Q4 2024 T. Rowe Price Group Inc Earnings Call
Thank you.
Daniel: Good morning. My name is Daniel, and I will be your conference facilitator today. Welcome to T. Rowe Price's 4th Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode until the question and answer period.
Daniel: I will give you instructions on how to ask a question at that time. As a reminder, this call is being recorded and will be available for replay on T. Rowe Price's website shortly after the call concludes.
Speaker Change: I will now turn the call over to Linsley Carruth, CRO Prices Director of Investor Relations.
Linsley Carruth: Hello, and thank you for joining us today for our fourth quarter earnings call. The press release and the supplemental materials document can be found on our IR website at investors.tiraprice.com.
Speaker Change: Today's call will last approximately 45 minutes. Our Chair, CEO, and President, Rob Sharps.
Linsley Carruth: CFO Jen Dardis, and Head of Global Investments Eric Veiel will discuss the company's results for about 20 minutes.
and we'll open it up to your questions.
Linsley Carruth: We ask that you limit it to one question per participant. I'd like to remind you that during the course of this call, we may make a number of forward-looking statements and reference certain non-GAAP financial measures. Please refer to the forward-looking statement language and the reconciliations to GAAP in the supplemental materials as well as in our press release.
Linsley Carruth: All investment performance references to peer groups on today's call are using Morningstar Peer Groups and for the fourth quarter that ended December 31st, 2024. Now I'll turn it over to Rob.
Thank you, Linsley.
Rob Sharps: I'm joined today by Jen Dardis, Chief Financial Officer, and Eric Veiel, Head of Global Investments.
Rob Sharps: they will provide a view of our 2024 financial and investment performance in a moment.
Rob Sharps: But first, I'd like to share a few thoughts on the year.
Rob Sharps: As noted in our earnings release, we closed 2024 with $1.6 trillion in assets under management and $43.2 billion in net outflows.
Rob Sharps: Despite the large sub-advisory redemption that we discussed on our third quarter call, net outflows for the year were reduced by nearly half year-over-year and 30% from 2022.
This trajectory demonstrates the progress we're making.
Our associates are advancing key growth initiatives.
Rob Sharps: I'm optimistic that we remain on the path to positive flows and we're on pace to further reduce outflows again this year.
We are seeing successes that support our optimism.
I'll share a few highlights from 2024.
We are growing our ETF business.
Rob Sharps: All told, we closed the year with almost $8 billion in assets under management in our ETF business.
Rob Sharps: Our Target Date franchise remains an industry leader, with net inflows of $16.3 billion for the year. We launched our first Target Date portfolios for Canadians, and are seeing more interest in customized solutions and in the blend category.
We are delivering innovative retirement offerings.
including personalized retirement manager and managed lifetime income.
Rob Sharps: We are also helping clients navigate change and pursue better outcomes through the Social Security Optimizer Tool and our five-dimensional framework, which evaluates retirement income offerings.
We are extending our alternatives business.
Rob Sharps: launching our first interval fund and securing our first close for a private lending fund.
Rob Sharps: We are leveraging our relationships in the Wealth Management Channel, hosting nearly 2,000 alternatives-related meetings with advisors in 2024.
Rob Sharps: We are making significant inroads in insurance, with a large insurance general account win in 2024 and the recently announced plans for a strategic partnership with ESPITA.
Rob Sharps: Through this partnership, we expect to manage both public and private assets for ESPITA.
Rob Sharps: This highlights our continued commitment to the expansion of our insurance business.
and to delivering innovative investment opportunities for our clients.
Rob Sharps: We look forward to the opportunity to develop tailored solutions with ESPITA and other insurance partners over time.
Rob Sharps: We were also pleased our gross sales were up substantially for the year.
Rob Sharps: Our net pipeline ended the year stronger than a year ago, largely driven by an increase in new opportunities, but also aided by a decline in assets deemed at risk.
Rob Sharps: We are expanding strategic partnerships in order to bring our products and insights to more advisors and clients, including an agreement that provides access to an additional 10,000 financial advisors and 2 million end clients.
Rob Sharps: We are unlocking new ways to connect with clients and prospects globally with a refreshed brand, new advertising, and new partnerships.
Rob Sharps: Our balance sheet remained strong, and we returned over $1.4 billion to stockholders in 2024.
Rob Sharps: We continue to prioritize the recurring dividend while maintaining ample liquidity support our seed capital program, opportunistic buybacks, and potential M&A and strategic investments.
Rob Sharps: While our path to positive flows will not be a straight line, we expect 2025 will be better than last year.
Rob Sharps: We are building momentum, and these successes are indicators that we are moving in the right direction.
Rob Sharps: Before I hand off to Jen for a more detailed view of our financial results, I want to thank our associates for their dedication to our clients and to our firm.
Speaker Change: My optimism and our path forward is grounded in my confidence in our associates and their work, our ability to deepen value to, and our connection with our clients.
With that, I'll turn to Jen.
Jen Dardis: Thank you, Rob, and hello everyone. I'll review our financial results before turning to Eric.
