BlackRock

Active Products: Active investment strategies continue to dominate client portfolios and remain central to our business. In 2011, we earned $4.5 billion of revenues on average AUM of $1.2 trillion³ in actively managed offerings. We continually invest in our portfolio management teams, risk management expertise and the operating systems supporting their investment processes. We encourage information sharing, and respect the integrity of each team's distinct investment opinions. Inevitably, some strategies will be out of favor from time to time, but we expect our managers to achieve their return targets over a market cycle. When we fail, we aren't afraid to take decisive action to address the problem.

Equities and fixed income represent three-quarters of our AUM and two-thirds of our base fees in active investments, with the remainder in alternatives and multi-asset class products. As investors de-risked during the second half of the year, international retail investors deserted equity funds, including those offered by BlackRock, in favor of global and emerging market debt funds for which we did not have competitive offerings. In contrast, we were able to leverage our broader product line-up in the United States to attract new business in equities and bonds throughout the year. Institutional outflows were driven primarily by reallocation out of scientific active equities despite strong performance and an industry trend away from active core bond portfolios to index, fiduciary and other strategies.

Alternatives: As market correlations have increased, traditional diversification methods have failed. Investors have responded by using a barbell approach, marrying efficient beta with alternative investments to diversify their sources of risk and return. To meet clients' needs, we added a renewable power team, a private equity team and a new head of our real estate business in 2011. Our core alternatives also include single-strategy hedge funds, a very successful multi-strategy fund, and funds of funds that can tailor alternative investment solutions to specific client interests. In addition to launching funds for our new teams, we introduced several alternative investment products specifically designed for retail investors. During 2011, we earned $557 million of base fees and $171 million of performance fees on $66 billion of average AUM in core alternatives. We expect alternatives to be a more significant contributor to client portfolios and BlackRock results over time.

Multi-Asset Class Solutions: The growing interest in multi-asset class solutions is driving strong demand for our global allocation funds, target-date portfolios and fiduciary management services. We offer tailored strategies to institutional clients, including a range of investment outsourcing services, custom glide paths for target-date offerings, and robust support for defined contribution platforms. We are also bringing investment approaches we use with institutional investors to the retail marketplace. For example, we recently introduced a multi-asset income fund, which combines a tactical asset allocation strategy that mitigates volatility with a flexible income solution. In 2011, we earned $894 million in base fees on $217 billion of average AUM managed in multi-asset class investments.

Passive Products: BlackRock's industry-leading index investment teams manage institutional accounts and our iShares ETPs to achieve net investment returns that closely track the index chosen by the client. The keys to success in this area include skillful portfolio construction, especially for indices that cannot be replicated at the security level, management of trading costs and other fund expenses, and the ability to offset these costs with securities lending revenue. ETP investors bear the additional cost of commissions or bid/ask spread on their shares, which can easily overwhelm differences in expense ratios. They are therefore very sensitive to the liquidity of their ETP shares. Similarly, taxable investors are sensitive to gains generated in the underlying portfolios, which reduce their after-tax returns. Given the sophisticated work that goes into efficiently delivering the returns our clients expect from these products, their managers need to be anything but "passive."

All types of investors use index funds and ETPs, including the largest, most sophisticated institutions, registered investment advisers and individual investors. These strategies are a key component of target-date funds and model portfolios, and are playing an increasingly important role in asset-liability management. Our institutional index accounts offer highly competitive services and the ability to customize an approach to obtaining desired market exposures. These accounts are often multi-billion dollar mandates that offer clients the benefit of scale pricing. In 2011, we earned $702 million in base fees on average institutional index AUM of $1.4 trillion.

Clients use iShares to equitize their cash and to take core and tactical exposures. As market volatility increased late last year, investors were drawn to the intraday liquidity and transparency of ETPs, and we benefited from having the most comprehensive product range with the deepest liquidity. Our European offerings feature physical (rather than synthetic) collateral, a differentiator that helped us capture a substantial share of flows in 2011. We devote significant resources and talent to supporting and building our iShares business, including dedicated capital markets, product development and distribution professionals, in addition to the index portfolio management teams. In 2011, iShares generated $2.3 billion of revenues on average AUM of $609 billion, nearly three-quarters of which were equity ETPs.

Risk Management & Advisory Services: There has never been greater demand for BlackRock Solutions ("BRS"), which encompasses our Aladdin operating platform, risk management offerings and financial markets advisory services. BRS achieved record revenues of $510 million in 2011. New business was particularly robust outside the United States and included our first two multi-asset Aladdin assignments in Japan. In addition, European governmental entities, including the Central Bank of Ireland and the Bank of Greece, sought the counsel of our financial markets advisory experts as they tackled their sovereign debt crises. We also capitalized on the bond market rally to liquidate portfolios we were asked to oversee during the financial crisis, including Maiden Lane II, which generated sufficient proceeds to fully repay liabilities to the New York Fed and AIG, and provide a net gain for U.S. taxpayers.