Ladies and gentlemen, thank you for standing by. I'm Natalie, your conference call operator. Welcome, and thank you for joining the DWS Group Full Year and Q4 2022 results with investor and analyst conference call. 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 would like to ask a question, you may press star 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, good morning, everybody from Frankfurt. This is Oliver from Investor Relations. I would like to welcome everybody to our earnings call for the full year of 2022. As always, I hope you're keeping healthy and safe. Before we start, I would like to remind you that the upcoming Deutsche Bank analyst call will outline the asset management segments results, which has a different parameter basis to the DWS results that we are presenting today. I'm joined by Stefan Hoops, our CEO, and Claire Peel, our CFO. Stefan will start with some opening remarks. Claire will take you through the financial presentation afterwards. For the Q&A, please could you limit yourself to the two most important questions so that we can give as many people a chance to participate as possible.
As always, I would also like to remind you that the presentation may contain forward-looking statements which may not develop as we currently expect, and I, therefore, would like to ask you to take note of the disclaimer and the precautionary warning on the forward-looking statements at the end of our materials. With that, I will now hand over to Stefan.
Thank you, Oliver. Good morning, ladies and gentlemen. Welcome to our Q4 and full year 2022 earnings call. Together, Claire and I will take you through our key developments in the fourth quarter and the full year. We will provide some guidance on what to expect in 2023 and beyond. Before we get into the details, allow me to set the context. If you had to design an ultimate super- bear scenario for an asset manager, it would look like our 2022. On the one hand, we were dealing with one industry challenge after another. You start with all asset classes dropping. On top of that, a war in Europe, plus specific concerns about the German economy. On the other hand, we were facing our own DWS- specific issues.
We had a raid on our headquarter, plenty of negative news flow, not to mention a very visible and abrupt CEO change. To call last year challenging would be an understatement of what we went through. If you look at our 2022 results, you will see that this remarkable franchise did not just survive the battle with the ultimate super bear, we actually came out looking pretty healthy. Total adjusted revenues remained in line with record levels achieved in 2021, driven by even stronger management fees year-on-year. The adjusted cost- income ratio was in line with our guidance of approximately 60% for the full year, leading to full year adjusted profit before tax of EUR 1 billion in 2022, slightly lower compared to 2021, still up 33% from 2020.
Although net flows were negative as investors de-risked their portfolios, we continued to attract client demand in alternatives and multi-asset. All in all, a pretty solid outcome considering the circumstances. The same could be said about Q4, which was a complicated quarter on many fronts. In the late summer, we saw a steep decline in asset prices, which resulted in weakened client sentiment and hence led to Q4 outflows. In the last quarter of the year, markets were down initially and then reversed. At the same time, the euro strengthened substantially versus the U.S. dollar, which in turn lowered the euro value of our U.S. assets. In addition, our great CFO department was very busy concluding a number of projects to ensure we start the new year ready for our 2025 financial plan. For example, the reversal of carried interest, which already led to a cost credit in Q4.
We also started a large restructuring program to reduce our cost run rate. Claire will provide more insight shortly. Before she does, let me provide an update on the important topic of ESG. In relation to the greenwashing allegations, I would like to start by giving you transparency on where we stand with our own investigations. We're now at a state where we can draw conclusions. As we've already said, we stand by our financial disclosures and prospectuses. We can also say that DWS, like the rest of our industry and beyond, should have great sensitivity when it comes to ESG communication. We have learned from the investigations and from our internal reviews, and we can obviously always improve. We are in the process of ensuring that we have ever more robust ESG governance, processes, and controls going forward.
We already communicated some changes on our ESG governance in the past months. We'll share more details in the coming weeks. When it comes to the external investigations, as we said before, we are fully cooperating with authorities. We are fully transparent and are sharing everything that was requested, plus anything we deemed relevant. For example, we have so far reviewed and shared around 3 million documents. Nevertheless, you will care about timelines and potential outcomes. On timing, we are in active discussions with all authorities and are hopeful we are moving to a resolution. I can assure you that our board and I are strongly focused on resolving the matters as quickly as possible. We obviously cannot control the process of resolutions with the authorities. We operate on their timeline. On potential resolutions, our goal is to arrive at an appropriate and satisfactory resolution of the matters.
You've seen that others have been investigated and sanctioned for certain misleading statements and practices around ESG in the U.S. However, all cases are different, and there are no precedents in Germany. Therefore, as we've already indicated in our last annual report, we cannot exclude that the outcome may be adverse and could involve financial penalties. However, as I said, we stand by our disclosures and our prospectuses and look forward to speedy resolution. As mentioned, we are fully transparent with the authorities. In the interest of transparency with you, we are taking an unconventional step and will share with you the key outcomes of our internal ESG governance process and policy review on our website as soon as possible.
You will not see us bragging about ESG in the future, one thing is clear, we will remain committed to ESG and to the clearness and fairness of our ESG disclosures. Now coming back to the purpose of today's call, our results and the year ahead. Looking forward, we will focus on executing on our refined strategy as presented at our Capital Markets Day in December. We will do this while honoring our fiduciary responsibility to serve our clients as well as we can, deliver the best possible investment performance, and create shareholder value. To demonstrate our commitment to shareholder value, the DWS executive board is pleased to propose a higher dividend of EUR 2.05 per share for 2022, subject to approval at our 2023 annual general meeting. I look forward to providing an outlook for 2023 later.
For now, over to Claire to explain our results.
Thank you, Stefan. Welcome to everyone. Today I will present our financial results and activities for the fourth quarter and full year 2022, starting with our Q4 financial snapshot. Starting at the top left, AUM remains stable at EUR 821 billion, supported by positive market developments in the fourth quarter. On the top right, adjusted revenues total EUR 634 million, down from Q3 due to lower management fees in Q4. On the bottom left, adjusted costs fell to EUR 380 million, down 13% quarter-on-quarter due to lower quarterly compensation and benefits costs. This resulted in an improved adjusted cost-income ratio of 60% and a solid adjusted profit before tax of EUR 254 million in the fourth quarter. Moving on to the full year snapshot.
