Ladies and gentlemen, thank you for standing by. I'm Hailey,
your Chorus Call
operator. Welcome and thank you for joining the First Quarter twenty nineteen Analyst Conference Call of the DWS Group. Throughout today's recording presentation, all participants will be in a listen only mode. The presentation will be followed by a question and answer session. I would now like to turn the conference over to Oliver Flaid.
Please go ahead.
Yes. Thank you very much, operator, and hello, everybody, from Frankfurt. This is Oliver Flade from Investor Relations, I would like to welcome everybody to our first quarter twenty nineteen 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 Doctor.
Zuka Wohrmann, our CEO and Claire Peel, our CFO. And Zuka will start today with some opening remarks and then Claire will take you through the presentation. For the Q and 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 and 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.
And now let me hand over to Ahsoka.
Thank you, Oliver. Hello, everybody, and welcome. I am very pleased to present the results for the first three months of twenty nineteen. 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 twenty eighteen, 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 costs by 2% compared to quarter four twenty eighteen. In the context of a dynamic late cycle market environment, our management team also reviewed the priorities, initiatives of BWS 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 CO area and cross central functions. Second, and 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 €3,000,000,000 inflows during the first quarter and the fourth, a refinement of our medium term targets to reflect change market conditions. I will go into detail on this point at the end of this presentation. To summarize, the first quarter twenty nineteen 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 twenty nineteen, starting with the key financial highlights. Adjusted profit before tax was a 153,000,000 in q one twenty nineteen, 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 q one were 2,500,000,000.0, primarily driven by strong performance in targeted growth areas of passive, alternatives, and multi asset.
Excluding cash, net inflows were €7,400,000,000 in the quarter. Fund performance improved and flagship products supported positive flow momentum in q one. Let's move to our financial performance snapshot starting
at
the top left. AUM increased to $7.00 4,000,000,000, up 6% quarter on quarter driven by improved market performance, positive FX movements, and net inflows. Moving to the top right, revenues of 534,000,000 represent a quarterly decline of 3% impacted by lower management performance and transaction fees. Management fees recovered faster than anticipated due to the strong recovery in markets following the sharp q four decline and with a resilient management fee margin of 30 basis points. On the top left, adjust sorry.
On the bottom left, adjusted costs were down 2% quarter on quarter to 382,000,000, driven by lower general and administrative expenses. This resulted in a cost income ratio of 71.4% for q one. Adjusted profit before tax was 153,000,000, down quarter on quarter, but up year on year given the continued downward trend in costs. Let's recap on the market environment in q one. The 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 SDAX increasing by 14% and the MSC 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 704,000,000,000 in q one twenty nineteen driven by favorable market performance, positive FX movements, and net new inflows.
The stronger equity indices contributed 35,000,000,000 of AUM, accounting for the majority of the 42,000,000,000 increase at quarter end. And this was further supported by 6,000,000,000 in positive FX movements as well as net inflows, which I'll which I'll now explain in some more detail. In q one, we reported €7,400,000,000 of net inflow flows 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 dividend reported strong inflows against the backdrop of equity outflows in the European retail market.
Improved performance at Concert Calder Morgan resulted in great inflows, and the DWS dynamic opportunities fund exceeded the 1,000,000,000 AUM threshold at the April following inflows in q one. These were further supported by sustained strong real estate inflows to our 10,000,000,000 fund family, Grand Visits, and to our US offering, Reef America two. 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 6,200,000,000.0 of inflows in q one, split roughly between new mandate wins, European, and US ETP inflows. In particular, our US ETF saw significant progress in the quarter, attracting 1,900,000,000.0 of inflows to existing products as well as to other newer offerings.
Alternative inflows also increased substantially to 2,600,000,000.0 in q one, reflecting strong flagship flows in addition to large US 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 q one 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 2,500,000,000.0 in the quarter. Let's look more closely at the cash trends.
We reported 4,900,000,000.0 of cash outflows in q one nineteen with inflows in the first two months, including a 1,400,000,000.0 mandate win, more than offset by outflows relating to European money market reforms and seasonal US cash movements. Volatility in the cash line is a trend we typically see within the quarters. And 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 and l given cash contributes just 1% to 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 twenty nineteen, we predominantly focused on expanding our ETF offerings, launching four innovative new products, spanning thematics and ESG. In The U. S, we launched the Xtracker MSCI USA ESG Leaders ETF with 740,000,000 in seed capital, making it the largest ESG ETF launch in the market. The product was developed in collaboration with a European pension insurance client.
