10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File No. 001-33099

 

 

LOGO

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   32-0174431

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

55 East 52nd Street, New York, NY 10055

(Address of Principal Executive Offices)

(212) 810-5300

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.01 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known, seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨


Table of Contents

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2010 was approximately $5.6 billion. The registrant has no non-voting common stock.

As of January 31, 2011, there were 131,795,285 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference herein:

Portions of the definitive Proxy Statement of BlackRock, Inc. to be filed pursuant to Regulation 14A of the general rules and regulations under the Securities Exchange Act of 1934, as amended, for the 2011 annual meeting of stockholders to be held on May 25, 2011 (“Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

 

 

 


Table of Contents

BlackRock, Inc.

Index to Form 10-K

TABLE OF CONTENTS

 

PART I   

Item 1

   Business      1   

Item 1A

   Risk Factors      28   

Item 1B

   Unresolved Staff Comments      37   

Item 2

   Properties      37   

Item 3

   Legal Proceedings      37   
PART II   

Item 5

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      38   

Item 6

   Selected Financial Data      40   

Item 7

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      42   

Item 7A

   Quantitative and Qualitative Disclosures About Market Risk      118   

Item 8

   Financial Statements and Supplementary Data      120   

Item 9

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      120   

Item 9A

   Controls and Procedures      120   

Item 9B

   Other Information      123   
PART III   

Item 10

   Directors, Executive Officers and Corporate Governance      123   

Item 11

   Executive Compensation      123   

Item 12

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      123   

Item 13

   Certain Relationships and Related Transactions, and Director Independence      123   

Item 14

   Principal Accountant Fees and Services      123   
PART IV   

Item 15

   Exhibits and Financial Statement Schedules      124   
   Signatures      129   


Table of Contents
Item 1. BUSINESS

Overview

BlackRock, Inc. (“BlackRock” or the “Company”) is an independent investment management firm with $3.561 trillion of assets under management (“AUM”) at December 31, 2010. The Company is highly regulated, serves its clients as a fiduciary, and derives all of its revenues from client business. We focus exclusively on investment management and risk management; we do not engage in proprietary trading or other activities that could conflict with the interests of our clients. Our business is global: we invest in capital markets throughout the world, we have employees in 25 countries and we serve investors in more than 100 countries. Our clients include taxable, tax-exempt and official institutions, retail investors and high net worth individuals.

The 2009 combination of BlackRock and Barclays Global Investors (“BGI”) created a firm with unsurpassed breadth of investment expertise and risk management capabilities across the global capital markets. Our unique platform enables us to bring together active (alpha) investments with index (beta) products and risk management to develop tailored solutions for clients. Our product range includes single- and multi-asset class portfolios investing in equities, fixed income and/or money market instruments. We offer our products directly and through intermediaries in a variety of vehicles, including open-end and closed-end mutual funds, iShares® exchange-traded funds (“ETFs”) and other exchange traded products (together with ETFs, “ETPs”), collective investment funds and separate accounts. We also offer our BlackRock Solutions® (“BRS”) investment systems, risk management and advisory services to institutional investors.

BlackRock’s common stock is publicly traded on the New York Stock Exchange under the symbol, “BLK”. A majority of our Board of Directors is independent, and we have no majority shareholder. On November 15, 2010, certain of BlackRock’s stockholders completed a $9.6 billion secondary offering through the sale of 58.7 million shares held by Bank of America Corporation (“Bank of America”) through its wholly-owned subsidiary, Merrill Lynch & Co., Inc. (“Merrill Lynch”), and The PNC Financial Services Group Inc. (“PNC”) at a price of $163.00. None of the proceeds of the offering went to the Company. At December 31, 2010, Bank of America did not hold any of BlackRock’s voting common stock outstanding and held approximately 7.1% of BlackRock’s capital stock. PNC held approximately 25.3% of BlackRock’s voting common stock outstanding and held approximately 20.3% of the Company’s capital stock. Barclays Bank PLC (“Barclays”) held approximately 2.3% of BlackRock’s voting common stock outstanding and held approximately 19.6% of the Company’s capital stock.

BlackRock operates in a global marketplace characterized by a high degree of market volatility and economic uncertainty, factors that can significantly affect earnings and stockholder returns in any given period. Management seeks to achieve attractive returns for stockholders over time by, among other things, capitalizing on the following factors:

 

   

the Company’s diversified product offerings, which enhance its ability to offer a variety of traditional and alternative investment products across the risk spectrum and to tailor single- and multi- asset class investment solutions to address specific client needs;

 

   

the Company’s longstanding commitment to risk management and the continued development of, and increased interest in, BRS products and services;

 

   

the Company’s global presence, with approximately 41% of employees outside the U.S. supporting local investment capabilities and serving clients of which approximately 44% of total AUM was managed for clients domiciled outside the U.S.; and

 

   

the growing recognition of the BlackRock brand globally, the strength of the Company’s culture and the depth and breadth of its intellectual capital.

The Company’s ability to increase revenue, earnings and stockholder value over time is predicated on its ability to generate new business in investment management and BlackRock Solutions products and services. New business efforts are dependent on BlackRock’s ability to achieve clients’ investment objectives in a manner consistent with their risk preferences and to deliver excellent client service. All of these efforts require the commitment and contributions of BlackRock employees. Accordingly, the ability to attract and retain talented professionals is critical to the Company’s long-term success.

 

1


Table of Contents
Item 1. BUSINESS (continued)

 

Overview (continued)

Selected financial results for the last six years are shown below:

 

      Selected GAAP Financial Results  
(Dollar amounts in millions, except per share amounts)    2010     2009     2008     2007     2006     2005     5 Year
CAGR
 

Total revenue

   $ 8,612      $ 4,700      $ 5,064      $ 4,845      $ 2,098      $ 1,191        49

Operating income

   $ 2,998      $ 1,278      $ 1,593      $ 1,294      $ 472      $ 341        54

Operating margin

     34.8     27.2     31.5     26.7     22.5     28.6     4

Non-operating income (expense)(1)

   $ 36      $ (28   $ (422   $ 162      $ 37      $ 28        5

Net income attributable to BlackRock, Inc.

   $ 2,063      $ 875      $ 784      $ 993      $ 321      $ 231        55

Diluted earnings per common share

   $ 10.55      $ 6.11      $ 5.78      $ 7.37      $ 3.83      $ 3.45        25
     Selected Non-GAAP Financial Results  
(Dollar amounts in millions, except per share amounts)    2010(2)     2009(2)     2008(2)     2007     2006     2005     5 Year
CAGR
 

As adjusted:

              

Operating income

   $ 3,167      $ 1,570      $ 1,662      $ 1,518      $ 674      $ 408        51

Operating margin

     39.3     38.2     38.7     37.4     36.7     38.9    

Non-operating income (expense)(1)

   $ 25      $ (46   $ (384   $ 150      $ 29      $ 18        7

Net income attributable to BlackRock, Inc.

   $ 2,139      $ 1,021      $ 856      $ 1,077      $ 443      $ 266        52

Diluted earnings per common share

   $ 10.94      $ 7.13      $ 6.30      $ 7.99      $ 5.29      $ 3.99        22

 

(1)

Net of net income (loss) attributable to non-controlling interests.

(2)

See reconciliation to GAAP measures in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.

See additional information in Item 6, Selected Financial Data.

BlackRock reports its financial results using accounting principles generally accepted in the United States of America (“GAAP”); however, management believes that evaluating the Company’s ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s financial performance over time. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Certain prior year non-GAAP data has been reclassified to conform to current year presentation.

 

2


Table of Contents
Item 1. BUSINESS (continued)

 

Overview (continued)

Operating Income, as Adjusted:

GAAP reported operating income includes certain significant items, the after-tax impact of which management considers non-recurring or transactions that ultimately will not impact BlackRock’s book value and, therefore, are excluded in calculating operating income, as adjusted.

Operating income, as adjusted (a non-GAAP measure), excludes certain expenses incurred related to the integration of the acquisitions of SSRM Holdings, Inc. (“SSR”), Merrill Lynch Investment Managers (“MLIM”), the fund of funds business of Quellos Group, LLC (“Quellos”) and BGI, as well as advisory fees, legal fees and consulting transaction expenses related to the BGI Transaction, a 2007 termination fee for closed-end fund administration and servicing arrangements with Merrill Lynch, 2008 and 2009 restructuring charges and compensation expense associated with appreciation/(depreciation) on assets related to certain BlackRock deferred compensation plans. These expenses have been excluded from operating income, as adjusted, because they have been deemed non-recurring by management and to help enhance the comparability of this information to prior periods.

The portion of compensation expense associated with certain of BlackRock’s long-term incentive plan (“LTIP”) awards that has or will be funded through distributions to participants of shares of BlackRock stock held by PNC and a Merrill Lynch cash compensation contribution, a portion of which has been received, has been excluded because, exclusive of the impact related to the exercise of LTIP participants’ put options, primarily in the three months ended March 31, 2007, these charges do not impact BlackRock’s book value. A detailed discussion of the LTIP funded by PNC is included in Note 15, Stock-Based Compensation, to the consolidated financial statements beginning on page F-1 of this Form 10-K.

Compensation expense associated with appreciation/(depreciation) on assets related to certain BlackRock deferred compensation plans has been excluded as returns on investments set aside for these plans, which substantially offset this expense, are reported in non-operating income (expense).

Management believes that operating income exclusive of these costs is more representative of the operating performance for the respective periods.

Operating Margin, as Adjusted:

Operating income used for measuring operating margin, as adjusted, is equal to operating income, as adjusted, excluding the impact of closed-end fund launch costs and commissions. Management believes that excluding such costs and commissions is useful because these costs can fluctuate considerably and revenues associated with the expenditure of these costs will not fully impact the Company’s results until future periods.

Operating margin, as adjusted, allows the Company to compare performance from period-to-period by adjusting for items that may not recur, recur infrequently or may fluctuate based on market movements, such as restructuring charges, transaction/integration costs, closed-end fund launch costs and fluctuations in deferred compensation expense based on mark-to-market movements in investments held to fund certain compensation plans. The Company also uses operating margin, as adjusted, to monitor corporate performance and efficiency and as a benchmark to compare its performance to other companies. Management reviews both the GAAP and non-GAAP financial measures.

 

3


Table of Contents
Item 1. BUSINESS (continued)

 

Overview (continued)

Operating Margin, as Adjusted (continued):

Revenue used for operating margin, as adjusted, excludes distribution and servicing costs paid to related parties and to other third parties. Management believes that excluding such costs is useful to BlackRock because it creates consistency in the treatment for certain contracts for similar services, which due to the terms of the contracts, are accounted under GAAP on a net basis within investment advisory, administration fees and securities lending revenue. Amortization of deferred sales commissions is excluded from revenue used for operating margin measurement, as adjusted, because such costs, over time, offset distribution fee revenue earned by the Company. Reimbursable property management compensation represented compensation and benefits paid to personnel of Metric Property Management, Inc. (“Metric”), a subsidiary of BlackRock Realty Advisors, Inc. (“Realty”). Prior to the transfer in 2008 to a third party, these employees were retained on Metric’s payroll when certain properties were acquired by Realty’s clients. The related compensation and benefits were fully reimbursed by Realty’s clients and have been excluded from revenue used for operating margin, as adjusted, because they did not bear an economic cost to BlackRock. For each of these items, BlackRock excludes from revenue used for operating margin, as adjusted, the costs related to each of these items as a proxy for such offsetting revenues.

Non-Operating Income (Expense), Less Net Income (Loss) Attributable to Non-controlling Interests, as Adjusted:

Non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted, equals non-operating income (expense), GAAP basis, less net income (loss) attributable to non-controlling interests, GAAP basis, adjusted for compensation expense associated with depreciation or appreciation on assets related to certain deferred compensation plans. The compensation expense offset is recorded in operating income. This compensation expense has been included in non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted, to offset returns on investments set aside for these plans, which are reported in non-operating income (expense), GAAP basis.

Management believes that non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted, provides for comparability of this information to prior periods and is an effective measure for reviewing BlackRock’s non-operating contribution to its consolidated results. As compensation expense associated with depreciation or appreciation on assets related to certain BlackRock deferred compensation plans, which is included in operating income, offsets the gain/(loss) on the investments set aside for these plans, management believes that non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted, provides a useful measure, for both management and investors, of BlackRock’s non-operating results that impact book value.

Net Income Attributable to BlackRock, Inc., as Adjusted:

GAAP reported net income attributable to BlackRock, Inc. and GAAP diluted earnings per common share include certain significant items, the after-tax impact of which management considers non-recurring or transactions that ultimately will not impact BlackRock’s book value or do not have a cash flow impact and, therefore, are excluded in calculating net income attributable to BlackRock, Inc., as adjusted.

Net income attributable to BlackRock, Inc., as adjusted, and diluted earnings per common share, as adjusted (non-GAAP measures), exclude the after-tax impact of the 2008 and 2009 restructuring charges, the 2007 termination of closed-end fund administration and servicing arrangements with Merrill Lynch, LTIP expense to be funded by PNC and by a Merrill Lynch cash compensation contribution, a portion of which has been received, the SSR, MLIM, Quellos and BGI integration costs, BGI transaction costs and the effect on deferred income tax expense attributable to changes in corporate income tax rates as a result of enacted legislation.

 

4


Table of Contents
Item 1. BUSINESS (continued)

 

Overview (continued)

See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a detailed reconciliation of GAAP reported operating income, non-operating income (expense) less net income (loss) attributable to non-controlling interests, net income attributable to BlackRock, Inc. and diluted earnings per common share to adjusted non-GAAP operating income, non-operating income (expense), net income attributable to BlackRock, Inc. and diluted earnings per common share.

Reported AUM by Asset Class

December 31,

 

     2005      2006      2007      2008      2009      2010  

Equity

   $ 36,774       $ 316,961       $ 362,705       $ 203,292       $ 1,536,055       $ 1,694,467   

Fixed income

     301,032         445,320         510,207         481,365         1,055,627         1,141,324   

Multi-asset class

     3,425         78,601         98,623         77,516         142,029         185,587   

Alternatives

     25,323         48,292         71,771         61,544         102,101         109,738   
                                                     

Long-term

     366,554         889,174         1,043,306         823,717         2,835,812         3,131,116   

Cash management

     86,128         235,453         313,338         338,439         349,277         279,175   

Advisory

     —           —           —           144,995         161,167         150,677   
                                                     

Total

   $ 452,682       $ 1,124,627       $ 1,356,644       $ 1,307,151       $ 3,346,256       $ 3,560,968   
                                                     

Component Changes in AUM by Asset Class

Five Years Ended December 31, 2010

 

     12/31/2005      Net New
Business
     Acquired
AUM, net(1)
    Market /
FX App
(Dep)
    12/31/2010      5-Year
CAGR(2)
 

Equity

   $ 36,774       $ 127,913       $ 1,322,892      $ 206,888      $ 1,694,467         115

Fixed income

     301,032         106,203         625,841        108,248        1,141,324         31

Multi-asset class

     3,425         53,442         111,089        17,631        185,587         122

Alternatives

     25,323         5,325         85,093        (6,003     109,738         34
                                                   

Long-term

     366,554         292,883         2,144,915        326,764        3,131,116         54

Cash management

     86,128         2,619         189,245        1,183        279,175         27

Advisory

     —           144,378         (10     6,309        150,677         N/A   
                                                   

Total

   $ 452,682       $ 439,880       $ 2,334,150      $ 334,256      $ 3,560,968         51
                                                   

 

(1)

Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009, other reclassifications to conform to current period combined AUM policy and presentation and BGI merger-related outflows due to manager concentration considerations and scientific active equity performance.

(2)

Compounded Annual Growth Rate

AUM

AUM represents assets that we manage on a discretionary basis pursuant to investment management agreements that are expected to continue for at least 12 months. In general, reported AUM corresponds to the basis used for billing (for example, net asset value). Reported AUM does not include assets for which we provide risk management or other forms of non-discretionary advice, or assets that we are retained to manage on a short-term, temporary basis (for example, in a transition management mandate, as described below).

 

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Table of Contents
Item 1. BUSINESS (continued)

 

Overview (continued)

Investment management fees are typically expressed as a percentage of net asset value. On some products, we earn securities lending fees. We also earn performance fees on certain portfolios relative to an agreed-upon benchmark or return hurdle. In addition, BlackRock offers its Aladdin® investment system, as well as risk management, outsourcing and advisory services, to institutional investors under the BRS name. Revenue on these services may be based on several criteria including asset volume, number of users, accomplishment of specific deliverables or other objectives.

At December 31, 2010, AUM was $3.561 trillion, representing a compound annual growth rate of 51% over the last five years. AUM growth during the period was achieved through net new business and mergers, including the acquisitions of MLIM in 2006, the fund of funds business of Quellos in 2007 and BGI in 2009. These acquisitions significantly changed our AUM mix, from predominantly fixed income in 2005 to a broadly diversified product range spanning asset classes and investment styles, as described below.

Products *

Asset Classes

Component Changes in AUM by Asset Class

 

     12/31/2009      Net New
Business
    Acquired
AUM,
net(1)
    Market /
FX App
(Dep)
    12/31/10
Sub-Total
     BGI
merger-
related
outflows(2)
    12/31/2010  

Equity

   $ 1,536,055       $ 69,067      $ (8,310   $ 197,052      $ 1,793,864       $ (99,397   $ 1,694,467   

Fixed income

     1,055,627         36,013        3,452        66,114        1,161,206         (19,882     1,141,324   

Multi-asset class

     142,029         26,262        3,550        13,873        185,714         (127     185,587   

Alternatives

     102,101         (136     —          8,263        110,228         (490     109,738   
                                                          

Long-term

     2,835,812         131,206        (1,308     285,302        3,251,012         (119,896     3,131,116   

Cash management

     349,277         (61,424     (4,852     (2,763     280,238         (1,063     279,175   

Advisory

     161,167         (12,021     —          1,541        150,687         (10     150,677   
                                                          

Total

   $ 3,346,256       $ 57,761      $ (6,160   $ 284,080      $ 3,681,937       $ (120,969   $ 3,560,968   
                                                          
                

 

(1)

Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009 and other reclassifications to conform to current period combined AUM policy and presentation.

(2)

Includes outflows due to manager concentration considerations and scientific active equity performance.

At year-end 2010, products invested primarily in long-term assets represented 88% of total AUM or $3.131 trillion, of which 54% were equity mandates, 36% fixed income accounts, 6% multi-asset class portfolios and 4% alternative investments. The remaining AUM was in cash management products and advisory mandates, which are long-term portfolio liquidation assignments. Net new business in long-term products totaled $131.2 billion, before giving effect to merger-related outflows (see below). Net inflows in long-term products were offset by net outflows in cash management products, as money market fund yields remained near zero and net distributions from advisory portfolios.