2022 has been an extremely challenging year compared to 2021. Markets remain turbulent due to a range of factors from geopolitical tensions, the European energy crisis, rising interest rates, and higher levels of inflation. Collectively, these created greater industry pressures, which were reflected in our full year 2022 results. AUM decreased to EUR 821 billion, down 11% year-over-year, mainly due to EUR 108 million, sorry, EUR 108 billion in negative market movement, but up 4% from full year 2020. Adjusted revenues remained resilient at EUR 2.7 billion, broadly in line with record levels in full year 2021 and supported by stronger management fees up 20% from full year 2020. Adjusted costs have increased compared to full year 2020 and 2021 as we continued to invest.
This resulted in a full year adjusted cost-income ratio of 60.6%. Adjusted profit before tax exceeded EUR 1 billion in 2022, down 7% from full year 2021, but representing a compound annual growth rate of 15% from full year 2020. Let's recap on the market environment. After a volatile start, we saw investor risk appetites increase in Q4 amid news of better inflation data, a milder European winter, and China easing its zero-COVID policies. Major equity indices also began to rally while government bond yields declined and the U.S. dollar weakened. This was short-lived as central banks remained hawkish and overall U.S. government bond yields remained unchanged at the end of Q4. While European rates were slightly up and the U.S. dollar lost almost 10% against the euro.
Collectively, these developments had a wider impact on the asset management industry as well as DWS, as reflected in our AUM, which I'll now outline. We reported EUR 821 billion of assets under management at year-end 2022, almost flat quarter-on-quarter, but down 11% year-on-year. In Q4, market performance was positive for the first time this year, helping to offset unfavorable FX movements and small quarterly net outflows. This also marked reversal from the first three quarters in which negative market movements accounted for the majority of our AUM decrease since the end of 2021. Looking at our targeted growth areas of passive and alternatives, these asset classes combined continue to represent approximately 39% of our total global AUM in 2022, slightly up from 2021.
In particular, alternatives AUM increased slightly to EUR 118 billion, supported by full year net inflows, while passive assets decreased to EUR 199 billion due to a mix of negative market performance and net outflows. Overall, net flows remained negative in the fourth quarter and the full year due to weaker investment sentiment, which I will now explain. In the fourth quarter, both retail and institutional investors continued to make portfolio allocation changes in response to ongoing volatility. This resulted in Q4 net outflows of EUR 1.6 billion and EUR 9.6 billion excluding cash inflows of EUR 8 billion. The largest quarterly redemptions came from active fixed income, especially from institutional investors in the U.S.
Overall, 2022 has been a difficult year for active fixed income as the asset class has come under greater pressure amid record levels of inflation, rising interest rates and the prospect of further quantitative tightening. Alternatives has also shifted into negative territory for the first time in Q4, reporting EUR 2.9 billion of net outflows following three consecutive quarters of net inflows. This is partly due to planned capital distributions from one of our pan-European infrastructure funds, coupled with outflows in liquid real assets. To note, capital returned is often reinvested into successor funds in the same alternative asset class, helping support net new revenue growth. Passive continued to report outflows in Q4, albeit at a lower level compared to Q3. This was mainly due to mandate losses in Europe, which were partly offset by a significant mandate win in APAC.
Furthermore, European-listed Xtrackers attracted net inflows in the fourth quarter and have continued to report positive flow momentum into the new year. Despite reporting overall outflows in Q4, DWS attracted net inflows into active equity. Active equity inflows of EUR 0.3 billion were driven by European retail investors, including inflows into our flagship Top Dividend Fund and the DWS Invest ESG Equity Income Fund. In short, Q4 concluded a challenging year of flow performance in 2022. Total net outflows were EUR 19.9 billion in the full year and EUR 13.9 billion excluding cash, as investors took greater action to reposition and de-risk their portfolios in challenging economic environments.
This investment behavior has been persistent throughout the year, especially across lower margin asset classes of active fixed income and cash, which jointly accounted for the majority of total annual net outflows. While passive has reported outflows for most of 2022, we are seeing positive flow momentum at the start of 2023. In addition, we've continued to attract positive flows across other areas of our diversified investment portfolio. In full year 2022, active multi-asset recorded EUR 5.9 billion of net inflows driven by both institutional and retail investors. With our flagship fund concept, Kaldemorgen, reporting strong annual net inflows. Alternatives sustained positive flow momentum from 2021 with EUR 0.6 billion of net inflows in the full year, driven by continued client demand for liquid real assets and real estate.
Alternative net inflows excluding the capital distributions totaled EUR 3.4 billion in 2022. Inflows into these high- margin alternative strategies have been important to sustain top line revenue growth and will continue to do so in the new year. ESG products attracted EUR 1 billion of net inflows in 2022, driven by both active and Xtrackers ESG funds. New product launches have continued to contribute net inflows in 2022, reaffirming the importance of product innovation to deliver our financial targets, which I will now explain in more detail. New product launches are fundamental to supporting clients' investment needs in ever-changing markets. Looking ahead to 2023, we are strengthening our Xtrackers and alternatives offerings, in particular, to ensure we remain on track to achieve our AUM growth targets of more than 12% and 10% respectively by 2025.
This is reflected in our new product launches in the first quarter of 2023. To continue growing our Xtrackers business globally, we are aiming to complete our range of UCITS ETPs this year, as well as roll out more specialized passive products in the U.S. At the same time, we are planning to leverage existing and new alternative funds to drive European transformation, which is one of our top strategic priorities in 2023. We will expand our flagship vintage series and open-ended funds across infrastructure and real estate in response to growing investor demand. Finally, we aim to capture inflows into our value asset classes by developing actively managed products based on market dynamics, strengths and innovation.
We will build out new capabilities in untapped markets, piloting digital asset use cases. Overall, new product launches since our IPO in Q2 2018 have attracted EUR 1 billion of net inflows in the fourth quarter and approximately EUR 9 billion of inflows in the full year. In particular, growth asset classes of Xtrackers and alternatives have been consistent key flow drivers, jointly accounting for more than three-quarters of our EUR 50 billion of cumulative net inflows from new product launches since 2018. This has helped to support top line revenue growth. Moving on to revenues. Total adjusted revenues stood at EUR 634 million in the fourth quarter, down 8% from Q3, and excluding the gain on sale relating to our digital investment platform in Q4. The quarterly decline in the total adjusted revenues included two key developments within the other revenue category.
