Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers Third Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, today's call is being recorded Thursday, October 20, 2022. I would now like to turn the conference over to Brian Heller, Senior Vice President and Corporate Counsel for Cohen & Steers. Please go ahead, sir.
Thank you, and welcome to the Cohen & Steers third quarter 2022 earnings conference call. Joining me are our Chief Executive Officer, Joe Harvey, our Chief Financial Officer, Matt Stadler, and our Chief Investment Officer, Jon Cheigh. I want to remind you that some of our comments and answers to your questions may include forward-looking statements. We believe these statements are reasonable based on information currently available to us, but actual outcomes could differ materially due to a number of factors, including those described in our accompanying third quarter earnings release and presentation, our most recent annual report on Form 10-K and our other SEC filings. We assume no duty to update any forward-looking statement. Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund or other investment vehicle.
Our presentation also contains non-GAAP financial measures referred to as adjusted financial measures that we believe are meaningful in evaluating our performance. These non-GAAP financial measures should be read in conjunction with our GAAP results. Reconciliation of these non-GAAP financial measures is included in the earnings release and presentation to the extent reasonably available. The earnings release and presentation, as well as links to our SEC filings, are available in the investor relations section of our website at www.cohenandsteers.com. With that, I'll turn the call over to Matt.
Thank you, Brian, and good morning, everyone. Consistent with previous quarters, my remarks this morning will focus on our as adjusted results. A reconciliation of GAAP to as adjusted results can be found on pages 18 and 19 of the earnings release and on slides 16 through 19 of the earnings presentation. Yesterday, we reported earnings of $0.92 per share, compared with $1.06 in the prior year's quarter and $0.96 sequentially. The third quarter of 2022 included a cumulative adjustment to compensation and benefits that increased the compensation to revenue ratio. Revenue was $140.2 million for the quarter, compared with $154.3 million in the prior year's quarter and $147.7 million sequentially.
Decrease from the second quarter was primarily attributable to lower average assets under management across all three investment vehicles, partially offset by one additional day in the quarter. Our effective fee rate was 58 basis points in the third quarter, compared with 58.2 basis points in the second quarter. Operating income was $60.1 million in the third quarter, compared with $70.4 million in the prior year's quarter and $64 million sequentially. Our operating margin decreased to 42.8% from 43.3% last quarter. Expenses decreased 4.3% when compared with the second quarter, as lower compensation and benefits and distribution and service fees were partially offset by higher G&A.
The compensation to revenue ratio with the cumulative adjustment referred to earlier increased to 35.04% for the third quarter and is now 34.5% for the nine months ending, 25 basis points higher than our previous guidance. The decrease in distribution and service fee expense was primarily due to lower average assets under management in U.S. open-end funds, as well as a mix shift into lower cost share classes. The increase in G&A was primarily due to higher hosted conferences and an increase in travel and entertainment expenses. Our effective tax rate remained at 25.25%, consistent with the guidance provided on our last call. Page 15 of the earnings presentation sets forth our cash and cash equivalents, corporate investments in U.S. Treasury securities, and liquid seed investments for the current and trailing four quarters.
Our firm liquidity totaled $269.9 million at quarter end, compared with $227.7 million last quarter. We continue to be debt-free. Assets under management were $79.2 billion at September thirtieth, a decrease of $8.7 billion or 9.9% from June thirtieth. The decrease was due to market depreciation of $7.4 billion, net outflows of $598 million, and distributions of $680 million. Advisory accounts had net outflows of $220 million during the quarter, compared with net outflows of $408 million during the second quarter. Joe Harvey will provide some color on our advisory flows, as well as an update on our institutional pipeline of awarded unfunded mandates.
Japan sub-advisory had net inflows of $132 million during the third quarter, compared with net inflows of $23 million during the second quarter. This marks the third straight quarter of net inflows. Distributions from these portfolios totaled $235 million, compared with $242 million last quarter. Sub- advisory, excluding Japan, had net inflows of $211 million during the third quarter, compared with net outflows of $90 million during the second quarter. The third quarter included an inflow of $200 million from a new relationship into a U.S. real estate portfolio. Open-end funds had net outflows of $732 million during the third quarter, compared with net outflows of $244 million during the second quarter.
