Good day, ladies and gentlemen, and welcome to the MSCI 4th Quarter 2020 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. We will have further instructions for you at that time. As a reminder, this conference call is being recorded.
I would now like to turn the call over to Sallie Schwartz, Head of Investor Relations and Treasurer. You may begin.
Thank you, operator. Good day, and welcome to the MSCI 4th Quarter 2020 Earnings Conference Call. Earlier this morning, we issued a release announcing our results for the Q4 2020. This press release, along with an earnings presentation we will reference on this call, as well as a brief quarterly update are available on our website, 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 ks and in our other SEC filings. During today's call, in addition to results presented on the basis of U. S. GAAP, We will 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 We'll also take a look at our financial results 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 in the appendix of the earnings presentation. We will also discuss run rate, which estimates at a particular point in time the annualized value of the recurring revenues under our client agreement for the next 12 months, subject to a variety of adjustments and exclusions that we detail in our SEC filings. As a result of those adjustments and exclusions, The actual amount of recurring revenues we will realize over the following 12 months will differ from run rate. We therefore caution you not to place undue reliance on run rate to estimate or forecast recurring revenue.
Additionally, we will 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 today are Henry Fernandez, our Chairman and CEO Baer Pettit, our President and COO and Andy Wischman, our Chief Financial Officer. Finally, I would like to point out that members of the media may be on the call this morning in a listen only mode. With that, let me now turn the call over to Henry Fernandez. Henry?
Thank you, Sally. Hello, everyone, and thank you for joining us today. MSCI continues to deliver on its mission of helping investors build better portfolios for a better world. Our ultimate goal is to provide an index for every portfolio and tools for every investment decision worldwide. Especially in 2020, We continue to deliver mission critical tools to enable clients to navigate uncertainty and respond to industry transformations resulting from the unprecedented environment.
Our relentless focus on execution, our disciplined approach to investments and our strategic capital allocation underpin our ability to deliver value to our shareholders. MSCI's financial performance in the 4th quarter We strongly validate this approach. We achieved total revenue growth of over 9% And total subscription run rate growth of nearly 11%. Adjusted EBITDA growth of over 16% And adjusted EPS growth of over 17%. In 2020, We achieved free cash flow of $760,000,000 up 16% from 20 19, we feel this was outstanding financial performance in the context of a very tumultuous year In so many fronts, our success and our momentum has been driven By also being able to identify and capitalize on major transformations taking place in the investment industry and our ability to support our clients with critical insights, thought leadership and Actionable Solutions.
I will provide a few selected comments Along the dimensions of clients, products and capabilities and there Anandie will then give you some more details. In the client category, we have been successful in expanding our footprint with both new and existing clients. In our strategic focus on wealth management, we are capitalizing On the focus of financial advisors on direct indexing, portfolio construction, risk and performance management and ESG and Climate. We're also seeing early traction with corporate clients And we now have over 80 corporate clients for our ESG and climate offerings. We continue to expand our business with our established base of asset managers and asset owners.
In 2020, our asset management clients launched more than 150 new ETFs linked to MSCI indices, over half of which were linked to MSCI ESG and Climate Regionally, our integrated client approach has led to high levels of engagement and activity. In Europe, regulatory requirements for our clients help drive record quarterly In Asia, new subscription sales in the 4th quarter Improved 62% sequentially after a very slow process during the year given the early pandemic disruptions in the region. In the category of products and services, Our product innovation is driven by our relentless focus on the needs of investors. One area of significant investor Our focus is the global transition to a low carbon economy and its impact on portfolios. Our climate value at risk products have seen excellent traction and are already helping investors measure and manage climate risk as well as identifying investment opportunities.
Fixed income is another area where we continue to enrich our We are leveraging our strong brand in ESG, climate factors and risk and performance analytics to benefit our credit investor clients. Lastly, we continue to build critical capabilities, especially in technology and data. This includes accelerating the transition of our suite of products to cloud through our partnership with Microsoft. We're also excited about enabling clients further with more seamless access to MSCI data across all product lines. You will be hearing more about in future quarters, especially in ESG and Climate.