Firstly, a significant tightening of swap fund spreads, especially in December, which resulted in an unfavorable change in the fair value of guarantees provision. Secondly, negative mark-to-market valuations of co-investments in Q4, predominantly from real estate funds. Together, these more than offset a EUR 20 million contribution from our Chinese investment Harvest, as well as positive deferred compensation hedge and net interest revenues. Performance and transaction fees were also lower quarter-on-quarter as we benefited from the recognition of strong real estate performance fees in Q3. Management fees and other recurring revenues also declined compared to the third quarter, mainly due to unfavorable FX movements in Q4. In the full year, adjusted revenues totaled EUR 2.7 billion in 2022, in line with record levels from 2021 and representing a compound annual growth rate of 9.5% since 2020.
This was supported by performance and transaction fees, which accounted for 5% of total full year adjusted revenues in line with our guidance for 3%-5% in 2022. Together with stronger management fee revenues, this enabled us to sustain a resilience management fee margin in 2022. Full year 2022 management fee margin was 28.1 basis points, demonstrating the strength of our diversified portfolio. Management fee revenues grew to EUR 2.5 billion in 2022, up 3.6% year-on-year, driven by growth areas of alternatives and passive. Together, these represented approximately 40% of total management fee revenues at the end of 2022, compared with approximately 37% at the end of 2021.
This growth was driven by a 22% increase in alternatives management fee revenues, supported by strong net inflows over the past two years. As a result, the alternative management fee margin increased to 50 basis points in 2022, up from 48 basis points in the prior year. Passive also reported positive management fee growth year-over-year, enabling us to achieve a stable management fee margin of 18 basis points in the full year. This is due in part to strong management fees generated from passive inflows in 2021, which overcompensated for net outflows in 2022. Meanwhile, active equity management fees were down slightly year-over-year, mainly due to negative market movements throughout the year. Although the management fee remained resilient at 71 basis points.
As we progress into 2023, we anticipate potential revenue pressures to continue amid ongoing market uncertainty and sector valuations, but expect our diversified assets to continue providing some protection against this. In particular, we expect growth asset classes of Xtrackers and alternatives to make up a greater proportion of overall revenue composition by the end of 2025. Looking more closely at the contribution from our Chinese investment Harvest. For more than a decade, we have owned a 30% stake in Harvest Fund Management in China. This joint venture continues to be fruitful, delivering recurring revenues for DWS, which is captured in the other revenue category. In full year 2022, Harvest generated EUR 69 million of contributions, including EUR 20 million in Q4, and helping to support overall revenue growth.
At the end of 2022, Harvest AUM stood at EUR 190 billion, down slightly year-on-year, mainly due to unfavorable FX movements. This more than offset positive flow momentum in the full year, which has been supported by Harvest's new product launches during 2022. Moving on to costs. In Q4, total adjusted costs decreased to EUR 380 million, supporting an improved adjusted cost income ratio of 60% in the fourth quarter. This decrease is mainly due to a reduction in adjusted compensation and benefits costs in Q4. As noted in the third quarter, we have restructured a fund vehicle to enable us to better align recognition of mismatched carried interest and performance fee. This has resulted in the reversal of incurred carried interest in the fourth quarter.
Adjusted general and admin expenses included higher marketing spend and other year-end activities. In the full year, total adjusted costs increased year-over-year, but with an adjusted cost-income ratio of 60.6% in line with our guided ratio of around 60% for 2022 and supported by revenues. As a reminder, the total adjusted cost base excludes EUR 58 million of investments into our infrastructure platform transformation in full year 2022. It also excludes other non-recurring expenses, most notably an impairment of an amortized intangible assets of EUR 68 million in Q4. This specifically relates to U.S. mutual fund retail contracts, where the value was established from a historic acquisition and measured periodically at fair value.
To conclude, Q4 marks the end of a challenging year, but also a year in which DWS demonstrated its ability to deliver profitable, disciplined growth in spite of ongoing market volatility. In 2023, we expect to face many of the industry pressures we faced in 2022, but this year we are working harder and faster to recalibrate the way we work to strengthen our ability to navigate markets and geopolitical dislocation, but also ensure that we are well positioned to deliver growth in an ever-evolving environment. We expect a slightly higher adjusted cost-income ratio in 2023, but below 65% as we reach the peak of our transformation costs to optimize our business operations.
In addition, we forecast total adjusted revenues to stay essentially flat in 2023 compared to 2022, supported by expected positive flow momentum in our targeted growth areas of Xtrackers and high margin alternatives. Thank you, and I will now hand over to Stefan for closing comments.
Thank you, Claire. Look, the last 15 minutes must have sounded like the attempt of a victory lap. To be clear, we do take pride in our 2022 results because they reflect the strength of our franchise, even under exceptionally challenging circumstances. That said, we are under no illusion that we enter 2023 from a difficult position. Our starting AUM being EUR 50 billion below our 2022 average, ongoing inflation pressures and ever greater competition. Fortunately, all of these conditions have been factored into our refined strategy that we outlined at our Capital Markets Day back in December. This is also why we fit the ground running in the new year, focusing on developments that enable disciplined portfolio optimization and that align with our four key categories of reduce, value, growth, and build.
In keeping with the spirit of greater transparency and accountability, allow me to update you on where we currently stand, starting with reduce. We're taking active action on our cost base to help us achieve our refined adjusted cost-income ratio target of below 59% by 2025. One of the levers to get us there is to delayer our organizational structure and right-size headcount. We've started a sizable restructuring program in Q4, and we'll continue to prioritize this effort in 2023 to ensure we remain on track to achieve our targeted run rate efficiencies as outlined at our Capital Markets Day. In addition, we've recently completed the transfer of two businesses, our digital investment platform, IKS, to BlackFin Capital Partners, and our private equity solutions business to Brookfield Asset Management.
