Our capital management strategy remains consistent. We invest first, either to scale strategic growth initiatives or drive operational efficiency, and then return excess cash to our shareholders through a combination of dividends and share repurchases. During the third quarter, we closed our acquisition of Kreos Capital, adding venture debt capabilities to our credit and private markets franchises. And earlier this week, we announced a minority investment as part of a strategic partnership with Upvest. Our M&A focus is on extending our capabilities in technology and private markets, tapping into revenue pools of adjacent industries, and building scale. We repurchased $375 million worth of common shares in the third quarter. At present, based on our capital spending plans for the year and subject to market conditions, we still anticipate repurchasing at least $375 million of shares in the fourth quarter, consistent with our previous guidance in January. BlackRock had $3 billion of total net inflows in the third quarter, which were impacted by $49 billion of low-fee institutional index equity redemptions. BlackRock was not immune to an overall slowing of investor activity, but we once again outperformed in what has been a challenging industry environment. Momentum in our ETF business continued with $29 billion of net inflows in the third quarter, led by core equity and fixed income ETF net inflows of $34 billion and $12 billion, respectively. Overall, ETF flows were impacted by redemptions concentrated in certain market-driven precision and fixed income products. The fourth quarter has historically been the strongest quarter of ETF flows for BlackRock when we've seen on average 35% of our annual ETF net inflows. BlackRock typically has been a large beneficiary of ETF industry seasonality related to year-end rebalancing and tax planning. In line with these historical results, we'd expect to see an acceleration in iShares ETF flows as we get closer to the end of 2023. With safe haven cash providing positive returns, retail net outflows of $4 billion primarily reflected industry pressure in active equities and liquid alternatives, partially offset by continued strength in SMAs through Aperio. Institutional index net outflows of $36 billion reflected the previously mentioned low-fee index equity redemptions. Our institutional active franchise experienced $1 billion of net outflows, primarily from active fixed income, which was impacted by a handful of client-specific partial redemptions, including reinsurance activity. These outflows were partially offset by continued demand for our target date, illiquid alternatives, and outsourcing capabilities. We've built our private markets capabilities over multiple years, and we continue to see strong demand for our illiquid alternative strategies. We generated nearly $3 billion of net inflows in the third quarter, driven by infrastructure and private credit. We're only seeing bigger and better private markets opportunities for BlackRock and for our clients. BlackRock's relationships across the world drive our differentiated deal flow. Deal flow alongside great teams with great tech and great data means we can deliver differentiated investment performance and grow vintage over vintage. We're investing as we scale our private markets platform by using our financial strength to bridge successor funds, facilitate growing co-investment activity, and seeding new fund launches. These investments can unlock future revenue and earnings potential for our shareholders. Finally, cash management net inflows were $15 billion in the quarter. Money market funds have returned to earning yields not seen in nearly two decades. We're leveraging our scale and integrated cash offerings to engage with clients who are using cash not only to manage liquidity but also to earn attractive returns. The current macro environment is causing some clients to pause, slowing overall activity in the asset management industry. Nevertheless, BlackRock has delivered positive organic asset and base fee growth over the last 12 months. We see significant opportunity to deepen relationships and consolidate our share with clients as they resume actively allocating assets. We're staying connected with our clients and positioning for what we believe can be massive growth unlocks. Looking ahead, we believe our platform strategy will continue to deliver for both our clients and shareholders, resulting in sustained market-leading organic growth, differentiated operating leverage, and earnings and multiple expansion over time. With that, I'll turn it over to Larry.