Looking forward to q two, 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 US where we have partnered with the S and P to launch an ETF that will provide a sustainable alternative to its US equity benchmark, the S and P five hundred. Moving on to revenues. Adjusted revenues are down 3% this quarter at 534,000,000. Management fees and recurring revenues decreased by 12,000,000, mainly due to a shorter business day quarter.
Given the strong market recovery following the q four decline, management fees rebounded quicker than expected, and I will discuss movements in the asset classes shortly. Performance and transaction fees decreased by 12,000,000 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 in transaction fees to increase in q two with a likely contribution from a European infrastructure fund. Other revenues increased by 9,000,000 in q one, driven by a smaller negative change in the fair value of guarantees compared to q four. Moving to the margin breakdown by asset classes.
Overall, our management fee margin was 30 basis points in q one 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 q four. FQI management fees and margin were down over the quarter, reflecting net outflows and lower distribution fees in q four. For passive, both management fees and margin are up quarter on quarter driven by continued net inflow flows and improved market conditions.
In alternatives, margin and fees were both up in q one, reflecting incremental real estate revenues and the positive effects of liquid real asset inflows. Moving on to costs. Total adjusted costs decreased to GBP $382,000,000 in Q1 twenty nineteen, down 2% quarter on quarter and 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. However, 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 £35,000,000 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 4,000,000 lower compared to q four. And together, these declines more than compensated for the expected higher DB Group service charges, which normalized in Q1 twenty nineteen. 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 €150,000,000 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 2019 before achieving our target of below 65% in the medium term. So 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 growth cost savings targets by year end. Strong flow momentum resulted in €2,500,000,000 of net inflows and was supported by well performing flagship funds. And with support from our innovative product launches and strategic partnerships, we anticipate inflows to continue. Thank you, and I will now hand over to Ahsoka 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 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. So going forward, we will target a 3% to 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% to 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 and A.
Thank you very much, Luzuka. And operator, we're ready for Q and A now. And again, if I could remind everybody in the queue to limit themselves to two questions. Thank you.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch tone telephone. To draw your question, you may press star followed by 2. And one moment for the first question, please. First question comes from the line of Jack Henry Gallaud of Kepler Cheuvreux.
Please go ahead.
Yes. Good morning, everyone. I have two questions, please. The first one would be on Claire, you were mentioning the costs and 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, it's a question, it's a combo on consolidation. The first one would really be on this UBS report in the ST. How come these things actually leak? That's the really main question I have. And the second, that would be a huge, 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.
Good morning. 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 and A. On the compensation costs, we had some seasonality effects in benefits, in particular, pertaining to the bonus period that would not repeat going forward. And on the g and a side, we had some specific external, transaction fees that wouldn't repeat going forward. So the two would effectively offset to some degree.
Going forward, there's always a certain amount element of small seasonality effects going forward, but not too material. I also commented, in terms of q two on an expected, contribution from a European infrastructure fund performance fee, bearing in mind, that 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, you know, apart. Again, first of all, we do not comment on market speculation as a matter of principle. Mhmm.
In managing DWS, we have a clear priority on generating organic growth and improving our efficiency. And additionally, as we always stated, we want to actively participate in the consolidation of the asset management industry if it is really create shareholder value and does not inter you know, interfer with our fiduciary duty of our clients and if that's going to pay out into our, you know, business model. And but again, you know, please understand with regard to recent speculation, we are not really going to comment.
Understood. That's okay. Thank you. The
next question is from the line of Mike 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. So a 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.
So I was just wondering, I know there's a lot of drivers to this, but how do you explain that decline? And 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? And then 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. And 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 basis points in the first quarter and that compared to 30.3 basis points in the fourth quarter of twenty eighteen. There was we'd originally anticipated a much more significant downward trend from the market downturn we saw in q four. That was lesser than we had expected. And 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 q one was greater than the margin of the outflows.
Mike, if I, you know, can address your, you know, 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's very much depend on one non controllable part from the management, for example, equity market movements like in the fourth quarter. So therefore, we want to, you know, we are directing our business to the high margin business. And for the future, we are very much, as I said, committed to this area, this high margin businesses and products. And it is and I have and you can see we are very resilient, you know, in the in the margin, and I do think, more than the wider industry.
And for us, it's always performance and innovation is a great protection against the feed dilution.
And 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, and 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 forward.
