Q2 2024 Cohen & Steers Inc Earnings Call
Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers Second Quarter 2024 Earnings Conference Call.
Operator: Quarter 2024 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode.
Operator: Afterward, we will conduct a question and answer session. At that time, if you have a question, please press the star followed by the number on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference call is being recorded Thursday, July 18, 2024. I would now like to turn the conference over to Brian Boll, Senior Vice President and Corporate Counsel of Cohen & Steers. Please go ahead.
Speaker Change: During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the star followed by the 1 on your telephone.
If at any time during the conference you need to reach an operator, please press star zero.
Speaker Change: As a reminder, this conference call is being recorded Thursday, July 18, 2024.
Speaker Change: I would now like to turn the conference over to Brian Boll, Senior Vice President and Corporate Counsel of Cohen & Steers. Please go ahead.
Brian William Heller: Thank you and welcome to the Cohen & Steers second quarter 2024 earnings conference call. Joining me are Joe Harvey, our Chief Executive Officer; Matt Stadler, our Executive Vice President, and until late June, Chief Financial Officer; Raja Thakori, our new Chief Financial Officer, and John Cheigh, our Chief Investment Officer.
Brian William Heller: Thank you, and welcome to the Cohen & Steers Second Quarter 2024 Earnings Conference Call.
Speaker Change: Joining me are Joe Harvey, our Chief Executive Officer, Matt Stadler, our Executive Vice President, and until late June , Chief Financial Officer, Raja Thakuri, our new Chief Financial Officer, and John Cheigh, our Chief Investment Officer.
Brian William Heller: I want to remind you that some of our comments and answers to your questions may include forward-looking statements. I believe these statements are reasonable based on the information currently available to us, but actual outcomes could differ materially due to a number of factors. Including those described in our accompanying second quarter earnings release and presentation, our most recent annual report on Form 10-K, and our other SEC filings. We assume no duty to update any forward-looking statements. Furthermore, none of our statements constitute an offer to sell or the solicitation of an offer to buy.
Brian William Heller: I want to remind you that some of our comments and answers to your questions may include forward-looking statements.
Brian William Heller: We believe these statements are reasonable based on information currently available to us, but actual outcomes could differ materially due to a number of factors.
Brian William Heller: including those described in our accompanying second quarter earnings release and presentation.
Brian William Heller: Our most recent annual report on Form 10-K and our other SEC filings.
Brian William Heller: We assume no duty to update any forward-looking statement.
Brian William Heller: Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund or other investment vehicle.
Brian William Heller: The Bulletproof Executive 2013, Our presentation also includes non-GAAP financial measures, which are referred to as adjusted financial measures, we believe are meaningful in evaluating our performance. These non-GAAP financial measures should be read in conjunction with our GAAP results. Reconciliation of these non-GAF financial measures is included in the earnings release and presentation to the extent reasonably available. The earnings release and presentation, as well as links to our SEC filings, are available in the Investor Relations section of our website at www.cohenandsteers.com. With that, I'll turn the call over to Matt.
Brian William Heller: Our presentation also includes non-GAAP financial measures, referred to as as-adjusted financial measures, that we believe are meaningful in evaluating our performance.
Brian William Heller: These non-GAAP financial measures should be read in conjunction with our GAAP results.
Brian William Heller: A reconciliation of these non-GAAP financial measures is included in the earnings release and presentation, to the extent reasonably available.
Brian William Heller: The earnings release and presentation, as well as links to our SEC filings, are available in the Investor Relations section of our website at www.cohenandsteers.com.
Matthew Scott Stadler: Thank you, Brian. Good morning, everyone.
Brian William Heller: With that, I'll turn the call over to Matt.
Matthew Scott Stadler: Thanks for joining us today. Before we begin the call, I'd like to welcome Raja Dacori, our new CFO, who joined us on June 24th. Raja will be reviewing the financial results on our earnings calls going forward. As in previous quarters, my remarks will focus on our as-adjusted results. A reconciliation of GAAP to as-adjusted results can be found on pages 17 and 18 of the earnings release and on slides 16 through 20 of the earnings presentation.
Matt: Thank you, Brian . Good morning, everyone. Thanks for joining today. Before we begin the call, I'd like to welcome Raja Dacori, our new CFO , who joined us on June 24th. Raja will be reviewing the financial results on our earnings calls going forward.
Matt: As in previous quarters, my remarks will focus on our as-adjusted results.
Matt: A reconciliation of GAAP to as-adjusted results can be found on pages 17 and 18 of the earnings release and on slides 16 through 20 of the earnings presentation.
Matthew Scott Stadler: Yesterday, we reported earnings of $0.68 per share compared with $0.70 in the prior year's quarter and $0.70 sequentially. Revenue was $122 million in the quarter, compared with $120.3 million in the prior year's quarter and $122.9 million sequentially. The decrease in revenue from the first quarter was primarily due to lower average assets under management. Our effective fee rate was 58 basis points in the second quarter, consistent with our rate in the first quarter.
Raja Dakori: Yesterday, we reported earnings of $0.68 per share compared with $0.70 in the prior year's quarter and $0.70 sequentially.
Matt: Revenue was $122 million in the quarter, compared with $120.3 million in the prior year's quarter, and $122.9 million sequentially.
Matt: The decrease in revenue from the first quarter was primarily due to lower average assets under management. Our effective fee rate was 58 basis points in the second quarter, consistent with our rate in the first quarter.
Matthew Scott Stadler: Operating income was $42.5 million in the quarter, compared with $43.8 million in the prior year's quarter and $43.7 million sequentially, and our operating margin decreased slightly to 34.9% from 35.5% last quarter. However, total expenses were essentially flat when compared with the first quarter as an increase in G&A was partially offset by a decrease in compensation and benefits. The increase in GNA was primarily due to higher recruitment costs, as well as an increase in professional fees, and the decrease in compensation and benefits was in line with the sequential decline in revenue as the compensation to revenue ratio for the second quarter remained at 40.5%.
Matt: Operating income was $42.5 million in the quarter, compared with $43.8 million in the prior year's quarter and $43.7 million sequentially.
Matt: and our operating margin decreased slightly to 34.9% from 35.5% last quarter.
Matt: Total expenses were essentially flat when compared with the first quarter, as an increase in G&A was partially offset by a decrease in compensation and benefits.
Matt: The increase in G&A was primarily due to higher recruitment costs as well as an increase in professional fees.
Matt: and the decrease in compensation and benefits was in line with the sequential decline in revenue as the compensation to revenue ratio for the second quarter remained at 40.5%.
Matthew Scott Stadler: Our effective hatch rate was 25.4% for the second quarter, consistent with our prior guidance. Page 15 of the earnings presentation sets forth our cash and cash equivalents, corporate investments in U.S. Treasuries, and liquid seed investments for the current and trailing four quarters. Our firm liquidity totaled $325.1 million at quarter end, compared with $233.1 million last quarter. The second quarter amount included net proceeds of $68.5 million from our recently completed registered stock offering, which closed in April, and we have not drawn on our 100 million revolving credit facility. Assets under management were $80.7 billion at June 30th, a decrease of $526 million or about 1% from March 31st. The decrease was due to net outflows of $345 million and distributions of $673 million, partially offset by market appreciation of $492 million.
Matt: Our effective hatch rate was 25.4% for the second quarter, consistent with our prior guidance.
Matt: Page 15 of the earnings presentation sets forth our cash and cash equivalents, corporate investments in U.S. Treasuries, and liquid seed investments for the current and trailing four quarters.
Matt: Our firm liquidity totaled $325.1 million at quarter end, compared with $233.1 million last quarter.
Matt: The second quarter amount included net proceeds of $68.5 million from our recently completed registered stock offering, which closed in April .
Matt: And we have not drawn on our $100 million revolving credit facility.
Matt: Assets under management were $80.7 billion at June 30th, a decrease of $526 million, or about 1% from March 31st.
Matt: The decrease was due to net outflows of $345 million and distributions of $673 million, partially offset by market appreciation of $492 million.
John Y. Cheigh: Joe Harvey will provide an update on our flows and institutional pipeline of awarded unfunded mandates. Meanwhile, let me briefly discuss a few items to consider for the second half of the year with respect to compensation and benefits. We maintain a disciplined and measured approach to both the acquisition of new talent for strategic initiatives and replacement hires so that, all things being equal, we would expect the compensation to revenue ratio to remain at 40.5%.
Joseph Martin Harvey: Joe Harvey will provide an update on our flows and institutional pipeline of awarded unfunded mandates.
Speaker Change: Let me briefly discuss a few items to consider for the second half of the year.
Speaker Change: with respect to compensation and benefits.