Unless stated otherwise, net new business figures are before giving effect to merger-related outflows of $121.0 billion, or less than 7% of the $1.8 trillion of AUM acquired in the BGI Transaction. The annualized investment advisory base fee loss associated with merger-related outflows is less than approximately $175 million.

 

 

* See Product Performance Notes below.

 

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Table of Contents
Item 1. BUSINESS (continued)

 

Products (continued)

Equity and Fixed Income

Equity and fixed income AUM include a wide range of active and passive strategies. In total, equity AUM increased $158.4 billion or 10% to $1.694 trillion at year-end 2010. Growth was driven by $69.1 billion of net new business and $197.1 billion of investment performance and market appreciation. Fixed income AUM ended 2010 at $1.141 trillion, up $85.7 billion or 8% relative to December 31, 2009. Net new business contributed $36.0 billion of the growth, while markets and investment performance contributed $66.1 billion. Merger-related outflows totaled $99.4 billion and $19.9 billion in equities and fixed income, respectively, primarily due to manager concentration and underperformance in scientific active equities. (See additional discussion under “AUM by Style,” below.)

Multi-Asset Class

BlackRock’s multi-asset class AUM ended 2010 at $185.6 billion, an increase of 31% or $43.6 billion. During the year, we were awarded $26.3 billion of net new business and portfolio values rose $13.9 billion. BlackRock’s multi-asset class team manages a variety of bespoke mandates that leverage our broad investment expertise in global equities, currencies, bonds and commodities and our extensive risk management capabilities. Investment solutions might include a combination of long-only portfolios and alternative investments, as well as tactical asset allocation overlays. The products are described briefly below.

BlackRock’s multi-asset class products were managed on behalf of a well-balanced client base. At December 31, 2010, institutional investors represented 56% of multi-asset class AUM, while retail and high net worth investors accounted for 44%. Flows were almost evenly split as well, with $15.3 billion or 59% and $10.7 billion or 41% coming from institutional and retail and high net worth investors, respectively. The geographic mix was similarly diversified, with 59% of multi-asset class AUM managed for clients based in the Americas, 32% in Europe, the Middle East and Africa (“EMEA”) and 9% in Asia-Pacific. During the year, clients in the Americas and EMEA awarded BlackRock net new business of $26.6 billion, which offset net outflows of $0.5 billion from clients in Asia-Pacific.

 

   

Asset allocation and balanced products represented 59% or $109.8 billion of multi-asset class AUM at year-end, up $23.0 billion on the strength of net new business of $14.0 billion and favorable investment performance and market movements of $9.0 billion. Our industry leading global allocation funds surpassed $70 billion in AUM in 2010.

 

   

Target date and target risk funds ended the year at $41.9 billion, or 23% of multi-asset class AUM, driven by net inflows of $7.5 billion, a year-over-year organic growth rate of 26% and portfolio appreciation of $4.5 billion. Products include our LifePath and LifePath Retirement Income® offerings, which are Qualified Default Investment Alternatives under the Pension Protection Act of 2006. These products utilize a proprietary asset allocation model that seeks to balance risk and return over an investment horizon based on the investor’s expected retirement timing.

 

   

Fiduciary management services accounted for 15% or $28.6 billion of multi-asset class AUM at December 31, 2010. AUM increased $4.1 billion during the year. These are complex mandates in which pension plan sponsors retain BlackRock to assume responsibility for some or all aspects of plan management. Customized services include tailoring investment strategy to client-specific risk budgets and return objectives, working closely with the client’s investment staff and trustees.

Volatile investor sentiment presented challenges for asset allocation strategies in 2010. While 35% of multi-asset class AUM achieved returns above their benchmarks or peer medians for the one year, longer-term results remained strong, with 81% of multi-asset class AUM outperforming for the three years and 87% for the five years ended December 31, 2010.

 

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Products (continued)

Alternative Investments

BlackRock ended 2010 with $109.7 billion of AUM in its alternative investment products, an increase of $7.6 billion. Net outflows totaled $0.1 billion, as withdrawals and disbursements in real estate, currency and opportunistic funds were offset by inflows in single- and multi-strategy hedge funds, global macro funds, funds of hedge funds and commodity products. We believe that as investors adapt their asset allocation strategies to best meet their investment objectives in the current environment, they will continue to increase their use of alternative investments to complement their core holdings.

The alternative investment client base was predominantly institutional, representing 75% or $81.8 billion of alternatives AUM with retail and high net worth investors comprising 8% or $9.3 billion of AUM at December 31, 2010. iShares comprised $18.6 billion or 17% of ending AUM. The geographic mix was well diversified, with 55% of AUM managed for clients in the Americas, 24% for clients in EMEA and 21% for clients in Asia-Pacific.

During 2010, we launched BlackRock Alternative Investors (“BAI”) to coordinate our alternative investment efforts, including product management, business development and client service. The products offered under the BAI umbrella are described below.

 

   

Real estate debt and equity products managed by BlackRock totaled $12.9 billion at year-end. Offerings include high yield debt and core, value-added and opportunistic equity portfolios. Real estate AUM decreased $5.5 billion during the year, driven by $3.3 billion in net outflows and $2.2 billion in market declines. Market performance rebounded for U.S. funds in 2010 and showed continued strength in the U.K. and within separate accounts.

 

   

Funds of funds AUM increased $1.8 billion or 8% to $23.9 billion at December 31, 2010, including $18.5 billion in funds of hedge funds and hybrid vehicles and $5.4 billion in private equity fund of funds. During the year, growth was driven by net inflows of $0.5 billion and $1.3 billion of investment and market performance. Performance was strong and a growing number of institutional clients worldwide sought our expertise in customized accounts and commingled vehicles.

 

   

Hedge funds ended the year with $25.9 billion of AUM in a variety of single-strategy, multi-strategy and global macro hedge funds, as well as portable alpha, distressed and opportunistic offerings. Products include both open-end hedge funds and similar products and closed-end funds that have been created to take advantage of specific opportunities over a defined, often longer-term investment horizon. Growth of $1.1 billion primarily came from $0.6 billion of net inflows into fixed income and multi-strategy hedge funds and strong investment and market performance of $1.8 billion across all strategies.

 

   

Currency and commodity mandates totaled $45.6 billion at year-end 2010. These products include a range of active and passive products primarily managed through institutional separate accounts. AUM increased $10.0 billion during the year, driven by $2.8 billion of net inflows, primarily in commodities and currency overlays and $7.1 billion of market appreciation. Our iShares commodities products represented $18.6 billion of AUM, which are not eligible to pay performance fees.

Cash Management and Securities Lending

AUM in cash management products totaled $279.2 billion at December 31, 2010, a decrease of $70.1 billion, or 20%, from AUM reported at year-end 2009. Investors continued to look for higher returns by reallocating balances to deposits and operations and to a lesser extent, longer-term investment products. Cash management products include taxable and tax-exempt money market funds and customized separate accounts. Portfolios may be denominated in U.S. dollar, euro or pound sterling.

 

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Products (continued)

Our cash management clientele is largely institutional, with 85% of cash AUM managed for institutions and 15% for retail and high net worth investors at year-end 2010. The investor base was also predominantly domestic, with 75% managed for investors in the Americas and 25% for clients in other regions, almost all EMEA-based. We suffered net outflows during the year, as investors sought higher yields in bank deposits, direct money market investments and as they became more confident of the market recovery, in longer-term assets. Clients also used their cash for operating purposes, as business investment increased and merger and acquisition activity increased. We expect these trends to continue, which will continue to put pressure on cash management flows.

The cash management team also invests the cash we receive as collateral for securities on loan in other portfolios. Securities lending, which is offered as a potential source of incremental returns on long-term portfolios, is managed by a dedicated team, supported by quantitative analysis, proprietary technology and disciplined risk management. Fees for securities lending can be structured as a share of earnings and/or a percentage of the value of the cash collateral. The value of the securities on loan and the revenue earned is captured in the corresponding asset class in AUM. The value of the cash or securities collateral is not included in cash management AUM.

The combination of the legacy businesses, along with the addition of new lending mandates, has increased lendable inventory and solidified BlackRock as a top tier provider of lendable assets. Outstanding loan balances ended the year at approximately $104 billion, down slightly from $111 billion at year-end 2009. Balance volatility throughout 2010 was lower than in recent years. Demand remained weak, as relatively few securities command premium lending fees. This trend is expected to continue through 2011, with a turnaround occurring when the end-borrowers of securities begin re-risking and putting their capital to work with more conviction.

BlackRock employs a conservative investment style that emphasizes quality, liquidity and superior client service throughout all market cycles. Disciplined risk management, including a rigorous credit surveillance process, is an integral part of the investment process. BlackRock’s Cash Management Risk Committee has established risk limits, such as aggregate issuer exposure limits and maturity limits, across many of the products BlackRock manages, including over all of its cash management products. In the ordinary course of our business, there may be instances when a portfolio may exceed an internal risk limit or when an internal risk limit may be changed and no such instances, individually or in the aggregate, have been material to the Company. To the extent that daily evaluation/reporting of the profile of the portfolios identifies that a limit has been exceeded, the relevant portfolio will be adjusted. To the extent a portfolio manager would like to obtain a temporary waiver of a risk limit, the portfolio manager must obtain approval from the credit research team, which is independent from the cash management portfolio managers. While a risk limit may be waived, such temporary waivers are infrequent.

 

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Products (continued)

Investment Styles

Reported Long-term AUM by Asset Class & Style

December 31, 2010

 

     Active      Institutional
Index
     iShares /
ETPs
     Total  

Equity

   $ 334,532       $ 911,775       $ 448,160       $ 1,694,467   

Fixed income

     592,303         425,930         123,091         1,141,324   

Multi-asset class

     181,101         4,116         370         185,587   

Alternatives

     82,544         8,603         18,591         109,738   
                                   

Long-term

   $ 1,190,480       $ 1,350,424       $ 590,212       $ 3,131,116   
                                   

Component Changes in Long-term AUM by Style

 

     12/31/2009      Net New
Business
    Acquired
AUM,  net(1)
    Market /
FX
App (Dep)
     12/31/10
Sub-Total
     BGI
merger-
related
outflows(2)
    12/31/2010  

Active

   $ 1,172,503       $ (2,016   $ (4,820   $ 89,395       $ 1,255,062       $ (64,582   $ 1,190,480   

Institutional index

     1,169,094         89,186        3,512        143,947         1,405,739         (55,315     1,350,424   

iShares / ETPs

     494,215         44,037        —          51,960         590,212         —          590,212   
                                                           

Long-term

   $ 2,835,812       $ 131,207      $ (1,308   $ 285,302       $ 3,251,013       $ (119,897   $ 3,131,116   
                                                           

 

(1)

Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009 and other reclassifications to conform to current period combined AUM policy and presentation.

(2)

Includes outflows due to manager concentration considerations and scientific active equity performance.

Long-term1 product offerings include active and passive (index) strategies. The investment objective for active portfolios is to earn attractive returns in excess of a market benchmark or performance hurdle (alpha). In contrast, passive strategies seek to closely track the returns of the corresponding index (beta), generally by investing in the securities that comprise the index or in a subset of those securities selected to approximate the risk and return profile of the index.

The BGI Transaction included an at-scale index business that materially changed BlackRock’s AUM mix. Index AUM, including institutional and iShares products, increased from 4% of AUM at year-end 2008 (prior to the BGI Transaction) to 54% of AUM at December 31, 2010.

Although many clients use both active and passive strategies, the profile of these assets differs greatly. For example, clients often use index products to gain exposure to a market or asset class pending reallocation to an active manager. This has the effect of increasing turnover on index AUM. In addition, institutional index assignments tend to be very large (multi-billion dollars) and priced at low fee rates. This has the effect of exaggerating the significance of net flows in institutional index on BlackRock’s earnings.

 

 

1

See discussions of Cash Management and Advisory (BRS) offerings.

 

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Products (continued)

Active Strategies

Component Changes in AUM - Active

 

     12/31/2009      Net New
Business
    Acquired
AUM,  net(1)
    Market /
FX App (Dep)
     12/31/10
Sub-Total
     BGI
merger-
related
outflows(2)
    12/31/2010  

Equity

   $ 348,573       $ 2,632      $ (3,920   $ 41,737       $ 389,022       $ (54,490   $ 334,532   

Fixed income

     595,580         (22,142     (3,923     32,262         601,777         (9,474     592,303   

Multi-asset class

     141,473         23,402        3,023        13,331         181,229         (128     181,101   

Alternatives

     86,877         (5,908     —          2,065         83,034         (490     82,544   
                                                           

Long-term

   $ 1,172,503       $ (2,016   $ (4,820   $ 89,395       $ 1,255,062       $ (64,582   $ 1,190,480   
                                                           

 

(1)

Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009 and other reclassifications to conform to current period combined AUM policy and presentation.

(2)

Includes outflows due to manager concentration considerations and scientific active equity performance.

We offer two types of active strategies: those that rely primarily on fundamental research and those that utilize primarily quantitative models to drive security selection and portfolio construction. At year-end 2010, active long-term AUM increased $18.0 billion to $1.190 trillion at year-end, of which 28% was in equities, 50% in fixed income, 15% in multi-asset and 7% in alternatives. Favorable markets contributed $89.4 billion of growth, which was slightly offset by $2.0 billion of net outflows. AUM growth was significantly hampered by merger-related outflows of $64.6 billion, primarily in scientific active equities (“SAE”).

Active Equity

BlackRock’s active equity AUM closed the year at $334.5 billion, a decline of 4%, or $14.0 billion relative to year-end 2009. Net new business contributed $2.6 billion of growth, while investment and market performance added $41.7 billion. A wide variety of products are offered, including global and regional portfolios; value, growth and core products; large, mid and small cap strategies; and selected sector funds. We believe an improving U.S. economy, strong corporate balance sheets, and sustained strong growth in the emerging markets bodes well for equity markets in 2011, although geopolitical risk remains a potential drag on investor sentiment.

BlackRock manages active equity portfolios for a diverse base of institutional and retail and high net worth investors globally. At December 31, 2010, approximately half of active equity AUM ($165.8 billion) was managed on behalf of institutional investors in separate accounts, collective investment trusts and mutual funds and half ($168.7 billion) for retail and high net worth investors, largely through open-end mutual funds and separately managed accounts. Approximately 46% of our active equity AUM was managed for investors based in the Americas, 39% in EMEA and 15% in Asia-Pacific.

 

   

Fundamental active equity ended 2010 with $239.1 billion in AUM. Net inflows of $3.9 billion in equity dividend, global, European and other regional strategies were offset by outflows of $0.2 billion in U.S. equity funds. Market appreciation of $30.4 billion bolstered AUM as equity markets rebounded late in the year. BlackRock’s fundamental active equity investors seek to add value relative to a specified index or on an absolute basis primarily through security selection based on proprietary research and portfolio manager judgment. Performance was strong in European and emerging market products, as well as selected sector funds including: energy, natural resources and health sciences. In total, 62%, 65% and 77% of fundamental active equity AUM beat their benchmarks or peer medians for the one-, three- and five-year periods ended December 31, 2010, respectively. During the year, we drew on existing talent to fill out the leadership team and attracted an experienced CIO for our U.S. fundamental active equity strategies.

 

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Products (continued)

 

   

Scientific active equity AUM declined 32% to $95.4 billion. Portfolio appreciation of $11.4 billion was insufficient to overcome BGI merger-related outflows of $52.6 billion, much of which was anticipated due to underperformance dating back to 2007 in key developed market products. SAE strategies seek superior investment outcomes through a stock selection process that aims to systematically find and exploit pricing opportunities, while rigorously managing risk and cost. During the year, we appointed a new head of the SAE business, who reorganized the team and instilled a strong performance culture that has begun to stabilize the asset base. Though still nascent, there are early signs of improvement, as 55%, 45% and 36% of SAE AUM outperformed their benchmarks or peer medians for the one-, three- and five-year periods ended December 31, 2010, respectively.

Active Fixed Income

BlackRock’s active fixed income AUM ended 2010 at $592.3 billion, a slight decrease of 1% or $3.3 billion, from the previous year’s results. During the year, we had $22.1 billion of net outflows, partially offset by $32.3 billion of investment and market performance. Fixed income mandates are often tailored to client-specified liabilities, accounting, regulatory or rating agency requirements, or other investment policies. U.S. bonds enjoyed good absolute returns in 2010. Despite a slight pullback during the fourth quarter, the Barclays Capital U.S. Aggregate Index returned 6.5% for the year. While sovereign credit risk remains a concern, particularly in parts of Europe, inflation is not expected to have a material impact on Federal Reserve policy in 2011.

Of BlackRock’s total active fixed income AUM, 82% was managed on behalf of institutional investors and 18% for retail and high net worth investors. The client base reflects our historical roots, with 69% of active fixed income AUM managed for investors in the Americas, 23% for EMEA domiciled clients, and 8% for investors in the Asia-Pacific region. Net inflows of $1.3 billion from Asia-Pacific clients were more than offset by outflows of $23.4 billion from investors in the Americas and EMEA.

 

   

Fundamental fixed income AUM totaled $553.5 billion, or 93% of active fixed income AUM, at year-end 2010. These products emphasize risk-controlled sector rotation and security selection driven by sector experts and direct interaction with issuers and market makers. Fundamental strategies experienced net outflows of $10.2 billion largely driven by client changes in overall asset allocation and long-term performance concerns. In addition, $8.8 billion of fixed income assets, on which we have been waiving fees for more than a year, transferred to cash management. Market appreciation contributed $30.5 billion to ending AUM. Positive flows in U.S. municipal bonds of $2.0 billion were buoyed by the successful launch of the $1.2 billion Build America Bond Trust in the third quarter of the year. Fundamental taxable fixed income strategies achieved strong performance in 2010, with 72%, 49% and 49% of AUM above their benchmarks or peer medians for the one-, three-, and five-year periods ended December 31, 2010, respectively.

 

   

Model-driven fixed income AUM declined $3.9 billion or 9%, ending the year at $38.8 billion. Investment and market performance of $1.7 billion was insufficient to overcome $3.2 billion of outflows. These strategies employ models to identify relative return opportunities and to apply those results, subject to a pragmatic review of model risk, on a systematic basis across portfolios. Performance in our model-driven fixed income strategies was mixed, with 66%, 81% and 92% of AUM above their benchmarks or peer medians for the one-, three- and five-year periods ended December 31, 2010, respectively.

Multi-Asset and Alternatives

Virtually all (98%) of AUM in multi-asset class mandates, and the majority (75%) of AUM in alternative investments are managed in active strategies. These products are discussed earlier. (See the corresponding sections under “Products — Asset Classes.”)

