BlackRock, Inc. (BLK) Q1 2018 Earnings Conference Call Transcript

BlackRock, Inc. (BLK -1.47%)
Q1 2018 Earnings Conference Call
April 12, 2018, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Jamie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock, Inc. First Quarter 2018 Earnings Teleconference. Our host for today's call will be Chairman and Chief Executive Officer Lawrence D. Fink, Chief Financial Officer Gary S. Shedlin, President Robert S. Kapito, and General Counsel Christopher J. Meade. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press *1 on your telephone keypad. If you would like to withdraw your question, please press #. Thank you. Mr. Meade, you may begin your conference.

Christopher J. Meade -- General Counsel

Good morning, everyone. I'm Chris Meade, 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 result 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 see today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So, with that, I'll turn it over to Gary.

Gary S. Shedlin -- Chief Financial Officer

Thanks, Chris. Good morning, everyone. It's my pleasure to present results for the first quarter of 2018. Before I turn it over to Larry to offer his comments, I'll review our financial performance and business results. While our earnings release discloses both GAAP and as-adjusted financial information, I will be focusing primarily on as-adjusted results. In addition, as we have previously discussed, our first-quarter 2018 financials reflect the recent adoption of FASB's new revenue recognition accounting standard, which became effective on January 1st.

The only significant change relates to the presentation of certain distribution costs, which were previously netted against revenues and are now presented as an expense on a gross basis. For 2017, the new standard resulted in a net gross-up of approximately $1.1 billion to BlackRock revenue, a corresponding gross-up to expense, and no material impact to as-adjusted operating income or as-adjusted operating margin.

In order to simplify historical comparisons of current and future results, we adopted the new standard on a full retrospective basis and filed an 8-K in late March with recast quarterly results for 2016 and 2017. All year-over-year and sequential financial comparisons referenced on this call will relate current quarter results to these recast financials.

After a strong start to the year driven by optimism related to U.S. tax reform and global economic growth, markets reversed in February and March as escalating trade tensions, inflationary concerns, and a flattening yield curve caused investors to pull back. Despite this increased market volatility, BlackRock's first-quarter results once again demonstrate the value of the investments we've made to assemble the industry's leading global and investment technology platform. The diversification and breadth of our business positions us to serve clients in a variety of market environments, helping to drive consistent and differentiated organic growth.

Paced by a strong January, BlackRock generated $55 billion of long-term net inflows in the first quarter, representing 4% annualized organic asset growth and 5% annualized long-term organic-based fee growth as quarterly organic asset growth reflected strong higher-fee global retail flows. First-quarter revenue of $3.6 billion increased 16% year over year while operating income of $1.4 billion rose 20%. Earnings per share of $6.70 was up 28% compared to a year ago, driven by higher operating results and a lower effective tax rate in the current quarter. Non-operating results for the quarter reflected $10 million of net investment gains. Recall that net interest expense in the first quarter of 2017 included $14 million of call premium expense associated with debt refinancing.

Our as-adjusted tax rate for the first quarter was approximately 20% and included a $56 million discrete tax benefit related to stock-based compensation awards that vested during this quarter. We now estimate that 24% is a reasonable projected tax rate for the remainder of 2018. However, the actual effective tax rate may differ as a consequence of non-recurring or discrete items and the issuance of additional guidance on or changes to our analysis of recently enacted tax reform legislation.

First-quarter base fees of $2.9 billion were up 17% year over year, driven primarily by market appreciation and organic-based fee growth of 7% over the last 12 months. Sequentially based fees were up 2%, reflecting a lower day count compared to the fourth quarter. Continued momentum in institutional Aladdin and expansion of our digital wealth and distribution technologies, including Aladdin Risk for Wealth and Cachematrix, resulted in 19% year-over-year growth in quarterly technology and risk management revenue. Demand remains strong for our full range of technology and risk management solutions, which contribute to gains in both technology revenue and base fees.

Today's growth is the result of the investments we've made over time, and we continue to invest in our business to create more opportunity for the future. Total expense increased 13% year over year, driven by higher compensation, G&A, and volume-related expense. Employee compensation and benefit expense was up $101 million or 10% year over year, driven primarily by higher headcount and increased incentive compensation associated with higher operating income, partially offset by approximately $20 million of severance and accelerated compensation expense associated with the repositioning of our active equity platform during the prior-year period. Sequentially, compensation and benefit expense was down 2% due to lower incentive compensation, primarily resulting from seasonally lower performance fees, partially offset by higher seasonal payroll taxes and an increase in stock-based compensation expense related to new 2018 grants.

