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Stanislaus County Employees Retirement Association
February 2010
1
I. BlackRock Overview
II. Fixed Income Overview
III. Approach to Passive Fixed Income
Appendix
Discussion Topics
2
BlackRock Overview
3
BlackRock Overview
Global provider of investment and risk management services
• Headquartered in NYC; offices in 24 countries
Independent firm in ownership and governance
• Established in 1988, BlackRock is a public company (NYSE:BLK)
• No majority owners
• Majority of Board of Directors is independent
• Laurence Fink, Chairman & CEO since firm’s inception
Leader in creating solutions for clients
• Strategies and services differentiated for clients
• Customized solutions to meet risk/return objectives
• Innovative strategies and services within and across asset classes
• Client dialogues have resulted in advisory assignments
• Senior level of commitment to client service
• “One-BlackRock” approach results in consistency & quality throughout firm
Pioneer in risk management and technology
• Currently provides risk management and enterprise investment services for over $8 trillion in assets
• BlackRock Solutions® offers independent risk management products
Multi-Asset
$156 Billion
Advisory
$163 Billion
Alternatives1
$108 Billion
Equity
$1,438
Billion
Cash
Management
$355 Billion
Fixed Income
$969 Billion
Total Assets of $3.19 Trillion
1Includes commodity and currency mandatesCombined AUM in USD as of 30 September 2009
For Use With Institutional Investors Only
4
BlackRock and BGI: Combination of Two Leading Asset Managers
On 1 December 2009, BlackRock and Barclays Global Investors (BGI) combined to create a new independent company with $3.19 trillion in assets under management
• New firm operates under BlackRock
Brings together two market leaders to create extraordinary investment platform
• Unique ability to combine active, enhanced, and index strategies to develop investment solutions for clients
• Market-leading iShares® ETF platform and BlackRock’s global mutual funds together create unmatched ability to tailor portfolios for investors
• Market-leading cash management, securities lending, and transition management businesses
• Industry-leading risk management and advisory platform, BlackRock Solutions®, benefits from broader capabilities
• Combined firm is independent and will be fully integrated, with employees, clients and products spanning the globe
• Global mutual fund platform• Customized solutions and advice• BlackRock Solutions (BRS)
• Active portfolio managementBlackRock
Combined AUM in USD as of 30 September 2009
• iShares, industry leading ETF-platform• Product innovation• Retirement solutions
• Indexed and scientific investingBGI
• Global leader in investment management with $3.19 trillion in AUM• Fiduciary for clients; pure asset manager• World -class risk management, analytics, and advisory capabilities• Fully-integrated, independent asset manager, with no majority owner• Common culture, emphasizing teamwork, excellence, and integrity• Strong corporate governance, with majority of independent directors
Combined Firm
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Significant Presence in All Major Markets
Extensive resources provide deep understanding of local markets and economies
• Headquartered in NYC with investment centers across asset classes worldwide
• Operating in 24 countries and more than 60 cities
• Extensive fund offerings registered in domiciles worldwide
• Governance model balances functional and regional leadership
* Joint venture
North America• Atlanta• Bloomfield Hills• Boston• Charlotte• Chicago• Cincinnati• Dallas• Durham• Houston• Jacksonville• La Jolla• Los Angeles• Miami• Montreal• New York
• Newport Beach• Northern New Jersey• Palm Beach• Philadelphia• Phoenix• Pittsburgh• Princeton• San Francisco• Seattle• Stamford• St. Louis• St. Petersburg• Toronto• Washington DC• Wilmington
UK, Continental Europe & Middle East• Amsterdam• Brussels• Dubai• Frankfurt• Geneva• Luxembourg • Madrid• Milan• Munich• Paris
• Stockholm• United Kingdom-Edinburgh-Isle of Man-Jersey-London-Peterborough