Jen Dardis: Our adjusted diluted earnings per share for Q4 2024 was $2.12, bringing full-year adjusted diluted EPS to $9.33, which is up 23% from 2023 on higher average AUM and investment advisory revenue.
Jen Dardis: We had $19.3 billion in net outflows for the quarter, which, as Rob mentioned, brings our full-year net outflows to $43.2 billion, a significant improvement from 2023.
Jen Dardis: The previously disclosed sub-advised variable annuity redemption was the primary driver of outflows in November and December. However, this was partially offset in December by a few large wins in U.S. equity from wealth management and institutional clients, and with continued success in fixed income from the insurance channel.
Jen Dardis: We saw signs of strength across asset classes and channels this quarter and in a few areas ended the year with positive flows.
Jen Dardis: Our target date franchise had $2.2 billion of net flows, its strongest Q4 since 2019, resulting in full-year target date inflows of $16.3 billion.
Jen Dardis: This momentum was largely driven by the increasing success of our blend products.
Jen Dardis: Fixed income and alternatives had positive net flows for the fourth quarter and full year. And from a channel perspective, the EMEA and APAC regions and the America's Institutional Channel also had positive net flows for these timeframes.
Jen Dardis: Within our growing ETF franchise, we had $1.4 billion in net flows during the fourth quarter, increasing our full-year net inflows to $4.7 billion.
Jen Dardis: Compared to full year 2023, our ETF net inflows more than tripled.
Jen Dardis: In 2024, strong equity markets drove our average AUM higher, increasing our investment advisory fees, net revenues, and diluted EPS over the prior year.
Jen Dardis: Our Q4 Investment Advisory Revenue of $1.7 billion increased 2.5% from the prior quarter and 16% from Q4 2023, driven by higher average AUM, partially offset by a decline in effective fee rate.
Jen Dardis: Our Q4 annualized effective fee rate, excluding performance-based fees, was 40.5 basis points.
Jen Dardis: This decrease from Q4 of last year was driven by a mixed shift in assets.
Jen Dardis: A large portion of growth sales were in strategies and vehicles that have lower than average fee rates, while a significant portion of redemptions were in asset classes and vehicles that have higher than average fee rates.
Jen Dardis: 2024 Investment Advisory Related Performance-Based Fees of $59.3 million, which we now present separately in the income statement, were $21 million higher than the prior year.
Jen Dardis: These represent realized in-year performance fees from alternatives and equity products.
Jen Dardis: Full year accrued carried interest income of $134.1 million was down year over year due to lower returns in 2024 versus 2023, reducing the accrual during the year.
Jen Dardis: Q4 adjusted operating expenses were $1.2 billion, bringing full-year adjusted operating expenses, excluding the carried interest expense.
Jen Dardis: Considering average market conditions, we anticipate 2025 adjusted operating expenses, excluding carried interest expense, will be up 4 to 6 percent over 2024's $4.46 billion.
Jen Dardis: This includes continued expense management to allow us to invest in our strategic priorities to support growth and the impact of real estate costs in 2025 as we move into our new headquarters in Baltimore.
Jen Dardis: During the fourth quarter, we bought back $71 million worth of shares, bringing our full-year buybacks to $355 million, and have continued to buy back shares during the start of 2025.
Jen Dardis: Our balance sheet remains strong, ending the year with $3.1 billion of cash and discretionary investments.
Jen Dardis: We continue to manage our business with a long-term perspective, carefully aligning our expenses with the market-driven nature of our revenues. From this position, we can preserve our ability to deliver new capabilities for clients and invest in growth areas of the market. And with that, I'll turn it over to Eric.
Thanks, Jen.
Speaker Change: For the second year in a row, we saw strong gains in most equity markets, particularly in the U.S., where technology stocks continue to drive returns. Fixed income markets were more muted for the year and were characterized by a significant interest rate volatility, with short rates falling and the long end of the curve rising.
Speaker Change: Equity market performance in 2024 saw similar themes to 2023 as large technology stocks continued to lead on the back of the growing impact of artificial intelligence, strong earnings momentum, and expanding valuation.
Speaker Change: The extreme narrowness in markets continued in 2024 as eight stocks drove 60% of the S&P 500's return.
Speaker Change: Our research also showed a significantly high level of factor volatility during the year within equity markets, despite the overall level of equity market volatility, as measured by the VIX, remaining low.
Speaker Change: This type of market environment makes it more difficult for our strategies to outperform given our discipline focus on fundamentals and valuation and our emphasis on the long term.
Speaker Change: Across asset classes, 54% of our funds beat their peer group medians for the year, and on an asset-weighted basis, 61% beat their peer groups.
Speaker Change: In our equity franchise, despite mixed performance overall, I'm encouraged by the evidence that our research process and teams remain very strong.
Speaker Change: Our flagship U.S. equity research strategy delivered another year of top quartile performance and outperformed the S&P 500 by 140 basis points net of fees.
Speaker Change: A number of our sector products also delivered strong performance, with science and technology, communications and technology, new era, financial services, and global technology all top quartile performers for the year.