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

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

Quarterly long-term net inflows of $55 billion were positive in both index and active strategies, including approximately $1 billion of active equity net inflows during the quarter. We achieved 5% or greater long-term organic-based fee growth for the fifth consecutive quarter despite the challenging market environment. Globalized shares generated quarterly net inflows of $35 billion driven by strong flows into core ETFs. During recent periods of elevated market volatility, iShare's ETFs once again offered price transparency and secondary-market liquidity to investors, demonstrated by the highest weekly exchange volume ever in the U.S., trading approximately $285 billion on exchange during a single week in February.

Retail net inflows of $17 billion, representing 11% annualized organic growth, continued to trend positively and have now increased for five consecutive quarters. Inflows were positive in the U.S. and internationally and were paced by $10 billion of flows into our top-performing active fixed-income platform, where 93% of our U.S. active fixed-income mutual fund assets have top-quartile performance over the trailing five-year period. Equity inflows of $4 billion were driven by flows into active Asian and European equities while multi-asset flows were driven by $3 billion of flows into our multi-asset income fund.

Institutional net inflows of $3 billion resulted from significant inflow and outflow activity during the quarter, as various clients derisked, rebalanced, or sought liquidity in the current environment. Index flows of $10 billion, driven by continued demand for LDI solutions, more than offset active net outflows of $7 billion, which were impacted by a single multi-asset redemption related to client M&A activity and fixed-income outflows linked to profit-taking and cash repatriation planning. Despite overall flat organic asset growth, institutional clients drove 5% annualized organic-based fee growth in the quarter, driven in part by momentum in higher-fee alternative products.

Core alternatives' net inflows of nearly $2 billion reflected inflows into hedge funds, private equity solutions, and infrastructure offerings. Illiquid alternative fundraising momentum continued into 2018 with an additional $2 billion in commitments raised during the first quarter. Finally, despite typical seasonal outflows in the cash industry during the first quarter, the strength of BlackRock's cash management platform drove $3 billion of net inflows as we continued to invest in our cash business and leveraged scale for clients.

Overall, our first-quarter results reflect the benefits of the investments we've made to build a differentiated global business model which can perform in various market environments. Our goal remains to exceed clients' needs by optimizing investments in talent and technology and delivering consistent and differentiated organic growth over time. With that, I'll turn it over to Larry.

Lawrence D. Fink -- Chairman and Chief Executive Officer

Thanks, Gary. Good morning, everyone, and thank you for joining the call. Driven by a strong January, BlackRock generated $55 billion of long-term net inflows in the first quarter, representing a 4% annualized organic growth rate and a 5% annualized organic-based fee growth in a volatile market environment. These results reflect our ability to deepen partnerships and manage holistic relationships with a more diverse and global set of clients than at any time in our history.

Meeting with clients recently in Europe, Asia, and here in the United States, I believe our position with clients has never been stronger. The quality of the discussions our people are having is more robust than ever. BlackRock's technology and risk analytics and the diversity of our investment platform position us to have broader, deeper, more robust conversations with our clients about their long-term needs.

Following a period of historically low volatility in 2017 and the record high equity markets in the first month of 2018, investors experienced a spike in equity market volatility in February and March. Rising concerns over a trade war and headlines in the technology sector have tempered investment sentiment, causing many clients to pause or pull back as they become more uncertain about the future. In addition, the yield curve has hit its flattest level since October 2007, as the spread between ten- and two-year treasuries has shrunk to just 50 basis points. While the prospects of rising rates tend to push investors away from long-dated fixed-income, the flat curve is creating strong relative risk/return opportunities in short-duration funds and cash management strategies, which we saw clients take advantage of in the first quarter.

While global economic growth prospects and expectations for corporate earnings remained strong in the quarter, the ongoing impact of U.S. tax reform and increased M&A activity influenced client behaviors, and we saw a number of large inflows and a large amount of outflows as clients rebalanced and sought liquidity to either fund future capital allocation or be more aggressive in share repurchases.

