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BlackRock, Inc. (NYSE:BLK)
Q2 2018 Earnings Conference Call
July 16, 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. second 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 speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press * then the number 1 on your telephone keypad. If you would like to withdraw your question, please press the # key. Thank you. Mr. Meade, you may begin your conference.

Christopher J. Meade -- General Counsel

Thank you. 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 FCC 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, and good morning, everyone. It's my pleasure to present results for this second 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.

As a reminder, all year over year financial comparisons referenced on this call will relate current quarter results to recast financials reflecting the adoption of FASB's revenue recognition accounting standard, which became effective on January 1st.

After a strong start to 2018, markets reversed mid-first quarter, as escalating trade tensions, inflationary concerns, and a flattening yield curve caused investors to pull back. Market uncertainty continued throughout the second quarter, reflecting ongoing global trade tensions, a slowdown in emerging markets, increased volatility, and widening credit spreads. In the face of an uncertain and evolving investment landscape, clients have paused, deferring their investment decisions until they have greater clarity on the future.

Last month at our 2018 investor day, we described how BlackRock's strategic differentiators, our globally integrated investment management and technology business with a comprehensive array of products and portfolio construction capabilities and unparalleled distribution reach positioned us to outperform, especially in times like these.

Client needs for investment advice, Aladdin, and digital tools, are greater than ever before, and we are having richer dialogues with them than at any time in our history. Our globally diversified business model enables us to stay committed to and continually invest in our long-term strategic growth plans to ensure we are well-positioned to serve clients in any market environment.

BlackRock generated $20 billion of total net inflows in the second quarter. Net inflows were positive across active, index and cash, evidenced in the breadth of our investment capabilities, including market cap-weighted indices, factors, alpha-seeking strategies, and illiquid alternatives. Despite the current slowdown in industry flows, BlackRock has generated over $275 billion in total flows over the last 12 months, representing 5% total organic asset growth.

The second quarter revenue of $3.6 billion increased 11% year over year, while operating income of $1.4 billion rose 16%. Earnings per share of $6.66 was up 28% compared to a year ago, driven by higher operating results and a lower effective tax rate in the current quarter. Our as adjusted tax rate for the second quarter was approximately 24%. We now estimate that 23% is a reasonable projected tax run rate for the remainder of 2018. However, the actual effective tax rate may differ as a consequence of non-recurring or discreet items and issuance of additional guidance on or changes to our analysis of last year's tax reform legislation.

Second quarter base fees of $2.9 billion are up 10% year over year, driven primarily by market appreciation and total organic base fee growth of 5% over the last 12 months. Sequentially, base fees were flat despite lower average AUM levels as a result of seasonally higher securities lending revenue and a higher day count in the second quarter.

Performance fees of $91 million increased $43 million year over year due to improved relative performance and long only equity funds and our broad-based direct and solutions-oriented hedge fund platform.

Continued momentum in institutional Aladdin, an expansion of our digital wealth and distribution technologies, resulted in 25% year over year growth in quarterly technology services revenue. Current quarter results were bolstered by the timing of several significant client go lives. Overall demand remains strong for our full range of technology solutions, which contributes to gains in both technology services revenue and base fees. Advisory and other revenue of $78 million reflected a strong quarter for financial markets advisory services.

Our commitment to investing for future growth remains steadfast, even in more challenging markets. Total expense increased 8% year over year driven by higher compensation, G&A, and volume-related expense. Employee compensation and benefit expense was up $85 million or 9% year over year, driven primarily by higher headcount and increased incentive compensation associated with higher operating income. Sequentially, compensation of benefit expense was down 3%, reflecting seasonally lower employer payroll taxes.

G&A expense was up $48 million year over year, reflecting higher levels of planned investment across a variety of categories, led by continued investment in technology and portfolio services. Direct fund expense was up $43 million or 19% year over year, primarily reflecting higher average AUM as a result of significant growth in our iShares franchise.

Our second quarter as adjusted operating margin of 45.2% was up 130 basis points year over year. We remain margin aware, especially in the current environment, but continue to play offense in order to optimize organic growth in the most efficient way possible. We also remain committed to returning excess cash flow to shareholders.

As we announced at investor day, we expect to seek board approval this week to increase our quarterly dividend from $2.88 per share to $3.13 per share. On an annualized basis, this represents an increase in our dividend of $1.00 per share to $12.52 per share, or a 25% increase from our 2017 dividend of $10.00 per share. We also repurchased an additional $300 million worth of common shares during the second quarter.

