Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining the first quarter 2019 analyst conference call of the DWS Group. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you'd like to ask a question, you may press star, followed by one on your touchtone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Oliver Flade. Please go ahead.
Thank you very much, operator, and hello, everybody from Frankfurt. This is Oliver Flade from Investor Relations, and I would like to welcome everybody to our first quarter 2019 earnings call. Please be reminded, as always, that the previous Deutsche Bank analyst call outlined the asset management segment results, which have a different parameter basis to the DWS results that we're presenting today. I'm again joined by Dr. Asoka Wöhrmann, our CEO, and Claire Peel, our CFO. Asoka will start today with some opening remarks, and then Claire will take us through the presentation. For the Q&A afterwards, I would ask everybody to limit yourself to the two most important questions as always, so that we can give as many people a chance to participate in the Q&A session as possible.
I would also like to remind you that the presentation may contain forward-looking statements which may not develop as we currently expect. I, therefore, ask you to take note of the disclaimer and the precautionary warning, at the end of our materials. Now let me hand over to Asoka.
Thank you, Oliver. Hello, everybody, and welcome. I am very pleased to present the results for the first three months of 2019. It has been a strong quarter for DWS. We saw good flow momentum and recorded a return to positive net flows while our margin proved resilient. This was based on improved fund performance, especially in flagship funds and the solutions capabilities we offer to our clients. Both compared to quarter four and quarter one 2018, we saw a huge swing in net new assets, especially in long-term assets, which are so relevant to the bottom line. Managing our cost base and accelerating our cost efficiency measures was, as we had committed, a continued focus in the first quarter. And we were rigorous in executing our cost-saving initiatives, lowering our overall cost by 2% compared to quarter four 2018.
In the context of a dynamic late cycle market environment, our management team also reviewed the priorities, initiatives of DWS to ensure we are flexible in the changing market setting. This review has resulted during the first quarter in, first, simplifications and structural changes throughout our organization, including in coverage, the COO area, and cross-central functions. Second, a new segmentation approach within our coverage teams, which better combines our core investment capabilities with the demand we see from our client base. Third, strengthened strategic partnerships, which contributed EUR 3 billion inflows during the first quarter. The fourth, a refinement of our medium-term targets to reflect changed market conditions. I will go into detail on this point at the end of this presentation. To summarize, the first quarter 2019 has marked a very successful start to the new year for DWS.
We had a huge swing and return to positive net flows. We continued to execute our accelerated cost efficiency measures, and we are continuing to do our homework, reviewing our priorities and initiatives. Let me now hand over to our CFO, Claire Peel, who will run through our financials in more detail. Claire, please.
Thank you, Asoka, and welcome everyone. Today, I will present the recent activities and results for the first quarter of 2019, starting with the key financial highlights. Adjusted profit before tax was EUR 153 million in Q1 2019, down 4% quarter on quarter, primarily reflecting slightly lower revenues. Adjusted cost-income ratio was 71.4%, with quarterly cost reductions offset by lower revenues. Net inflows achieved in Q1 were EUR 2.5 billion, primarily driven by strong performance in targeted growth areas of passive, alternatives, and multi-asset. Excluding cash, net inflows were EUR 7.4 billion in the quarter. Fund performance improved and flagship products supported positive flow momentum in Q1. Let's move to our financial performance snapshot, starting at the top left. AUM increased to EUR 704 billion, up 6% quarter on quarter, driven by improved market performance, positive FX movements, and net inflows.
Moving to the top right, revenues of EUR 534 million represent a quarterly decline of 3%, impacted by lower management performance in transaction fees. Management fees recovered faster than anticipated due to the strong recovery in markets following the sharp Q4 decline, and with a resilient management fee margin of 30 basis points. On the bottom left, adjusted costs were down 2% quarter on quarter to EUR 382 million, driven by lower general and administrative expenses. This resulted in a cost-income ratio of 71.4% for Q1. Adjusted profit before tax was EUR 153 million, down quarter on quarter, but up year on year, given the continued downward trend in costs. Let's recap on the market environment in Q1. The first quarter of 2019 has shown signs of recovery following one of the most challenging years for the asset management industry in 2018.