Even with these various crosscurrents, retail and institution clients turned to BlackRock over the quarter for both active and indexed strategies. Clients expressed demand across a diverse range of active and indexed fixed-income strategies, including on constrained short-duration, total return, and emerging market debt funds. We also saw strong utilization of equity ETFs as simple and efficient tools for both taking on and deemphasizing market exposures. Finally, increasing demand for risk on assets and performance drove flows into active equities and alternative strategies.

Our long-term strategy at BlackRock has been to create a diverse and integrated global investment and technology platform, one that serves clients in all market environments. We harness this platform to construct and manage risk-aware, holistic portfolios that help clients achieve long-term outcomes. We also provide institutions and intermediary partners with risk management and portfolio construction technology to better operate their own businesses.

As I discussed in my letter to shareholders in our annual report, this focus on client needs forms the foundation of our long-term strategy and will continue to drive future growth at BlackRock for our clients and our shareholders. Our strategy is simple: We will continue investing in our business to establish a clear market leadership in areas of the greatest growth and client demand and we will leverage those full capabilities of our platform to enhance the value for our clients.

In iShares, we have steadily invested over time and are the market leaders today. We have generated over $900 billion of net inflows -- or a 22% annualized organic asset growth -- since we acquired the business in 2009. In the first quarter, we once again captured the No. 1 share year-to-date globally, in the U.S., and European net inflows, as well as the No. 1 share of inflows in the equity and smart beta categories.

Demand is growing from clients who utilize ETFs for efficient, liquid market exposure through the secondary market. February's volatile global equity market drove heightened ETF trading volumes and iShares performed as our clients have come to expect. During the week from February 5th through February 9th, when the U.S. stock market had suffered its steepest declines in more than two years, U.S.-listed ETFs traded more than $1 trillion on exchanges, with iShares trading a record $285 billion, yet creates and redeem activity of iShares funds over that same period of time was very low at less than $3 billion, demonstrating the benefits of a robust secondary market to create additional liquidity in stressed markets.

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

BlackRock's top-performing fixed-income platform generated $27 billion of net inflows in the quarter, capturing client demand in a rising rate environment. Inflows were driven by a diverse range of strategies, including unconstrained, total-return, short-duration strategies, and our emerging-market debt funds. We are also seeing early signs of progress since our active equity platform was revitalized a year ago when we segmented our product offerings across the risk, return, and value spectrum, even more effectively harnessing the power of data science and technology to efficiently and consistently deliver investment performance. At the end of the quarter, 66 of our fundamental active funds and 84% of our systematic active equity products were above benchmark or pair medians for the one-year period.

Illiquid alternatives also remained a strategic growth priority for BlackRock as clients searched for diverse sources of return. We raised $2 billion of new commitments in the quarter for a total of $18 billion of dry powder to invest on behalf of our clients as we continue to build on our platform. We currently are managing $49 billion across our illiquid alternative platform, and including our illiquid strategies, our core alternative platform now has $102 billion in assets.

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

Last month, we crossed ten years since the start of the financial crisis. Over this time, we have seen many developments in the regulatory environment that have impacted our clients' operations and increased their need for technology solutions to help manage risk. Since our founding 30 years ago, we have always focused on using technology to better understand risk in clients' portfolios. Aladdin risk analytics capabilities are what enabled us to be a trusted advisor for clients during the financial crisis, and as we look ahead, we will remain steadfast in maintaining a high standard for risk management and continuing to use technology to enhance our own and our clients' business.

The movement toward fee-based advice in wealth management globally has continued to be strong, even with some greater uncertainty around the fiduciary role in the U.S. We continue to view this as an important trend and will require wealth managers to put greater focus on the overall portfolio, not just products. There will be more focus on risk management, and most important, there will be more focus on a repeatable, scalable investment process. This fee-based trend and recent market volatility has increased demand for our capabilities, such as Aladdin Risk for Wealth, our newly launched advisor center in the U.S., Future Advisor and iRetire, which help advisors construct better portfolios and scaling of their own businesses.

Demand remains strong for our institutional added business, especially in Europe, where many of our clients are upgrading their technology infrastructure to support growth in a changing regulatory environment. We saw 19% year-over-year growth in our technology and risk management revenues in the first quarter and continue to expect double-digit growth going forward.

In early 2018, we also established the BlackRock Lab for Artificial Intelligence in Palo Alto to advance how BlackRock uses artificial intelligence and associated disciplines -- machine learning, data science, natural language processing -- to improve outcomes and to drive progress for our investors, for our clients, and for the overall firm.