Thank you.
The next question is from the line of Stuart Graham of Autonomous Research. Please go ahead.
Hi, thank you for taking my question. Two questions, please. The first one is, Osaka, 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? And then the second question is a kind of number question. You referenced €3,000,000,000 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 does that €3,000,000,000 come in, please? Thank you.
Again, Stuart, thank you for the both questions. And 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, you know, announced and well talking to the market during the IPO. All the things what I, you know, you said promise, but I think, committed is to, look priorities and projects, what is directed to grow strategically. So that is what we exactly done.
That's what I exactly set 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. And the third area, the refinement, and I think that was one of the most, you know, 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.
So therefore, I do think I felt we've done a very substantial, you know, refinement actions already in the last last six months. And I do think and I want to say that also the strategic changes, and that is what think what I really said and mentioned. We want to do in our own business, you know, then all the what is, you know, going on, outside, our organization. That means also selected investment in product capabilities what we've done. And I think Claire has very clearly mentioned the broadening of our ETF products with the new product innovations like you know, ETF.
But also, I want to bring additional team like, you know, artificial intelligence, big data, future mobility, this kind of thing. This is very important for us to be positioned us in the industry strategically. We also successfully launched a direct, lending fund, what I feel in light of low interest rates, that will be a great answer for many, 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 a target operating model refinement, vendor management, and as I said, the KPIs. And let me say to come to the strategic partnerships. Yes, we have very much, the 3,000,000,000 is on the flagship areas in Europe, and in Germany, the, the four products what Claire mentioned, has really, you know, received huge inflows from our strategic partners, especially, you know, Deutsche Bank, private bank, but also in these areas. But I would give for this question to Claire, and 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, as Sokka has mentioned, in terms of deepening those relationships and has resulted in in excess of €3,000,000,000 of inflows in the first quarter. That's spanning all of our partners. I recognize you, asked for which one 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 from the line of Arnold Gibler of Exane. Please go ahead.
Hi. Good morning. Yes. I've got two questions, please. Firstly, on costs.
So your cost targets for 2019 are very clear. I'm wondering how we should think about any marginal costs or any marginal revenues in excess of 2018 in 2019? My second question is on M and A. Without looking for any specific commentary on any specific speculation, I'm wondering how you're thinking of M and 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.
If you were to would you think of Ala Lodge as an opportunity to further materially reduce the cost base? Thank you.
Hi. I'll address your questions on costs. So 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 on year, which consistent with the outlook we present and therefore indicates a decline in our costs year over year after accounting for the €150,000,000 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 eyes 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.
And, I would like to again reiterate, I can't comment on all the M and A speculation, in the market, but I want to say and I think this 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, you know, in in in the industry, you know, in what what is going on. And I do think for that, we done already bolt on investments. For example, in Skyline, an AI shop to get more intelligence, introduce more intelligence to our alternative platform. We have been engaged with Neo, the very innovative distribution platform in Middle East. And we are engaging and we are looking for this kind of opportunities to modernize and to be a state of the art, you know, introduce a state of the art platform into into our asset management platform in all the asset classes, all the platform, and all the regions.
And 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 from the line of Anil Sharma of Morgan Stanley. Please go ahead.
Hello. Yes. It's Anil from Morgan Stanley. Just one question. The two to 3% net new money target for 2019, if I look at the consensus, it's just below the bottom end of that range.
So 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, but 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, you know, the 2% to 3% range could be hit this year? Thank you.
I do think, look, it's 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 work management work to get that out. I do think, for example, net inflows, there's a huge spread between other aspirations and consensus, what is, you know, how they guessing and and judging and estimating other potential there. But, you know, I do think after very difficult year 02/2018.
And if you look now in, for example, in inflows of the first quarter two thousand eighteen compared to first quarter nineteen, we had a huge swing of flows of 10,000,000,000. Ex cash, much higher, 13 and a half billion. I am expecting that this consensus is going to change. It's, you know, that is what I'm expecting. But also in my opinion is might be also, outlining in a consensus difficult market environment what, you know, all the the industry are expecting.
So I think there's a two facts that is giving little bit the spread. But again, we know that we have a very ambitious target, and we know that we are I 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.
And from this standpoint, you know, I do think this let me that word is too, you know, too big to say conundrum, but that will hopefully more or less converge together in the near future.
That's helpful. Thank you.
And there are no further questions at this time. I hand back to Oliver for closing comments.
Yes. 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 has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.