All major equity indices have rebounded with the NASDAQ increasing by 14% and the MSCI World Index by 12% since the start of the year. Although a market rebound has helped, investment sentiment still remains somewhat fragile, particularly in the European retail market. Appreciation of the US dollar also contributed to the higher AUM base this quarter, while lower interest rates negatively impacted fair value of guarantees. Let's move on to AUM development. Assets under management increased to EUR 704 billion in Q1 2019, driven by favorable market performance, positive FX movements, and net new inflows. The stronger equity indices contributed EUR 35 billion of AUM, accounting for the majority of the EUR 42 billion increase at quarter end. This was further supported by EUR 6 billion in positive FX movements as well as net inflows which I will now explain in some more detail.
In Q1, we reported EUR 7.4 billion of net inflows excluding cash. This reflects improved flows into high-margin active flagships compared to outflows in 2018 and continued demand for our real estate flagship products. Top Dividende reported strong inflows against a backdrop of equity outflows in the European retail market. Improved performance at Concept Kaldemorgen resulted in greater inflows, and the DWS Dynamic Opportunities Fund exceeded the EUR 1 billion AUM threshold at the beginning of April following inflows in Q1. These were further supported by sustained strong real estate inflows to our EUR 10 billion fund family, Grundbesitz, and to our U.S. offering, RREEF America II. Beyond the flagships, we have seen positive trends across most asset classes this quarter. In addition to significant improvements in the Americas region and in our insurance business.
Continued momentum in passive contributed EUR 6.2 billion of inflows in Q1, split roughly between new mandate wins, European and U.S. ETP inflows. In particular, our U.S. ETF saw significant progress in the quarter, attracting EUR 1.9 billion of inflows to existing products as well as to other newer offerings. Alternative inflows also increased substantially to EUR 2.6 billion in Q1, reflecting strong flagship flows in addition to large U.S. mandate win and further supported by liquid real assets which moved into positive territory this quarter. Looking at active equity, fixed income, and SQI, we have seen a much slower rate of redemptions in Q1 compared to the previous quarter. In fixed income, we saw improved positive flows in insurance and inflows into our Invest Asian and corporate bond funds. Altogether, total net inflows, including cash, were EUR 2.5 billion in the quarter.
Let's look more closely at the cash trends. We reported EUR 4.9 billion of cash outflows in Q1 2019, with inflows in the first two months, including a EUR 1.4 billion mandate win, more than offset by outflows relating to European money market reforms and seasonal U.S. cash movements. Volatility in the cash line is a trend we typically see within the quarters. Due to this inter and intra-quarter volatility in cash flows, we will disclose group flows both including and excluding these cash balances. This has little impact on our P&L, given cash contributes just 1%-2% of management fee revenues each quarter. Moving on to product launches. Innovation remains key at DWS as we aim to develop products to meet client needs in the late cycle environment, as well as growing demand for ESG offerings.
In Q1 2019, we predominantly focused on expanding our ETF offerings, launching four innovative new products spanning thematics and ESG. In the U.S., we launched the Xtrackers MSCI USA ESG Leaders ETF. With EUR 740 million in C capital, making it the largest ESG ETF launch in the market. The product was developed in collaboration with the European Pension Insurance client. Looking forward to Q2, we have a pipeline of product launches across several asset classes, subject to demand assessments and approvals. ESG remains an important feature to our portfolio, as reflected in almost all of the launches planned for the second quarter, including in the U.S., where we have partnered with the S&P to launch an ETF that will provide a sustainable alternative to its U.S. equity benchmark, the S&P 500. Moving on to revenues. Adjusted revenues are down 3% this quarter at EUR 534 million.