 

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Products (continued)

Institutional Index

Component Changes in AUM - Institutional Index

 

     12/31/2009      Net New
Business
     Acquired
AUM,  net(1)
    Market /
FX App (Dep)
     12/31/10
Sub-Total
     BGI
merger-
related
outflows(2)
    12/31/2010  

Equity

   $ 806,083       $ 44,569       $ (4,390   $ 110,420       $ 956,682       $ (44,907   $ 911,775   

Fixed income

     357,557         39,148         7,374        32,259         436,338         (10,408     425,930   

Multi-asset class

     354         2,721         528        513         4,116         —          4,116   

Alternatives

     5,100         2,748         —          755         8,603         —          8,603   
                                                            

Long-term

   $ 1,169,094       $ 89,186       $ 3,512      $ 143,947       $ 1,405,739       $ (55,315   $ 1,350,424   
                                                            

 

(1)

Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009 and other reclassifications to conform to current period combined AUM policy and presentation.

(2)

Includes outflows due to manager concentration considerations and scientific active equity performance.

Institutional index AUM, generally managed in common trust funds or separate accounts, comprised 38% of total AUM at December 31, 2010. AUM growth was driven by net new business of $89.2 billion and market appreciation of $143.9 billion. Merger-related outflows of $55.3 billion were concentrated among a relatively small number of clients. Where possible, we worked with these investors to address manager concentration issues by reallocating commoditized, low fee AUM, while retaining significant relationships and opportunities.

 

   

Equity products comprised 68% of institutional index AUM, ending the year at $911.8 billion, driven by net inflows of $44.6 billion and $110.4 billion of market appreciation. Net inflows in global, U.S. equity and other regional strategies were partially offset by outflows of $2.7 billion in other low fee currency overlays for equity strategies. Toward the end of the year, investors began to reallocate to higher return asset classes, helping to fuel a recovery in the global equity markets. Institutional index equity portfolios closely tracked their respective benchmarks, with 97%, 96% and 98% of AUM at or above tracking error tolerance for one-, three-, and five-year periods.

 

   

Fixed income products represented 32% or $425.9 billion of institutional index AUM, an increase of 19% or $68.4 billion. Net new business totaled $39.1 billion fueled by $12.8 billion of net inflows primarily in liability hedging strategies. Investors remained risk averse largely due to the European sovereign debt crisis in the first half of the year, favoring low risk fixed income exposures. As global markets stabilized and a recovery in the U.S. looked increasingly likely, equity markets recovered and investor confidence returned. Institutional index fixed income portfolios closely tracked their respective benchmarks, with 92%, 94% and 98% of AUM at or above tracking error tolerance for one-, three-, and five-year periods.

 

   

Less than 1% of institutional index AUM is in alternatives or multi-asset class products. (See discussions under “Products — Asset Classes,” above.)

 

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Products (continued)

iShares / ETPs

Component Changes in AUM - iShares / ETPs

 

     12/31/2009      Net New
Business
     Acquired
AUM,  net(1)
     Market /
FX App (Dep)
     12/31/10
Sub-Total
     BGI
merger-
related
outflows(2)
     12/31/2010  

Equity

   $ 381,398       $ 21,865       $ —         $ 44,897       $ 448,160       $ —         $ 448,160   

Fixed income

     102,490         19,008         —           1,593         123,091         —           123,091   

Multi-asset class

     203         140         —           27         370         —           370   

Alternatives

     10,124         3,024         —           5,443         18,591         —           18,591   
                                                              

Long-term

   $ 494,215       $ 44,037       $ —         $ 51,960       $ 590,212       $ —         $ 590,212   
                                                              

 

(1)

Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009 and other reclassifications to conform to current period combined AUM policy and presentation.

(2)

Includes outflows due to manager concentration considerations and scientific active equity performance.

iShares is the leading ETF provider in the world, with $590.2 billion of AUM at December 31, 2010, an increase of $96.0 billion or 19% since year-end 2009. We were the top asset gatherer globally in 20102, with $44.0 billion of net inflows complemented by $52.0 billion of market appreciation. We also introduced 78 new ETPs during the year, maintaining our dual commitment to innovation and responsible product structuring. Our broad product range offers investors the building blocks required to assemble diversified portfolios and implement tactical asset allocation strategies and the liquidity required to make adjustments to their exposures quickly and cost-efficiently.

The market for ETPs continues to grow globally, with investor preference driven to varying degrees by performance (as measured by tracking error, which is the difference between net returns on the ETP and the corresponding index), liquidity (bid-ask spread), tax-efficiency, transparency and client service. Flows also reflect investor risk appetite, which shifted toward fixed income and, within equities, to broad and single country emerging market funds in 2010. In early 2011, investors have begun to shift equity allocations back to developed markets.

At year-end, our iShares product mix included $448.2 billion, or 76%, in equity offerings, and $123.1 billion, or 21%, in bond ETPs. The remaining $19.0 billion or 3% of iShares AUM was in multi-asset and alternative investments. iShares equity AUM increased $66.8 billion or 18% versus 2009, with $21.9 billion in net inflows and $44.9 billion of market and foreign exchange appreciation. iShares fixed income AUM rose $20.6 billion or 20% over the previous year, with 92% of the increase being driven by $19.0 billion of net inflows. iShares multi-asset and alternatives AUM grew by $8.6 billion or 84%, with $3.2 billion of net inflows, predominately in commodity products such as gold and silver, and $5.5 billion of market and foreign exchange appreciation.

In total, we had net inflows in 315 different ETPs during 2010. As of year-end, we managed three of the top five, six of the top ten, and twelve of the 20 largest ETFs in the U.S.2 Our iShares offerings were traded on 19 exchanges throughout the world. These included 276 funds2 in the Americas with $480.3 billion, or 81%, of iShares AUM. Assets in these funds increased $77.6 billion, or 19%, during the year, including $27.8 billion of net inflows.

 

 

2

Year-end 2010 ETF Landscape Industry Review; BlackRock Global ETF Research and Implementation Strategy Team, Bloomberg, National Stock Exchange (NSX)

 

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Products (continued)

Notwithstanding a substantial increase in the number of ETP sponsors and products, iShares has maintained market share of more than 48% in the U.S. and 36% in EMEA3. In addition, we are the largest ETF manager in Mexico, have pioneered the product in Chile and Peru, and have introduced products in Brazil, Australia, Hong Kong and Japan. Importantly, our share of revenues is significantly higher due to our product mix. In general, we expect to maintain our pricing, so long as it is supported by performance and the iShares value proposition, although we continually seek to achieve efficiencies and pass them through to our clients.

BlackRock Solutions and Advisory

BlackRock offers investment systems, risk management, outsourcing and advisory services under the BlackRock Solutions brand name. Over $10.0 trillion of positions are processed on our Aladdin operating platform, which serves as the investment system for BlackRock and a growing number of sophisticated institutional investors around the world. BRS also offers comprehensive risk reporting via the Green Package® and risk management advisory services, interactive fixed income analytics through our web-based calculator, AnSer®, middle and back office outsourcing services and investment accounting. Clients have also retained BRS’ Financial Markets Advisory (“FMA”) group for a variety of engagements, such as valuation and risk assessment of illiquid assets, portfolio restructuring, workouts and dispositions of distressed assets and financial and balance sheet strategies.

As global capital markets have recovered, clients have focused more on risk management, and demand for BRS services continues to be robust. During the year, BRS added 62 net new assignments. While revenue declined modestly by 4% to $460 million, demand was strong for Aladdin and risk management services, with year-over-year revenue growing 14%, particularly in EMEA where we signed a record number of new BRS clients onto the platform. Aladdin assignments are long-term contracts providing significant recurring revenue.

During the year we added 49 new FMA assignments and completed 33 engagements. The nature of FMA assignments shifted from urgent, short-term risk analyses to longer term advisory and risk monitoring engagements, with year-over-year revenue declining 23%, as the crisis subsided and fewer clients required emergency valuation and liquidation services. Advisory AUM decreased 7% to $150.7 billion, with $1.5 billion of market appreciation insufficient to offset $12.0 billion of client distributions in these long-term liquidation portfolios.

At year-end, BRS served 149 clients, including banks, insurance companies, official institutions, pension funds, asset managers and other institutional investors across North America, Europe, Asia and Australia. During the year, BlackRock acquired and integrated Helix Financial Group LLC to enhance BRScommercial real estate capabilities, which proved to be critical to BRS success in winning several high profile assignments. We will continue to consider acquisition opportunities that can expand Aladdin functionality and our risk management expertise.

The BRS and Aladdin teams are also supporting key aspects of the BGI integration. These efforts are vital to establishing a unified operating platform and consistent operating processes. We expect functionality added in connection with the integration to enhance the Aladdin platform over time. Additionally, we will seek to leverage our scale for the benefit of our clients through the creation of a robust global trading platform and other initiatives.

Transition Management Services

BlackRock also offers transition management services, involving the temporary oversight of a client’s assets as they transition from one manager to another or from one strategy to another. We provide a comprehensive service that includes project management and implementation based on achieving best execution consistent with the client’s risk management tolerances. We use state-of-the-art tools and work closely with BlackRock’s trading cost research team to manage four dimensions of risk throughout the transition: exposure, execution, process and operational risk. The average transition assignment is executed within two weeks, although the duration can be longer or shorter depending on the size, complexity and liquidity of the related assets. These portfolios are not included in AUM unless BlackRock has been retained to manage the assets after the transition phase.

 

 

3

Year-end 2010 ETF Landscape Industry Review; BlackRock Global ETF Research and Implementation Strategy Team, Bloomberg, National Stock Exchange (NSX).

 

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Products (continued)

Risk & Quantitative Analysis

Across all asset classes, in addition to the efforts of the portfolio management teams, the Risk & Quantitative Analysis (“RQA”) group at BlackRock provides risk management advice and independent risk oversight of the investment management processes, identifies and helps manage counterparty and operational risks, coordinates standards for firmwide investment performance measurement and determines risk management-related analytical and information requirements. Where appropriate, RQA will work with portfolio managers and developers to facilitate the development or improvement of risk models and analytics.

Product Performance Notes

Past performance is not indicative of future results. The performance information for actively managed accounts reflects U.S. open-end and closed-end mutual funds and similar EMEA-based products with respect to peer median comparisons, and actively managed institutional separate accounts and funds located globally with respect to benchmark comparisons, as determined using objectively based internal parameters, using the most current information available as of December 31, 2010. The performance information does not include funds or accounts that are not measured against a benchmark, private equity products, CDOs, or accounts managed by BlackRock’s Financial Markets Advisory Group. Comparisons are based on gross-of-fee performance for U.S.-based products and institutional separate accounts, and net-of-fee performance for EMEA-based products. The performance tracking information for institutional index accounts is based on gross-of-fee performance as of December 31, 2010, and includes all institutional accounts globally using an index strategy. AUM information is based on AUM for each account or fund in the asset class shown without adjustment for overlapping management of the same account or fund, as of December 31, 2010. Source of performance information and peer medians is BlackRock, Inc. and is based in part on data from Lipper Inc. for U.S. funds and Morningstar, Inc. for non-U.S. funds. Fund performance reflects the reinvestment of dividends and distributions, but does not reflect sales charges.

Clients

Reported AUM by Client Region & Client Type

December 31, 2010

 

     Institutional      Retail /
HNW
     iShares /
ETPs(1)
     Total  

Americas

   $ 1,401,566       $ 295,036       $ 480,345       $ 2,176,947   

EMEA

     828,587         87,544         100,684         1,016,815   

Asia-Pacific

     325,907         32,116         9,183         367,206   
                                   

Total

   $ 2,556,060       $ 414,696       $ 590,212       $ 3,560,968   
                                   

 

(1)

Based on jurisdiction of fund, not underlying client.

BlackRock serves institutional and retail and high net worth investors in more than 100 countries through the efforts of professionals located in 25 countries. We strive to leverage our global expertise and scale, together with our understanding of local requirements and business customs, to most effectively serve our clients. Portfolios may be invested in local, regional or global capital markets. Products may be structured to address location-specific issues, such as regulations, taxation, operational infrastructure, market liquidity, and client-specific issues, such as investment policy, liability structure and ratings.

In order to enhance our ability to best serve our clients and develop our talent, we modified our matrix organizational structure in 2010 to reinforce the teamwork required among global functions and regions. The global functions — Portfolio Management, BRS, Global Clients, and Corporate & Business Operations — are key to driving coordination and consistency, and to achieving the benefits of our scale. The regions — Americas, EMEA, and Asia-Pacific — support local clients, employees, regulators and business strategy. At December 31, 2010, 44% of our AUM was managed for clients outside the U.S., and 41% of employees were based outside the U.S. We expect these figures to approach 50% over the coming years.

 

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Clients (continued)

Global Clientele

Reported AUM by Asset Class & Client Region

December 31, 2010

 

     Americas         EMEA        
 
Asia-
Pacific
 
  
     Total   
                                   

Equity

   $ 1,045,713       $ 483,129       $ 165,625       $ 1,694,467   

Fixed income

     609,412         374,410         157,502         1,141,324   

Multi-asset class

     109,306         59,773         16,508         185,587   

Alternatives

     60,120         26,469         23,149         109,738   
                                   

Long-term

     1,824,551         943,781         362,784         3,131,116   

Cash management

     209,595         68,370         1,210         279,175   

Advisory

     142,801         4,664         3,212         150,677   
                                   

Total

   $ 2,176,947       $ 1,016,815       $ 367,206       $ 3,560,968   
                                   

Reported AUM by Style & Client Region

December 31, 2010

 

     Americas      EMEA      Asia-
Pacific
     Total  

Active

   $ 711,179       $ 345,593       $ 133,708       $ 1,190,480   

Institutional index

     633,027         497,504         219,893         1,350,424   

iShares/ETPs

     480,345         100,684         9,183         590,212   
                                   

Long-term

     1,824,551         943,781         362,784         3,131,116   

Cash management

     209,595         68,370         1,210         279,175   

Advisory

     142,801         4,664         3,212         150,677   
                                   

Total

   $ 2,176,947       $ 1,016,815       $ 367,206       $ 3,560,968   
                                   

Americas

At year-end 2010, assets managed on behalf of clients domiciled in the Americas (defined as the U.S., Caribbean, Canada, Latin America and Iberia), totaled $2.177 trillion or 61% of total AUM, an increase of $118.8 billion or 6% in 2010. Growth was driven by $78.4 billion in net new business in long-term products and $177.3 billion in investment performance and market appreciation. Clients are served through offices in Brazil, Canada, Chile, Mexico, Spain and throughout the U.S.

Offerings include closed-end funds and iShares traded on domestic stock exchanges, a full range of open-end mutual funds, collective investment funds, common trusts, private funds and separate accounts. The long-term product mix is well diversified and proportional to the firm’s mix: 57% in equities, 34% in fixed income, 6% in multi-asset class and 3% in alternatives. By comparison, cash management offerings predominantly serve clients in the Americas. We also have a wide variety of BRS assignments for institutional investors and governmental entities in the U.S. and Canada.

 

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Clients (continued)

The mix by investment style is also balanced, with 39% of long-term AUM managed in active products, 35% in institutional index accounts and 26% in iShares and other ETPs at year-end. Note that the iShares figures are based on the jurisdiction of the fund, rather than the underlying investor. Non-U.S. investors often prefer U.S. iShares, primarily due to the depth of the markets and liquidity of the products.

EMEA

AUM for clients based in EMEA ended the year at $1.017 trillion or 29% of total AUM, an increase of $79.7 billion from 2009. During the year, clients awarded us net new business of $28.0 billion, including inflows from investors in 24 countries across the region. Our offerings include fund families in the U.K., Luxembourg and Dublin, and iShares listed on stock exchanges throughout Europe, as well as separate accounts and pooled investment products.

Clients invested across the entire product spectrum with 51% of long-term AUM in equities, 40% in fixed income, 6% in multi-asset class and 3% in alternatives. EMEA clients constitute the remaining 25% of our cash management AUM, and represent just 3% of our advisory AUM. BRS has steadily built its presence in EMEA, including Aladdin relationships with a variety of institutional investors and FMA engagements for financial services companies and official institutions, including the valuation assignment announced in January 2011 for the Central Bank of Ireland.

The mix by investment style is slightly more concentrated than in the Americas, with 36% invested in active products, 53% in institutional index accounts and 11% in iShares and other ETPs. The relatively higher percentage in institutional index is driven by low fee institutional liability hedging portfolios which account for approximately 25% of total institutional index assets. The relatively lower percentage in iShares primarily reflects the fact that the European ETP market is at an earlier stage of development.

Asia-Pacific

Clients in the Asia-Pacific region are served through offices in Japan, Australia, Hong Kong, Singapore, Taiwan and Korea, and joint ventures in China and India. At December 31, 2010, we managed $367.2 billion of AUM for clients in the region, an increase of 5% or $16.2 billion from 2009. Net new business contributed $15.4 billion, and the remainder of the increase was attributable to investment performance and favorable market movements. We also acquired the Taiwan-based asset manager Primasia Investment Trust Co. Ltd, strengthening our onshore investment capabilities by offering locally managed investment solutions.

At year-end, the mix of long-term products managed for these clients consisted of 46% equities, 43% fixed income, 5% multi-asset class and 6% alternative investments. Asia-Pacific clients represented 2% of our advisory AUM and less than 1% of our cash management AUM. BRS served a select number of the largest and most sophisticated investors in the region.

The mix among investment styles was more tilted toward institutional index accounts than in the other regions, with $219.9 billion or 61% of long-term AUM in these products. This bias can be traced to the presence of very large governmental institutions and pensions that are heavy users of index products. Asia-Pacific institutional investors also use iShares for tactical allocation, but often favor the liquidity of the U.S. products (which are counted in Americas iShares). Active mandates represented 36% of AUM managed for investors in the region at year-end.

 

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Clients (continued)

Clients Served

Reported AUM by Asset Class & Client Type

December 31, 2010

 

     Institutional      Retail /
HNW
     iShares /
ETPs(1)
     Total  

Equity

   $ 1,070,622       $ 175,685       $ 448,160       $ 1,694,467   

Fixed income

     910,422         107,811         123,091         1,141,324   

Multi-asset class

     104,076         81,141         370         185,587   

Alternatives

     81,803         9,344         18,591         109,738   
                                   

Long-term

     2,166,923         373,981         590,212         3,131,116   

Cash management

     238,478         40,697         —           279,175   

Advisory

     150,659         18         —           150,677   
                                   

Total

   $ 2,556,060       $ 414,696       $ 590,212       $ 3,560,968   
                                   

Reported AUM by Style & Client Type

December 31, 2010

 

     Institutional      Retail /
HNW
     iShares /
ETPs(1)
     Total  

Active

   $ 824,447       $ 366,033       $ —         $ 1,190,480   

Institutional Index

     1,342,476         7,948         —           1,350,424   

iShares/ETPs

     —           —           590,212         590,212   
                                   

Long-term

     2,166,923         373,981         590,212         3,131,116   

Cash management

     238,478         40,697         —           279,175   

Advisory

     150,659         18         —           150,677   
                                   

Total

   $ 2,556,060       $ 414,696       $ 590,212       $ 3,560,968   
                                   

 

(1)

Based on jurisdiction of fund, not underlying client.

