Good day, ladies and gentlemen, and welcome to the MSCI Second Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session where we will limit participants to one question and one follow-up. Further instructions will follow at that time. As a reminder, this conference call is being recorded. I would like to now turn the call over to Mr. Andrew Wiechmann, Chief Strategy Officer. You may begin.
Thank you, Shannon. Good day, and welcome to the MSCI Second Quarter 2019 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the second quarter, which is available on our website, along with our earnings presentation and a second quarter update. A copy of the release, second quarter update, and the slide presentation that we have prepared for this call may be viewed at msci.com under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and our other SEC filings.
During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures, including but not limited to organic operating revenue growth rates, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS, and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide insight into our core operating performance. You'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful, as well as how management uses these measures on pages 21-28 of the earnings presentation. We will also discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures. On the call with me today are Henry Fernandez, our Chairman and CEO, Baer Pettit, our President, and Linda Huber, our Chief Financial Officer.
With that, let me now turn the call over to Mr. Henry Fernandez. Henry?
Thank you, Andy. Hello, everyone, and thank you for joining us today. Before I start, I would like to say that we're very pleased to have Linda do her first quarterly report to you all on MSCI. I hope you treat her well, and she does a good job, right?
Thank you.
Our strong performance and momentum in the quarter is being driven by continuous strength in all of our offerings, accelerated by the incredibly attractive opportunities we see across a broad range of new growth frontiers. During the first half of each year, our board and the management team conduct an annual strategic planning process where we explore in great detail relevant client dynamics, industry developments, and all of our MSCI capabilities with a goal of prioritizing the most attractive focus areas for the firm. This year, we came away from the process with an overwhelming sense of excitement about the future of MSCI, and we reaffirm our belief that we are only scratching the surface of what is possible to achieve with this franchise.
We see data management, advanced analytical models, and sophisticated technology becoming increasingly critical to the investment industry, and the role and the value of MSCI is growing every single day. An important discussion internally then has become how we fuel the investments necessary to pursue the many opportunities we have while preserving our high profit margins. As we have discussed in the past, we have a very rigorous focus on allocating our capital to the highest returning projects through our internal capital allocation process. We think of our internal spending across two broad categories: run the business expenses and change the business investments. Run the business expenses relate to supporting the existing products and capabilities in their current form. While change the business investments relate to enhancing the existing business, and even more importantly, creating new growth areas for us.
A top priority for us is to increase investments allocated to change the business activities. We do this by improving efficiency and productivity, therefore squeezing and reducing expenses across run the business activities. This way, we can continue to allocate investments to the highest returning projects and consequently grow faster and be even more profitable. We spent a little bit of time talking about all of this at Investor Day. We see a long runway of opportunities and growth for our current run the business activities. We're also extremely excited about the growth potential for the change the business activities. Two examples of these are, first, new high growth areas of content creation, such as ESG and factors for both equity and fixed income, fixed income analytics and indices, and real estate and other private asset classes.
A second example is new client areas, such as wealth management, key geographies such as Asia, and new index licensing opportunities such as futures and options listed on exchanges and OTC derivatives issued by banks and broker-dealers. A third example is new distribution channels and new content-enabling technology that allows for those distribution channels to prosper. These are all very attractive investment areas in their own right, in addition to complementing and driving even more value to our existing index analytics franchises. Over the last several months, we have had several notable developments that reinforce our conviction around this change the business investment areas. Let me highlight a few of these developments. First, across content creation dimension.
In the first half of the year, 40% of inflows into all U.S. exposure equity ETFs went into ETFs linked to MSCI indices, primarily driven by a $9 billion inflow into ETFs linked to our factor indices. Globally, there was a total of $14 billion of inflows into ETFs linked to our factor indices. By leveraging our cutting-edge fixed income factor model, we rolled out a new tier multi-asset class factor framework, which allows clients to seamlessly analyze their portfolios from the highest level of factors all the way down to the most granular ones across any asset class and within one cohesive tier framework. In fixed income analytics, this quarter, we added a series of new corporate credit curves, which broaden and enhance our fixed income and multi-asset class capabilities.
One last example in this content creation category is that we have internally launched a series of fixed income factor indices that we expect to release to the market later this year. In looking at the client and product dimensions, let me highlight a few of the new developments that have given us conviction about our investment plan. We continue to deliver double-digit organic subscription run rate growth of 13% across Asia, 11% within real estate, and 19% and 25% for indices and ESG products sold to wealth managers respectively. In Q2, the notional value traded in listed futures and options linked to MSCI indices reached a record level of $1.4 trillion, with contract volume at near record levels of 29 million contracts.
This has been fueled by a strong traction in listed futures and options based on our flagship indices, such as the MSCI Emerging Markets and the MSCI EAFE, which together grew in total 24% year-over-year. In addition to that, we also have new launches in futures contracts, especially in the MSCI Saudi Arabia Index. We think the market for multi-country, multi-currency, listed and over-the-counter derivatives is potentially very significant, and we intend to be one of the largest index providers in this area. All the cases that I have cited are good examples of areas where our recent investments and innovation have driven highly profitable long-term growth in relatively new areas, in addition to our existing trajectory of growth in the run-the-business areas.