• Vienna• Warsaw• Zurich
Australia• Brisbane• Melbourne • Perth• Sydney
Asia• Beijing• Hong Kong• Mumbai*• Seoul• Shanghai*• Singapore• Taipei• Tokyo
Latin America• Mexico City• Santiago• São Paulo
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Investment Platform
Fixed Income
Equity
Alternatives
Multi-Asset
Liquidity
Real Estate
Transition Management
Securities Lending
Risk & Quantitative Analysis
One BlackRock Organizational Structure
Clients benefit from pooled expertise of BlackRock’s resources
• Ensures consistency on a global basis
• Tailors products and services to client objectives and to local needs
• Promotes teamwork
• Facilitates operational integrity and efficiency
Global Client Group
Pension Plans
Defined Contribution
Foundations · Endowments
Financial Institutions
Official Institutions
Wealth Management
Corporations
Consultants
Private Clients
iShares
BlackRock Solutions®
Aladdin® Investment Platform
Financial Modeling
Portfolio Analytics
Investment Accounting
Financial Markets Advisory
Firmwide Infrastructure
Operations & Administration · Aladdin & Technology · Aladdin Portfolio Services Group
Strategic Provider Management · Legal & Compliance · Finance · Human Resources
Facilities Management · Sourcing and Vendor Management
One BlackRock
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iShares
Index Equity
iShares
FIXED INCOME $969 Billion
Fundamental Fixed Income
Model-Based Fixed Income
Index Fixed Income
$355 BillionCASH MANAGEMENT
Scientific Active Equity
Fundamental Equity
EQUITY $1,438 Billion
1Includes commodity and currency mandates Combined AUM in USD as of 30 September 2009
Products & Services in Multiple Asset Classes and Styles
$3.19 trillion in world-class products across asset classes that span the full risk spectrum
BlackRock SolutionsSecurities LendingTransition Management
iShares
iShares
Global Market Strategies Group
BlackRock Multi-Asset Client Solutions
Asset Allocation / Balanced
Capital Markets
Real Estate
BlackRock Alternative Advisors
$163 BillionFINANCIAL MARKETS ADVISORY
MULTI-ASSET
ALTERNATIVES1
$156 Billion
$108 Billion
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BlackRock Fixed Income Overview
8
9
BlackRock’s Fixed Income Organization
Peter FisherHead of Fixed Income
Investment Management Groups
Curtis Arledge
$205 billion
Rick Rieder
$54 billion
Corporate Credit
Scott Thiel
$82 billion
European & Non-US Fixed Income
Peter Knez
Index: $377 billion
Model-based: $53 billion
Index & Model-Based Fixed Income
Kevin Holt
$160 billion
Financial Institutions
Peter Hayes
$38 billion*
Municipal BondsMulti-Sector & Mortgages
Cross-Functional Teams
Business & Product Strategy Performance Trading
Marie Chandoha Andy Phillips Richie Prager
Risk & Quantitative Analysis (RQA) Group
BlackRock Solutions® Analytics & Aladdin Platform
AUM as of September 30, 2009*Represents long-dated dedicated municipal mandates only, not total municipal assets managed/overseen of $115 billion
FundamentalCurtis Arledge - CIO
Rick Rieder - Deputy CIOScott Thiel - Deputy CIO
Index & Model-Based Peter Knez - CIO
Tim Webb - Deputy CIO
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Fixed Income Investing at BlackRock
$969 billion in fixed income assets across four investment approaches
• Shared commitment to consistent, predictable performance
• Cross-platform resource sharing leverages Risk & Quantitative Analysis Group and BlackRock Solutions® analytics
Indexed$377 billion
Model-BasedActive
$53 billion
Fundamental Active
$379 billion
Balanced Sheet/Liability Driven
$160 billion
• Enhanced Index• Active Governments• Core/Core PLUS• Inflation-Linked• Absolute Return Hedge Funds
• Institutional Index• ETFs
• Accounting, tax, regulatory, or capital constrained
• Financial institution balance sheets
• Liability-driven
• Sector/Regional Specialty• Global Bond• Municipals• Short Duration• Bank Loans/Distressed
BlackRock’s Fixed Income Investment Approaches
Efficient Beta Alpha Seeking
Total & Absolute Return Oriented
Pro-forma AUM in USD as of September 30, 2009
