BlackRock, Inc. (BLK) Q3 2023 Earnings Call

BlackRock, Inc. (NYSE:BLK) Q3 2023 Earnings Conference Call October 13, 2023 7:30 AM ET

Company Participants

Christopher Meade - General Counsel and Chief Legal Officer

Martin Small - Chief Financial Officer

Laurence Fink - Chairman and Chief Executive Officer

Robert Kapito - President

Conference Call Participants

Craig Siegenthaler - Bank of America

Michael Cyprys - Morgan Stanley

Alexander Blostein - Goldman Sachs

Daniel Fannon - Jefferies

Brian Bedell - Deutsche Bank

Brennan Hawken - UBS

Operator

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

Mr. Meade, you may begin your conference.

Christopher Meade

Good morning, everyone. I'm Chris Meade, the General Counsel of BlackRock. Before we begin, I'd like to remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual results may, of course, differ from these statements.

As you know, BlackRock has filed reports with the SEC, which lists some of the factors that may cause the results of BlackRock to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements.

So with that I'll turn it over to Martin.

Martin Small

Thanks, Chris, and good morning, everyone. It's my pleasure to present results for the third quarter of 2023. Before I turn it over to Larry, I'll review our financial performance and business results. Our earnings release discloses both GAAP and as-adjusted financial results, I'll be focusing primarily on our as-adjusted results.

Rate hikes over the last 18 months mean that for the first time in nearly 20 years, clients can earn a real return in cash. In the short-term, this has benefited many portfolios. Investors have been able to generate positive returns while waiting for inflation to cool and for more policy certainty from central bankers. This weighting has weighed on industry flows, including here at BlackRock, consistent with prior periods of policy uncertainty like 2013, 2016 and 2018.

At September's Federal Reserve meeting, central bankers decided to pause, keeping the policy rate steady, but communicated forward guidance that interest rates will stay higher for longer. We think this is good news. It begins to offer investors more clarity about time frames and entry points into fixed income and equities and a path to re-risking global investment portfolios.

At BlackRock, we never pause. We've used this period of investor portfolio redesign to stay close to our clients. We're providing insights, advice, and solutions to help clients prepare to deploy assets following greater certainty on markets, terminal rates, and the shape of the yield curve.

Clients entrusted BlackRock with $193 billion of total net inflows in the first nine months of 2023, representing 3% annualized organic asset growth. While our clients' decisions to take advantage of safe haven cash as they redesign portfolios are reflected in our third quarter flows, clients are actively engaging to do more with BlackRock. We believe the long-term trend of clients consolidating business with fewer managers will be accelerated as a result of this period.

Third quarter gross fund sales were 95% of average levels over the last 12 months, and flows would have been meaningfully positive excluding a $19 billion single client index redemption and $13 billion of market-related precision ETF net outflows, so client momentum remains strong.

Today, we manage $9.1 trillion in assets for our clients. These units of trust are $1.1 trillion higher than a year ago. Revenue is 5% higher, operating income is up 7%, and earnings per share increased 14% over this time period. Powering these numbers are clients' increasing use of BlackRock as a platform and staying within our ecosystem of capabilities, combining investment, technology, and portfolio servicing to meet their specific business needs.

This platform approach is driving our industry-leading organic growth over the long-term. Market fluctuations and client risk appetite may temporarily lift or lower our AUM and revenues. But our focus remains on delivering BlackRock's platform to clients, through access to unique opportunities, expertise, and world-class client service.

Our strategy is working, and clients are choosing to build bigger relationships with BlackRock. We've grown our asset base over the long-term with over $1 trillion of net inflows since the start of 2021 and over $300 billion of that in just the last 12 months. We know our shareholders and clients have high expectations of BlackRock.

We believe in our 5% organic base fee growth target over the long-term, and we challenge ourselves to envision what it takes to rise above that target. We've said before that we don't strive to be the fastest grower in any given quarter, but we continue to drive durable, consistent organic growth, well above our peer group over the long-term.

Third quarter total net inflows were $3 billion and included $49 billion of lower fee institutional index equity redemptions driven by client-specific index allocation changes. Institutional index equity represents less than 3% of BlackRock's total base fees. These lower fee strategies are often only a portion of our clients' overall relationships with BlackRock. For example, results included in the $19 billion redemption from a single client, but the clients working with us to extend its mandates and active strategies.

Total quarterly annualized organic base fee decay of 2% reflected net outflows from higher fee precision ETFs and redemptions in active equity and retail liquid alternatives offerings. Third quarter revenue of $4.5 billion was 5% higher year-over-year driven by organic growth, the impact of market and foreign exchange movements over the last 12 months on average AUM, and higher technology services revenue.

Operating income of $1.7 billion was up 7% year-over-year. Earnings per share of $10.91, increased 14%, also reflecting a lower effective tax rate, partially offset by lower non-operating income compared to a year ago.

Our as-adjusted tax rate for the third quarter was approximately 12%, reflecting $215 million of discrete tax benefits associated with the resolution of certain outstanding tax matters. We continue to estimate that 25% is a reasonable projected tax run rate for the remainder of 2023. The actual effective tax rate may differ because of nonrecurring or discrete items, or potential changes in tax legislation.