The colleagues in those businesses have done a great job while at DWS, and I would like to personally thank them for their service. At this stage, it was in the best interest of our clients and investors to transfer these subscale businesses into better hands. Together, these divestments will enable us to make savings, but to also reallocate our time and resources to areas where we want to build and grow. At the same time, we are strengthening our value franchise so that we can maintain our strong position in mature markets. Right now, we're in the process of changing the compensation framework for our portfolio managers in line with risk and regulatory guidelines. The goal is to ensure we continue delivering strong investment outperformance for our clients. One area I will be personally focused on is our offering in institutional fixed income.
As already discussed at our Capital Markets Day, our recent fixed income performance has not been to the standard our clients deserve. Obviously, I didn't like our Q4 outflows either. That said, we see great opportunity for growth, especially now that interest rates are rising, which is why we will make targeted investments in this space. Furthermore, we have reorganized and announced new leadership for our multi-asset, equity, and research teams to leverage existing expertise and strengthen our capabilities. This leads me nicely onto our growth category in which we are focusing on Xtrackers and alternatives. As Claire noted earlier, both asset classes combined accounted for approximately 40% of total management fee revenues in 2022, up from 37% in 2021.
Obviously, we are further intensifying our focus on Xtrackers and alternatives to ensure we deliver on our AUM growth targets of more than 12% and more than 10%, respectively, by 2025. To keep us on this trajectory, we're concentrating on product innovation in both business areas. In alternatives, our focus on European transformation is gaining momentum with multiple funds in marketing. In addition, we will be supported by new hires such as Paul Kelly, who will join us in a couple of days as Global Head of Alternatives. I very much look forward to having him on the team. In Xtrackers, we are building a pipeline of targeted and bespoke ETFs to sustain the positive flow momentum we've seen at the start of 2023. Finally, looking at the areas where we want to build and develop new capabilities.
On this front, our teams have already started to assess strategic partners and commence due diligence on potential targets. The drop in market prices for digital assets could present interesting opportunities that bring us to the next level. We're actively preparing to address the likely legal and regulatory challenges associated with such new opportunities. I expect to provide an update on this in the coming quarter. In the meantime, we remain laser-focused on accelerating our strategy implementation across all four categories throughout 2023. Now with markets moving the right direction, we are even more confident in the strategy we presented at our Capital Markets Day and in our ability to deliver on our new 2025 financial targets. Thank you. I will now pass over to Oliver for Q&A.
Yeah. Thank you, Stefan. Operator, we're ready for Q&A now.
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 withdraw your question, you may press star followed by two. Anyone who has a question may press star followed by one at this time. Our first question is from the line of Jacques-Henri Gaulard from Kepler Cheuvreux. Please go ahead.
Yes, good morning, team. Just two questions, maybe three, because you answered one, Stefan. First of all, on the cost management and the accumulation of one-offs you had, I was wondering if this was something that you had planned for a while or looking at Q4 not turning up necessarily where you thought, "Okay, I might as well gain a little bit of down on 2023 and just, you know, kill as much as possible to actually clear the pathway." That's the first question. The second, I think you confirmed the outlook for 2025, as well as the commitment to the EUR 1 billion dividend, I take it, even if this was not specific. I'll afford a very quickly third one.
I think, Claire, you mentioned a one-off revenue in Q4, which is not into the adjusted revenue. If we could have a bit of detail because I probably bypassed it. I'm sorry. Thank you very much.
Hi, Jacques-Henri. Thank you for the questions. I'll take the first couple there. Firstly on Q4, yes, we do have some exceptional cost items there. The item that is specifically unplanned for is the impairment of intangible assets, which was EUR 68 million in the fourth quarter, and this relates to U.S. retail mutual fund contracts. We have to do a fair value, you know, validation of the value of that intangible asset periodically. In the fourth quarter, we had a EUR 68 million impairment on that. Very much something that's unplanned, but equally, represents the valuation of that portfolio, if you like. Otherwise, what was planned is the transformation charges. We've been very clear on the IT transformation program that we have. Those were in line with expectations.
We took in Q4, EUR 23 million of severance and restructuring costs, which is obviously setting us up for restructuring activities to deliver against efficiencies that we've committed to going forward and to take us forward on our future cost-income ratio targets. The second question related to the extraordinary dividend that we committed to at the Capital Markets Day of up to EUR 1 billion in 2024, obviously subject to pipeline for capital commitments. That commitment is still very much in place. We further have announced today the dividend proposal for 2022. On the adjusting revenue item, if I heard the question correctly, in Q4, we reported EUR 30 million of revenues, which is outside of our adjusted revenues. That would obviously be on top.
That EUR 30 million represents a gain on sale from the deconsolidation of our IKS platform and now the joint venture partnership that we have with BlackFin.
That's lovely. Thank you so much.
The next question is from the line of Haley Tam from Credit Suisse. Please go ahead.
Morning. Thank you very much for taking my questions. If I can ask two, please. First of all, just in terms of fund flows, you did mention you've made some changes in your investment division personnel. I think we saw announced yesterday the departure of Tim Albrecht and the integration of the German equities team to the European equities team. I just wonder if you can confirm what conversations you've had with your institutional investors and your wholesale fund allocators ahead of this change, and if you anticipate any alteration in the recent positive momentum you've seen in equity fund flows as a result of this. The second question, just again, if I can just follow up on those, significant cost adjustments in Q4.
if I think about the severance and restructuring, the transformational changes and the other cost elements, is there any guidance you can give us for 2023? 'cause it seems to me that if we are doing more restructuring of personnel, there could be more changes there. I think I heard you say that the 2023 is gonna be the peak of the transformation spend. if you could just remind us of what to expect, that'd be much appreciated. Thank you.
Hi, Haley. Thank you for the questions. I'll start with the second question on the adjusting items. Firstly, maybe on severance and restructuring. For the full year of 2022, we've reported EUR 37 million of severance and restructuring costs. We do need to continue restructuring the platform to right size and delayer as we come into 2023. Difficult to be really specific on the size of that, but something around the levels of 2022 for severance and restructuring should be appropriate. On the transformational charges, we presented at the Capital Markets Day a slide which showed that we would indeed expect to see our transformation charges reaching a peak in 2023, I think we continue to see that outlook for transformational charges.
