Q4 2020 MSCI Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the N. S. C. I fourth quarter 2020 earnings conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session, where we will limit participants to one question and one follow up we will have further.
For you at that time as a reminder, this conference call is being recorded.
Now I'd like to turn the call over to Sally Schwartz head of Investor Relations and Treasurer you may begin.
Yeah.
Yeah.
Thank you operator, good day and welcome to the MSCI fourth quarter 2020 earnings Conference call.
Earlier. This morning, we issued a press release announcing our results for the fourth quarter 2020.
This press release, along with an earnings presentation, we will reference on this call as well as a brief quarterly update are available on our website MSCI dot com under the Investor Relations tab.
Let me remind you that this call contains forward looking statements.
You are cautioned not to place undue reliance on forward looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation.
For a discussion of additional risks and uncertainties. Please see the risk factors and forward looking statements disclaimer in our most recent form 10-K.
And in our other SEC filings.
During today's call. In addition to results presented on the basis of U S. GAAP.
We will also refer to non-GAAP measures, including but not limited to organic operating revenue growth rates adjusted EBITDA adjusted EBITDA expenses, adjusted EPS and free cash flow.
We believe our non-GAAP measures facilitate meaningful period to period comparisons and provide insight into our core operating performance.
You'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation.
We will also discuss run rate, which estimates at a particular point in time, the annualized value of recurring revenues under our client agreements for the next 12 months subject to a variety of adjustments and exclusions that we detailed on our SEC filings.
As a result of those adjustments and exclusion the actual amount of recurring revenues, we will realize over the following 12 months will differ from run rate.
We therefore caution you not to place undue reliance on run rate to estimate or forecast recurring revenues.
Additionally, we will discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.
On the call today are Henry Fernandez, our chairman and CEO Baer Pettit, our president and C O L and Andy Wichmann, our Chief Financial Officer.
Finally, I would like to point out that members of the media maybe on the call. This morning in a listen only mode.
With that let me now turn the call over to Henry Fernandez Henry.
Thank you Sally.
Hello, everyone and thank you for joining us today.
M. A C. All it continues to deliver on its mission of helping investors build better portfolios for a better world.
Our ultimate goal is to provide on index for every portfolio.
On tools for every investment decision worldwide.
Especially in 2020, we continued to deliver mission critical tools to enable clients to navigate all uncertainty.
On respond to industry transformations, resulting from the unprecedented environment.
Our relentless focus on execution.
All of our disciplined approach to investments.
On our strategic capital allocation on there being our ability to deliver value to our shareholders.
M. A C. All of its financial performance in the fourth quarter is totally valid days based approach.
We achieved total revenue growth from over 9% on total subscription run rate growth of nearly 11%.
Adjusted EBITDA growth of over 16%.
And adjusted EPS growth of over 17%.
In 2020, we achieve free cash flow of $760 million up 16% from 2019.
We feel this was outstanding financial performance in the context of a very tumultuous year in so many fronts.
Our success on our momentum has been driven by all of us being able to identify on capitalize on major transformations, taking place in the investment industry.
On our ability to support our clients with critical insights.
That leadership.
And actually on a bowl solutions.
I will provide a few selected commons along the dimensions of clients.
Robert Oaks on.
Capabilities.
On bear and Andy will then give you some more details.
And declining category, we have been successful in expanding our footprint with both new and existing clients.
And our strategic focus on wealth management, we are capitalizing on the focus of financial advisors on direct index in portfolio construction.
Just on performance management on.
ESG and climate.
We're also seeing early traction with corporate clients and.
And we now have from over 80 corporate clients for our ESG on climate offerings.
We continue to expand our business with our established based on asset managers and asset owners.
In 2020 on.
Our asset management clients launched more than 100 on 50, new Etfs linked to MSCI indices.
Over half of which were linked to MSCI ESG and climate ambitious.
Regionally our integrated plan approach has led to high levels of engagement on activity.
In Europe, the regulatory requirements for our clients helped drive record quarterly recurring subscription sales during the fourth quarter.
In Asia, New subscription sales in the fourth quarter improved 62% sequentially.
There are various more but all says during the year given the early pandemic disruptions in the region.
In the category of bolt on services.
Our product innovation is driven by our relentless focus on the needs of investors.
One area of significant Investor focus is the global transition to a low carb on economy and its impact on portfolios.
Our climate value at risk products have seen excellent traction on are already helping investors measure and manage climate risk.
As well as identifying investment opportunities.
Fixed income is another area, where we continue to enrich our offerings.
We are leveraging our strong brand and ESG climate.
First on risk and performance analytics to benefit or rather invest or plans.
Lastly, we continued to build critical capabilities, especially in technology and data.
This includes accelerating the presentation, all our suite of products to the platform.
Through our partnership with Microsoft.
We're also excited about enabling clients Burger, where more seamless access to MSCI data across all product lines.
You will be hearing more about this in future quarters, especially in ESG and climate.
And all the key ingredient of our strategy is allocating capital in a systematic and disciplined matter.
This approach has been highly effective for us including in a year like 2020.
We activated our downturn playbook in the second quarter as the pandemic took hold and market volatility and economic uncertainty rose dramatically.
Then in the third quarter, we transition efficiently to our upturn playbook as our business remains resilient.
Our financials, we're protected on we saw expansion opportunities.
It is also important to note that in 'twenty and 'twenty are adaptable and entrepreneurialism culture played a critical role in our success.
Especially given the major disruptions in our working environment and that all of our clients.
Following closely on the incredible momentum we have built in 2020.
MSCI has never been better positioned to take advantage of accelerating secular and disruptive investment trends.
Which will allow us to deliver sustained and significant top line growth.
We remain deeply committed to investing responsibly in triple crown opportunities to leverage on bill on the established scale of our business.
Our intention is to continue to drive long term value for our shareholders.
We are especially energized to talk further with you about our plans on our upcoming Investor day on February 24th.
Before I turn the call over to bear on Andy.
I am pleased to announce that we will be reporting ESG and climate as a stand alone reporting segment.
Starting in the first quarter of this year.
Our all other segment will consist of our private assets.
With us, it's a product line, including our real estate business.
This incremental transparency will enhance awareness and understanding of this important growth areas for our company.
You will have more insight into the drivers of sales of segment growth.