Laurence Fink, CEO
Thank you, Martin. Good morning, and thank you all for joining the call. I'd like to begin by saying that our thoughts are with everyone who has friends, family, or loved ones impacted by terrorist acts in Israel. The violence and the loss of innocent lives have been shocking and truly heartbreaking. We at BlackRock will continue to do everything we can to support our colleagues and all our clients in the region. Turning to our results, clients have always been at the center of BlackRock's growth strategy. I believe that BlackRock is better positioned today than ever before to help our clients achieve the long-term outcomes they need. We are having comprehensive conversations with clients globally on how we can partner with them to navigate a new market regime and capitalize on investment opportunities. BlackRock is uniquely positioned in this environment to serve our clients with integrated advisory, investment management, and technology expertise, something no other asset manager can provide. Sustained organic growth and market appreciation has led to a $1.1 trillion increase in BlackRock's AUM, alongside margin improvement and 14% growth in earnings per share over the last 12 months. Clients have entrusted us with over $300 billion in net inflows over the same time period. Technology service revenues increased 20% year-over-year, reflecting sustained demand for Aladdin and eFront renewals from several large clients. We remain committed to delivering differentiated organic growth and margin. We've invested ahead of major opportunities for BlackRock in private markets, technology, and whole portfolio solutions. Through disciplined execution, we aim to both grow client assets and drive profitable growth, unleashing financial success for our clients alongside revenue and earnings power for our shareholders. Structural and secular changes in business models, technology, and most of all monetary and fiscal policy have made the last two years extremely challenging for traditional asset management, with a majority of industry players seeing outflows. BlackRock's differentiated business model has enabled us to grow consistently with our clients and maintain positive organic base fee growth since 2022. Investors face continued uncertainty. The S&P saw its best start to July in 26 years, but retreated in August and September. Central banks are being forced to keep policies tight as they lean against inflationary pressures. Two and 10-year treasuries climbed to 16-year highs as investors anticipated rates remaining higher for longer. Rapid advancements in technology and artificial intelligence, the rewiring of globalization, the transition to a low-carbon economy, aging populations, and a fast-evolving financial system are all macro trends clients are evaluating. As market dynamics shift and uncertainty increases, clients are pausing to think about the future, assessing their options, and seeking out BlackRock to take action. BlackRock's quarterly net inflows were not immune to an overall industry slowdown, as Martin discussed. Of course, I'm disappointed when we have softer flow quarters, but the long-term trends of clients consolidating more of their portfolios with BlackRock are only accelerating. Rate hikes over the past year and a half, the fastest in the US since the early 1980s, have made cash not just a safe place, but now a very profitable place for investors to wait for the time being. In short, investors are being paid to wait, something we haven't seen to this degree in years. Investors can earn 5% to 7% from conservative cash and bond portfolios. This dynamic reduces the near-term incentive to implement portfolio changes, resulting in temporarily slower client activity inflows. The degree to which investors have hunkered down in cash is shown by nearly $7 trillion in money market funds AUM across the industry. Investors will eventually put that money to work. We've seen this dynamic before, as recently as 2016 and 2018, when policy uncertainty and the ability to earn yields and cash resulted in temporary slowdowns in activity. Through these times, BlackRock stayed connected with our clients, connected across our businesses, and what immediately followed those periods in the past were new records for BlackRock client flows and organic base fee growth at or above the 5% target. We expect that investors will begin redeploying assets once there's conviction in a terminal rate and the shape of the yield curve. We've seen that effect play out in prior cycles, most recently following the Fed pause in 2019, when flows rebounded, particularly in fixed income. BlackRock's integrated platform and deep, longstanding relationships with clients position us to be a major beneficiary once flows return. We are the only asset manager delivering our platform as a service. Clients entrust us with $9.1 trillion in assets, and we are serving them with excellence. We lead our industry in delivering accessibility, affordability, and innovation. Times of uncertainty are often when transformational opportunities emerge. Moments in our history like this have led to new ideas, led to new partnerships and acquisitions. BlackRock has a strong track record of successful transformational M&A. Most people think of BGI and MLM when I say that, but I also think of acquisitions like eFront and Aperio. They have been smaller in size, but were also transformational in their own way. In both, we anticipated and delivered on our clients' needs. We scaled strong existing technologies and built new revenue streams for our shareholders. Organic growth in Aperio has been over 20% since our acquisition, and eFront revenues have grown nearly 50%, while also strengthening our