Let me now turn the call over to Baer, who will do a deeper dive into one of our specific areas of growth that I briefly mentioned, which we're extremely excited about. In this quarter, this focus will be on the index ecosystem and the critical role that index-linked derivatives can play in that. Baer.
Thank you, Henry. As we've talked about in the past, there are three important pillars to our index franchise: active management, passive, or what we call indexed management, and derivatives. These three areas reinforce each other, creating an ecosystem of investment and trading activity around our indexes that is globally interconnected. Asset owners who use our indexes as benchmarks will use investable products to equitize cash and manage their exposure relative to the benchmark. These asset owners and active managers will use exchange traded and OTC index-linked derivatives to hedge their investments, achieve customized exposures, and manage risk relative to the benchmark. The OTC derivative markets for equity indexes have become larger over the years, but have high carrying costs for sell-side market participants. The transition from OTC to listed markets helps these products reduce costs.
As volume and liquidity grows in these derivatives, the increased liquidity facilitates the participation of the trading community, benefiting the ecosystem of ETFs and the OTC market. Success in any one of these pillars of our ecosystem creates a virtuous circle that helps drive demand in the others. Within this MSCI index ecosystem, the pillar that has been least developed is derivatives. This is a relatively new growth area for us that we believe could be substantial over time. Historically, the market for listed index-linked derivatives was almost entirely focused on single-market, single-currency derivatives, where the trading hours and currencies of all the underlying securities were the same. Over the last decade, trading technology has progressed, and our exchange partners have increasingly had success in educating the global trading community on how to trade in listed futures based on our indexes, which are mostly multi-market, multi-currency in nature.
To help accelerate the growth of this opportunity, we have invested in building out a team comprised of several key individuals focused heavily on licensing our indexes for listed and OTC derivatives. This team is broadening and deepening our relationships with exchanges and broker-dealers who are generating a healthy pipeline of new index-linked derivative product launches and an elevated focus on promoting index-linked derivatives. Investments in building this team have already provided returns and a quick payback. We are seeing our exchange partners invest in marketing, sales coverage, sell-side partnerships, and market maker programs which aim to foster liquidity formation. Within broker-dealers, we see our clients finding numerous new opportunities to serve their retail and institutional clients with structured products like index-linked notes, swaps, and options.
Most of these are based on our market cap indexes, but increasingly are also used for factor overlays as well as thematic and ESG tilts. The incremental revenues MSCI from licensing these products should be high margin over time, with lower cost growth as we leverage our existing IT. In 2018, revenue from listed futures and options based on our indexes was $17.1 million, having grown at a CAGR of 37% from $4.8 million in 2014. The notional value of the open interest on listed futures and options based on our indexes has grown at a CAGR of 54% over the last three years. We believe this area could have a long trajectory of attractive growth and profitability.
As one measure of the potential opportunity in this area, many futures contracts based on single-market, single-currency indexes from other providers have meaningfully higher traded notional values relative to their ETF AUM linked to those indexes than those of MSCI. Our active focus on index-linked derivatives highlights just one strong example of how we are investing to capitalize on the wide range of new growth frontiers in front of us. While we are discussing the pillars of index growth, I thought it would be important to provide a brief update on our iShares relationship. The current terms of our ETF licenses are scheduled to expire in March of next year, subject to relatively short-term evergreen renewal provisions. We are now engaged in advanced constructive discussions with iShares around a new long-term agreement.
Our objective is to continue to expand our successful partnership by balancing the price-volume mix in order to maximize long-term revenue growth. Please note that we'll not be able to answer questions or provide more information about the negotiations until we have a final agreement, which we expect to occur within the next few months. With that, I'll turn the call over to Linda to take us through the financial highlights and discuss guidance for the remainder of the year. Linda?
Thanks, Baer, and hello to everyone on the call. MSCI's second quarter was another quarter of strong financial performance. On the operating front, our performance was solid, but a tough lap given the exceptional second quarter in 2018. The double-digit organic subscription run rate growth was driven by strength across regions and major client segments. Specifically, the Americas were up 8%, EMEA was up 11%, and Asia was up 13%. Asset owners, asset managers, and broker-dealers, which collectively comprise more than 80% of our subscription run rate, saw organic subscription run rate growth of 9%, 10%, and 10% respectively. Our strong focus on continually adding value to our clients has helped us achieve a retention rate of 95.5% in Q2, the highest level in the last decade. Our consistently high retention rates have helped drive organic subscription run rate growth of approximately 10% for the last seven consecutive quarters.
For recurring net new sales, the first half was up 11%, with Q2 down 3%. As I mentioned previously, the lower growth rate in the second quarter was the result of lapping a very strong Q2 2018. Also in Q2, we saw continued momentum across product segments. I'll now discuss the specifics for each of the product lines. First, for ESG, we continued our exceptional run across client segments and geographies. Within client segments, run rate growth was 24% for our largest segment, asset managers, which was complemented by exceptional growth more than 50% for hedge funds and broker-dealers. Across geographies, we had run rate growth of 50% in Asia, 27% in EMEA, and 18% in the Americas. It was also our second highest quarter ever in terms of both recurring sales and recurring net new sales for ESG.
