Sabadra, and I cover information services companies here at RBC Capital Markets. We are excited to host Jorge, Head of Analytics of MSCI. Thanks for giving us this opportunity.
Thank you, Ashish. Great to be here. Thanks for the invitation.
Thank you. We'll kick it off with a broad overview. If you can just give us an overview of MSCI's analytics business, what are the key products, what is really driving the strong momentum that we've seen?
Yeah, so the analytics business at MSCI, it really focuses around serving investors around portfolio construction, risk management, performance attribution. And we do that through a combination of products. Some of them are geared towards the front office. Some of them are geared towards enterprise risk and performance management. So we have our equity analytics suite of products, which is what you might know as Barra Factor Models. Obviously, we've been in the market with that for several decades. And these factor models are being used by quants, including multi-strats and single strategy hedge funds that are quantitatively oriented, broker dealers for hedging and portfolio creation, asset owners for total plan risk management, and also traditional asset managers, and also some fundamental investors that are becoming more factor aware and need to incorporate some of these tools into their arsenal. So that's part of the business, right?
The other part of the business is really enterprise risk and performance. That's where we help all kinds of institutions, buy side and sell side. On the buy side, asset managers, hedge funds, asset owners, so pension funds, sovereign wealth funds, endowments foundations, et cetera, as well as banks manage the risk in their portfolios. That's where we consume all of the portfolios of those institutions. We basically run all of the risk metrics that they need as part of their operations. Those would be the two big parts of the analytics product line.
That's great color. Now, if you think about the business, the recurring subscription sales grew 11% in Q3 . I was wondering if you can talk about what kind of products or client types are driving such strong new recurring subscription sales?
Yeah, so we have good traction with some of the new products that we've launched recently. One example of that is our next generation equity models, part of our equity factor model franchise, where we've had good demand from hedge funds and broker dealers. I would say that's been an important part of the story. And separately, we've also had good traction in enterprise risk and performance with asset managers and asset owners that are trying to, in some cases, consolidate or streamline their infrastructure. And some cases might have some very specific needs. So for example, asset owners are drastically increasing their allocation to private asset classes. We do have risk models for private assets, private equity, real estate, infrastructure, et cetera. And some of the sophisticated asset owners now have 40, 50, 60% of their total plan invested in these private assets.
Having that total portfolio view across public and private is important to them. Again, some of the new products that we've been releasing both on the equity side as well as on the multi-asset class side have been helping with that demand that we've seen recently.
That's great color. I do want to drill down into some of the newer products and these client types. But before we do that, I just wanted to take a step back and talk about how does analytics fit into the overall MSCI strategy? How does all these other businesses that you have across private asset ESG index benefit analytics, and how does analytics also then contribute back to those businesses?
Yeah, it's a great question. And Henry's been, our CEO, has been very vocal about this point, right, that we don't want to run a divisionalized company where we have four things that have nothing to do with each other. So all of the various product lines that we have at MSCI are supposed to complement each other, and that's what analytics does. So part of it is obviously we do all the things that I just mentioned, but if you look at analytics, if you step back, right, and look at analytics broadly, one of the key things that we do for the firm is we consume client portfolios, right? So when we sell to an asset manager, when we sell to an asset owner, we onboard every single one of their portfolios across all asset classes.
So once you have those portfolios, you can run more calculations and provide more content on top of those portfolios. That content might ESG or climate, right? So for example, if they wanted to get the financed emissions across their entire portfolio, an asset owner that's already an analytics client would find it very easy to just add that climate content, the carbon emissions, right, on top of the analytics content that we're providing to them today. So that can also help with private assets, for example, a private assets product line, et cetera. Also, some of the risk and performance content that we provide, the factor models in particular, can be turned into an index product, right? So we have factor indices, for example, that leverage the same factor models that we're distributing through analytics to create those non-market cap indices as an example.
So it's very important to look at analytics in those two ways, right? One, yes, what we do on portfolio construction and enterprise risk, which I described, but also how we might help other product lines in terms of new product creation and/or distribution of the content that they have.
That's very helpful color. And if I can ask a question on the technology side, can you talk about some of the initiatives that you've done on the technology front to position the company for much better growth going forward?
Yeah, so we're looking at what technology can do for us both to improve our internal operations as well as how can we develop better products for our clients, right? So in terms of internally what we've done, we're using AI very extensively to improve efficiencies in a lot of internal processes that we have. As you would imagine, we have a very large data team that basically sources data from lots of different sources, curates it, cleans it, and then makes it available for consumption for clients. A lot of it is being improved by the use of AI and machine learning, right? But then when you look at what products we can create using these technologies, one of the things that we're very much focused specifically in analytics is how to make the products that we already sell to clients a lot more valuable to them, right?