Non-operating results for the quarter included $127 million of net investment gains, driven primarily by non-cash mark-to-market gains in the value of our private equity co-investment portfolio. Third quarter base fee and securities lending revenue of $3.7 billion increased 4% year-over-year, reflecting the positive impact of market beta and foreign exchange movements on average AUM, positive organic base fee growth, and higher securities lending revenue.

Sequentially, base fee and securities lending revenue was up 2%. On an equivalent day count basis, our annualized effective fee rate was approximately two-tenths of one basis point lower compared to the second quarter. This was due to lower securities lending revenue, underperformance of non-US equity markets, and changing client risk preferences favoring risk off lower fee exposures.

As a result of continued global equity and bond market depreciation toward the end of the third quarter, including the impact of FX-related dollar appreciation, we entered the fourth quarter with an estimated base fee run rate, approximately 3% lower than our total base fees for the third quarter. Performance fees of $70 million decreased from a year ago, primarily reflecting lower revenue from liquid alternatives.

Quarterly technology services revenue was up 20% compared to a year ago, driven by sustained demand for our technology offerings. Current quarter technology services revenue also benefited from the impact of several large client renewals of their eFront on-premises licenses, for which accounting treatment recognizes a majority of the revenue at time of renewal.

Approximately half of the year-over-year technology services revenue increase resulted from these eFront contract renewals. Annual contract value, or ACV, increased 10% year-over-year. We remain committed to low- to mid-teens ACV growth over the long-term, driven by demand for Aladdin's broadening technology capabilities and the growing value proposition it presents for clients.

Total expense was 4% higher year-over-year. Higher compensation and direct fund expenses were partially offset by lower distribution and servicing costs and G&A. At present, we expect full year 2023 core G&A to fall on the low end of our previously communicated guidance of a mid- to high-single-digit percentage increase. In line with this outlook, we would also expect fourth quarter core G&A to reflect seasonal increases in marketing spend and execution of planned technology investment spend.

Our third quarter as-adjusted operating margin of 42.3% was up 30 basis points from a year ago, benefiting in part from the favorable impact of market movements on quarterly revenue over the last year. Our platform strategy has delivered scale and operating leverage through time, and we aim to be disciplined in driving profitable growth.

We're prioritizing investments to propel our differentiated organic growth and drive operating leverage. We'll look to find more opportunities to variabilize expenses, generate fixed cost scale through technology and automation, and align investment spend with organic revenue growth potential.

Our capital management strategy remains consistent. We invest first, either to scale strategic growth initiatives or drive operational efficiency, and then return excess cash to our shareholders through a combination of dividends and share repurchases.

During the third quarter, we closed our acquisition of Kreos Capital, adding venture debt capabilities to our credit and private markets franchises. And earlier this week, we announced a minority investment as part of a strategic partnership with Upvest. Our M&A focus is on extending our capabilities in technology and private markets, tapping into revenue pools of adjacent industries, and building scale.

We repurchased $375 million worth of common shares in the third quarter. At present, based on our capital spending plans for the year and subject to market conditions, we still anticipate repurchasing at least $375 million of shares in the fourth quarter, consistent with our previous guidance in January.

BlackRock had $3 billion of total net inflows in the third quarter, which were impacted by $49 billion of low fee institutional index equity redemptions. BlackRock was not immune to an overall slowing of investor activity, but we once again outperformed in what has been a challenging industry environment.

Momentum in our ETF business continued with $29 billion of net inflows in the third quarter, led by core equity and fixed income ETF net inflows of $34 billion and $12 billion, respectively. Overall, ETF flows were impacted by redemptions concentrated in certain market-driven precision and fixed income products.

The fourth quarter has historically been the strongest quarter of ETF flows for BlackRock when we've seen on average 35% of our annual ETF net inflows. BlackRock typically has been a large beneficiary of ETF industry seasonality related to year-end rebalancing and tax planning. In line with these historical results, we'd expect to see an acceleration in iShares ETF flows as we get closer to the end of 2023.

With safe haven cash providing positive returns, retail net outflows of $4 billion primarily reflected industry pressure in active equities and liquid alternatives, partially offset by continued strength in SMAs through Aperio. Institutional index net outflows of $36 billion reflected the previously mentioned low fee index equity redemptions.

Our institutional active franchise experienced $1 billion of net outflows, primarily from active fixed income, which was impacted by a handful of client-specific partial redemptions, including reinsurance activity. These outflows were partially offset by continued demand for our target date, illiquid alternatives, and outsourcing capabilities

We've built our private markets capabilities across multiple years and we continue to see strong demand for our illiquid alternative strategies. We generated nearly $3 billion of net inflows in the third quarter, driven by infrastructure and private credit. We're only seeing bigger and better private markets opportunities for BlackRock and for our clients.