Index delivered another quarter of double-digit subscription run rate growth, with factors growing at 25%, ESG growing at 48%, and custom and specialized modules growing at 14%. We continue to see consistent performance in our core market cap products, which had 10% growth. Additionally, we had a strong retention rate of 97%. For Analytics, as we've repeatedly mentioned in previous calls, operating metrics can be lumpy quarter-over-quarter. This is increasingly so as we are seeing larger and more complex deals being closed. Our recurring sales for the quarter was $14 million, lower than the second quarter of 2018, which was itself up 44% over Q2 2017, making for a tough comparison. However, recurring sales were up 7% compared to the first quarter of 2019.
We continued our positive momentum with a strong retention rate of 94% and continued strength in multi-asset class and fixed income analytics, which collectively had run rate growth of 7%. Finally, for real estate, our organic run rate growth was 11%, with strong traction in our market information offering. Finally, we'd like to spotlight our non-recurring or one-time sales, which were up 7% to $9 million versus the prior year period, primarily driven by increased sales in our index derivatives and risk manager product offerings. Turning to our performance in ABF, we continue to benefit from our focus on derivatives with listed futures and options revenue growing 20%, driven by 17% year-over-year volume growth. Most notably, volume and listed futures linked to MSCI's EM and EAFE indices together grew 24%.
ETF ABF revenue was down about 1%, with a modest increase in year-over-year average AUM in equity ETFs linked to MSCI indices, offset by a year-over-year decline in average basis points. Equity ETF assets under management linked to MSCI indexes ended the quarter at $819 billion, up 10% versus the prior year, driven by market appreciation across all geographies and continued flows into U.S. exposure products, offset by outflows from emerging market exposures. Overall, we saw more than $7 billion of inflows into ETFs based on our factor in ESG indexes. There was an inflow of $5.9 billion in funds based on U.S. exposure indexes, where half of the flows were in ETFs based on our factor indexes. These flows were directed primarily into low volatility products, while more than a quarter of the inflows into ETFs were based on our ESG indexes.
Turning now to capital allocation, we're continuing our commitment to returning capital to shareholders with a 17% increase in our quarterly dividend or an increase to $0.68 from $0.58 per share. We have consistently increased our dividends to shareholders, which has grown at a CAGR of 30% over the last five years. We had no share repurchases during the quarter, as it is our policy to repurchase opportunistically. As a reminder, however, we have returned more than $1 billion through share repurchases since the beginning of 2018. Looking at our cash balance, our cash balance at the end of Q2 was $771 million. Note that our policy is to maintain a minimum of approximately $200 million-$250 million of cash globally for general operating purposes. Turning to free cash flow for Q2, this was $177 million, down $23 million from Q2 2018.
The primary drivers of this decline were the timing of collections, higher payments for interest payments, and cash expenses, particularly offset by benefits from lower tax payments. Our approach to capital allocation remains the same, with no changes to our dividend policy, our leverage target, or our approach to repurchases. Lastly, I'd like to provide an update on our guidance for the year. Given our strong business performance and our focus on driving growth, we will continue with our plan to invest on a number of high-returning growth opportunities. These investments are expected to drive our adjusted EBITDA expenses and CapEx to the high end of the guidance range, or $685 million-$705 million for EBITDA expenses and $45 million-$55 million for CapEx. With regard to our tax guidance, we expect our full-year effective tax rate to be between 8% and 11%.
This includes the income tax benefit related to divesting of certain multi-year PSUs in the first quarter of approximately 11 percentage points, which has been excluded from adjusted EPS. Excluding this benefit, we expect the effective tax rate used for our adjusted EPS to be in the range of 19%-22%. With that, we'll open the line to take your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, please place your line on mute once your question has been stated. We ask that you please limit yourself to one question and one follow-up. Our first question comes from Manav Patnaik with Barclays. Your line is open.
Thank you. Good afternoon, everybody. My first question is just around the ESG initiatives. Obviously, some impressive growth rates there you guys called out, but maybe just more broadly, we've seen a lot of other names in our space make some tuck-in acquisitions, put together their own initiatives, lot of PR around it. I was just wondering how you look at the competitive landscape and if they're just a bunch of wide spaces that maybe everybody has an opportunity here.
Thanks Manav for that question. Clearly the opportunity on ESG or sustainable investing in the world is enormous. Over time, as ESG factors get integrated into mainstream investing, we may not be talking about ESG investing or sustainable investing. It will be all investing, in which if somebody's not taking sustainability into account will be debasing their fiduciary duties, right? It's a huge wide space. We have had incredible success and continue to do so. We've had a lot of investments into this area that have propelled significant growth. We have a product set that cuts across the board from ESG research for exclusions and screening to ESG ratings, to ESG indices, to ESG as a factor in risk models. We are now taking all of that ESG content and putting it into our technology platform distribution channels and the like.
We're also expanding from ratings into equity to large amounts of ratings into fixed income, which is an area that we want to focus on. Some of these fixed income indices that I have mentioned, that we have launched internally are on factor indices, but the team is also working on ESG indices as well, and the like. We feel pretty good on where we are. A lot of what we're doing is organic growth. We will also look at acquisition opportunities that present themselves, but they have to be very targeted and very value-added for us with the right financial returns. I'm sure this area will attract a lot of other providers and competitors, but we feel pretty good about the leadership position that we have and that we're maintaining in the space.
Okay, fair enough. Thank you. Then, maybe, just for Linda, and welcome to the call. The comments around the lumpiness in the analytic sales, I guess, is that just implying that there was a bunch of contracts that maybe got pushed out? I was just wondering if you could elaborate on that a little bit more specific to the quarter.