How can we expand the usage of the data that we provide to those clients? And so the way that we have traditionally worked with clients, for example, in the enterprise side is to tell them, "Look, give us all your portfolios. We'll go to the custodian or wherever these portfolios reside. We suck those portfolios in, and then we calculate a lot of numbers for them, right? We push those numbers out, and then our client, right, would be responsible for consuming that data, parsing the data, storing it somewhere, sometimes the data warehouse or something like that, and then either building reports and storing those reports internally or pushing some bits and pieces of that data into internal applications." So that's a lot of work that they have to do.
So what we started doing now with a product that we call Insights is that we're actually holding on to that data that we would push onto the client, and we're storing it in the cloud in Snowflake specifically, and then allowing clients to do a number of things. The first one is it's available in Snowflake, so you can just grab it from there if you need it. And that cuts a lot of processing time on the client side, right? The second thing is since we have access now to that stored data historically, we can make it available in very simple dashboards to a much larger number of users in those clients' organizations. So now you don't have to be a risk expert to use a risk application and extract value out of it.
If you're the CIO, you can just log into these things and basically have access to all the risk and performance numbers across all the portfolios. So that's helping us help clients extract a lot more value from what they're already buying from us. And then the last thing, which is very new, is applying artificial intelligence on top of that data, right? On top of the risk reports, the performance reports. And so what we're doing very specifically is summarizing what those reports say. So we're not trying to predict something or build a new model. We're basically saying we have all of these risk report data stored. What a client would typically do is say to an analyst, "Okay, here's this data.
Can you please sift through it and write a report in English about what this says?" Well, that's something that can be done with technology these days. Instead of doing that, you can just log in the morning, and you will have your summary in English in terms of what these data says, right? And then we're continuing to add capabilities to basically interrogate the data. So basically, rather than go to a report, you can just ask the question, "What is my exposure to Japanese yen in this portfolio?" and get the answer now. That's something that you can get if you go through a report and look at the right line. But you don't have to do that anymore, right? You can just interrogate the reports that way.
And so we're finding that this is making it a lot easier for clients to get value out of the tools and the data that we've been providing for a long time. That last piece, because I always get a lot of questions, to be specific, we had our first release in June. So it's released for equities. We're working on multi-asset class to be released soon. But we'll continue to improve this platform because we're seeing that beyond the models that we continue to improve all the time, just making it really easy for our clients to consume this information is just as critical, right?
That's very helpful color. I was just going to ask if it's possible to share any early feedback? As you said, this was a module which was our product which was launched for equity very recently, but any initial customer feedback?
Yeah, so very good. We've gotten good traction, good feedback from clients. I would say so the whole insights piece, which means the Snowflake and the dashboards that was launched last year. So we have more clients using it, and the feedback has been very good. It's interesting. Sometimes there were things that we didn't realize. So for example, it's like, "Wow, now I cut two hours out of my process in the morning because you're pushing this data directly into Snowflake," right? That might not be the same for every client depending on your own infrastructure, but that was a nice surprise to us that we didn't realize how much we were helping the downstream operations of our clients. But on the AI specifically, which I think was your question, I think people are still experimenting with it, right? There is.
So just to give you a little bit of color on this thing, I got a prototype shown to me of this thing in the summer of 2023. And it blew my mind, and I thought, "Okay, this thing's going to be done in two months." And then we realized, "Well, it's not so easy, right? Because this thing has to be near perfect or nobody will use it in our space." So it can't be the standards of normal AI. We need to have a higher standard because of the industry that we operate in. And so it took us a year to get it to the point where we were happy with the results. Now we pushed it out, and I think clients are starting to use it more and more, still cautious and double-checking things and making sure that.
But the feedback that we've received has been good. They want more of it, right? A lot of them are saying, "This is great, but I really want the multi-asset class," for example, which is common. So that's good to know that they're anticipating demand for these things, right?
That's great. Maybe switching back to the private asset, you mentioned there's been a pretty big demand for private asset. Does that also come from your Burgiss acquisition? So maybe I was just wondering if you could elaborate more on that private asset offering.
Absolutely. So the data that we use to build the models in analytics comes from Burgiss, indeed, right? So it all comes from our Private Capital Solutions part of the business. And that goes back to the point that I made earlier about not running a divisionalized company, right? Just like we use the factor models to create indices, we use the Burgiss data to create risk models on private assets. Now what we have today is basically a risk model for each individual sub-asset class within private assets. We are now thinking about going much further than that because the way in which investors think about risk in private assets is different, right? It's not just volatility. They worry a lot about cash flow risk. They worry a lot about liquidity, particularly when you start pushing your allocations to private assets to very high levels.