Just to recap on that, we said our expenses will reach their peak in 2023 because we'll be operating a dual platform. We will continue to establish our own capabilities while still running on Deutsche Bank's operated services, and we will see upward cost pressure from that DB charging structure this year. Approximately half of those 2023 transformation expenses relate to license costs associated with the new cloud-based technology and associated platforms. We will see those costs increasing in 2023, of course declining as the program comes to a conclusion in 2024. On the other cost adjustments, we would anticipate that we should see those decline in terms of legal expenses as we come into 2023. Regarding litigation expenses, of course, I just have to refer to the statement that those can be...
They can be higher, they can be lower. It's difficult to predict any litigation expenses on the forward. Same statement that we have on that. Hopefully, that clarifies on the other costs.
Thank you. Can I just quickly check? The transformation charges in 2023 then being a peak, they should be more than EUR 58 million we see in 2022, just to understand the scale. Thank you.
Yes, absolutely. They should be, yes.
Haley, hey, it's Stefan. On your first question, just quickly on the org chart in the investment division and then like answering your specific questions on flows and whether it was discussed with coverage and clients before. Going forward, we will have four asset class heads report directly to me, meaning we wanna put much more emphasis on the specificities of the different asset classes. We're going to have head of active, a CIO, head of Xtrackers, and head of alternatives going to me. What we've done over the last couple of weeks is to really have clarity on all of the org chart essentially underneath those four individuals as quickly as possible. One of the things I dislike is uncertainty for too long.
Clearly you wanna make sure that everybody's fully focused on markets and clients and investing. What we've announced over the last couple of weeks are changes in our equity setup. We now have reconfirmed two global cohorts of equity going into our head of active. We announced changes to our multi- asset setup last week. We announced changes to research, that's really it on the changes. I referred to fixed income, where both Vincenzo Vedda, and myself will spend a lot of time on. When it comes to your question on whether it was pre-discussed, yes, it was. Right? Some of those changes now involved new people stepping up to manage funds. We have some super talented people that, you know, so far were supporting the senior person managing a fund.
We promoted a bunch of really senior women yesterday to manage, or the last couple of days, to manage key funds for us. All of that was discussed with coverage and with our key clients beforehand. To answer your question specifically, we do not expect any negative impact on the recent positive flow momentum. I think on the contrary, I would expect even better momentum going forward because of that.
That's very clear. Thank you very much.
Thank you, Haley.
The next question is from the line of Tom Mills from Jefferies. Please go ahead.
Hi, good morning. I had three questions, please. I missed the beginning of the call, so apologies if I something that's already been covered. I was gonna ask around NII gearing. Could you maybe speak a little bit about how you see that playing out in 2023? I guess particularly the sort of benefit that might provide to the top line given the guidance you're providing for 2023. I guess just on the fixed income outflows, you know, a lot of your U.S. peers are talking up expectations of significant fixed income inflows over the next sort of 12-24 months given the changing rate backdrop.
To what extent do you think that you can start to be a beneficiary of that turnaround in sentiment towards the asset class in 23 and beyond? Just on the alt side, could you give us a little bit of an idea on the pipeline coming through this year, given I guess you're talking up that as one of the drivers of a return to net inflows? Thanks very much.
Hey, Tom. We definitely understand there are a lot of competing quarterly calls or full year calls right now. Today is a busy day for all of you. Thank you for joining. On your three questions. The net interest income gearing is something that I'm spending time on. I mean, I've spent the last four years in cash management. I will not be able to give you specific numbers, but the markets are quite different. In the U.S., you tend to really get the benefit of interest rate hikes. It's like minus a spread for the bank. Europe is a bit different.
In Europe, it's much more bilateral negotiations. We expect, let's say substantial enough upside to make up for potentially lower management fees and therefore getting us to stable revenues in 2023 as per our previous guidance. I will not be able to give you specific numbers, right? Given, you know, the quantum of cash we have in multiple currencies, that should be a substantial tailwind for us in 2023. Granted, kind of like the weakest type of revenues. I mean, we're not a bank, right? We're as a manager, but at the same time obviously revenues that we like. Secondly, on flows for fixed income. Yes, look, I think this year was probably one of the tougher years for fixed income, not just for DWS, but overall.
We could go on for some time to discuss a trajectory of years, of spreads, potential defaults. Generally speaking, I think we are constructive on kinda like the rates picture stabilizing. I mean, the Fed will probably go up a bit more. ECB will probably go up. But I think that's stabilizing. I think meaning people will probably not fear asset price losses if they enter the market now. I think on spreads, we probably like investment grade better than high yield, which is fortunately how our franchise is geared. I would expect there to be upside. When you look at our 2022, I think we had some weakness in fixed income performance. I think we can probably improve on our offering for institutionals.
I mean, I grew up being a fixed income to institutional person, so that's something that, you know, I think we can do better. That's why we'll be investing in that space. I do see upside specifically with insurance companies. I think on alternatives, I will keep it high level. Maybe Claire wants to add. We have multiple funds in marketing. I think the ones that I'm personally most excited about is we have an infrastructure fund for retail, which will start being marketed in a couple of weeks. Everybody's talking about retail distribution for alternatives. There aren't really that many offerings in Europe, so that should be one of the first for infrastructure.
You know, I think that it's going to be in high demand given that everybody sees massive investments in infrastructure across Europe. With a couple of funds in the real estate space, which are in active marketing. I mean, we have our normal vintage funds. Paul will join on February 13th, and you will definitely see us increase our focus on private credit. We've always been pretty strong in the equity version of real estate and infrastructure. We've started to have decent debt for infrastructure and real estate offerings. I think our private credit needs to, you know, we simply need to have more on the shelf and it's something that Paul will focus on, we'll update you on over the next couple of quarters.
Thanks, Stefan. That's super helpful. Sorry, can I just ask one follow-up? On the alts outflow in 4Q. Appreciate most, a lot of it was kind of capital return, but I think you mentioned that there were outflows in the liquid real assets piece. Could you just say a bit more about where those came from? Was that on the real estate side?