Quarterly net inflows of $20 billion were positive in both active and index strategies as well as in our cash management business. Global iShares generated quarterly net inflows of $18 billion, driven by continued strong demand from long-term investors in our core franchise. Flows into higher fee, non-core iShares have slowed during the year, as market uncertainty has impacted investors' tactical risk allocation decisions.

Retail net inflows of $5 billion were paid by flows into active fixed income, our multi-asset income fund, and our event-driven liquid alternative fund. Equity net outflows were primarily associated with products investing in non-US equities and natural resources.

Institutional net outflows of $9 billion resulted from both significant inflow and outflow activity during the quarter as various clients de-risked, rebalanced, or sought liquidity in the current environment. Despite net outflows, institutional clients drove positive, annualized, organic base fee growth in the quarter, driven in part by mix shift associated with higher fee active products.

Institutional index net outflows of $13 billion reflected significant de-risking activity in the passive equity book, partially offset by continued demand for LDI fixed income solutions. Institutional active net inflows of $5 billion were driven by multi-asset net inflows of $8 billion led by continued demand for our target date offerings. Fixed income net outflows of $3 billion reflecting continued cash repatriation activity and client losses associated with insurance related M&A transactions.

Illiquid alternative fundraising momentum continued, with an additional $2 billion in commitments raised during the second quarter. We also announced the acquisition of Tennenbaum Capital Partners, scheduled to close in the third quarter, augmenting our position as a leading global credit asset manager and advancing our goal of providing clients with a diverse range of alternative investment products and solutions to meet their evolving needs.

Finally, despite a difficult quarter for the cash management industry, driven by both seasonal and repatriated quarterly tax payments, BlackRock's cash management basis on net inflows of $6 billion as our product breadth, scale, and technology first distribution strategy is resonating with clients and leading to differentiated business performance.

We have managed our business through market volatility and uncertainty at various times over the past few years. During each instance, we remain intensely focused on strategically positioning ourselves for long-term growth. Our strong and resilient platform enables us to continue investing prudently in our fastest-growing opportunities and extending our value proposition in those areas where we are already market leaders. With that, I'll turn it over to Larry.

Lawrence D. Fink -- Chairman and Chief Executive Officer

Thank you, Gary. Good morning, everyone. And thank you for joining the call. After a strong close to 2017 and equity markets reaching all-time highs in January, volatility has remained elevated in the second quarter as clients recalibrated their risk.

Political uncertainty has ramped up again. Governments are changing hands in Italy and Mexico and further questions around other elections and policy decisions continue to challenge investors' confidence. Most significantly, some of the strongest foundational components of international investing are being tested as trade frictions escalate to new levels.

Strong earnings and the US economic growth unfortunately are being offset by heightened uncertainty due to rising protectionism and potential barriers to the open markets and free trade that have for years supported global economic growth and the expansion of international markets. These circumstances are impacting markets, exchange rates, and global capital flows.

Additionally, companies are using excess capital to make acquisitions and more aggressively repurchasing shares at levels not seen since 2007. And the pool of investable equities is shrinking -- over time, the supply and demand dynamic should be positive for the market, but the current market environment has not rewarded such corporate behavior as it has in the past.

If you strip out a handful of outperforming tech stocks, the lack of breadth in the equity markets is troubling. We are at a pivotal point. Clients are struggling to better understand increased risk and uncertainty and market dynamics are shifting, causing those clients to pause as they think about the future. Short-term rates have now surpassed 2%, a level not seen in almost ten years. These rising rates and a flattening curve have made cash not a safe place, but now also a more profitable place for investors to stand by and wait.

While investors' caution has impacted industry flows, BlackRock continues to benefit from the value of our diverse global investment and technology platform. Revenue has increased 11%, operating income increased 16%, and our earnings per share increased 28% year over year.

We generated $20 billion of total net inflows, positive across active index and cash in the second quarter. We have seen markets and uncertainty like this before, as clients globally grapple with this uncertainty. They are reaching out to BlackRock with more frequency, with more momentum.

The dialogues with the clients today have never been stronger. We believe that the long-term trends that BlackRock is strategically positioned to address remain intact. The investments we have made to strengthen our index, our active and alternative platforms, and our investments in portfolio construction, asset allocation, and distribution technologies position us to deepen relationships and partnerships with both institutional and wealth clients.