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Distinct Active Investment Process: Model-Based
Alpha & Portfolio Construction Teams
Research Teams
Peter KnezChief Investment Officer
Identification of economically sound, empirically valid investment ideas Signal development and testing and
portfolio construction
Tim WebbDeputy CIO
• Ultimate decision making forum for investment decisions in model-based portfolios
• Approves implementation of new investment strategies
• Responsible for oversight of risk and performance in hedge funds and long only funds
RatesMike RiersonRalph Smith
Disciplined process combining skill of investors with science of models
• Peter Knez as Chief Investment Officer of Fixed Income, Index & Model-Based Portfolios leads model-based research
• Tim Webb as Deputy CIO of Fixed Income, Index & Model-Based Portfolios and leads model-based alpha teams
• Research Teams are responsible for research and analysis to evaluate, monitor, and improve models continuously
• Alpha and Portfolio Construction Teams are responsible for signal development, testing and portfolio construction
Fixed Income Investment Review Committee
Fixed Income Research Approval Committee
• Provide quality control, peer review and oversight of the model-based research process
• Provide recommendations on both new models and signals and amendments to models and signals
RatesJohn MaskellMike Rierson
CreditHeather DeGarmo
Tom Parker
MortgagesEddy Vataru
Asset AllocationBenjamin Brodsky
Securitized CreditBrent Canada
Emerging MarketsKetan Gada
Portfolio SolutionsScott Radell & Lee Sterne
Alex Claringbull & Michael Harper
Corporate CreditNavneet Arora
Asset AllocationSanjay Yadav
MortgagesMike Rierson
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BlackRock Fixed Income Index and Model-Based Business Overview
•Largest bond indexer with 25 years experience of indexing innovation and results*
•$372 billion of indexed assets under management.
•Top tier counterparty trading over $1 trillion annually
Source: BlackRock. Asset under management information as of 31 December 2009* Source: Pensions and Investments, May 2009.
Active Long-Only$53 billion
ETFs$103 billion
Indexed Strategies $269 billion
Long/Short & Alternatives
$3 billion
Global Fixed Income $429 billion
• Barclays Capital Aggregate
• Citi WGBI
• Government/Credit
• Mortgage/Asset Backed Securities
• Global Aggregate
• Emerging Market Bonds
• DS/BARRA Canadian Universe Bond
• LDI
• Treasury Market
• Corporate Credit Market
• Broad Market
• Emerging Market
• Treasury Inflation Protected
• Global Agg
• CorePlus Bond
• Alpha Credit
• Alpha Mortgage
• Ascent Life Gilt
• Ascent UK Real Return
• Ascent UK Corporate
• Alpha Emerging Market Bond
• Global Multi-Strategy
• Capital Structure
• Global Rates Long/Short Strategy
• Structured products
13
BlackRock Approach to Passive Fixed Income
14
Passive Philosophy: Total Performance Management
Total Performance Management — understanding, measuring, forecasting and managing the three dimensions of investment performance
Return
• Performance as expected
• Largest US Fixed Income Index Manager with over 25 years of experience
Risk
• Proprietary BlackRock portfolio & risk systems control investment and operational risk
• Stress testing across multiple dimensions
Cost
• Trading costs integrated into portfolio construction using proprietary T-cost models
• Internal crossing network minimizes transaction costs
Total Performance Management
Return Risk
Cost
15
Performance as Expected
For 25 years, BlackRock has been delivering consistent, predictable index fund performance
BarCap US Aggregate Index Fund
Government Funds
Intermediate Government Index
Long Government Index
Corporate Credit Funds
Intermediate Investment Grade Credit
Long Investment Grade Credit
Securitized
MBS
CMBS
ABS
AnnualizedTracking
FundInception AUM
FundReturn
IndexReturn
Jun-1986 7.31% 7.27% 0.04%$30.8B
Oct-1989 6.43% 6.39% 0.04%$16.7B
Dec-1989 8.23% 8.13% 0.10%$3.7B
Dec-1989 7.10% 7.14% -0.04%$11.6B
Dec-1989 8.01% 8.10% -0.09%$9.5B
Dec-1989 7.18% 7.11% 0.07%$14.9B
Performance data annualized since fund inception.As of 12/31/09.