Sure, Manav, and I'll let Baer add to this, but as we've said quite a few times, and we mentioned in the prepared comments that we've already made, lumpiness is a factor of the analytics business. Specifically if a couple of deals had moved a few days, we would have found the results to be a bit different. Nothing particularly unusual going on there, and I'll see if Baer has anything else he wants to add.
The only other comment I would make would be about the retention rate, which is up 220 basis points year-on-year. That's always been an important indicator for us for the health of the analytics business. I think overall, there's no change in the trend, there's no change in our previous comments, and we're carrying on as normal.
Got it. Thank you.
Thank you. Our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.
Thank you. Henry, historically, you've had a different profile in your index business than your largest competitor there. Basically, they've had sort of a bigger piece of their business in at the base fees and traded products, Now it seems like you have a real opportunity in the traded product space to get increasingly larger there. I guess that's an observation, but my question is how do you see MSCI's business model changing over time? Do you see the subscription component going down because of the bigger opportunity in the traded products area? Anything you could add there would be helpful.
As Baer indicated, the three legs of a stool that keeps the stool together, is the active management, passive management, and derivatives management. Exposure management or agent management. We started obviously with the subscription part, which is active management, and grew that and continue to grow that enormously. That 10%-11% growth in index subscription is all active management with a lot of new products, a lot of new clients, a lot of new use cases, et cetera. Obviously, way back, we were the inventors of the international ETF business by licensing them to Morgan Stanley, and that has grown enormously, and now we're not only international growth order, but we're also domestic indices in many areas, like we mentioned about the U.S. exposure indices through factors and ESG and all of that.
That we continue to grow, and that will be another big runway in our growth there. The third part is obviously, derivatives. We have always been licensed for over-the-counter derivatives, but the absence of listed futures and options in multi-country, multi-currency indices was a slowdown, a difficulty in the explosion or the potential growth. A few years back, maybe five, six, seven years back, the model was broken in the sense that we were able to find a path for this multi-country, multi-currency index futures, with our exchange partners to trade in a time zone in which the underlyings are sometimes sleeping and therefore, the success of the MSCI Emerging Markets futures contract, which is now the third-largest futures contract in the world in open interest, the MSCI EAFE contract and all of that.
That has created a path forward for the growth of this industry, which should be more logical to have because the investment process is not single country, single currency. The whole investment is global and is regional, why should derivatives not be that? We anticipate in 10 years' time, 15 years' time, that actually multi-country, multi-currency derivatives trading may become larger than national ones. We want to be one of the leading providers of indices in that area. As Baer indicated, this is all an ecosystem, that the more derivatives you have, the more trading in ETFs, the more trading in over-the-counter, hopefully the more active management that takes place. It's all an ecosystem of liquidity and reinforcing one another across the world.
That's very helpful. You mentioned launching fixed income factor indices. Congratulations. Obviously, fixed income has been an area that you've been investing in and focusing for some time. I guess my question is, what has changed that has enabled you to be able to provide these now? What has changed internally that has gotten you to this place?
Sure
It's a little different than history.
Yeah. Toni, what's really different is if you think about the equity indexes, from the very outset, they were global and market cap-weighted, or in fixed income terms, issuance-weighted. We've taken quite a different strategy in fixed income, which is to start with clearly differentiated, you could call them more specialized indexes, which will serve very particular client needs and product needs. We felt that in this space, we could use some of the thought leadership and the content that we have from fixed income analytics and also the infrastructure that we have there. This has been kind of an exciting little entrepreneurial venture within the firm. We should be bringing this to market, as we said, later in the year. We're having really exciting discussions with some pretty major market counterparties about this.
For sure, this will not be a major business line in the short run, but using this model of driving it from a licensing business, we hope to then develop the income to self-finance this venture so that it becomes self-financing through licensing income from the early stages. It's small, but I think it will be innovative, it will be different, and I think that's what we hope to do to bring something new and innovative to this space.
Thank you. Sounds like you have a lot to look forward to.
Thank you.
Our next question comes from Alex Kramm with UBS. Your line is open.
Yeah. Hey, good morning, everyone. I guess just coming back to the analytics sales question from earlier. Appreciate the lumpiness in the business. Would love to hear updated thoughts on the environment more broadly. Some of your, not competitors, but other players in the space have certainly acknowledged the consolidation in the industry, obviously struggles on the sell side in some areas. I know you have been very immune so far. Just curious how the environment is getting tough or what you're experiencing out there.
Alex Kramm, look, for sure, as you're aware, all the various client bases that we deal with are focused on efficiency and operating their firms and allocating their expenses in the most efficient manner. That has actually been a central pillar of our analytics sales strategy, is actually to go not merely with an analytical offering to give them better understanding of their portfolios, but to work on creating efficiency in their organizations through better data management, so that they can use more technology and fewer humans, et cetera. I would say that our response of our strategy has been very much catering to that environment that you refer to. Consequently, the result is that we continue to be confident with the analytics story. We continue to be confident in the manner that we've described, a steady progression of growth.
At present, even though, as we say, there's this lumpiness, there's sometimes a big deal that doesn't make it in a given quarter, fundamentally, our guidance that we've given before on this product area and how we're managing it and the growth trajectory is unchanged.
