Hello. I'm Alex Hess J.P Morgan's lead analyst on MSCI and a member of the Business and Information Services team here at J.P. Morgan. We are led by Andrew Steinerman. We're really pleased to have with us today MSCI CEO, Andy Wiechmann. Andy?
CFO.
Sorry. Oh.
Not taking Henry's job.
Oh, my. Welcome, Andy, and thank you for making a third appearance at Ultimate Services. You think I would have gotten your title right by now. Andy, so I want to start with some comments that MSCI made during the third quarter earnings call a few weeks ago. You spoke to gradual signs of an improving sales environment, but also that elevated cancellations and longer sales cycles continue in the near term. So stylistically, we sort of picked up that the initial comments were guarded and well-framed, but got a little more optimistic as the call progressed during the Q&A. When you look back on the call, what was your overarching message that shareholders should take away from the environment?
You know, I think you touched on it. Importantly, we wanted to underscore that we are seeing a gradual improvement in the dialogue among our clients, and so the sustained momentum we've seen in the equity markets translating through to higher assets, higher revenues, higher margins for many asset managers, which, as you know, is the largest client segment for us, and equity active managers are particularly the largest for us, and so the run in equity markets has been constructive, and so we're seeing that gradual improvement in dialogues with clients. We did also clarify prior comments that we've given about the near-term outlook and particularly the fourth quarter, so we made comments regarding the lingering impacts of longer sales cycles and tighter budgets and elevated cancels, which is consistent with what we've said before.
It was really a clarification on a point that we mentioned about retention rates rebounding closer to the levels we saw last year in the fourth quarter. That was relative to the drop in retention rates we saw in the third quarter. It was really two distinct messages. One is we're seeing this improvement in dialogues with clients, but also trying to just provide some clarification, which is consistent with what we've said before on the fourth quarter.
Got it. So with respect to just to poke on that a little, it sounds like I never took it as, you know, hey, we're going to be bang on in line year on year with retention in Q4. But that's just my interpretation of those comments. But do you guys see cancels with more visibility than a new booking? Is it easier for you to go out and say, oh, yeah, I see what my existing clients are not going to want to do in three months than it is to say, well, these guys want our product, but they don't know if it's going to be this quarter or next? Is there just a visibility difference on those two sides?
You know, I would say we have a cancels pipeline similar to a sales pipeline. The dynamics can be different. We recognize cancels when we have definitive evidence that there will be a downsale or a cancel, and sometimes that can be an organization goes out of business. We might still have three quarters remaining on a contract and recognizing revenue over the next three quarters, but when we know that organization is not going to be renewing, we'll take a cancel. Sometimes that can catch us off guard, and so the timing can sometimes be a surprise there, but in a lot of instances, we have ongoing dialogues with our clients, and they are telling us, hey, we're looking to rationalize this contract, or we've downsized in this office location or closed this office.
And we will have a long discussion with them about what's going to happen for that specific license, but other licenses that we might have and broadening the usage with those clients. And so we have some idea as to where cancels are and roughly when they will come. But some of it just depends on the nature of that ongoing negotiation and when deals are finalized. But it is something that we follow and track closely.
Got it. So it sounds like just final question on this point. You have a sales pipeline, going back to our first question, that you see encouraging signals out of. You have a cancels pipeline that you know and can transparently share with investors was a little above normal running into presently. And so there's a put, there's a take.
Slightly above last year.
Slightly above last year.
Yeah.
So that's the sum total of what was driving it.
Exactly. Yeah.
Okay. That's very helpful. Can you maybe talk about the more recent conversations? Obviously, we had a pretty tectonic shift in the political landscape over the last week and change. Are clients more enthusiastic, animal spirits, do more business, or are they more guarded? Who knows what's going to happen?
Yeah. I'd say it's early to make any sort of diagnosis or definitive assessment. As I was alluding to earlier, we know that sustained momentum in the equity markets and the markets more broadly tends to be a positive thing for buying behavior and buying dynamics. Ultimately, for many of our clients, the driver of being in expansionary mode versus contractionary mode is confidence. And so when financial services organizations are more confident about the outlook and the environment, that will generally translate through to their willingness to launch new funds, hire more teams, open new offices, all of which are helpful to us. The other thing that I would highlight is when you do have periods of significant rotations and flows or shifts in asset values, our tools can be helpful in navigating those shifts.