Dec-1991 5.87% 5.76% 0.11%$1.3B
Jun-1999 5.95% 5.77% 0.18%$1.5B
16
For illustrative purpose only.Source: BlackRock
Tracking Error
Number of issues
Transaction CostsOptimal Portfolio
Fixed Income Indexing
Unlike equities, Fixed Income is not traded on exchanges
Prohibitive costs, uncertain liquidity, and issue scarcity often makes perfect replication infeasible
Index process optimizes marginal contribution to tracking error with T-Costs
Quantitative Process Balances Tracking Error & Transaction Costs
Different Markets, Different Strategies
17
Index Portfolio Construction Processes
• Expert traders• Unit exchange opportunities• Economies of scale
• Daily updates from index providers• Index methodology changes• New securities
• Investment Review Committee• Dedicated return attribution• Independent compliance
• Portfolio analysis• Full replication vs. stratified sampling• Leading edge portfolio construction
technology
Detailed Benchmark Knowledge
Index ReplicationPerformance Analysis
Efficient Trading
18
Modular Funds Match the Design of the Indexes
Barclays Capital US Aggregate Bond Index
Duration: modified/effectiveTotal may not equal 100% due to rounding.Source: BlackRock; data as of 30 September 2009
Barclays Capital U.S. AggregateIssues: 8,492Duration: 4.43 years
Government/CreditIssues: 4,755 Duration: 5.34 years
Mortgage-BackedSecuritiesIssues: 1,536Duration: 3.08 years
Asset-Backed SecuritiesIssues: 133Duration: 3.19 years
Com. Mortgage-Backed SecuritiesIssues: 2,068 Duration: 4.02 years
Intermediate Government/CreditIssues: 3,596 Duration: 3.89 years
Intermediate GovernmentIssues: 890 Duration: 3.62 years
Intermediate CreditIssues: 2,706 Duration: 4.37 years
Long Government/CreditIssues: 1,159 Duration: 12.19 years
Long GovernmentIssues: 128 Duration: 12.40 years
Long CreditIssues: 1,031 Duration: 12.03 years
3%Commercial Mortgage-Backed1%Asset-Backed
38%Mortgage-Backed23%Credit35%Government
Mortgage-
Bac ked
Government
Credit
Commerc ial
Mortgage-
Bac kedAsset-Bac ked
Detailed BenchmarkKnowledge
Rigorous Portfolio Construction
to Replicate Index
Performance Analysis and
Review
Efficient Trading
Detailed BenchmarkKnowledge
Rigorous Portfolio Construction
to Replicate Index
Performance Analysis and
Review
Efficient Trading
19
Portfolio Construction
Stratified sampling methodology: Dividing the various indexes into subsets (cells) based upon relative parameters
Portfolios are constructed by sampling bonds from each index cell
Mortgage-Backed Securities
Issuer (GNMA, FNMA, FHLMC)
Mortgage type(30 year, 15 year, balloon)
Coupon
Age (year of issuance)
Credit and Asset-Backed
Securities
Sector/issue type
Maturity/average life
Credit rating
Call/payment structure
Sector
Mat
urit
y
Cred
it qu
ality
Cell• BBB-rated • Industrial• 7–10 years
maturity
Government Bonds
Sector/Issue type
Maturity
Call Features
Detailed BenchmarkKnowledge
Rigorous Portfolio Construction
to Replicate Index
Performance Analysis and
Review
Efficient Trading
20
Portfolio Construction