Joseph Martin Harvey: We maintain a disciplined and measured approach to both the acquisition of new talent for strategic initiatives and replacement hires so that all things being equal We would expect the compensation to revenue ratio to remain at forty point five percent
John Y. Cheigh: We still expect GNA to increase 5-7% for the year from the 55 million we recorded in 2023. As a reminder, 2023 GNA included an adjustment to reduce accrued costs associated with the implementation of our trade order management. Excluding that adjustment, we would expect GNA to increase 3-5% year over year. The majority of the increase is related to investments in technology, as well as costs associated with the relocation of our London and Tokyo offices. Finally, we expect our effective tax rate to remain at 25.4%. Now I'd like to turn it over to our Chief Investment Officer, John Cheigh, who will discuss our investment performance.
Joseph Martin Harvey: We still expect G&A to increase 5 to 7% for the year from the 55 million we recorded in 2023. As a reminder, 2023 G&A included an adjustment to reduce accrued costs associated with the implementation of our trade order management system.
Joseph Martin Harvey: Excluding that adjustment, we would expect GNA to increase 3-5% year-over-year.
Joseph Martin Harvey: The majority of the increase is related to investments in technology, as well as costs associated with the relocation of our London and Tokyo offices.
Joseph Martin Harvey: And finally, we expect our effective tax rate will remain at 25.4%.
Joseph Martin Harvey: Now I'd like to turn it over to our Chief Investment Officer, John Cheigh, who will discuss our investment performance.
John Y. Cheigh: Thank you, Matt, and good morning. Today, I'd like to first cover our performance scorecard and then discuss the investment environment for the quarter, including recent market shifts which we believe favor our asset class. Last, I'd like to discuss rising global energy demand and how we are taking advantage of this trend within our investment portfolios and how this should drive investor interest in our strategy. Turning to our performance scorecard, for the second quarter, 96% of our total AUM outperformed its benchmark, maintaining our exceptional performance from the previous quarter.
Jon Cheigh: Thank you, Matt, and good morning. Today, I'd like to first cover our performance scorecard and then discuss the investment environment for the quarter, including recent market shifts which we believe favor our asset classes.
Jon Cheigh: Last, I'd like to discuss rising global energy demand, and how we are taking advantage of this trend within our investment portfolios, and how this should drive investor interest into our strategies.
Jon Cheigh: Turning to our performance scorecard, for the second quarter, 96% of our total AUM outperformed its benchmark.
John Y. Cheigh: On a one-year basis, 98% of our AUM outperformed its benchmark, while our 3-, 5-, and 10-year outperformance now stands at 96%, 97%, and 99%, respectively. From a competitive perspective, 94% of our open-end fund AUM is rated 4- or 5-star by Morningstar, which is up modestly from 93% last quarter. Our AUM-weighted alpha over the last year has been 270-plus basis points in Acceleration vs. Our Longer Term Numbers.
Jon Cheigh: maintaining our exceptional performance from the previous quarter.
Jon Cheigh: On a one-year basis, 98% of our AUM outperformed its benchmark, while our 3-, 5-, and 10-year outperformance now stands at 96%, 97%, and 99%, respectively.
Jon Cheigh: From a competitive perspective, 94% of our Open End Fund AUM is rated 4 or 5 star by Morningstar, which is up modestly from 93% last quarter.
Jon Cheigh: Our AUM weighted alpha over the last year has been 270 plus basis points, an acceleration versus our longer term numbers.
John Y. Cheigh: Put simply, our short and long-term performance is compelling, and we keep getting better. Transitioning to investment market conditions, on the one hand, the second quarter was more of the same. Global equity saw a gain of 2.6%, and the market fretted daily over the precise timing and amount of interest rate cuts for 2024 and 2025.
Jon Cheigh: Put simply, our short and long-term performance are compelling and we keep getting better.
Jon Cheigh: Transitioning to investment market conditions. On one hand, the second quarter was more of the same.
Jon Cheigh: Global equity saw a gain of 2.6% and the market fretted daily over the precise timing and amount of interest rate cuts for 2024 and 2025.
John Y. Cheigh: Equity momentum during the quarter remained highly concentrated in select large-cap growth stocks, leaving behind the majority of the market, including value, small, and mid-cap stocks. Our equity-oriented asset classes all continue to lag cap-weighted indices, with U.S. and global REITs and global listed infrastructure all modestly negative for the quarter. Taking a step back, over the last five years, while listed REITs and infrastructure have had periods of outperformance, overall, performance differences versus equities are stark. For example, over the last five years, U.S. REITs have underperformed U.S. equities by 1,160 basis points annualized, and Global Listed Infrastructure has underperformed global equities by 820 basis points annualized.
Jon Cheigh: Equity momentum during the quarter remained highly concentrated in select large-cap growth stocks, leaving behind the majority of the market, including value, small, and mid-cap stocks.
Speaker Change: Our equity-oriented asset classes all continue to lag cap-weighted indices with U.S. and global REITs and global listed infrastructure all modestly negative for the quarter.
Speaker Change: Taking a step back, over the last five years, while listed REITs and infrastructure have had periods of outperformance,
Speaker Change: Overall, performance differences versus equities are stark.
Speaker Change: For example, over the last five years, U.S. REITs have underperformed U.S. equities by 1,160 basis points annualized, and Global Listed Infrastructure has underperformed global equities by 820 basis points annualized.
John Y. Cheigh: The trailing absolute returns of our asset classes have been disappointing, but there are three key factors that make us very positive about the forward prospects for these asset classes in our business. The majority of the underperformance has resulted in the valuation or multiple expansion of equities versus the multiple contraction seen in our asset class. Earnings growth differences have been a small part of the performance difference relative to just changes in valuation. Today, by some measures, equity valuations are somewhere in the bottom quintile or decile versus history, while valuations of our asset classes look historically normal or, in some cases, more attractive relative to history.
Speaker Change: The trailing absolute returns of our asset classes have been disappointing. But there are three key factors that make us very positive about the forward prospects for these asset classes in our business.
Speaker Change: First, the majority of the underperformance has resulted in the valuation or multiple expansion of equities versus the multiple contraction seen in our asset classes.
Speaker Change: Earnings growth differences have been a small part of the performance difference relative to just changes in valuation.
Speaker Change: Today, by some measures, equity valuations are somewhere in the bottom quintile or decile versus history, while valuations of our asset classes look historically normal or in some cases more attractive relative to history.
John Y. Cheigh: While valuation is a wonderful long-term signal, we know that value may not matter in the short run. Fortunately, in our view... The inflation report of last Thursday will likely go down as a so-called all-clear sign that growth in inflation has slowed and that we are entering a rate-cutting cycle. This shift will alter market leadership, and we already see this with our asset classes outperforming. U.S. REITs, as one example, have outperformed the S&P 500 by 680 basis points in the last five trading days.
Speaker Change: Second, while valuation is a wonderful long-term signal, we know that value may not matter in the short run.
Speaker Change: Fortunately, in our view, the inflation report of last Thursday will likely go down as a so-called all-clear sign that growth in inflation has slowed and that we are entering a rate-cutting cycle.
Speaker Change: This shift will alter market leadership and we already see this with our asset classes outperforming. U.S. REITs, as one example, have outperformed the S&P 500 by 680 basis points over the last five trading days.
John Y. Cheigh: While we believe attractive valuations coupled with a market shift are sufficient preconditions for return on performance, in our view, the under-ownership and money sitting on the sidelines represent a significant available opportunity for our asset class. According to one major Southside survey, investors are the most underweight in real estate they have been since January of 2009, which was the middle of the global financial crisis.
Speaker Change: Third, while we believe attractive valuations coupled with a market shift are sufficient preconditions for return on performance, in our view, the under-ownership and money sitting on the sidelines represent a significant available opportunity for our asset classes.
Speaker Change: According to one major Southside survey, investors are the most underweight real estate they have been since January of 2009, which was the middle of the global financial crisis.
John Y. Cheigh: We further believe cuts in Fed funds will drive the trillions of dollars currently in money markets to seek higher returns, given the attractive valuation of our asset class in their lagged trailing performance. We believe our strategies are a natural opportunity for fresh capital. Take Advantage of a Market Rotation Into Relative Value and Yield, not to be ignored. Private real estate, as measured by the preliminary results for the NACREF Odyssey Index, had modest declines for the quarter of negative 0.5%.
Speaker Change: We further believe cuts in Fed funds will drive the trillions of dollars currently in money markets to seek higher returns.
Speaker Change: Given the attractive valuation of our asset classes and their lagged trailing performance, we believe our strategies are a natural opportunity for fresh capital to take advantage of a market rotation into relative value and yield.