And so, again, too early to say what it means specifically, but I would say momentum in equity markets tends to be a healthy contributor to our business.
I think that's been pretty clear, but let's dig in. For a long time, the ESG and climate business, where growth rates have sort of, I would say, normalized, but we've converged to industry standard or thereabouts, were this big driver, and obviously, first take I get a lot is, does that business work in a Trump administration? Second take I get is, well, last time around, it worked fantastically. What are the puts and takes for ESG and climate in this administration?
Yeah, and it's very dynamic, so the first thing to appreciate is that close to two-thirds of our ESG and climate segment run rate is outside the Americas, which is a higher weighting internationally than any other segment for us, so that's an important thing to keep in mind because the dynamics are different in Europe. They're different in Asia. Asia's earlier in its adoption. Europe's more mature, but the multitude of use cases and opportunities across Europe is still significant, and regulation is a helpful factor there. Listen, in the Americas, and I would say this is even true globally, there has been a crystallization and clarification of what ESG investing is, and so I think part of the rhetoric and noise that you have seen in the US is related to many different views of what ESG investing is. Is it woke capitalism? Is it do no harm?
Is it trying to drive a political agenda? Those are the areas that get a lot of attention. But MSCI has always differentiated in providing financial materiality-based insights in our ESG and climate tools. And they are tools that help investors navigate financial risks associated with ESG considerations. They help clients navigate the physical and transition risks and opportunities associated with climate change and a move towards a low-carbon economy. And so we do hear from clients that that is something they know they need, and that's what they are focused on right now. And so there has been, I think, some clarification around that financial materiality topic. And you've seen some other ESG providers feeling pressured, especially those that are less focused on that. And that's an opportunity for us.
Listen, I don't think we should bank on meaningful U.S. regulation on U.S. organizations in the near term, but that doesn't mean that ESG is not important, and I think the tools that we are providing, as I've mentioned before, continue to be very important mission-critical tools for these organizations that have become embedded in the investment process and an area where we are standard, but it will be dynamic here, and we're agile, and we have a wide range of tools, you alluded to this, that can help across a multitude of use cases and a number of avenues for growth across a number of geographies, asset classes, and client segments.
Got it. So the other area where you guys have been feeling, shall we say, a bit more pressure than last year, not just ESG and climate, has been, you started out with this, the asset manager channel. And I think you and I have discussed this in the past, but I start to think a little bit about you've had very prominent flows into money market accounts. And of course, a dollar can only go one place if you're going to invest it, unless you borrow more for it. But with money market funds, having attracted so much capital, it feels like that's an institutional and a retail story. Does that keep investors on the sidelines, keep some of your clients maybe a bit more defensive because the money isn't going into their fee products?
Yeah. So to your point, we've seen in 2022, 2023, significant flows into money market products as well as cash products more generally. Definitely, some of that is attributable to the higher yield environment. At the same time, we have seen significant outflows from active equity strategies. And for sure, some of that is shifting into lower risk, higher yielding cash money market type products. And so some of that pressure that the asset managers have felt has been driven by the higher rate environment and flows into cash products. There's more than that going on, and it is more dynamic, but that has been a contributing factor. Similarly, you've seen some more muted flows into equity ETFs. You have seen an acceleration in those flows this year. You've seen a pickup in those flows.
And so I think combination of just the momentum in equities generally translates through to a better environment for not only passive equity investing, but also active equity investing. And to the extent you do see yields come down and you see the relative returns that you can get in a money market fund become less relative to equities, that should be additive and helpful as well. The other thing that I would point out, and you know this, is the fees in money market funds. While many asset managers have picked up flows into money market funds, the fees tend to be lower than in active strategies. And so it can be a double whammy for them.