BlackRock's relationships across the world drive our differentiated deal flow. Deal flow alongside great teams with great tech and great data mean we can deliver differentiated investment performance and grow vintage over vintage. We're investing as we scale our private markets platform by using our financial strength to bridge successor funds, facilitate growing co-investments activity and seeding new fund launches. These investments can unlock future revenue and earnings potential for our shareholders.

Finally, cash management net inflows were $15 billion in the quarter. Money market funds have returned to earning yields not seen in nearly two decades. We're leveraging our scale and integrated cash offerings to engage with clients who are using cash not only to manage liquidity, but also to earn attractive returns.

The current macro environment is causing some clients to pause, slowing overall activity in the asset management industry. Nevertheless, BlackRock has delivered positive organic asset and base fee growth over the last 12 months. We see significant opportunity to deepen relationships and consolidate our share with clients as they resume actively allocating assets.

We're staying connected with our clients and positioning for what we believe can be massive growth unlocks. Looking ahead, we believe our platform strategy will continue to deliver for both our clients and shareholders, resulting in sustained market-leading organic growth, differentiated operating leverage and earnings and multiple expansion over time.

With that, I'll turn it over to Larry.

Laurence Fink

Thank you, Martin. Good morning, and thank you, all, for joining the call. I'd like to begin saying that our thoughts are with everyone who has friends, family, or loved ones impacted by terrorist acts in Israel. The violence and the loss of innocent lives has been shocking and truly heartbreaking. We at BlackRock will continue to do everything we can to support our colleagues and all our clients in the region.

Turning to our results. Clients have always been at the center of BlackRock's growth strategy. I believe that BlackRock is better positioned today than ever before to help our clients achieve the long-term outcomes they need.

We are having comprehensive conversations with clients globally on how we can partner with them to navigate on a new market regime and capitalize on investment opportunities. BlackRock is uniquely positioned in this environment to serve our clients with an integrated advisory, investment management and technology expertise, something no other asset manager can provide.

Sustained organic growth and market appreciation has led to a $1.1 trillion increase in BlackRock's AUM, alongside margin improvement and 14% growth in earnings per share over the last 12 months. Clients have entrusted us with over $300 billion in net inflows over the same time period. Technology service revenues increased 20% year-over-year, reflecting sustained demand for Aladdin and eFront renewals from several large clients.

We remain committed to delivering differentiated organic growth and margin. We've invested ahead of major opportunities for BlackRock in private markets, technology and whole portfolio solutions. Through disciplined execution, we aim to both grow client assets and drive profitable growth, unleashing financial success for our clients alongside revenue and earnings power for our shareholders.

Structural and secular changes in business models, technology and most of all monetary and fiscal policy have made the last two years extremely challenging for traditional asset management, with a majority of industry players seeing outflows.

BlackRock's differentiated business model has enabled us to grow consistently with our clients and maintain positive organic base fee growth since 2022. Investors face continued uncertainty. The S&P saw its best start to July in 26 years, but retreated in August and September.

Central banks are being forced to keep policies tight as they lean against inflationary pressures. Two and 10-year treasuries climbed to 16-year highs as investors anticipated rates remaining higher for longer. Rapid advancements in technology and artificial intelligence, the rewiring of globalization, the transition to a low-carbon economy, aging populations, and a fast-evolving financial system are all macro trends clients are evaluating.

As market dynamics shift and uncertainty increases, clients are pausing to think about the future, assessing their options, and seeking out BlackRock to take action. BlackRock's quarterly net inflows were not immune to an overall industry slowdown, as Martin discussed. Of course, I'm disappointed when we have softer flow quarters, but the long-term trends of clients consolidating more of their portfolio of BlackRock is only accelerating.

Rate hikes over the past year and a half, the fastest in the US since the early 1980s, have made cash not just a safe place, but now a very profitable place for investors to wait for the time being. In short, investors are being paid to wait, something we haven't seen to this degree in years.

Investors can earn 5% to 7% from conservative cash and bond portfolios. This dynamic reduces the near-term incentive to implement portfolio changes, resulting in temporarily slower client activity inflows. The degree to which investors have hunkered down in cash is shown by nearly $7 trillion in money market funds AUM across the industry.

Investors will eventually put that money to work. We've seen this dynamic before, as recently as 2016 and 2018, when policy uncertainty and the ability to earn yields and cash resulted in temporarily slowing in activity. Through these times, BlackRock stayed connected with our clients, connected across our businesses, and what immediately followed those periods in the past were new records for BlackRock client flows and organic base fee growth at or above 5% target.

We expect that investors will begin redeploying assets once there's a conviction in a terminal rate and the shape of the yield curve. We've seen that effect play out in prior cycles, most recently following the Fed pause in 2019, when flows rebounded, particularly in fixed income.

BlackRock's integrated platform and deep, long standing relationships with clients position us to be a major beneficiary once flows return. We are the only asset manager delivering our platform as a service. Clients entrust us with $9.1 trillion in assets and we are serving them with excellence. We lead our industry in delivering accessibility, affordability and innovation.

Times of uncertainty are often when transformational opportunities emerge. Moments in our history like this have led to new ideas, led to new partnerships and acquisitions. BlackRock has a strong track record of successful transformational M&A.

