Laurence Fink: Great question. I mean we’ve consistently large-scale immunization in the UK pension fund world, a major component of the entire UK market, to find benefit plans have been immunized already. Over the last five years, about another $4 billion to $6 billion that have moved out and been — and more and more immunized. I don’t see that happening yet at a 5% or a 4.5% environment yet. But if we peak long rates at 5.5%, 6%, if the yield curve becomes more steep instead of flat or inverted, that’s when you’re going to see it. I think it’s more of the shape of the yield curve where you’re going to start seeing more and more people thinking about immunization. Unquestionably, on the margin, you’re going to see some pension funds immunize.
And it will — depending on that type of flow, it is going to put some pressure on the equity market as money moves out of equities and permanently go into long-dated bonds. We’re having conversations with a lot of organizations on that. And so I can tell you there are a lot of — there are quite a few pension funds now because our liability rate has been reset at a higher rate. They are getting closer to their — to matching. This is more corporate plans, not state plans. And that occurs you’re going to see a significant de-risking. Instead of that, we are actually seeing more and more companies looking to earn higher returns in credit and infrastructure right now. They’re trying to lock at higher returns that way. But we haven’t seen a major shift of duration extension in the treasury market.
And I think that’s very evident right now. And that’s why I think the yield curve is flattening out right now. But we are seeing significant interest level with a lot of pension funds to take — bring down their — I would say, their exposure in equities, to bring down their exposure in some components of alternatives and focus on income-oriented alternatives to really get an 8%, 9%, 10% type of coupon return. Rob, do you want to follow up on that?
Robert Kapito: Yeah, I’d just add a couple of things. That’s a really great question, because I think I’d speak for Larry. We haven’t heard the word immunization for a very, very long time and we’ve been visited by several pension plans to talk about that. Obviously, it’s rate-driven. I think the number is going to be 7% plus that they’re going to have to get. And if you want to do a little history, in 1995, you can have a portfolio of all bonds and get a 7.5% return. So when you add that together with the environment I described before that might be coming. Now, there’s a step before that. And we have been the beneficiary of a lot of these plans, finding that it’s too complicated, they were very barbelled. They’re not sure what the reallocation could be.
It’s hard to find the people to do this in the locations that they are and they don’t have the technology. So we’ve been the beneficiary through what we call the OCIO business. And we have had a significant amount of large wins in that business to help them with the appropriate reallocation. I think the next stage of that in the future might be more institutions may be going into immunizing the portfolio. But as Larry said, it’s really rate-driven. We’re not that far away. But a lot of things have to happen before then. And a lot of that, of course, will be done in the bond market, which, in my previous answers, really adds fuel to the fire where we could be a very big participant in that.
Operator: Your next question comes from Brennan Hawken with UBS. Please, go ahead.
Laurence Fink: Hi, Brennan. How are you?
Brennan Hawken: Hey, good morning. Thanks for taking my question. Just kind of curious about — thinking about expenses here. Martin, you spoke to coming into the low end of the range on the core G&A, which is certainly encouraging. But right now, it’s probably a time when you all are beginning to sharpen your pencils on the budgets here into next year. The environment — BlackRock is incredibly well-positioned, as you all have hit on several times here today, but the environment is challenging. And so how are you thinking about 2024? And how should we be thinking about that as we refine our models today? Thanks.
Martin Small: Thanks, Brennan. Just — I will reiterate, we expect full year G&A to fall on the low end of our previously communicated — committed guidance of mid to high-single-digit percentage increase, still accept to keep our headcount broadly flat for this year, as we’ve said in the last two quarters. And just on outlook for expense, and I suppose, margin, again, our strategy for driving values to deliver organic growth, differentiated in premium operating margin and consistent capital management policy. We’re focused on investing for profitable growth. When I think about operating leverage in a higher for longer rate environment, you’ve heard on our last few calls that we’re looking to make more concentrated investments in places that can drive higher organic growth, deliver more operating efficiency, but we’re also looking to add flexibility to the cost base.
But most importantly, Brennan, we’re looking to drive more fixed cost scale that comes through technology, automation, organizational design and foot-printing. There are so many exciting things happening at BlackRock on that front. We launched our BlackRock AI Lab back in 2018. We’ve been using artificial intelligence, machine learning, natural language processing in our systematic business going back 20 years. And we have teams all over these things for how we can scale trading, pricing, operations, client service and even automation to make our software engineers most productive. So if you ask me where are we going to focus investments going forward with a particular sharp eye, I look at our total annual operating expense of about $11 billion and our largest fixed investments by dollars and importance, that’s our really talented BlackRock employees.
So giving them more tools to enhance productivity, from large language models to better CRM, tools that help clients customize and self-service, like our BlackRock Advisor Center, those are going to be some of our best opportunities to deliver, I think, long-term profitable growth and where we’d be looking towards our expenses. But also, we’ve got great investments that I think Larry alluded to that are in commercial partnerships. Those are with TAMPs, neo brokers, digital wealth platforms, other distribution venues. So we’d invest some of that. It will be fixed M&P. Some of it will be variable distribution and servicing, which gives us some more resilience. That’s some of the variablizing of expenses that I’ve talked about. But they all have the potential to accelerate outsized growth for iShares and other BlackRock investments.
And our budget for 2024 is going to look to optimize organic growth in the most efficient way possible and expanding our premium margin over time.
Operator: Ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, do you have any closing remarks?
Laurence Fink: Thank you, operator. Thank you, everyone, for joining us today and your continued interest in the organization. BlackRock’s underlying business momentum remains incredibly strong. And we believe there are more money being put to work as investors glean clarity on the path, the path of rate movements, related to geopolitical issues and more people are seeking opportunities with BlackRock. I do see great opportunities ahead for our clients and look forward to delivering more opportunity for you, our shareholders, our investors. And I want to thank you for your continued interest. Have a good quarter.
Operator: This concludes today’s teleconference. You may now disconnect.