The third quarter included $1 billion of outflows attributable to an intermediary who, based on current market conditions, decided to eliminate its model allocation to U.S. REITs. Net inflows into Multi-Strategy Real Assets, Global Listed Infrastructure, and Global Real Estate were more than offset by net outflows from U.S. Real Estate and Preferred Securities. Distributions totaled $293 million, $248 million of which was reinvested. Let me briefly discuss a few items to consider for the fourth quarter. Since the start of the year, market depreciation has resulted in a meaningful decline in our assets under management, and we have ended each of the past two quarters with assets under management that were lower than average assets under management. In response to the corresponding decline in revenue that this will present, we have reduced our incentive compensation accrual and increased our compensation-to-revenue ratio.
In addition, with respect to new hires, the bar has been raised significantly, and we do not anticipate any meaningful headcount additions through year-end. As a result, and all things being equal, we expect our compensation-to-revenue ratio for the fourth quarter to remain at 34.5%. We expect G&A to increase 12%-13% from the $47.2 million we recorded in 2021. Although we continue to review discretionary spending in order to identify areas where we can reduce costs, 2022 included certain investments in technology, including the ongoing implementation of a new trading and order management system, that were necessary and are expected to result in future operational efficiencies. In addition, although our T&E has increased from last year, it is still below pre-pandemic levels. Finally, we expect our effective tax rate will remain at 25.25%.
Now I'd like to turn it over to our Chief Investment Officer, Jon Cheigh, to discuss our investment performance.
Thank you, Matt, and good morning. Today, I'd like to briefly cover three areas. First, our performance scorecard. Second, the current environment and how our major asset classes are performing. Last, some of the high-level takeaways from our recent white paper, which we view as the beginning of a very important education process entitled Private and Listed Infrastructure: The Case for a Complete Portfolio. Turning to performance, in the third quarter, eight of nine core strategies outperformed their benchmarks. Over the past 12 months, again, eight of nine strategies outperformed. The sole underperformer this quarter was our Midstream Energy strategy, which very modestly underperformed by 2 basis points, but is still outperforming by 69 basis points year to date. Measured by AUM, 81% of our portfolios are outperforming their benchmark on a one-year basis, a decline from 93% last quarter.
The biggest driver of the decline since last quarter was the performance of our U.S. Real Estate Opportunities Strategy, which tends to have greater weightings in value-oriented small caps, which have been relatively more impacted by the environment. On a three- and five-year basis, 100% of our AUM is outperforming. From a competitive perspective, 97% of our open-end fund AUM is rated four- or five-star by Morningstar, compared with 98% last quarter. While Q2 absolute returns were challenging, our excess returns continue to be broadly positive. Because we are in a bear market, our investment teams are acutely focused on risk management, balance sheet quality, and earnings risk. As we demonstrated in 2008 and in 2020, bear markets are sometimes the best times to mine and deliver alpha for our investors.
While today we are being cautious, with the swift and significant asset repricing that has happened in public markets, we are increasingly bullish about the forward investment opportunity across all of our asset classes. During the quarter, hopes for a Fed pivot were dashed, and forward curves now reflect very restrictive monetary policy. Global equities were down 6.7%, and the Bloomberg Barclays Global Aggregate was down 6.9%. In contrast to prior quarters, real assets generally modestly underperformed equities. Preferreds, though, meaningfully outperformed global bonds.
Turning to our three major asset classes of infrastructure, real estate, and preferreds, infrastructure lagged the broader equity markets in the third quarter, down 8.9%, as the market reacted to the roughly 80 basis point increase in the 10-year Treasury yield during the period. While the more cyclical and inflation-sensitive parts of infrastructure outperformed, the more interest rate-sensitive subsectors in the universe, utilities and telecom infrastructure lagged. We expect infrastructure to outperform in today's macro environment, characterized by slowing economic growth, persistently high inflation, albeit falling from today's high levels, and higher market volatility. Further, private infrastructure capital continues to find its way into the listed markets.