Management fees and recurring revenues decreased by EUR 12 million, mainly due to a shorter business day quarter. Given the strong market recovery following the Q4 decline, management fees rebounded quicker than expected. I will discuss movements in the asset classes shortly. Performance and transaction fees decreased by EUR 12 million quarter-on-quarter due to lower transaction fees in alternatives and reflecting seasonality of higher performance fee recognition in the fourth quarter. Given run rate trends, we anticipate performance and transaction fees to increase in Q2, with a likely contribution from a European infrastructure fund. Other revenues increased by 9 million in Q1, driven by a smaller negative change in the fair value of guarantees compared to Q4. Moving to the margin breakdown by asset classes. Overall, our management fee margin was 30 basis points in Q1, and is expected to remain stable, assuming constructive markets.
The quarterly decline can be attributed to specific one-off events by quarter and a smaller market effect than originally anticipated. Management fees were impacted by fewer business days in the quarter, despite recovering faster than expected from the market turmoil in Q4. SQI management fees and margin were down over the quarter, reflecting net outflows and lower distribution fees in Q4. For passive, both management fees and margin are up quarter-on-quarter, driven by continued net inflows and improved market conditions. In alternatives, margin and fees were both up in Q1, reflecting incremental real estate revenues and the positive effects of liquid real assets inflows. Moving on to costs. Total adjusted costs decreased to EUR 382 million in Q1 2019, down 2% quarter-on-quarter, down 9% year-on-year, reflecting our intensified cost focus and accelerated efficiency initiatives.
Total adjusted compensation and benefit costs increased over the quarter due to normalization of bonus accruals and seasonal upticks in benefit costs. These increases were more than offset by total adjusted general and admin expenses, which fell by 11% over the quarter. The quarterly decline was driven by a EUR 35 million decrease in non-compensation direct costs, demonstrating tighter cost management through lower third-party transaction fees, as well as lower consulting and legal fees. Charges for DWS functions in DB entities were four million lower compared to Q4. Together, these declines more than compensated for the expected higher DB group service charges, which normalized in Q1 2019. Let's refresh on the cost glide path. In 2018, we saw costs fall faster than expected, exceeding our guidance and despite continued investment in growth initiatives.
In 2019, we have intensified this focus by accelerating efficiency efforts to achieve the full amount of our targeted EUR 150 million of gross cost savings by year-end. This will be achieved through incremental cost measures, such as further integration and simplification of our front to back platform, extracting incremental value from consolidation of vendors, and limiting external spend on contractors and professional fees. Additionally, we will calibrate our investment spend to the market environment, given the prospect of continued headwinds in 2019. Assuming revenues remain flat year-on-year, we will target a cost-income ratio of approximately 70% by the end of 2019, before achieving our target of below 65% in the medium term. To conclude, DWS had a strong start in the first quarter. Intensified efficiency efforts have delivered, putting DWS on track to achieve the top end of its gross cost savings target by year-end.
Strong flow momentum resulted in EUR 2.5 billion of net inflows and was supported by well-performing flagship funds. With support from our innovative product launches and strategic partnerships, we anticipate inflows to continue. Thank you, and I will now hand over to Asoka for some closing comments.
Thank you, Claire. Over the past few months, we have successfully made significant progress in making necessary adjustments to DWS given the continued challenging market environments that we expect. The initial results of our efforts can be seen clearly in our quarter one financials. Additionally, we have taken careful consideration and have refined our medium-term targets as part of our management team's review of priorities and initiatives. In this regard, the cost-income ratio will become our main priority to ensure maximum shareholder value in the market environment in which we operate. Assuming revenues remain flat year-on-year, we will target a full year cost-income ratio of about 70% by the end of 2019 on our way to achieving our medium-term target of lower than 65%.