value proposition and positioning in Aladdin and private markets. BlackRock has been a successful acquirer, and today advancements in technology and AI, scaling of private markets, and more attractive valuations mean BlackRock is once again becoming increasingly engaged in M&A trend discussions. What made our acquisition so successful was our enduring commitment to fuse the best of the acquired companies into a stronger and faster-growing BlackRock, fully connecting all parts of the firm to our clients. We have a proven history of realizing long-term benefits in areas of expansion. Today, we're similarly connecting with our partners across markets to lay the groundwork for future growth. In July, we announced an agreement to form Jio BlackRock, a 50-50 joint venture with Jio Financial Services, an entity carved out of Reliance Industries. India has been an integral part of the global platform, and BlackRock is one of the largest international investors in India today, with nearly 15% of our colleagues located across multiple offices in the country. India offers enormous opportunities. Jio BlackRock represents a powerful new partnership in a fast-growing market, where we see the potential to revolutionize India's asset management industry. We look forward to expanding our footprint with the ambition to improve the financial futures for millions of investors in India. BlackRock is working in India and markets around the world to lower the barriers to investing through accessible, affordable, and transparent solutions. Another example of the new growth opportunities is our partnership and agreement announced last month for BlackRock to be the asset manager partner of Monzo. Monzo is the UK's leading digital bank, and we are launching a new investment offering for their eight million customers. Since the launch, more than 250,000 Monzo clients have joined the waiting list for this new offering. Just earlier this week, we announced our partnership with Upvest to drive innovation in how Europeans access markets and make it cheaper and simpler to start investing. What we have seen is that we can make investing easier and more affordable, quickly attracting new clients. For first-time investors, the preferred way of investing is through ETFs, specifically iShares. Through investment and innovation, we've evolved our iShares ETF franchise to meaningfully increase access to global markets. This includes access for tens of millions of new investors. It also includes access for our most seasoned clients to use our ETF technology to actively allocate across all types of markets. BlackRock's ETF platform delivers industry-leading performance, choice, and scale. With growing use cases, diversification, and customization, ETFs and indexes are increasingly an important component of active management. Across our ETFs, BlackRock generated net inflows of $29 billion in the third quarter and nearly $100 billion year-to-date. Flows in core equity and fixed income ETFs were partially offset by redemptions in precision ETFs in August and September, something we expect and have seen before in risk-off environments as clients use our ETFs to actively manage their portfolios. These tactical allocation tools are unique to BlackRock, and their high utilization reinforces the value proposition associated with iShares' strong secondary market liquidity, its unique options, and lending markets. BlackRock's market-driven, long-duration fixed income products were also an important tool for investors to rotate into a longer duration position. The breadth of our ETF platform enables us to capture changes in client demand, keeping investors within BlackRock. For example, iShares treasury funds were three of the top five grossing bond ETFs in the industry as investors shifted duration preferences in the quarter. Our market-leading levels of performance and liquidity helped our clients nimbly reposition as market conditions evolved. As we approach peak interest rates, we expect a resurgence in fixed-income flows, with clients capitalizing on higher yields. BlackRock is well positioned to benefit from this reallocation with our comprehensive $2.6 trillion fixed income platform. Going back to the periods immediately following the taper tantrum in 2013 or the Fed pause in early 2019, the industry saw a quick rebound in fixed income flows following rate stability. Both BlackRock ETFs and our active fixed income funds were large beneficiaries at that time. Our conversations with clients aren't just about active and index; we work with clients to understand their investment challenges, helping them shape and execute strategic portfolio construction decisions. BlackRock is the only asset manager that can deliver outcomes in the context of clients' whole portfolios across market classes, asset classes, investment styles, public and private markets. Organizations are increasingly turning to private markets for their capital and financing needs, leading to bigger and better investment opportunities for BlackRock and our clients. BlackRock's worldwide network of relationships with corporations and governments, sourcing capabilities, and a rigorous selection process help us deliver unique solutions and drive performance for our clients across private market asset classes. In the third quarter, we announced that BlackRock is partnering with the New Zealand government to launch an over $1 billion climate infrastructure strategy. BlackRock's Decarbonization Partners joint venture also reached $1 billion in committed capital for its first round and has now invested in five portfolio companies. These initiatives are a real example of BlackRock's long-standing relationship with clients and how we deliver the