The actions that were taken on the investments that we're making.
Finally, we believe it's critical that we meaningfully inc. The great corporate responsibility principles into our on his strategy on operations.
We continued to enhance our processors on disclosures, including most recently publishing our 'twenty 'twenty DCF day report and SaaS be aligned disclosures on data security.
Workforce diversity and engagement and professional integrity.
I look forward to providing you with further updates as we continue to make progress in this very important areas.
With that I'll now turn over the call over to Beth.
Thank you Henry and greetings, everyone I'll Echo Henry's enthusiasm for the progress we've made this past year.
We had our best ever quarter for subscription sales across MSCI and in our index and ESG segments individually.
In equity Etfs linked to MSCI index is passed the one trillion dollar mark for the first time in our history.
As of last Thursday. These assets reach further all time highs above 116 trillion dollars.
AUM in equity Etfs linked to MSCI ESG and climate Index is we're at $106 billion at year end tripling year over year.
And seven of the 10 largest equity ESG Etfs globally are benchmarked to MSCI indexes.
We're pleased with these accomplishments and excited for the momentum we see in our business.
I want to expand on some aspects of our strategy starting with clients and client segments are key accounts, which represent nearly two thirds of our run rate growth, 50% of new subscription sales this quarter. While in 2020 MSCI also gained more than 450 new clients.
And ESG new clients represented over 50% of new subscription sales this year.
Henry noted our efforts with wealth management firms.
We are pleased both with the progress of our sales in this segment.
And our early steps in new opportunities like direct indexing.
Wealth management was the fastest growing client segment for analytics in 2020 with run rate up 11%, while index run rate grew at 20% and ESG research at over 70%.
Our total run rate with wealth managers is now more than $60 million up 23% from 2019.
For corporate we recently launched an interactive industry ESG materiality map on MSCI Dot com.
This tool helps corporates better understand how various ESG risk exposures factor into their ESG ratings.
More broadly issuers and corporate advisory firms are leveraging our ESG ratings universe for use cases, ranging from benchmarking to climate modeling.
From a regional perspective in EMEA, our 2020 subscription run rate growth was 15% as strong recurring sales offset cancels.
In Asia, and the Americas, we had nine 7% on subscription run rate growth respectively.
A solid result for the year, especially acknowledging the challenges some of our clients based during the pandemic.
We're now seeing our pipeline build as we would expect at this time of year.
It remains healthy across products and regions and above pipeline levels at this time last year.
As I have emphasized before I've been eager to make innovation in our products and services central to what we do at MSCI.
In October we launched eight MSCI climate, Paris aligned indexes.
These indexes are designed to help investors incorporate climate change into their portfolios.
They also help investors align their investment strategies with the 1.5 degree warming scenario targeted by the Paris agreement.
Henry mentioned the success, we're seeing with our climate value at risk products.
We recently integrated climate value at risk into analytics products to support clients with their regulatory requirements, such as Tcf day reporting.
We also integrated analytics portfolio optimization tools into our climate value at risk products.
Thus climate analysis feeds our analytics products and vice versa.
Further and analytics during the fourth quarter, we launched multi period stress testing capabilities.
We are acutely aware that investors look at their positions through a lens of different time horizons, and we want to provide them with industry, leading tools to do so.
We believe MSCI is truly differentiated in this regard has these capabilities leverage MSCI is market, leading multi asset class factor models and stress testing tools.
As Youre aware fixed income is another area of focus for MSCI.
I'm pleased to note that we closed our first fixed income index subscription deal during the past quarter. This is an important milestone on a validation of our belief that this nascent product line has significant potential.
We are also mapping our ESG ratings to bank loans, expanding our ESG ratings coverage of fixed income securities and enhancing fixed income factor content for our risk and performance analytics.
Our footprint in fixed income continues to grow with run rate in this area up 10% in 2020.
Henry mentioned, our focus on enhancing our data capabilities.
Leveraging our partnership with Microsoft We have made a great deal of progress with our API strategy in the fourth quarter.
As one example.
We are building accessibility to our ESG ratings and other ESG underlying data through API as well as through other state of the art content delivery platforms.
We must continue to support our clients ever evolving needs.
Lean into our own tremendous opportunities and just drive sustained high levels of growth.
MSCI will invest in several key areas in 2021.
First we will continue developing new innovative indexes and other tools that enable our clients to build portfolios that meet their investment objectives.
Second we will keep expanding the coverage of our ESG and climate ratings and capabilities, including the data initiatives I mentioned previously.
And third we will invest in our broader technology transformation and client driven migration to a service platform.
These investments will be executed within a rigorous triple crown capital allocation framework.
We intend to continue generating strong free cash flow.
As Henry noted, we look forward to highlighting our opportunities our investments and the value creation. We believe will result at our upcoming Investor day on that.
Let me now turn the call over to Andy who will discuss more specifics of the financial aspects of our performance over to you Andy.
Thanks, Baer and Hello to everyone on the call this margin.
As Henry and Bear have noted we finished 2020 with a strong fourth quarter and significant momentum heading into 2021.
In index, we recorded double digit subscription run rate growth for the 28th consecutive quarter.
Market cap weighted modules, which represent the largest part of our index subscription run rate continued to deliver strong growth of approximately 9% in the quarter.
While our factor ESG custom and specialized modules grew at healthy double digit growth rates.
From a client segment perspective, the index subscription run rate growth with asset managers, the largest client segment was 9%.
While growth rates among wealth managers hedge funds and asset owners were all greater than 15 per cent.
Assets under management in equity Etfs linked to MSCI index has reached record levels driven by strong cash inflows of $59 billion or close to 30% of all cash inflows into equity Etfs during the quarter.
This was driven by strong market share capture of cash inflows across all geographic regions and particular strength in emerging market exposures.
Equity Etfs linked to MSCI ESG and climate index has experienced cash inflows of nearly nearly $25 billion during the quarter fees cash inflows represented nearly 80% of all inflows into ESG and climate Etfs.
Overall asset based fee revenue was up over 15% year on year, reflecting the higher results across the board, including from Etfs, non ETF passive products and futures and options.
Turning now to our adjusted earnings per share growth year over year underlying business performance drove the vast majority of our growth in adjusted EPS, while our share repurchases also contributed.