We remain focused on investing in BlackRock's future to stay ahead of our clients' needs and capture the most impactful long-term industry opportunities. This means constantly improving our investment platform and technology, becoming more global and more local in the markets where we operate and taking advantage of our scale to serve our clients better and deliver more value to our shareholders.

As institutional clients around the world react to market movements and uncertainty, activity has been elevated year to date, with growth flows up substantially relative to the same period last year. However, while clients have shifted assets with investment strategies, they have been hesitant to put new assets to work and net flows have been more muted as a result.

Similar to last quarter, the ongoing impact of US tax reform also influenced institutional client behavior in the second quarter. A number of US-based clients sought liquidity from US equity allocations to fund share repurchases and M&A. Pension clients are looking to outsource their investment responsibilities in an increasingly complex investment landscape, which is driving momentum in our outsource CIO business, both in the United States and internationally. We're also seeing strong momentum in LDI discussions as the combination of rising rates and resilient equity market levels create incentives for clients to immunize their portfolios.

Our commitment to delivering a differentially long-term retirement solution to corporate clients is also generating results. We continue to see interests in our asset allocation and customized target date capabilities. LifePath, our target date series, has generated $8 billion of net inflows in the quarter, representing 17% annualized organic growth.

This quarter, adoption of ETFs at the core of investors' portfolios drove $18 billion of net inflows into iShares and BlackRock once again captured the number one share of global ETF flows year to date. Because buy and hold clients are positioning their portfolio for the long-term, they tend to be less sensitive to inter-quarter volatility than liquidity-driven users of ETFs.

We have strategically invested to provide high-quality index exposures with a range of value of propositions for our clients. We are confident in the long-term secular growth opportunity for ETFs and we believe that the global ETF market can reach between $10 trillion and $12 trillion in assets by the end of 2023.

Growth will be driven by core and non-core products. Institutions are increasingly using ETFs as alpha generation tools and replacement for futures and swaps, both in equities and fixed income exposures. And while clients globally are using ETFs in fee-based ecosystems, wealth managers are increasingly using models in their fee-based advisory businesses and the nature of BlackRock's relationships with wealth managers and advisors is becoming more and more similar to the deep holistic engagements we have with our institutional clients.

Our ability to provide clients with digital tools and whole portfolio solutions drove $5 billion of retail net inflows in the second quarter. This represents our sixth consecutive inflow quarter and growing momentum with financial advisors who are leveraging BlackRock's technology to manage risk and construct portfolios using both ETFs and our active mutual funds.

Inflows were driven by our strong demand and our top-performing active fixed income strategies where we generated $2 billion in net flows, each in our municipal bonds and our Unconstrained strategies. Our Unconstrained fixed income franchise in the US and globally are particularly well-positioned for a rising rate environment.

We achieved the number one position in gathering active fixed income flows for the quarter in the United States wealth space, where we are delivering strong performance at good value where 88% of our assets are top-performing and lowest price quartile. The strength of BlackRock's fixed income platform reflects the team's use of Aladdin technology, sophisticated risk analytics, and scenario testing tools across a diversity offering of products, from short duration to unconstrained.

Performance across fixed income strategies remained strong at the end of the quarter. 78% of our taxable fixed income assets were above benchmark or peer medium for a one-year period. Our active equities, 59% of our fundamental and 86% of our systematic active equity assets were above benchmark or peer mediums for a one-year period. Strong performance is the foundation for delivering client outcomes and driving net inflows.

In alternatives, we're seeing more momentum in fundraising than any point in BlackRock's history. Over the last few years, we've invested both organically and inorganically to build a comprehensive and differentiated alternative platform. Supported by robust sourcing capabilities, investment expertise, and scale distribution, we're beginning to see the benefits of these investments.

Through strong performance across our platform, especially in infrastructure and private credit, which are key focus areas for BlackRock and position us well in leading illiquid alternative space. We raised $2 billion in flows and $2 billion in additional commitments in our illiquid alternative business in the second quarter.

During the quarter, we closed our European middle market private debt strategy with over $1 billion in commitments, which represents significant progress in establishing a leading global private credit platform and further expanding our capabilities in Europe.

We also announced the first close of our third global energy and power infrastructure fund last week with $1.5 billion in commitments from a diverse global set of clients. This strong first close reinforces our position as the leading energy and power investment platform in the industry. And we continue to make progress in our long-term private capital strategy. We are seeing tremendous client interest for a structure that aligns with their long-term goals.

Cash management is another area where we are gaining share and we now manage $457 billion in cash assets. With cash strategies earning between approximately 2% and 2.5%, levels not seen in the past decade, clients are using cash as not only a safe asset, but one that provides attractive returns, especially in this market environment.