Speaker Change: Not to be ignored, private real estate, as measured by the preliminary results for the NACREF Odyssey Index, had modest declines for the quarter of negative 0.5%.
John Y. Cheigh: This is the seventh quarter in a row of declines, which is consistent with the lead-lag relationship with listed real estate, which bottomed in Q3 2023. We continue to believe that other funds and investment teams are focused on playing defense on their last cycle private portfolios and redemption. However, we are focused on taking advantage of repriced real estate and improving debt costs of capital versus 9-12 months ago, creating attractive cash yields to equity investors relative to long-term history.
Speaker Change: This is the seventh quarter in a row of declines, which is consistent with the lead-lag relationship with listed real estate, which bottomed in Q3 2023.
Speaker Change: We continue to believe that other funds and investment teams are focused on playing defense on their last cycle private portfolios and redemptions.
Speaker Change: However, we are focused on taking advantage of repriced real estate and improving debt cost of capital versus 9-12 months ago, creating attractive cash yields to equity investors relative to long-term history.
John Y. Cheigh: The last topic I want to discuss is global power, its impact on energy markets, and how we have been capitalizing on our forward view on this trend. Most of you have likely seen the many recent headlines on this topic.
Speaker Change: and many more.
Speaker Change: The last topic I want to discuss is global power, the impact on energy markets, and how we have been capitalizing on our forward view on this trend.
Speaker Change: Most of you have likely seen the many recent headlines on this topic.
John Y. Cheigh: Put simply, the world needs more energy. However, power demand in the United States has been flat for nearly two decades. That is beginning to change, and energy efficiency can no longer offset rising power needs. Perhaps the most topical driver of higher electricity demand is data centers, with a particular focus on AI, which require substantial computing power, storage capacity, and cooling technology. But it's not just data centers driving higher demand. Onshore outsourcing of energy-intensive activities like precision manufacturing, as well as shifts related to the energy transition, will play a significant role in power demand growth over time, increasing adoption of electric appliances coupled with the growing number of electric vehicles on the road, to further expand electricity needs. The title of our recent whitepaper says it best: this is about changing the narrative from energy transition to energy addition.
Speaker Change: Put simply, the world needs more energy.
Speaker Change: Power demand in the United States has been flat for nearly two decades.
Speaker Change: But that is beginning to change and energy efficiency can no longer offset rising power needs.
Speaker Change: Perhaps the most topical driver of higher electricity demand is data centers, with particular focus on AI, which requires substantial computing power, storage capacity, and cooling technologies.
Speaker Change: But it's not just data centers driving higher demand. Onshoring of energy-intensive activities like precision manufacturing, as well as shifts related to the energy transition, will play a significant role in power demand growth over time.
Speaker Change: Increasing adoption of electric appliances, coupled with the growing number of electric vehicles on the road, will further expand electricity needs.
Speaker Change: The title of our recent white paper says it best. This is about changing the narrative from energy transition to energy addition.
John Y. Cheigh: We see significant investment opportunities for existing and new investors here. First, we launched the Future of Energy Fund in March of this year. The thesis behind this strategy is that there will be a rise in global energy consumption through at least 2040. Last year, we diverged from consensus in proposing that even though the global economy is becoming more energy efficient, these gains will not be enough to offset rising energy demands resulting from global population and economic growth. Rising electricity demands from data centers have only since made this a mainstream conversation.
Speaker Change: We see significant investment opportunities for existing and new investors here.
Speaker Change: First, we launched the Future of Energy Fund in March of this year.
Speaker Change: The thesis behind this strategy is that there will be a rise in global energy consumption through at least 2040.
Speaker Change: Last year we diverged from consensus in proposing that even though the global economy is becoming more energy efficient
Speaker Change: These gains will not be enough to offset rising energy demands resulting from global population and economic growth.
Speaker Change: Rising electricity demands from data centers have only since made this a more mainstream conversation.
John Y. Cheigh: We believe that traditional and alternative energy will both play meaningful roles in responding to the world's power demands. The Future of Energy Fund is well positioned. We believe that parent traditional and alternative energy creates the ability to generate superior investment outcomes in an area requiring active management. Our client facing teams have been excited to deliver this strategy to potential investors, and the feedback has been quite positive in both wealth and institutional markets.
Speaker Change: We believe that traditional and alternative energy will both play meaningful roles in responding to the world's power demands.
Speaker Change: The Future of Energy Fund is well positioned as we believe that parent traditional and alternative energy creates the ability to generate superior investment outcomes in an area requiring active management.
Speaker Change: Our client-facing teams have been excited to deliver this strategy to potential investors and the feedback has been quite positive in both wealth and institutional markets.
Joseph Martin Harvey: The second opportunity we see is that nearly half of our infrastructure portfolios will benefit from or seek incremental investment opportunities from this acceleration in power demand growth. This will include companies that own and operate power generation, that build, operate, and maintain our electric grid, and Midstream Energy, or the pipeline companies that supply power generators. At the same time, the Powered Demand story... is part of a wider backdrop that we think is favorable for listed infrastructures.
Speaker Change: The second opportunity we see is that nearly half of our infrastructure portfolios will benefit or seek incremental investment opportunities from this acceleration in power demand growth.
Speaker Change: This will include companies that own and operate power generation, those that build, operate, and maintain our electric grid, and midstream energy, or the pipeline companies that supply power generators.
Speaker Change: At the same time, the power demand story is part of a wider backdrop that we think is favorable for listed infrastructure.
Joseph Martin Harvey: The need to invest tens of trillions of dollars in the world's infrastructure, where power demand is just one driver, and provide a tailwind for years to come. Meanwhile, listed infrastructure trades at a rare discount to global equities and at a steep markdown to its historical enterprise value. The third area where we see power demand as a tailwind is within natural resource equities, which, as a reminder, focus on three major sectors: agribusiness, metals & mining, and energy.
Speaker Change: The need to invest tens of trillions of dollars in the world's infrastructure, where power demand is just one driver.
Speaker Change: can provide a tailwind for years to come.
Speaker Change: Meanwhile, listed infrastructure trades at a rare discount to global equities and at a steep markdown to its historical enterprise multiple.
Speaker Change: The third area where we see power demand as a tailwind is within natural resource equities, which, as a reminder, focuses on three major sectors.
Speaker Change: agribusiness, metals and mining, and energy.
Joseph Martin Harvey: We believe that the world has under-invested in natural resource discovery over the last ten years and that this will create an era of scarcity over the next decade, with a track record since inception more than 10 years ago of performing by more than 200 bassist points. 400 plus basis points over the last five years. We believe natural resources will be an exciting area for absolute returns and will remain ripe for very active management. With that final comment, let me turn the call over to Joe.
Speaker Change: We believe that the world has under-invested in natural resources discovery over the last 10 years, and that this will create an era of scarcity over the next decade.
Speaker Change: with a track record since inception more than 10 years ago of outperforming by more than 200 basis points
Speaker Change: and 400 plus basis points over the last five years.
Speaker Change: We believe natural resources will be an exciting area for absolute returns and will remain rife for very active management.
Speaker Change: With that final comment, let me turn the call over to Joe. Thank you.
Joseph Martin Harvey: Thank you, John, and good morning. Today I will review our second quarter key business metrics and trends, then discuss our current positioning and growth initiatives for the future. Our asset classes lag the stock market in the second quarter. In terms of flows, some of our clients continue to react to broader challenges they are facing related to funding obligations and portfolio reallocation as the regime change in markets continues to play out. As to factors we can control, such as investment performance, client education on our asset classes, and resource allocation, we are performing well and continuing to innovate and invest for the future. I remain optimistic about our position. For most of the second quarter, the macroeconomic environment was dominated by the higher-for-longer expectation for interest rates. The 10-year treasury yield averaged 4.44%.
Joe: Thank you, John , and good morning. Today I will review our second quarter key business metrics and trends, then discuss our current positioning and growth initiatives for the future.
Joe: Our asset classes lag the stock market in the second quarter.
Speaker Change: In terms of flows, some of our clients continue to react to broader challenges they are facing related to funding obligations and portfolio reallocation as the regime change in markets continues to play out.
Speaker Change: As to factors we can control, such as investment performance, client education on our asset classes, and resource allocation, we are performing well and continue to innovate and invest for the future. I remain optimistic about our positioning.
Joseph Martin Harvey: However, after quarter end, we finally saw inflation continuing to ease, and the focus has now turned back to the potential for rate cuts later this year with yields on the 10-year Treasury declining. If our flow patterns since 2017 are any indication, the onset of the seizing cycle, combined with our strong investment performance, could portend a shift in our flows, that is, from outflows to the longer-term trend of organic growth. This perspective is supported by our flows during this current interest rate cycle.