Operating revenue growth was strong and year over year expenses were up modestly once again benefiting from lower travel and entertainment expenses, which were lower than the fourth quarter of 2019 by $4 2 million.
And somewhat offset or reaccelerate the pace of investments in the second half of 2020.
Turning to our balance sheet, we continue to have strong liquidity that provides us tremendous flexibility. We finished the quarter with total debt to adjusted EBITDA of 3.5 times at.
At the top end of our targeted range of three to three five times.
Lower cash tax payments and disappointing client collections led to significant outperformance in our free cash flow generation in the fourth quarter relative to our guidance.
As Henry noted earlier, we have been pleased with the success of our capital management strategy and we will continue our disciplined and patient approach to allocating capital. We are keenly focused on reinvesting in the business as a first priority.
Optimizing our leverage profile to enhance returns and maintain flexibility providing a consistent quarterly dividend that grows with earnings and is based on a payout ratio of 40% to 50% of adjusted EPS Opportunistically pursuing the M P&A and share repurchases with an intense focus on maximizing returns to shareholders.
And preserving our strong liquidity position.
As Henry noted to enhance shareholder awareness and understanding of our progress on pursuing key growth opportunities in ESG and climate and in private assets. Starting this year, we will present ESG and climate as its own reporting segment and all other will consist of operating segments in private assets.
Beginning in April when we report Q1 earnings you will see the same financial and operating metrics. We currently show for the index and analytics segments also for the ESG and climate segment and for real estate.
So that you have historical information for comparative purposes, we will provide information for the new reporting segment annually for 2018 in 2019 and quarterly for 2020.
Revenue and operating metrics from ESG and climate indexes will remain within our index segment.
We are excited to bring this incremental transparency to our disclosures and to continue to update you on these exciting areas of growth and opportunity.
Before I turn to guidance I would like to highlight that recurring subscription revenue has lagged subscription run rate by slightly larger amount in the last couple of quarters.
As noted in our disclosures there are several factors that can contribute to this including but not limited to the timing of sales and cancels modifications FX movements delayed contract start dates also known as advanced bookings and implementation periods.
In response to the Covid pandemic, we have selectively used advanced bookings recently to help drive new business in key areas.
When these are offered decline is contractually committed to a subscription agreement, but may have access to the service prior to the beginning of the fee period at no cost in these cases the sales may be recognized before we begin recognizing revenue or we may recognize a lower amount of revenue in the first year relative to the size of the sale.
We use these tools selectively this past year and while we do intend to continue to use them going forward, we don't expect the magnitude to increase materially.
However, as we said at the top of the call. We would caution you not to place undue reliance on run rate to estimate or forecast recurring revenues.
Turning to our guidance our expectations for 2021 reflect what we believe will be another strong year for MSCI with several guiding principles.
Our expense guidance assumes relatively flat equity market levels for the year as such our expenses may flex up and down depending on market conditions and the trajectory of our asset based fees to that end, we will continue to implement our upturn and downturn playbooks, if and when they are needed.
As we've noted throughout this call investing in our business remains our top priority. However, we are also committed to delivering positive operating leverage.
Although you should expect to see more modest margin expansion than in recent past.
Our free cash flow guidance reflects strong operating performance and strong collections relatively flat market levels. Although we could of course, the markets performed better or worse margin expansion over the course of the year again likely at a more modest pace than in recent past and higher cash taxes in 2021.
In summary, 2020 was a very strong year for MSCI, despite the global hardship related to the pandemic we.
We have continued to deliver innovative indexes research data and other tools.
We've executed against our strategic priorities sustained incredibly productive and engaged as a team and as always we remain committed to driving further value for our shareholders. We look forward to speaking with you in a few weeks at Investor day, and with that operator. Please open the line for questions.
As a reminder to ask a question you all need to press star one on your telephone.
Draw on your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Toni Kaplan from Morgan Stanley. Your line is now open.
Thank you.
So looking at the expense guidance you were targeting about a 9% increase in expenses for the year, which is a relatively normal percentage for you, but it's off of a year, where you didn't increase expenses at all versus the prior and so just running through the model I'm getting at maybe you could expand.
EBITDA margins by about 100 basis points off of the year, where margins were abnormally high because of Covid savings like low lower travel et cetera.
My question is you know why not invest more in the business to support the growth is this caution because you know maybe we're not through with Covid, yet or do you view. This COVID-19 savings items as sustainable and then you know maybe just says when he left through the year should we expect more of on margin increase at.
The beginning versus the back half or maybe some of the COVID-19 items.
Return thanks.
That's a great question Tony.
And any cuts to the heart.
What we're trying to do you know at MSCI.
And that is to navigate.
The tight rope between.
Maintaining on enhancing our even though modestly our margin levels.
And at the same time.
Heavily investing.
In the critical growth areas that our clients are crying for new tools, such as solvency climate change now which is increasing dramatically.
Obviously overall ESG.
The demand for.
For index says with an investment thesis around them.
It's off the charts clearer.
Clearly understanding the risk of People's portfolio, especially factor risks such as the transition from Baidu per growth.
Or simply come to growth investing and of course, you know the private asset classes. So we are entering a period.
<unk>.
Of major.
Major major demand from our existing clients on the newer client segments that were penetrating such as wealth.
Brit insurance companies for a lot more tools coming from MSCI.
So let me turn it over to wanted to see if you can give us give us a little more insight into how the all of that plays into the dynamics of the growth on the EBITDA expense line.
Yeah. Thanks Henry.
Good question, Tony maybe if I can provide a little bit more color from a financial standpoint, and underscores some of the points that you've made in Henry made.
We are coming off a year as you said where expenses were lower than we anticipated. They were brought down by COVID-19 related impact slight peony being lower.
We're also very active we went to the downturn playbook in the middle of the year and the ABF rebounded faster.
And then we were able to begin reinvesting in the business. When we went back to the upturn playbook. So that did depress the expense base in 2020, if to your point. If you look back to 2019 and extrapolate through to what our guidance says for 2021, you'll see there's a more normalized trajectory across the two years.
I'm looking.
Looking forward and taking into consideration a couple of factors that set into our guidance. Firstly, there will be some rebound in P&A and COVID-19 related costs.
But we don't anticipate it will be a full normalization. So there will be some continued benefit going forward.