I would add to that also, Alex, that first of all, it's very important that we say one more time, we're very comfortable where we are in the trajectory of this, and if we saw any bells or whatever, you're going to be the first one to tell you. Right? Secondly, is that we're very optimistic about all of this because the client dialogue that we're having, and on the lines of what Baer described, it's pretty positive. The high level of retention rates that are almost record levels of retention rates in this area, which in the past sometimes you all have questions about this, are another proof that our offering is sticking to people and therefore not as subject to competitive pressures, for example. That's a second area.
A third area is that as we improve our technology, not only our content, but as we improve our technology, it's going to unleash a lot more value of that content in the hands of the clients. That's the one area we're putting a lot of effort into it because we believe that for every unit of content in analytics, we should be selling a lot more. The handicap there has always been the enabling technology to make the use cases work.
Fair enough. Thank you very much. Just shifting gears actually to Linda. First of all, welcome to your first earnings call. Great to have you.
Yes.
Semi-personal question here, but obviously, you've been there for three months now, this is your first earnings call. Would be very curious to hear what you've been focused on, what you're seeing from a bigger picture perspective, in particular as you make your mark on this organization. MSCI has become a very well-oiled machine over the last few years. It seems like there's not a lot of room for improvement. Curious what you think you can do and where you've been spending your time.
Alex, thanks for the very kind question. Working for Mr. Fernandez here, there is always room for improvement, which I think my colleagues would agree with that statement. Alex, the real challenge here is to keep the growth trajectory moving forward and to really take advantage of these incredible opportunities ahead of us. It's been a great first 90 days. I've been spending my time and traveling, learning the business, and the big focus here is on our internal capital allocation process, as Henry has said. We want to make sure we get these investments right, that we put them in the right places where they have strong returns, relatively short payoffs, and that we focus on the areas which are valued most highly by the shareholders.
This place is a quite a well-run machine, but there's always opportunity for improvement, and I look forward to that as we move into the operating plan part of the cycle. Thanks.
All right. Thank you.
Linda's middle name is ICA. It is Linda ICA Huber, which is Internal Capital Allocation.
Thank you. Our next question comes from Joseph Foresi with Cantor Fitzgerald. Your line is open.
Hi, this is Drew Kubina for Joe. Just wanted to touch on the M&A front. You guys have talked about continuing to expand the new initiatives, just seeing how the pipeline looks for that.
Look, good question. The focus on MSCI has traditionally been in the last X number of years on organic growth. We're very proud of that, and we want to continue that, especially because as our franchise grows and our infrastructure grows, think about the platform of data and content, and technology, and research on top of that. The incremental investments in that platform gets lower for every unit of revenue that we can produce, and therefore, we build a virtual circle that the more organic investments, the higher the rate of return on those investments because they are made at the margin. The cost is at the margin, and the revenue expands dramatically. That's one reason why it's pretty imperative to look at mostly organic growth because we are not going to find those rates of return anywhere else in the marketplace.
Having said that, there are always a few strategic areas that we're looking at to add to those capabilities. They have to be extensions of what we do, not going out far afield, and they have to have very high superior return because the returns in buyback of shares are extremely high, as we proved last year. The internal capital allocation and returns to these projects are extremely high, and therefore, the cost of putting capital to work in an acquisition that is great returns but not as great as the organic ones, is high. That's why we're so focused on this area. We look at everything, obviously, because it's our fiduciary duty to do so.
Got it. Just wondering if you could talk about any shifts you're seeing in the demand environment and how AUMs are shifting and what you expect moving forward.
Look, we have been very pleasantly surprised that after an incredible run-up in 2018, on AUM, on ETFs and part of 2017, with some volatility at the end of 2018, of course, but that the AUM levels have held up extraordinarily high, and continue to do so around the world. There's been a lot of shifts, obviously, emerging markets. The U.S. market has done incredibly well. Some developed market areas are stronger, some other ones are weaker. We're very proud of the diversification we have in all of that because if the U.S. market is doing well, we have a lot of factor in ESG indices in the U.S. If developed markets do well and the emerging markets do well, we're the big kahuna there, right? We have a lot of these flows coming in, into all these ETFs.
I think that this is a great franchise, and the key is to continue to feed it and diversify it, and innovate constantly. That's the reason why the fixed income factor on ESG indexes is a big building block into that.
Perfect. Thank you.
Our next question comes from Bill Warmington with Wells Fargo. Your line is open.
Good morning, everyone. You highlighted Asia as a growth geography, and I just wanted to ask how much revenue do you generate from Asia today, and how much revenue do you think you'll generate from Asia in five years?
Look, Asia is an area that we have not been happy with. Even though it was growing at a healthy pace before. Given the enormous amount of savings that are going into institutional asset owners in Asia, and the enormous amount of wealth creation in individuals, and the growth of wealth management in the region, all of that is something that we look at and we say, "Why can we not be growing double or triple what we're growing today?" We've always been an Asian house. I, for one, been visiting Asia for four years now consistently, and we always had a big presence in Asia and all the countries. If anything, today, most of our employees are in Asia, right? Just to put that in there.