BlackRock generated $6 billion in net inflows and cash strategies in the quarter, driven by the benefits of our global scale and tech-enabled distribution. This highlights one of the true benefits and differentiators of BlackRock's diverse business model.

Technology is also a strategic differentiator and one of our largest priorities at BlackRock. Asset managers, wealth managers, and custodial banks globally are rethinking their business models and looking for ways to operate more efficiently. Insurers and banks are facing regulatory consolidation and evolving regulatory requirements. These changes are driving increased demand for BlackRock's broad-based technology services and digital tools like Institutional Aladdin, Aladdin Wealth, Provider Aladdin, and Cachematrix.

For institutions, Aladdin is an enterprise investment management system powering the entire investment process on a single platform, from portfolio analytics and construction to trade execution to compliance to investment operations. It is also a powerful solution for custodians, who service those assets through Provider Aladdin, as well as for wealth managers through Aladdin Wealth, bringing sophisticated institutional tools to the broad wealth management community.

Aladdin continues the benefit for most trends favoring global scale, multi-asset solutions, and operating efficiency and simplicity. Our technology services revenues grew 25% year over year, reflecting an outsized number of institutional clients going live on the Aladdin platform in the quarter. We continue to expect double-digit growth in the low to mid-teens range going forward.

We are focused on near-term opportunities that partner with clients on their technology needs and investing in longer-term opportunities in artificial intelligence and data science to enhance the way we and our clients invest, the way we distribute, and how we operate.

I want to end by saying we've seen these markets like this before that have caused investors to pause. But we believe that we are better prepared today to meet client needs than ever before. This is reflective of the depth, the quality of the dialogue we're having with clients across the globe. Indeed, we believe that in markets like these, clients put an even greater premium on the differentiating value proposition that BlackRock can offer them. 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 * then the number 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 yourself 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. And our first question comes from the line of Bill Katz with Citigroup.

Lawrence D. Fink -- Chairman and Chief Executive Officer

Hey, Bill.

William Katz -- Citigroup -- Analyst

Good morning, everyone. Thank you very much for taking my question this morning. Larry, I'd like to circle back to your technology discussion. It seemed like a very nice ramp by the quarter-quarter year on year. When you think about your guidance of low to mid-teens from here, is the second quarter -- I think you said there were a few things that turned on during the quarter -- is this a good start point for that assumption or is there sort of further momentum into the second half of the year to which we build to that low to mid-teens growth rate into '19?

Lawrence D. Fink -- Chairman and Chief Executive Officer

Well, we tend to use that as a baseline. I'm going to let Gary answer that with more specifics. But as I said in my prepared remarks, some of the wins we had a year ago and two years ago, depending on how long these conversions took, went live. I'm very pleased to say two very large institutional clients went live. So, the ramp rate is higher.

The dialogue we're having for Aladdin and all technology solutions is growing. But I think it's fair that we haven't adjusted yet our run rate. I'll let Gary go into that a little more.

Gary S. Shedlin -- Chief Financial Officer

I think, Larry, I think you answered it. The question of what's there becomes the rate going forward, but the sequential year over year increase has obviously changed as a function of timing. So, as Larry said, the growth this quarter, 25% year over year did reflect an outsized number of significant institutional clients going live on the platform and the platform will continue to benefit.

The other smaller item, obviously, that will come into play is we closed our cash matrix deal in July of 2017, which we obviously benefited from the timing of that revenue related to the periods. So, that revenue will now be in both periods of time as we think about year over year changes.

Lawrence D. Fink -- Chairman and Chief Executive Officer

I would just add one more thing related to this -- the demand for Aladdin services and all technology services is growing across the board. In my conversations worldwide, I'm hearing more and more clients are looking to add Aladdin services. But I think for run rate, as Gary and I both said, it's a good level. It's a benchmark.

Gary S. Shedlin -- Chief Financial Officer

We'll continue to say this probably an answer to a couple questions, but as I think we've always said, we don't believe quarter to quarter comparisons are the best way to think of our business. We tend to look at longer periods of time. If you look at 12 months versus 12 months on an LTM basis for Aladdin, it's up closer to 18%, which is much more in line with our focus going forward.

Lawrence D. Fink -- Chairman and Chief Executive Officer

But the momentum is strong.

Gary S. Shedlin -- Chief Financial Officer

Absolutely.

Operator

Your next question comes from Craig Siegenthaler with Credit Suisse.