Most people think of BGI and MLM when I say that, but I also think of acquisitions like eFront and Aperio. They have been smaller in size, but were also transformational in their own way. In both, we anticipated and delivered on our clients' needs. We scaled strong existing technologies and built new revenue streams for our shareholders.

Organic growth in Aperio has been over 20% since our acquisition, and eFront revenues have grown nearly 50%, while also strengthening our value proposition and positioning in Aladdin and private markets.

BlackRock has been a successful acquirer and today advancements in tech and AI, scaling of private markets and more attractive valuations means BlackRock is once again becoming increasingly engaged in M&A trend discussions.

What made our acquisition so successful was our enduring commitment to fuse the best of the acquired companies into a stronger and faster-growing one BlackRock, fully connecting all parts of the firm to our clients. We have a proven history of realizing long-term benefits in areas of expansion. Today, we're similarly connecting with our partners across markets to lay the groundwork for future growth.

In July, we announced an agreement to form Jio BlackRock, a 50-50 joint venture with Jio Financial Services, an entity carved out of Reliance Industries. India has been an integral part of the global platform and BlackRock is one of the largest international investors in India today. And almost 15% of our colleagues are located across multiple offices in the country. India offers enormous opportunities.

Jio BlackRock represents a powerful new partnership in a fast-growing market where we see the potential to revolutionize India's asset management industry. We look forward to expanding our footprint with the ambition to improve the financial futures for millions of investors in India. BlackRock is working in India and markets around the world to lower the barriers to investing through accessible, affordable and transparent solutions.

Another example of the new growth opportunities is our partnership and agreement we announced last month for BlackRock to be the asset manager partner of Monzo. Monzo is the UK's leading digital bank and we are launching a new investment offering for their eight million customers.

Since launch, more than 250,000 Monzo clients have joined the waiting list for this new offering. And just earlier this week, we announced our partnership with Upvest to drive innovation in how Europeans access markets and make it cheaper and simpler to start investing.

What we have seen in the markets after markets is that we can make investing easier and more affordable and we could quickly attract new clients. For first-time investors, the preferred way of investing is often through ETFs, and specifically iShares. Through investment and innovation, we've evolved our iShares ETF franchise to meaningfully increase access to global markets.

This includes access for tens of millions of new investors. It also includes access for our most seasoned clients to use our ETF technology to actively allocate across all types of markets. BlackRock's ETF platform delivers industry-leading performance, choice and scale. With growing use cases, diversification and customization, ETFs and indexes are often and increasingly an important component of active management.

Across our ETFs, BlackRock generated net inflows of $29 billion in the third quarter and nearly $100 billion year-to-date. Flows in core equity and fixing ETFs were partially offset by redemptions in precision ETFs in August and September, something we expect and have seen before in risk-off environments as clients use our ETF to actively manage their portfolios. These tactical allocation tools are unique to BlackRock, and their high utilization reinforces the value proposition associated with iShares' strong secondary market liquidity, its unique options, and lending markets.

BlackRock's market-driven, long-duration fixed income product were also an important tool for investors to rotate at a longer duration position. The breadth of our ETF platform enables us to capture changes in client demand, keeping investors within BlackRock. For example, iShares treasury funds were three of the top-five grossing bond ETFs in the industry as investors shifted duration preferences in the quarter. Our market-leading levels of performance and liquidity helped our clients nimbly reposition as market conditions evolved.

As we approach peak interest rates, we expect a resurgence in fixed-income flows, with clients capitalizing on higher yields. BlackRock is well-positioned to benefit from this reallocation with our comprehensive $2.6 trillion fixed-income platform. Going back to the periods immediately following the taper tantrum in 2013, or the Fed pause in early 2019, the industry saw a quick rebound in fixed income flows following rate stability.

Both BlackRock ETFs and our active fixed income funds were large beneficiaries at that time. Our conversations with clients aren't about just active and just index, we work with clients to understand their investment challenges, helping them shape and execute strategic portfolio construction decisions. BlackRock is the only asset manager that can deliver outcomes in the context of clients' whole portfolios across market classes, asset classes, investment styles and in public and in private markets.

Organizations are turning to the private markets with greater frequency for their capital and financing needs, leading to bigger and better investment opportunities for BlackRock and our clients. BlackRock's worldwide network of relationships with corporations and governments sourcing capabilities and a rigorous selection process helps us deliver unique solutions and drive performance for our clients across private market asset classes.

In the third quarter, we announced that BlackRock is partnering with the New Zealand government to launch an over $1 billion climate infrastructure strategy. BlackRock's Decarbonization Partners joint venture also reached $1 billion in committed capital for its first round and has now invested in five portfolio companies. These initiatives are a real example of BlackRock's long-standing relationship with clients and how we deliver the entirety of our platform to pioneer solutions and meet our clients' evolving needs.