Yes. You're right that in alternatives, firstly, we did have planned capital redistributions from our pan-European infrastructure funds. That was over EUR 1 billion in the fourth quarter. That's obviously returning capital to investors, but with a strong positive return. Separately, we saw some outflows in liquid real assets, in particularly in some U.S. funds in that example. We've seen strong flows actually in liquid real assets in quarters one, two and three. That was the first quarter that we saw that move into negative territory. As we come into 2023, I would just add that on the planned capital distributions, we do see a final redistribution, back to our investors maybe in the second quarter.
Offsetting that, we are starting to market further series in that range, hopefully to see that capital being returned.
Thanks very much, Claire.
Perfect. Thank you, Tom, and also thank you, Jacques-Henri . We actually got muted before we could thank you for your question.
The next question is from the line of Arnaud Giblat from BNP Paribas Exane. Please go ahead.
Yeah, good morning. I'd like to come back to your revenue guidance. Regarding pro forma revenues in 2023. I mean, there's a major market assumption in there. I wonder if you could share that with us. Also, I suppose, another big part of that guidance is performance fees and as you mentioned earlier, NII. How much are you looking for a step up in performance fees, NII? You said it's gonna step up. I was just wondering for NII if you could give us an indication how much of a contribution that was in Q4. That's a sort of a first big question.
My second one is on cost guidance for you're talking about 65% cost to income. Again, what sort of step up should we be looking for in 2023 particularly? I think you have to unwind the comp reversal you saw in Q4. Some investments, some inflation. I was just wondering if you could put some numbers or some orders of magnitude onto that. That'd be helpful. Thank you.
Yes. I can take that question. Thank you, Arnaud, for the question. Starting on the 2023 guidance, for revenues, we're guiding to broadly flat revenues coming into 2023. I think from what we've seen at the closing of year-end 2022 and the entry point into 2023, that does meet our market outlook. We obviously saw markets perform quite strongly at the end of the year. We guided at the Capital Markets Day to single-digit market growth assumptions during 2023. We've seen some of that achieved as we've come into the year, but we do expect to see some volatility. I would point to the fact that our average AUM for 2022 was EUR 873 billion compared to closing at EUR 821 billion. We're aware of that difference.
We have seen some of that already being made up with a strong start coming into January. The market assumptions that we have made are holding in the outlook that we see. On the performance and transaction fees, we increased our guidance to be 3%-6% of our management of our total revenues. Again, we consider that still to hold. In the other revenue items, some of the exceptions that we saw in Q4, we should see some positive offsetting effects coming into 2023. Net Interest Income being one, the fair value of guarantees being another. As noted previously, co-investment valuations, of course, can move up or down. We're conscious of the real estate risk factor that we potentially have there.
Taking all that into account, we are still comfortable with the market guidance of broadly flat revenues. That kind of takes me to costs. We're targeting below 65% cost-income ratio this year. We do see costs increasing. That is in part due to the transformation project which reaches its peak as we start to finalize the onboarding of all activity there, and that will lead to an increase in our adjusted expenses and hence the higher level of cost-income ratio that we expect for 2023. Hopefully that addresses.
Thank you, Arnaud.
Just, the NII contribution in Q4.
In Q4, the NII contribution is EUR 7 million.
Great. Thank you very much.
Thank you, Arnaud.
Next question is from a line of Michael Werner from UBS. Please go ahead.
Thank you very much for the presentation and the opportunity to ask some questions here. I've got two, please. Just looking at your targeted guidance for passive growth of 12% I think it is per annum. I think you mentioned that you're expecting a no beta world, I think is the term you used, going forward. Just love to know your thoughts on how you get to that 12% growth. Is that all coming from new launches? Is that coming from flows from existing products? You know, if there's any tailwinds coming from markets included in that figure. Secondly, just wanted to get a little bit more clarity on the valuation adjustments with regards to your co-investments.
Just wondering if you have a magnitude number, an actual number for the adjustments in Q4? Ultimately, how much you have co-invested, i.e. what percentage that decline represents of the total principal? Thank you.
Hey, Mike, thank you for your questions. I will start with one, and then hand over to Claire for two. A couple of things in, within the 12%, about 2/3 are expected from new flows and 1/3 from market. That's what we said at the Capital Markets Day. I think we're probably slightly ahead on where markets moved. I mean, we hadn't expected the DAX to be at 15,000 that quickly. Broadly speaking, 2/3 flow, 1/3 market appreciation. I think when you look at our, you know, what we have with strong brands, strong leadership and really all capabilities, you know, pretty diversified offering, the thing we have to spend more time on is our distribution channels. Right?
I think that we have, you know, a bit too much reliance on private bank channels who we like, but they also like to essentially disintermediate. Therefore, we like our partners, but I think we probably have to diversify a bit, a bit more. I think we are reliant on some large clients in the institutional space. Again, we like them a lot, but also need to go a bit broader. We probably have some gaps in our fixed income offering, which, you know, historically was relevant, maybe not super relevant. Obviously, as you have seen with some of our very large competitors, there are strong inflows in fixed income on the passive side. Right? I think, Mike, I think we're on track when it comes to what we expect in terms of flows.
I think probably slightly ahead of track. Probably a little bit better than expected when it comes to market, and pretty clear game plan that we expect the combination of product coverage and then the investment division to focus on.
Thank you.
On the question of the mark- to- market that we saw on co-investment balances, we saw in Q4 a markdown overall across the portfolios of EUR 13 million, and that compared to actually positive marks that we saw in the first three quarters and in the prior year. We were anticipating that we could see some of those markdowns on co-investment balances, particularly in real estate, and we did indeed see some of that in Q4. In terms of the portion that we co-invest in, it really varies across the different portfolios. We tend to follow market standard and expectations at the point of launching funds. We co-invest at the entry point of a fund being launched. As I say, it does very much vary.
We do expect to potentially see some volatility in the first half of the year around those co-investment balances. That, again, takes us back to the real estate guidance that we gave in December.
Thank you. Just a quick follow-up. Is it possible just to get the nominal total investment that you have or DWS has in those funds in aggregate? Thank you.
Yes, we can get that number. I'll come back to you on that during the call.
Okay, thanks.