And obviously that can that can change in adjusted depending on how the pandemic unfolds here and we returned to the pace with which we return to a normalized working environment.
The other thing that is important to remember here is as I mentioned in my opening remarks.
Our guidance assumes markets remain relatively flat and so we've put an expense guidance range here.
That assumes.
Relatively flat market levels if at all.
Get levels to rebound significantly and show a sustained improvement.
Or the markets increased significantly and show a sustained improvement we will go to our upturn playbook likely in expenses can be hyder. Similarly, we could see if the markets pull back significantly for a sustained amount we could be lower than the expense guidance and so it could go either way.
One other things we wanted to do with the guidance. This year was with show you what the guidance is based on current market levels.
To give you the heads up that it could change if they swing one way or the other.
The other point of note I would I would say factors in here is there is some implicit FX pressure embedded in the expense growth as well.
Where the U S dollar has appreciated depreciated.
Relative to most foreign currencies relative to average rates for 2020, and so that put some pressure.
On the expense growth as well and that's something we're keeping a close eye on.
Overall, two to Henry's point, we are extremely focused on continuing to invest in key initiatives on key investments that are going to continue to extend the duration and improve the trajectory of our growth profile going forward.
And so that will be a top priority and we will continue to calibrate it throughout the throughout the year.
Given the importance on dawn and given the importance of this question. Let me just add one more comment here on that is.
We have.
In the recent past.
It.
Began to look at EBITDA expenses.
Into two major categories.
Expenses that are required to continue to run the business.
On EBITDA expenses that are really investments significant investments into areas of growth.
And given that you know given the nature of our company is on US on IP company in the vast majority of our investments gets expense.
Immediately upon execution on the revenue will come in a year or two or three years later.
What we have done and continue to do.
The space is.
Basically strangle as much as we can squeeze as much as we can the EBITDA expenses of running the business to free up more and more capital.
The investments are going to change in the business.
Kind of a bagel.
So the rough numbers some overtime, we will give you a more precise analysis of this.
Our or change the business.
Spencers, which are really investments in the operating expenses on the company I E. The EBITDA expenses on the company are somewhere in the low to mid teens percentage of the total EBITDA expenses, we're trying to move that to the mid to high teens.
All in 'twenty 'twenty, one on beyond hopefully someday in the next two to three years those can be in the twenty's. So that a meaningful percentage of what people think of expenses are really investing you'll have seen the acceleration of growth in many aspects of our business, especially ESG futures on op.
<unk> on fixed income on all of that which are beneficiaries of this investment that we have made one or two or three years prior to getting the acceleration of growth.
That's really all Henry let me just add one last point to make sure everyone's aware of and I know most of you incorporate this into your models.
But given the swings we saw both on the top line and the expense line in 2020 throughout the year.
<unk> expense growth and margin could fluctuate quarter to quarter throughout 2021, just given the relative comparisons year over year.
That's great. Thanks to both of you on that.
I wanted to also ask how important to you is or was the IHS partnership that you had is your expectation that they will not be working with you in the future because they have announced the combination with S&P I know you were working with them on fixed income liquidity risk solutions and thankfully.
But maybe there were other areas too. So can you outline what opportunities you are working on with them and if those can be replicated by partnering with another provider like Bloomberg for example.
Yes.
That's another great question.
We have a very.
Our focus on strong strategy at MSCI.
Working in partnerships with others from the industry.
On whether it's client partnerships, obviously that will be the highest.
Impact to two people, who have different kinds of beta or different kinds of technology or different distribution systems. We believe strongly at MSCI in an open architecture system.
For the benefit of clients. So the area that you will see all.
Working extremely hard in building partnerships across the whole spectrum on when you think about our M&A. So to speak the vast majority of our time on therefore in M&A is Glenn we called MBNA mergers partnerships and acquisitions. So all IHI IHS Markit has been one of those key relationships that we.
Have built in the context of the merger between between S&P Global on IHS Markit I have had discussions with the Ceos of both companies.
In which they intend to preserve and enhance the nature of these partnerships for for all to join US Tomorrow products.
Products together on for the benefit of clients.
That's great. Thank you.
Thank you. Our next question comes from the line on Manav Patnaik from Barclays. Your line is now open.
Thank you maybe kind of from follow up to that that Henry I was just wondering you know the way the markets have been you know.
Pretty much just going up.
Spike Covid, there's also been a lot of M&A around.
You know your areas of focus ESG data you know generally speaking.
How is that influencing or changing the way you look at your.
Build versus buy decisions or even just your M. P any framework.
Good question might have I think the strategy continues the same and we are in the high <unk>.
Enviable position at MSCI.
That our organic investment opportunities are vast.
On the yield incredible returns.
And it means all needs that they have built at the margin on top of on existing infrastructure.
We can see that he's based in index and we're beginning to see it in ESG and often seen analytics, we still building some capabilities. So the returns are lower than the index and ESG, but it's still in the in the high double digits.
On the internal rates of return so so therefore.
And we are stretched for a four four investment given the objectives that we have on the margin on the company. So therefore, we're very focused on on organic investment, we do not really need any.
Any significant acquisition at this point to get us to where we want to be in the company that doesn't mean, we will look at everything and analyze everything.
We are trying to step up our activities in a small bolt on acquisitions and data and tools and technology and under like particularly in areas like fixed income on of course, all private asset classes et cetera.
But those at all.
It will be more smaller on bolt on.
Therefore, we continue to have major focus on organic investment and the other thing that we like about that is because we want to do the opposite of what others are trying to do we want to stay extremely focused on our strategy with a very power on.
Manorial culture.
In which all you know people can innovate we can.
How better client interaction, but Atlanta services on all of that and therefore, we don't want to become a sort of financial data conglomerate to a financial investment dual conglomerate made up of a lot of divisions.
And those divisions being run by the administrators, we want to do the opposite we want to have a highly integrated company run by an improper nurse with high levels of innovation and high levels of investment.
And obviously, a preservation and enhancement on margin, we think that's a winning strategy for us.
Got it that makes sense I appreciate that and just in terms of the upcoming IR day.
On the disclosures and so forth do you guys have always given quite a bit of color. I was just curious like what are what should we be what does it mean I guess agenda points on the upcoming idea that we should be looking forward to.