While we continue to believe net flows are an important key performance indicator for asset management industry, the volatile market environment might impact annual flows in any given year, which we will now reflect in our targets. Going forward, we will target a 3%-5% average net flows over the medium term. For 2019, it is our ambition to outperform the asset management industry on net flows, which are currently expected to be around 2%-3%. As we do our homework to further improve DWS and to show its full potential and capacity, these are the targets we will focus on, along with our dividend payout ratio to shareholders, which remain unchanged and untouched. Thank you for your attention. With that, I will now pass to Oliver for the Q&A.
Thank you very much, Asoka. Operator, we're ready for Q&A now. Again, if I could remind everybody in the queue to limit themselves to two questions. Thank you.
Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. To withdraw your question, you may press star followed by two. If you are using speaker equipment today, please raise your handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from the line of Jacques-Henri Gaulard of Kepler Cheuvreux. Please go ahead.
Yes. Good morning, everyone. I have two questions, please. The first one would be, Claire, you were mentioning the costs, the reduction in Q1, including some non-recurring items which will normalize in the next quarters. If you can actually detail these, that would be really helpful. The second question is a combo, on consolidation. The first one would really be on this UBS report in the FT. How come these things actually leak? That's the really main question I have. The second, that would be a huge undertaking because you would double your size. Considering that you've just been listed, should your priority be to actually assert the new DWS as it is, rather than launch into something which has quite high execution risks? Thank you very much.
Hello. Sorry, it's not good morning. Thank you for the question. I will take the first question on the costs and the one-offs that we've seen in the first quarter that wouldn't repeat. That applies to the compensation costs and also to the G&A. On the compensation cost, we had some seasonality effects in benefits, in particular pertaining to the bonus period that would not repeat going forward. On the G&A side, we had some specific external transaction fees that wouldn't repeat going forward. The two would effectively offset to some degree. Going forward, there's always a certain element of small seasonality effects going forward, but not too material. I also commented, in terms of Q2, on an expected contribution from a European infrastructure fund performance fee, bearing in mind that also comes with a compensation and benefit cost in Q2 as well.
Okay. Thank you.
Jack, I think I will take your second question on consolidation apart. Again, first of all, we do not comment on market speculation as a matter of principle.
In managing DWS, we have a clear priority on generating organic growth and improving our efficiency.
Additionally, as we always stated, we want to actively participate in the consolidation of the asset management industry if it really creates shareholder value and does not interfere with our fiduciary duty of our clients, and if that's going to pay out into our business model. Again, please understand with regard to recent speculation, we are not really going to comment.
Understood, Asoka . Thank you.
The next question is from the line of Michael Werner of UBS. Please go ahead.
Thank you. I've got two questions. One, really looking at the fee margin. We saw a fee margin of 30.0. Saw strong inflows into alternatives during the quarter, which is a high margin product. Outflows from cash products, which tend to be low margin, and yet we saw the margin decline. I was just wondering, I know there's a lot of drivers to this, but how do you explain that decline? I didn't see in the refined targets any mention about the 30 basis point fee margin. Should we assume that that's no longer a key target of yours in the medium term? Second, we've seen the headcount increase at DWS over the past couple of quarters. Some of this is due to a moving perimeter, but even in Q1 we saw further growth in headcount.
I was just wondering, where is this headcount growth being focused on, which areas of the business, and is this something that we can expect as we go through 2019? Thank you.
Hi, thanks for the questions. I will take your question first on the fee margin, which was 30.0 basis points in the first quarter, and that compared to 30.3 basis points in the fourth quarter of 2018. We'd originally anticipated a much more significant downward trend from the market downturn we saw in Q4. That was lesser than we had expected. In fact, what has affected it is more one-off effects that we see between the quarters, which we've pointed to before, where we have various one-off distribution fees or payments that come in and out of quarters and cause some degree of volatility.
What I would rather point to is that the 30 basis points is a reasonably stable expectation that we have going forward, obviously, with a constructive market environment assumption, and the margin of the inflows that we saw in Q1 was greater than the margin of the outflows.