entirety of our platform to pioneer solutions and meet our clients' evolving needs. We're also effectively scaling successor funds in private markets, delivering larger funds through raises of subsequent fund vintages. For example, we're on the 10th vintage of our flagship US Private Lending Fund. And we're in the market with a fourth vintage of our global diversified infrastructure equity fund series. Infra IV already raised $4.5 billion in initial investor commitments at the first close last year, achieving over half its targeted size. This is the next phase of successful scaling of the franchise. In 2020, our third fund in the series raised a total of $5 billion, surpassing the total assets of vintages one and two combined. Strong investment performance is critical to this momentum. Our flagship private equity fund currently stands at more than a 35% net IRR. We've seen double-digit net returns this year in our flagship private credit strategies. BlackRock's proprietary differentiated deal flow is what drives long-term investment performance and outcomes for clients. Our global network of relationships, data and analytics, and flexible, adaptable capital needs help us source unique deals for our clients, and we are increasingly finding that opportunities seek us as much as we seek them. Companies want BlackRock as an investor and partner, recognizing the uniqueness of our global reach, brand, and expertise across markets and industries. Our growing profile from investments around the world in the US, Europe, and Asia is leading to more and larger deal opportunities. BlackRock's global relationships and expertise in sourcing and underwriting, portfolio and risk management, and technology and analytics allow us to unlock unique deals for clients. At the same time, our growing momentum in private markets is delivering value for our shareholders through organic growth and less beta-sensitive revenues. Years ago, we anticipated how clients would benefit from alternative investments being evaluated inside a portfolio-level risk management framework. This led to the combination of eFront and Aladdin, which has set a new standard in investment and risk management technology. The acquisition of eFront opened up a new segment of alternative GPs and asset services, and most importantly, enabled us to help clients across their whole portfolio. Our acquisition and integration of eFront continues to be transformational for clients. We're seeing strong demand both on a standalone basis and for whole portfolio solutions across public and private assets. We now have a data platform and business that covers 13,000 funds and over 150,000 assets, a significant portion of the private market fund universe. We're redefining the industry expectations of transparency in private markets. Nearly half of Aladdin's clients are leveraging our newer offerings, including eFront, which is a true competitive advantage in the tech market. As Martin spoke to, you saw eFront's contribution reflected in this quarter's tech results. Investors and advisors are increasingly choosing a small number of scale technology platforms that offer everything in their ecosystem in one place. Aladdin works seamlessly alongside other aspects of client investment processes and tech stack, serving as a foundation while enabling clients to create custom solutions to meet their specific needs. To get here, we also have developed deep integration with custodial banks, fund accountants, broker-dealers, and other leading ecosystem partners. This flexibility and choice are just some of the reasons clients are entrusting us with the growing numbers of their portfolios. Going forward, we are confident that clients will continue to turn to Aladdin to unify their investment management process. BlackRock's willingness to reimagine our business, our ambition to partner comprehensively with our clients, and our drive to innovate ahead of their needs is translating into broader, deeper relationships, and we see an incredible opportunity in front of us. We remain intensely focused on staying close to our clients, especially during periods of market volatility and rising uncertainty. Clients are coming to us for advice, for solutions tailored to this macroeconomic environment, wanting to do more with BlackRock. Horizontal connectivity is critical. Our leadership team and the entire organization are coming together to differentiate ourselves in delivering for clients today and preparing to capture the money in motion we anticipate in the near future. As I've always done, I'm challenging our teams to continue to innovate and stay perpetually aware of our clients' needs. BlackRock will continue to lead in creating more access and connections between long-term investors, capital markets, and the real economy. I'm incredibly excited about the opportunities I see for our clients and especially for BlackRock, which will then lead to growth for you, our stakeholders. Let us now open it up for questions.
Operator, Operator
Your first question comes from Craig Siegenthaler with Bank of America. Please go ahead.
Laurence Fink, CEO
Hello, Craig.
Craig Siegenthaler, Analyst
Hey, good morning, Larry. Hope everyone is doing well.
Laurence Fink, CEO
Absolutely.
Craig Siegenthaler, Analyst
So my question is on the organic growth outlook. There were several low fee redemptions in the quarter. And also given that we're in year three of a bond bear market, your flows are arguably depressed versus a longer-term run rate. So, how do you think about the organic growth trajectory and the potential money in motion? And specifically, do you expect to see a pickup in fixed income flows once the Fed is done raising, which could be very soon here?