If you get into a crisis and you get a capital call, it can be challenging to make that capital call, right? So there's a whole host of analytics that we think we can help clients with that will be in our roadmap going forward. Similarly, there's problems that we couldn't have solved before that I think we are in a better position to solve. For example, how do you do performance attribution in private assets? Well, the first thing that you need if you're going to do that is a benchmark, right? But benchmarks are not straightforward in private assets. But now we have a business, obviously have a big index franchise, but we have a business in Burgiss that provides benchmarks in private assets. And we're working with our colleagues to try to solve that problem.
This is not ready now, but I'm giving you a sense of how we're thinking about evolving our offering specifically for private assets going forward.
That's great color. Question on maybe by client type, if we can start first with asset managers. One of the concerns we always hear is asset managers' budgets have been quite tight. They've been shrinking. How do you think about the asset manager segment itself? What drives growth there within the asset management space? How much of it is gaining wallet share? And then when you think about pipeline, how do you think about the pipeline going forward? So a multi-part question around asset managers.
Yeah, so it's true. I mean, asset managers' budgets have been tight. Importantly, they're also being managed very differently than in the past. There's a lot more centralization. It used to be highly decentralized, and every team used to be able to just pick their own tools and control their budget. Now it's looked at more centrally. I don't think that part is going to change. But importantly, there's two areas where I think they are spending money, will continue to spend money. One is when they spend money to save money. So that's sort of this trend towards simplification of their technology infrastructure. We have a role to play there because some of these firms, you go in there and they have 20, 30 providers. I know it sounds crazy, but it's true. We've been part of these projects, right?
They want to try to go down to maybe half a dozen or a dozen, right? It's never going to be one, but it's a smaller number. And so firms like us that have a lot of use cases we can cover are finding opportunities with asset managers, and they will certainly spend money to simplify their infrastructure and save money in the long run. The other is they're doing new things, and when they want to get a new business off the ground, they're going to spend money. They're all trying to get into private assets. That's just an example, right? Or there might be regulatory requirements that they need to fulfill, and in that case, it's not discretionary. It's something that they got to do as part of our business. So there's still pockets of opportunity like that.
Even when budgets are tight, they can find the money or reshuffle the spend to achieve those goals.
That's very helpful color. I was just wondering if you could also comment on the pipeline. What do you see from a demand perspective? What are your conversations like with clients?
Yeah, so we've had, I think, a very good demand for the first three quarters of the year. As you have seen, we continue to have very constructive conversations with our clients. We always get the question, "Well, is the environment improving? What does next year look like?" I think it's early to tell, but we're cautiously optimistic that the budgets will improve. But again, too early to say. The one thing I always caution people, it happens across our business, but I think it's a little bit more pronounced in analytics because of the type of clients and use cases that we serve is that things will be lumpy from quarter- to- quarter, both on the sell side and on the cancellation side. And those things don't necessarily signal some systematic shift of any kind, right? So sometimes these are isolated events.
And so I would just caution against drawing conclusions from that lumpiness.
That's very helpful color. Maybe switching gears here a bit, can you talk about the wealth opportunity? How do you think about pushing analytics on the wealth space where you are on that front?
Yeah, so we're aggressive, but early in our journey, right? So we made an acquisition in January of this year of a company called Fabric, a small company that has a terrific application, great user experience to solve mainly two problems for clients. The first one is help wealth organizations with multi-portfolio construction and then help the advisors in these organizations personalize client portfolios at scale while staying within the risk appetite and the house view, right? And so we can connect both a small portfolio construction with what's happening on the advisory side to track whether or not they're complying with the house view. So that gives them the ability to go fast in terms of serving clients' preferences, but in a controlled manner. Again, we acquired this company in January. We've renamed the product to MSCI Wealth Manager.
So that'll be the new name going forward so you can keep track of that. And we've acquired a few clients this year, and there's many more that we're having conversations with. So we would expect that to be a bigger contributor for us next year. And we know this is going to be a long term because this was a buy-to-build type of acquisition.
That's great. Maybe focusing on asset owners, you obviously talked about stronger demand from asset owners for, I think, enterprise risk management, private asset particularly. But how do you think about the asset owner opportunity?
Yeah, so more and more asset owners are managing the money in a, it's not necessarily in a more professional way, but they are internalizing a lot of the functions, right? Sometimes not just the portfolio management, at least in pockets, but they're starting to use the same tools that asset managers are using. And that creates an opportunity for us. Now, the very sophisticated ones have been doing it for a long time, but we're seeing even smaller ones trying to adopt the same set of tools that the large asset owners are using. And so we think that that will be an important opportunity for us, particularly as we continue to improve our toolkit around private assets, right?