We serve a diverse mix of institutional and retail investors worldwide. Clients include tax-exempt institutions, such as defined benefit and defined contribution pension plans, charities, foundations and endowments; official institutions, such as central banks, sovereign wealth funds, supranationals and other government entities; taxable institutions, including insurance companies, financial institutions, corporations and third party fund sponsors; and retail and high net worth investors. We also serve both institutional and retail and high net worth investors who acquire iShares on exchanges worldwide (iShares is discussed under “Products,” above).

Institutional Investors

Assets managed for institutional investors totaled $2.556 trillion or 72% of total AUM at year-end 2010. During the year, net new business, excluding merger-related outflows, in long-term products totaled $60.3 billion, which was partially offset by $38.4 billion of net outflows in cash management and $12.0 billion of net distributions in advisory assignments. Investment performance and market appreciation contributed $201.2 billion of additional AUM growth.

 

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Clients (continued)

BlackRock’s institutional AUM is well diversified by both product and region. Long-term AUM was $2.167 trillion at year-end, 49% of which was in equities, 42% fixed income, 5% multi-asset class and 4% alternatives. The mix by investment style was 38% active and 62% passive (excluding institutional investors in iShares). As noted earlier, institutional index accounts tend to be very large mandates managed for relatively low fee rates and subject to higher turnover.

We serve institutional investors on six continents, with 55% of AUM managed on behalf of investors in the Americas, 32% in EMEA and 13% in Asia-Pacific. Institutional clients are further diversified by sub-segments: tax-exempt, official institutions, taxable and cash investors, as described below.

 

   

BlackRock is among the largest managers of pension plan assets in the world, with $1.487 trillion, or 58%, of institutional AUM managed for defined benefit, defined contribution and other pension plans for corporations, governments and unions at December 31, 2010. An additional $57.0 billion was managed for other tax-exempt investors, including charities, foundations and endowments. Assets managed for these clients grew $90.4 billion during 2010, including $18.4 billion of net inflows from defined contribution plans, which represent an important and growing component of the retirement market.

 

   

We also managed $245.4 billion or 10% of institutional AUM for official institutions, including central banks, sovereign wealth funds, supranationals, multilateral entities and government ministries and agencies. These clients often require specialized investment policy advice, the use of customized benchmarks and training support. In addition, BRS has been selected by a number of official institutions to provide a range of services, including Aladdin, risk management and financial markets advisory assignments.

 

   

BlackRock is the top independent manager of assets for insurance companies, which accounted for $218.6 billion or 9% of institutional AUM at year-end. These clients awarded us $4.6 billion of net new business, driven by a trend toward outsourcing, particularly in Europe last year. Assets managed for other taxable institutions, including corporations, banks and third party fund sponsors for which we provide sub-advisory services, totaled $326.6 billion or 13% of institutional AUM at year-end.

 

   

The remaining $221.7 billion or 9% of institutional AUM was managed on behalf of taxable and tax-exempt institutions invested in our cash management products at December 31, 2010. See the Product section above for additional information on our cash management AUM.

Retail and High Net Worth Investors

BlackRock serves retail and high net worth investors globally through separate accounts, open-end and closed-end funds, unit trusts and private investment funds. At December 31, 2010, assets managed for retail and high net worth investors totaled $414.7 billion, up 8%, or $31.3 billion, versus year-end 2009 AUM. During the year, net inflows of $26.9 billion in long-term products were partially offset by $21.9 billion of net outflows in money market funds. Investment performance and market appreciation contributed $31.1 billion of additional AUM growth.

Retail and high net worth investors are served principally through intermediaries, including broker-dealers, banks, trust companies, insurance companies and independent financial advisors. Clients invest primarily in mutual funds, which totaled $318.2 billion or 77% of retail and high net worth AUM at year-end, with the remainder invested in private investment funds and separately managed accounts. The product mix is well diversified, with 47% of long-term AUM in equities, 29% in fixed income, 22% in multi-asset class and 2% in alternatives. The vast majority (98%) of long-term AUM is invested in active products, although this is partially inflated by the fact that iShares is shown independently, since we cannot identify all of the underlying investors.

The client base is also diversified geographically, with 68% of long-term AUM managed for investors based in the Americas, 23% in EMEA, and 9% in Asia-Pacific. The remaining $40.7 billion, or 10%, of retail and high net worth AUM is invested in cash management products, principally money market funds offered in the U.S. Our success in each of these regions reflects strong relationships with intermediaries and an established ability to deliver our global investment expertise in funds and other products tailored to local regulations and requirements.

 

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Clients (continued)

Our retail and high net worth offerings include the BlackRock Funds in the U.S., our Luxembourg cross-border fund families, BlackRock Global Funds (“BGF”), BlackRock Strategic Funds and a range of retail funds in the U.K. BGF is comprised of 61 funds and is registered in 35 countries. Over 60% of the funds are rated by S&P. In 2010, we were ranked as the second largest cross border fund provider4. In the U.K., we ranked among the six largest fund managers4, and are known for our innovative product offerings, including the absolute alpha products we introduced in 2005. In the U.S., we had over 50 product placements on broker-dealer platforms during the year and have grown our market position from tenth to fourth largest fund manager since we acquired MLIM in late-20065. In 2010, BlackRock won the Dalbar award for customer service in financial services, the eleventh occasion on which we have been recognized for outstanding achievement in this area.

Competition

BlackRock competes with investment management firms, mutual fund complexes, insurance companies, banks, brokerage firms and other financial institutions that offer products that are similar to, or alternatives to, those offered by BlackRock. In order to grow its business, BlackRock must be able to compete effectively for AUM. Key competitive factors include investment performance track records, the efficient delivery of beta for passively managed products, investment style and discipline, client service and brand name recognition. Historically, the Company has competed principally on the basis of its long-term investment performance track record, its investment process, its risk management and analytic capabilities and the quality of its client service. Certain of the Company’s competitors, however, have greater marketing resources than BlackRock, particularly in retail channels. These factors may place BlackRock at a competitive disadvantage and there can be no assurance that the Company’s strategies and efforts to maintain its existing AUM and to attract new business will be successful.

 

 

4

Lipper Feri

5

Simfund

 

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Geographic Information

BlackRock has clients in over 100 countries across the globe, including the United States, the United Kingdom, and Japan.

The following table illustrates the Company’s total revenue for the years ended December 2010, 2009 and 2008 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the customer resides.

 

(Dollar amounts in millions)           % of            % of            % of  

Revenue

   2010      Total     2009      Total     2008      Total  

Americas

   $ 5,824         67   $ 3,309         70   $ 3,438         68

Europe

     2,300         27     1,179         25     1,360         27

Asia-Pacific

     488         6     212         5     266         5
                                                   

Total revenue

   $ 8,612         100   $ 4,700         100   $ 5,064         100
                                                   

The following table illustrates the Company’s long-lived assets, including goodwill and property and equipment at December 31, 2010, 2009 and 2008 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located.

 

(Dollar amounts in millions)           % of            % of            % of  

Long-lived Assets

   2010      Total     2009      Total     2008      Total  

Americas

   $ 13,092         99   $ 12,983         99   $ 5,714         99

Europe

     42         —       46         —       27         —  

Asia-Pacific

     99         1     94         1     52         1
                                                   

Total long-lived assets

   $ 13,233         100   $ 13,123         100   $ 5,793         100
                                                   

Americas primarily is comprised of the United States, Canada, Brazil and Mexico, while Europe primarily is comprised of the United Kingdom and Asia-Pacific primarily is comprised of Japan, Australia and Hong Kong.

Employees

At December 31, 2010, BlackRock had a total of 9,127 employees, including 3,797 located in offices outside the United States. At December 31, 2009, BlackRock had a total of 8,629 employees.

 

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Regulation

Virtually all aspects of BlackRock’s business are subject to various laws and regulations both in and outside the United States, some of which are summarized below. These laws and regulations are primarily intended to protect investment advisory clients, investors in registered and unregistered investment companies, trust customers of BlackRock Institutional Trust Company, N.A. (“BTC”) and the bank subsidiaries of Bank of America and PNC and their customers. Under these laws and regulations, agencies that regulate investment advisers, investment funds and financial and bank holding companies and their subsidiaries, such as BlackRock and its subsidiaries, have broad administrative powers, including the power to limit, restrict or prohibit the regulated entity from carrying on business if it fails to comply with such laws and regulations. Possible sanctions for significant compliance failures include the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of investment adviser and other registrations, censures and fines. The rules governing the regulation of financial institutions and their holding companies and subsidiaries are very detailed and technical. Accordingly, the discussion below is general in nature and does not purport to be complete.

Regulatory Reform

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA”) was signed into law in the United States. The DFA is expansive in scope and requires the adoption of extensive regulations and numerous regulatory decisions in order to be implemented. The adoption of these regulations and decisions will in large measure determine the impact of the DFA on BlackRock. The DFA may significantly change BlackRock’s operating environment in unpredictable ways. It is not possible to predict the ultimate effects that the DFA, or subsequent implementing regulations and decisions, will have upon BlackRock’s business and results of operations. Among the potential impacts of the DFA, provisions of the DFA referred to as the Volcker Rule could affect the method by which BlackRock invests in and operates its private equity funds, hedge funds and fund of funds platforms. In addition, BlackRock could become designated as a systemically important financial institution (“SIFI”) and become subject to direct supervision by the Federal Reserve System (the “Federal Reserve”). If BlackRock were designated as a SIFI, it could be subject to enhanced prudential, supervisory and other requirements, such as risk-based capital requirements; leverage limits; liquidity requirements; resolution plan and credit exposure report requirements; concentration limits; a contingent capital requirement; enhanced public disclosures; short-term debt limits; and overall risk management requirements. Further, proposed regulations under the DFA, relating to regulation of swaps and derivatives, could impact the manner by which BlackRock and BlackRock advised funds use and trade swaps and other derivatives, and could expose BlackRock to increased costs as the derivatives market moves toward central clearing and increased position reporting. Other jurisdictions outside the United States in which BlackRock operates are also in the process of devising or considering more pervasive regulation of many elements of the financial services industry, which could have a similar impact on BlackRock.

The DFA and its regulations, and other new laws or regulations, or changes in enforcement of existing laws or regulations, could materially and adversely impact the scope or profitability of BlackRock’s business activities; require BlackRock to change certain business practices; and expose BlackRock to additional costs (including compliance and tax costs) and liabilities, as well as reputational harm. For example, in addition to regulatory changes mandated by the DFA, the Securities and Exchange Commission (the “SEC”) has adopted new regulations related to, and continues to review the role and risks related to, money market funds and have indicated that it may adopt additional regulations. Some of the proposed changes, if adopted, could significantly alter money market fund products and the entire money market fund industry. Similarly, the SEC continues to review the distribution fees paid to mutual fund distributors in accordance with Rule 12b-1 under the Investment Company Act of 1940, which are important to a number of the mutual funds we manage. Any changes to 12b-1 fees would alter the way our distribution partners distribute our products. Regulatory changes could also lead to business disruptions, could materially and adversely impact the value of assets in which BlackRock has invested directly and/or on behalf of clients, and, to the extent the regulations strictly control the activities of financial services firms, could make it more difficult for BlackRock to conduct certain businesses or distinguish itself from competitors.

Additional legislation, changes in rules promulgated by regulators and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and regulations may directly affect the method of operation and profitability of BlackRock. BlackRock’s profitability also could be materially and adversely affected by modification of the rules and regulations that impact the business and financial communities in general, including changes to the laws governing taxation, antitrust regulation and electronic commerce.

 

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Regulation (continued)

U.S. Regulation

BlackRock and certain of its U.S. subsidiaries are subject to regulation, primarily at the federal level, by the SEC, the Department of Labor (the “DOL”), the Board of Governors of the Federal Reserve, the Office of the Comptroller of the Currency of the United States (the “OCC”), the Financial Industry Regulatory Authority (“FINRA”), the National Futures Association (the “NFA”), the Commodity Futures Trading Commission (the “CFTC”) and other government agencies and regulatory bodies. Certain of BlackRock’s U.S. subsidiaries are also subject to various anti-terrorist financing, privacy, anti-money laundering regulations and economic sanctions, laws and regulations established by various agencies.

The Investment Advisers Act of 1940, as amended (the “Advisers Act”), imposes numerous obligations on registered investment advisers such as BlackRock, including record-keeping, operational and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The Investment Company Act of 1940, as amended (the “Investment Company Act”), imposes stringent governance, compliance, operational, disclosure and related obligations on registered investment companies and their investment advisers and distributors, such as BlackRock. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and the Investment Company Act, ranging from fines and censure to termination of an investment adviser’s registration. Investment advisers also are subject to certain state securities laws and regulations. Non-compliance with the Advisers Act, the Investment Company Act or other federal and state securities laws and regulations could result in investigations, sanctions, disgorgement, fines and reputational damage.

BlackRock’s trading and investment activities for client accounts are regulated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as the rules of various U.S. and non-U.S. securities exchanges and self-regulatory organizations, including laws governing trading on inside information, market manipulation and a broad number of technical requirements (e.g., volume limitations, reporting obligations) and market regulation policies in the United States and globally. Depending on the scope of the rules to be adopted by the SEC, provisions of the DFA added to the Exchange Act may require certain BlackRock subsidiaries to register as municipal advisers in relation to their services for state and local governments, pension plans and other investment programs, such as college savings plans. In addition, BlackRock manages a variety of investment funds listed on U.S. and non-U.S. exchanges, which are subject to the rules of such exchanges. Violation of these laws and regulations could result in restrictions on the Company’s activities and in damage to its reputation. BlackRock manages a variety of private pools of capital, including hedge funds, funds of hedge funds, private equity funds, real estate funds, collective investment trusts, managed futures funds and hybrid funds. Congress, regulators, tax authorities and others continue to explore, on their own and in response to demands from the investment community and the public, increased regulation related to private pools of capital, including changes with respect to investor eligibility, certain limitations on trading activities, record-keeping and reporting, the scope of anti-fraud protections, safekeeping of client assets and a variety of other matters. BlackRock may be materially and adversely affected by new legislation, rule-making or changes in the interpretation or enforcement of existing rules and regulations imposed by various regulators.

Certain BlackRock subsidiaries are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and to regulations promulgated thereunder by the DOL, insofar as they act as a “fiduciary” under ERISA with respect to benefit plan clients. ERISA and applicable provisions of the Internal Revenue Code impose certain duties on persons who are fiduciaries under ERISA, prohibit certain transactions involving ERISA plan clients and impose excise taxes for violations of these prohibitions, mandate certain required periodic reporting and disclosures and require BlackRock to carry bonds ensuring against losses caused by fraud or dishonesty. ERISA also imposes additional compliance, reporting and operational requirements on BlackRock that otherwise are not applicable to non-benefit plan clients.

 

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Regulation (continued)

BlackRock has two subsidiaries that are registered as commodity pool operators and commodity trading advisers, two other subsidiaries that are registered as commodity trading advisers and three additional subsidiaries only registered as commodity pool operators with the CFTC. All seven of these subsidiaries are members of the NFA. The CFTC and NFA each administer a comparable regulatory system covering futures contracts and various other financial instruments, including swaps as a result of the DFA, in which certain BlackRock clients may invest. Four of BlackRock’s other subsidiaries, BlackRock Investments, LLC (“BRIL”), BlackRock Capital Markets, LLC, BlackRock Execution Services, and BlackRock Fund Distribution Company (“BFDC”) are registered with the SEC as broker-dealers and are member-firms of FINRA. Each broker-dealer has a membership agreement with FINRA that limits the scope of such broker-dealer’s permitted activities. BRIL is also an approved person with the New York Stock Exchange (“NYSE”). BRIL and BFDC are members of the Municipal Securities Rulemaking Board (“MSRB”) and are subject to MSRB rules.

U.S. Banking Regulation

Each of Bank of America and PNC is a bank holding company and a “financial holding company” regulated by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). Based on Bank of America’s and PNC’s current and/or prior ownership interests in BlackRock, BlackRock is deemed to be a non-bank subsidiary of Bank of America and PNC and is therefore subject to the supervision and regulation of the Federal Reserve and to most banking laws, regulations and orders that apply to Bank of America and PNC. The supervision and regulation of Bank of America, PNC and their respective subsidiaries under applicable banking laws is intended primarily for the protection of their respective banking subsidiaries, their depositors, the deposit insurance funds of the Federal Deposit Insurance Corporation, and the banking system as a whole, rather than for the protection of stockholders, creditors or clients of Bank of America, PNC or BlackRock. Bank of America’s and PNC’s relationships and good standing with their regulators are important to the conduct of BlackRock’s business. BlackRock may also be subject to foreign banking laws and supervision that could affect its business.

BTC is a national trust company that does not accept deposits and is a member of the Federal Reserve System. Accordingly, BTC is examined and supervised by the OCC and is subject to various banking laws and regulations enforced by the OCC, such as capital adequacy, regulations governing fiduciaries, conflicts of interest, self-dealing, and anti-money laundering laws and regulations. BTC is also subject to various Federal Reserve regulations applicable to member institutions, such as regulations restricting transactions with affiliates. Many of these laws and regulations are meant for the protection of BTC’s customers, and not BTC, BlackRock and its affiliates or BlackRock’s shareholders.

BlackRock generally may conduct only activities that are authorized for a “financial holding company” under the BHC Act. Investment management is an authorized activity, but must be conducted within applicable regulatory requirements, which in some cases are more restrictive than those BlackRock faces under applicable securities laws. BlackRock may also invest in investment companies and private investment funds to which it provides advisory, administrative or other services, to the extent consistent with applicable law and regulatory interpretations. The Federal Reserve has broad powers to approve, deny or refuse to act upon applications or notices for BlackRock to conduct new activities, acquire or divest businesses or assets, or reconfigure existing operations. There are limits on the ability of bank subsidiaries of Bank of America and PNC to extend credit to or conduct other transactions with BlackRock. Bank of America, PNC and their subsidiaries are also subject to examination by various banking regulators, which results in examination reports and ratings that may adversely impact the conduct and growth of BlackRock’s businesses.

The Federal Reserve has broad enforcement authority over BlackRock, including the power to prohibit BlackRock from conducting any activity that, in the Federal Reserve’s opinion, is unauthorized or constitutes an unsafe or unsound practice in conducting BlackRock’s business. The Federal Reserve may also impose substantial fines and other penalties for violations of applicable banking laws, regulations and orders. The DFA strengthened the Federal Reserve’s supervisory and enforcement authority over a bank holding company’s non-bank affiliates, such as BlackRock.