Martin Small, CFO
Thanks, Craig. It's Martin. Let me just say a few things about organic growth and the outlook. In the last 12 months, we've delivered positive organic asset and revenue growth, $300 billion in flows over the last year, and $193 billion year-to-date. We, as I mentioned, have conviction in our 5% base fee target over the long term. We've reached it on average over the last five years and met or exceeded it in seven out of the last ten. Our 5% organic growth target is better than 3% industry estimates. We feel it's reasonable and attainable based on our product breadth, solutions orientation, and technology capabilities. When the management team looks at our client engagement and sales measures, we see good momentum. As I mentioned in my comments, our Q3 gross fund sales were at 95% of average levels over the last 12 months. So we see those as good measures of engagement and our activity with clients. On the flows, we see them as marked by this offsetting activity across our platform with some specific client moves. The way I look at it, Craig, is, on one hand, we had a combined $60 billion in net inflows: $29 billion from ETFs, over $13 billion in institutional multi-asset and target date in OCIO, and $50 billion of cash. On the other hand, this was offset by the $50 billion of institutional index equity redemptions, with $19 billion from one non-US client. In assessing how we're doing, the conversations with our clients, the momentum we have, we think the flows would have been very positive, but for these rebalancing moves. As Larry mentioned, they happen from time to time, and they have very little impact on base fees. It's a low-single-digit point basis business, sub-3% of our revenue. We manage close to $2 trillion of institutional index equity, and we think it's a good business. These large AUM index relationships have meaningful franchise value beyond fee rates. A large mandate of index assets, as Larry mentioned, is typically only part of our overall relationship with a client, which has active alternatives, ETFs, or advisory. You have to be a scaled player to be in the large index market. This is the business we're in, and from time to time, it can impact the flow number, and that's something we don't manage quarter-to-quarter. We look at over the long term. On organic base fee growth, I think it's good to simplify this, Craig. Q3 base fees were impacted by mix, primarily from two areas: $13 billion of redemptions from precision ETFs, which Larry mentioned are unique to BlackRock and important vehicles for clients, and also part of our platform strategy in terms of how clients stay with iShares and move from EM to DM to high yield to treasuries, and we had $2.5 billion of outflows from retail liquid alternatives. Remember, Craig, because I know you love the page, from our Investor Day we showed the average fee rates across different segments of our products and services. The order of magnitude of base fee decay would be over $60 million. I hope that gives you a sense of what weighed on base fee growth this quarter. It's largely in those areas that we know have long-term franchise value, have grown over time, and contributed to earnings. But in any quarter-to-quarter, they may weigh on the fee rate and base fee growth. Over a cycle, Craig, we see a clear path to 5% plus organic base fee growth with our platform strategy. We keep growing and scaling private markets, re-risking global investment portfolios. We're continuing to see high-teens growth in tax-managed direct indexing with Aperio. Rob will discuss the generational opportunity in active fixed income and bond ETFs, model portfolios and iShares, where we think half our ETF growth will come through models. We still see big opportunities to continue to hit those targets and beyond. Rob, would you like to add something about fixed income?
Robert Kapito, President
I think most of the questions are going to concern the why, the where, and the when. The yield curve is the most inverted that it's been since the 1980s. Investors are really getting paid to wait. Money market funds have nearly $7 trillion in assets under management. As we approach the peak in interest rates, we expect some very large allocations to fixed income, something some may call the great reallocation. Today, there are better opportunities to invest in bonds than have been in years. Over 80% of the bond market is yielding over 4%, enabling investors to derive a large part of their liability needs from owning bonds and access returns with less risk. So, as Martin just said, we are well-positioned to benefit from this reallocation with our comprehensive $2.6 trillion fixed income platform, which spans unconstrained total return, municipals, and the entire yield curve. So, with more money in motion, BlackRock will benefit as clients build fixed income allocations alongside higher-performing active strategies and ETFs, with particular focus on the short end of the curve and private credit. When? We've seen historically a rebound in fixed income following rate stability. This year's yield spikes have been mostly from market re-pricing and expectations concerning policy rates. There is concern over US debt levels and large treasury issuance, and investors are demanding a higher premium. Historically, after periods of uncertainty, like the taper tantrum in 2013 or the Fed pause in early 2019, we've seen quick rebounds in fixed income flows. The moment we see more certainty on a terminal rate and the yield curve shape, we expect acceleration in demand for immediate and longer duration fixed income.
Operator, Operator
Your next question comes from Michael Cyprys with Morgan Stanley. Please go ahead.