We're also effectively scaling successor funds in private markets, delivering larger funds through raises of subsequent fund vintages. For example, we're on the 10th vintage of our flagship US Private Lending Fund. And we're in the market with a fourth vintage of our global diversified infrastructure equity fund series. Infra IV already raised $4.5 billion in initial investor commitments at close -- at the first close last year, achieving over half its targeted size. This is the next phase of successful scaling of the franchise. In 2020, our third fund in the series raised a total of $5 billion, surpassing the total assets of vintages one and two combined.

Strong investment performance is critical to this momentum. Our flagship private equity fund currently stands at more than a 35% net IRR. We've seen double-digit net returns this year in our flagship private credit strategies. BlackRock's proprietary differentiated deal flow is what drives long-term investment performance and outcomes for clients.

BlackRock's global network of relationships, data and analytics, and flexible, adaptable capital needs we get sourced a unique deal for our clients, and we are increasingly finding that opportunity seek us as much as we seek opportunities. Companies want BlackRock as an investor and a partner, recognizing the uniqueness of our global reach, our brand, and our expertise across markets and industries.

Our growing profile from investments around the world in the US and Europe and Asia is leading to more and larger deal opportunities. BlackRock's global relationships and expertise in sourcing and underwriting, portfolio and risk management and technology and analytics allow us to unlock unique deals for clients. At the same time, our growing momentum in private markets is delivering value for our shareholders through organic growth and less beta-sensitive revenues.

Years ago, we anticipated how clients would benefit from alternative investments being evaluated inside a portfolio level of risk management framework. This led to the combination of eFront and Aladdin, which has set a new standard in investment and risk management technology.

The acquisition of eFront opened up a new segment of alternative GPs and asset services, and most importantly, enabled us to help clients across their whole portfolio. Our acquisition and integration of eFront continues to be transformational for clients. And we're seeing strong demand both as a stand-alone basis and for whole portfolio solutions across public and private assets.

We now have a data platform and business that covers 13,000 funds and over 150,000 assets, a significant portion of the private market fund universe. We're redefining the industry expectations of transparency in private markets. Nearly half of Aladdin's clients are leveraging our newer offerings, including eFront, which is a true competitive advantage in the tech market. And as Martin spoke to, you saw eFront's contribution reflecting in this quarter's tech results.

Investors and advisors are increasingly choosing a small number of scale technology platforms that offer everything in their ecosystem in one place. Aladdin worked seamlessly alongside other aspects of client investment processes and tech stack, serving as a foundation while enabling clients to create custom solutions to meet their specific needs.

To get here, we also have developed deep integration with custodial banks, with fund accountants, broker-dealers, and other leading ecosystem partners. This flexibility and choice are just some of the reasons clients are entrusting us with the growing numbers of their portfolios. Going forward, we are confident that clients will continue to turn to Aladdin to unify their investment management process.

BlackRock's willingness to reimagine our business, our ambition to partner comprehensively with our clients, and our drive to innovate ahead of their needs is translating into broader, into deeper relationships, and we see an incredible opportunity for us in front of us. We remain intensely focused on staying close to our clients, especially, during periods of market volatility and rising uncertainty. Clients are coming to us for advice, for solutions tailored to this macroeconomic environment, wanting to do more with BlackRock.

Horizontal connectivity is critical. And our leadership team and an entire organization are coming together to differentiate ourselves in delivering for clients today and preparing to capture the money in motion we anticipate in the near future. As I've always done, I'm challenging our teams to continue to innovate and stay perpetually neurotic about staying in front of our clients.

BlackRock will continue to lead in creating more access and connections between long-term investors, capital markets and the real economy. I'm incredibly excited about the opportunities I see for our clients, and especially for BlackRock, which will then lead especially for you, our stakeholders.

Let us now open it up for questions.

Question-and-Answer Session

Operator

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

Laurence Fink

Hello, Craig.

Craig Siegenthaler

Hey, good morning, Larry. Hope everyone is doing well.

Laurence Fink

Absolutely.