Typically, as listed infrastructure companies sell assets to these private funds, these transactions are coming at significant premiums compared to where the listed companies are trading, supporting our view that the public infrastructure markets are attractively priced relative to private market valuations, creating a tactical opportunity within what we think is a strategic allocation. U.S. and global REITs also lagged the equity market, with declines in the quarter of 10.9% and 11.6% respectively. Inflation is traditionally a tailwind for real estate performance, but declining growth expectations and the historically sharp rise in real yields has instead dominated. For perspective, looking over the last 30 years, U.S. REITs have on average declined 20.9% in recessions versus their year-to-date performance of -27.9%. In other words, REITs have likely priced in a worse than average recession.
In contrast, the commonly cited private real estate NFI-ODCE index has produced year-to-date performance of +10%. We strongly believe this is a timing difference and does not reflect some intrinsic difference between public and private real estate. Given this lag in private market revaluations, we believe with high conviction that REITs will provide materially better returns than core real estate as currently priced over the next three years. Today, REITs are being used as a source of liquidity, but over time, we expect allocations out of private into listed for investors able to take advantage of this return-enhancing portfolio shift. Shifting to preferred securities, core preferred securities were down 2.3% in the quarter, outperforming the Bloomberg Global Aggregate return of -6.9% and investment-grade bond performance of -5.1%.
We believe there is a great deal of tightening and slowing already in the system. We expect that inflation will be materially lower 12 months from now. However, it may stabilize at higher than pre-pandemic levels. As a result, we believe we are near the end of the tightening cycle. Long rates will likely fall as we get close to the terminal rate hike, although credit implications will be more nuanced. We find yields very appealing now at 7%-10% across our investment universe. IG yields are 6% now. Aside from the global financial crisis, the last time IG yields were 6% was 2006-2007 when the overnight rate was 5.25%. We believe a great deal of tightening and growth contraction has already been priced into credit and preferred markets.
Preferreds also continue to offer materially higher income rates than investment-grade corporate bonds, tax advantages that makes after-tax income attractive versus munis, and importantly, strong credit quality with well-capitalized banks and insurance companies generally still seeing earnings improve as rates and net interest margins rise. In summary for our major asset classes, the short term may be challenged by tightening and economic slowing. Strategically, we are particularly positive about the long-term asset allocation need for infrastructure and real assets. Tactically, going into 2023, as we get to the other side of tightening and slowdown, we believe the best investment opportunity will likely come from areas most impacted this year, real estate and preferred securities. Before I pass the call to Joe, I'd like to provide three important takeaways from our recently published white paper, Private and Listed Infrastructure: The Case for a Complete Portfolio.
We believe this research is important because infrastructure investor demand is significant, and in our view, is too biased towards private allocations, with the two most commonly cited reasons being that listed infrastructure are just equities and that private structures help produce an illiquidity return premium. When comparing the performance of private and listed infrastructure from 2004 to 2021, we reach the following three conclusions. First, in the short run, listed infrastructure may be more correlated with equities and infrastructure. After only four quarters, listed infrastructure is far more correlated with private infrastructure at greater than 80% and 90% correlated at holding periods greater than three years. Second, over that long-term time period, listed infrastructure produced a superior arithmetic return of 9.8% versus private infrastructure of 9.4%.
Last, the reported volatility of private infrastructure is roughly half that of listed. When adjusted for appraisal-based smoothing, private and listed volatility are essentially the same. We have high conviction that investors need more infrastructure in their portfolios. We believe the combination of education and great investment performance will allow investors to realize that listed infrastructure is a more efficient and often less expensive way to access the attributes of infrastructure. With that, let me turn the call over to Joe Harvey.