Another area where technology and analytics are becoming increasingly important is in sustainable investing or ESG-related strategies. More and more clients -- not only in Europe, but increasingly in the United States -- are seeking to understand their exposures to various environmental, social, and government-related risks in their investments. From BlackRock's perspective, business-relevant sustainable issues can contribute to a company's long-term financial performance. For this reason, we're increasingly integrating these considerations into our technology and risk platform for investment research, portfolio construction, and the stewardship process that we do. In addition, BlackRock now manages over $430 billion in sustainable investment strategies, and we see demand growing from institutions and retail clients alike.

In line with our strategic focus on technology and being a market leader in areas of greatest client demand, last month, we appointed three new directors with combined expertise in technology, financial services, and fast-growing markets to join our board of directors. Peggy Johnson, Bill Ford, and Mark Wilson will bring a deep institutional and industry knowledge with fresh perspectives on key areas of future growth for BlackRock.

The value of BlackRock is delivering to clients and the growth we are generating for shareholders is driven by our talented employees living our principles and believing in our purpose every day. It's our culture anchored in our principles that ensures we never forget who we are, who we serve, even as the markets, our industry, and even our firm experiences constant and sometimes dramatic changes.

Rob and I are focused on instilling this culture for our next generation with all of our 14,00 employees around the globe because that is what will position BlackRock to thrive and generate continued growth going forward in our next 30 years. We begin 2018 by maintaining our steadfast focus on clients' needs. We continue to invest in and execute on a strategy for long-term growth, leveraging the benefits of our technology and scale, reinvigorating our focus on institutionalizing our culture for our future. With that, let's open it up for questions.

Questions and Answers:

Operator

At this time, I would like to remind everyone in order to ask a question, please press *1 on your telephone keypad. If you do ask a question, please take your phone off of its speaker setting and use your handset to avoid any potential feedback. Please limit yourselves to one question. If you have a follow-up, please reenter the queue. We'll pause for just a moment to compile the Q&A roster. Our first question is from Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler -- Credit Suisse -- Managing Director

Good morning, Larry and Gary. Thanks for taking my question here. So, over the last two years, equity TF flows have benefited from the implementation of the DOL rule, which is now vacated, and also, a very strong equity market backdrop, which triggered rerisking. I'm just wondering how do you look for equity TF flows to trend here? Is there some deceleration as we have this evolving backdrop? Also, what's the risk now to equity TF outflows if we have a large pullback in the equity markets, just given that the business is now more mature?

Gary S. Shedlin -- Chief Financial Officer

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

Lawrence D. Fink -- Chairman and Chief Executive Officer

I would also add that we have witnessed a big shift from the big financial advisory firms more toward advice. I think that shift is moving more rapidly whether we are guided by a fiduciary role or not. Next week, the SEC will be reviewing this, so we'll hear from the SEC, but I do believe the changes that we've witnessed by the large platforms have changed how they sell products. I think it's much more portfolio-based. I believe it will continue to be more portfolio-based, less product-based, more solutions-based. But, I would also say there is confusion -- as you suggested -- in the U.S., but in Europe, it's moved. Europe has definitely moved -- especially with MiFID II -- much more toward advice and through a portfolio solution. So, I think this trend toward advice is global, it is not slowing down, and I do believe -- and, I'll reconfirm it -- the secular growth in ETFs will continue to be very strong. We have said -- and we have not changed our opinion -- over the next three to five years, ETFs will double in size.

Operator

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

Glenn Schorr -- Evercore ISI -- Managing Director

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

Gary S. Shedlin -- Chief Financial Officer

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

Lawrence D. Fink -- Chairman and Chief Executive Officer

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

Operator

Our next question comes from Bill Katz with Citi.

William Katz -- Citigroup Research -- Analyst

Thank you very much. Good morning, everyone, and thank you for taking the question. Coming back to expenses, thank you very much for the added disclosure. That is helpful. As we look at the $383 million, particularly in the G&A line, how should we think about that going forward? Gary, you mentioned a few things in there that affected the year-to-year change, but I know you're spending a bit; I heard that the income through the commentary is well. Is this a good base to run off of or are there seasonal pressures here that maybe start to abate against the second half of the year?

Gary S. Shedlin -- Chief Financial Officer

Good morning. Thanks for your question. I think we tried to answer that question last quarter. We'll continue to try to answer it again. I think that we need to continually focus on looking at the entirety of our discretionary expense base. There's definitely an interplay between our G&A line and compensation, and as we continue to invest more across the platforms, some of those items will hit the G&A line like data, technology, occupancy -- obviously, MiFID II costs hit there as well. But, as we do that, we're also able to change the composition of our employee base.