Another key ingredient of our Strategy is allocating capital in a systematic and disciplined matter. This approach has been highly effective for us, including in a year like 2020. We activated our downturn playbook in the 2nd quarter As the pandemic took hold and market volatility and economic uncertainty rose dramatically. Then in the Q3, we transitioned efficiently to our upturn playbook as our business remained resilient, Our financials were protected and we saw expansion opportunities. It is also important to note that in 2020, our adaptable and entrepreneurial culture played a critical role in our success, Especially given the major disruptions in our working environment and that of our clients.
Following closely on the incredible momentum we have built in 2020, MSCI has never been better positioned to take advantage of Accelerating secular and disruptive investment trends, which will allow us to deliver sustained and significant Top line growth. We remain deeply committed to investing responsibly in Triple Crown opportunities To leverage and build on the established scale of our business, our intention is to continue to drive Long term value for our shareholders. We're especially energized to talk further with you about our plans at our upcoming Investor Day on February 24. Before I turn the call over to Beran Andy, I am pleased to announce that we will be reporting ESG and Climate as a standalone reporting segment Starting in the Q1 of this year, our all other segment will consist of our private assets, The private assets product line, including our real estate business. This incremental transparency will enhance awareness Understanding of these important growth areas for our company, you will have more insight into the drivers of segment growth, The actions that we are taking and the investments that we're making.
Finally, we believe it's critical We meaningfully integrate corporate responsibility principles into our own strategy and operations. We continue to enhance our processes and disclosures, including most recently, publishing our 2020 TCFD report and SaaS B aligned disclosures on data security, workforce diversity and engagement, and professional integrity. I look forward to providing you with further updates as we continue to make progress in these very important areas. With that, I'll now turn over the call over to Baer.
Thank you, Henry, and greetings, everyone. I'll echo Henry's enthusiasm for the progress we've made this past year. We had our best ever quarter for subscription sales across MSCI and in our Index and ESG segments individually. Assets in equity ETFs linked to MSCI indexes passed the $1,000,000,000,000 mark for the first time in our history. As of last Thursday, these assets reached further all time highs above $1,160,000,000,000 AUM and Equity ETFs linked to MSCI ESG and Climate indexes We're at $106,000,000,000 at year end, tripling year over year.
And 7 of the 10 largest Equity ESG ETFs globally are benchmark to MSCI indexes. We're pleased with these accomplishments and for the momentum we see in our business. I want to expand on some aspects of our strategy starting with clients and client segments. Our key accounts, which represent nearly 2 thirds of our run rate, drove 50% of new subscription sales this quarter. While in 2020, MSCI also gained more than 4.50 new clients.
In ESG, New clients represented over 50% of new subscription sales this year. Henry noted our efforts with wealth management firms. We are pleased both with the progress of our sales in this segment and our early steps in new opportunities like direct indexing. Wealth Management was the fastest growing client segment for analytics in 2020 with run rate up 11%, while index run rate grew at 20% and ESG Research at over 70%. Our total run rate with wealth managers is now more than $60,000,000 up 23% from 2019.
For corporates, we recently launched an interactive industry ESG materiality map on msci.com. This tool helps corporates better understand how various ESG risk exposures factor into their ESG ratings. More broadly, issuers and corporate advisory firms are leveraging our ESG ratings universe for use cases ranging from benchmarking From a regional perspective, in EMEA, our 2020 subscription run rate growth was 15% as strong recurring sales offset cancels. In Asia and the Americas, we had 9% and 7% subscription run rate growth respectively, A solid result for the year, especially acknowledging the challenges some of our clients faced during the pandemic. We are now seeing our pipeline build as we would expect at this time of year.
It remains healthy across products and regions and above pipeline levels at this time last year. As I've emphasized before, I've been eager to make innovation in our products and services central to what we do at MSCI. In October, we launched 8 MSCI Climate Paris aligned indexes. These indexes are designed to help investors incorporate climate change into their portfolios. They also help investors align their investment strategies with the 1.5 degree warming scenario targeted by the Paris agreement.