Speaker Change: These strong underlying strategy results translated into top quartile performance across a number of key diversified strategies, including mid-cap value, blue-chip growth, and diversified mid-cap growth.
Speaker Change: However, results were below our high expectations in a number of strategies, including mid-cap growth, new horizons, dividend growth, and emerging markets equity. Our teams remain highly focused on improving performance in these and all of our strategies.
Speaker Change: I will also take the opportunity to highlight that for the 17th consecutive year, one of our flagship funds managed by David Giroux beat its Morningstar peer group. This is the longest streak of outperformance versus its Morningstar peers among any U.S. equity or multi-asset fund under the same portfolio manager.
Speaker Change: This is not the only example of performance consistency. It's evident in a number of our products and across asset classes.
Speaker Change: In addition to capital appreciation managed by GRU, U.S. equity research, mid-cap value, institutional floating rate, Maryland tax-free bond, and the 2015 and 2020 vintages of our retirement funds all delivered top-decile performance for the three, five, and ten-year time periods.
Speaker Change: Our broad target date franchise continued to deliver strong performance over multiple time periods.
Speaker Change: On an asset-weighted basis, 73% of our target-date assets beat their peer group medians for both the 1- and 3-year time periods, and over 90% were top quartile for the 5-, 10-, and 15-year time periods.
Thank you for watching.
Speaker Change: In our Fixed Income Division, a number of our muni strategies, as well as our short-duration income, institutional floating rate, and global high-income products had top-quartile one-year performance. Conversely, our high-yield and international bond products had a more challenging year with performance-lagging peers and benchmarks.
Speaker Change: And in our ETFs, three of our fixed-income ETFs, Ultra Short-Term Bond, U.S. High Yield, and Floating Rate, all had top quartile one-year performance, while the other two fixed-income ETFs with one-year performance beat their peer medians.
Speaker Change: Returns across alternative strategies were generally positive in the fourth quarter. Structured credit generated the strongest returns, while liquid strategies tracked the overall market backdrop.
Speaker Change: Private market strategies experience greater dispersion with private credit performing ahead of special situations and distressed strategies.
Speaker Change: I've shared a few highlights related to investment performance. Now I'll turn to several important initiatives we've advanced in 2024.
Speaker Change: Last year brought exciting growth in our ETF business. We started the year with 2.5 billion in AUM, and as Rob mentioned, we closed the year with just under 8 billion in AUM.
Speaker Change: and we expect to bring these to market this spring. We are considering additional strategies to offer clients in this tax-efficient wrapper and expect further launches throughout 2025 and 2026.
Speaker Change: As the largest provider of active target date products and an industry leader in retirement, we are always focused on anticipating and evolving client needs and expanding our offerings to meet them.
Speaker Change: In 2024, we extended the target date range to include Personalized Retirement Manager, or PRM, as well as a Managed Lifetime Income product.
Speaker Change: PRM is a service that uses personal data to create a unique asset allocation tailored to an individual's specific saving goals, preferences, and financial situation to help drive better retirement outcomes.
Speaker Change: from Pacific Life to offer retirees stable and predictable monthly income for life.
Speaker Change: We're also seeing continued success with our blend products, which we designed to meet the needs of price-sensitive clients who are interested in our target date expertise.
Speaker Change: Looking forward, we are exploring how alternatives could be used in our target date products if or when regulatory hurdles come down and client demand materializes.
Speaker Change: We've been managing integrated equity strategies for nearly two decades, combining fundamental and quantitative processes with our deep portfolio construction expertise.
Speaker Change: Our 12-person integrated equity team manages about $12 billion across a range of integrated equity products, including U.S. small, mid, and large cap, and global and international equity.
Speaker Change: In 2024, we added an equity solutions portfolio manager who works closely with our clients to deliver customized solutions. We closed the year with over $1 billion in equity solutions AUM and several other opportunities advancing in the pipeline.
Speaker Change: Another way we've looked to deliver alpha for our clients has been through allocations to late-stage, pre-IPO private companies in our U.S. 40-act mutual funds and other pool products, which we've been doing since 2007.
Speaker Change: As one of the most active, prominent managers of small and mid-cap equities, we've built a network of established relationships to put our team at the forefront of emerging investment opportunities.
Speaker Change: Our private equity capability can draw on the expertise of over 230 global research analysts immersed in their industries and regions. At year-end, over 25 of our investment strategies were invested in privates. We are now exploring new ways to move beyond the 40-act fund structure to offer this capability to more clients in a dedicated product.
Speaker Change: Our U.S. equity research strategy, with over 25 T. Rowe Price Associate Analysts contributing to the portfolio in their focus area of expertise, demonstrates the strength of our research platform across the breadth of the market and our pipeline of investment talent.
Speaker Change: Clients are responding to our rules-based portfolio construction and risk management that isolates our analyst stock selection skill as the alpha driver.
Speaker Change: In addition to the consistent long-term performance I mentioned previously, we saw strong growth sales to this strategy in 2024.