That's very helpful. One of the questions around ESG, obviously ESG has been weak and just given the political environment, maybe that continues. But climate has been a growth area. So how do you think about Climate Lab Enterprise and climate analytics products?
Yeah, so that is one of the areas that I mentioned earlier where analytics works closely with our ESG and climate product line. Since we already have the assets of asset owners, of asset managers, we can very quickly turn around enterprise views, for example, on climate emissions. We think that demand is going to, and I'm talking about climate specifically, that demand will anticipate for climate risk models specifically. The state of the art is still early stages because what people really want to know is what is my financial risk due to climate change, right? And so we do already have some models in that direction, but there's a lot more work that we and everybody else need to do to help organizations answer that question in a more precise way.
So I think the opportunity is large, but it will grow over time because this is becoming just embedded in the way people manage risk. It will not be a sort of a thing in the side, but it's going to be part and parcel of how institutional investors do risk management. But again, there's still a lot of work that has to happen. What we're focused on now is making sure that for our clients, they're able to track emissions and know where is it that they have the exposures. And then the next step is to help them quantify those exposures in financial terms a lot more precisely.
That's very helpful. Now, talking about by asset type, fixed income, how do you think about your fixed income capabilities? It was obviously highlighted as a big growth area, small percentage of revenue back in 2021, but a big growth area. How do you think about that?
Yeah, so we've been putting a lot of emphasis on fixed income for many years, and we focus on a number of areas, right? Certainly improving our modeling capabilities, particularly in hard-to-model assets like securitized products. That investment was, first and foremost, investment in people. So we had to bring experts from banks that were running research on securitized products, and those banks built a team around those people. And so we've been able to improve quite significantly to the point where we think we're best in class in modeling a lot of these asset types. So that was part of the investment. The other part of the investment was meeting clients where they were, right? Which is a lot of them want to consume this information in the order management system. So that means that we had to distribute through partners.
We have a partnership with State Street, with Charles River specifically, where we distribute our single security fixed income analytics, our factor exposures through their order management system, and that's how portfolio managers access it. We also distribute risk and performance capabilities directly to front office fixed income teams that want to use it outside of the OMS. So that's a second area in which we monetize. And then the third one, which is interesting, still a small piece, but we're seeing some interesting demand there is for factor models on a standalone basis. So very analogous to what we do in equities with the equity factor models. These are the fixed income models selling to systematic quant shops as well as credit trading desk, fixed income ETF trading desk, etc.
Again, this is a small base for now, but we're seeing some demand for fixed income models in the same way that same use case, right? Or very similar use case that we've seen people use our equity factor models.
That's very helpful. So we talked about you obviously had a very strong presence on the equity side, grown your fixed income, private asset. So you put all of that together, multi-asset class. How do you think about the growth in multi-asset class and what's really driving it? Which asset types? You obviously talked about asset owners, but what other client types are driving multi-asset class demand?
Yeah, I think the growth in multi-asset class is the combination of many of the things that we just discussed, right? So clearly, coverage of private assets is helping. Fixed income is helping because fixed income is also part of multi-asset class. Obviously, we do it on a standalone basis, but also as part of our multi-asset class risk and performance solutions. And then what I mentioned about insights and making all of these a lot easier for our clients to use as well as much broader usage within existing clients. What I mean by that is usage by more people.
All of that is helping us drive growth across asset owners, across asset managers, across hedge funds because hedge funds also use us for risk management, not just, we talk a lot about equity model usage, but they're also big consumers of our multi-asset class solutions as well. So it's really been across segments, right?
That's helpful. And then you talked about obviously a lot of organic investment, but also tuck in M&A there, Fabric, for example. As you look at your product portfolio, do you see any gaps there? Do you think that there is more opportunity for you to do either tuck-ins or other M&A?
Yeah, we are always looking for interesting assets. The reality is we're focused on organic development. If we find something like we did with Fabric, we will obviously consider it, but we're focused on improving what we already bought and what we have because we think there's a lot of organic opportunities ahead of us.
That's great. And maybe if I can ask a quick question on margins, you've seen some pretty good margin expansion there. How do you think about it broadly in terms of investments and margin opportunity?
Yeah, so we've been optimizing the expense base of analytics for a long time. It's been multiple years, and we've had good success streamlining our strategy, getting rid of things that weren't helping us. And there's an ongoing effort on efficiency. I mentioned what we're doing with artificial intelligence internally. So we're always looking for ways to become more efficient and reinvest that money or at least a good portion of that money back into new growth initiatives. And that's something that we'll continue to do going forward.
That's great. Thank you. Thanks for giving us this opportunity.
Thank you, Ashish.