Well not to steal the Thunder from the 24th so we can get everyone to to show up right.
I think what you're going to see from US is a continued.
Focus on the mission of the company the strategy the demand that we see for multi client segments on the needs from clients. Therefore, the organic investment plan is that that is attributed to that.
On the integrated franchise between the different product lines and all of that and I think the area that you will see even more change.
And this isn't this investor day is our incredible push into technology and data in the past we had MSCI have always thought of the investment tools first on technology and data, enabling the investment tools, we want to start thinking the reverse Watkins technology on data open up for us.
To create even more investment tools for the world. So there will be a segment on that as well.
Got it thank you very much.
Thank you. Our next question comes from the line of Alex Kramm from UBS. Your line is now open.
Hey, good morning, everyone.
This may be too detailed on the analytics side, but I remember a few years ago. When you were still breaking all its portfolio management and risk and there was a time that portfolio management was very weak and you've cited quant.
Quant funds as an area of weakness there has been a lot of stories recently again, all will performance in Quant has been in 2020, if this environment clearly it doesn't work for them. So just curious if it's a quant funds still a very big area for you guys.
Maybe you can give us some updated numbers and <unk> and I know you've seen weakness on that client segment.
Yes.
Sure.
Yes.
All right.
That's all.
Yes.
I'm sorry can you hear me.
Much better now yes.
Yes, I'm sorry, yes, so I don't have the numbers in front of me, but directionally.
I would say that.
When you look at the the equity analytics and the and the rest of the enterprise risk aspects.
<unk>.
Of the of the business there is no very explicit patterns.
On that.
That are that are have been very stable over time.
So the.
The the latest characteristic I would say is clearly and factors we have grown very strongly in terms of their contribution to the index business. The quant funds generally on the larger end of the scale, we're doing very well with that's a limited.
Number of very large players.
And but I would then say that the smaller hedge funds.
With share you know, which are mixed range of strategies continue to be a challenge for analytics so but.
But if you look even further forward I would say that this definition.
Of the simple split between Quanta and non Quants is something which we think has changed over the years.
And what we're seeing particularly with kind of the next generation of clients is precisely the integration.
Of Quant tools, our quant overlays into.
Into a lot of traditional portfolio management.
But I don't know day, Andy if you have any specific numbers on that.
In front of US we can always follow up with you Alex but I think long story short is there's definitely not a sort of a negative pattern here, we're not seeing clients as being anything unusually going on outlier type of number and on the more sophisticated quants were doing well.
Yes, no I'd underscore that there I think.
From a retention standpoint hedge funds are below average.
And it's largely attributable to the smaller hedge funds.
And is there said, we do have success selling.
And growing within a lot of the larger larger hedge funds across products that we offer.
I'd say the one other segment just to provide a little bit more color on on retention and analytics that we felt pressure in 2020.
Was around banks and so we did help some.
Particularly one large cancel among your bank, which which depressed the retention rate across analytics.
Okay, Great and then quickly other topic.
You know China is is it's something that we keep on hearing about and obviously.
With some other restrictions theres been a news around your index inclusions et cetera, which is.
I know this is normal course of business for you, but my my more important part of this question is how does this kind of impact your China strategy in general I mean that that region is obviously growing rapidly and opening up for financial market participants. So I think your are you definitely have your eye on that region. So does that.
<unk> creates headwinds right now and being able to do to.
To grow with potential clients in the region and maybe you can remind us how big China is as well. Thank you.
Yeah.
Yeah. So so we are neutral to any of this deal political issues.
Based in the World.
Our main focus is always to serve the needs of <unk>.
Global investors.
Investing in all regions of the world.
Including obviously emerging markets, which are higher.
A higher risk than other regions.
We've tried to therefore stay away from and from all the politics on all the.
On the pediatrics that take place there.
Secondly, we continue to believe that China as the current second largest economy in the world on the opening up.
All of it.
All of its financial markets.
Is going to present vast opportunities for.
For investors in AR and the volume of market on the private markets. All Lucy equity investment is opening up dramatically bond investing given the high yields here on the appreciation of renminbi will continue.
To be a major attraction for bonding on investor suspension on the sovereign bond investors on the like we are very focused on continue to expand our business from China to grow our cross.
Cross border business, so to speak between grow on investors going into China, or the business all of helping Chinese institutions invest outside of China on the domestic markets of China as well in this case, China, including obviously Hong Kong. So all our business is still small.
And the sort of.
$15 million to $20 million range, something like that in terms of run rate.
Come in directly from China, All Lucy.
Global investors, who are focused on investing in China through our emphasis on.
All in on our risk models.
But we think that the opportunity is enormous and we are very focused on building a strategy on expanding our footprint there, especially this year.
In order to continue to capitalize on on that significant opportunity on obviously continue to stay on away from the geopolitics and will have to comply with executive orders on.
Sure Richard legislation or whatever that comes our way on that that creates a lot of the work for us but.
Overall, the Big picture is nobody can really at this point not negate the huge importance of China has and will have in portfolio is around the world.
Very helpful. Jay can provide a little a little bit more product color around it.
We are our largest product.
Traction in China is around analytics, where we have had quite a bit of traction and continue to grow and as Henry said, if we build out our fixed income front office capability.
A range of security coverage as.
As well as.
With it capabilities around private assets, we're bullish about the continued opportunity on analytics, but we're extremely excited I think given our small base on the enormous opportunity in some of the other products like ESG, where were starting to get some real traction as well as on the index side for the reasons Henry highlighted so we very much view many layer.
Of growth.
On the China from.
All right. Thanks again.
Thank you all our next question comes from the line of Owen Lau from Oppenheimer. Your line is now open.
Good morning, Thank you for taking my question.
I think last quarter MSCI launched correct me if I'm wrong on these numbers launched 22 proprietary fixed income indices and the total was 40 I think this quarter I think you mentioned that the run rate was about 10% in 2020. So it looks to me the pace has been quite strong in this area.
Would you please talk about the pipeline in the fixed income products are you still in the investing mold and she'll do a small products or do you think you have most of the products you'd like in a focus more on sales and distribution. So that investors can feel can see weakness in the runway up pretty soon thank you.
Oh.
Sure.
I see.
So the up.
I think what I can tell you on on fixed income indices.
Our monetization.