Henry mentioned the success we are seeing with our Climate Value at Risk products. We recently integrated Climate Value Risk into analytics products to support clients with their regulatory requirements such as TCFD reporting. We also integrated analytics portfolio optimization tools into our Climate Value at Risk products. Thus, Climate Analysis feeds our analytics products and vice versa. Further in analytics, during the Q4, we launched multi period stress testing capabilities.
We're acutely aware that investors look at their positions through a lens of different time horizons, and we want to provide them with industry leading tools to do so. We believe MSCI is truly As you're aware, fixed income is another area of focus for MSCI. I'm pleased to note that we closed our 1st fixed income index This is an important milestone and a validation of our belief that this nascent product line has significant potential. We are also mapping our ESG ratings to bank loans, expanding our ESG ratings coverage of fixed income securities and enhancing fixed income factor content for our risk and performance analytics. Our footprint in fixed income continues to grow with run rate in this area Up 10% in 2020.
Henry mentioned our focus on enhancing our data capabilities. Leveraging our partnership with Microsoft, we have made a great deal of progress with our API strategy in the 4th quarter. As one example, we are building accessibility to our ESG ratings and other ESG underlying data through APIs as well as through other state of the art content delivery platforms. We must continue to support our clients' ever evolving needs, lean into our own tremendous opportunities and drive sustained high levels of growth. MSCI will invest in several key areas in 2021.
First, we will continue developing new innovative indexes and other tools that enable our clients to build portfolios that meet their investment objectives. 2nd, We will keep expanding the coverage of our ESG and climate ratings and capabilities, including the data initiatives I mentioned previously. And third, we will invest in our broader technology transformation and client driven migration to a service platform. These investments will be executed within our rigorous Triple Crown capital allocation framework. We intend to continue generating strong free cash flow.
As Henry noted, We look forward to highlighting our opportunities, our investments and the value creation we believe will result at our upcoming investor demand. Let me now turn the call over to Andy, who will discuss more specifics of the financial aspects of our performance.
Over to you, Andy. Thanks, Baer, and hello to everyone on the call this morning. As Henry and Baer have noted, we finished 2020 with a strong 4th quarter And significant momentum heading into 2021. In Index, we recorded double digit subscription run rate growth for the 28th consecutive quarter. Market cap weighted modules, which represent the largest part of our index subscription run rate, continued to deliver strong growth of approximately 9% in the quarter, while our factor, ESG, custom and specialized modules grew at healthy double digit growth rates.
From a client segment perspective, the index subscription run rate growth with asset managers, the largest client segment, was 9%. While growth rates among wealth managers, hedge funds and asset owners were all greater than 15%. Assets under management in Equity ETFs linked to MSCI indexes reached record levels, driven by strong cash inflows of $59,000,000,000 or close to 30% of all cash inflows into equity ETFs during the quarter. This was driven by strong market Equity ETFs linked to MSCI ESG and Climate indexes experienced cash inflows of nearly 25 $1,000,000,000 during the quarter. These cash inflows represented nearly 80% of all inflows into ESG and climate ETFs.
Overall, asset based fee revenue was up over 15% year on year, reflecting higher results across the board, including from ETFs, Non ETF passive products and futures and options. Turning now to our adjusted earnings per share growth year over year. Underlying business performance drove the vast majority of our growth in adjusted EPS, while our share repurchases also contributed. Operating revenue growth was strong and year over year expenses were up modestly, once again benefiting from lower travel and entertainment expenses, which were lower than the Q4 of 2019 by $4,200,000 and somewhat offset our reaccelerated pace of investments in the second half of 2020. Turning to our balance sheet, we continue to have strong liquidity that provides us tremendous flexibility.