Speaker Change: We've broadened the equity research franchise with international and global equity research strategies, which mirror the time-tested approach of our U.S. equity strategy. These newer strategies hit their three-year track records in September of 2024.
Speaker Change: In addition, we are developing a small and mid-cap structured research capability within our T. Rowe Price Investment Management Advisor that we plan to seed this year.
Speaker Change: We formed the T. Rowe Price Investment Institute with the overarching mission of creating a center of excellence within investments that focuses on our clients and our investors. Led by Justin Thompson, the Institute will enhance our offer to clients beyond investment performance.
Speaker Change: who differentiated thought leadership, client training, and other value-added experiences for clients that showcase our investment and research capabilities. We will assist with their investment decision-making and ultimately help drive enhanced commercial outcomes for us.
Speaker Change: The Institute will also help to support our global investment team, the heart of our investment capability, with wide-ranging investment skills training from analyst best practices to portfolio construction.
Speaker Change: With Justin's new role, we took the opportunity to review our equity organization and combined our U.S. equity and international equity divisions into one global equity division.
Speaker Change: This allows us to build on our strengths to ensure we maximize our investment performance, attract, develop, and retain the highest caliber of talent, maximize our efficiency, and optimize our commercial success.
Speaker Change: Josh Nelson has assumed the role of head of global equity.
Speaker Change: 2024 was Araf Hussein's first year as head of Global Fixed Income, and momentum is building across the franchise.
Speaker Change: On an asset-weighted basis, 65% of our fixed income assets outperformed their peer groups in 2024, and we had $12.6 billion in positive net flows to fixed income, bringing our fixed income AUM to $188 billion at the end of the year.
Speaker Change: We've made a concerted and fruitful push into the insurance sector, and fixed income is the main asset class of interest for these clients.
Speaker Change: It is this insurance channel that drove much of our strong fixed income flows in Q2 and Q4 of 2024.
Speaker Change: Our fixed income team is also upgrading the tools our investors use and working with our distribution teams to ensure we have the sales and support staff to further enable our fixed income growth.
Speaker Change: We have been building capabilities in data science, machine learning, and predictive models since 2017. Our approach has always been one of intelligent augmentation, enabling our investors with additional data points to aid their decision making and to unlock productivity gains.
Speaker Change: We now have 280 investors using our AI tool, Investor Copilot, a custom chatbot embedded within the private environment of our research platforms to summarize proprietary research and service insights.
Speaker Change: We believe generative AI technology is still nascent in its capabilities to add material, lift the common tasks in investment research, but that there is potential to add material business value as the technology and our use cases mature.
Speaker Change: I'm pleased with the progress we made in 2024, and that we made this progress while staying firmly rooted in our three pillars of people, process, and culture. We remain singularly focused on pursuing investment excellence for our clients, and I'm confident we have the right team and resources in place.
Speaker Change: With that, I'd like to ask the operator to open the line for questions.
To withdraw your question, please press star 1 1 again.
Speaker Change: In the interest of time, we ask that you please limit yourself to one question.
Bill Katz: Our first question comes from Bill Katz with TD Cowan. Your line is open.
Bill Katz: Great, thank you very much, appreciate the extra disclosure and call this quarter. Just coming maybe where you ended the conversation a couple days ago, you announced
Bill Katz: How many other platforms you might be working with? Secondly, you mentioned in your prepared comments that you sort of tweak it around on all into retirement. I'm wondering if this relationship would be portending anything along the way.
Bill Katz: How do you think about M&A here to continue to expand your product set in a world where public and private investment seems to be converging?
Thank you.
Good morning. Yeah, thank you for the question.
Speaker Change: I'll start with Aspita and then maybe talk about insurance more broadly and then hand it over to Eric to give some perspective on
how we're approaching the potential for alternatives in defined contribution.
Speaker Change: With regard to ASPEDA, I think we're really excited to partner with the ASPEDA team and with ARIES. As you said, we just announced this, so while we're really just getting started,
Speaker Change: As we engage with those teams, we identified a number of areas that we could work together, both on TIRA Price's Fixed Income Platform and with OHA.
Speaker Change: I would say, importantly, working with ESPITA will allow us to refine our insurance asset management offering, particularly in the life and annuity space, which should create additional opportunity with other insurers.
Speaker Change: In time, we've also discussed evaluating, co-developing some investment offerings with ESPITA and potentially with Ares.
Speaker Change: We should see some direct benefit from this year and expect that it will build over time. If we do a nice job for ESPITA and their book grows, I think there's a tremendous amount of potential here.
Speaker Change: With regard to insurance broadly, it's an important area for us and one that we've been focused on for a number of years where I'd say we really started to build momentum in 2024, even before announcing the partnership with Espita.
Speaker Change: We had improved organic growth in fixed income, and a substantial amount of that was driven by some
Speaker Change: additional commitments from existing insurance clients. We also are engaged with a number of potential insurance clients.
Speaker Change: The arrangement with the SPEDA isn't exclusive, but again, it's one that we're really, really excited about.