Therefore, we did a wholesale change of the client coverage team in the last sort of 18 months in Asia with the appointment of a senior manager for the whole region. Some of the country heads were changed. We reorganized the region. We're putting product heads and all of that. We are so actually pleasantly surprised how fast that impact has been had. That's why the quarterly reports highlights the growth in Asia, even though some of these managers have just arrived in the last few quarters. I think that'll be great. I think in terms of split right now of the, say, when you look at the total subscription run rate, not including the ETF for a minute, we have about $1.2 billion in subscription, and about $200 million of that is Asia, or about 13%.
Over the next 10 years, that number has to be a lot bigger. It will not be because EMEA and America is going down. It has to be because the rate of growth of Asia needs to be a lot bigger than the other regions. We're now very well positioned to attack that in a big way. The other thing I will highlight is that when you look at the ETF market, clearly the vast majority of the ETFs linked to the MSCI indices are listed in the U.S., but a minority of those ETFs are purchased by Asian investors. There are some statistics that may be in the order of 20%-30%, sometimes 15%, 20%, 30% of those ETFs sometimes are purchased by Asian investors in the U.S. time zone. A big number, maybe it's not as high as that, but it's a meaningful number.
It's hard to analyze all of this going underneath the ETFs, right?
Yeah. Well, the other question that came to mind as you were discussing all the derivatives was, I was wondering how long it was going to be before we got some ESG derivatives.
Yep.
We've got very shortly. We've got some launches coming up. For sure you'll see more of those. We've got some recent launches. That's a category which we're very confident will grow.
Of course, a shout-out to Linda, just saying congratulations and welcome. Thank you.
Thanks very much, Bill. We dug out the Asia run rate number. It's about $200 million. Obviously, we're looking to improve on that. We're making some investments in the Asia region, particularly in coverage, and we think there's more to come there. Thanks again, Bill.
Thank you.
Our next question comes from Hugh Miller with Buckingham. Your line is open.
Hi. Thanks for taking my questions. Had one here with regard to, you noted a really nice business win displacing a competitor's standard benchmark with the MSCI USA Index, and also noted just some of your expertise and factors helping to win that. Obviously, I think you guys enjoy benefits from being the name brand benchmark in several geographies. Wanted to get a sense of kind of how you guys think about just mitigating displacement risk with the areas that you have very strong name brand recognition in, and how you think about solidifying your moat to just kind of reduce any displacement risk out there.
Yeah. A few comments. I think all the remarks that Baer went through in terms of the ecosystem creates a huge moat around our indices. If you're an asset allocator, a patient funder, or sovereign wealth fund that you're an MSCI shop with respect to your policy benchmarks. You can give active managers, you can do passive, you can do overlays through features and options. You could do over-the-counter derivatives like swaps and the like. Therefore, you don't have to be deviating from taking basis risk from your benchmark. That's a big, huge moat around that. The second big area that we worked on is innovation, and creativity and new product development. Don't underestimate how hugely important that is.
In the market cap indices, it's a continued process of security inclusion and country inclusion, and the like, in which we work closely with the various countries around the world to see who's opening up and how do we go to our investors and go to those countries to be included. Secondly, is all the innovation we're doing in ESG and factors and all of that represents different builds of the portfolio as well. That's the second part. The third part is services. The services that we can provide to our clients, especially our asset manager clients, in terms of helping them build internal indices for managing their own processes internally. That sometimes, people have talked about self-indexes being a threat.
It's actually a big opportunity for us because some clients that want to do their own indices themselves to build their own portfolios, they can rent our entire infrastructure to do that. There are a lot of drivers of continued growth and profitability in this space.
That's very helpful color. I appreciate it. Then just as the follow-up, you noted in the AUM drivers for the ETFs that we're seeing just a shift in demand towards U.S. equities, that the long-term outlook is very favorable for your products and services. I guess, as you think about your expertise in factor investing and momentum, et cetera, are you guys expecting that in the nearer term, though, that there will likely continue to be kind of a skew towards demand for U.S. equities relative to international?
Well, clearly, if we look at it in a historical context, it's a relatively new category for us. We're really excited by it. For sure it's been a focus of ours. What we've seen as successes have probably been at the high end of our expectations. I think we view it as kind of a flanking strategy to have this specialized content, this innovative content, to then be more present in U.S. equities. That's kind of, if you like, a product-driven bottom up. Top-down, as we see asset owners mandate when they look at their total portfolio based on ACWI and then drill down and give out mandates. We're seeing more and more of those going out with MSCI USA benchmarks rather than some of the incumbents. We think that this is a space where people's perceptions are altering.
They're making decisions that they may not have made a few years ago, and we see the trend continuing. We're pretty excited about that, and I think we've got increasing interest from many of our partners, whether it's in ETFs or the derivatives areas to help support that because they love seeing this type of innovation and change as well. I think we're on a good trend, and we believe it will continue.
Got it. Thank you very much.
Our next question comes from Chris Shutler with William Blair. Your line is open.
Hey, everyone. Good morning. Sounds like you're spending a little more time thinking about M&A and inorganic opportunities. Maybe just get a little more specific regarding how you think about rates of return and payback periods. Fair to say the stuff that you would consider would likely be more of the tuck-in variety types of deal?
No, Chris, I would not say we're spending more time on it. I think we're spending the same amount of time. What is changing, though, is that at MSCI, as an open architecture business, we want to develop many more partnerships. Obviously we have great partnership with our clients. We have certain partnership with distribution channels, and we want to do 360 partnership. We want to have many more partnership with suppliers of data. For example, in the private asset class space, we don't have to go buy the data or buy the company. We can have a partnership to use the data, for example. We do that in fixed income indices. We're not vertically integrated in fixed income indices. We have partnerships that give us the terms and conditions and the evaluated prices and like, right?
