BlackRock

2011 was filled with opportunity and peril for investors. While the resilience of the U.S. consumer and strong corporate earnings offered some bright spots, markets reacted to political, economic and social upheavals. These ranged from the Arab Spring and Occupy Wall Street, to the devastating earthquake and tsunami in Japan, to the Eurozone crisis and sovereign debt downgrades, to moderating growth in China, India and Brazil.

Early optimism about recovery from the financial crisis gave way to uncertainty and soaring volatility in the second half of the year, driving investors to the sidelines. Their anxiety led them to favor cash and short-term securities over long-term investments, bonds over equities, passive products over active, and ETPs over mutual funds. The S&P 500 ended the year almost exactly where it started, outperforming global and emerging market equity indices, but lagging traditional safe havens, including U.S. Treasurys, gold, the Japanese yen and the Swiss franc.

Sustaining our record of growth

BlackRock not only navigated these challenging business conditions, but we sustained our record of growth. We increased revenues by 5%, adjusted operating income by 7% and diluted earnings per share, as adjusted, by 8%. In addition, we increased our adjusted operating margin to 39.7%, demonstrating our ongoing commitment to disciplined management of the Company. Adjusted operating cash flow rose to $2.6 billion, supporting a 38% increase in our dividends per share. In total, we returned $3.7 billion to shareholders through dividends and share repurchases, while continuing to reinvest meaningfully in our business.

We expanded and diversified our shareholder base over the past 16 months, dramatically increasing the liquidity of our stock and eliminating a source of overhang. In November 2010, we executed a highly successful secondary offering and in June 2011, repurchased the remaining stake held by Bank of America, once a 49% owner. Our public float increased from 20% to nearly 60%. BlackRock also achieved a significant milestone when BLK was added to the S&P 500 Index in April 2011. We view this as a testament to the quality and durability of the franchise we have built.

Transitioning from savers to investors

During 2011, we completed the BGI merger integration and made considerable headway on the implementation of our global operating platform, which we believe will continue to unlock efficiencies over time. This progress allowed us to focus all of our attention on working with BlackRock's clients to address their growing investment challenges. Broadly speaking, these challenges reflect how difficult it is in the current environment to structure portfolios that can generate returns sufficient to meet expected liabilities.

Fear made the problem worse last year. In response to the unfolding European debt crisis, a tense standoff over the U.S. debt ceiling and increased volatility, investors "shortened up" rather than investing in line with their long-term financial needs. They withdrew from equity markets and flocked to cash and U.S. Treasurys. Bank deposits and money market funds in the United States jumped a half-trillion dollars to $14 trillion¹, while buyers of U.S. Treasurys drove yields to historic lows. Despite being downgraded to double-A in August, U.S. Treasurys ended the year beating both stocks and commodities with a total return of 9.8%².

Was this a flight to safety or a false sense of security? We believe it was the latter. In fact, we believe investors increased their risk, as the shift to cash widened the gap between their assets and liabilities. Put simply, short-term "savings" will not produce long-term nest eggs. The conundrum is how we manage our longevity. We are so pre­occupied by our health, exercising and eating better so we can live longer, yet we ignore the need to invest so we can afford that longer life.

The task is more difficult in the current environment. Low real rates may be the medicine needed to restore health to our economies, but savers are the ones left with a bitter taste. Lower yields are sapping their ability to compound earnings on their assets to pay for the rising costs of education, healthcare and living expenses. There are no shortcuts. Investors must "mind the gap" between their assets and earnings power on the one hand, and their current and future expenses on the other. They must invest long-term to meet long-term needs.

This short-termism is a widespread disease afflicting not only investors, but also politicians and businesspeople everywhere. In our connected world, we have become hyper-consumers of information, deluged by data and paralyzed by our inability to digest it all. We let fear erode our opportunities and fail to tackle the larger challenges facing society. We need to build our infrastructure, educate our children, fund our retirements and improve our standard of living. To accomplish these goals, we need to fight off short-termism and move from saving to investing at every level.

BlackRock was built for these times

For BlackRock, this imperative reinforces the sense of responsibility to our clients around which we have built our business. Our capabilities encompass a full range of active and passive strategies and a deep belief in data and analytical rigor, anchored in the risk management expertise of BlackRock Solutions and our deep intellectual talent. Our unparalleled platform makes us a valued partner for our clients across geographies and through market cycles.

This is especially true as investors shift their focus from individual products to investment solutions. Clients want a more holistic approach to asset allocation to achieve targeted outcomes. This focus has encouraged use of active strategies with a proven ability to consistently deliver alpha, whether in long-only portfolios managed relative to a benchmark or in alternative investments that are less correlated to broader markets. It also has driven increased demand for beta or index strategies that offer market access, liquidity and efficiency.

The intersection of index and active strategies across asset classes offers compelling opportunities to design effective investment solutions for clients. To succeed, we have to deliver investment performance: alpha over a benchmark, absolute returns, or beta with minimal tracking error. This will always be our foremost priority. In all cases, we apply disciplined investment processes supported by sophisticated risk management capabilities and our renowned Aladdin® operating system. BlackRock's platform for providing investment solutions simply has no equal.