Lawrence D. Fink -- Chairman and Chief Executive Officer

Good morning, Craig.

Craig Siegenthaler -- Credit Suisse -- Managing Director

Hey, good morning, Larry. Thanks for taking my question. So, it looks like the slowdown in European flows is more of an industry issue than anything BlackRock-specific. Can you just give us your thoughts on the softness and maybe any perspective on this if this is a shorter-term issue or a longer-term problem?

Lawrence D. Fink -- Chairman and Chief Executive Officer

Well, some of it has been outflows from US-based investors that had their money overseas and they were investing in European products. So, when we had tax reform and they repatriated the money, you're seeing that in the flows. Two, there still remains to be, in some of the sovereign wealth funds, some de-risking that occurred in the second quarter, and you're seeing some clients taking profits because of the value of the dollar. The dollar appreciated quite well in the second quarter.

So, you're seeing many different divergent trends. But I would say -- I don't have enough information to tell you if it's a one-quarter event, but I just came back from Europe, spending quite a bit of time there. The opportunities in Europe, the broad conversation we're having with some very large European and Middle Eastern clients is strong as ever. In some cases, some of them have pause because of the tension related to trade.

But I would say over a long period of time, the growth trends are intact and I would say we're seeing outcomes of repatriation of cash, strong dollar, and just global uncertainty, but let's be clear -- the dialogues are deeper than ever.

Operator

Your next question comes from the line of Alex Blostein with Goldman Sachs.

Lawrence D. Fink -- Chairman and Chief Executive Officer

Hi, Alex.

Alex Blostein -- Goldman Sachs -- Analyst

Hi, Larry. Good morning, everybody. Just going back to the Aladdin discussion for a second, I was wondering if you guys could give us an update on the progress Aladdin for Wealth is making, and again, any metrics you guys can put around would be helpful, whether it's client assets that are already in the platform and, I guess, any sense what sort of AUM contribution you guys have had, maybe kind of over the last 12 months from Aladdin for Wealth.

Robert S. Kapito -- President

So, this is a great new platform for us because what we're doing is giving wealth managers the ability to analyze their portfolios, utilizing all of the technology that we have built in Aladdin so that they can suggest better risk and better returns and instead of 100 portfolios, 500 portfolios. So, this is becoming a very, very big business. There are over 7,000 individual advisors that are now using this.

As we're building this out, their request for more and more technology is quite significant and we're building that in. So, this is going to be something that I think will help in that they will be utilizing their models. Some people will be utilizing our models. We will be comparing the products they have in their client's portfolios to better products that they might have in their portfolios, suggesting that they might not only use our products, but other people's products to better the portfolios.

So, this is a way to take what we're doing for our institutional clients and get deeper into solutions for the individual investor, but it's a business to business, where we're utilizing this to help our distributors create better solutions for their clients. So, we're very excited about this. We have several firms that have already signed on to this. It's going to take us a while to implement this. Also, it takes us a while to get people to actually use it even though it is implemented.

So, we're very excited about this, very excited about the future of it. And again, following up on Larry's comments, it gives us the ability to have more holistic conversations with a wider group of clients and in this case, the retail clients or wealth management clients, which we're seeing a lot of flow from, especially this quarter.

Lawrence D. Fink -- Chairman and Chief Executive Officer

Alex, let me just add one more thing. I think Rob said it very clearly. Aladdin Wealth takes maybe as long as one to two years, like a conversion, to get our retail wealth management clients to utilize them and to affect it. But one thing that we are hearing very loud, the advisors are looking for better client understanding and portfolio understanding. They're looking for better transparency. They're looking for better tools to navigate their client's money with better consistency. They're using, as Rob said, more models and having Aladdin for wealth allows them to navigate this.

So, if any anything, we are seeing greater demand for these types of products because it simplifies the process. It creates a better environment for investing, a better environment for compliance and compliance review, and importantly, it allows the advisors and the firms to better understand all of their clients' risks in comparing the risks associated with all the portfolios and making sure that those portfolios are meeting the needs of each and everyone's client portfolios.

This plays into our strength. This gives us a great opportunity to be more connected with our distribution partners. We're providing what I would say the most clear thing, a differentiating value proposition. So, it's not just about a product. It is providing them with a better enterprise solution to deal with their client's issues more effectively with greater transparency.

Operator

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

Lawrence D. Fink -- Chairman and Chief Executive Officer

Hey, Ken.