So, I think as we said before, as we would expect G&A expense to increase in stable markets, we're also looking for compensation as a percent of revenue to decline, primarily as a function of historical investment and scale in our business. So, the result when you look at the two of them -- again, assuming that we've got fairly stable markets -- is continued upward buys in our margin, and we intend to continue playing offense in this environment. We went into 2018 planning to basically invest as much in the business as we have in years, and I think for the moment, really, nothing is changing our view there.

That being said, I think we've tried to call out -- and, you'll see, obviously, on some of the disclosures there -- most of that was basically in our queue. We're moving it up a little bit, but we have added a few lines. We have been calling out what we call some more episodic...let's call it non-core G&A lines that make that line item bump around a lot. We think hopefully, with the incremental disclosure, you'll have better insight as to what the recurring investment through that category is.

Operator

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

Michael Cyprys -- Morgan Stanley -- Executive Director

Good morning. Thanks for taking the question. I just wanted to ask about the BlackRock Lab for Artificial Intelligence. I'm just curious how you're thinking about the key objectives for this lab, how you're embedding it within the overall organization, and what sort of metrics you're focused on in measuring the success of this lab. Maybe you could share with us any sort of stats on the headcount and how you see that growing over the next couple years.

Robert S. Kapito -- President

This is really quite important to us, and it dovetails with the first area that we built to assist portfolio managers, which is the BlackRock Investment Institute. This was getting all of our portfolio things together with some of the best econometrics and people to talk about how we can structure portfolios better. Once we had that together -- and, that's a pretty significant group of people that meet four times a year and produce weekly commentary, and this is really for internal use -- with the success of that, we wanted to take this further because we believe that utilizing artificial intelligence and people -- so, man and machine -- is going to create a better result of man or machine.

And so, what we're doing is staffing up, and we hired a number of technology-oriented people, we've hired someone from NASA, we've hired someone from the technology area out west, and what we're doing is we're putting together a group to start to use the technology that we've already built to see how we can find some significance in that for performance. So, this is the beginning of what everyone has been writing about.

It's more than just fintech. This is using data to try to pull it in first, which is not easy to do -- you have to have the technology to pull in the data -- of which most data has only been around for the last five years, getting access to the data, pulling it in, analyzing it, seeing if there's any significance to it, and then testing that in the portfolio's performance. So, this is a real important effort that's going on, and we're investing quite a lot into this, and it will dovetail into our investment institute, the internal research that we do, the portfolio manager's capability, and eventually, all be able to be the throughput through Aladdin and our other technology.

Lawrence D. Fink -- Chairman and Chief Executive Officer

Let me add one more thing, Michael. As I've said in many quarterly updates -- and, I've discussed that in my chairman's letter that is going to be released Friday...Monday? I hear Monday. Technology continues to be one of our most important focuses as a firm. This is a focus not just for the investment area, it's a focus across the entire firm. Clearly, using technology to give us better insights for investment performance is key, but we have historically used technology to improve our operational scale.

I think this is one of the reasons why our margins have improved over the last five years. We're using technology to enhance our connectivity with our clients and creating better distribution technology. Obviously, we historically have used technology to enhance our risk analytics. So, our scale and our global reach is allowing us to continue to invest significantly for the future on behalf of our shareholders and our clients, but there is -- I think our Palo Alto labs are just another step in this investment.

The key for us to continue to drive our scale -- our connectivity -- to our clients and better investment performance is creating better operational efficiencies. You framed the question about how many people we're going to be hiring. I don't know if that's significant, whether the number is -- it is our expectation that these investments -- as they have in the past -- are going to create more operational efficiencies over the long run. I believe that's how we continue to drive our business, by creating better operating efficiencies, by creating more scale, especially as we expand globally, and the need for better risk analytics as we're investing more and more globally worldwide. So, this is just a component. It's pretty special, as Rob suggested, and we believe we're going to get better, deeper insight on AI specifically with this one investment, but it is part of a whole strategy of investing related to technology.