Speaker Change: For most of the second quarter, the macroeconomic environment was dominated by the higher-for-longer expectation for interest rates.
Speaker Change: The 10-year treasury yield averaged 4.44%.
Speaker Change: However, after quarter end, we finally saw inflation continuing to ease.
Speaker Change: The focus has now turned back to the potential for rate cuts later this year, with yields on the 10-year Treasury declining.
Speaker Change: If our flow patterns since 2017 are any indication.
Speaker Change: The onset of the seizing cycle, combined with our strong investment performance, could portend a shift in our flows, that is, from outflows to the longer-term trend of organic growth.
Speaker Change: This perspective is supported by our flows over this current interest rate cycle.
Joseph Martin Harvey: Until the first Fed rate hike in the second quarter of 2022, which took Fed funds from 25 to 50 basis points, we had experienced 11 straight quarters of net inflows, averaging $2.15 billion per quarter. Since then, as rates increased to 5.5%, we've had nine straight quarters of outflows, averaging $745 million per quarter. If the yield curve normalizes at a higher level... Less Monetary Policy Extremes, it is possible that our flows and the relative attractiveness of our asset classes could be less influenced by rates and more by our performance.
Speaker Change: Up until the first Fed rate hike in the second quarter of 2022, which took Fed funds from 25 to 50 basis points,
Speaker Change: We had experienced 11 straight quarters of net inflows, averaging $2.15 billion per quarter.
Speaker Change: Since then, as rates increased to 5.5%, we've had 9 straight quarters of outflows averaging $745 million per quarter.
Speaker Change: If the yield curve normalizes at a higher level, with less monetary policy extremes, it is possible that our flows and the relative attractiveness of our asset classes could be less influenced by rates and more by our performance.
Joseph Martin Harvey: Our relative investment performance has been strong for a long time and continued in the second quarter. As a result, we have had good success at taking share from our competitors as well as competing for new mandates. Our weighted average excess return over the past year was 273 basis points, compared with 309 basis points last quarter.
Unknown Executive: As a result, we have had good success at taking share from our competitors, as well as competing for new mandates. Our weighted average excess return of the past year was 273 basis points, compared with 309 basis points last quarter. The three-year excess return was 195 basis points, so recent performance has trended higher.
Speaker Change: Our relative investment performance has been strong for a long time and continued in the second quarter.
Speaker Change: As a result, we have had good success at taking share from our competitors as well as competing for new mandates.
Speaker Change: Our weighted average excess return over the past year was 273 basis points, compared with 309 basis points last quarter.
Joseph Martin Harvey: The 3-year excess return was 195 basis points, so recent performance has trended higher. This performance helps us maintain our fee rates, which are overall 58 basis points, compared with 57 basis points the same quarter last year. Over the past several years, many of our traditional asset manager peers have experienced fee rate compression. However, asset owners continue to face challenges balancing portfolios amidst a changing and dynamic market environment. These challenges range from inflationary pressures on funding obligations to building more efficient return risk profiles.
Speaker Change: The three-year excess return was 195 basis points.
Unknown Executive: This performance helps us maintain our fee rates, which overall are 58 basis points, compared with 57 basis points the same quarter last year.
Speaker Change: So, recent performance has trended higher.
Speaker Change: This performance helps us maintain our fee rates, which overall are 58 basis points, compared with 57 basis points the same quarter last year.
Unknown Executive: Over the past several years, many of our traditional asset manager peers have experienced fee rate compression.
Speaker Change: Over the past several years, many of our traditional asset manager peers have experienced fee rate compression.
Unknown Executive: After donors continue to face challenges balancing portfolios amidst a changing and dynamic market environment. These challenges range from inflationary pressures on funding obligations to building more efficient return risk profiles, considering the more attractive menu of fixed income opportunities, and the liquidity constraints from private allocations and associated capital commitments.
Speaker Change: Asset owners continue to face challenges balancing portfolios amidst a changing and dynamic market environment.
Speaker Change: These challenges range from inflationary pressures on funding obligations
Joseph Martin Harvey: Considering the more attractive menu of fixed income opportunities and the liquidity constraints from private allocations and associated capital commitments, looking at firm-wide flows, we had net outflows of $345 million in the second quarter compared with $2 billion in the first quarter.
Speaker Change: to building more efficient return risk profiles.
Speaker Change: Considering the more attractive menu of fixed income opportunities.
Speaker Change: and the liquidity constraints from private allocations and associated capital commitments.
Unknown Executive: Looking at firm wide flows, we had net outflows of 345 million in the second quarter compared with 2 billion in the first quarter. By strategy, preferred securities have outflows of 366 million, and global real estate had outflows of 127 million, which were offset by inflows of 152 million into US real estate. The majority of the outflows were from the sub-advisory and Japan sub-advisory segments.
Joseph Martin Harvey: By strategy, preferred securities had outflows of $366 million, and global real estate had outflows of $127 million, which were offset by inflows of $152 million into U.S. real estate. Institutional advisory had 73 million net inflows, and subadvisory ex-Japan had $134 million in outflows.
Speaker Change: Looking at firm-wide flows, we had net outflows of $345 million in the second quarter compared with $2 billion in the first quarter.
Speaker Change: By strategy, Preferred Securities had outflows of $366 million and Global Real Estate had outflows of $127 million.
Speaker Change: which were offset by inflows of $152 million into U.S. real estate.
Speaker Change: The majority of the outflows were from the sub-advisory and Japan sub-advisory segments.
Unknown Executive: Institutional advisory had 73 million of net inflows. Sub-advisory extra-pan had 134 million in outflows. Both segments were active with fundings and redemptions.
Speaker Change: Institutional advisory had 73 million of net inflows.
Speaker Change: Subadvisory ex-Japan had $134 million in outflows. Both segments were active with fundings and redemptions.
Joseph Martin Harvey: Both segments were active with Fundings in Redemption. Now that the macro regime is normalizing, there have been a lot of adjustments to client portfolios, categorizing our client redemptions and advisory over the past several years. 33% was from rebalancing and raising cash, 35% was from eliminating our strategy from the strategic allocation, 17% was profit-taking, and 15% was to fund a private allocation.
Unknown Executive: Now that the macro regime is normalizing, there have been a lot of adjustments to client portfolios.
Speaker Change: Now that the macro regime is normalizing, there have been a lot of adjustments to client portfolios.
Unknown Executive: Categorizing our client redemptions and advisory the past several years. 33% was from rebalancing and raising cash. 35% was from eliminating our strategy from the strategic allocation. 17% was profit-taking, and 15% was to fund a private allocation.
Speaker Change: Categorizing our client redemptions and advisory the past several years
Speaker Change: 33% was from rebalancing and raising cash, 35% was from eliminating our strategy from the strategic allocation, 17% was profit taking, and 15% was to fund a private allocation.
Joseph Martin Harvey: Many of these portfolio shifts are cyclical or aimed at capturing perceived opportunities that have emerged during the regime change. We still believe that many investor types are under allocated to our asset classes based on the fundamental merits of risk and return. Japan's sub-advisory had outflows of $185 million compared with $312 million of outflows in the first quarter.
Unknown Executive: Many of these portfolio shifts are cyclical or aimed at capturing perceived opportunities that have emerged during the regime change.
Speaker Change: Many of these portfolio shifts are cyclical or aimed at capturing perceived opportunities that have emerged during the regime change.
Unknown Executive: We still believe that many investor types are underallocated to our asset classes based on the fundamental merits of risk and return.
Speaker Change: We still believe that many investor types are under allocated to our asset classes based on the fundamental merits of risk and return.
Unknown Executive: Japan sub-advisory had outflows of 185 million, compared with 312 million of outflows in the first quarter.
Speaker Change: Japan's sub-advisory had outflows of $185 million compared with $312 million of outflows in the first quarter.
Joseph Martin Harvey: Last quarter, I characterized the environment in Japan as an investing renaissance. Yet, so far, equities have dominated the flows versus interest rate-sensitive asset classes, while Japanese investors are also showing awareness about the strength of the U.S. dollar and an aversion to yield-oriented funds. Reforms to the country's retirement program, called NESA, are resulting in modest but steady inflows, yet passive strategies have seen greater inflows than active strategies to date. For example, our one unfunded pipeline was $1 billion compared with $1 billion last quarter and a three-year average of $1.17 billion.
Unknown Executive: Last quarter, I characterized the environment in Japan as an investing renaissance. Yet so far, equities have dominated the flows versus interest rate-sensitive asset classes. While Japanese investors are also showing awareness about the strength of the US dollar and in a version to yield-oriented funds. Reforms to the country's retirement program called Nisa are resulting in modest but steady inflows. Yet passive has seen greater inflows than active strategies today.