Mike, the one thing to add is I mean, I don't even wanna say so far. What we have not done is invest our capital with the intention of really making money in co-investments. We've only done what was necessary to launch, what was necessary because of essentially industry convention on that type of fund. I think unlike some of our peers that are more focused on alternatives, and therefore really, let's say, invest their own money, we haven't really done that. I'm not sure that we would change it going forward. You know, I would imagine that Paul Kelly has quite a bit of experience in how to do that, but also what sort of risk management you would need.
Just wanna make sure that if people hear that, you know, we distribute the EUR 1 billion in 2024 subject to pipeline, please do not misunderstand that we're not starting to invest essentially prop into alternatives, if that was part of your question or the background of your question.
Understood. Thank you very much.
The next question is from the line of Bruce Hamilton from Morgan Stanley. Please go ahead.
Hi. Good morning, and thanks for taking my questions. A couple from me. On flows, I guess, to kind of summarize, you've got your kind of structural growth, focus, so sort of Xtrackers and alternatives. Then tactically it sounds like the biggest opportunity would be fixed income. I just wanna check if there were any other areas tactically, emerging markets or other that you think could be helpful. Then as we think about the shape of flows, is it gonna be very much second half weighted, any sort of pickup, particularly given your sort of fixed income performance, or, do you see it coming through more quickly? Then second question really around some of the changes that have been announced.
I guess, you know, understandable that where there have been performance challenges, there should be perhaps some PM changes. I'm interested in the broader point on how you're managing sort of key risk around the important PMs driving growth, so Kaldemorgen, Top Dividend Fund. How do you ensure that, you know, doesn't become a problem, and how locked in are those folks? Final, just to clarify, on the point you made about opportunities to sell infrastructure into retail, what product vehicle would you be doing that, and how do you avoid sort of, you know, problems around liquidity mismatch? Thank you.
Hey, Bruce. Thank you for your questions. I think I will start with flows I will probably stay high level. If you want us to be more precise, my super capable partner will have to jump in. When it comes to flows, I think equity super stable, right? I mean, that's, by far our biggest revenue contributor. I think everybody knows the numbers. I mean, our equity revenues are 2x Xtrackers and 3x of what we make in fixed income. The fact that that's stable in pretty tough year for equity is great. Would love to see inflows. Would love to see inflows in Top Dividend. I'll come back to your third question a second. I think equity we're quite happy.
I think multi-asset, you saw that we had nice inflows, last year. Kaldemorgen, but also other total return funds, have done quite well. If you just look at our investment performance, they had a good start to the year. I spoke to them yesterday. I think there we should also have, inflows. I think on the last quarter call, somebody asked whether multi-asset is over now that you have, you know, 3%, 4%, 5% in risk-free fixed income. I don't think so. I simply feel that the baseline for multi-asset, meaning what they have to beat, simply went up by a couple of percentage points, and that needs to be the ambition to also beat that. I think fixed income, yes, we have upside.
You may have seen when you look at where our flows came from, the retail side was essentially flat and the outflows were on the institutional side. Right? Institutional clients tend to be faster to react. Majority of outflows when fixed income in cash. Cash is what it is. I think fixed income, we simply need to add a couple of, let's say, solutions, specifically when it comes to pension funds and insurance companies. Everybody's talking about collateral management after what happened to U.K. pension funds, you know, working a few things. Your question like whether those flows will be back ended in 2023, I have no idea, right? I think it sort of depends on the market. Markets have been friendlier than expected in the last couple of weeks. Let's see.
There's definitely plenty of interest from clients, so we have, you know, many discussions. I think all we covered, I will come to your question on the specific vehicle, which is actually will be an open-ended fund to retail. You know, the structure high level is that you need to be invested for two years, then you have 12 months notice to get your cash out, meaning it is not as liquid as money market, but liquid enough to be considered open-ended and, you know, catering to retail. I will actually invest in it myself. I mean, I shouldn't declare those things on calls, but I think so far it's been quite difficult to invest in infrastructure as a retail person, and it's something which we want to address. I think Xtrackers flows we have addressed.
I mean, happy to pass on to Claire to go into more detail, but that's essentially on the flow side, right? Xtrackers, as Claire said, we saw a nice change in momentum with inflows over the last, it was like two months. I covered your question on the infrastructure for retail vehicle. It will be called Infrastruktur Sondervermögen Europa, for those of you who speak German and care. Your third question on essentially some of our star PMs. Long discussion which we had with the leadership team, whether we want to have star performers with all of the upside and downside as it brings, right?
I think that we have been, sort of like blessed with some really strong performers. To be clear, Tim has been one of them, right? Tim is really essentially leaving the industry, right? Plenty of kids, plenty of interest. The discussion was one where he simply wants to do something different, feels he's still young enough to change path, but, you know, leave the industry. Some of our other star performers we like, and we tie to us long-term. I think when it comes to concept Kaldemorgen, I think people know that he is, you know, reasonably seasoned, meaning we probably won't have him for another few decades. Which is why, you know, just specifically for that fund, we actually introduced a co-manager, Christoph Schmidt, in the beginning of, or like middle of last year.
Have already been talking to key clients, and distribution partners, and saying that over time, Mr. Kaldemorgen will likely become more of an advisor, and Christoph will take a more active role. We have similar backups for all of the key funds. Right? Therefore continue to like, in a high performance culture, star PMs. I mean, that's what inspires, and inspires, you know, young talent, at the same time, obviously you need to have a proper long-term, succession plan.
Brilliant. That's very helpful. Thank you.
Thank you, Bruce.
Perhaps I can just add on the previous question around co-investment balances that we have on the balance sheet, that's around EUR 500 million at the end of 2022.
The next question is from the line of Pierre Chédeville from CIC. Please go ahead.
Yes, good morning. Can you hear me?
Hey, Pierre. Yes, we can.
Okay. First question is regarding the transfer of your digital investment platform to BlackFin Capital Partners. I know them quite well, and in my view, they will not stay in the company for a long time because it's a private equity company. So I was wondering first why I don't see the strategic reason why you transfer this investment platform. Do you want to sell it to other partners to leverage the investment? And at the end of the day, when BlackFin Capital Partners will sell it, are you sure that you want to keep a 30% stake? How do you see the future of this investment platform? That would be my first question. My second question relates to China.