 

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Regulation (continued)

Any failure of either Bank of America or PNC to maintain its status as a financial holding company could result in substantial limitations on certain BlackRock activities and its growth. Such a change of status could be caused by any failure of one of Bank of America’s or PNC’s bank subsidiaries to remain “well capitalized,” by any examination downgrade of one of Bank of America’s or PNC’s bank subsidiaries, or by any failure of one of Bank of America’s or PNC’s bank subsidiaries to maintain a satisfactory rating under the Community Reinvestment Act. In addition, the DFA broadened the requirements for maintaining financial holding company status by now also requiring the holding company to remain “well capitalized” and “well managed.”

Non-U.S. Regulation

BlackRock’s international operations are subject to the laws and regulations of non-U.S. jurisdictions and non-U.S. regulatory agencies and bodies. As BlackRock continues to expand its international presence, a number of its subsidiaries and international operations have become subject to regulatory systems comparable to those affecting its operations in the United States.

The Financial Services Authority (the “FSA”) currently regulates certain BlackRock subsidiaries in the United Kingdom. Authorization by the FSA is required to conduct any financial services related business in the United Kingdom pursuant to the Financial Services and Markets Act 2000. The FSA’s rules govern a firm’s capital resources requirements, senior management arrangements, conduct of business, interaction with clients and systems and controls. Breaches of these rules may result in a wide range of disciplinary actions against the Company’s U.K.-regulated subsidiaries. The U.K. government has announced that it intends to abolish the FSA and to establish three new regulatory bodies, the Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority in its place. More detailed proposals, including draft legislation, are expected early in 2011 with the aim being for the new regulatory structure to be in place by the end of 2012.

In addition to the above, the Company’s U.K.-regulated subsidiaries and other European subsidiaries and branches, must comply with the pan-European regime established by the Markets in Financial Instruments Directive (“MiFID”), which came into effect on November 1, 2007 and regulates the provision of investment services throughout the European Economic Area, as well as the Capital Requirements Directive, which delineates regulatory capital requirements. MiFID sets out detailed requirements governing the organization and conduct of business of investment firms and regulated markets. It also includes pre- and post-trade transparency requirements for equity markets and extensive transaction reporting requirements.

The United Kingdom has adopted the MiFID rules into national legislation, as have those other European jurisdictions (excluding Switzerland which is not part of the EU) in which BlackRock has a presence. A review of MiFID by the European Commission is in process and is likely to result in further regulation including changes to pre- and post-trade reporting obligations and an expansion of the types of instruments subject to these requirements. It may also result in changes to other areas, such as firms’ conduct of business requirements. In addition, the new EU Alternative Investment Fund Managers Directive has been approved by the European Parliament in final form and is likely to be implemented by the summer of 2013. This directive will regulate managers of, and service providers to, alternative investment funds domiciled within Europe and the marketing of all alternative investment funds into Europe. There are also ongoing plans to reform the framework to which regulated firms are subject, including in relation to regulatory capital and the protection of client assets.

 

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Regulation (continued)

In the aftermath of the financial crisis, the European Commission set out a detailed plan for EU financial reform, outlining a number of initiatives to be reflected in new or updated directives, regulations and recommendations. UCITS IV, the next iteration of the Undertakings for Collective Investment in Transferable Securities (“UCITS”) directive, is required to be adopted in the national law of each EU member state by July 1, 2011. This directive will introduce a requirement for UCITS funds to provide a key investor information document. There are also European Commission consultations in process that are intended to improve retail investor protection and create a consistent framework and approach for certain insurance wrap products (referred to in the United Kingdom as packaged retail investment products), and regarding UCITS V, which is addressing, among other items, custodial liability. In the United Kingdom, the Bribery Act 2010, which is not yet in effect, will impose additional burdens on the Company’s U.K.-regulated subsidiaries. In addition, a retail distribution review has been initiated by the FSA, and is expected to change how investment advice is paid for in the United Kingdom for all investment products. Final retail distribution rules are expected in early 2011, with implementation to occur by the end of 2012.

In addition to the FSA, the activities of certain BlackRock subsidiaries, branches, and representative offices are overseen by comparable regulators in Germany, The Netherlands, Ireland, Luxembourg, Switzerland, Isle of Man, Jersey, Guernsey, France, Belgium, Italy, Poland, Spain and Sweden. Regulators in these jurisdictions have authority with respect to financial services including, among other things, the authority to grant or cancel required licenses or registrations. In addition, these regulators may subject certain BlackRock subsidiaries to net capital requirements. Other BlackRock subsidiaries, branches, and representative offices are regulated in China, Hong Kong, Singapore, Taiwan, South Korea, India, Dubai, Brazil, Chile, Mexico and Canada.

In Japan, certain BlackRock subsidiaries are subject to the Financial Instruments and Exchange Law (the “FIEL”) and the Law Concerning Investment Trusts and Investment Corporations. These laws are administered and enforced by the Japanese Financial Services Agency (the “JFSA”), which establishes standards for compliance, including capital adequacy and financial soundness requirements, customer protection requirements and conduct of business rules. The JFSA is empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease and desist orders or the suspension or revocation of registrations and licenses granted under the FIEL.

In Australia, BlackRock’s subsidiaries are subject to various Australian federal and state laws and certain subsidiaries are regulated by the Australian Securities and Investments Commission (the “ASIC”) and the Australian Prudential Regulatory Authority (the “APRA”). The ASIC regulates companies and financial services in Australia and is responsible for promoting investor, creditor and consumer protection. The APRA is the prudential regulator of the Australian financial services industry and oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies and most members of the superannuation (pension) industry. Failure to comply with applicable law and regulations could result in the cancellation, suspension or variation of the regulated subsidiaries licenses in Australia.

The activities of certain BlackRock subsidiaries in Hong Kong are subject to the Securities and Futures Ordinance (the “SFO”) which governs the securities and futures markets and the non-bank retail leveraged foreign exchange market in Hong Kong. The SFO is administered by the Securities and Futures Commission (the “SFC”), an independent non-governmental body. The relevant subsidiaries, and certain individuals representing them, which conduct business in any of the regulated activities specified in the SFO are generally required to be registered or licensed with the SFC, and are subject to the rules, codes and guidelines issued by the SFC from time to time.

There are parallel legal and regulatory arrangements in force in many other non-U.S. jurisdictions where BlackRock’s subsidiaries are authorized to conduct business.

 

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Available Information

BlackRock files annual, quarterly and current reports, proxy statements and all amendments to these reports and other information with the SEC. BlackRock makes available free-of–charge, on or through its website at http://www.blackrock.com, the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and all amendments to those filings, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The Company also makes available on its website the charters for the Audit Committee, Management Development and Compensation Committee and Nominating and Governance Committee of the Board of Directors, its Code of Business Conduct and Ethics, its Code of Ethics for Chief Executive and Senior Financial Officers and its Corporate Governance Guidelines. Further, BlackRock will provide, without charge, upon written request, a copy of the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and all amendments to those filings as well as the committee charters, its Code of Business Conduct and Ethics, its Code of Ethics for Chief Executive and Senior Financial Officers and its Corporate Governance Guidelines. Requests for copies should be addressed to Investor Relations, BlackRock, Inc., 55 East 52nd Street, New York, New York 10055. Investors may read and copy any document BlackRock files at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Reports, proxy statements and other information regarding issuers that file electronically with the SEC, including BlackRock’s filings, are also available to the public from the SEC’s website at http://www.sec.gov.

 

Item 1A. RISK FACTORS

As a leading investment management firm, risk is an inherent part of BlackRock’s business. Global markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. While BlackRock devotes significant resources across all of its operations to identify, measure, monitor, manage and analyze market and operating risks, BlackRock’s business, financial condition, operating results or non-operating results could be materially adversely affected, or our stock price could decline by any of the following risks.

Risks Related to BlackRock’s Business and Competition

Changes in the value levels of the capital, commodities or currency markets or other asset classes could lead to a decline in revenues and earnings.

BlackRock’s investment management revenues are primarily comprised of fees based on a percentage of the value of AUM and, in some cases, performance fees expressed as a percentage of the returns earned on AUM. Movements in equity, debt or commodity market prices, interest rates or foreign exchange rates could cause:

 

   

the value of AUM to decrease;

 

   

the returns realized on AUM to decrease;

 

   

clients to withdraw funds in favor of products in markets that they perceive offer greater opportunity that BlackRock may not serve;

 

   

clients to rebalance assets away from products that BlackRock manages into products that it may not manage;

 

   

clients to rebalance assets away from products that earn higher fees into products with lower fees; and

 

   

an impairment to the value of intangible assets and goodwill.

The occurrence of any of these events could result in lower investment advisory, administration and performance fees or earnings and cause our stock price to decline.

 

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Poor investment performance could lead to the loss of clients and a decline in revenues and earnings.

The Company’s management believes that investment performance, including the efficient delivery of beta for passively managed products, is one of the most important factors for the growth and retention of AUM. Poor investment performance relative to applicable portfolio benchmarks or to competitors could reduce revenues and cause earnings to decline as a result of:

 

   

existing clients withdrawing funds in favor of better performing products, which could result in lower investment advisory and administration fees;

 

   

the diminishing ability to attract funds from existing and new clients;

 

   

the Company earning minimal or no performance fees; and

 

   

an impairment to the value of intangible assets and goodwill.

The determination to provide support to particular products from time to time may reduce earnings or other investments in the business.

BlackRock may, at its option, from time to time support investment products through capital or credit support. See, for example, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Such support utilizes capital that would otherwise be available for other corporate purposes. Losses on such support, or failure to have or devote sufficient capital to support products, could have an adverse impact on revenues and earnings.

Changes in the value levels of the capital markets or other asset classes could lead to a decline in the value of investments that BlackRock owns.

At December 31, 2010, BlackRock’s net economic investment exposure of approximately $1.0 billion in these investments (see Item 7A, Quantitative and Qualitative Disclosures About Market Risk) is primarily the result of co-investments and seed investments in its sponsored investment funds. A decline in the prices of stocks or bonds, or the value of real estate or other alternative investments within or outside the United States could lower the value of these investments and result in a decline of non-operating income and an increase in the volatility of our earnings.

Continued capital losses on investments could have adverse income tax consequences.

The Company may generate realized and unrealized capital losses on seed investments and co-investments. Realized capital losses may be carried back three years and carried forward five years and offset against realized capital gains for federal income tax purposes. The Company has unrealized capital losses for which a deferred tax asset has been established. In the event such unrealized losses are realized, the Company may not be able to offset such losses within the carryback or carryforward period or from future realized capital gains, in which case the deferred tax asset will not be realized. The failure to utilize the deferred tax asset could materially increase BlackRock’s income tax expense.

The soundness of other financial institutions could adversely affect BlackRock.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. BlackRock, and the products and accounts that it manages, have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose BlackRock or the funds and accounts that it manages to credit risk in the event of default of its counterparty or client. There is no assurance that any such losses would not materially and adversely impact BlackRock’s revenues and earnings.

 

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The failure or negative performance of products of other financial institutions could lead to reduced AUM in similar products of BlackRock without regard to the performance of BlackRock’s products.

The failure or negative performance of products of other financial institutions could lead to a loss of confidence in similar products of BlackRock without regard to the performance of BlackRock’s products. Such a negative contagion could lead to withdrawals, redemptions and liquidity issues in such products and have a material adverse impact on our AUM, revenues and earnings.

Loss of employees could lead to the loss of clients and a decline in revenues.

The ability to attract and retain quality personnel has contributed significantly to BlackRock’s growth and success and is important to attracting and retaining clients. The market for qualified fund managers, investment analysts, financial advisers and other professionals is competitive. There can be no assurance that the Company will be successful in its efforts to recruit and retain required personnel. Loss of personnel could have a material adverse effect on the Company.

BlackRock’s investment advisory contracts may be terminated or may not be renewed by clients and the liquidation of certain funds may be accelerated at the option of investors.

Separate account and commingled trust clients may terminate their investment management contracts with BlackRock or withdraw funds on short notice. The Company has, from time to time, lost separate accounts and could, in the future, lose accounts or significant AUM under various circumstances such as adverse market conditions or poor performance.

Additionally, BlackRock manages its U.S. mutual funds, closed-end funds and exchanged-traded funds under management contracts with the funds that must be renewed and approved by the funds’ boards of directors annually. A majority of the directors of each such fund are independent from BlackRock. Consequently, there can be no assurance that the board of directors of each fund managed by the Company will approve the fund’s management contract each year, or will not condition its approval on the terms of the management contract being revised in a way that is adverse to the Company.

Further, the governing agreements of many of the Company’s private investment funds generally provide that, subject to certain conditions, investors in those funds, and in some cases independent directors of those funds, may remove the investment adviser, general partner or the equivalent of the fund or liquidate the fund without cause by a simple majority vote, resulting in a reduction in the management or performance fees as well as the total carried interest BlackRock could earn.

Failure to comply with client contractual requirements and/or guidelines could result in damage awards against BlackRock and loss of revenues due to client terminations.

When clients retain BlackRock to manage assets or provide products or services on their behalf, they specify guidelines or contractual requirements that the Company is required to observe in the provision of its services. A failure to comply with these guidelines or contractual requirements could result in damage to BlackRock’s reputation or in its clients seeking to recover losses, withdrawing their AUM or terminating their contracts, any of which could cause the Company’s revenues and earnings to decline.

Competitive fee pressures could reduce revenues and profit margins.

The investment management industry, including the offering of exchange-traded funds, is highly competitive and has relatively low barriers to entry. To the extent that the Company is forced to compete on the basis of price, it may not be able to maintain its current fee structure. Fee reductions on existing or future new business could cause revenues and profit margins to decline.

 

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Item 1A. RISK FACTORS (continued)

 

Performance fees may increase revenue and earnings volatility.

A portion of the Company’s revenues is derived from performance fees on investment and risk management advisory assignments. Performance fees represented $540 million, or 6%, of total revenue for the year ended December 31, 2010. In most cases, performance fees are based on relative or absolute investment returns, although in some cases they are based on achieving specific service standards. Generally, the Company is entitled to performance fees only if the returns on the related portfolios exceed agreed-upon periodic or cumulative return targets. If these targets are not exceeded, performance fees for that period will not be earned and, if targets are based on cumulative returns, the Company may not earn performance fees in future periods. Performance fees will vary from period to period in relation to volatility in investment returns and the timing of revenue recognition, causing earnings to be more volatile.

Additional acquisitions may decrease earnings and harm the Company’s competitive position.

BlackRock employs a variety of strategies intended to enhance earnings and expand product offerings in order to improve profit margins. These strategies have included smaller-sized lift-outs of investment teams and acquisitions of investment management businesses, such as the MLIM, Quellos and BGI Transactions. These strategies may not be effective, and failure to successfully develop and implement these strategies may decrease earnings and harm the Company’s competitive position in the investment management industry. In the event BlackRock pursues additional acquisitions, it may not be able to find suitable businesses to acquire at acceptable prices, and it may not be able to successfully integrate or realize the intended benefits from such acquisitions.

Risks Related to BlackRock’s Operations

Failure to maintain adequate infrastructure could impede BlackRock’s productivity and growth.

The Company’s infrastructure, including its technological capacity, data centers, and office space, is vital to the competitiveness of its business. The failure to maintain an adequate infrastructure commensurate with the size and scope of its business, including any expansion, could impede the Company’s productivity and growth, which could cause the Company’s earnings or stock price to decline.

Failure to maintain adequate business continuity plans could have a material adverse impact on BlackRock and its products.

A significant portion of BlackRock’s critical business operations are concentrated in a few geographic areas, including San Francisco, California, New York, New York and London, England. A major earthquake, fire, terrorist or other catastrophic event could result in disruption to the business. The failure of the Company to maintain updated adequate business continuity plans, including backup facilities, could impede the Company’s ability to operate upon a disruption, which could cause the Company’s earnings or stock price to decline.

Operating in international markets increases BlackRock’s operational, regulatory and other risks.

As a result of BlackRock’s extensive international business activities, the Company faces increased operational, regulatory, reputational and foreign exchange rate risks. The failure of the Company’s systems of internal control to properly mitigate such additional risks, or of its operating infrastructure to support such international activities, could result in operational failures and regulatory fines or sanctions, which could cause the Company’s earnings or stock price to decline.

 

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Failure to maintain a technological advantage could lead to a loss of clients and a decline in revenues.

A key element to BlackRock’s continued success is the ability to maintain a technological advantage in providing the sophisticated risk analytics incorporated into BlackRock’s Aladdin technology platform that support investment advisory and BlackRock Solutions clients. Moreover, the Company’s technological and software advantage is dependent on a number of third parties who provide various types of data. The failure of these third parties to provide such data or software could result in operational difficulties and adversely impact BlackRock’s ability to provide services to its investment advisory and BlackRock Solutions clients. There can be no assurance that the Company will be able to maintain this technological advantage or be able to effectively protect and enforce its intellectual property rights in these systems and processes.

Failure to implement effective information security policies, procedures and capabilities could disrupt operations and cause financial losses that could result in a decrease in BlackRock’s earnings or stock price.

BlackRock is dependent on the effectiveness of its information security policies, procedures and capabilities to protect its computer and telecommunications systems and the data that reside on or are transmitted through them. An externally caused information security incident, such as a hacker attack, virus or worm, or an internally caused issue, such as failure to control access to sensitive systems, could materially interrupt business operations or cause disclosure or modification of sensitive or confidential information and could result in material financial loss, regulatory actions, breach of client contracts, reputational harm or legal liability, which, in turn, could cause a decline in the Company’s earnings or stock price.

The failure of a key vendor to BlackRock to fulfill its obligations could have a material adverse effect on BlackRock and its products.

BlackRock depends on a number of key vendors for various fund administration, custody and transfer agent roles and other operational needs. The failure or inability of BlackRock to diversify its sources for key services or the failure of any key vendors to fulfill their obligations could lead to operational issues for the company and in certain products, which could result in financial losses for the Company and its clients.

The remaining integration of the BGI business creates risks and uncertainties that could adversely affect profitability.

A portion of the BGI business and personnel remain in the process of being integrated with BlackRock’s previously existing business and personnel. These transition activities are complex and the Company may encounter unexpected difficulties or incur unexpected costs including:

 

   

the diversion of management’s attention to integration matters;

 

   

difficulties in the integration of operations and systems;

 

   

difficulties in the assimilation of employees; and

 

   

challenges in keeping existing clients and obtaining new clients, including potential conflicts of interest and client imposed concentration limits on the use of an investment manager; and

As a result, the Company may not be able to realize all of the benefits that it hoped to achieve from the transaction. In addition, BlackRock may be required to spend additional time or money on integration that would otherwise be spent on the development and expansion of its business and services.