Speaker Change: Last quarter, I characterized the environment in Japan as an investing renaissance.
Speaker Change: Yet, so far, equities have dominated the flows.
Speaker Change: versus interest rate sensitive asset classes while Japanese investors are also showing awareness about the strength of the US dollar and an aversion to yield oriented funds.
Speaker Change: Reforms to the country's retirement program, called NESA, are resulting in modest but steady inflows, yet passive has seen greater inflows than active strategies to date.
Unknown Executive: Our one unfunded pipeline was $1 billion, compared with $1 billion last quarter and the three-year average of $1.17 billion, tracking the change from last quarter: $181 million funded from five accounts, and there were newly awarded mandates from six clients totaling $300 million.
Speaker Change: Our one unfunded pipeline was $1 billion, compared with $1 billion last quarter and a three-year average of $1.17 billion.
Joseph Martin Harvey: Tracking the change from last quarter, $181 million was funded from 5 accounts, and there were newly awarded mandates from 6 clients totaling $300 million. The majority of the pipeline is in global and U.S. real estate. Offsetting the pipeline will be $558 million of expected redemption, mostly in global real estate strategies across three accounts, two of which are eliminations from the client's strategic allocation, and one of which is with an OCIO provider who lost a client relationship.
Speaker Change: Tracking the change from last quarter, $181 million funded from 5 accounts and there were newly awarded mandates from 6 clients totaling $300 million.
Unknown Executive: The majority of the pipeline is in Global and US real estate.
Unknown Executive: Offsetting the pipeline will be $558 million of expected redemptions, mostly in global real estate strategies across three accounts, two of which are eliminations from the client's strategic allocation, and one of which is with an OCIO provider who lost a client relationship.
Speaker Change: The majority of the pipeline is in global and U.S. real estate.
Speaker Change: Offsetting the pipeline will be $558 million of expected redemptions.
Speaker Change: mostly in global real estate strategies across three accounts, two of which are eliminations from the client's strategic allocation and one of which is with an OCIO provider who lost a client relationship.
Joseph Martin Harvey: I thought it would be helpful to share a recent new real estate mandate we've been funding for an Asian institution. The plan is $200 billion in size, and they have $10 billion allocated to real estate. Of that, we have allocated $300 million to REITs, which represents just 15 basis points of their overall plan.
Unknown Executive: I thought it would be helpful to share a recent new real estate mandate we've been funding for an Asian institution. The plan is $200 billion in size, and they have $10 billion allocated to real estate. Of that, they have allocated $300 million to reach, which represents just 15 basis points of their overall plan.
Speaker Change: I thought it would be helpful to share a recent new real estate mandate we've been funding for an Asian institution.
Speaker Change: The plan is $200 billion in size, and they have $10 billion allocated to real estate.
Speaker Change: Of that, we have allocated $300 million to REITs, which represents just 15 basis points of their overall plan.
Unknown Executive: We believe that this is representative of many investors' under allocations to listed rates and the growth potential for this asset class. We believe we are well positioned to capitalize on the opportunity and are listed real asset classes while we continue to invest in new opportunities and innovate for the future.
Joseph Martin Harvey: We believe that this is representative of many investors' under-allocations to listed REITs and the growth potential for this asset class. We believe we are well-positioned to capitalize on the opportunity in our listed real asset classes, while we continue to invest in new opportunities and innovate for the future. While macro headwinds have been difficult since mid-2022, when the Fed began normalizing interest rates, we believe we are close to a turn toward easing. In fact, markets are pricing in six rate cuts starting this fall and into next year.
Speaker Change: We believe that this is representative of many investors' under-allocations to listed REITs and the growth potential for this asset class.
Speaker Change: We believe we are well positioned to capitalize on the opportunity in our listed real asset classes, while we continue to invest in new opportunities and innovate for the future.
Unknown Executive: While the macro headlines have been difficult since mid-22, when the Fed began normalizing interest rates, we believe we are close to turn or easing. In fact, markets are pricing in six rate cuts starting this fall and into next year. Our number one priority is to continue our excellent investment performance and advise clients how to allocate to our asset classes over the next phase of this cycle. Our core strategies, READS, and preferred should be aided by the rate cycle.
Speaker Change: While the macro headwinds have been difficult since mid-2022, when the Fed began normalizing interest rates, we believe we are close to a turn toward easing. In fact, markets are pricing in six rate cuts starting this fall and into next year.
Joseph Martin Harvey: Our number one priority is to continue our excellent investment performance and advise clients how to allocate to our asset classes over the next phase of this cycle. Our core strategies, REITs, and PREFEREDs, should be aided by the rate cycle. Also, our multi-strategy real assets portfolio, in my view, is very under-allocated as investors are underweight in inflation-sensitive instruments in a world where inflation will be more persistent.
Speaker Change: Our number one priority is to continue our excellent investment performance and advise clients how to allocate to our asset classes over the next phase of this cycle.
Speaker Change: Our core strategies, REITs and PREFEREDs, should be aided by the rate cycle.
Unknown Executive: Also, our multi-strategy relasses portfolio, and my view, is very under-allocated to, as investors are underweight and flesh inflation-sensitive instruments in a world where inflation will be more persistent. As John discussed, listed infrastructure should get more attention as a lower-bader real asset, with secular themes due to underinvestment and plays on artificial intelligence through power and data centers. We have also planned for greater adoption of listed real estate and infrastructure allocations in Asia.
Speaker Change: Also, our multi-strategy real assets portfolio, in my view, is very under-allocated to as investors are underweight, inflation-sensitive instruments in a world where inflation will be more persistent.
Joseph Martin Harvey: As Jon discussed, listed infrastructure should get more attention as a lower beta real asset with secular themes due to underinvestment and plays on artificial intelligence through power and data centers. We have also planned for greater adoption of listed real estate and infrastructure allocations in Asia. Other growth initiatives include the Future of Energy Open End Fund, scaling our offshore CCAP funds now that we've hit $1 billion in size, launching active ETFs, and capitalizing on the Japan Renaissance considering our 20-year presence in that market. Our non-traded REIT, CNS REIT, is gaining momentum.
Speaker Change: As John discussed, listed infrastructure should get more attention as a lower beta real asset with secular themes due to underinvestment and plays on artificial intelligence through power and data centers.
Speaker Change: We have also planned for greater adoption of listed real estate and infrastructure allocations in Asia.
Unknown Executive: Other growth initiatives include the Future of Energy Open and Fund, scaling our offshore sea cap funds now that we've hit 1 billion in size, launching active ETFs, and capitalizing on the Japan Renaissance, considering our 20-year presence in that market.
Speaker Change: Other growth initiatives include the Future of Energy Open End Fund,
Speaker Change: Scaling our offshore CCAP funds now that we've hit $1 billion in size.
Speaker Change: launching active ETFs and capitalizing on the Japan Renaissance considering our 20-year presence in that market.
Unknown Executive: Our non-treated READS, CNS READ, is gaining momentum. Recall that we have seed capital to deploy, and CNS READ made its first real property acquisition this past January. We have been opportunistic, waiting for prices to adjust downward to reflect the change in the cost of capital. We have several other properties under contract and have gained momentum assembling the portfolio.
Speaker Change: Our non-traded REIT, CNS REIT, is gaining momentum.
Joseph Martin Harvey: Recall that we have seed capital to deploy, and CNS ReitReit made its first real property acquisition this past January. We have been opportunistic, waiting for prices to adjust downward to reflect the change in the cost of capital. We have several other properties under contract and have gained momentum assembling the portfolio. As a vehicle with fresh capital to invest, CNS REIT is not contending with performance headwinds tied to NAV market downs of legacy real estate assets.
Speaker Change: Recall that we have seed capital to deploy, and CNS ReitReit made its first real property acquisition this past January .
Speaker Change: We have been opportunistic, waiting for prices to adjust downward to reflect the change in the cost of capital.
Speaker Change: We have several other properties under contract and have gained momentum assembling the portfolio.
Speaker Change: As a vehicle with fresh capital to invest, CNS REIT is not contending with performance headwinds tied to NAV market downs of legacy real estate assets.
Joseph Martin Harvey: While it has been a relatively short time period, our initial performance has been positive, driven primarily by two factors. First, is our focus on open-air shopping centers. Second, is our focus on using listed REITs as an alpha driver to complement the private portfolio. As John discussed earlier, our listed real estate performance has been outstanding this year, further contributing to CNS REIT's momentum. Other milestones include going live on the Schwab Alternative Investment Platform, which is the most-used platform for Registered Investment Advisors, who are our initial target allocators for CNS REITs.