For illustrative purpose only. Source: BlackRock
Key Rate & Gap Analysis Int Term Credit Bond Index FundKey Rate Durations
Sector Portfolio 3M 1Yr 2Yr 3Yr 5Yr 7Yr 10Yr
TOTAL ASSETS INTCORPA 0.0 0.1 0.3 0.7 0.9 1.3 0.8 LCREDINT 0.0 0.1 0.3 0.8 1.0 1.2 0.9 Gap 0.0 0.0 0.0 (0.0) (0.0) 0.1 (0.0)
Financials - Lehman Sector INTCORPA 0.0 0.1 0.3 0.8 1.0 1.4 0.7 LCREDINT 0.0 0.1 0.3 0.8 1.0 1.3 0.7 Gap 0.0 0.0 0.0 (0.0) (0.0) 0.1 (0.0)
Banking INTCORPA 0.0 0.1 0.3 0.8 1.0 1.3 0.7 LCREDINT 0.0 0.1 0.3 0.8 1.0 1.3 0.7 Gap 0.0 0.0 0.0 (0.0) (0.0) 0.0 (0.0)
Brokerage INTCORPA 0.0 0.1 0.2 0.8 1.0 1.8 1.0 LCREDINT 0.0 0.1 0.2 0.7 1.1 1.8 0.9 Gap 0.0 (0.0) 0.0 0.0 (0.0) 0.0 0.1
REITS INTCORPA 0.0 0.1 0.3 0.6 1.1 2.0 0.6 LCREDINT 0.0 0.1 0.3 0.6 1.2 1.7 0.7 Gap 0.0 0.0 0.0 (0.0) (0.1) 0.2 (0.2)
Finance Company INTCORPA 0.0 0.2 0.4 0.9 0.8 1.0 0.5 LCREDINT 0.0 0.2 0.4 0.9 0.8 1.0 0.5 Gap 0.0 0.0 (0.0) (0.0) 0.0 0.0 0.0
Insurance INTCORPA 0.0 0.1 0.3 0.7 1.0 1.5 0.9 LCREDINT 0.0 0.1 0.3 0.7 1.0 1.5 0.9 Gap 0.0 0.0 0.0 (0.0) (0.0) 0.1 (0.1)
Other Finance INTCORPA 0.0 0.1 0.5 1.2 1.0 0.6 0.1 LCREDINT 0.0 0.1 0.5 1.2 1.0 0.5 0.1 Gap 0.0 0.0 0.0 (0.1) 0.0 0.1 0.0
Industrials - Lehman Sector INTCORPA 0.0 0.1 0.3 0.7 0.9 1.3 1.1 LCREDINT 0.0 0.1 0.3 0.7 1.0 1.2 1.1 Gap 0.0 0.0 0.0 0.0 (0.1) 0.1 (0.0)
Basic INTCORPA 0.0 0.1 0.2 0.8 1.0 1.3 1.3 LCREDINT 0.0 0.1 0.2 0.8 1.1 1.3 1.3 Gap 0.0 0.0 0.0 (0.0) (0.0) 0.1 (0.0)
Capital Goods INTCORPA 0.0 0.1 0.3 0.8 0.8 1.2 1.1 LCREDINT 0.0 0.1 0.3 0.8 0.9 1.1 1.2 Gap 0.0 0.0 (0.0) 0.0 (0.1) 0.1 (0.1)
Consumer Cyclical INTCORPA 0.0 0.2 0.4 0.7 0.8 1.4 0.6 LCREDINT 0.0 0.2 0.4 0.7 0.8 1.4 0.6 Gap 0.0 0.0 (0.0) 0.0 (0.0) 0.0 (0.0)
Consumer Non Cyclical INTCORPA 0.0 0.1 0.3 0.8 1.0 1.4 1.1 LCREDINT 0.0 0.1 0.3 0.8 1.0 1.3 1.1 Gap 0.0 0.0 (0.0) 0.0 (0.0) 0.1 (0.0)
Energy INTCORPA 0.0 0.1 0.4 0.6 0.9 1.4 1.5 LCREDINT 0.0 0.1 0.3 0.6 1.0 1.3 1.4 Gap 0.0 0.0 0.0 (0.0) (0.1) 0.1 0.1
• Control interest rate risk at a sector andsub-sector level
• Manage “Key Rate”durations to address parallel and non-parallel yield curve shifts
Curve Risk: Key Rate Duration and Gap Analysis
Detailed BenchmarkKnowledge
Rigorous Portfolio Construction
to Replicate Index
Performance Analysis and
Review
Efficient Trading
21
Aladdin (GP Live)
Global Trading System
TradeWeb
Aladdin (Dashboard)
Custodian Bank
Order created by Portfolio Manager
Order transmitted to Trading
Order Routing and Execution
Execution transmitted back to Trading
Trade Operations
Execution sent to custodian bank
MarketAxess
Efficient Trading: Electronic Linkages Between Systems
Detailed BenchmarkKnowledge
Rigorous Portfolio Construction
to Replicate Index
Performance Analysis and
Review
Efficient Trading
22
-6.0%-5.0%-4.0%-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Portfolio Return Index Return Difference
Fund TrackingError Attribution
Performance Analysisand Review
• Analytics generate PTE• Analysis of projected
tracking error vs. realized
Source: BlackRock, Barclay's Capital Point