Ken Worthington -- J.P. Morgan -- Analyst

Hi, good morning. It seems like we're seeing a greater use of commission-free platforms for the distribution of ETFs. So, Schwab has built its ETF platform from scratch using this approach. More recently, we've seen expanded use of commission-free ETF trading by both Ameritrade and Vanguard. So, I guess maybe, Larry, what do you think of these moves to commission-free trading and ETFs and is this sort of the next evolution in ETF competition?

Robert S. Kapito -- President

Sure. I think it's actually positive for us in that the more people that are aware of ETFs, the better. The more people that have access to ETFs, the better. So, we are the manufacturer here and if there is a cheaper way that these groups want to distribute ETFs, quite frankly, it benefits us.

So, I think for the distributors, it's a competitive process that they're going to have to step up to the plate like we do because price and value is certainly one of the aspects of ETFs. But for us, with the largest market share, the more people are distributing and buying ETFs, the better.

Operator

Your next question is from Dan Fannon with Jefferies.

Dan Fannon -- Jefferies -- Managing Director

Thanks. Good morning. Can you discuss the multi-asset flows in a bit more detail? You talked about LifePath, I think, seeing around $8 billion. I guess can you just discuss momentum in that business more broadly and how to think about kind of the growth in that business or that segment going forward?

Gary S. Shedlin -- Chief Financial Officer

Sure, Dan. I think there's no question that there are really two or three big drivers of multi-asset flows in the quarter. One thing I just want to just say right at the outset is I think we've said before and you no very well it's important not to conflate the multi-asset line item that you see on our financial reconciliation tables to the broader theme of outcome-oriented investing and solutions.

But the multi-asset line item did see $8 billion of flows in the quarter, as you mentioned, continued demand for target data offerings, including one significant custom target date solution for a large client, in addition, strong flows into MAI or multi-asset income fund and factor-based strategies of about $1 billion each.

That being said, we do continue to see outflows from our global allocation fund. That was about $3 billion in the second quarter. I think as we've mentioned before, that is relevant, not as it relates necessarily to the flow itself, but we do note that obviously global has a higher fee than LifePath does and that obviously creates some drag on the pay rate and overall revenue growth. But otherwise, we're continuing to invest and believe very strongly in the multi-asset category in and of itself and broader portfolio construction. It pulls together lots of different parts of the BlackRock organization into client models and solutions.

Operator

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

Patrick Davitt -- Autonomous Research -- Partner

Good morning. How are you all? You saw some pretty punchy losses in longer dated core bond products in the second quarter. Could you speak to what you're seeing in terms of client conversations in terms of movement within the bond category and if you're seeing maybe a pipeline of running from the hills from the longer data stuff at this point?

Lawrence D. Fink -- Chairman and Chief Executive Officer

Well, I don't think it was that big of outflows. I'm getting the number right now, but it's $2 billion or less. We saw $26 billion of fixed income flows. I think in long duration, it's a function of investors' belief over the long run that inflation is going to increase and the reserve is going to continue to be tightening and there's greater value in the short-end at this moment than at the long end.

I think when you look at the fixed income universe, it's many different opportunities. There are many times when you see clients moving on the long end into the short end or short end into long end. I don't believe there's any really dramatic change. I think we did see emerging market outflows and that's intermediate type of level of outflows. But I don't think there's anything extraordinary in fixed income at all in the second quarter. If anything, the trends continue -- inflows in the short duration, inflows in unconstrained, I think that continues to be the trend.

We continue -- this is more intermediate again -- we continue to see very strong gains in municipals. That's around the 10-year maturity, seven to ten years. I don't know if there's any big trend. Rob?

Robert S. Kapito -- President

So, Patrick, the only trend is what Larry mentioned in his opening remarks, that today, you can get as a good a yield in a combination of risk-free assets and risk assets as you can get in just risk assets. So, therefore, the flows that we're seeing, which are appropriate, considering where interest rates are where the risk free rate has gone, that people would come out of high-yield and emerging markets because they're not getting compensated enough relative to risk free rates.

So, it wouldn't be longer-term and shorter-term. It would just be riskier assets versus risk free assets. There, we saw the flows and when that changes, we see the flows the other way. So, we're not worried about it. It's really market-oriented and it's those people that are investing for the short-term versus the long-term.

Operator

Your next question comes from the line of Michael Cyprys with Morgan Stanley.

Lawrence D. Fink -- Chairman and Chief Executive Officer

Hi, Michael. I think we lost him.

Operator

Mr. Cyprys, your line is open.