Thank you, Jon, and good morning. It was a challenging quarter in terms of market volatility and share price depreciation. Flows were negative, reflecting the market environment, but we have elements of strength in business development, and our relative performance remains strong. While we still see attractive corporate investment opportunities, we intend to prioritize initiatives more stringently and defer some discretionary spending until the magnitude of the recession becomes more clear. We are in the midst of one of the biggest regime shifts in the macroeconomic environment in my career. In my view, two notable features of this transition have emerged. First, the cycle is taking a long time to unfold, reflecting the significant momentum that our economy had and that cheap capital has been available for many years.
Routinely now, the Fed is being criticized for being behind the curve, the latest being the speed of tightening without allowing for the economy to respond. Second, the adjustments to financial asset prices could continue to be challenging as interest rates move from zero to more normal levels at the same time as investors require higher risk premiums. In other words, multiples are compressing while inflation is flowing through earnings power. Several factors make me think about higher required risk premiums, including de-globalization, the end of the Fed put, and the end of the fiscal put, as recently evidenced by the bond vigilantes showing up in the U.K. De-globalization, together with the Fed jumping from one side of the monetary policy boat to the other, could create more volatility in the economy, in earnings power, and in growth rates. Meantime, asset allocations are being reevaluated as fixed income reprices.
1-year Treasury bills yielding 4.6% is a noteworthy benchmark. While this sounds like a challenging investment environment, and it is, it will ultimately create opportunity. Our relative performance, as Jon reviewed, remains strong. Last quarter, we called our performance unique due to the rapid market regime changes over the past few years. The same qualifier holds true in bear markets, which are torturous, confounding, and emotionally taxing. Rallies are typical and powerful due to short covering, providing another challenge for our portfolio managers. The important ingredients to navigating bear markets include patience and awareness that they take time to fully play out, investment frameworks that guide discovery of the unknowable and tail risks, and of course, strong leadership and focus. Fortunately, our firm's financial strength and positioning within asset management allow our investment teams to continue to focus on investing.
In the third quarter, we had net outflows of $598 million firm-wide, bringing year-to-date outflows to $559 million. Outflows in the quarter were driven primarily by U.S. REITs and to a lesser extent by preferreds. In U.S. REITs, the outflows were attributable to one allocator in our flagship fund, Cohen & Steers Realty Shares. In addition, three advisory separate account clients trimmed portfolios to fund private real estate commitments or to take profits. Offsetting the outflows in U.S. REITs, we had inflows into Global Real Estate, Global Listed Infrastructure, and Multi-Strategy Real Assets. Open-end funds had net outflows of $732 million. Gross inflows were 18% below the trend line, reflecting that volatility has made investors in wealth more hesitant to allocate to risk assets. Redemptions were the second highest ever after the record set in the second quarter.
Bright spots in the wealth channel were the 17th straight quarter of inflows from defined contribution and the 9th straight quarter of inflows into our offshore SICAV funds, led by our multi-strategy Real Assets SICAV. The one allocator to U.S. REITs just mentioned accounted for $1 billion of outflows in open-end funds in the quarter. They follow an economic cycle-based approach and have been positioning for a recession. Their remaining allocation of $200 million was liquidated after the quarter, completing their program. The other major story in the open-end funds was preferreds. Two months of inflows into Cohen & Steers Preferred Securities and Income Fund, precipitated by market expectations of a Fed pause in July and August, were offset by redemptions in September when the pause was not realized.
Our Multi-Strategy Real Assets fund was a bright spot with inflows of $174 million in the quarter and $647 million year to date. Advisory had outflows of $220 million. Gross inflows included $400 million from four new mandates, yet were offset by the three client rebalances previously mentioned. The four new accounts were in Global Listed Infrastructure from an African sovereign wealth fund, in U.S. REITs for a corporate pension, in Multi-Strategy Real Assets for a corporate pension, and in Global Real Estate, which was a takeaway from an underperforming peer manager for a state pension fund. Advisory has had five straight quarters of outflows driven by various reasons, including harvesting profits from opportunistic fundings during the pandemic drawdowns, rebalancing for planned funding needs, and navigating this year's volatility.