We finished the quarter with total debt to adjusted EBITDA of 3.5 times at the top end of our targeted range of 3 to 3.5 times. Lower cash tax payments and disciplined client collections led to significant outperformance in our free cash flow generation in the 4th quarter relative to our guidance. As Henry noted earlier, we have been pleased with the success of our capital management strategy And we'll continue our disciplined and patient approach to allocating capital. We are keenly focused on reinvesting in the business as a first priority, Optimizing our leverage profile to enhance returns and maintain flexibility, providing a consistent quarterly dividend that grows with earnings and is based on a payout ratio of 40% to 50% of adjusted EPS, opportunistically pursuing MP and A and share repurchases with an intense focus on maximizing returns to shareholders and preserving a strong liquidity position. As Henry noted, to enhance shareholder awareness and understanding of our progress in pursuing key growth opportunities in ESG and Climate And in Private Assets, starting this year, we will present ESG and Climate as its own reporting segments and all other will Beginning in April, when we report Q1 earnings, You will see the same financial and operating metrics we currently show for the Index and Analytics segments also for the ESG and Climate segment and for Real Estate.
So that you have historical information for comparative purposes, we will provide information for the new reporting segment We are excited to bring this incremental transparency to our disclosures and to continue to update you on these exciting areas of growth and opportunity. Before I turn to guidance, I would like to highlight that recurring subscription revenue has lagged subscription run rate by a slightly larger amount in the last couple of quarters. As noted in our disclosures, there are several factors that can contribute to this, including but not limited to the timing of sales and cancels, modifications, FX movements, delayed contract start dates also known as advanced bookings and implementation periods. In response to the COVID pandemic, but may have access to the service prior to the beginning of the fee period at no cost. In these cases, the sale may be recognized before we begin recognizing revenue where we may recognize a lower amount of revenue in the 1st year relative to the size of the sale.
We used these tools selectively this past year And while we do intend to continue to use them going forward, we don't expect the magnitude to increase materially. However, as we said at the top of the call, We would caution you not to place undue reliance on run rate to estimate or forecast recurring revenues. Turning to our guidance, our expectations for Our expense guidance assumes relatively flat equity market levels for the year. As such, our expenses may flex up and down depending on market conditions and the trajectory of our asset based fees. To that end, we will continue to implement our upturn and downturn playbooks if and when they are needed.
As we've noted throughout this call, investing in our business remains our top priority. However, we are also committed to delivering positive operating leverage. Although you should expect to see more modest margin expansion than in recent past. Our free cash flow guidance reflects strong operating performance and strong collections, relatively flat market levels, although we could of course see markets perform better or worse, Margin expansion over the course of the year, again likely to more modest pace than in recent past and higher cash taxes in 2021. In summary, 2020 was a very strong year for MSCI despite the global hardship related to the pandemic.
We have continued to deliver innovative indexes, research, data and other tools. We've executed against our strategic priorities, staying incredibly productive and engaged as a team. And as always, we remain committed to driving further value for our shareholders. We look forward to speaking with you in a few weeks at Investor Day. And with that, operator, please open the line for questions.
Please stand by while we compile the Q and A roster. Our first question comes from the line of Toni Kaplan from Morgan Stanley. Your line is now open.
Thank you. So looking at the expense guidance, you're targeting about a 9% increase in expenses at all versus the prior. And so just running through the model, I'm getting that maybe you could Expand EBITDA margins by about 100 basis points off of a year where margins were abnormally high because of COVID savings like lower travel, etcetera. So my question is, why not invest More in the business to support the growth. Is this caution because maybe we're not through with COVID yet?
Or Do you view this COVID savings items as sustainable? And then maybe just as we look through the year, Should we expect more of a margin increase at the beginning versus the back half or maybe some of the COVID items come return? Thanks.
That's a great question, Tony. And it cuts to the heart What we're trying to do at MSCI and that is to navigate a pretty tight rope between Maintaining and enhancing our even though modestly our margin levels I'm at the same time heavily investing in the critical growth areas That our clients are crying for new tools such as obviously climate change now, which is increasing dramatically. Obviously, overall ESG, the demand for indices with an investment thesis around them, It's off the charts. Clearly understanding the risk of people's portfolio, especially factor risks Such as the transition from value to growth or cyclical to growth investing and of course the private asset So we are entering a period at MSCI of major, major demand From our existing clients and the newer client segments that we're penetrating such as wealth, corporate insurance companies For a lot more tools coming from MSCI. So let me turn it over to Andy to see if he can give us a little more insight into how the all of that plays into the dynamics of the growth of the EBITDA expense line.