 

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Failure to manage risks in operating BlackRock’s securities lending program for clients could lead to a loss of clients and a decline in revenues and liquidity.

The size of BlackRock’s securities lending programs increased significantly with the completion of the BGI Transaction. As part of these programs, BlackRock must manage risks associated with (i) ensuring that the value of the collateral held against the securities on loan does not decline in value or become illiquid and that its nature and value complies with regulatory requirements and investment requirements, (ii) the potential that a borrower defaults or does not return a loaned security on a timely basis, (iii) the potential that the collateral held may not be sufficient to repurchase the loaned security, and (iv) errors in the settlement of securities, daily mark-to-market valuations and collateral collection. The failure of the Company’s controls to mitigate these risks could result in financial losses for our clients that participate in our securities lending programs as well as for the Company.

Risks Related to Relationships with Bank of America/Merrill Lynch, PNC, Barclays and Other Institutional Investors

Merrill Lynch is an important distributor of BlackRock’s products, and the Company is therefore subject to risks associated with the business of Merrill Lynch.

Under a global distribution agreement entered into with Merrill Lynch, Merrill Lynch provides distribution, portfolio administration and servicing for certain BlackRock investment management products and services through its various distribution channels. The Company may not be successful in distributing products through Merrill Lynch or in distributing its products and services through other third party distributors. If BlackRock is unable to distribute its products and services successfully or if it experiences an increase in distribution-related costs, BlackRock’s business, results of operations or financial condition may be materially and adversely affected.

Loss of market share within Merrill Lynch’s Global Wealth & Investment Management business could harm operating results.

A significant portion of BlackRock’s revenue has historically come from AUM generated by Merrill Lynch’s Global Wealth & Investment Management (“GWIM”) business. BlackRock’s ability to maintain a strong relationship within GWIM is material to the Company’s future performance. If one of the Company’s competitors gains significant additional market share within the GWIM retail channel at the expense of BlackRock, then BlackRock’s business, results of operations or financial condition may be negatively impacted.

The failure of Barclays to fulfill its commitments, or the inadequacy of the support provided, under certain capital support agreements in favor of a number of cash management funds acquired in the BGI Transaction, could negatively impact such funds and BlackRock.

Barclays has provided capital support agreements through December 2013, or until certain criteria are met, to support certain cash management products, which were acquired by BlackRock in the BGI Transaction. The failure of Barclays to fulfill its obligations under these agreements, or the inadequacy of the support provided, could cause our clients to suffer losses and BlackRock to suffer reputational and other adverse impacts. For a discussion on the capital support agreements see “Management, Discussion and Analysis – Liquidity and Capital Resources – Barclays Support of Certain Cash Funds.”

 

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Item 1A. RISK FACTORS (continued)

 

PNC and Barclays have each agreed to vote as stockholders in accordance with the recommendation of BlackRock’s Board of Directors, and certain actions will require special board approval or the prior approval of Bank of America/Merrill Lynch, PNC and Barclays.

PNC and Barclays have agreed to vote all of their voting shares in accordance with the recommendation of BlackRock’s Board of Directors in accordance with the provisions of their respective stockholder agreements with BlackRock. As a consequence, if the shares held by PNC and Barclays constitute a substantial portion of the outstanding voting shares, matters submitted to a stockholder vote that require a majority or a plurality of votes for approval, including elections of directors, will have a substantial number of shares voted in accordance with the determinations of the BlackRock Board of Directors. This arrangement has the effect of concentrating a significant block of voting control over BlackRock in its Board of Directors, whether or not stockholders agree with any particular determination of the Board. At December 31, 2010, PNC and Barclays owned approximately, 25.3% and 2.3%, respectively, of BlackRock’s voting common stock.

A large portion of our capital stock is held by a small group of significant shareholders. Future sales of our common stock in the public market by us or our large stockholders could adversely affect the trading price of our common stock.

As of December 31, 2010, after giving effect to the dispositions referred to in the following sentence, PNC, Barclays and Bank of America/Merrill Lynch owned 20.3%, 19.6% and 7.1% of our capital stock, respectively. We have entered into registration rights agreements with PNC, Barclays and Bank of America/Merrill Lynch, as well as the institutional investors who purchased shares of BlackRock capital stock in connection with the BGI Transaction, and, pursuant to such agreements, on November 15, 2010, Bank of America/Merrill Lynch and PNC sold approximately 58.7 million shares of our capital stock. The registration rights agreements, which include customary “piggyback” registration provisions, may continue to allow the respective stockholders to cause us to file one or more registration statements for the resale of their respective shares of capital stock and cooperate in certain underwritten offerings. Sales by us or our large stockholders of a substantial number of shares of our common stock in the public market pursuant to registration rights or otherwise, or the perception that these sales might occur, could cause the market price of our common stock to decline.

Legal and Regulatory Risks

BlackRock is subject to extensive regulation in the United States and internationally.

BlackRock’s business is subject to extensive regulation in the United States and around the world. See the discussion under the heading “Business – Regulation.” Violation of applicable laws or regulations could result in fines, temporary or permanent prohibition of the engagement in certain activities, reputational harm, suspensions of personnel or revocation of their licenses, suspension or termination of investment adviser or broker-dealer registrations, or other sanctions, which could have a material adverse effect on BlackRock’s reputation, business, results of operations or financial condition and cause the Company’s earnings or stock price to decline.

BlackRock may be adversely impacted by legal and regulatory changes in the United States and internationally.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA”) was signed into law in the United States. The DFA is expansive in scope and requires the adoption of extensive regulations and numerous regulatory decisions in order to be implemented. The adoption of these regulations and decisions will in large measure determine the impact of the DFA on BlackRock.

The DFA and its regulations, and other new laws or regulations, or changes in enforcement of existing laws or regulations, could adversely impact the scope or profitability of BlackRock’s business activities, could require BlackRock to change certain business practices and could expose BlackRock to additional costs (including compliance and tax costs) and liabilities, as well as reputational harm. Regulatory changes could also lead to business disruptions, could adversely impact the value of assets in which BlackRock has invested on behalf of clients and/or via seed or co-investments, and, to the extent the regulations strictly control the activities of financial services firms, could make it more difficult for BlackRock to conduct certain business activities or distinguish itself from competitors.

 

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Item 1A. RISK FACTORS (continued)

 

Failure to comply with the Advisers Act and the Investment Company Act and related regulations could result in substantial harm to BlackRock’s reputation and results of operations.

Certain BlackRock subsidiaries are registered with the SEC under the Advisers Act and BlackRock’s U.S. mutual funds and exchange-traded funds are registered with the SEC under the Investment Company Act. The Advisers Act imposes numerous obligations and fiduciary duties on registered investment advisers, including record-keeping, operating and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The Investment Company Act imposes similar obligations, as well as additional detailed operational requirements, on investment advisers to registered investment companies. The failure of any of BlackRock’s subsidiaries to comply with the Advisers Act or the Investment Company Act could cause the SEC to institute proceedings and impose sanctions for violations of either of these acts, including censure, termination of an investment adviser’s registration or prohibition to serve as adviser to SEC-registered funds, and could lead to litigation by investors in those funds or harm to the Company’s reputation, any of which could cause its earnings or stock price to decline.

Failure to comply with ERISA regulations could result in penalties and cause the Company’s earnings or stock price to decline.

Certain BlackRock subsidiaries are subject to ERISA and to regulations promulgated thereunder, insofar as they act as a “fiduciary” under ERISA with respect to benefit plan clients. ERISA and applicable provisions of the Internal Revenue Code impose duties on persons who are fiduciaries under ERISA, prohibit specified transactions involving ERISA plan clients and provide monetary penalties for violations of these prohibitions. The failure of any of the relevant subsidiaries to comply with these requirements could result in significant penalties that could reduce the Company’s earnings or cause its stock price to decline.

BlackRock is subject to banking regulations that may limit its business activities.

Because the total equity ownership interest of each of Bank of America and PNC in BlackRock exceeds or until recently exceeded certain thresholds, BlackRock is deemed to be a non-bank subsidiary of each of Bank of America and PNC, which are both financial holding companies under the Bank Holding Company Act of 1956, as amended. As a non-bank subsidiary of each of Bank of America and PNC, BlackRock is subject to banking regulation, including the supervision and regulation of the Federal Reserve. Such banking regulation limits the activities and the types of businesses that BlackRock may conduct. The Federal Reserve has broad enforcement authority over BlackRock, including the power to prohibit BlackRock from conducting any activity that, in the Federal Reserve’s opinion, is unauthorized or constitutes an unsafe or unsound practice in conducting BlackRock’s business, and to impose substantial fines and other penalties for violations. Any failure of either Bank of America or PNC to maintain its status as a financial holding company could result in substantial limitations on certain BlackRock activities and its growth. In addition, BlackRock’s trust bank subsidiary is subject to regulation by the OCC, which is similar in many respects to that imposed under the Advisers Act and the Investment Company Act as described above and to capital requirements established by the OCC. The OCC has broad enforcement authority over BlackRock’s trust bank subsidiary. Being subject to banking regulation may put BlackRock at a competitive disadvantage because most of its competitors are not subject to these limitations.

Failure to comply with laws and regulations in the United Kingdom, other member states of the European Union, Hong Kong, Japan, Australia and other non-U.S. jurisdictions in which BlackRock operates could result in substantial harm to BlackRock’s reputation and results of operations.

The Financial Services Authority (the “FSA”) regulates BlackRock’s subsidiaries in the United Kingdom. Authorization by the FSA is required to conduct any financial services-related business in the United Kingdom under the Financial Services and Markets Act 2000. The FSA’s rules govern a firm’s capital resources requirements, senior management arrangements, conduct of business, interaction with clients and systems and controls. Breaches of these rules may result in a wide range of disciplinary actions against the Company’s U.K.-regulated subsidiaries.

 

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Item 1A. RISK FACTORS (continued)

 

In addition, these subsidiaries, and other European subsidiaries, branches or representative offices, must comply with the pan-European regime established by the Markets in Financial Instruments Directive, which regulates the provision of investment services throughout the European Economic Area, as well as the Capital Requirements Directive, which delineates regulatory capital requirements. As discussed under “Business-Regulation,” in the aftermath of the financial crisis the European Commission set out a detailed plan to complete the EU’s financial reform, outlining a number of initiatives to be reflected in new or updated directives, regulations and recommendations. There are changes proposed by the Alternative Investment Fund Managers Directive, to be implemented by the summer of 2013, and UCITS IV, which is required to be adopted in the national law of each EU member state by July 1, 2011. There are also European Commission consultations in process regarding certain insurance wrap products (referred to in the United Kingdom as packaged retail investment products), covering pre-contractual information to be provided with respect to such products, and UCITS V, which addresses, among other items, custodial liability. In the United Kingdom, the Bribery Act 2010 was to be implemented in April 2011 but has been put on hold while the U.K. government rewrites guidance for businesses on how to comply with its provisions. When in force it is likely to impose additional procedures on the Company’s U.K.-regulated subsidiaries. In addition, a retail distribution review initiated by the FSA is expected to change how investment advice is paid for in the United Kingdom for all investment products. Final retail distribution rules are expected in early 2011, with implementation to occur by the end of 2012.

In Japan, certain BlackRock subsidiaries are subject to the Financial Instruments and Exchange Law (the “FIEL”) and the Law Concerning Investment Trusts and Investment Corporations. These laws are administered and enforced by the Japanese Financial Services Agency (the “JFSA”), which establishes standards for compliance, including capital adequacy and financial soundness requirements, customer protection requirements and conduct of business rules. The JFSA is empowered to conduct administrative proceedings that can result in censure, fines, the issuance of cease and desist orders or the suspension or revocation of registrations and licenses granted under the FIEL.

In Australia, BlackRock’s subsidiaries are subject to various Australian federal and state laws and certain subsidiaries are regulated by the Australian Securities and Investments Commission (the “ASIC”) and the Australian Prudential Regulation Authority. The ASIC regulates companies and financial services in Australia and is responsible for promoting investor, creditor and consumer protection. Failure to comply with applicable law and regulations could result in the cancellation, suspension or variation of the relevant subsidiaries’ licenses in Australia.

The activities of certain BlackRock subsidiaries in Hong Kong are subject to the Securities and Futures Ordinance (the “SFO”) which governs the securities and futures markets and the non-bank retail leveraged foreign exchange market in Hong Kong. The SFO is administered by the Securities and Futures Commission (the “SFC”), an independent non-governmental body. The relevant subsidiaries, and certain individuals representing them, which conduct business in any of the regulated activities specified in the SFO are generally required to be registered or licensed with the SFC, and are subject to the rules, codes and guidelines issued by the SFC from time to time.

There are similar legal and regulatory arrangements in force in many other non-U.S. jurisdictions where BlackRock’s subsidiaries conduct business or where the funds and products it manages are organized. Failure to comply with laws and regulations in any of these jurisdictions could result in substantial harm to BlackRock’s reputation and results of operation.

Legal proceedings could adversely affect operating results and financial condition for a particular period.

Many aspects of BlackRock’s business involve substantial risks of legal liability. The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations, class actions and other litigation arising in connection with BlackRock’s activities. From time to time, BlackRock receives subpoenas or other requests for information from various U.S. and non-U.S. governmental and regulatory authorities in connection with certain industry-wide, company-specific or other investigations or proceedings. Additionally, certain of the investment funds that the Company manages are subject to lawsuits, any of which could potentially harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.

 

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Item 1B. UNRESOLVED STAFF COMMENTS

The Company has no unresolved comments from the SEC staff relating to BlackRock’s periodic or current reports filed with the SEC pursuant to the Exchange Act of 1934.

 

Item 2. PROPERTIES

BlackRock’s principal office, which is leased, is located at 55 East 52nd Street, New York, New York. BlackRock leases additional office space in New York City at 40 East 52nd Street and throughout the world, including Boston, Chicago, Edinburgh, Gurgaon (India), Hong Kong, London, Melbourne, Munich, Plainsboro (New Jersey), San Francisco, Seattle, Singapore, Sydney, Taipei and Tokyo. The Company also owns an 84,500 square foot office building in Wilmington (Delaware).

 

Item 3. LEGAL PROCEEDINGS

From time to time, BlackRock receives subpoenas or other requests for information from various U.S. federal, state governmental and regulatory authorities in connection with certain industry-wide, company-specific or other investigations or proceedings. It is BlackRock’s policy to fully cooperate with such inquiries. The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations and other litigation arising in connection with BlackRock’s activities. Additionally, certain of the investment funds that the Company manages are subject to lawsuits, any of which could potentially harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.

Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of regulatory matters or lawsuits will have a material adverse effect on BlackRock’s earnings, financial position, or cash flows, although, at the present time, management is not in a position to determine whether any such pending or threatened matters will have a material adverse effect on BlackRock’s results of operations in any future reporting period.

 

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Part II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

BlackRock’s common stock is listed on the NYSE and is traded under the symbol “BLK”. At the close of business on January 31, 2011, there were 400 common stockholders of record. Common stockholders include institutional or omnibus accounts that hold common stock for multiple underlying investors.

The following table sets forth for the periods indicated the high and low reported sale prices, period-end closing prices for the common stock and dividends declared per share for the common stock as reported on the NYSE:

 

     Common Stock Price
Ranges
     Closing      Cash
Dividend
 
     High      Low      Price      Declared  

2010

           

First Quarter

   $ 243.80       $ 200.56       $ 217.76       $ 1.00   

Second Quarter

   $ 212.27       $ 143.01       $ 143.40       $ 1.00   

Third Quarter

   $ 172.87       $ 138.42       $ 170.25       $ 1.00   

Fourth Quarter

   $ 193.74       $ 161.53       $ 190.58       $ 1.00   

2009

           

First Quarter

   $ 143.32       $ 88.91       $ 130.04       $ 0.78   

Second Quarter

   $ 183.80       $ 119.12       $ 175.42       $ 0.78   

Third Quarter

   $ 220.17       $ 159.45       $ 216.82       $ 0.78   

Fourth Quarter

   $ 241.66       $ 206.00       $ 232.20       $ 0.78   

BlackRock’s closing common stock price as of February 25, 2011 was $203.92.

Dividends

On February 24, 2011, the Board of Directors approved BlackRock’s quarterly dividend of $1.375 to be paid on March 23, 2011 to stockholders of record on March 7, 2011.

Barclays, Merrill Lynch, PNC and their respective affiliates along with other institutional investors that hold non-voting participating preferred stock receive dividends on these shares, which are equivalent to the dividends received by common stockholders.

 

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Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (continued)

 

Issuer Purchases of Equity Securities

During the three months ended December 31, 2010, the Company made the following purchases of its common stock, which is registered pursuant to Section 12(b) of the Exchange Act.

 

     Total
Number of
Shares
Purchased
    Average
Price Paid
per Share
     Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
     Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs(1)
 

October 1, 2010 through October 31, 2010

     3,525 (2)    $ 170.30         —           4,203,898   

November 1, 2010 through November 30, 2010

     399 (2)    $ 165.85         —           4,203,898   

December 1, 2010 through December 31, 2010

     885 (2)    $ 180.75         —           4,203,898   
                      

Total

     4,809      $ 171.85         —           4,203,898   
                      

 

(1)

In July 2010, the Company announced a 5.1 million share repurchase program with no stated expiration date.

(2)

Includes purchases made by the Company primarily to satisfy income tax withholding obligations of employees and members of our Board of Directors related to the vesting of certain restricted stock or restricted stock unit awards. All such purchases were made outside of the publicly announced share repurchase program.

 

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Item 6. SELECTED FINANCIAL DATA

The selected financial data presented below has been derived in part from, and should be read in conjunction with, the consolidated financial statements of BlackRock and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K. Prior year data reflects certain reclassifications to conform to the current year presentation.

 

     Year ended December 31,  
(Dollar amounts in millions, except per share data)    2010(1)     2009     2008     2007(2)      2006  

Income statement data:

           

Total revenue

   $ 8,612      $ 4,700      $ 5,064      $ 4,845       $ 2,098   

Expenses

           

Restructuring charges

     —          22        38        —           —     

Termination of closed-end fund administration and servicing arrangements

     —          —          —          128         —     

Fee sharing payment(3)

     —          —          —          —           34   

Other operating expenses

     5,614        3,400        3,433        3,423         1,592   
                                         

Total expenses

     5,614        3,422        3,471        3,551         1,626   

Operating income

     2,998        1,278        1,593        1,294         472   

Total non-operating income (expense)

     23        (6     (577     526         53   
                                         

Income before income taxes

     3,021        1,272        1,016        1,820         525   

Income tax expense

     971        375        387        463         188   
                                         

Net income

     2,050        897        629        1,357         337   

Less: Net income (loss) attributable to non-controlling interests(4)

     (13     22        (155     364         16   
                                         

Net income attributable to BlackRock, Inc.