Craig Siegenthaler

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

Martin Small

Thanks, Craig. It's Martin. Let me just say a few things about organic growth and the outlook. So, just last 12 months, we've delivered positive organic asset and revenue growth, $300 billion in flows over the last year, $193 billion year-to-date. We, as I mentioned, have conviction in our 5% base fee target over the long-term. We've reached it on average over the last five years and met or exceeded it in seven out of the last 10. Our 5% organic growth target is better than 3% industry estimates. And we still feel we underwrite that number all the time together. We feel it's reasonable, it's attainable based on our product breadth, our solutions orientation, our technology capabilities. And when the management team looks at our client engagement and sales measures, we really do -- we see good momentum. As I mentioned in my comments, our Q3 gross fund sales were at 95% at average levels over the last 12 months. So we see those as good measures of engagement and our activity with clients. On the flows, we see them as just marked by this offsetting activity across our platform with some very specific client moves. The way I look at it, Craig, is, on the one hand, we had a combined $60 billion in net inflows. That's $29 billion from ETFs, it's over $13 billion in institutional multi-asset and target date in OCIO and it's $50 billion of cash. That right there, I think, is sort of right at a lot of the consensus or higher numbers. On the other hand, this was offset by the $50 billion of institutional index equity redemptions, with $19 billion from one non-US client. So, just in assessing how we're doing, the conversations with our clients, the momentum we have, we think the flows would have obviously been very positive, but for these re-balancings. As Larry mentioned, they happen from time to time, and they have very little impact to base fees. It's a low-single-digit point basis business. It's sub-3% of our revenue. But what I'd say is we managed close to $2 trillion of institutional index equity. We think it's a good business. These large AUM index relationships, they have meaningful franchise value for us beyond fee rates. A large mandate of index assets, Larry mentioned, it's typically only part of our overall relationship with a client, which has active alternatives, ETFs or advisory. And you've got to be a scaled player to be in this large index market. So, this is the business we're in, and from time to time, it can impact the flow number, and that's something that we don't manage quarter-to-quarter. We look at over the long-term. On organic base fee growth, I also think it's good to simplify this, Craig. Q3 base fees were impacted by mix. And I think those really come from two areas. We had $13 billion of redemptions from precision ETFs, which Larry mentioned, are unique to BlackRock and important vehicles for clients and also part of our platform strategy in terms of how clients stay with iShares and move from EM to DM to high yield to treasuries, and we had $2.5 billion of outflows from retail liquid alternatives. And you'll remember, Craig, because I know you love the page, from our Investor Day that we showed the average fee rates across different segments of our products and services. And if you were to take those average fee rates and the fee rates available on our public website for '40 Act alternatives, just for illustration purposes, the order of magnitude of base fee decay would be $60-plus million. So, I hope that gives you a sense of what weighed on base fee growth this quarter. It's largely in those things that we know have long-term franchise value, have grown over time and added to earnings. But in any quarter-to-quarter, they may weigh on the fee rate and on the base fee growth. Over a cycle, Craig, we still see a really clear path to 5% plus organic base fee growth with our platform strategy. We keep growing and scaling private markets, the re-risking of global investment portfolios. We're continuing to see high-teens growth in tax-managed direct indexing with Aperio. Rob will talk a little bit, hopefully, when I'm done, about the generational opportunity in active fixed income and bond ETFs, model portfolios and iShares, where we think half our ETF growth will come through models. So, we still see big opportunities to continue to hit those targets and beyond. Rob, do you want to say a couple of things about fixed income?

Robert Kapito

So I think most of the questions are going to concern the why, the where, and the when. And so, the yield curve is the most inverted that it's been since the 1980s. So, maybe, Larry and I can add a little value since we were there at that time. And investors are really getting paid to wait. And money market funds have nearly $7 trillion in assets under management. So that's $7 trillion. And as we approach the peak in interest rates, we expect that there are going to be some very, very large allocations to fixed income. And I'm sure someone will call it the great reallocation. And the reason is, today, there are better opportunities to invest in bonds than have been in the years. Over 80% of the bond market is yielding over 40%, enabling investors to derive a large part of their liability needs from owning bonds and access returns with less risk. So, as Martin just said, we are so well-positioned to benefit from this reallocation with our comprehensive $2.6 trillion fixed income platform, which spans unconstrained total return, municipals, and actually the entire yield curve. So with more money in motion, and it will be in motion, BlackRock will benefit as clients build fixed income allocations with higher-performing active, alongside of ETFs and private market strategies. In particular, right now, clients are focusing their opportunity in the short end of the curve, and of course, in private credit. So when? Well, we have historically seen a rebound in fixed income following rate stability. And this year's yield spikes have been mostly from market re-pricing and policy rate expectations. There is a lot of concern over US debt levels and large treasury issuance, and investors are demanding a higher premium. So, if we go back to the periods immediately following the taper tantrum in 2013 that Larry mentioned, or the Fed pause in early 2019, the industry saw a very quick rebound in fixed income flows. Both ETFs and active fixed income funds were the beneficiaries. So when? Well, once there's more certainty on a terminal rate and the shape of the yield curve, then we expect more deployment into fixed income. And I'll recap it. A slowdown in short-term issuance and more balanced term structure of interest rates are the indicators we're looking for in anticipation of accelerating demand for immediate and longer duration fixed income.

Operator

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

Laurence Fink

Good morning, Michael.

Michael Cyprys

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

Laurence Fink

So, obviously, the foundation of the firm and the -- was Milliman, the BGI transaction. But we've been quite active in deals and partnerships, whether it's Jio BlackRock partnership that we're working on, which I think will be transformational. That's not an M&A deal. But our Aperio deal, our eFront deal, are great examples of execution, precision, with 20% and 50%, respectively, increase in revenues in both those businesses. I would look back and say, we spent about $4 billion on M&A over the last five years. And I'm now challenging all of us, including myself, about what are the ecosystem changes that are around today. And I -- if you look back when we did the big transactions, there was a lot of market on settlement, and I think there is quite a bit going on now, big shifts. And so, we are looking at different opportunities related to technology, private markets. We're always engaged in conversations. But I'm challenging the team and myself to really -- to think more broadly and more openly about the opportunities we have. And we're engaged. We're engaged in a large way across the world, across the opportunities. That is not going to be displacing the opportunities of partnerships like the partnership with Monzo, the partnership with Reliance Industries and Jio Financial. We see those going to be additive. They inform us. They help us be more connected. We see different opportunities. And so, we're challenging ourselves. We are engaged in a lot of conversations right now, probably more than we have been in many, many years. And we'll see how this all plays out.