From an opportunistic point of view regarding your views, conservative views on the markets for 2023, do you see any opportunity to accelerate in China through Harvest Fund Management or any other things in China or maybe elsewhere in Asia? Last question regarding ESG. I'm not clear about your introductory remarks on that subject. Would I say to investors that your introductory remarks were more or less nothing new under the sun? Or is it a reassuring statement compared to what you previously said, for instance, in your Capital Markets Day? I'm not sure about the tone of these introductory remarks on ESG. Thank you very much.
Hey, Pierre, thank you for your questions. You know, the way that Claire and I like divide labor, is that anything specific, she will cover. Some of the questions on China and ESG are probably more so like in my camp. Starting with IKS, so maybe we should have spoken to you before, because you seem to have really deep insights into them. Look, our thinking behind it was also following. There are plenty of investments from competitors in digital investment platforms, and it is difficult if you have a mono channel, meaning if you only do it for yourself, to justify the same quantum of investments that platforms or the people that have multiple, let's say, things to sell on the platform.
Our view was simply that we would never be able to invest as much as somebody who would have us as a client but would also be open to others. Therefore, the strategic rationale of this project, which was, you know, started long before my time, but which I liked and obviously, fully supported, was to really increase funding in that platform by having us remain as the largest partner or largest provider of clients and products. By the way, we have a first right to repurchase if BlackFin wanted to exit. In addition to us, have other people on the platform and would simply be in the best interest of all clients because there will be more investments.
On China, as you know, we're not super large in China. I mean, we have Harvest, we have a few people in Beijing and Hong Kong, but it's not a sizable standalone part of our strategy, which is why, you know, I'm interested. I will actually spend a full week in Hong Kong and Beijing in three weeks. Maybe we can have the same question at the next quarterly call, where I will have select, you know, probably more insights into what we will do specifically in China. When it comes to ESG, you know, to some extent I should simply just reread what I've said, not because...
I mean, I fully understood your question, but as you would imagine, what I said was pretty scripted and went through, you know, our legal department. I think what we wanted to do is simply give transparency on what we've done, right? Our view was that after the pretty visible onsite visits in June, all we have done visibly is to say that we stand by our disclosures and prospectuses, but nobody really knows what we've done internally or externally, right? We haven't really been able to speak about timeline or the potential resolution. I think what we wanted to do is simply give you comfort that it's of utmost management priority. I give you comfort that we are really fully cooperating and having reviewed and shared 3 million documents just to show that.
Again, I think the point about us taking the pretty unconventional step to, as soon as possible, share on our website, the outcome of our internal reviews is hopefully also something which will give you comfort in what we've done, but also comfort kind of to other asset managers on what they may want to do, given that we are kind of the, let's call it guinea pig in the public eye of how asset managers should set up their governance for ESG.
Okay. Thank you.
Thank you.
The next question is from the line of Angeliki Bairaktari from JP Morgan. Please go ahead.
Good morning. Thanks for taking my questions. First of all, we have seen some headlines over the past few weeks about a potential ban on inducements in Europe. I just wanted to hear your view on what do you think is the probability of a ban, and how much would that impact DWS? In particular, how much of your group management fees are linked to inducements in your retail distribution networks today? If you can give us the EUR million amount, that would be very helpful. Secondly, you spoke about divestments contributing to your ambitious cost income target for 2025 at the Capital Markets Day, and you have today announced the sale of your secondaries business. The perimeter of that looks rather small at EUR 500 million AUM, I think seven-person team.
I presume the cost savings on the back of this are rather limited. Is it fair to assume that the bulk of divestments is still to come? Thank you.
Hi, Angeliki. Thanks for the questions. On the first one, referring to the European Commission's Retail Investment Strategy, we know that that is in consultation with the EU and has been since 2021, and we've of course been involved in that consultation to look at all of the details of what is being proposed. Of course, it is still in the early stages. Anything that would be finalized is still some time away. We will continue to be very involved in understanding what that looks like in terms of distribution and product structuring requirements. Really, there is no detailing around that at the moment.
It's clear to see, of course, there could be a high impact for the industry, that would certainly put pressure on margins if there was to be a complete ban on so-called inducements. We have seen that in other jurisdictions in the past. There is really much work to do to understand what the scope of that is. Within our portfolio, of course, we are split between both retail and institutional. This is focusing more on retail channels and more specifically in Europe. We're not at a point really to establish the specific details for disclosure purposes and what that would look like, but something that we're very much participating in. We'll track that and perhaps more to come.
On the second question around divestments, yes, I mean, we have concluded in 2022, obviously the IKS platform deconsolidation, which we've just referred to. We've always indicated that that has a neutral impact on cost-income ratio, separate to gain on sale, but does have a different mix effect between costs and revenues. As you rightfully say, the announcement that we've made on the private equity platform is small in absolute size. It's a single-digit number of people. Not something that's large scale going to contribute to efficiencies in the future. That's more for the purposes of enabling focus on the alternatives growth plan and focus areas. Yes, we do have more restructuring to do, and we do have more opportunities that we are investigating.
We can't give specific details, of course, on elements of what those are, but we do have restructuring in front of us as indicated.
Thank you, Angeliki.
If I may just follow up on my first question on inducements. I appreciate that you don't want to give the absolute number, but can I just confirm that you are paying back inducements or rebates, not just to say the Deutsche Bank retail networks, which is standard practice, but potentially also to other distributors in Germany, Italy, Spain, et cetera?
Yes, in the European landscape outside of the U.K. and the Netherlands, which have got different structures in place, then that is the European structure that is in place today. Hence it's a really broad industry topic that would certainly take some years to really fully understand, document, legally implement and execute against. Yes, it's an EU-wide topic.
Thank you very much.
There are no further questions at this time, and I hand back to Oliver Flade for closing comments.
Yeah. Thank you very much, everyone for your good questions and for dialing in today. As always, if there are any follow-up questions, please feel free to contact the IR team, otherwise, I wish you a great day and a healthy time. Thank you very much.
Thank you.
Bye-bye.
Ladies and gentlemen, the conference is now concluded and you may disconnect. Thank you for joining, and have a pleasant day. Goodbye.