Yes. Thanks, Henry. And good question, Tony. Maybe if I can provide a little bit more color from a financial standpoint and underscore some of the points that you made And Henry Made. We are coming off a year, as you said, where expenses were lower than we anticipated.
They were brought down by COVID Related impacts like T and E being lower. We also very actively went to the downturn playbook in the middle of the year And ABF rebounded faster than we were able to begin reinvesting in the business when we went back to the upturn playbook. So that did depress the expense base in 2020. To your point, if you look back to 2019 and extrapolate through to what our guidance says for 20 21, you'll see there's a more normalized trajectory across the 2 years. Looking forward and taking into consideration Couple factors that set into our guidance.
Firstly, there will be some rebound in T and E and COVID related costs, But we don't anticipate it will be a full normalization. So there will be some continued benefit going forward. And obviously that can change and adjust depending on how the pandemic unfolds here and we return to the pace with which we return to a normalized working The other thing that is important to remember here is, as I mentioned in my opening remarks, Our guidance assumes markets remain relatively flat and so we've put an expense guidance range here that assumes Relatively flat market levels. If market levels do rebound significantly and show a sustained improvement Where the markets increased significantly and show a sustained improvement, we will go to our upturn playbook likely and expenses could be higher. Smartly, we could see if the markets pull back significantly for a sustained amount, we could be lower than the expense guidance.
And so it could go either way. One of the things we wanted to do with the guidance this year was show you what the guidance is based on current market levels. So to give you a heads up that Could change if they swing one way or the other. The other point of note, I would say factors in here is there is some implicit FX pressure embedded in the expense growth as well, where the U. S.
Dollar has depreciated relative to most foreign currencies relative to average rates for 2020. And so that puts some pressure on The expense growth as well and that's something we're keeping a close eye on. But I think overall to Henry's point, We are extremely focused on continuing to invest in key initiatives and key investments that are going to continue to extend the duration and Prove the trajectory of our growth profile going forward. And so that will be a top priority and we will continue to calibrate it throughout the year.
Tony,
given the importance of this question, let me just add one more comment here. And that is we have In the recent past, began to look at EBITDA expenses into 2 major categories. Expenses that are required to continue to run the business and EBITDA expenses that are really investment, Significant investments into areas of growth. And given that given the nature of our company as an IP company, the vast Majority of our investment gets expensed immediately upon execution and the revenues come in a year or 2 or 3 years later. So what we have done and continue to do in this space It basically strangle as much as we can, squeeze as much as we can the EBITDA expenses of running the business To free up more and more capital for investments that go into changing the business.
In kind of vague and sort of rough numbers and over time we'll give you a more precise analysis of this. Our change to business expenses, which are really investments in the operating expenses of the company, I. E, the EBITDA expenses of the company, Are somewhere in the low to mid teens percentage of the total EBITDA expenses. We're trying to move that To the mid to high teens in 2021 and beyond. Hopefully someday in the next 2 to 3 years, Those can be in the 20s, so that a meaningful percentage of what people think of expenses Are really investing.
You have seen the acceleration of growth in many aspects of our business, especially ESG, features and options and fixed income and all of that, which are beneficiaries of this investment that we have made 1 or 2, 3 years prior to getting the acceleration of growth.
That's really helpful.
Henry, let me just add one last point to make sure everyone's aware of. And I know most of you incorporate this into your models. But given the swings we saw both on the top line and the expense line in 2020 throughout the year, The expense growth and margin could fluctuate quarter to quarter throughout 2021, just given the relative comparisons year over year.
That's great. Thanks to both of you on that. Wanted to also ask how important to you Is or was the IHS partnership that you had, is your expectation that they will not be working with you in the future because they've announced The combination with S and P, I know you were working with them on fixed income liquidity risk solutions and ThinkFolio, but Maybe there were other areas too. So can you outline what opportunities you were working on with them and if those can be replicated by partnering with another provider like Bloomberg for example? Thanks.