The most important takeaways for me are demand for our strategies continues to grow. Our sales team is well-organized and has a good strategic plan, and we're enjoying more success with asset consultants. Bottom line, we need to bring more new accounts in to offset the inevitable churn that occurs during market environments such as this. Sub-advisory ex-Japan was driven by a new variable annuity mandate of $200 million, where the client hired us to replace an affiliated manager in U.S. REITs. As Matt reviewed, Japan sub-advisory had net inflows, which were supported by strength in the U.S. dollar versus the yen. One of the U.S. REIT funds that we sub-advise for Daiwa Asset Management is among the best-selling funds. Our won and unfunded pipeline is $1.1 billion, compared with $1.5 billion last quarter.
$820 million of last quarter's pipeline was funded, and we won $562 million of new unfunded mandates. Measured by AUM, our pipeline is 65% Global Real Estate, 13% U.S. Real Estate, and 13% Global Listed Infrastructure. Looking forward, we have shaped our corporate priorities for 2023 from our investment views, asset allocation trends, and client demand. First area of priority, we see accelerating demand for Global Listed Infrastructure and Multi-Strategy Real Assets allocations. We are mobilized to educate on asset allocations and offer both core and customized solutions. In each of these asset classes, our relative performance is strong, so our goal is to gain market share in those growing asset classes. The backlog of opportunities in institutional advisory for Global Listed Infrastructure is significant and is broadening by investor type and geography.
Factors driving the interest in infrastructure include recognition of general underinvestment in infrastructure, which can set up good investment opportunity, awareness of the difficulty in fulfilling allocations with private infrastructure alone, and the view that the investment characteristics of infrastructure can be attractive in a volatile environment. For Multi-Strategy Real Assets, the persistence of high inflation plus the risk of inflation surprises is helping to generate demand. Our second area of focus, we believe the corrections in REIT and preferred security prices will present a compelling entry point over the next year. REIT prices are down 30% this year, compared with 21% for stocks. Our valuation metrics show that REITs are cheap versus stocks and versus U.S. private real estate, but less so compared with bonds. Private real estate values need to adjust lower to reflect both economic slowing and changes in the debt markets.
That is higher borrowing costs, lower LTVs, and contracting loan availability. We believe that a good to great buying opportunity is emerging in preferred securities. As the yield curve adjusts to the new regime and anticipating the Fed will overshoot, the pathway of higher yields and higher than average credit spreads will present a great income opportunity currently in the 7%-10% zone, with potential for capital appreciation should the Fed turn neutral. Further, for preferreds, we are planning to see two new strategies which have broader mandates, a move prompted by the improvement in the fixed income cycle. We continue to advance our initiatives in private real estate. Right now, we believe the best opportunities are available in the listed market, considering share price declines for REITs. However, the price discovery process has commenced in the private market as well.
We expect that an attractive buying period is emerging in private real estate, and therefore we are continuing our capital raising efforts and focusing on investment strategies accordingly. In terms of distribution priorities, we are seeing more interest in listed real assets in Asia, so we expect to allocate more resources there. Another priority is organizing our wealth team to distribute private real estate in the broker-dealer, registered investment advisor, and family office segments. As the wealth channel continues to allocate more to alternatives, we will supplement our existing sales teams with specialists in private real estate. In closing, one of the biggest questions for asset managers will be how asset owners shift allocations in response to higher fixed income yields and lower plan assets. Some plans may have less flexibility due to funding needs, which could favor listed strategies. Many still need strong returns to achieve their investment goals.
We believe fixed income now provides solid return potential with diversification, which didn't occur this year, but we expect will ultimately return once the rate cycle matures. This should result in portfolio tilts back to fixed income. For real assets, I believe that demand will continue for the total return, inflation sensitivity, and diversification characteristics that they provide. Operator, at this point, let's open the call to questions.
Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press one three. One moment please for the first question. We do have a question from the line of John Dunn with Evercore ISI. Please go ahead.