We want partnerships in sideways in terms of technology providers, academic institutions, to help build new models and the like. The area where we are really exploding in activity is in the area of those partnerships. They have kind of M&A components to them because you got to understand what the nature of the partnership is and who wants the property and what are the royalties, and how do you structure the agreement, and the like. They don't have meaningful outlays of money, and you have to look at returns and the time and effort that you put into them and the like. We're not out there fishing for big transformative deals. If somebody comes to us and say, "Can you buy us?" and it's strategic, and it's extremely low price, we're not going to say no, right?
We're not actively looking at any of those right now.
All right. Thanks, Henry. Speaking of big transformative deals, there was one announced this morning with LSE and Refinitiv. Just any high-level comments you could provide on impacts to MSCI, good or bad from that deal? Thanks.
Look, firstly, kudos to them, both of them and their owners, because it sounds like a great deal for them, and obviously the market reaction has been pretty positive. We've had extensive relationships and partnership with both parties in various areas, and every indication is that will continue and in some cases strengthen, for example. The implications to that to us, there's no change at all in our strategy. Obviously, when this came out, we talked about it. We had a board meeting earlier this week, obviously because of the earnings release. We talked to our board, and there's no change in the strategy. We are staying our course. As a result of that, there is nothing that we say we have to go do or buy.
There may be some deals that happen as a result of that, some good deals, some shareholder destruction deals, but we don't want to partake in any of those right now.
All right. Thank you.
Our next question comes from Henry Chien with BMO. Your line is open.
Hey, good morning, Henry. Linda Huber. I had a question. There's a lot of cool products that you guys are building, and it's very exciting, all the different markets that you're going after, whether it's ESG or factors. I wanted to ask about some of the comments you made around prioritizing based off ROI or return on investment. How are you, beyond just the quantitative metrics, how do you actually think about the returns, whether it's the size of the market or the ease of creation? What's your framework for that? Thanks.
Sure. First of all, for all of our ongoing projects, we track all of them, the expenses and the financial returns. Through our operating process, our monthly business reviews, et cetera, we're constantly on top of those. There's clearly a broad range. There are certain categories of content where we, allowing for our existing infrastructure, we can typically make a pretty good judgment about that will have a modest investment and a relatively fast return. If it's some variation of existing content or tweaking methodologies or developing new ones. Clearly, when we're looking at more substantive investments, if we look at, let's say, our technology infrastructure, et cetera, we're clearly looking at both a broad market, the broader market opportunity, the competition. Those are typically the discussions that we have in our strategy meetings with the board, et cetera.
I think it's really fit for purpose, depending on the scale and the time horizon. Linda, any other observations from your recent observations? Yeah.
Sure. Henry, I think it's appropriate to say the rigor and the discipline around this here is extraordinary, and that will continue as we go forward. There is a pretty remarkable array of really high return investments that we can make. Let me just say a few more things about this. You've heard a lot about what we're doing in index with the new products because we think getting to market first really is a huge advantage. You've heard about the investments in index, in fixed income, and in factors. In ESG, I think we have touched on some of the things we're doing, including technology and quality enhancements to help drive our coverage in that area, which has been returning very well for us and very quickly. We probably didn't say enough about our go-to-market strategy. We're exploring the wealth management area.
We're thinking about that, obviously, we're looking to make appropriate investments, as Henry had spoken about, in Asia, particularly to drive our coverage capabilities there. We were just looking at the run rate in Asia is up 13% for the quarter year-over-year, which shows that that's starting to pay off, which is really great. Then lastly, investments in technology and our technology team to drive all of that. We've made some great new hires lately, I think we're really approaching a very exciting period of expansion and capability in the technology area. Everything feels pretty good. It's underpinned by the fact that we feel relatively good about the market tone and tenor now. We're appropriately cautious. We are leaning forward here, and we think there's a lot of great stuff to do. If I've missed anything, Henry's going to add it.
Just one last point, this is such an important area. Investments in the company. All of our investments are not because we want to be bigger or have more people or even have more revenues or even have more profits. All of those are means to an end. All of our investments are here to create shareholder value. If the investment is going to make shareholder value, it doesn't go anywhere. That's why we focus on the returns on that investment. You have to focus first on the strategy. Is that something we want to be in or not? Once you're beyond that, what is the return? What is the payback? The quicker the payback, the better. Importantly, what is the valuation of those? Not every dollar EBITDA has the same value.
Therefore, we got to go to investments in which the results of the profits that are brought out of that have high multiples. That's what we are, and we're very mercantilistic about that because that's what we're here to do.
Got it. That's awesome. All right. Thanks so much.
Our next question comes from Craig Huber with Huber Research Partners. Your line is open.
Thank you. Maybe Henry, I'll start with you if I could. Just a broad question here. What's worrying you as the CEO of your company right now the most? Put aside the obvious, potential bear market down the road, big macro issue. What's worrying you the most right now?
A lot of people ask me that question, by the way, Craig. The answer that I give consistently, across pretty much every aspect of it, is that I feel fortunate enough and privileged enough to be working at a company that has an opportunity to change the investment world and create enormous amount of value for our shareholders and our clients and the like. What worries me and keeps me up at night is how do I not mess that up?