   $ 2,063      $ 875      $ 784      $ 993       $ 321   
                                         

Per share data:(5)

           

Basic earnings

   $ 10.67      $ 6.24      $ 5.86      $ 7.53       $ 3.95   

Diluted earnings

   $ 10.55      $ 6.11      $ 5.78      $ 7.37       $ 3.83   

Book value(6)

   $ 136.09      $ 128.86      $ 92.91      $ 90.16       $ 83.63   

Common and preferred cash dividends

   $ 4.00      $ 3.12      $ 3.12      $ 2.68       $ 1.68   

 

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Item 6. SELECTED FINANCIAL DATA (continued)

 

     December 31,  
(Dollar amounts in millions)    2010      2009(1)      2008      2007      2006  

Balance sheet data:

              

Cash and cash equivalents

   $ 3,367       $ 4,708       $ 2,032       $ 1,656       $ 1,160   

Goodwill and intangible assets, net

     30,317         30,346         11,974         12,073         11,139   

Total assets(7)

     178,459         178,124         19,924         22,561         20,470   

Less:

              

  Separate account assets(8)

     121,137         119,629         2,623         4,670         4,300   

  Collateral held under securities lending agreements(8)

     17,638         19,335         —           —           —     

  Consolidated investment vehicles(9)

     1,610         282         502         805         1,236   
                                            

    Adjusted total assets

     38,074         38,878         16,799         17,086         14,934   

Short-term borrowings

   $ 100       $ 2,234       $ 200       $ 300       $ —     

Convertible debentures

     67         243         245         242         238   

Long-term borrowings

     3,192         3,191         697         697         3   
                                            

Total borrowings

   $ 3,359       $ 5,668       $ 1,142       $ 1,239       $ 241   

Total stockholders’ equity

   $ 26,094       $ 24,329       $ 12,069       $ 11,601       $ 10,789   
     December 31,  
(Dollar amounts in millions)    2010      2009(1)      2008      2007      2006  

Assets under management:(10)

              

Equity:

              

Active

   $ 334,532       $ 348,574       $ 152,216       $ 291,324       $ 255,330   

Institutional index

     911,775         806,082         51,076         71,381         61,631   

iShares / Exchange-traded products

     448,160         381,399         —           —           —     

Fixed income:

              

Active

     592,303         595,580         477,492         506,265         441,046   

Institutional index

     425,930         357,557         3,873         3,942         4,274   

iShares / Exchange-traded products

     123,091         102,490         —           —           —     

Multi-asset class

     185,587         142,029         77,516         98,623         78,601   

Alternatives

     109,738         102,101         61,544         71,771         48,292   
                                            

Long-term

     3,131,116         2,835,812         823,717         1,043,306         889,174   

Cash management

     279,175         349,277         338,439         313,338         235,453   
                                            

Sub-total

     3,410,291         3,185,089         1,162,156         1,356,644         1,124,627   

Advisory(11)

     150,677         161,167         144,995         —           —     
                                            

        Total

   $ 3,560,968       $ 3,346,256       $ 1,307,151       $ 1,356,644       $ 1,124,627   
                                            

 

(1)

Significant increases in 2009 (for balance sheet data and AUM) and 2010 (for income statement data) were primarily the result of the BGI Transaction which closed on December 1, 2009.

(2)

Significant increases in 2007 (for income statement data only) were primarily the result of the MLIM Transaction which closed on September 29, 2006.

(3)

Represents a 2006 fee sharing payment to MetLife, Inc. representing a one-time expense related to a large institutional real estate equity client account acquired in the SSR Transaction.

(4)

Includes both redeemable and nonredeemable non-controlling interests.

(5)

Series A, B, C and D non-voting participating preferred stock is considered to be a common stock equivalent for purposes of earnings per share calculations.

(6)

Total BlackRock stockholders’ equity, excluding appropriated retained earnings, divided by total common and preferred shares outstanding at December 31 of the respective year-end.

(7)

Includes separate account assets that are segregated funds held for purposes of funding individual and group pension contracts and collateral held under securities lending agreements related to these assets that have equal and offsetting amounts recorded in liabilities and ultimately do not impact BlackRock’s stockholders’ equity or cash flows.

(8)

Equal and offsetting amounts, related to separate account assets and collateral held under securities lending agreements, are recorded in liabilities.

(9)

Includes assets held by consolidated variable interest entities and consolidated sponsored investments funds.

(10)

Data reflects the reclassification of AUM into the current period presentation.

(11)

Advisory AUM represents long-term portfolio liquidation assignments.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Statements

This report, and other statements that BlackRock may make, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, with respect to BlackRock’s future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “potential,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.

BlackRock cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and BlackRock assumes no duty to and does not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

In addition to risk factors previously disclosed in BlackRock’s Securities and Exchange Commission (“SEC”) reports and those identified elsewhere in this report the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: (1) the introduction, withdrawal, success and timing of business initiatives and strategies; (2) changes and volatility in political, economic or industry conditions, the interest rate environment, foreign exchange rates or financial and capital markets, which could result in changes in demand for products or services or in the value of assets under management; (3) the relative and absolute investment performance of BlackRock’s investment products; (4) the impact of increased competition; (5) the impact of capital improvement projects; (6) the impact of future acquisitions or divestitures; (7) the unfavorable resolution of legal proceedings; (8) the extent and timing of any share repurchases; (9) the impact, extent and timing of technological changes and the adequacy of intellectual property protection; (10) the impact of legislative and regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, and regulatory, supervisory or enforcement actions of government agencies relating to BlackRock, Barclays Bank PLC, Bank of America Corporation, Merrill Lynch & Co., Inc. or The PNC Financial Services Group, Inc.; (11) terrorist activities, international hostilities and natural disasters, which may adversely affect the general economy, domestic and local financial and capital markets, specific industries or BlackRock; (12) the ability to attract and retain highly talented professionals; (13) fluctuations in the carrying value of BlackRock’s economic investments; (14) the impact of changes to tax legislation and, generally, the tax position of the Company; (15) BlackRock’s success in maintaining the distribution of its products; (16) the impact of BlackRock electing to provide support to its products from time to time; (17) the impact of problems at other financial institutions or the failure or negative performance of products at other financial institutions; and (18) the ability of BlackRock to complete the integration of the operations of Barclays Global Investors.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Overview

BlackRock, Inc. (“BlackRock” or the “Company”) is the largest publicly traded investment management firm. As of December 31, 2010, the Company managed $3.561 trillion of assets under management (“AUM”) on behalf of institutional and individual investors worldwide. The Company provides a wide array of products including passively and actively managed products including equities, fixed income, multi-asset class, alternative investment and cash management products, and offer clients diversified access to global markets through separate accounts, collective investment trusts, open-end and closed-end mutual funds, exchange-traded funds, hedge funds and funds of funds. In addition, BlackRock Solutions® provides market risk management, financial markets advisory and enterprise investment system services to a broad base of clients. Financial markets advisory services include valuation of illiquid securities, dispositions and workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.

On September 29, 2006, Merrill Lynch & Co., Inc. (“Merrill Lynch”) contributed the entities and assets that constituted its investment management business, Merrill Lynch Investment Managers (“MLIM”), to BlackRock in exchange for common and non-voting preferred stock such that immediately after such closing Merrill Lynch held approximately 45% of BlackRock’s common stock outstanding and approximately 49.3% of the Company’s capital stock on a fully diluted basis (the “MLIM Transaction”). On October 1, 2007, BlackRock acquired certain assets and assumed certain liabilities of the fund of funds business of Quellos Group, LLC (“Quellos”) for a combination of cash and common stock (the “Quellos Transaction”).

On January 1, 2009, Bank of America Corporation (“Bank of America”) acquired Merrill Lynch. In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and The PNC Financial Services Group, Inc. (“PNC”) pursuant to which each agreed to exchange a portion of BlackRock voting common stock they held for non-voting preferred stock.

On December 1, 2009, BlackRock acquired from Barclays Bank PLC (“Barclays”) all of the outstanding equity interests of subsidiaries of Barclays conducting the business of Barclays Global Investors (“BGI”) (the “BGI Transaction”) in exchange for 37.6 million capital shares valued at $8.53 billion, or $227.08 per share, the closing price of BlackRock’s common stock on November 30, 2009 and $6.65 billion in cash, for a total of $15.2 billion. The fair value of the BGI Transaction on June 5, 2009, several days prior to the announcement of the transaction, included the capital shares valued at $6.16 billion, or $163.74 per share, and $6.65 billion in cash, for a total of $12.8 billion. The increase in the fair value of BlackRock’s common stock resulted in $2.4 billion, or 19%, of additional purchase price consideration for accounting purposes as compared to a 16% increase in the S&P 500.

On November 15, 2010, Bank of America and PNC sold 58,737,122 shares of BlackRock’s common stock, which included 56,407,040 shares of common stock that converted from non-voting preferred stock. In connection with this transaction, BlackRock entered into an exchange agreement with PNC pursuant to which PNC agreed to exchange 11,105,000 shares of BlackRock non-voting preferred stock they held for common stock.

As of December 31, 2010, equity ownership of BlackRock was as follows:

 

     Voting
Common
Stock
    Capital  Stock(1)  

PNC

     25.3     20.3

Barclays

     2.3     19.6

Bank of America/Merrill Lynch

     0.0     7.1

Other

     72.4     53.0
                
     100.0     100.0
                

 

(1)

Includes outstanding common and non-voting preferred stock only.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

The following table summarizes BlackRock’s operating performance for the years ended December 31, 2010, 2009 and 2008:

Financial Highlights

(Dollar amounts in millions, except per share data)

 

           Variance  
     Year ended December 31,     2010 vs. 2009     2009 vs. 2008  
     2010     2009     2008     Amount     %     Amount     %  

GAAP basis:

              

Total revenue

   $ 8,612      $ 4,700      $ 5,064      $ 3,912        83   $ (364     (7 %) 

Total expenses

   $ 5,614      $ 3,422      $ 3,471      $ 2,192        64   $ (49     (1 %) 

Operating income

   $ 2,998      $ 1,278      $ 1,593      $ 1,720        135   $ (315     (20 %) 

Operating margin

     34.8     27.2     31.5     7.6     28     (4.3 %)      (14 %) 

Non-operating income (expense), less net income (loss) attributable to non-controlling interests

   $ 36      $ (28   $ (422   $ 64        *      $ 394        93

Net income attributable to BlackRock, Inc.

   $ 2,063      $ 875      $ 784      $ 1,188        136   $ 91        12

Diluted earnings per common share (e)

   $ 10.55      $ 6.11      $ 5.78      $ 4.44        73   $ 0.33        6

Effective tax rate

     32.0     30.0     33.0     2.0     7     (3.0 %)      (9 %) 

As adjusted:

              

Operating income (a)

   $ 3,167      $ 1,570      $ 1,662      $ 1,597        102   $ (92     6

Operating margin (a)

     39.3     38.2     38.7     1.1     3     (0.5 %)      (1 %) 

Non-operating income (expense), less net income (loss) attributable to non-controlling interests (b)

   $ 25      $ (46   $ (384   $ 71        *      $ 338        88

Net income attributable to BlackRock, Inc.(c), (d)

   $ 2,139      $ 1,021      $ 856      $ 1,118        110   $ 165        19

Diluted earnings per common share (c), (d), (e)

   $ 10.94      $ 7.13      $ 6.30      $ 3.81        53   $ 0.83        13

Effective tax rate

     33.0     33.0     33.0     —       —       —       —  

Other:

              

Assets under management (end of period)

   $ 3,560,968      $ 3,346,256      $ 1,307,151      $ 214,712        6   $ 2,039,105        156

Diluted weighted-average common shares outstanding (e)

     192,692,047        139,481,449        131,376,517        53,210,598        38     8,104,932        6

Shares outstanding (end of period)

     191,191,553        188,806,296        129,896,028        2,385,257        1     58,910,268        45

Book value per share **

   $ 136.09      $ 128.86      $ 92.91      $ 7.23        6   $ 35.95        39

Cash dividends declared and paid per share

   $ 4.00      $ 3.12      $ 3.12      $ 0.88        28   $ —          —  

 

* – Not applicable or the percentage is in excess of +/- 1,000%.

** – Total BlackRock stockholders’ equity, excluding appropriated retained earnings, divided by total common and preferred shares outstanding at December 31 of the respective year-end.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

Financial Highlights

(continued)

 

BlackRock reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”); however, management believes that evaluating the Company’s ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s financial performance over time. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Certain prior period non-GAAP data has been reclassified to conform to the current presentation. Computations for all periods are derived from the Company’s consolidated statements of income as follows:

 

(a) Operating income, as adjusted, and operating margin, as adjusted:

Operating income, as adjusted, equals operating income, GAAP basis, excluding certain items deemed non-recurring by management or transactions that ultimately will not impact BlackRock’s book value, as indicated in the table below. Operating income used for operating margin measurement equals operating income, as adjusted, excluding the impact of closed-end fund launch costs and commissions. Operating margin, as adjusted, equals operating income used for operating margin measurement, divided by revenue used for operating margin measurement, as indicated in the table below.

 

     Year ended December 31,  
(Dollar amounts in millions)    2010     2009     2008  

Operating income, GAAP basis

   $ 2,998      $ 1,278      $ 1,593   

Non-GAAP expense adjustments:

      

BGI transaction/integration costs

      

Employee compensation and benefits

     25        60        —     

General and administration

     65        123        —     
                        

Total BGI transaction/integration costs

     90        183        —     

PNC LTIP funding obligation

     58        59        59   

Merrill Lynch compensation contribution

     10        10        10   

Restructuring charges

     —          22        38   

Compensation expense related to appreciation/(depreciation) on deferred compensation plans

     11        18        (38
                        

Operating income, as adjusted

     3,167        1,570        1,662   

Closed-end fund launch costs

     15        2        9   

Closed-end fund launch commissions

     2        1        —     
                        

Operating income used for operating margin measurement

   $ 3,184      $ 1,573      $ 1,671   
                        

Revenue, GAAP basis

   $ 8,612      $ 4,700      $ 5,064   

Non-GAAP adjustments:

      

Distribution and servicing costs

     (408     (477     (591

Amortization of deferred sales commissions

     (102     (100     (130

Reimbursable property management compensation

     —          —          (21
                        

Revenue used for operating margin measurement

   $ 8,102      $ 4,123      $ 4,322   
                        

Operating margin, GAAP basis

     34.8     27.2     31.5
                        

Operating margin, as adjusted

     39.3     38.2     38.7
                        

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

Financial Highlights

(continued)

 

 

(a) (continued)

 

Management believes that operating income, as adjusted, and operating margin, as adjusted, are effective indicators of BlackRock’s financial performance over time. As such, management believes that operating income, as adjusted, and operating margin, as adjusted, provide useful disclosure to investors.

Operating income, as adjusted:

BGI transaction and integration costs recorded in 2010 and 2009 consist principally of certain advisory payments, compensation expense, legal fees, marketing and promotional, occupancy and consulting expenses incurred in conjunction with the BGI Transaction. Restructuring charges recorded in 2009 and 2008 consist of compensation costs, occupancy costs and professional fees. The expenses associated with restructuring and BGI transaction and integration costs have been deemed non-recurring by management and have been excluded from operating income, as adjusted, to help enhance the comparability of this information to the current reporting periods. As such, management believes that operating margins exclusive of these costs are useful measures in evaluating BlackRock’s operating performance for the respective periods.

The portion of compensation expense associated with certain long-term incentive plans (“LTIP”) that will be funded through the distribution to participants of shares of BlackRock stock held by PNC and a Merrill Lynch cash compensation contribution, a portion of which has been received, have been excluded because these charges ultimately do not impact BlackRock’s book value.

Compensation expense associated with appreciation/(depreciation) on investments related to certain BlackRock deferred compensation plans has been excluded as returns on investments set aside for these plans, which substantially offset this expense, are reported in non-operating income (expense).

Operating margin, as adjusted:

Operating income used for measuring operating margin, as adjusted, is equal to operating income, as adjusted, excluding the impact of closed-end fund launch costs and commissions. Management believes that excluding such costs and commissions is useful because these costs can fluctuate considerably and revenues associated with the expenditure of these costs will not fully impact the Company’s results until future periods.

Operating margin, as adjusted, allows the Company to compare performance from period-to-period by adjusting for items that may not recur, recur infrequently or may fluctuate based on market movements, such as restructuring charges, transaction and integration costs, closed-end fund launch costs, commissions paid to certain employees as compensation and fluctuations in compensation expense based on mark-to-market movements in investments held to fund certain compensation plans. The Company also uses operating margin, as adjusted, to monitor corporate performance and efficiency and as a benchmark to compare its performance to other companies. Management uses both the GAAP and non-GAAP financial measures in evaluating the financial performance of BlackRock. The non-GAAP measure by itself may pose limitations because it does not include all of the Company’s revenues and expenses.

Revenue used for operating margin, as adjusted, excludes distribution and servicing costs paid to related parties and other third parties. Management believes that excluding such costs is useful to BlackRock because it creates consistency in the treatment for certain contracts for similar services, which due to the terms of the contracts, are accounted for under GAAP on a net basis within investment advisory, administration fees and securities lending revenue. Amortization of deferred sales commissions is excluded from revenue used for operating margin measurement, as adjusted, because such costs, over time, offset distribution fee revenue earned by the Company. Reimbursable property management compensation represented compensation and benefits paid to personnel of Metric Property Management, Inc. (“Metric”), a subsidiary of BlackRock Realty Advisors, Inc. (“Realty”). Prior to the transfer in 2008, these employees were retained on Metric’s payroll when certain properties were acquired by Realty’s clients. The related compensation and benefits were fully reimbursed by Realty’s clients and have been excluded from revenue used for operating margin, as adjusted, because they did not bear an economic cost to BlackRock. For each of these items, BlackRock excludes from revenue used for operating margin, as adjusted, the costs related to each of these items as a proxy for such offsetting revenues.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

Financial Highlights

(continued)

 

(b) Non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted:

Non-operating income (expense), less net income (loss) attributable to non-controlling interests (“NCI”), as adjusted, equals non-operating income (expense), GAAP basis, less net income (loss) attributable to NCI, GAAP basis, adjusted for compensation expense associated with depreciation/(appreciation) on investments related to certain BlackRock deferred compensation plans. The compensation expense offset is recorded in operating income. This compensation expense has been included in non-operating income (expense), less net income (loss) attributable to NCI, as adjusted, to offset returns on investments set aside for these plans, which are reported in non-operating income (expense), GAAP basis.