Hi, good morning. You touched on the private real estate effort you guys are engaging in. Can you give more of update? Like, are you gathering assets? How's asset gathering going? Or are you making investments? And then, this newer relative value which you talked about between public and private, you talked about being a tactical opportunity. Maybe how big of an opportunity do you think it could be for you guys?
Sure. Let me start, and I'll ask Jon Cheigh to add on after I answer the question. First, you know, in terms of our private initiative, we are in the market for a couple strategies to begin to raise assets. One of those strategies is a income/total return strategy, and the other is a more opportunistic capital appreciation strategy. In terms of deploying capital, we've bought several assets, but at this point, in light of our view of the macroeconomic environment, we are going very slow in order to let this, you know, price adjustment that both Jon Cheigh and I described take place in the private markets. We're being patient.
Importantly, for the vehicles that we have in mind, we would have an element of listed in them that would complement the private and afford us the ability to take advantage of what's happening right now. As you can imagine, we're in certain property sectors, you know, using the capital that we have raised to take advantage of some opportunities in the listed market. Jon, anything to add?
Well, the only answer. Look, there's been a 40% spread year to date between how private, as reported, it's up 10%, and how public has done. There's a 40% spread. As I said, there are some differences between public and private, but there's not a 40% difference in terms of what's happening from a fundamental and valuation perspective. You know, we've all seen this before. We know that there's a delay in how private values need to go through a cutting cycle. Usually, you know, our research, and we saw this in 2009, usually the listed markets are going up when sometimes the private markets are still going down. We think there's a very big return gap.
The problem is that today, and you know, you only need to look at, you know, what happened with, you know, in the U.K. with LDI and things like that. There's just a lack of liquidity. You see investors, frankly, some can optimize returns today, but some are also just focused on their liquidity situation. They are tending to redeem that which is liquid, as opposed to that which is not yet marked down, but they are unable to redeem for. We think we're gonna get to that point where investors will be able to take advantage of that big spread in where values have gone. You know, of course, we need to get a bit deeper into the cycle.
You know, look, we would say that, you know, clearly, you know, a lot of money has gone into, you know, the private real estate market, both institutionally and through the wealth channels. It wouldn't be surprising that it's not just institutions that will start to do this rebalance, but individuals will start to do this rebalance, and the gatekeepers themselves may start to change their advice on how much an individual investor should have in something that's private as opposed to something that's public, given this big valuation shift.
Gotcha. You guys touched on two big moves in two of your stronger historical growth engines, you know, REITs having sold off a bunch and preferred yields coming up. Are you starting to see investors and PMs looking more opportunistically, you know, and could lead to inflows? I think you talked about over the course of the next year, but could, you know, flows come back sooner in those two areas?
Well, let me start again. This is Joe, and I'll ask Jon again to complement what I have to say. You know, in my talking points, I reviewed how in our preferred fund, we had inflows into the first couple of months of the quarter, and then, you know, as investors anticipated, the Fed pausing. I think that's an indication that investors are waiting, you know, for, you know, this Fed tightening, you know, process to play out. I believe, particularly with what we described in terms of the investment opportunity, the yield opportunity, and I think there's a capital appreciation opportunity on the back of that process. Investors are waiting to go into preferred.
I'd say that's probably a little bit more near term. In terms of real estate, we're not seeing the interest yet. You know, I mentioned that we've had a couple of clients trim their portfolios to fund private commitments. That actually feels a little bit, you know, opposite of what, you know, as Jon laid out, what we would recommend investors to do at this point, because, you know, the cycle over history has played out, you know, the same many times, and that listed goes down first, then the private market corrects, but then listed recovers first. You know, we see, you know, some pretty good value in the listed market.
I still think there's a little bit of hesitation by investors to kind of see the Fed tightening process begin to play out, but also get a little bit more visibility on what the recession will look like and how that will affect, you know, real estate fundamentals. I mean, real estate fundamentals right now are holding pretty steady, so that's a good thing. You know, we would expect that investors are gonna start to, you know, nibble at real estate because, you know, they see how the cycle is evolving. We're coaching them on that.