That's another great question. We have a very Focus on strong strategy at MSCI of working in partnerships with others in the industry. And whether it's client partnerships, obviously, that will be the highest impact to people who have Different kinds of data or different kinds of technology or different distribution systems. We believe strongly at MSCI in an open architecture system for the benefit of clients. So the area that you will see us working Extremely hard in building partnerships across the whole spectrum.
And when you think about our M and A, so to speak, the vast majority of our time and effort in M and A It's what we call NP and A, mergers, partnerships and acquisitions. So IHS Markit I have had discussions with the CEOs of both companies in which they intend to preserve and enhance The nature of this partnership for us to join to have products together and for the benefit of our clients.
That's great. Thank you. Thank you. Our next question comes from the line of Manav Patnaik from Barclays. Your line is now open.
Thank you. Maybe kind of a follow-up to that, but Henry, I was just wondering the way the markets have been pretty much just going up Despite COVID, there's also been a lot of M and A around your areas of focus, ESG, GE data, generally speaking, how is that influencing or changing the way you look at your Build versus buy decisions or even just your MP and A framework?
Good question, Manav. I think The strategy continues the same and we are in the highly enviable position At MSCI that our organic investment opportunities are vast and they yield Incredible returns. And the reason is that they have built at the margin on top of an existing infrastructure. We could see that in states and index and we're beginning to see it in ESG and obviously in analytics, we're still building some capabilities. So The returns are lower than index and ESG, but it's still in the high double digit, the internal rates of return.
So therefore, we are stretched for investment given the objectives that we have on the margin of the company. So therefore, we're very focused on organic investment. We do not really need Any significant acquisition at this point to get us to where we want to be in the company, That doesn't mean we don't look at everything and analyze everything. We are trying to step up our activities in a small bolt on Acquisitions in data and tools and technology and the like, particularly in areas like fixed income and Of course, private asset classes, etcetera. But those will be more smaller and bolt on.
And therefore, we continue to have major focus on organic investment. The other thing that we like about that is because we want to do the opposite of what others are We want to stay extremely focused on our strategy with a very empower and entrepreneurial culture in which people can innovate, we can have better client interaction, better client services and all of that. And therefore, we don't want to become a sort of financial data conglomerate or financial investment tool conglomerate made up of a lot of divisions And those divisions being run by the administrators, we want to do the opposite. We want to have a highly integrated company Run by entrepreneurs with high levels of innovation and high levels of investment and We see preservation of an enhancement of margin. We think that's a winning strategy for us.
Got it. That makes sense. I appreciate that. And just In terms of the upcoming IRD, I mean, you talked about disclosures and so forth, you guys have always given quite a bit of color. I was just curious like what should be the what are the main, I guess, agenda points on the upcoming hire day that we should be looking forward to?
Well, not to steal the thunder from the 24th, so we can get everyone to show up. I think what you're going to see from us is a continued focus on the mission of the company, the strategy, The demand that we see from all the client segments and the needs from clients, therefore, the organic investment plan That is attributed to that, the integrated franchise between the different product lines and all of that. And I think the area that you will see even more change in this Investor Day is our Incredible push into technology and data. In the past, we at MSCI have always thought of The investment tools first and technology and data enabling the investment tools. We want to start thinking the reverse.
What can technology and data open up for us to create even more investment tools for the world. So there will be a segment on that as well.
Got it. Thank you very much.
Thank you. Our next question comes from the line of Alex Kramm from UBS. Your line is now open.
Hey, good morning, everyone. This may be too detailed on the analytics side, but I remember a few years ago when you were still breaking out portfolio management and risk, there was a time that Your portfolio management was very weak and you cited quant funds as an area of weakness. There's been a lot of stories recently again how poor performance in Quant has been in 2020 and this environment clearly doesn't work for them. So just curious, is a quant fund still a very big Area for you guys, maybe you can give us some updated numbers. And are you seeing weakness in that client segment?
Yes. So Alex,
I don't have the
Much better now.