Speaker Change: In terms of how we evaluate opportunities from either a strategic investment or an M&A perspective, I think it's the same framework that we use across the board.
Speaker Change: We have a strong balance sheet and we have capacity to make strategic investments or do M&A to the extent that it brings us additional capability or allows us to access a broader range of clients.
Speaker Change: I think we're mostly interested in doing that in areas where we don't have the potential to build the capability organic or leverage our existing investment capabilities.
Speaker Change: I think we're also interested in kind of any opportunity to reach a broader range of clients.
Speaker Change: So, we evaluate those one by one. It's an area where there's been a fair bit of activity, and while, you know, I can't say that there's anything specific that we're working on right now, I wouldn't be surprised to see additional developments in this area over the course of coming quarters or coming years.
Bill Katz: And Bill, in relation to your question around alts into retirement more broadly, obviously defined contribution is a critical part of our business. It's a very large part of our business and so we've been focused on this for some time.
Speaker Change: were fully in favor of anything that leads to better client outcomes.
and our research is...
Speaker Change: going deep into what asset classes like private credit could do to improve the risk return equation for different participants within that channel.
Speaker Change: We have been engaging with clients and consultants and our investment team on this.
Speaker Change: Obviously, to date, a lot of the activity has been more on the custom side, but we think it's increasingly likely that there'll be an opportunity to broaden that discussion out into more standard offerings, excuse me. But there's a lot of work to do. We still have hurdles, fee budgets, liquidity, daily pricing, but it's our belief that over time client interest is likely to grow in this area, and we think it's an important part of the value proposition for active managers, and we're excited about what we can do over
Speaker Change: Thank you. Our next question comes from Benjamin Budish with Barclays Capital. Your line is open.
Benjamin Budish: Good morning and thank you for taking the question. I wanted to ask a question about, Jen, your comments on the C-rate dynamics in the quarter. You mentioned that a large portion of sales were in strategies with lower-than-average rates, and a portion of redemptions were in asset classes with higher-than-average fee rates. I'm just curious, what did the exit C-rate look like?
Benjamin Budish: Coming out of the quarter, what are you seeing in January and how should we think about those dynamics into 2025? Thank you.
Sure. Thanks, Ben.
Benjamin Budish: So I think, starting out to say, we have seen higher fee compression this year than on average. In the past, we've talked about an average level of about 1 to 1.5% per year.
Benjamin Budish: I mean, it's fairly persistent within the industry as we see, you know, scale players being able to command lower fee rates.
Benjamin Budish: and just, you know, the higher competitive level of fees in the industry, this year was about 2%. And I would say the first thing that I would highlight is it's the same trends that hit our flows over the past two years that have also influenced the effective fee rate. So if you think about the places where we've seen elevated net outflows,
Benjamin Budish: It's primarily been in equity products, and these tend to have higher fee rates on average.
Benjamin Budish: It's also important to consider, as you think about the direction of travel, that it's not really just the net flow. It's about sales versus redemptions. And so we've seen elevated redemptions in mutual funds that also tend to have higher average fee rates.
Benjamin Budish: And sales have come in lower fee vehicles such as common trusts, ETFs, and institutional separate accounts, which on average tend to be lower effective fee rates.
Benjamin Budish: And I'd say finally, we see the impact of some of our strategic choices. These are places where we're attempting to grow in the marketplace and where we've seen good success that were highlighted by Rob and I in comments.
Benjamin Budish: Some of that is success in our Target Date Blend product, some large wins in fixed income insurance, and some places where we've used pricing levers to scale new products as we grow in new markets.
Benjamin Budish: And then, you know, in certain cases, although this has tended to be a smaller portion of what we do, we have done some selective repricing to position more competitively in places where we think we have a good value proposition for clients and the right to win.
Benjamin Budish: I just end by saying that while much of this is persistent, there are some trends that should help to offset this over time.
Benjamin Budish: And that's largely that equity redemptions have eased significantly in the back half of the year, and we would expect that trend to continue. And the alternatives products that we offer also tend to be higher fee, which offsets a portion of that as that grows as a portion of the book.
Benjamin Budish: I'll add a little bit of color on this topic. First, we don't manage to a specific fee rate. We've been navigating fee pressure for quite some time. This is an intensely competitive business, and a number of our competitors are really focused on being a low-cost provider.
Benjamin Budish: We expect fees to continue to come down in a manageable way over time.
Benjamin Budish: My view is that lower fees are good for clients and that they enhance our value proposition.
Jen Dardis: And I think to an extent, there is a toggle or a tradeoff between fees and flows. As Jen said, we've got a number of strategies that are specifically oriented towards clients with either lower risk or fee budgets.
Jen Dardis: Blended, Hybrid, and the Retirement Date Suite, QM Bond. We've got a number of offerings that we'd like to grow where the fees are lower than our...
Jen Dardis: But there's also opportunity in plus sectors like emerging market bond or in alternatives where the fee rates are more compelling.