Operator

Your next question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Laurence Fink

Good morning, Alex.

Alexander Blostein

Hi. Good morning, Larry. I appreciate the comments earlier. Maybe just another one around M&A. So, 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 from an EPS accretion? And any other kind of framework you could put around what a potential deal could look like? Thanks.

Laurence Fink

I'm going to hand it off to Martin.

Martin Small

Hi, Alex. It's Martin. How are you? So, the centerpiece and hallmark of the M&A strategy here has always been about accelerating organic growth. It's been about developing capabilities that we don't have and or de-risking capabilities that we're building. And I'd say when you look at eFront, when you look at Aperio, when you look at many of the transactions Larry has talked about, that's really been the center of the strategy. It's about accelerating organic growth and delivering for clients. And as Larry said, in the last five years, we've spent about $4 billion on M&A. We're not capital-constrained. We have ample debt capacity. And so our goal is to be able to drive earnings acceleration and also deliver more for our clients through M&A.

Laurence Fink

I would just add one more thing related to that. Martin, I just want to double-down. We have a lot of debt capacity. We have a lot of opportunities. And we're really refocusing on where can we be additive. The one thing that I could tell you, when we do integrations of firms, we are not going to be a boutique. We are going to be organizing it and building it out. We love the opportunity of having Aperio, but it's a part of a big organized firm. We love eFront. It's organized around the whole Aladdin ecosystem. But it is not -- we're not building a boutique of different fragments. We're building a unified organization. As Martin said, to be additive in revenues, additive in client connectivity, and additive in reach, reach in technology and reach in product.

Operator

Your next question comes from Daniel Fannon with Jefferies. Please go ahead.

Laurence Fink

Hi, Dan.

Daniel Fannon

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 3Q? 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

Thanks very much for the question. So, when I think about the active equities business at BlackRock, we had continued to see a very strong active equity business over the last three years. We've generated over $30 billion in active equity net inflows, while our average AUM has grown by 34%. And so, while, again, quarter-to-quarter and year-on-year, we'd fully expect to see, particularly in this environment, some rotations out of equities and into cash, which has been the main theme, I think, of this call and the many others, we still see really strong growth in the business. And we think it's fundamentally a big part of client portfolios. I do think over time, in our product strategy, you've seen we've been adding, for example, transparent active ETFs, through which we'll be growing our active equity business and our other active businesses. And so, we think about these over time as being delivered through multiple rampers and an integral part of our base fee growth strategy.

Robert Kapito

And let me just add to that. Because we have to be a little bit careful about what we call active, because people are active with both their index and their ETFs through models and I would prefer to say it's active as we originally knew the definition alongside of all of our ETF products. And when is active going to continue to have more flows? When you can add outflow? And we're going into an environment where I believe active flows will be greater because there are now more opportunities to add alpha than there has been before. So we've seen $65 billion of active net inflows in 2023 year-to-date, which compares to industry outflows. And part of that is coming from some of the different pockets that we have created that require more active than passive management. So, we continue to see strong demand in the private markets and in LifePath. These are the strength in income-oriented equities total return in core bond strategies. So just to give you an idea, since 2019, positive active flows have been in 16 out of the 19 quarters. And a lot of that also depends upon performance. And that's what we've been able to keep our promise to with our clients and will drive active inflows going forward.

Laurence Fink

One more last thing on this, Dan, I would just say, we have committed enlarging our iShares platform globally. I think that's going to be an integral part of what we're doing in India. But if you look at the trends of ETFs in the year-to-date, in Europe, ETF flows are up 70%. In the US, the ETF flows are actually a little lower than they were last year. But as we continue to build out our platform globally, we become a very large beneficiary. And what is happening in Europe, the rise of its capital markets and the utilization of ETFs as an instrument of active and an instrument of exposures and an instrument of passives, we're winning big market share in that business.

Operator

Your next question comes from Brian Bedell with Deutsche Bank. Please go ahead.

Laurence Fink

Good morning, Brian.

Brian Bedell

Great. Thanks. Good morning. Maybe, Rob, if we could just go back to institutional fixed income, a different angle of this being the prospect of pension plans immunizing their portfolios given how much longer-term bond yields have improved. What do you sense as sort of, I guess, first of all, the potential magnitude of that switch, of that reallocation to immunizing the plans as you talk with your clients and then sort of the timing of that? Are they also waiting for yields to peak to do that or is it more seasonal or something that might actually do by year end?