Speaker Change: While it has been a relatively short time period, our initial performance has been positive, driven primarily by two factors.
Speaker Change: First is our focus on open-air shopping centers which have very strong fundamentals and are mispriced in our view.
Speaker Change: Second is our focus on using listed REITs as an alpha driver
Speaker Change: As John discussed earlier, our listed real estate performance has been outstanding this year.
Speaker Change: further contributing to CNS REIT's momentum.
John: Other milestones include going live on the Schwab Alternative Investment Platform, which is the most used platform for registered investment advisors who are our initial target allocators for CNS REIT.
Joseph Martin Harvey: As Matt mentioned, Cohen & Steers raised $68.5 million in a registered offering that was conducted in conjunction with our company being added to the S&P 600 Small Cap Index. This new capital has made our balance sheet even stronger. We would envision using a portion of the capital to seed new investment vehicles, potentially active ETFs. Meanwhile, with attractive yields on short-term treasuries, we are able to invest this additional capital on a neutral basis to current earnings.
Matt: As Matt mentioned, Cohen & Steers raised $68.5 million in a registered offering that was conducted in conjunction with our company being added to the S&P 600 Small Cap Index.
Speaker Change: This new capital has made our balance sheet even stronger. We would envision using a portion of the capital to seed new investment vehicles, potentially active ETFs.
Speaker Change: Meantime, with attractive yields on short-term treasuries, we are able to invest this additional capital on a neutral basis to current earnings.
Joseph Martin Harvey: We had two key leadership additions in the quarter. First, Raja Thakuri as CFO, succeeding Matt Stadler, who is retiring. Raja was a named executive officer and chief risk officer at Valley National Bank, where he joined through Valley's acquisition of Bank Lumi, where he was CFO.
Speaker Change: We had two key leadership additions in the quarter. First is Raja Thakuri as CFO , succeeding Matt Stadler, who is retiring.
Speaker Change: Raja was a named Executive Officer and Chief Risk Officer at Valley National Bank, where he joined through Valley's acquisition of BankWUMI, where Raja was CFO .
Joseph Martin Harvey: He is tasked with taking a strong finance department and lifting it to the next level, further integrating with the heads of our teams to strategically measure and manage the business. Second, Dan Noonan joined as Head of Wealth Distribution. Dan was head of Enterprise Wealth and the Private Capital Group at Nuveen, and before that, he was with PIMCO. Dan, in addition to running our core wealth business in the U.S., will be focusing on shifting and adding resources, contributing or distributing our non-traded REITs and launching active ETFs.
Speaker Change: He is tasked with taking a strong finance department and lifting it to the next level, further integrating with the heads of our teams to strategically measure and manage the business.
Speaker Change: Second, Dan Noonan joined as Head of Wealth Distribution.
Dan Noonan: Dan had been head of Enterprise Wealth and the Private Capital Group at Nuveen, and before that he was with PIMCO.
Dan Noonan: Dan, in addition to running our core wealth business in the U.S., will be focusing on shifting and adding resource.
Dan Noonan: resources to the registered investment advisor market and multifamily office segments.
Dan Noonan: contributing or distributing our non-traded REITs and launching active ETFs.
Joseph Martin Harvey: With the transition to Raja as CFO nearly complete, we are turning to celebrating Matt Stadler's retirement and contributions to Cohen & Steers. This was Matt's 77th and final earnings call. For over 19 years, Matt made contributions to numerous companies to count as CFO and as an Executive Committee member. His greatest leadership was felt in running a tight financial ship. Focusing on critical business factors, asking the hard but necessary questions, and believing passionately in our business.
Speaker Change: With the transition to Raja as CFO nearly complete,
Speaker Change: We are turning to celebrating Matt Stadler's retirement and contributions to Cohen & Steers. This was Matt's 77th and final earnings call.
Speaker Change: For over 19 years, Matt made contributions to numerous to count as CFO and as an Executive Committee member.
Speaker Change: His greatest leadership was felt in running a tight financial ship.
Speaker Change: focusing on critical business factors, asking the hard but necessary questions, and believing passionately in a business. Please join me in saying farewell to Matt. I know he'll be cheering for us. Thank you, Matt. We wish you well in retirement.
Joseph Martin Harvey: Please join me in saying farewell to Matt. I know he'll be cheering for us. Thank you, Matt. We wish you well in retirement. At this point, I'll turn the call back to the operator, Julianne, to facilitate Q&A.
Speaker Change: At this point, I'll turn the call back to the operator, Julianne, to facilitate Q&A.
Julianne: Thank you. As a reminder to ask a question, please press star followed by the number one on your telephone keypad.
Operator: Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from John Dunn from Evercore ISI. Please go ahead; your line is open.
Julianne: Our first question comes from John Dunn from Evercore ISI. Please go ahead, your line is open.
Douglas Goldstein: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show. He is a licensed financial professional in both the U.S. and Israel. Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts held by National Financial Services, LLC. Member NYSE//SIPC, a Fidelity Investments company. His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered at www.profile-financial.com.
John Joseph Dunn: Hi, and congratulations Matt.
John Joseph Dunn: Maybe just a little more on the Wealth Management Channel for U.S. Reads and Preferreds. I'm starting to see those conversations shift.
Speaker Change: And then also the 15% of redemptions from private markets, thanks for delineating that. Can you update us on the push and pull of demand for public versus private in the Wealth Management Channel?
Matthew Scott Stadler: Sure, let me start, and maybe John can add some things here. Just in terms of the wealth flows this year, if you recall in the first quarter when there was anticipation about rate cuts, we had some very strong months early in the quarter, and that included both inflows into REITs as well as preferreds. In the second quarter, as expectations got pushed out, we saw some redemptions and preferreds. However, we've continued to see inflows into our open-end refunds.
Speaker Change: Let me start and maybe John can add some things here. Just in terms of the wealth flows this year, if you recall in the first quarter when there was anticipation about rate cuts,
John Joseph Dunn: Some very strong months early in the quarter, and that included both inflows into REITs as well as preferreds.
John Joseph Dunn: in the second quarter as...
John Joseph Dunn: The expectations got pushed out. We then saw some redemptions and preferreds.
Speaker Change: However, we've continued to see inflows into our open-end refunds. Now, most of the flows have come from what we call our institutional version of our core real estate strategy.
Matthew Scott Stadler: Now, most of the flows have come from what we call our institutional version of our core real estate strategy, and so driving those flows have been some important large RIAs in the process of restarting to signal a new return cycle. So, you know, I would expect that, again, to the extent that you can have an expectation for flows, they are impossible to predict.
Speaker Change: And so, driving those flows have been some important large RIAs, which is a market that we've been targeting, and they've been averaging in to this.
Speaker Change: process of restarting to signal a new return cycle. So, you know, I would expect that, again, to the extent that you can have an expectation for flows, they are
Matthew Scott Stadler: But if you go back to my comments about, you know, what we've seen over the long term, if we're entering an easing cycle, you know, I think that's positive for both of those strategies in the wealth channel. As it relates to our institutional advisory clients... redeeming to fund private investments. Taking a step back, the bigger picture is private allocations have been going up in portfolios for some time, and that's been turbocharged recently with the love fest with private credit.
Speaker Change: Impossible to predict, but if you go back to my comments about what we've seen over the long term, if we're entering an easing cycle, I think that's positive for both of those strategies in the wealth channel.
Speaker Change: As it relates to our institutional advisory clients,
Speaker Change: you know, redeeming to fund private investments.
Speaker Change: Taking a step back, the bigger picture is private allocations have been going up in portfolios for some time, and that's been turbocharged recently with the love fest with private credit.
Matthew Scott Stadler: These asset owners navigate the regime change. They've made commitments to private investments. And so it's the money's got to come from somewhere and it they can't get it from private because Realizations aren't happening Fixed income is is gaining more share in portfolios. So it's got to come from listed allocation and that's been equities and in some cases are listed asset classes as it relates to the real estate return cycle, we think that You know the price correction that we've been Looking for in the private markets is about two-thirds of the way complete And but it's it's highly variable depending on the property sector as I mentioned We've been putting some money to work in the shopping center sector, which hadn't had the cyclical, Top off that other sectors like apartments or industrial had as interest rates went to new lows and cap rates went to new lows, but we've started to put money to work and, We feel that with the signaling that's happened from the REIT market, that's a good indicator of the spottuming process, and if, as both John and I talked about... We're into a rate-cutting cycle that will start to help on the cost of capital for real estate, but there still needs to be adjustments in seller expectations and the marks that they have in their portfolio.
Speaker Change: As these asset owners navigate the regime change, they've made commitments to private investments and
Speaker Change: So the money's got to come from somewhere.