Jen Dardis: So, I think there are going to be give-and-takes, but I think we forecast that while the fee rate will continue to come down, it will come down at a very manageable pace, and ultimately with some of these lower fee strategies, it will kind of quicken our ability to get back to positive net flow.
Speaker Change: Thank you. Our next question comes from Glen Shore with Evercore ISI. Your line is open.
Hello, thanks very much.
Speaker Change: So I have a question that kind of spans across OHA, ESPDA, and your insurance comments. And it's more of what you're seeing in terms of client demand or the potential for hybrid products across public and private.
particularly in fixed income.
Speaker Change: And what really piqued my interest is, in your prepared remarks, you talked about doing both public and private for SPDA. So I don't know if you could comment on, is that a set allocation or do you manage actively across public and private for them? So big picture of more hybrid potential and managing actively across public and private.
Thanks so much.
Thank you.
Speaker Change: Yeah, Glenn, at a high level there's been a lot of discussion with regard to convergence of public and private markets.
Speaker Change: I think in certain structures, more traditional GPLP, you've had firms like OHA that have offered
Speaker Change: multi-strategy credit offerings for an extended period of time. If you look at some of their flagship funds,
Speaker Change: They basically have the ability to invest in credit kind of across
Speaker Change: liquid, public, and private, high-yield bonds, loans, and private credit. So OHA's got a demonstrated capability in doing that over an extended period of time.
Speaker Change: I think what's newer is that there are offerings now in the wealth channel through interval funds or BDCs that cut across public and private in credit.
Speaker Change: over time. We've engaged not only with OHA, but with some other
Speaker Change: some other alternative asset management firms to discuss opportunities with regard to, you know, kind of bringing a combined liquid public and private offering to the marketplace. I would say nothing that I would characterize as particularly advanced right now.
Speaker Change: But I think eventually, if you think about some of the areas that Eric referenced need to be solved for in terms of fee budgets, liquidity, that may be part of the solution and the opportunity eventually to bring alternatives to the defined contribution marketplace.
Speaker Change: Specifically as it relates to ESPITA, we basically have talked about areas where we really think we can add value to their portfolio and their underlying returns and have agreed on areas that will work together.
Speaker Change: There aren't any specifically identified targets or allocations, but there are several areas where we have capabilities, expertise, and a strong track record that they believe would be additive.
Speaker Change: and you have ultimately will get the opportunity to prove that out and I think that's true.
Speaker Change: both with regard to tier or price fixed income capabilities but also across the spectrum of what OHA does from private credit to many of their structured offerings. So I think there's a big opportunity there for us to work with them on both sides.
Speaker Change: Thank you. Our next question comes from Craig Siegenthaler with Bank of America. Your line is open.
Speaker Change: of future private equity or private credit allocations to retirement products from internal capabilities, including leveraging OHA? And could this trigger future strategic M&A in white spaces? Or will TRO look to form partnerships with third parties, which could include in areas?
Speaker Change: I'll start. We want to offer best-in-class investment solutions. I mean, we're a leader in retirement. We're a leader in retirement solutions, whether that's our suite of retirement date funds or retirement income.
We have tremendous confidence in
Speaker Change: But, you know, in certain areas we're open to or may even need to partner with other managers who have a demonstrated capability in areas where we don't. So we're open to it, kind of ultimately whether that takes the form of partnerships.
Speaker Change: or takes the form of M&A, I would say is to be determined.
Speaker Change: offering different types of private investments in that environment, Craig. So we're, while we're looking at this over time and within different vehicles, it's not, we're not in a position where this just happens automatically.
Speaker Change: Yeah, I mean, as Eric said earlier, most of the activity to date has been, you know, kind of more in custom retirement date.
Speaker Change: You know, we do think in time with potential for safe harbor and client interest and research that shows
Speaker Change: But, you know, this is, I think, very, very early days and, you know, an area that is likely to come to fruition, but, you know, kind of in terms of really going to market or impacting our underlying business, it could be years off.
Dan Fannin: Thank you. Our next question comes from Dan Fannin with Jefferies. Your line is open.
Dan Fannin: Thanks. Good morning. I wanted to expand upon your comments around gross sales trends. Rob, you were quite optimistic around the improvement you're seeing.
Dan Fannin: give a little more context around maybe the backlog and particularly maybe in the departure date side of the business and maybe on the institutional side where you have a little bit more line of sight and any granularity or context around kind of versus prior periods would be helpful. Thank you.
Yeah, Dan, thank you.
Thank you.
Dan Fannin: We saw improved growth sales across almost all distribution channels and geographies. In fact, it was our best growth sales year since 2021, which was elevated, as you'll recall, by pretty ebullient markets during the pandemic.
Thank you.
Dan Fannin: Overall, 24 was a significant improvement over 22 and 23, but we're still not where we need to be. Importantly, we saw less pressure on redemptions and equities, particularly large-cap growth, where we've had strong absolute and improving relative performance.
Dan Fannin: We had our third best year ever in retirement date funds with $16 billion in net inflows. As I said, we grew in fixed income, including some notable insurance wins. We grew in alternatives, and we saw an inflection point in our EETF business.