Laurence Fink, CEO
Good morning, Michael.
Michael Cyprys, Analyst
Hey, good morning. Question on M&A. Larry, you've suggested that you're open to large transformational M&A. I was just hoping you can articulate why that is the case. What's changed versus a couple of years ago, as I don't recall you mentioning large transformational M&A a couple of years ago? Maybe you could talk about some of your objectives and aspirations there, and if you could help clarify what might be the focus area versus maybe what's off the list completely.
Laurence Fink, CEO
The foundation of the firm was Milliman and the BGI transaction. We've been active in deals and partnerships, whether it's the Jio BlackRock partnership that we're working on, which is transformational. That's not an M&A deal. But our Aperio deal and our eFront deal are great examples of execution and precision, with a 20% and 50% increase in revenues, respectively, in both those businesses. Looking back, we spent about $4 billion on M&A over the last five years. Now, I'm challenging all of us, including myself, about what are the ecosystem changes that are happening today. If you look back when we did the big transactions, there was a lot in the market on settlement, and there's quite a bit going on now with big shifts. We're looking at opportunities related to technology and private markets. We're engaged in conversations, and we’re challenging ourselves to think more broadly and openly about the opportunities we have. We see different opportunities, and so we are engaged in lots of conversations right now, probably more than we have been in many years. We’ll see how this all plays out.
Operator, Operator
Your next question comes from Alex Blostein with Goldman Sachs. Please go ahead.
Laurence Fink, CEO
Good morning, Alex.
Alexander Blostein, Analyst
Hi, good morning, Larry. I appreciate the comments earlier. Maybe just another one around M&A. It sounds like you have a pretty wide lens through which you're considering different targets or partnerships. Can you remind us about financial targets for a potential deal for BlackRock in terms of EPS accretion? And any other kind of framework you could put around what a potential deal could look like?
Laurence Fink, CEO
I'm going to hand it off to Martin.
Martin Small, CFO
Hi, Alex. It's Martin. How are you? The centerpiece and hallmark of the M&A strategy has always been to accelerate organic growth. It's been about developing capabilities that we don't have and de-risking capabilities that we're building. When you look at eFront, Aperio, and many of the transactions Larry has shared, that's been at the center of the strategy. In the last five years, we've spent about $4 billion on M&A. We're not capital-constrained, and we have ample debt capacity. Our goal is to drive earnings acceleration and deliver more for our clients through M&A.
Laurence Fink, CEO
I would add that we have a lot of debt capacity and a lot of opportunities. We're refocusing on where we can be additive. When we integrate firms, we will not be a boutique. We will be organizing it and building it out. We love the opportunity of having Aperio as part of a big organized firm. We will not build a boutique of different fragments. We're building a unified organization, adding revenues, client connectivity, reach in technology, and reach in product.
Operator, Operator
Your next question comes from Daniel Fannon with Jefferies. Please go ahead.
Laurence Fink, CEO
Hi, Dan.
Daniel Fannon, Analyst
Thanks. Good morning. Hi. Another question on flows, active equities, and alternatives, both higher fee segments and, I think, key contributors to you hitting your long-term base fee target. Can you talk about the trends in those businesses outside of maybe just the seasonal stuff for Q3? But really, as we think about the next 12 months, 24 months, the kind of funds and growth outlook you think for both, obviously, alternatives, but then also the active equity segment?
Martin Small, CFO
Thanks very much for the question. The active equities business at BlackRock has shown strong performance over the last three years, generating over $30 billion in active equity net inflows while our average AUM has grown by 34%. While we expect to see some rotations out of equities and into cash, which has been a main theme of this call, we again envision strong growth in the business. Over time in our product strategy, we're adding transparent active ETFs, which will help grow our active equity and other active businesses. We view them as integral to our base fee growth strategy.
Robert Kapito, President
Let me just add, we need to be careful about defining what we call active, as people are active with both their index and ETFs through models. I'm optimistic about active flows because we are in an environment where there are better opportunities to add alpha than before. We've seen $65 billion of active net inflows year-to-date in 2023, which compares to industry outflows. Demand remains strong in private markets and LifePath. Since 2019, positive active flows have occurred in 16 out of 19 quarters. A lot of that depends on performance. We've kept our promise to clients, which will drive active inflows going forward.