On fixed income indices is made up of our on indices.
On the partnerships that we have with others.
So therefore in.
And a big part of our success, thus far has been in our ESG and climate change fixed income indices.
Partnership with Bloomberg Barclays on and that has had significant run rate.
Not all do a lot on assets have gone into into those in a significant amount of run rates associated with that.
We are built in partnership with others as well that that are on the hub fixed income indices for us to support them with the content of ESG and climate and factors on.
In addition to that we obviously have started building our proprietary our own proprietary fixed income indices in areas that we believe that all.
Have high potential.
As well and that's what you'll see on launching and that's what the the first.
The up to the run rate on our own proprietary on fixed income is still a very very small because we're just getting going on this on the light in terms of the broader span. We for sure are all have ambitions to create a very.
A large number of all products.
It all looks up MSCI label fixing.
Fixed income indices in in a lot of different varieties, we will try to avoid being in the issuance weighted type of window says the market GAAP weighted up all the indices on focused enormously on the things in which we have a proprietary on.
On value add content. So those factors suggest ESG suggests climate on anthem.
<unk> Malik our investment themes.
Got it.
That's very helpful.
I would probably like we do have a very healthy pipeline of new opportunities Oh, and so I think you'll continue to see.
Hopefully, new new Etfs and other passive products launched on our indexes and we've got a healthy pipeline also.
Subscription type deals on the fixed income index side. So it's very early days. This year as you know we just launched.
Our index is about a year ago, but we continue to see pretty healthy demand.
Got it that's very helpful. And then my next question if I understand it most of the day.
Man.
All of the ESG products come from.
Investors like asset managers and asset owners I.
I think Henry you mentioned that.
On cost breaks it's quite strong I think you had 80 clients right now because I remember if I remember correctly.
Do you think the reason NASDAQ board diversity and disclosure proposal can further accelerate the demand all of your ESG products from corporate in the United States can.
Can you talk about your recent conversation with them in terms of subsequent tipping into more MSCI ESG offerings, maybe Paul with the U S and outside the U S. Thank you.
Yes, so I think the there potentially two different things there if I understood the question correctly.
On one hand.
Yeah.
You have is a whole range of fixed income.
But all look offering.
From indices to fixed income risk models to fixed income analytics liquidity and all of that that are geared initially doors. The the asset managers that focus on fixed income and some asset owners. The plan there is to expand that offering to corp.
Insurance companies, which all busy as you know well are very heavy investors in fixed income products around the world. So that that is our entry into that client segment that traditionally has been more difficult for us because we haven't had a very expansive fixed income product line. So we're very hopeful that we can expand significantly into <unk> into <unk>.
<unk> on property and casualty insurance.
For their own account with respect to fixed income indices on analytics.
And that will have also on overlay.
Our value is in terms of ESG.
In terms of climate on in terms of factors because unintended so themes, because that's where that's where we can differentiate ourselves.
All of climate change, that's that's very separate right on.
On a on the strategy there is that.
As climate change, particularly in ESG in general is getting more and more focus on attention on on behalf of <unk> best doors.
A lot on corporate clients have come to us and say.
How can you help us how can we understand.
The kind of disclosures that are required for the ratings.
To understand you know, where we stack up relative to the rest of the industry, what kind of data should we be producing how do we transmit that data to investors on.
On all of that so what we're doing therefore is the initial cut at this thing is too to make sure that we sell the the industry ratings on.
On the industry data to corporates and therefore, we have established a corporate sales force to do that.
We're working with partners to figure out if there is a mechanism by which we can create other technology platform for a lot of this data to be easily transmitted between investors on the providers of capital on the usage of capital and all of that so we see significant potential of expanding into the core bread.
Sweep the issuer suite and when do we take corporate just not normally corporations. It's also other issuers all fixed income instruments. For example, we see a significant way to expand in that client segment, starting with a lot of their demands for.
ESG on understanding the outside a climate change understanding the data that they need to produce.
The way that they need to to look at their ratings on so on and so forth.
Okay. That's very helpful. Thank you very much.
Okay.
Yeah.
Thank you. Our next question comes from the line of Chris Schott from William Blair. Your line is now open.
Hi, good afternoon.
Henry We've recently seen a couple of big direct indexing or custom indexing related acquisitions across the space. I know there are some puts and takes for MSCI as that phenomenon growth.
But just just curious the degree to which you're having conversations with.
Brokers asset managers.
Technology providers to to license your indexes and just how you're thinking about that.
Phenomenon more broadly do you think the low.
Pipe is is justified.
Yes.
Okay.
Yeah, Hi, it's bear here I might take this one so look we think that this is a category with a lot of opportunity for us.
You you know referencing the Blackrock acquisition carriers Amir.
Using our tools across the board.
And we have a very strong relationship with them.
We had.
I would say very attractive sale recently in the wealth segment, driven entirely by direct index, saying as well as a few of them in some other segments. So so we think that the component parts, there which are basically indexes.
High quality portfolio analytics tools.
And clearly an overlay of various methodological things related to tax et cetera, well suited to us.
And that's I would say our house view at this moment.
I I'm fairly confident that during the course of 'twenty 'twenty, one we'll be able to bring you new examples of what we're doing there.
We're all kind of lead give you more color on the nature of that opportunity, but we feel it really plays to a lot of MSCI its core strengths and and at present, we're viewing it as nothing but opportunity.
Okay. Thanks per and then just one other one on on ESG strong momentum there.
I'm curious if you could just talk a little more specifically about the wealth channel opportunity I know that there's a <unk>.
Good amount of skepticism around around kind of ESG with financial advisors, So guessing the opportunity to sell your ESG solutions into.
The home offices.
Maybe the custodian so maybe just a little more color about how you're going to market there on with what what solutions.
Sure. So actually we found that ESG and climate as well and we distinguish them now as you know on this call have been really an accelerant of our dialogue with wealth organizations now there may be to a degree something to your point about the distinction between the home office and the.
Advisor.
And I think that that's particularly true in the perhaps in the United States, but I think that that's true for example in wealth organizations.
Across EMEA or even now in a nascent way in Asia, where I think the advisers also view this as an opportunity.
And.
I see that already changing.
You know I would say that what we get from feedback both through intermediaries and on ourselves from the advisors, even compared to a year ago.
Their view is changing.