Mike, if I can address your margin question regarding the target setting. We want to make very clear, we remain committed to delivering high margin business. However, the average margin, and I mentioned that many times already, it very much depend on one non-controllable part from the management. For example, equity market movements like in the fourth quarter. Therefore, we are directing our business to the high margin business. For the future, we are very much, as I said, committed to this area at this high margin businesses and products. You can see we are very resilient in the margin. I do think more than the wider industry. For us, it's always performance and innovation is a great protection against fee dilution.
I'll just pick up on your question on headcount. I think we had a relatively small increase in headcount in the first quarter compared to the fourth quarter, the majority of which was related to a final transfer in of a branch activity for some coverage staff, 15 staff related to that entity that came in. Otherwise, some limited hiring in our alternatives business to support the fund launches and growth that we have in that area. We would not expect to have substantial headcount growth going forwards.
Thank you.
The next question is from the line of Stuart Graham of Autonomous Research. Please go ahead.
Hello. Thank you for taking my question. Two questions, please. The first one is, Asoka, you promised us a strategy update. Is this it or is there more to come? Is there an event coming or what you've said today is the strategy update? The second question is a kind of number question. You referenced EUR 3 billion of net new money from partners. Can you just split out where that comes? Is that active equity? Is that passive? Is that alternatives? Which buckets is that EUR 3 billion come in, please? Thank you.
Again, Stuart, thank you for the both questions. As I said, I know that people always expecting a big bang in strategy changes. First of all, we had already a strategy that has been announced and well, talking to the market during the IPO. All the things what you said promise, but I think committed is to look-
Yes
at the priorities and projects, what is directed to grow strategically. That is what we exactly done. That's what I exactly said, the four items, simplification and structure changes throughout the organization. Second, the new segmentation approach in the coverage area. Third, the strength in the strategic partners. Your second question, I will come in some second to that. The third area, the refinement, and I think that was one of the most asked question in the last three months to Claire and to me, and to Oliver, is the refinement of our medium term target and prioritization of the targets and so on.
Therefore, I do think, I felt we've done a very substantial refinement actions already in the last six months. I do think, I want to say that also the strategic changes, and that is what I really said and mentioned, we want to do in our own business, than all what is going on outside our organization. That means also selected investment in product capabilities, what we've done. I think Claire has very clearly mentioned the broadening of our ETF product suite with the new product innovations like ETF. Also I want to bring additional themes like artificial intelligence, big data, future mobility, this kind of thing. This is very important for us to position us in the industry strategically.
We also successfully launch a direct lending fund, what I feel in light of low interest rates, that will be a great answer for many institutional type of clients. The second area, as I said, distribution capabilities. We really reviewed and aligned our coverage setups and, again, mentioned organization efficiency, lot of reduction of duplications. We got much leaner. We are on the way to become much leaner. Rigorous execution on the cost initiatives like target operating model refinement, vendor management and, as I said, the KPIs. Let me say to come to the strategic partnerships. Yes, we have very much the EUR 3 billion is on the flagship areas in Europe, and in Germany, the four products, what Claire mentioned, has really received huge inflows from our strategic partners, especially Deutsche Bank Private Bank, but also in these areas.
I would give for this question to Claire, She can give you all the details.
Sure. Thank you.
Yes. Just to further address the point on strategic partnerships, which has been absolutely one of the priorities, Asoka has mentioned, in terms of deepening those relationships, and has resulted in excess of EUR 3 billion of inflows in the first quarter. That is spanning all of our partners. I recognize you asked for which ones specifically. It was spread across all of those partners, all contributing, and also across all asset classes. The largest one that we point to is the Swiss insurer, Zurich, which transferred a large passive investment mandate to DWS. That was the largest contribution, but there was a contribution across all others and all asset classes.
Okay. Thank you.