Speaker Change: Realizations aren't happening. Fixed income is gaining more share in portfolios. So it's got to come from listed allocation and that's been equities and in some cases are listed asset classes.
Speaker Change: As it relates to the real estate return cycle, we think that
Speaker Change: The price correction that we've been looking for in the private markets is about two-thirds of the way complete.
Speaker Change: But it's it's highly variable depending on the property sector as I mentioned We've been putting some money to work in the shopping center sector, which hadn't had the cyclical
Speaker Change: Top off that other sectors like apartments or industrial had as interest rates went to new lows and cap rates went to new lows. But we've started to put money to work and
Speaker Change: We feel that with the signaling that's happened from the REIT market, that's a good indicator of the spottuming process, and if, as both John and I talked about...
Speaker Change: We're into a rate-cutting cycle that will start to help on the cost of capital for real estate, but there still needs to be adjustments in seller expectations and the marks that they have in their portfolios.
Joseph Martin Harvey: Got it. And then on Japan, could you talk about how NISA actually could end up being a significant tailwind down the road, and then maybe a little more on this idea of Japan going into a renaissance and how you plan to take advantage of that across maybe multiple channels, distribution channels. Well, uh...
Speaker Change: Got it. And then, on Japan, can you talk about how NISA actually could be...
Speaker Change: end up being sort of a tailwind down the road, and then maybe a little more on this idea of Japan.
Speaker Change: going into a renaissance and how you plan to take advantage of that across maybe multiple distribution channels.
Joseph Martin Harvey: Well, the renaissance stems from the very positive, you know, investing-related trends that have been happening in Japan, including Reflation Starting in Japan and Getting out of a Deflationary Environment Improved Corporate Governance Warren Buffett Blessing the Market and Global Allocators, Wanting to find a different home rather than China, and so money has been going into Japan. As I mentioned, so far, it's been going into equities, which is not inconsistent with what we've seen here with the leadership of some of the growth-related technology companies.
Speaker Change: Well, the Renaissance stems from the very positive...
Speaker Change: Investing related trends that have been happening in Japan, including
Speaker Change: Reflation starting in Japan and getting out of a deflationary environment, improved corporate governance, Warren Buffett blessing the market, and global allocators.
Speaker Change: Wanting to find a different home rather than China, and so money has been going into Japan.
Speaker Change: As I mentioned, so far, it's been going into equities, which is not inconsistent with what we've seen here with the leadership of some of the growth-related technology companies. But I think, more importantly, if it...
Joseph Martin Harvey: But I think, more importantly, if this – and the regulators have been putting a focus on the investing markets and trying to improve the quality of the investment vehicles that are there and educating investors – so if that as a whole is favorable for investing, we think we'll get our share of portfolio allocation. Our partners, DIWA, are optimistic about this. They want to market our strategies more, and we've committed to giving them more sales resources.
Speaker Change: And the regulators have been putting a focus on...
Speaker Change: The investing markets and trying to improve the quality of
Speaker Change: The investment vehicles that are there and educating investors, so if that as a whole is favorable for investing, we think we'll get our share of portfolio allocations.
DIWA: You know, our partners, DIWA, are optimistic about this.
Speaker Change: They wanted to market our strategies more and we've committed to giving them more sales resources. So it's early days, but we're, I think a transition in this renaissance context, we'll take some time and we're.
Joseph Martin Harvey: So, it's early days, but we're, you know, I think a transition in this renaissance context will take some time, and we've been there for 20 years, and we think we should get our fair share of that activity.
Speaker Change: We've been there for 20 years and we think we should get our fair share of that activity.
Operator: As a reminder, to ask a question, please press star followed by 1. Our next question comes from Adam Beatty from UBS. Please go ahead, your line is open.
Speaker Change: Thank you.
Speaker Change: and many others.
Speaker Change: As a reminder, to ask a question, please press star followed by one. Our next question comes from Adam Beatty from UBS. Please go ahead, your line is open.
Adam Quincy Beatty: All right, good morning, and congratulations to Matt. Perhaps I'd like to kick it off with a question about the sources and uses of capital. You did have the recent offering. Joe mentioned maybe seeding some funds. So, just wondering, you know, how else you might deploy that capital and maybe whether or not M&A might be on the table, just given some of the valuations around. Also, you know, your stock has done very well. So I was wondering, you know, how you might think about maybe issuing some more shares, you know, to take advantage of that, and then having maybe some dry powder, you know, for future initiatives. Thank you.
Adam Quincy Beatty: Hi, good morning and congrats to Matt. Fittingly, perhaps I'd like to kick it off with a question about sources and uses of capital. You did have the recent offering. Joe mentioned maybe seeding some funds. So just wondering, you know, how else you might deploy that capital and maybe whether or not M&A might be on the table, just given some of the valuations around. Also, you know, your stock has done very well. So I was wondering, you know, how you might think about maybe issuing some more shares, you know, to take advantage of that and then having maybe some dry powder, you know, for future initiatives. Thank you.
Joseph Martin Harvey: Yeah, let me let me start and maybe Matt can add. So yeah, our stock has done very well and that can be linked to this inflection point on interest rates and a shift, as John talked about, in market leadership toward small cap and value. And so we've Seeing a nice rally in the stock. As it relates to raising capital, our balance sheet is very strong. We've got plenty of capital. What we did earlier in the year was opportunistic, and with the context being.
Speaker Change: Yeah, let me let me start and maybe Matt can add
Speaker Change: So, yeah, our stock has done very well and that can be linked to this inflection point on interest rates and a shift, as John talked about, in market leadership toward small cap and value.
Speaker Change: We've seen a nice rally in the stock. As it relates to raising capital, our balance sheet is very strong. We've got plenty of capital. What we did earlier in the year was opportunistic, and with the context being...
Joseph Martin Harvey: You know, our business has become a little bit more capital-intensive with the private real estate business, which requires more co-investment than a listed security vehicle would require and those commitments include 125 million for our non-traded REITs and 50 million for our opportunistic, you know traditional private equity vehicle So so with that as a context and then thinking about launching active ETFs in light of the markets bouncing around we just thought it would be a good insurance policy to Be opportunistic and take advantage of the inclusion trade which where the stock went up 10% overnight, and show up the balance sheet. And right now, it's as strong as it's ever been.
John Joseph Dunn: You know our business has become a little bit more capital intensive with the private real estate business which requires
John Joseph Dunn: More co-investment than a listed security vehicle would require.
John Joseph Dunn: And those commitments include $125 million for our non-traded REITs and $50 million for our opportunistic...
John Joseph Dunn: Traditional private equity vehicle.
John Joseph Dunn: So with that as a context, and then thinking about launching active ETFs.
John Joseph Dunn: In light of
Speaker Change: The market's bouncing around. We just thought it would be a good insurance policy to be opportunistic and take advantage of the inclusion trade, where the stock went up 10%.
Speaker Change: overnight.
Speaker Change: and show up the balance sheet and right now.
Joseph Martin Harvey: But as it relates to, you know, uses of capital, they're going to be primarily organic. And, you know, at this time, we don't have any acquisitions in mind. As you know, we've been more of an organic growth-oriented firm. And right now, we have plenty of that opportunity with our private real estate business and with active ETFs.
Speaker Change: It's as strong as it's ever been, but as it relates to uses of capital, they're going to be primarily organic, and at this time...
Speaker Change: We don't have any acquisitions in mind as you know. We've been more of an organic growth oriented firm and right now we have plenty of that opportunity with our private real estate business and with active ETFs.
Adam Quincy Beatty: Got it. Thank you.
John Y. Cheigh: Yeah. And point taken on the private co-invest. Just shifting over a little bit to maybe real estate subsectors. John talked a lot about energy, obviously. And then Joe mentioned open-air shopping centers and data centers as well. And I was wondering whether there was any concern about, you know, in the context of a potential regime change here, any concern about growth areas like data centers, you know, maybe being a little bit less robust. And then, broadly, you know how you're thinking about allocating to different real estate subsectors. Thanks.
Speaker Change: Got it. Thank you. Yeah. And point taken on the private co-invest. Just shifting over a little bit to maybe real estate subsectors. John talked a lot about energy, obviously. And then Joe mentioned open-air shopping centers and data centers as well. And just wondering about, you know, in the context of a potential regime change here, any concern about, you know, growth areas like data centers, you know, maybe being a little bit less
Speaker Change: robust, and then broadly, you know, how you're thinking about allocating to different real estate subsectors. Thanks.