Right. It's disintermediation in a way. Can you highlight the ETF business? Trackable. You guys report on it monthly. It's very transparent. You have a non-ETF institutional passive business that is also asset-based that broadly tracks directionally more or less in line with the ETF business. But we don't have a lot of color on quarter to quarter. Can you talk a bit about what's in that business, regional product exposures, index tracking, what sort of investors need to know in that business?
Yeah. No, appreciate your flagging that. It is an area that is strategically important, has compelling secular trends, and an area where we've tried to provide a little bit more clarity. But we know there's a lot going on there. And so it's probably worth level setting. So that non-ETF passive line picks up a few main categories of investing or investment products. One is what we call institutional passive. And so that is where an institution like a pension fund allocates assets into a separately managed account or co-mingled account that is tracking one of our indexes. So it's a passive or an index mandate in a wrapper other than an ETF. Index-based mutual funds are also in that category. And then you have things like direct indexes. So when you hear us talk about direct index portfolios, that's also in that non-ETF passive line.
Similarly to the ETF area, we charge basis points on the assets under management, tracking our indexes in those various funds and wrappers. I think we've given the color that it's about $3.65 trillion of AUM. And so just to mention that, the ETF, AUM and ETFs tracking our equity indexes is about $1.76 trillion. And in that non-ETF passive line, it's $3.65 trillion. So it's actually a bigger pool of assets. The run rate there is around $175 million. It's a little bit more than that. I think it's like $178 million compared to the ETF run rate, which is in the $445 million. And so from that, you can gauge that the fees are lower. So they tend to be somewhere around half a basis point. But those fees have been pretty steady.
So we've seen, unlike in ETFs where you've seen this gradual decline in fees with outsized growth in lower fee products, what we call mix shift within the non-ETF passive line, you've seen stability in the fees. And that is in part driven by the fact that you're seeing strong growth in demand for non-market cap weighted products. And those are areas where we play a more significant role in the value chain. We are an important provider and partner to an institution who wants to do a custom mandate or launch a passive strategy against one of our custom indexes. If they're trying to overlay a climate objective or some factor strategy, those are all areas where we can command more compelling economics. And we're seeing growth in that. And part of that's picking up that custom index trend that you hear us talk about.
To your question about the exposures, the exposures are within the non-ETF passive category, pretty similar to the ETF category. There are slightly different weights, but there is today a heavy concentration of those assets around kind of our big market cap weighted franchises like ACWI, like World, Emerging Markets, EFA. But as I alluded to, you are seeing strong growth in some of the non-market cap weighted products in areas where we think we have a differentiated position.
Got it. And then one of the things that annoys me in following you guys, and hopefully annoys you even more, is sometimes we'll have a salesperson, trader be like, "X stock outperformed the MSCI." And I'm just like, "Which one?" Because you guys slap the brand in front of everything. Is that something you guys spend a lot of time on, like enhancing your brand and thinking about the brand? It is an important, especially as you think about maybe putting some business in wealth, where obviously S&P have a great brand.
So firstly, we have a very powerful brand. But there are certain parts of the investment community where that brand is not as well known or as appreciated. I think within the institutional investment process, it is the premier brand, conveys trust in quality frameworks, research, and then ultimately tools that have more utility and are more effective for clients to achieve their objectives. And it has become a critical part of that ecosystem. But you're right. There are certain areas as we continue to expand where there's probably not as deep of an appreciation for that value proposition that I outlined. So we've hired a new, she's not new anymore, a Chief Marketing Officer a couple of years ago, Kristina. She's been a tremendous addition to the organization.
Part of what she's doing, she's doing a whole host of things, enhancing user experience, our ability to more systematically go into some of these client segments, but also enhancing the awareness and brand of MSCI in some of these key growth areas, like, as you said, the wealth-driven investment process, which we believe is a big opportunity for us. We think we have a differentiated value proposition. So, yeah, continuing to build awareness around the multitude of things that we can do. As you said, we're not just a way to measure international markets. We are a tool that's critical for constructing a portfolio, allocating assets, understanding performance and risk. We think that value proposition is probably not fully unlocked and realized within certain pockets of the investment community. These are big pockets of the investment community where we're relatively small today.