You know, once the Fed process gets to the next phase, then the stocks are gonna start anticipating the other side of it.
Gotcha. Maybe another quick one on the REIT piece. You know, you mentioned REITs being down, I think you said 27%. Might you expect some potential recaps, like, you know, a la what we saw in 2009, you know, to pay off stuff like debt or get some offensive capital?
Yeah. I mean, that's a good question. Look, we're not generally at that kind of extreme yet. The first thing I'd say is, you know, balance sheets of real estate companies, whether measured by things like debt to EBITDA or weighted average maturity, I'd say for the most part, they've all meaningfully improved since the financial crisis, mainly 'cause we all lived through it, learned some lessons. That being said, we've been in a zero interest rate environment, and the tide has gone out. We would expect that there's gonna be some opportunities in different places. Now, opportunities, it can mean recaps, but it can also mean we haven't had a lot of IPOs, 'cause frankly, there's been a lot more money on the private side than there has been on the public side.
We could see IPOs, too, to help recapitalize companies, which is what happened after the S&L crisis. That's really how the modern REIT era got started. We could be cornerstoning those IPOs. We could be doing pre-IPOs for companies that had growth plans, thought that they were early cycle, and then all of a sudden it was the end of the cycle. I think for all these, they can be really good opportunities, like we saw in 2009. It could be a great beta opportunity, 'cause this helps to unlock value, but there's just a lot of alpha in it. We think some of these opportunities are in the U.S., probably by percentage, a little bit more are in Europe, where leverage has run a bit higher than here in the U.S.
We're gonna see situations of developers, and there's been a lot of development whether it be on the residential side, the industrial side, the data center side, anything like that that assumes, you know, things are gonna continue the way they are. You're gonna see some opportunities there. We definitely think we'll see some of those, but it doesn't just have to be recaps.
Sounds good. Maybe one on the institutional advisory side. My sense is you've been investing more on the non-U.S. advisory side recently. Can you talk about what that business looks like now and maybe the outlook? Then on the U.S. side too, you know, a couple of years after the org. Then third, you mentioned Asia as a priority. Kind of what does your Asia ex-Japan business look like now at this point?
Let me start in terms of, you know, where we've made the biggest investment. It actually has been in U.S. Advisory, and that goes back two and a half, three years ago to when we brought in Daniel Charles to head up and unify all of our distribution. Then he, along with our head of advisory, Jeffrey Palma, changed our model to be more of a regional model that would unify within those regions, you know, sales, consultant relations, and client relationship coverage. We've also changed our compensation structure to be more success-based. We're really pleased with all of those developments.
On the scale of, you know, what we're doing in advisory, that's where the biggest changes and investment have been made. As I said in my talking points, I'm pleased with our team and what we're doing. We've just been in a period where, between the pandemic and now the macroeconomic shifts, it's just been a more challenging environment for, you know, the advisory business.
When we look at the you know the pipeline and the backlog and the interest in our strategies and where it's coming from along with how we're doing on the you know consultant relations front which is you know heavily supported by our investment performance you know we're feeling pretty good about that segment. When you look outside of the U.S., we've had success in the Middle East. When you look at our pipeline and our backlog again, there's a lot of activity there. It demonstrates what's been happening which is broader adoption of listed real assets specifically real estate and infrastructure by other types of investors around the world.
We've just been seeing some so-called green shoots interest from Asia-Pacific. We've got some new mandates in our recent fundings and in our pipeline. We think that's gonna continue. We're gonna allocate some more sales resources in Asia-Pacific. You know, this is very consistent with the long-term, you know, trend of investors raising allocations to real assets in portfolios, and then within that, complementing private allocations with listed, which is our view on how these allocations can be made. You've kinda gotten a flavor for that. As Jon and I have talked about where we're at in the cycle and how each of those mediums can complement one another.
Gotcha. Maybe one on the cost side. We can talk about 2023 G&A in January, but can you remind us where, like, the bulk of your investment dollars are going and what, in particular, the money you're spending now can translate the quickest into organic growth?