Laurence Fink

Great question. I mean we've consistently large-scale immunization in the UK pension fund world, a major component of the entire UK market, to find benefit plans have been immunized already. Over the last five years, about another $4 billion to $6 billion that have moved out and been -- and more and more immunized. I don't see that happening yet at a 5% or a 4.5% environment yet. But if we peak long rates at 5.5%, 6%, if the yield curve becomes more steep instead of flat or inverted, that's when you're going to see it. I think it's more of the shape of the yield curve where you're going to start seeing more and more people thinking about immunization. Unquestionably, on the margin, you're going to see some pension funds immunize. And it will -- depending on that type of flow, it is going to put some pressure on the equity market as money moves out of equities and permanently go into long-dated bonds. We're having conversations with a lot of organizations on that. And so I can tell you there are a lot of -- there are quite a few pension funds now because our liability rate has been reset at a higher rate. They are getting closer to their -- to matching. This is more corporate plans, not state plans. And that occurs you're going to see a significant de-risking. Instead of that, we are actually seeing more and more companies looking to earn higher returns in credit and infrastructure right now. They're trying to lock at higher returns that way. But we haven't seen a major shift of duration extension in the treasury market. And I think that's very evident right now. And that's why I think the yield curve is flattening out right now. But we are seeing significant interest level with a lot of pension funds to take -- bring down their -- I would say, their exposure in equities, to bring down their exposure in some components of alternatives and focus on income-oriented alternatives to really get an 8%, 9%, 10% type of coupon return. Rob, do you want to follow up on that?

Robert Kapito

Yeah, I'd just add a couple of things. That's a really great question, because I think I'd speak for Larry. We haven't heard the word immunization for a very, very long time and we've been visited by several pension plans to talk about that. Obviously, it's rate-driven. I think the number is going to be 7% plus that they're going to have to get. And if you want to do a little history, in 1995, you can have a portfolio of all bonds and get a 7.5% return. So when you add that together with the environment I described before that might be coming. Now, there's a step before that. And we have been the beneficiary of a lot of these plans, finding that it's too complicated, they were very barbelled. They're not sure what the reallocation could be. It's hard to find the people to do this in the locations that they are and they don't have the technology. So we've been the beneficiary through what we call the OCIO business. And we have had a significant amount of large wins in that business to help them with the appropriate reallocation. I think the next stage of that in the future might be more institutions may be going into immunizing the portfolio. But as Larry said, it's really rate-driven. We're not that far away. But a lot of things have to happen before then. And a lot of that, of course, will be done in the bond market, which, in my previous answers, really adds fuel to the fire where we could be a very big participant in that.

Operator

Your next question comes from Brennan Hawken with UBS. Please, go ahead.

Laurence Fink

Hi, Brennan. How are you?

Brennan Hawken

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, which is certainly encouraging. But right now, it's probably a time when you all are beginning to sharpen your pencils on the budgets here into next year. The environment -- BlackRock is incredibly well-positioned, as you all have hit on several times here today, but the environment is challenging. And so how are you thinking about 2024? And how should we be thinking about that as we refine our models today? Thanks.

Martin Small

Thanks, Brennan. Just -- I will reiterate, we expect full year G&A to fall on the low end of our previously communicated -- committed guidance of mid to high-single-digit percentage increase, still accept to keep our headcount broadly flat for this year, as we've said in the last two quarters. And just on outlook for expense, and I suppose, margin, again, our strategy for driving values to deliver organic growth, differentiated in premium operating margin and consistent capital management policy. We're focused on investing for profitable growth. When I think about operating leverage in a higher for longer rate environment, you've heard on our last few calls that we're looking to make more concentrated investments in places that can drive higher organic growth, deliver more operating efficiency, but we're also looking to add flexibility to the cost base. But most importantly, Brennan, we're looking to drive more fixed cost scale that comes through technology, automation, organizational design and foot-printing. There are so many exciting things happening at BlackRock on that front. We launched our BlackRock AI Lab back in 2018. We've been using artificial intelligence, machine learning, natural language processing in our systematic business going back 20 years. And we have teams all over these things for how we can scale trading, pricing, operations, client service and even automation to make our software engineers most productive. So if you ask me where are we going to focus investments going forward with a particular sharp eye, I look at our total annual operating expense of about $11 billion and our largest fixed investments by dollars and importance, that's our really talented BlackRock employees. So giving them more tools to enhance productivity, from large language models to better CRM, tools that help clients customize and self-service, like our BlackRock Advisor Center, those are going to be some of our best opportunities to deliver, I think, long-term profitable growth and where we'd be looking towards our expenses. But also, we've got great investments that I think Larry alluded to that are in commercial partnerships. Those are with TAMPs, neo brokers, digital wealth platforms, other distribution venues. So we'd invest some of that. It will be fixed M&P. Some of it will be variable distribution and servicing, which gives us some more resilience. That's some of the variablizing of expenses that I've talked about. But they all have the potential to accelerate outsized growth for iShares and other BlackRock investments. And our budget for 2024 is going to look to optimize organic growth in the most efficient way possible and expanding our premium margin over time.

Operator

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

Laurence Fink

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. And we believe there are more money being put to work as investors glean clarity on the path, the path of rate movements, related to geopolitical issues and more people are seeking opportunities with BlackRock. I do see great opportunities ahead for our clients and look forward to delivering more opportunity for you, our shareholders, our investors. And I want to thank you for your continued interest. Have a good quarter.

Operator

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