Got it. And then maybe to round out just the index discussion with the subscription business, what's changed year to year at the sales cycle, but also the degree to which you're leaning on price? It feels like 2023, we leaned on price a little more than in the typical year. And in 2024, we've taken a little gap to just be like, "Hey, clients, we appreciate you." And you know can't lean on that every year, year in, year out in a higher way. But as you look out to your conversations today, looking into 2025, how do you think about where we land on price next year?
Yeah. I don't want to be prescriptive or too specific because it is a continual discussion. Internally, it's something we try to be systematic and regimented about. To your point, we've indicated that this year the contribution of price increases to recurring sales is slightly below what it was in 2023. The approach that we generally take to pricing is that we look at the overall pricing environment, including our costs. We do factor in client health, and that varies client segment to client segment. We look at the value that we're delivering. So if we've brought significant enhancements to a service or a specific product, that will help oftentimes translate through to a higher price increase in those areas. And so we use all those to triangulate around a price increase for typically a specific client segment and a specific product.
And then, as I said, we try to be systematic about it. I would say, and I mentioned this on the earnings call, there are opportunities where we can probably be more aggressive at price increase. But we are trying to take a long-term view here and long-term approach, particularly when others in the space might be trying to be aggressive on their price increases. And we recognize that over time, more of our growth is going to come from doing more with organizations rather than price increase. And we think we can establish ourselves more strongly as a partner to these organizations if we are measured on price increase. Having said that, we do always want to capitalize on and capture the value that we're delivering.
And so we play a key role for many of these organizations in helping them attract assets, command fees, be more effective at investing. And we continue to enhance those services in that role. And that's something that we will monetize.
Excellent. So speaking of monetization, let's talk about analytics and how that's held up pretty well in the sales environment. You guys have obviously flagged that the revenue growth has some chunkiness to it. But the run rate has been 7% organic all year, which I think is quite good given what we've seen elsewhere. You've had a couple of new business wins last quarter. How do you think about why the product is doing well? Are you winning share in the market? I thought of you guys, especially on the enterprise risk side, transparently, as a share donor for many years. It doesn't seem like that's the case on you.
Yeah. I would say we have been getting strong traction in the key focus areas within our analytics segment. And so you've heard us talk a lot about what we call equity analytics, which is largely our risk models or our factor models, as well as the portfolio analytic tools that we offer to help clients backtest, optimize, do risk attribution on their portfolios. We've had tremendous success there. And it's an area where we are differentiated. We believe we have the best-in-class risk models. That's an area we continue to innovate. And we've seen strong momentum there. Part of that has been fueled by the success you've seen in the multi-strat hedge funds, who are big clients of ours. Obviously, Quant Funds are big clients of ours as well.
But many of these organizations use our risk models as a key ingredient or key input into how they manage their organizations and manage risk particularly. And so we play a critical role for them. We've benefited there. But I think we've been leading on that to continue to increase our presence outside of that traditional Quant or multi-strat hedge fund client base. And that's an area where I would say we are winning over time. And I think there's a growing appreciation among more traditional asset managers that they can use these risk models to understand drivers of asset values, understand what's happening in the market. It's equally as important as stock selection is to understand market drivers and risk drivers. So that's been really encouraging for us and an area where we think we have a strong position.
As you said, on the enterprise risk side, we've been seeing traction on the heels of investments we've made in fixed income, so that has benefited us not only in some discrete fixed income wins where we're serving the fixed income investing part of organizations, but it's also been bolstering our enterprise risk offering, so our continued enhancements to the quality of our pricing models and terms and conditions across hard-to-model assets like mortgage-backs and corporate loans have all been things that have been additive to helping to differentiate us. They've been nice upsell opportunities.
And then we have, to your point about, I wouldn't say necessarily we've been ceding market share, but there is competition in there on the large side at times from the front-to-back providers whose value proposition is, "I'm going to save money for you," to the, I'll call it lower-cost offerings from some of the workstation or terminal providers who have an offering that for somebody that doesn't have a broad portfolio across many different asset classes might have something that's good enough. We are clearly the best-in-class provider, and we have made our tools easier to work with. And so we've made enhancements to our APIs. We've made a lot of our content available on platforms like Snowflake. You've heard us talk about our insights offering and more recently our AI Insights offering. And so clients are able to get more value out of our tools.