 

     Year ended
December 31,
 
(Dollar amounts in millions)    2010     2009     2008  

Non-operating income (expense), GAAP basis

   $ 23      $ (6   $ (577

Less: Net income (loss) attributable to NCI

     (13     22        (155
                        

Non-operating income (expense) (1)

     36        (28     (422

Compensation expense related to (appreciation)/depreciation on deferred compensation plans

     (11     (18     38   
                        

Non-operating income (expense), less net income (loss) attributable to NCI, as adjusted

   $ 25      $ (46   $ (384
                        

 

(1)

Net of net income (loss) attributable to non-controlling interests.

Management believes that non-operating income (expense), less net income (loss) attributable to NCI, as adjusted, provides for comparability of this information to prior periods and is an effective measure for reviewing BlackRock’s non-operating contribution to its results. As compensation expense associated with (appreciation)/depreciation on investments related to certain deferred compensation plans, which is included in operating income, offsets the gain/(loss) on the investments set aside for these plans, management believes that non-operating income (expense), less net income (loss) attributable to NCI, as adjusted, provides a useful measure, for both management and investors, of BlackRock’s non-operating results that impact book value.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

Financial Highlights

(continued)

 

(c) Net income attributable to BlackRock, Inc., as adjusted:

Management believes that net income attributable to BlackRock, Inc., as adjusted, and diluted earnings per common share, as adjusted, are useful measures of BlackRock’s profitability and financial performance. Net income attributable to BlackRock, Inc., as adjusted, equals net income attributable to BlackRock, Inc., GAAP basis, adjusted for significant non-recurring items as well as charges that ultimately will not impact BlackRock’s book value or benefits that do not impact cash flow.

 

     Year ended
December 31,
 
(Dollar amounts in millions, except per share data)    2010     2009     2008  

Net income attributable to BlackRock, Inc., GAAP basis

   $ 2,063      $ 875      $ 784   

Non-GAAP adjustments, net of tax: (d)

      

BGI transaction/integration costs

     59        129        —     

PNC LTIP funding obligation

     40        41        39   

Merrill Lynch compensation contribution

     7        7        7   

Restructuring charges

     —          14        26   

Income tax law changes

     (30     (45     —     
                        

Net income attributable to BlackRock, Inc., as adjusted

   $ 2,139      $ 1,021      $ 856   
                        

Allocation of net income attributable to BlackRock, Inc., as adjusted: (f)

      

Common shares (e)

   $ 2,109      $ 995      $ 828   

Participating restricted stock units

     30        26        28   
                        

Net income attributable to BlackRock, Inc., as adjusted

   $ 2,139      $ 1,021      $ 856   
                        

Diluted weighted-average common shares outstanding (e)

     192,692,047        139,481,449        131,376,517   

Diluted earnings per common share, GAAP basis (e)

   $ 10.55      $ 6.11      $ 5.78   
                        

Diluted earnings per common share, as adjusted (e)

   $ 10.94      $ 7.13      $ 6.30   
                        

The restructuring charges and BGI transaction and integration costs reflected in GAAP net income attributable to BlackRock, Inc. have been deemed non-recurring by management and have been excluded from net income attributable to BlackRock, Inc., as adjusted, to help enhance the comparability of this information to the reporting periods.

The portion of the compensation expense associated with certain LTIP awards that will be funded through the distribution to participants of shares of BlackRock stock held by PNC and the Merrill Lynch cash compensation contribution, a portion of which has been received, has been excluded from net income attributable to BlackRock, Inc., as adjusted, because these charges ultimately do not impact BlackRock’s book value.

During third quarter 2010 and third quarter 2009, the United Kingdom and New York City, respectively, enacted legislation reducing corporate income tax rates, which resulted in a revaluation of certain net deferred tax liabilities primarily related to acquired intangible assets. The resulting decrease in income taxes has been excluded from net income attributable to BlackRock, Inc., as adjusted, as these were non-recurring enacted tax legislation changes that do not have a cash flow impact and to ensure comparability of this information to the reporting periods.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

Financial Highlights

(continued)

 

(d) For the years ended December 31, 2010, 2009 and 2008 non-GAAP adjustments were tax effected at 33%, 30% and 33%, respectively, which reflects the blended rate applicable to the adjustments.
(e) Series A, B, C and D non-voting participating preferred stock are considered to be common stock equivalents for purposes of determining basic and diluted earnings per share calculations. Certain unvested restricted stock units (“RSUs”) are not included in this number as they are deemed participating securities in accordance with required provisions of Accounting Standards Codification (“ASC”) 260-10, Earnings per Share (“ASC 260-10”).
(f) Allocation of net income attributable to BlackRock, Inc., as adjusted, to common shares and participating RSUs is calculated pursuant to the two-class method as defined in ASC 260-10.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

BlackRock has portfolio managers located around the world, including the United States, the United Kingdom, the Netherlands, Japan, Hong Kong, Australia and Germany. The Company provides a wide array of products including passively and actively managed equities, fixed income, multi-asset class, cash management and alternatives and offers clients diversified access to global markets through separate accounts, collective trusts, open-end and closed-end mutual funds, exchange-traded funds, hedge funds, and funds of funds to its diverse global clientele. BlackRock provides global advisory services for investment funds and other non-U.S. retail products. The Company’s non-U.S. investment funds are based in a number of domiciles and cover a range of asset classes, including cash management, fixed income, equities and alternatives.

In the United States, the primary retail offerings include various open-end and closed-end funds, including iShares®, the global product leader in exchange-traded funds for institutional, retail and high net worth investors. There are over 475 iShares globally across equities, fixed income and commodities, which trade like common stocks on 19 exchanges worldwide. The BlackRock Global Funds, the Company’s primary retail fund group offered outside the United States, are authorized for distribution in more than 35 jurisdictions worldwide. Additional fund offerings include structured products, real estate funds, hedge funds, hedge funds of funds, private equity funds and funds of funds, managed futures funds and exchange funds. These products are sold to both U.S. and non-U.S. high net worth, retail and institutional investors in a wide variety of active and passive strategies covering both equity and fixed income assets.

BlackRock’s client base consists of financial institutions and other corporate clients, pension plans, charities, official institutions, such as central banks, sovereign wealth funds, supranational authorities and other government entities, high net worth individuals and retail investors around the world. BlackRock maintains a significant sales and marketing presence both inside and outside the United States that is focused on establishing and maintaining retail and institutional investment management relationships by marketing its services to retail and institutional investors directly and through financial professionals, pension consultants and establishing third-party distribution relationships. BlackRock also distributes its products and services through Merrill Lynch under a global distribution agreement, which following Bank of America’s acquisition of Merrill Lynch, runs until January 2014. After such term, the agreement will renew for one automatic three-year extension if certain conditions are met.

BlackRock derives a substantial portion of its revenue from investment advisory and administration fees, which are recognized as the services are performed. Such fees are primarily based on pre-determined percentages of the market value of AUM, percentages of committed capital during investment periods of certain alternative products, or, in the case of certain real estate equity clients, net operating income generated by the underlying properties, and are affected by changes in AUM, including market appreciation or depreciation, foreign exchange translation and net subscriptions or redemptions. Net subscriptions or redemptions represent the sum of new client assets, additional fundings from existing clients (including dividend reinvestment), withdrawals of assets from, and termination of, client accounts, purchases and redemptions of investment fund shares and distributions to investors representing return of capital and return on investments to investors. Market appreciation or depreciation includes current income earned on, and changes in the fair value of, securities held in client accounts. Foreign exchange translation reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.

BlackRock also earns revenue by lending securities on behalf of clients, primarily to brokerage institutions. The securities loaned are secured by collateral in the form of cash or securities, with minimums generally ranging from approximately 102% to 112% of the value of the loaned securities. The revenue earned is shared between BlackRock and the funds or other third-party accounts managed by the Company from which the securities are borrowed.

Investment advisory agreements for certain separate accounts and BlackRock’s alternative investment products provide for performance fees, based upon relative and/or absolute investment performance, in addition to base fees based on AUM. Investment advisory performance fees generally are earned after a given period of time and when investment performance exceeds a contractual threshold. As such, the timing of recognition of performance fees may increase the volatility of BlackRock’s revenue and earnings. Historically, the magnitude of performance fees in the fourth quarter generally exceeds the first three calendar quarters in a year due to the higher number of products with performance measurement periods that end on December 31.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

BlackRock provides a variety of risk management, investment analytic and investment system and advisory services to financial institutions, pension funds, asset managers, foundations, consultants, mutual fund sponsors, real estate investment trusts and government agencies. These services are provided under the brand name BlackRock Solutions and include a wide array of risk management services, valuation services related to illiquid securities, disposition and workout assignments (including long-term portfolio liquidation assignments), strategic planning and execution, and enterprise investment system outsourcing to clients. Over $10 trillion of positions are processed on our Aladdin® operating platform, which serves as the investment system for BlackRock and other institutional investors. Fees earned for BlackRock Solutions and advisory services are determined using some, or all, of the following methods: (i) fixed fees, (ii) percentages of various attributes of advisory assets under management and (iii) performance fees if contractual thresholds are met.

BlackRock also builds upon its leadership position to meet the growing need for investment and risk management solutions. Through its scale and diversity of products, it is able to provide its clients with customized solutions including fiduciary outsourcing for liability-driven investments and overlay strategies for pension plan sponsors, balance sheet management and related services for insurance companies and target date and target return funds, as well as asset allocation portfolios, for retail investors. BlackRock is also able to service these clients via its Aladdin platform to provide risk management and other outsourcing services for institutional investors and custom and tailored solutions to address complex risk exposures.

The Company also earns fees for transition management services comprised of referral fees or agency commissions from acting as an introducing broker-dealer in buying and selling securities on behalf of its customers. Commissions related to transition management services are recorded on a trade-date basis as securities transactions occur.

Operating expenses reflect employee compensation and benefits, distribution and servicing costs, amortization of deferred sales commissions, direct fund expenses, general and administration expenses and amortization of finite-lived intangible assets.

 

   

Employee compensation and benefits expense includes salaries, commissions, temporary help, severance, deferred and incentive compensation, employer payroll taxes and related benefit costs.

 

   

Distribution and servicing costs include payments made to Merrill Lynch-affiliated entities under a global distribution agreement, to PNC-affiliated entities and Barclays, as well as other third parties, primarily associated with obtaining and retaining client investments in certain BlackRock products.

 

   

Direct fund expenses primarily consist of third party non-advisory expenses incurred by BlackRock related to certain funds for the use of index trademarks, reference data for indices, custodial services, fund administration, fund accounting, transfer agent services, shareholder reporting services, legal expenses, audit and tax services as well as other fund related expenses directly attributable to the non-advisory operations of the fund. These expenses may vary over time with fluctuations in AUM, number of shareholder accounts, or other attributes directly related to volume of business.

 

   

General and administration expenses includes marketing and promotional, occupancy and office related costs, portfolio services (including clearing expenses related to transition management services), technology, professional services, communications, closed-end fund launch costs and other general and administration expenses.

Non-operating income (expense) includes the effect of changes in the valuations on investments (excluding available-for-sale investments) and earnings on equity method investments, as well as interest and dividend income and interest expense. Other comprehensive income includes changes in valuations related to available-for-sale investments. BlackRock primarily holds investments in sponsored investment products that invest in a variety of asset classes, including private equity, distressed credit/mortgage debt securities, hedge funds and real estate. Investments generally are made for co-investment purposes, to establish a performance track record, to hedge exposure to certain deferred compensation plans, or for regulatory purposes, including Federal Reserve Bank stock. BlackRock does not engage in proprietary trading or other investment activities that could conflict with the interests of its clients.

In addition, non-operating income (expense) includes the impact of changes in the valuations of consolidated sponsored investment funds and consolidated collateralized loan obligations. The portion of non-operating income (expense) not attributable to BlackRock is allocated to non-controlling interests on the consolidated statements of income.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Assets Under Management

 

AUM for reporting purposes is generally based upon how investment advisory and administration fees are calculated for each portfolio. Net asset values, total assets, committed assets or other measures may be used to determine portfolio AUM.

Assets Under Management

by Asset Class(1)

 

     December 31,      Variance  
(Dollar amounts in millions)    2010      2009      2008      2010 vs. 2009     2009 vs. 2008  

Equity:

             

Active

   $ 334,532       $ 348,574       $ 152,216         (4 %)      129

Institutional index

     911,775         806,082         51,076         13     *   

iShares / Exchange-traded products

     448,160         381,399         —           18     *   

Fixed income:

             

Active

     592,303         595,580         477,492         (1 %)      25

Institutional index

     425,930         357,557         3,873         19     *   

iShares / Exchange-traded products

     123,091         102,490         —           20     *   

Multi-asset class

     185,587         142,029         77,516         31     83

Alternatives

     109,738         102,101         61,544         7     66
                               

Long-term

     3,131,116         2,835,812         823,717         10     244

Cash management

     279,175         349,277         338,439         (20 %)      3
                               

Sub-total

     3,410,291         3,185,089         1,162,156         7     174

Advisory (2)

     150,677         161,167         144,995         (7 %)      11
                               

Total

   $ 3,560,968       $ 3,346,256       $ 1,307,151         6     156
                               

 

* – Not applicable or the percentage is in excess of +/- 1,000%.

(1)

Data reflects the reclassification of AUM into the current period presentation.

(2)

Advisory AUM represents long-term portfolio liquidation assignments.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Assets Under Management (continued)

 

Mix of Assets Under Management

by Asset Class(1)

 

     December 31,  
     2010     2009     2008  

Equity:

      

Active

     9     10     12

Institutional index

     26     25     4

iShares / Exchange-traded products

     13     11     —  

Fixed income:

      

Active

     17     18     36

Institutional index

     12     11     —  

iShares / Exchange-traded products

     3     3     —  

Multi-asset class

     5     4     6

Alternatives

     3     3     5
                        

Long-term

     88     85     63

Cash management

     8     10     26
                        

Sub-total

     96     95     89

Advisory(2)

     4     5     11
                        

Total

     100     100     100
                        

 

 

(1)

Data reflects the reclassification of AUM into the current period presentation.

(2)

Advisory AUM represents long-term portfolio liquidation assignments.

AUM increased approximately $215 billion, or 6%, to $3.561 trillion at December 31, 2010, compared to $3.346 trillion at December 31, 2009. The growth in AUM was primarily attributable to $267 billion in net market appreciation, $131 billion of net subscriptions in long-term mandates and $17 billion increase due to foreign exchange movements, partially offset by $127 billion of BGI merger-related outflows (due to manager concentration considerations and active equity quantitative performance) and acquisition adjustments, $61 billion of net outflows in cash management products and $12 billion of net client distributions in advisory assignments.

Net market appreciation of $267 billion included $191 billion of net appreciation in equity products due to an increase in global equity markets, $55 billion in fixed income products due to current income and changes in interest rate spreads, $14 billion in multi-asset class products, and $7 billion in alternatives, primarily due to appreciation in precious metals, including silver and gold.

The $17 billion net increase in AUM from converting non-U.S. dollar denominated AUM into U.S. dollars was primarily due to the weakening of the U.S. dollar against the Japanese yen, Canadian dollar and Australian dollar, partially offset by the strengthening of the U.S. dollar against the euro and pound sterling.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Assets Under Management (continued)

 

The following table presents the component changes in BlackRock’s AUM for the years ended December 31, 2010, 2009 and 2008.

 

     Year ended
December 31,
 
(Dollar amounts in millions)    2010     2009     2008  

Beginning assets under management

   $ 3,346,256      $ 1,307,151      $ 1,356,644   

Net subscriptions/(redemptions) (1)

      

Long-term

     131,206        84,436        (2,822

Cash management

     (61,424     (49,122     25,670   

Advisory (2)

     (12,021     11,642        144,756   
                        

Total net subscriptions/(redemptions)

     57,761        46,956        167,604   

BGI merger-related outflows (3)

     (120,969     (2,894     —     

Acquisitions/reclassifications (4)

     (6,160     1,850,252        —     

Market appreciation/(depreciation)

     266,981        143,706        (188,950

Foreign exchange (5)

     17,099        1,085        (28,147
                        

Total change

     214,712        2,039,105        (49,493
                        

Ending assets under management

   $ 3,560,968      $ 3,346,256      $ 1,307,151   
                        

 

(1)

Includes distributions representing return of capital and return on investment to investors.

(2)

Advisory AUM represents long-term portfolio liquidation assignments.

(3)

Includes outflows due to manager concentration considerations and active equity quantitative performance.

(4)

Includes AUM acquired from Barclays in December 2009 and R3 Capital Management, LLC in April 2009 and Barclays acquisition adjustments and reclassifications to conform to current period combined AUM policy.

(5)

Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.

BlackRock has historically grown aggregate AUM through organic growth and acquisitions. Management believes that the Company will be able to continue to grow AUM by focusing on strong investment performance, the efficient delivery of beta for index products, client service and by developing new products and new distribution capabilities.

 

54


Table of Contents

 

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Assets Under Management (continued)

 

The following table presents the component changes in BlackRock’s AUM(1) for the year ended December 31, 2010.

 

(Dollar amounts in millions)    December 31,
2009
     Net
subscriptions
(redemptions)(2)
    BGI merger-
related
outflows(3)
    Acquisition/
reclassifications(4)
    Market
appreciation/
(depreciation)
    Foreign
exchange(5)
    December 31,
2010
 

Equity:

               

Active

   $ 348,574       $ 2,632      $ (54,490   $ (3,920   $ 40,670      $ 1,066      $ 334,532   

Institutional index

     806,082         44,570        (44,907     (4,390     104,152        6,268        911,775   

iShares/ETPs(6)

     381,399         21,865        —          —          45,830        (934     448,160   

Fixed income:

               

Active

     595,580         (22,143     (9,474     (3,922     31,945        317        592,303   

Institutional index

     357,557         39,148        (10,408     7,374        21,220        11,039        425,930   

iShares/ETPs

     102,490         19,008        —          —          2,195        (602     123,091   

Multi-asset class

     142,029         26,262        (127     3,550        13,917        (44     185,587   

Alternatives

     102,101         (136     (490     —          7,170        1,093        109,738   
                                                         

Long-term

     2,835,812         131,206        (119,896     (1,308     267,099        18,203        3,131,116   

Cash management

     349,277         (61,424     (1,063     (4,852     (38     (2,725     279,175   
                                                         

Sub-total

     3,185,089         69,782        (120,959     (6,160     267,061        15,478        3,410,291   

Advisory(7)

     161,167         (12,021     (10     —          (80     1,621        150,677   
                                                         

Total

   $ 3,346,256       $ 57,761      $ (120,969   $ (6,160   $ 266,981      $ 17,099      $ 3,560,968   
                                                         

 

(1)

Data reflects the reclassification of prior period AUM into the current period presentation.