Michael Cyprys -- Morgan Stanley -- Analyst

Hello? Sorry. I think I was on mute. Can you hear me now?

Lawrence D. Fink -- Chairman and Chief Executive Officer

Yes.

Michael Cyprys -- Morgan Stanley -- Analyst

Great. So, thanks for taking the question. Just curious if we see true tower floors emerge. What do you think the impact can be on asset flows? Where do you think we can see money flow out in terms of asset class geographies? Where do you think it flows into?

Lawrence D. Fink -- Chairman and Chief Executive Officer

Well, it will flow more into dollar-based assets, generally. We would see a strengthening of the dollar. So, we'd probably see more dollar flows in the short run. In the long run, it may be negative. It really depends on if we had a real tariff war, does that disrupt the accelerated GDP growth that the US is experiencing from tax reform? Does it create more uncertainties?

But if it doesn't, if we don't have an all outright tariff war increased from this point now, I would say equity markets are cheaper today than they were in January. We've had great corporate earnings, record M&A, record amount of stock repurchases. So, the amount of underlying equities has shrunk. PEs have reduced. PEs are reduced from a year to date level because of the global uncertainty.

So, if there is more positive clarification that doesn't lead to tariff wars, then the markets would probably reassert itself quite strongly. If there's a tariff war, some of it's priced into the market, some of it's not. I would say, Michael, that there's some asymmetry here. I think there's probably a little more upside right now than downside. But let's be clear. If the trade war leads to a reduction in future GDP, then the market will have a setback, but as I said, PEs have fallen from the beginning of the year, so the market is trying to digest all this as we speak. I'm pretty calm about it.

The one thing I will say, and I said this in my prepared remarks, I have never witnessed more client conversations around this uncertainty and the opportunities we have with some of the clients today are as large as ever. We are having deeper conversations, broader conversations on clients on relooking at their risks on how to design their portfolios in these different types of scenarios and probably the most important thing I can say is more and more clients are coming to BlackRock.

Operator

Your next question is from the line of Glenn Schorr with Evercore ISI.

Glenn Schorr -- Evercore ISI -- Managing Director

I think your margin improvement in not the greatest environment is great to see. Do you think you held back on any of the spending during the quarter?

Lawrence D. Fink -- Chairman and Chief Executive Officer

No. I'll let Gary get into the details. We have not adjusted our spending related to investing in our future. We are going to continue to invest in our future to stay in front of our clients' needs. I think what you're seeing in terms of the margin expansion is our investments in the past in technology has created better efficiencies and we're able to do more with less. Gary?

Gary S. Shedlin -- Chief Financial Officer

Thanks, Larry. I would just echo a couple of things -- one is I agree with Larry. We really are spending right now what we planned on spending when we went into the beginning of this year. We're obviously trying to be more thoughtful as to spending in the places we get the greatest impact in the current market. So, there's obviously always reallocation and rethinking as to what we want to do with that spend.

But I think there's no question that our heads are up, our eyes are forward, and we're continuing to play offense in the market and continuing to invest in all of the strategic initiatives that we've talked at length with you about and discussed, again, at investor days.

So, illiquids, factors, portfolio construction, technology across the board, as Larry said, in terms of alpha generation, digital distribution are our own operating platform, continuing to think smartly about investing in regions, especially in the current environment, where it may be even more important than ever to be local in key markets. So, I think that's exactly right.

On the other hand, again, as I echoed when we talked about our technology growth from a year over year perspective, quarterly margins are obviously we are even in positive markets, we would basically ask you to look at the trends overall. I think the trend over the last 12 months has been close to around 80 basis points of margin improvement rather than what we saw this quarter. So, spend will change on a quarter to quarter basis. Again, I think looking at longer-term trends is much more indicative of our operating leverage than necessarily on a quarter to quarter basis.

Lawrence D. Fink -- Chairman and Chief Executive Officer

As we constantly say, we're margin aware.

Gary S. Shedlin -- Chief Financial Officer

Especially in this environment.

Lawrence D. Fink -- Chairman and Chief Executive Officer

Yeah.

Operator

Your next question comes from the line of Robert Lee with KBW.

Lawrence D. Fink -- Chairman and Chief Executive Officer

Hey, Robert.