Laurence Fink, CEO
I want to emphasize that we're committed to enlarging our iShares platform globally. Looking at trends in ETFs year-to-date, ETF flows in Europe are up 70%. In the US, ETF flows are lower than last year. As we continue to build out our platform globally, we become large beneficiaries. What's happening in Europe, the rise of its capital markets, and the use of ETFs as instruments of active management and passive exposures are providing significant market share opportunities.
Operator, Operator
Your next question comes from Brian Bedell with Deutsche Bank. Please go ahead.
Laurence Fink, CEO
Good morning, Brian.
Brian Bedell, Analyst
Great. Thanks. Good morning. Maybe, Rob, if we could just go back to institutional fixed income and the prospect of pension plans immunizing their portfolios given how much longer-term bond yields have improved. What do you sense is the potential magnitude of that switch to immunizing plans as you talk with your clients, and what's the timing? Are they also waiting for yields to peak before doing that, or is it more seasonal, something that might actually happen by year-end?
Laurence Fink, CEO
Great question. We've consistently seen large-scale immunization in the UK pension fund world, a major component of that market, find benefit plans have been immunized already. Over the last five years, about $4 billion to $6 billion have moved out and been immunized. I don't foresee that happening yet in a 5% or 4.5% environment. If long rates do peak at 5.5% or 6%, and the yield curve steepens instead of flattening or inverting, we will start to see more interest. There will be a significant de-risking as some funds seek to move out of equities. Significant interest exists with many pension funds looking to improve returns in credit and infrastructure.
Robert Kapito, President
That's an excellent question, and I think we can agree that we haven't heard the word immunization for a long time. Several pension plans have visited us, discussing that. It's rate-driven. The target is probably around 7% that they would need to achieve. A long time ago, one could construct a bond portfolio and achieve a 7.5% return. If the environmental conditions we discussed support that, we can anticipate a shift toward immunizing portfolios. Many organizations are looking toward OCIO business to facilitate appropriate reallocations. We're positioned to benefit significantly from this.
Operator, Operator
Your next question comes from Brennan Hawken with UBS. Please go ahead.
Laurence Fink, CEO
Hi, Brennan. How are you?
Brennan Hawken, Analyst
Hey, good morning. Thanks for taking my question. Just kind of curious about thinking about expenses here. Martin, you spoke to coming into the low end of the range on the core G&A. Right now, it's probably time when you all are beginning to sharpen your pencils on the budgets for next year. The environment—BlackRock is incredibly well-positioned, as you've hit on several times today—but the environment is challenging. How are you thinking about 2024? And how should we think about that as we refine our models today? Thanks.
Martin Small, CFO
Thanks, Brennan. Just to reiterate, we expect full-year G&A to fall on the low end of our previously communicated guidance of mid- to high-single-digit percentage increase. We expect to keep our headcount broadly flat for this year, as we've said in the last two quarters. I’ll touch on the outlook for expense and margin. Our strategy remains focused on delivering organic growth, differentiated premium operating margin, and a consistent capital management policy. We're concentrating on investing for profitable growth. Operating leverage in a higher for longer rate environment is key. We've been using AI and advanced technology to streamline transactions and site servicing. Our total annual operating expense of about $11 billion includes substantial fixed investments in our talented team. Tools that enhance productivity—like large language models and a better CRM—are crucial to ensure long-term profitable growth. We also have exciting investments in commercial partnerships with TAMPs, neo-brokers, or digital wealth platforms that will enhance our resilience. Our 2024 budget will focus on optimizing organic growth efficiently while expanding our premium margins over time.
Operator, Operator
Ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, do you have any closing remarks?
Laurence Fink, CEO
Thank you, operator. Thank you, everyone, for joining us today and your continued interest in the organization. BlackRock's underlying business momentum remains incredibly strong. We believe there is more money to be put to work as investors glean clarity on the path of rate movements, related to geopolitical issues, and more people seeking opportunities with BlackRock. I see great opportunities ahead for our clients and look forward to delivering more opportunities for you, our shareholders, and our investors. Thank you for your continued interest. Have a good quarter.
Operator, Operator
This concludes today's teleconference. You may now disconnect.