Well, I'd say there are, you know, two buckets for asset managers. One is our talent. You know, we've been in a fortunate situation where, you know, we've had a lot of organic growth looking historically, and part of that is just more accounts, more customized portfolios, and that requires, you know, more team members. As we've added new strategies, new capabilities such as private real estate, that's another driver of, you know, our need for talent. As both Matt and I talked about, obviously, with the change in our asset levels, we need to be more disciplined about, you know, matching resources and the team size with our opportunity set.
You know, we think we still have, and as illustrated by Jon's setup on the investment opportunity set, you know, we're gonna have opportunities. We're balancing the near term challenges that the markets are providing with the longer term investments that represented by the market share opportunities that we have. The other big bucket is using balance sheet capital to seed strategies. I referred to seeding a couple of new preferred strategies. Of course, you know, we've got the private real estate strategies which represent very attractive uses of our balance sheet capital.
Great. Just one more, and thank you again. Can you talk a little more about the construction of your U.S. real estate portfolio? You talked about some countervailing factors, you know, I think a positivity on rents, less building, some of the more logistical cyclical growth stuff. There's caution of falling real estate prices. Just what's your outlook for the area you're in?
I'll let Jon take that question in terms of how we're thinking about our portfolio construction right now.
Well, I think I understand the question. Look so far, I mean, as you know, the economy slowed a little bit, and we've seen a little bit of a downshift in fundamentals, but certainly not a material downshift in fundamentals. I think most of the repricing this year has been about expectations about higher cost of capital, so a shift in multiples, and it's really been about bigger earnings downgrades. You know, where you've seen the biggest impact from that so far is in the kind of lower cap rate, higher multiple things.
Things like industrial, apartments, cell towers, while all attractive sectors, were in a they looked good in a low rate world, they don't look quite as good as the one-year Treasury, I think Joe said was, you know, 4.7%. That's where we've seen the biggest repricing. You know, in terms of how we're positioned, you know, our portfolio is very balanced, so we have very little exposure to office on the REIT side. But we do like areas such as residential, as well as retail, and as well as self-storage, 'cause we think it gives us a balance where we're not as vulnerable to rising rates. But we also feel like there's good pricing power, particularly on the self-storage and on the residential side.
Yeah, maybe just one kind of like under the hood business-side correlate to that question. Those insights, how do you communicate those to clients during the sales process?
Well, it depends upon the client, but I mean, we're, you know, we're always talking with our existing clients and, prospective clients, about, you know, our people, our process, our views on where we are in the cycle. Kind of related to that, you know active management is really important in all of our asset classes. I mean, these are at least one of the important ingredients for why we chose these asset classes. You know, expressing those views, so for example, five or six years ago, we might have owned zero retail, when at least at that time, retail was viewed favorably. When I tell people that we own in our U.S. REIT portfolios, basically about 1% of our U.S. REIT portfolio is office, that's very surprising to them.
It's certainly part of the process in talking about the outlook and how we've created alpha and how we're gonna create alpha in the future.
Yeah. I'd just add to this maybe to close out here. We have a substantial commitment to producing thought capital for our clients. That's delivered in many ways, ranging from our relationship managers knowing exactly what a client or prospect is interested in and engaging with them directly to having that research on our website. We just rolled out a new version of our website. We also a couple of weeks ago had our annual investor conference, which is a great forum where our teams can share our thinking with clients and then meet one-on-one with them.
Of course, you know, our investment teams have always been because they're dedicated to a single asset class, but always interested to work with investors to help educate on our asset classes. We've got a lot of people and a lot of ways that we deliver, you know, our thinking.
Great. Thank you very much. Appreciate it.
Thanks for your questions, John.
We have no further questions on the phone lines. I would now like to turn the call over back to Joe Harvey for closing remarks.
Great. Well, simply, we appreciate your time today, and we look forward to our next earnings call in January 2023. Thank you.
That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.