So.
And then you know where we're really excited about this opportunity. It's also giving us dialogues not merely on ESG and climate, but on some of our other product lines. So so overall I think really a really attractive opportunity for us as well and ended in a door opener in many ways.
Yeah.
Okay. Thank you.
Thank you. Our next question comes from the line of Craig Huber from Huber Research Partners. Your line is now open.
Great. Thank you Henry maybe if you could just touch on a little bit further.
The growth aspirations on the futures and options area and how that may differ the U S vs.
Overseas.
Yeah.
Vast opportunity.
For us.
You probably remember.
Four years ago of me talking about we're making $5 million on futures and options revenues.
Will be 50 million in all time on.
100 million 200 million on.
In the next five to seven years, all well like I was wrong.
We are at a base right now.
Even even higher revenues that I thought that will happen in the timeframe. So so I think the opportunity is significant.
In many many respects.
It's.
As I've said before the futures and options the listed futures and options industry has typically been a national market made up low single currency single country exposures on.
And you.
One or two exceptions, which as you know the euro Stoxx 50, it's a multi country, but it's still single single currency exposure. So the area, where MSCI blades is in the multi country multi currency exposure on I think it.
Change partners have to crack the code of how to create that and be traded in that time zone. So we started in the U. S. Then we moved the day work to Europe and now obviously, we're spending a lot of time in Asia with the Hong Kong exchanges. So I I view based on a 510 year horizon.
Peoples of the run rate that we have today on obviously most of it is pure profit because it's all a byproduct of existing indices on it.
Both from a market cap indices alone to them ESG indices.
The change in the sense that might again this at some point will be experimented with fixed income index disposal as well. So you know a significant opportunity for us.
And that's a great Henry Vandy, Craig we're starting to see the highlight just to keep in mind for the near term expectations. The run rate over the last six quarters or so has really benefited from the repricing of agreements with many of our exchange partners.
Those are largely complete.
And we would expect the run rate growth to be more closely correlated with contract volumes going forward.
I appreciate that but the other question on want to ask you Henry or someone.
Active versus passive what percentage of the U S equity market. Henry do you think is passive growth now with the day to day to your study what does that number also in Europe, and maybe also just touch upon Japan, which I understand is much higher.
Yeah look there's always a lot of debate and discussion about this.
Okay.
But all the debate is what point, it's gonna have reached saturation on how point is if you're going to build the balance and on.
At what point, possibly will create high book on all of that we don't believe in any of that and therefore.
We have not spend that much of our time focusing on measuring how much it's active on which is positive on all of that.
What I can tell you is that.
In other.
As it relates to our index says there is about three on a half a trillion dollars.
Worth of of.
Money.
Possibly tracking our MSCI indices about $2 five trillion of that is what.
What we call institutional passive meaning non exchange traded.
Which is mostly institutional some retail on the other trillium plus is obviously the Etfs that would report on that number keeps growing by leaps and bounds on.
Therefore, we believe that we're continuing to play on that on that theme.
Thank you.
If I might just add one comment.
Clearly the category has become significantly redefined compared to 10 or 20, let alone 20 years ago. So a lot of the indexes were bill we're building our rules based active portfolios. They are taking an active bet on the market, but based on rules. So.
I think that this distinction is also important because the you know, it's it's much less black and white and the market for rules based indexes that have strategies I think is is.
Potential besides clearly the market cap representation of them.
Great. Thanks, David I'll throw out some rough numbers.
Because I know you've asked about it in the past and will continue to refine these and these are a little bit David but broadly speaking active equity active AUM.
<unk> is in the ballpark of 22 trillion.
Equity indexed assets are in the ballpark of about 14 trillion.
And these are global figures on the fixed income side active it's closer to 28 trillion and on the passive side within fixed income four trillion. So the other point to underscore here is that there are significant opportunities across other asset classes asset classes, including fixed income.
Understood. Thanks, guys.
Thank you. Our next question comes from the line of Simon Clench from Atlantic Equities. Your line is now open.
Hi.
Thanks for taking my question.
I was wondering if you go back to.
The points about the opportunity to reissue with corporate customers.
And I was wondering if you could perhaps expand on the competitive landscape you see in that environment, how you think that might develop and ultimately.
What kind of size, you think that opportunity might be.
Perhaps in the context of the size of the market you see on the more investor side of yesterday.
So the opportunity really.
Opened up in the sense of.
You know initially more of us a necessity in which.
The corporate client base wanted to know how would they were rated by MSCI on how those those ratings compared to others in the industry or in other industries. So so they keep asking questions on and then we said well why don't we sell them. The we're not going to give the information from frame why don't we seldom the sector rating profile.
You know to them. So there is a large market for that because we'd right.
As a niche words right right now actually would read like 20000 issuers about the flow.
10000, or so are in the eight.
Eight to 10000 and companies on another 10 to 12 thousands are.
Fixed income Ishares and growing right and then we're going to get into ratings, all private equity private credit and all of that so that opportunity by itself is just you know just selling them data I think the area that where we are now that is all that is studying right now that that's already in flight overseen for my small based.
On all of that then the next phase will be.
What what why do we do to help these people aggregate their data on.
And displayed their data to investors, how do we connect them directly from from us from them to the investors on those MSCI play a role in that that's still on the drawing board at this point, but that could present another opportunity.
Okay. Thanks, that's helpful. And then just a loss per I was wondering if you could just go back and talk about the retention rates in the analytics business I know you referenced.
Some of the challenges facing the industry, obviously, it's been a tough yet but.
I was wondering if you could talk a give us a sense of how to think about that trend.
Through 'twenty, one and if there's anything in particular, we should we should note about the dip that we saw this quarter.
Yes.
No.
Yeah sure so.
Couple of things to highlight and I mentioned this earlier.
We obviously saw a dip in the retention rate this past year.
It was.
Primarily driven by two segments hedge funds and with it if we didn't hedge funds with smaller hedge funds and then within within banks.
And it was particularly one large cancel in the quarter from from a bank.
We continue to see we believe relatively healthy healthy sales.
Analytics and the pipeline right now.
It looks reasonably healthy for 2021, and so we're optimistic we think on the cancel side you know what.
A lot of these are not in the most core parts of the franchise and so we are hopeful that.