Operator

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

Brian Bedell -- Deutsche Bank -- Director

Hi, good morning. Thanks for taking my question. Maybe just a shift back to the financial advisor and sales effort that you guys have been obviously really cranking out for the last few years, especially with Aladdin for Wealth. I think you both mentioned the potential for a renewed advisors' revisiting active strategies. Maybe if you can talk about that a little bit more and how you're positioning your ETF franchise versus your active franchise with advisors. And also, on some more beta, obviously, we've been more in a beta rally with ETF flows over the last year or so. Do you see a greater demand for smart beta products versus the beta with this new volatility regime in the markets?

Robert S. Kapito -- President

So, working backwards, we're seeing a huge demand for smart beta product, and you know that in 2017, we saw about 15% organic growth in smart beta, and we are really differentiating ourselves in that particular area. At the end of the first quarter, we managed about $190 billion in factor-based products, including $108 billion of smart beta ETFs, which were the No. 1 player. iShares now has a global lineup of 147 smart beta ETFs, so we've created that as we're seeing the demand. We did see factor-based inflows of about $3 billion this quarter, representing so far 6% annualized organic growth rate.

So, we believe the factor strategies are going to continue to grow and we're investing in people and technology in the space. We have a pretty good set of unique advantages in factors, a rich history of innovation in thought leadership as we created the first smart beta equity yield fund in 1979, we have the full spectrum of strategies from smart beta -- whether it be multifactor, single-factor, min vol -- to enhance to loan-only factors, which enable us to actually create solutions.

The construction capabilities I believe that we have help our clients to construct what we call a "factor-aware" model. The technology and analytics that we have powered by Aladdin really help our team isolate and monitor factors in our investment process and to perform the necessary risk analysis for clients. Lastly, our people, which we've included Andrew Ang, who heads our factor-based strategies group, and they bring significant portfolio construction experience and model-based investment skills for the clients.

Now, when it comes to ETFs and financial advisors, financial advisors are being asked to do more. It's not a stock-picking or a bond-picking environment. What they need to do is they need to have the tools to be able to understand the risk behind the individual portfolios that they have, they need help in modeling portfolios, and a lot of this is going to be coming through technology.

So, we have spent many years now building technology for large institutional clients, and have had most recently the ability to use that technology to bring it to the financial advisor where they can look at individual portfolios and understand the risk that they have and the returns and match it to the liabilities or the outcome that a client needs, and not only individual, but they can do it in aggregate for all of the portfolios that they are overseeing. That gives them not only the ability to have better information, but it also gives them the ability to be much more efficient, and they can handle many more clients.

So, by working to understand what they need for their clients, they need to grow their business. We are seeing a huge demand for that capability. And of course, when you're modeling and the changes in compensation have taken place for financial advisors, they need to create portfolios based upon the lowest-priced products that they could have, and that describes some of the movement between the alpha-seeking strategies and the passive and ETF business. Part of the ETF business is driven by this need to have products to express precision ways to get returns in a portfolio that they have.

So, it all dovetails in. You have to have the analytics, the technology, the modeling capability, the portfolio construction experience, and the products to put in. If you think about what Larry described in his opening session, it was developing these tools specifically for that, and that's been our mission, and I think that's what's driving more financial advisors to want to work with BlackRock, because we can provide the full service that they need for their business going forward and achieve the desired result for their client.

Operator

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

Michael Carrier -- Bank of America Merrill Lynch -- Managing Director

Hi. Thanks a lot. Just a question on the institutional channel -- two parts. You mentioned a lot of the inflows and outflows, the lumpy things in the quarter. Has that mostly died down, or do you expect more? The more important question is you highlighted the alternative platform, and specifically on the illiquids, I think you guys are around $50 billion. It's definitely scale relative to some of the players in the industry, but some are at $150 billion or $200 billion plus and have relationships with most of the LPs out there. So, the alt fundraising backdrop is great. I just wanted to get an update on your strategy -- maybe ambitions -- for the illiquid alt and where you think that can be over the next couple years.

Lawrence D. Fink -- Chairman and Chief Executive Officer

You're correct in saying we had a good quarter. We expect illiquid alts to be one of the more significant deltas or net drivers for us in the next few years. We have spent -- since 2012 -- a long foundation in building our infrastructure business up to $18 billion now. We're out fundraising now for another global alternative energy fund. We are in the process of raising a long-term private capital fund.