Dan Fannin: I'd also say that we closed out 24 with really strong momentum, right? I mean, despite the large sub-advisory redemption that we talked about on the third quarter call that basically came through in December, we funded a number of new mandates in December which served to partially offset that.
Dan Fannin: So for 25, we really feel like we're in a position to build on this momentum. The year's off to a good start, and our net pipeline ended the year stronger than a year ago.
Dan Fannin: reflecting, I'd say, both new opportunities across channels. And you asked specifically about retirement date funds. We feel very good about our pipeline and our opportunity set there. And, you know, look, the net pipelines also help by less at risk with fewer mandates at risk, primarily in equities.
Dan Fannin: So, look, our base case is that in 2025 we further reduce net outflows and set the stage to return to organic growth. I know there's a tremendous amount of interest in our perspective on...
Dan Fannin: when we believe we'll get back to net inflow. It's just really difficult to say. It depends on a handful of things that are in our control.
Dan Fannin: right, do we deliver great investment performance, are we successful with our go-to-market and strategic initiatives in wealth, retirement, alternatives, insurance, and outside the U.S.
Dan Fannin: But it also depends on some things that are less in our control or outside of our control if you think about the market backdrop
Dan Fannin: But it's been an extraordinarily challenging environment in terms of the return profile of the market.
Dan Fannin: for active management. This has been really, really difficult to generate alpha where the cap-weighted benchmarks have continued to deliver strong returns dominated by the largest positions in those benchmarks.
Dan Fannin: It's also taken interest away from a lot of things that we've historically done really well.
You know, while it's benefited our large-cap gross wheat, it...
Dan Fannin: It basically has meant that there's been little to no interest in areas like small and mid-cap.
Dan Fannin: There's been little to no interest in areas like non-U.S. emerging market, international and global.
Dan Fannin: Look, I think to the extent that we're in a more constructive environment for alpha generation, you have a broader opportunity set where there's investor interest. We're confident that we'll find our way back to net inflows, it's just really, really hard to say when that will be.
Patrick Davitt: Thank you. Our next question comes from Patrick Davitt with Autonomous Research. Your line is open.
Thank you.
Thank you.
Speaker Change: Hey, good morning everyone. Thanks for the question. You've mentioned the offsetting winds in December a few times. Would we possibly get a little, dig in a little bit more on the color of those winds and possibly frame the scale of those winds as we think about the repeatability of things like that? Thank you.
Speaker Change: positive flow of quarters in the Target 8 franchise since 2019, so we were pleased to see some of the growth there. And we also saw inflows in fixed income, so it was fairly broad-based in terms of where we saw those flows.
Speaker Change: We had some stats, we don't typically share these, but I think there were 10 or 11 that were above 200 million that came in in December alone. So again, it was a nice set of wins that we saw that came in across the board.
Yeah, it was really broad, I mean, it was...
Speaker Change: across strategies and equities and across channels. So large cap growth in wealth, structured research or U.S. equity research strategy and institutional, fixed income win in insurance, a big retirement date fund win that funded. So
Speaker Change: Obviously as disappointed as we were to lose the sizable client mandate that
Speaker Change: redeemed in in November and December you know we were pleased to for the month of December to be able to partially offset that and close the year out with some some pretty nice momentum
Speaker Change: Thank you. Our next question comes from Ken Worthington with J.P. Morgan. Your line is open.
Ken Worthington: Hi, thanks for taking the question. So equity outflows have been elevated in recent years, performance was an issue.
Ken Worthington: Is performance, is improving performance enough to turn the tide and move your equity franchise back to positive sales?
Ken Worthington: Or do you really need more at this point, given how the market, the...
Ken Worthington: ecosystem has sort of evolved. And so when we think about the innovation that you're pursuing, product structure, distribution, what do you see as most likely
Ken Worthington: to drive improved equity sales of the initiatives that you have underway. And ultimately, what are you most excited about in terms of what could be the needle?
Ken Worthington: Yeah, hey Ken, this is Eric. I'll take that at first.
Speaker Change: We view performance as clearly a necessary but not solely sufficient
Ken Worthington: circumstance to drive flows in the equity business and frankly across all of our asset classes but taking equity specifically.
Ken Worthington: It's obviously critical to have that performance and to be able to deliver it. But increasingly, we have to meet clients where they want to be, from a vehicle perspective, from a price perspective, and from a risk appetite perspective. And I would say included in that vehicle perspective is increasingly an emphasis, especially in the U.S., on tax efficiency.
Ken Worthington: That drives you towards having more vehicles like our ETF franchise, like our retail separately managed account franchise.
on platforms and available to the clients.
Ken Worthington: in ways that historically we've been growing. And that's important, but it will take time to fully get on those platforms to have the right arrangements in place to do it. So I feel really good about where we are from an underlying performance perspective, as I talked about, and I'm increasingly confident that we're building the right set of products.
Ken Worthington: to deliver the performance to clients in the packages that they want across our equity franchise. But as you see from the data every day, the overall active equity market is in outflows for everybody, not just for us. And so that's the headwind that we're facing.