The next question is the line of Arnaud Giblat of Exane. Please go ahead.
Hi. Good morning. I've got two questions, please. Firstly, on costs. Your cost targets for 2019 are very clear. I'm wondering how we should think about any marginal costs on any marginal revenues in excess of 2018 in 2019. My second question is on M&A. Without looking for any specific commentary on any specific speculation, I'm wondering how you're thinking of M&A as an opportunity to further reduce costs. I'm asking this question, especially in light of the significant efforts you're really making on cost reduction. Would you think about a large deal as an opportunity to further materially reduce the cost base? Thank you.
Hi. I'll address your questions on costs. Yes, as you rightly say, we're trying to give very specific guidance for 2019, with an approximately 70% cost-income ratio, and that's assuming broadly flat revenues year-over-year, which is consistent with the outlook we present, and therefore indicates a decline in our costs year-over-year after accounting for the EUR 150 million of gross savings that would be captured into that. I think your question was specifically what's the ups and downs that we would see on either side of that, and we're very much focusing on the 70% cost-income ratio target. We see that as something that we can control in a constructive market environment. It's a profitability driver that's very important for us in terms of managing the business going forward.
There will always be a certain amount of one-offs that we may see that come and go in the cost base, and that's why we point to the target of 70%, which we can certainly manage within certain degrees of revenue movements.
I would like to again reiterate, I can't comment on all the M&A speculation in the market, but I want to say, and I think this question is quite relevant, I do think for the whole industry that the industry had to improve to adopt all the new technology in the industry, what is going on. I do think for that, we've done already bolt-on investments. For example, in Skyline AI, an AI shop, to get more intelligence, introduce more intelligence to our alternative platform. We have been engaged with Neo in a very innovative distribution platform in Middle East, and we are engaging, and we are looking for this kind of opportunities to modernize and to introduce a state-of-the-art platform into our asset management platform in all the asset classes, all the platform in all the regions. This is super relevant question.
I do think that is a very much also our strategic thoughts are going on.
Okay, thank you.
The next question is the line of Anil Sharma of Morgan Stanley. Please go ahead.
Hello. Yes, Anil from Morgan Stanley. Just one question. The 2%-3% net new money target for 2019, if I look at the consensus, it's just below the bottom end of that range. I'm curious as to what you think they're missing. I take the point you've got there on the slide with the strong pipeline, could you just give us a bit more color? Has some of that started to fund or is there some institutional mandates that you have visibility on that gives confidence that the 2%-3% range could be hit this year? Thank you.
I do think, look, it is always, Anil, to address why people are underestimating our potential, what we are seeing ourselves is always difficult and as a former investor, I would say, yes, might be the models are underestimating our potential. That is our management work to get that out. I do think, for example, net inflows, there is a huge spread between our aspirations and consensus, how they are guessing and judging and estimating our potential there. I do think after very difficult year, 2018, and if you look now, for example, in flows of the first quarter 2018 compared to first quarter 2019, we had a huge swing of flows of EUR 10 billion. X cash, much higher, EUR 13.5 billion. I am expecting that this consensus is going to change. That is what I am expecting.
Also, in my opinion, it might be also outlining in a consensus difficult market environment what all the industry are expecting. I think there are the two facts that is giving a little bit the spread. Again, we know that we have a very ambitious target, and we know that we are expecting, too early to talk about turnarounds after one quarter. We want to continue our momentum. We want to have further inflows into especially into our long-term asset base. This is something what we are very much looking on. That is exactly where our profitability is coming from. From this standpoint, I do think that word is too big to say conundrum, but that will hopefully more or less converge together in the near future.
That is helpful. Thank you.
There are no further questions at this time. I hand back to Oliver for closing comments.
Yeah, thank you very much, and thank you everyone for dialing in today. Obviously, for any follow-up questions, please feel free to contact the IR team. Otherwise, we wish you a good day. Bye-bye.
Thank you.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.