Investment Review Committee
• Portfolio Mangers and Management meet monthly
• Regional and Global Committee Oversight
• Daily and Monthly Attribution• Custodial reports• Daily flags on tolerances
Performance Analysis and Review
Testing for Low Tracking: Risk Model Simulates Index and Fund Return and Tracking Error Difference
Detailed BenchmarkKnowledge
Rigorous Portfolio Construction
to Replicate Index
Performance Analysis and
Review
Efficient TradingMultiple checkpoints to deliver consistently low tracking
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Why BlackRock? Index Provider Checklist
•Wide breadth of strategies across all major asset class segments
•Flexible “modular” design for custom solutionsGlobal Platform
•Transparent pricing without cross subsidization (BlackRock has no custody business)
•All trades executed on best execution basis (incl. FX trades)
Business Transparency
•Cost savings from economies of scale
•Tier 1 counterparty with unique access to liquidityCost Efficiency
•State-of-the-Art Technology
•Comprehensive integrated platform for risk and operations management
•Largest bond indexer with 25 years experience of indexing innovation and results*
•Experienced team delivering consistently low tracking error
Risk Management
Consistent Returns
* Source: Pensions and Investments, May 2009.
24
Appendix:
Performance and FundCharacteristics
25
25
US D
ebt Index Fund506864
Proprietary and Confidential: This material m
ay not be distributed beyond its intended audience.TO
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26
Portfolio Profile
US Debt Index Fund
Data are for analytical purposes only. Index data may differ to those published by the Index due to calculation methods. Breakdowns may not sum to total due to rounding, exclusion of cash, STIF, and statistically immaterial factorsAs of 31 December 2009. Source: BlackRock
US-Debt-Idx-A-Pro
0.000.00
8.148.19
9.749.74
4.034.01
78.0878.07
Quality Breakdown (Mkt Val %)
AAA or above
AA
A
BBB
Below BBB
0.400.3930+
6.126.1820-30
3.684.1610-20
16.1516.347-10
10.2510.525-7
28.9530.533-5
22.8019.212-3
10.6911.481-2
0.961.210-1Maturity Breakdown (Mkt Val %)
US Debt Index FundBarclays Capital
Aggregate Bond Index
Sector Breakdown (Mkt Val %)27.6427.79Treasury8.968.87Agencies6.776.79Financials9.859.86Industrials2.162.17Utilities3.803.81Non-US Corp0.480.45Taxable Muni0.360.36ABS35.0334.98Mortgages5.515.52GNMA 30 year0.120.01GNMA 15 year10.079.75FHLM Gold 30 year1.802.44FHLM Gold 15 year0.000.01FHLM Balloons15.0714.70FNMA 302.472.56FNMA 151.741.76Hybrid ARM3.203.13CMBS
3.473.47Nominal Yield (%)4.524.55Current Yield (%)3.493.49Yield to Maturity (YTM)
6.156.20Weighted Avg Life (yrs)
4.264.26Effective Duration (yrs) 3.373.38Spread Duration5657Option Adjusted Spread (bps)
-0.44-0.41Convexity103.64103.73Avg Price ($)
AaaAaaMoody RatingAAAAA+S&P Rating
4.684.72Coupon (%)Characteristics
8,3724,871# Issues
US Debt Index Fund Barclays Capital Aggregate Bond Index
13,577.1430.79Market value ($B)