Okay. That was quick. Appreciate that.
Very short and sweet. Don't mess it up.
Don't mess it up. It probably fell out to Linda as well, right? When you hire. Congratulations, Linda. Let me ask you about analytics, if I could. The last three quarters, I guess, the organic growth there, high single digits. It's been obviously a number of years coming there. It's good to see and stuff. Can you just briefly tell us what sort of change from your end to help accelerate growth to that? How sustainable do you think it is to have growth that are above mid-single digits for a while to come? Thank you.
Look, I think the nature of analytics is that both the strategy, which I alluded to earlier, which is both the quality and innovation in the analytics themselves, helping our clients communicate with their clients, helping them build better portfolios, but also extremely importantly, to stress this again, helping them be more efficient. This is a critical part of our offering, and our goal is working. Another element of that is that means that we are as much really a service to them as a seller of products. A lot of what we do is in the form of reporting, in services that help them with their data management. That is an increasing part of the analytics run rate and continues to be so. Again, repeating the critical point from earlier, the retention rate is up roughly 220 basis points.
That is an important indicator for us because it shows us that our clients are happier with what we're offering them. This is, I think, a solid, steady progression. We're focused on executing every day, every week. If we continue to do so, this trajectory should continue. I'm particularly pleased that we have been, I would say, called this right in our communication to you and to the market, i.e., we never said that it was going to be rapid or dramatic in its change, but we said it would be consistent over time, and that we would deliver. That's the same message that we continue to give.
Thank you.
Our next question comes from Keith Housum with Northcoast Research. Your line is open.
Great. Good morning, guys. Thanks for the opportunity. Question for you. Just trying to understand, as we look at EPS going out for the next year or so. First of all, understanding the history. You guys have been able to move a lot of your employees from developed markets to emerging markets. How critical to the EPS growth over the past 2, 3 years has that been? Two, how much more opportunity is that as you look forward over the next year or 2?
Look, I think that in terms of the overall cost structure of the company, our major move and location in emerging market centers has been critical to the expansion of people and capabilities. More importantly, it's not just about the cost, it's about the great quality of these people and the ability that we have had to create new products and new services by operating in a lot of these places with a lot of more flexibility and expandability and the like. That has driven, I would say, the top line much more importantly than just the cost line, because when you aggregate the cost of all emerging markets, even though it's 60%-plus of employees, it's a lot lower relative to the high-cost centers that we operate in. That's the specific answers.
Clearly, the EPS has been growing significantly over the years by the increase in revenue growth, by the expansion of the operating leverage, the expansion of the EBITDA margin, by the leverage of the company, the significant buyback of shares, and obviously, the major drop in the tax rate that we've seen in the last few years.
Right.
It's Linda. The number is 63% of our employees in the emerging market centers. Let me just give you a bit of color. Having traveled to many of them over the past three months, I've been incredibly impressed by the quality of the people that we have in the emerging market centers. It is remarkable that this company already has a well-thought-out and well-oiled structure to have emerging market centers really well integrated with the developing market centers. This isn't a case where we have to go change all that. It's already done. That does help our costs, obviously. As Henry said, it is more about the quality. Going forward on EPS, I think Henry touched on, we have, as with most other U.S. companies, been the beneficiary of wind at our backs from the tax law changes.
We'll see what happens as the final strokes are done in terms of implementation of those changes that were announced at the beginning of this year. That driver may weaken a little bit as we move forward. We will continue to buy back shares opportunistically, and we will keep that discipline, but obviously, we're optimistic as we move forward. We're going to focus a little more heavily on the operational part of things because the tax turbocharging may fade a bit as we move into 2020, particularly.
Yep, got it. Thank you. Appreciate the color.
Just another quick question. Earlier questions were obviously more focused on the analytical sales in the quarter. Just remind us, what is the average size of your typical analytical sales?
Gosh.
Do we have that number in front of us? Look, it's quite a broad range, is the simplest answer. Typically, the very low end of the range is sort of $50,000, $75,000 for some simple equity-type solutions, typically. Then at the higher end for large firm-wide multi-asset class solutions, we're into the multiple millions, right? We can dig out the numbers, but the short answer is it's a pretty broad range. A good part of the revenue comes from the bigger deals, but we have a really broad pipeline with a lot of different use cases, and we can give you some more detail offline.
The other important part of that question is that as time has gone by, the high end of those sales, the high end of the size of those sales has dramatically increased.
Yes.
A big deal used to be, many years ago, $750,000, $800,000. A big deal today is multi-million. Therefore, in every single quarter, if one of those slips from the last week of the quarter to the first week of the next quarter, then you say, "Oh, what happened to the analytics sales? They're weaker or they're so strong." The best way to look at our analytics sales is on a rolling quarter basis because otherwise you're going to get a distorted picture of what's happening.
Agreed. Got it. Thank you.
Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Andrew Wiechmann for closing remarks.
Thank you everyone for joining us today. As always, please do not hesitate to reach out if you do have additional questions. Always happy to engage with all of you. We look forward to keeping you posted on our progress, and have a great day. Thank you so much.
Ladies and gentlemen, this concludes today's conference. Thank you for joining, and have a wonderful day.