John Y. Cheigh: Uh, sure, um... I mean obviously there's been big performance dispersions in the listed market over the last 12 months for a lot of different reasons, I think, to your point. You know, really, they're just going to be the fundamental drivers in the data center business, which has driven wholesale rents up meaningfully, and it's going to continue to drive wholesale rents up meaningfully over the next few years, mainly because there's a lot of demand and there's an absence of supply because, frankly, there's just difficulty in sourcing power, which is the necessary ingredient, of course, for data centers.
Speaker Change: Sure.
Speaker Change: Ameen.
Ameen: I mean obviously there's been big performance dispersions in the listed market over the last 12 months for a lot of different reasons. I think to your point
Speaker Change: You know really it's just going to be the fundamental drivers in the data center business, which has driven wholesale rents up meaningfully It's going to continue to drive wholesale runs up meaningfully over the next few years
Speaker Change: Mainly because there's a lot of demand and there's an absence of supply because
Speaker Change: Frankly, there's just difficulty in sourcing power, which is the necessary ingredient, of course, for data centers. So, I'm not sure there's going to be a big shift as it relates to some of the fundamental trends that we're seeing.
John Y. Cheigh: I'm not sure there's going to be a big shift as it relates to some of the fundamental trends that we're seeing. But, of course, there's going to be differences as it relates to the listed market in terms of sector dispersion and things like that. So, you know, we've moved our portfolios over time to capitalize on big dispersions and returns, for example, between the tower sector, which was, A Darling, if you will, for many years, but, frankly, it's been a big laggard over the last few years.
Speaker Change: But, of course, there's going to be differences as it relates to the listed market in terms of sector dispersion and things like that. So, you know, we've moved our portfolios over time.
Speaker Change: to capitalize on big dispersions and returns, for example, between the tower sector, which was
Speaker Change: a darling if you will for many years but frankly it's been a big laggard over the last few years so you know Tara Reitz for us we see as a very big opportunity
John Y. Cheigh: So, you know, Tower Reads, for us, is a very big opportunity, and data centers also continue to be a very big opportunity. So, you know, I think there's certainly shifts like that, but, you know, most of the dynamic changes that I was referring to more relate to some of the multiple compression and expansion that's happened within the different parts of the market. You know, large cap has beaten small, really across all GIF categories.
Speaker Change: and data centers also continue to be a very big opportunity. So, you know, I think there's certainly shifts like that, but, you know, most of the...
Speaker Change: Some of the multiple compression and expansion that's happened within the different parts of the market
Speaker Change: You know, large cap has beaten small, really, across all GICS categories.
John Y. Cheigh: And the REIT market, when you look at it, has basically had very comparable earnings growth. It's lagged a little bit versus the S&P over the last five years. That's been surprising to people because I think the... USA Today view is real estate's bad, it must be an earnings story, but that's fundamentally not true. And so a lot of our conversations have been about office as a very small part of our portfolios, in areas like data centers, healthcare, and towers, which are much bigger parts of the REIT market, much bigger parts of really what's driving earnings growth.
Speaker Change: And the REIT market, when you look at it, has basically had very comparable earnings growth.
Speaker Change: It's lagged a little bit versus the S&P over the last five years.
Speaker Change: That's been surprising to people because I think the...
Speaker Change: USA Today view is real estate is bad, it must be an earning story.
Speaker Change: But that's fundamentally not true, and so a lot of our conversations have been about office as a very small part of our portfolios in areas like data centers, healthcare, and towers.
Speaker Change: are much bigger parts of the REIT market, much bigger parts of really what's driving earnings growth, and as you'd expect, there's a lot of tailwind still in those areas.
Adam Quincy Beatty: That's great. I appreciate the detail. That's all I have for today. Thank you.
Speaker Change: That's great. I appreciate the detail. That's all I had today. Thank you.
Operator: Our next question comes from Mack Sykes from Gabelli. Please go ahead; your line is open.
Speaker Change: Our next question comes from Mack Sykes from Gabelli. Please go ahead, your line is open.
Mack Sykes: I just want to reiterate, you know, thank you to Matt and the team there. I mean, it's been a great support to me and to Industry Insight, and I would note that it's been many years. Thank you, Matt, and best wishes.
Mack Sykes: I just want to reiterate, you know, thank you to Matt and the team there. I mean it's been a great support to me and as well as Industry Insight and I would note that's been many years over the
Joseph Martin Harvey: I had two questions, so I'll just ask them together. On the active ETFs, are there any specific product areas that you're targeting, REITs vs. Preferreds, etc.? And then on the closed-end fund side, I know you're a pretty big provider there, and we have this Pershing IPO coming up. I was wondering if that catalyst there is changing your opinion on opportunities.
Mack Sykes: course of my coverage of the firm. So, thank you, Matt, and best wishes.
Speaker Change: I had two questions, I'll just ask them together. On the active ETFs, are there any specific product areas that you're targeting?
Speaker Change: REITs versus Preferreds etc. And then on the closed-end fund side I know you're a pretty big provider there and we have this purging IPO coming up. I was wondering if that Catalyst there is changing your opinion on opportunities in closed-end funds. Thank you
Joseph Martin Harvey: Sure, as we launch active ETFs, it will happen in several phases, and the product positioning Our question is a really complicated one in light of all the incumbent relationships that we and all of our peers have, but we will lead with our strength with core strategies and include REITs and PREFEREDs and one other area that John talked about today, which we just feel very, very strongly about investment-wise. So that's how we'll start, you know; we'll, we'll, we'll start.
Speaker Change: Thank you.
Speaker Change: Sure, as we launch active ETFs it will happen in several phases and the product positioning
Speaker Change: You know, question is a really...
Speaker Change: area that John talked about today, which we just feel very strongly about investment-wise. So that's how we'll start. You know, we'll start.
Joseph Martin Harvey: Not slow, but medium, and then as the market evolves, and it's evolving rapidly, we'll see how the different technologies evolve. You know that many firms have filed lawsuits with the SEC to try to get ETF share classes of open-end funds. So this is going to play out over a long period of time, but we will lead with our strength.
Speaker Change: Not slow, but medium. And then as the market evolves, and it's evolving rapidly, we'll...
Speaker Change: Hopefully, we'll see how
Speaker Change: The different technology evolves. You know that many firms have filed a lawsuit with the FCC to try to get ETF share classes of open-end funds.
Speaker Change: So this is going to play out over a long period of time, but we will lead with our strength.
Joseph Martin Harvey: As it relates to closed-end funds, there hasn't been a traditional closed-end fund in a while, and the reason is that interest rates have been so high. One feature of the majority of new-issue closed-end funds is to have a leverage component, and with the cost of debt right now, it's hard to create a positive spread on your portfolio relative to the cost of your borrowing. So that is still a pretty big headwind.
Speaker Change: as it relates to closed-end funds.
Speaker Change: There hasn't been a traditional closed-end fund in a while, and the reason is interest rates have been so high.
Speaker Change: One feature of
Speaker Change: The majority of new issue closed end funds is to have a leverage component to it and with the cost of debt right now, it's hard to create a positive spread.
Speaker Change: on your portfolio relative to the cost of your borrowing. So that is still a pretty big headwind.
Joseph Martin Harvey: What Bill Ackman and Pershing are trying to do is very different. They're very different, and it's very different than the traditional closed-end fund market, but it's going to work, too. His market position and investing style, which isn't an income-oriented investment strategy that you'll typically find in closed-end funds, and that has been a different differentiating factor as it relates to how closed-end funds trade in the aftermarket. So, we would love for that market to open up, but I don't see it happening until we get some more, you know, relief on the interest rate front.
Bill Ackman: What Bill Ackman and Pershing are trying to do is very different. They're very different. And it's very different than the traditional closed-end fund market, but it's going to play to...
Speaker Change: his market position and investing style, which isn't an income-oriented
Speaker Change: investment strategy that you'll typically find in closed-end funds and that has been a different differentiating factor as it relates to how closed-end funds trade in the aftermarket.
Speaker Change: We would love for that market to open up, but I don't see it happening until we get some more relief on the interest rate front.
Joseph Martin Harvey: We have no further questions. I would like to turn the call back over to Joe Harvey for closing remarks. Well, I've got the...
Speaker Change: [inaudible]
Speaker Change: We have no further questions. I would like to turn the call back over to Joe Harvey for closing remarks.
Joseph Martin Harvey: Well, thank you, Julianne, and thanks everybody for taking the time to listen to us today. We look forward to reporting to you next quarter.
Joseph Martin Harvey: Well, thank you, Julianne, and thanks everybody for taking time to listen to us today. We look forward to reporting to you next quarter.
Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: [inaudible]
Speaker Change: Have a great day.
Speaker Change: This concludes today's conference call. Thank you for your participation. You may now disconnect.