Those will continue to moderate and trickle through to growth going into 2021.
Thanks, I was just clarify that the.
A large bank cancellation was this quarter.
Correct, yes, okay.
All right yeah.
Thank you. Our next question comes from the line of Henry Chen from BMO Capital markets. Your line is now open.
Hey, Yeah. Good afternoon, everybody. Thanks for taking my question.
So I wanted to ask a little bit about the investments that you're doing I mean, you talked a good amount of color on on the discipline that year.
Carrying to enact it.
Well some of the product in the market.
And.
Ryan segment, you know that if I tried to put that.
Together at a high level I don't know if you have like that.
A tam or way of the world that you see in terms of day.
The total type of addressable opportunity or maybe suggests.
Like an entrepreneurial thing you just keep going on and finding new business and any color on it.
Around that would be great and maybe a comment on the regulatory environment as it relates to ESG and whether that's a.
The big enabler as well thanks.
That's like what what is toward the latter than the former.
We are in the industry in which we are creating the industry.
To a large extent, creating the industry of all.
On index for every portfolio on investment tools wherever we could it be co investment decision on.
Well, that's one the second party that we all a lot on demand you know that we have.
Are people coming to us and say can you build management for this can you do this can you. All can you give me a better software can you. All can you help me with my ESG can you help me with my risk et cetera et cetera on.
And there is a huge amount of client interaction on that so we are we are the other stage in which it at all.
It looks like the addressable market is large.
We haven't spent any time on effort trying to measure how large it is because we're like we're cherry picking.
We're picking all the fluids. So we can as fast as we can in that.
It will last a number of years, so why try to take a centrally planned approach to developing models as to the total addressable market.
And Henry on the regular on the regulatory front clearly it's.
It is headed in the right direction I think with the change of administration in the U S. It seems like it's going to be more conducive in terms of encouraging more ESG disclosure and better ESG practices, which naturally benefits us I think you'd see some tangible examples of regulation in Europe that are starting to impact us.
Including T CFT.
And the impending S F D R regulations.
<unk>, which required disclosures, which we are very well suited to do and we're well positioned to help financial institutions.
To make the required ESG related disclosures and we expect those types of trends to continue.
Got it.
Alright, Thank you and I guess the last follow up on.
So it's sort of separately, but you know looking at looking.
Looking at passage it being such a large share of that at least in the U S equity markets.
And I know, it's not technically you roll on in terms of you provide the indices and the data, but do you ever think that there's any there might be risks around just passed it starts to impact <unk>.
Equity market structure in a way that that are limiting limits its growth.
I think we're far from that at this point.
The I think the area that is obviously our always on.
Caution is that a big part of passive investing is momentum investing obviously mindy.
The higher the weight of our company into an index the more people buy the company.
But that can be said about a lot of different ways of investing right. That's not just attributed to.
Tobias <unk>.
At this point, so I think we got a sort of build the only on on that and look at the underlying purchases.
People make.
Passive has done is created a major revolution for people to focus on asset allocation and on not just our stock picking.
And that is you know.
All from sectors to do you're all going to fees to the fixed income versus equity on all of that and its split up an incredible amount of time. So is created enormous value for society.
Because because through these packages or bundles of securities into a due on ETF. For example, you can move around much more easily.
Got it yeah, no it makes sense.
All right. Thanks, Thanks, so much everyone. Thank you.
Thank you. Our next question comes from the lineup to East Zone from Northcoast Research. Your line is now open congrats on.
Noon guys I know, we're running long here, so I'll try to be quick Andy just following up on a comment you made in your script regarding I think it sounded like there were some delayed deals and whatnot that you described that could you perhaps drive a little more color on that where there's like a pull forward of business or do you think this is business that you guys were able to close more because of the opportunities your offer on this.
Quarter.
Yeah. It was it was a little bit of both I think it was a tool that was instrumental in.
Helping some clients right on the heels of the pandemic when it unfolded.
Was well received by certain clients. It's also a tool that has been helpful with I'll call on large strategic deals.
For clients, who might be signing up for a significant.
Purchase.
One of our offerings and using it across their organization.
And maybe just to provide a little bit more color on how.
How these things are structured and firstly before I do that I just want to underscore I don't I don't want to overstate the impact of these this is just one component of what drives the disconnect between run rate on revenue, but it is something that we used more of this year, we will likely use them going forward, although I think that the pay.
This should not increase materially.
But the way these work and maybe I can give you just a quick example to make it very tangible so if if a client signs up to an agreement to access one of our products are.
At the beginning of the contract term, we provide the client with access to the product.
For say three months at no cost.
And let's say the client pays US 100 ATK for the next 12 months. So in that case, we would recognize the 180 K as a sale on a run rate goes up when the client signs the contract. So that's at the beginning of the free trial period, if you will where that period, where theyre not pain.
Although we all recognize the revenue.
180, K over the 15 months.
On a time period, so we will effectively be recognizing.
That's 180, K over 15 months, which works out to about 144 K of revenue for the 12 months. After the contract is signed so when we book the sale and recognize the sale we take the full 180 K, but we only have revenue of 144 K for the subsequent 12 months.
When that client renews, so when they renew its for an annual term again. This is all just illustrative, but when a client renews it's for an annual term.
Assuming no price increase they would stay flat at the 180 K. So the run rate in revenue sync up on that renewal for the second term.
Gotcha, and then is it possible to compress quantify anything that was like 1% to 2% of your growth in your run rate business is that too much.
Yeah, I don't want to I don't want to give the specifics.
But I would say it was something that and we've mentioned this in the past with us.
Within analytics and we've used it in analytics and park with with some large all comm solutions type deals.
We have used it selectively within ESG as well, but.
But I would just to dimension it a little bit I would say the impact within analytics is not greater generally than the impact of implementations, where we want to start recognizing revenue until the implementation is complete to even though we recognize the sale when the client signs the contract and so that tends to have a bigger impact than these techs.
Are things just to dimension it, but we did want to call it out as something that to increase slightly in 2020.
And and May have an impact going forward.
Great. Thank you.
There are no further questions I will now turn the call over back to Henry Fernandez, Chairman and CEO for closing remarks.
Thank you very much everyone for attending today, we look forward to speaking with you again during our Investor day event on February 24th and.
In the meantime, please stay well on its stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
All right.
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