And so, I think we're going to have a lot to talk about over the next few quarters related to the opportunities and the position that BlackRock has across our illiquid platform. I would also suggest -- I think we're in a very good position in our liquid alts area, too. So, we look at this as an important growth area for the firm, we believe this will be a continued driver in our net organic-based fee column, and we purposely have been investing in these areas now for the last five years, and I do believe we are just beginning to see the net positive flows into these strategies.

Gary S. Shedlin -- Chief Financial Officer

Michael, I would just remind people of a couple things on the illiquid alts business. First of all, when we talk about the so-called "committed but uninvested" capital, there is about an $18 billion incremental pipeline to that $50 billion number that you mentioned, which frankly is across the board both in terms of private equity solutions and private credit, which is a big focus for us. Larry mentioned both real estate infrastructure and, obviously, by virtue of the fact that we are a solutions-oriented firm, we actually have a fairly significant effort in tying together solutions of alternatives, which has got another couple billion dollars of commitments that are outstanding.

Secondly -- and, that creates, as you know -- for us, because we call it "committed capital" and not "net new business," it's because we don't earn fees on the committed capital, so as that committed basically gets put into the ground, that becomes a future bank of net new business for us going forward. Secondarily, just because the performance fee line gets a lot of attention now and then, remember, we also don't account for our performance fees and illiquids the same way as some of those pure plays do. We're basically waiting until the end of the cycle of those funds once the capital is returned and no longer subject to clawback, and we are not marking to market that across the board. We do try to provide some incremental disclosure for you in some of our annual filings on that so you have an idea of what the built-in bank there is, but I think as we think about it, we're very bullish on the future growth prospects of that sector.

Operator

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

Christopher Harris -- Wells Fargo Securities -- Director

Thanks. Hey, guys. Wondering if you can give us an update on the actives business outside the U.S. Really just hoping you guys could give us a little bit of incremental color on where you see the biggest opportunities and what you're most optimistic about outside the U.S.

Robert S. Kapito -- President

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

Operator

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

Patrick Davitt -- Autonomous Research -- Partner

Good morning. So, we're starting to see U.K. pension mandate consolidation and fee pressure accelerate, and we would expect the upcoming consultant anti-competition review to push that along. As one of the largest pension managers there, I imagine you could be a consolidator through this theme. Could you speak to how that's playing out from a flow and fee perspective and how you see BlackRock positioned as a net winner or loser as it plays out?

Robert S. Kapito -- President

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

Lawrence D. Fink -- Chairman and Chief Executive Officer

I would just add one more point to that before I go into my closing remarks. The consultant community -- as you suggested -- has been a heavy winner in some of the OCIO businesses, and I think that's where the opportunities will be for us. As Rob suggested, those are the lower-fee businesses, but I do believe we can be a consolidator and we don't have the apparent conflicts that are being investigated in the U.K. pension community.

With that, let me just thank you for joining us this morning and having continued interest in BlackRock. BlackRock's first-quarter results reflect the value that our diverse investment platform, the investments we made, our risk management capabilities, our technology -- what we provide to our clients as they are trying to invest to achieve their long-term goals. We have continuously evolved our platform to deliver the outcomes for our clients through a changing market backdrop, and today, we are better positioned, we're having deeper dialogues, we're having more consistent meetings with our clients than ever before. In these higher-volatility moments, this is when BlackRock -- over our 30 years -- have differentiated ourselves.

The anomaly of low volatility in 2017 is now over. We're back to more volatile worlds, different inputs, different issues, and this is where BlackRock has historically done quite well, and I believe we are well positioned for that. We're focused on delivering growth and scale advantages to both our clients and our shareholders in 2018, and I think the first quarter was a good start to that, and I expect a continuation of that throughout 2018. So, have a good quarter and we will talk to everybody sometime in July.

Operator

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

Duration: 58 minutes

Call participants:

Lawrence D. Fink -- Chairman and Chief Executive Officer

Gary S. Shedlin -- Chief Financial Officer

Robert S. Kapito -- President

Christopher J. Meade -- General Counsel

Craig Siegenthaler -- Credit Suisse -- Managing Director

Glenn Schorr -- Evercore ISI -- Managing Director

William Katz -- Citigroup Research -- Analyst

Michael Cyprys -- Morgan Stanley -- Executive Director

Brian Bedell -- Deutsche Bank -- Director

Michael Carrier -- Bank of America Merrill Lynch -- Managing Director

Christopher Harris -- Wells Fargo Securities -- Director

Patrick Davitt -- Autonomous Research -- Partner

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