Ken Worthington: Importantly, I would say, Ken, in areas where our performance is strong,
Ken Worthington: We have a number of strategies that have been in net inflow over multiple year time horizons. So, performance is very important. I think the research that we've done suggests that three and five year performance is most influential.
Ken Worthington: on flows, it varies across channel. There are certain channels that are more sensitive to the one and three, but, you know, kind of in many really important channels, defy contribution, investment only, home office from a wealth perspective, institutional. The three and five-year numbers are really important.
Ken Worthington: I think for us, we obviously want to deliver great investment performance every year, but this is an important year because we roll off 22, which was a poor year for us in the three-year number. So I think we're on the path to delivering better performance. But in areas like the equity research strategy, global focus growth, capital appreciation, all-cap opportunities, where we've had good performance, we continue to have good flows.
Speaker Change: Thank you. Our next question comes from Brennan Hawken with UBS. Your line is open.
Good morning. Thanks for taking my question.
was curious to touch on the expense outlook.
Speaker Change: So, thanks for providing that. I know that sometimes you provide the expense outlook.
Speaker Change: as of, not necessarily as of the first day of the quarter, but
Speaker Change: intra-quarter, so is that the case? And could you let us know what date that is and what's your market assumptions? And also, you flagged real estate costs. I'm guessing that's the HQ move.
Speaker Change: can you give a sense of magnitude there and is that just going to be a 2025 event? Thank you.
Sure, thanks for the question.
Speaker Change: In terms of our market assumptions, we essentially looked at an average for the final quarter of the year, which was fairly similar to where the year ended from an AUM perspective. So, we have some carryover impact of the rising average AUM through the year of 2024 on to 2025 variable expenses.
Speaker Change: In terms of market expectations for 2025, we use our standard assumptions, which is kind of, we blend in an average return on equity markets and fixed income that aligns to our mix of business.
Speaker Change: Specifically, with regard to real estate, yes, that is the new move to headquarters. In Baltimore, I'd say, depending on timing, that's somewhere between $20 and $30 million of impact. Part of that is one time of double rent as we move from one building to the other, and the rest is sort of a one-time step-up given the additional capacity in the space in the new location.
Speaker Change: What I would highlight there is, though it's not a this year impact, we continue to look at excess capacity in our real estate portfolio, so we'll look at opportunities over time to see how we might be able to bring expenses down in other spaces with the addition of this new space downtown.
Thank you.
Alexander Blostein: Thank you. And our final question comes from Alexander Blostein with Golden Saks. Your line is open.
Thank you.
Alexander Blostein: Thanks. Good morning. Thanks for squeezing in here. I wanted to ask about a medium-term target or medium-term thought around the expense management for the business. Very encouraging to obviously hear the flow commentary for 2025. That said, we all know that the fee rates matter more than the flows, right? So when you kind of think about the areas where you guys are seeing traction, those tend to be a lower fee rate than the back book.
Alexander Blostein: Probably in the mid-single-digit range, maybe a little below that. Is there room to bend that kind of non-variable part of the expense base to be more aligned with the organic revenue growth, and what would that look like?
Jen Dardis: Maybe I'll just start at a very high level and then turn to Jen to talk a little more in specifics. I think, Alex, the question is spot on in the sense that if...
Jen Dardis: fees are going to be under slightly more pressure than they've been in the past.
Jen Dardis: then I think you need to think differently about your controllable expense growth rate. And I do think that there's opportunity for us to do some things that are more structural that can bring that down.
Yeah, I think those things take time to do right.
Jen Dardis: But we're evaluating a number of things that kind of can be helpful.
in the 2026 and beyond time frame.
Jen Dardis: And we do want to invest in capabilities as we see them paying off. If you think about the growth that we're really beginning to see accelerate with OHA, if you think about some of the opportunities that we're seeking in retirement outside of the United States.
Jen Dardis: If you think about continuing to penetrate the opportunity that we have in U.S. wealth and broaden our coverage in specialty sales in areas like ETF and alternatives.
Jen Dardis: A lot of those require additional hires and additional capability. So I'd say there is scope for some structural cost savings, but at the same time, we don't want to save our way to prosperity. We want to invest in the business and get the business to a place where, in time, we're delivering more regular growth.
Speaker Change: Yeah, you've covered it well, but maybe just a couple specific comments. As we've gone through our planning processes, what we've tried to do is step back from episodic reductions, because those tend to be, you know, less specific if you're reacting to market conditions, and look more at structurally over multiple years, how can you start to lay these projects in so that you can have more sustainable and repeatable?
Speaker Change: As Rob mentioned, you might have to spend up front to be able to take savings out over time. So, as we look at how we want to spend for new capabilities that Rob mentioned, we've been targeting, I'd say over the past year or two, trying to come up with 2-3% of savings a year on a structural basis to be able to fund some of those new initiatives.
Speaker Change: Thank you. This concludes our question and answer session and today's conference call. Thank you for participating. You may now disconnect.