And I think that is positioning us well relative to competitors. But we are competing on quality. And we are providing a mission-critical tool. And so if you're an organization that wants to have best-in-class risk management, understand the drivers of risk in a language that the investment community is generally using, we are the provider of choice.
Excellent. So when I look to, we'll pivot maybe to some of the expense side of the business. Got to spend money to make money, right? When I look at 2024 guidance, the high end implies 15% expense growth from Adjusted EBITDA expenses. Most of that's inorganic. I think you're tracking at around 6% growth organically through 3Q by math.
It's in that ballpark.
Yeah. So outside of M&A and these acquisitions you're digesting, where is MSCI investing for growth now? Where is that incremental organic dollar going? And then should we anticipate maybe a return to that high single-digit expense growth framework next year?
Sure. Yeah, so we are continually investing, and actually, we have the objective to grow our investment portfolio, which is our—you've heard us call it Change-the-business expenses in the past—but those are. You can think of it as discretionary expenditures that are above and beyond the Run-the-business cost of the company, but we try to drive the growth of that investment expenditure base by twice the growth rate of the overall expense base, and so we are absolutely continually focused on investing. A lot of that is enabled by continuing to drive productivity enhancements and efficiencies across the Run-the-business expense base. But listen, the areas that we are investing in are the areas you hear us talk a lot about, so probably the number one investment area is Custom indexes at scale, which involves investments we're making to our technology infrastructure, including user interfaces for clients.
Firstly, for our internal team, our research team, but then ultimately for clients, investments into our data architecture, investments into our researchers who are providing those frameworks or classification systems to come up with systematic ways to understand, dissect, ultimately allocate across thematic topics, specific factors, the varying objectives that investors have, and then go to market. So as you know, we're growing quickly in many client segments where we are smaller, and so investing in that footprint, and a lot of that is on the heels of our custom index capability, so that is first and foremost an area we're heavily focused on and investing in. We're also investing in continuing to invest in the private asset space, into the range of climate tools, and this is content innovation. It's go-to-market. It's trying to establish standards in places where there are not standards.
And then we talked about on analytics, some of the targeted investment areas that we're focused on. And so we are continually focused on investing in the company, but it is balancing that against creating a sustainable, attractive growth trajectory of profits and cash flows. And so we're investing for the long term, but making sure we have a steady financial model in the short term.
Got it. And absent from those facts, the ones you just mentioned was ESG and climate.
So sorry, I thought I had mentioned with private assets, climate. So for sure, yes, yes. That was not intentional. We are continuing to invest in ESG and climate. And we think this environment's actually creating opportunities for us in a number of areas. But you've seen us launch things like our geospatial dataset, asset location dataset. You've seen us doing work in areas like nature and biodiversity, a whole host of regulatory solutions. So we continue to see attractive opportunities there. That was not intentional.
And so that's maybe more organic. But inorganically, each of those segments, I think now we've lapped Burgiss. But yeah, we have. But each of those segments had an acquisition within, call it the last five quarters. Are all of them progressing as you guys had envisioned? Have there been any negative surprises, any positive surprises from that portfolio?
Yeah. I would say we're seeing the value unlocked across those opportunities generally, so you mentioned one in each product area. Importantly, they are in those key investment areas and growth areas that I mentioned, so you saw Foxberry, which is enabling our custom index efforts. Fabric is helping on the wealth side. Trove enhancing our client content set in an area that we know is going to be important. Then Burgiss, obviously, giving us the best investment quality dataset for private assets, so we continue to be encouraged about the capabilities that we've gotten. They are unlocking opportunities. You've seen the momentum that we've had on the PCS side, which is the Burgiss franchise growing in the high teens, consistently growing in the high teens. I'd say the integration of those other businesses continues to progress nicely there.
These will be important long-term capabilities for us.
Andy, thank you so much for your time. All right, everybody, have a lovely day.
Thank you so much.