Robert Lee -- KBW -- Managing Director

Hey, good morning, everyone. I guess my question maybe will have an A and B. We always talk about kind of an organic growth from a flow perspective. I guess what really matters, the flow contribution to the bottom line. I guess with that in mine, maybe get a little bit of sense of how -- I know you don't want to focus too much on just one quarter, but we kind of look at the mix, I think you kind of hinted at it a little bit, but how would you characterize the bottom line contribution of flows this quarter and maybe how that compares to where it's been the last several quarters?

Gary S. Shedlin -- Chief Financial Officer

Yeah, Rob. Thanks. Good question. Obviously, as we saw investors pause amid uncertainty and flows, specifically when we looked at what caused some of those slowdown flows this quarter, we did see a slowdown in organic base fee growth for the quarter. I would say that slowdown was primarily driven by a client shift in sentiment on equities. We did see strength in alternatives. We did see strength in fixed income, though there was a shift to shorter duration fixed income and that does come with a bit of a lower fee more broadly.

If we look at equities, as Larry mentioned, we saw strong growth in core iShares, but less momentum in higher fee non-core exposures versus what we've seen historically, and in particular, outflows in EEM, which is our flagship liquid emerging markets offering, as well as in Europe, Japan, and some non-US developed markets in equities. On a base fee growth, if we think about it, those funds clearly are relatively higher fee than the core.

I think we additionally saw some slower active equity flows, particularly in Europe and Asia, which frankly is an area of strength for us from a performance standpoint. As we've mentioned in the past in our discussions of divergent beta and FX, those carry higher fee rates.

But again, I think we feel really confident that the broader platform is going to do what it's going to do. As Larry mentioned, we're having stronger and deeper conversation with our clients. As this uncertainty passes, we're pretty convinced that we're right where we need to be when the client activity kicks back in.

Operator

Your next question comes from the line of Brennan Hawken with UBS.

Brennan Hawken -- UBS -- Analyst

Hey, good morning. Thanks for taking my question. I just had one, hopefully for a bit of color on the sec lending side -- strong this quarter, highlighted some seasonality, but it was up year over year as well and we're hearing that regulatory changes in Europe have sort of softened some of the traditional seasonality. So, maybe could you give a little bit of color on what you are seeing there and is it a volume versus spread dynamic? How should we think about that here this quarter?

Lawrence D. Fink -- Chairman and Chief Executive Officer

Well, it's actually both. When we have record on M&A, it produces more volume, more stocks are on special, in addition, when you have higher rates, it's partially rates. Also, I do believe because of our position, because of the stable nature of our platform and our investable assets or the assets that can be lent, we are able to command premium rates also because of the nature of the stability of the type of assets we have.

And we made this as a major component of the value proposition that we provide to our iShares investors and to our index investors that we're able to generate better returns for them and in many cases, because of the strengths and the power of BlackRock's sec lending business, we're able to provide products after fees positive to the index.

Gary S. Shedlin -- Chief Financial Officer

So, Brennan, specifically to your question on the sequential basis, where we saw sec lending up about 18%, I would say that it was definitely both a price and a volume, as Larry mentioned. The book was up. But frankly, sequentially, spreads were up more and that helped drive it. I think part of that was increasing rates -- so, we saw asset spreads going up -- and part of it, obviously, was increased demand for specials, which I think is partly seasonal that you see in Europe, but also, just the fact that the M&A environment is up significantly is helping or business.

Operator

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

Lawrence D. Fink -- Chairman and Chief Executive Officer

Well, let me thank everybody for joining us this morning. As I said in my prepared remarks earlier, we have seen markets like this before. We've seen customers and clients pause. I think we're better prepared to meet the clients' needs than ever before and the opportunities in front of us have never been greater.

Our second quarter results reflect the value that our diverse investment and technology platform provide for our clients as they invest to achieve their long-term goals. We are confident that continued differentiation that BlackRock provides will enable us to deliver the growth that our shareholders ask of us and the scale opportunities over the long-run to help both our clients and our shareholders. I believe that is intact and the opportunities in front of us are as great as ever.

Have a good quarter, everyone.

Operator

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

Duration: 56 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

William Katz -- Citigroup -- Analyst

Craig Siegenthaler -- Credit Suisse -- Managing Director

Alex Blostein -- Goldman Sachs -- Analyst

Ken Worthington -- J.P. Morgan -- Analyst

Dan Fannon -- Jefferies -- Managing Director

Patrick Davitt -- Autonomous Research -- Partner

Michael Cyprys -- Morgan Stanley -- Analyst

Glenn Schorr -- Evercore ISI -- Managing Director

Robert Lee -- KBW -- Managing Director

Brennan Hawken -- UBS -- Analyst

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