Yes, I'm sorry. Yes. So I don't have the numbers in front of me, but directionally, I would say that when you look at the equity analytics And the rest of the enterprise risk aspects of the business, There's no very explicit patterns that have been very stable over time. So
the
latest characteristic I would say is clearly in factors We have grown very strongly in terms of their contribution to the index business. The quant funds Generally, on the larger end of the scale, we're doing very well with. That's a limited number of very large players. And but I would then say that the smaller hedge funds, which are mixed range of strategies Continue to be a challenge for analytics. So, but if you look even further forward, I would say that This definition of the simple split between quants and non quants is something which we think has Changed over the years and what we're seeing particularly with kind of the next generation of clients It's precisely the integration of quant tools or quant overlays into a lot of traditional portfolio management.
But I don't know, Andy, if you have any specific numbers on that In front of us, we can always follow-up with you, Alex. But I think the long story short is there's definitely not a sort of a negative pattern here. We're not seeing quants as being anything unusually an outlier type of number. And on the more sophisticated quants, we're doing well.
Yes. No, I'd underscore that there, I think. From a retention standpoint, hedge funds are below average, and it's largely attributable to the smaller hedge funds. And as Baer said, we do have success selling And growing within a lot of the larger hedge funds across products that we offer. I'd say the one other segment just to provide a little bit more color On retention and analytics that we felt pressure in 2020 was around banks.
And so we did have some Particularly one large cancel among your bank, which depressed the retention rate across analytics.
Okay, great. And then quickly other topic. China is something that we keep on hearing about. And obviously, With some of the restrictions, there's been a lot of news around your index inclusions, etcetera. We're just I know this is normal course of business But my more important part of this question is, how does this kind of impact your China strategy In general, I mean that region is obviously growing rapidly and opening up for financial market participants.
So I think you definitely have your eye on that region. So does that noise create headwinds right now in being able To grow with potential clients in the region and maybe you can remind us how big China is as well. Thank you.
Yes. So we are neutral to any of these geopolitical issues that take place in the world. Our Main focus is always to serve the needs of global investors to invest in all regions of the world, Including obviously emerging markets, which are higher risk than other regions. We tried to therefore stay away from all the politics and all the theatrics that take place there. Secondly, we continue to believe that China as the current 2nd largest economy in the world and the opening up Of its financial markets is going to present vast opportunities for investors in In the public market and the private markets, obviously, equity investment is opening up dramatically.
Bond investing, given the high yields here, The appreciation of renminbi will continue to be a major attraction for bond investors, especially sovereign bond investors And the like. We are very focused on continuing to expand our business in China to grow our cross border business, so to Global Investors going into China, our business of helping Chinese institutions invest outside of China And in the domestic markets of China as well, and in this case, China, including obviously Hong Kong. So our business is still small In the sort of $15,000,000 to $20,000,000 range, something like that in terms of run rate, coming directly from China. Obviously, There is global investors who are focused on investing in China through our indices and our risk models. But we think that the opportunity is enormous and we are very focused on building a strategy and expanding our footprint there, Especially this year, in order to continue to capitalize on that significant opportunity and obviously continue to stay away from the Geopolitics and we'll have to comply with executive orders or legislation or whatever that comes our way And that creates a lot of work for us.
But overall, the big picture is nobody can really, at this point, Negate the huge importance that China has and will have in portfolios around the world.
Very helpful. Yes. Just to provide A little
bit more product color around it. We are our largest product traction in China is Around analytics where we have had quite a bit of traction and continue to grow. And as Henry said, if we build out our fixed income front office capability, Our range of security coverage, as well as analytic capabilities around private assets, we're bullish about the continued opportunity on We're extremely excited, I think given our small base and the enormous opportunity in some of the other products like SG, where we're starting to get some real traction as well as on the index side for the reasons Henry highlighted. So we very much view many layers of growth On the China front.
All right. Thanks again.
Thank you. Our next question comes from the line of Owen Lau from Oppenheimer. Your line is now open.
Good morning. Thank you for taking my question. I think last quarter MSCI launched correct me if I'm wrong on these numbers launched 22 proprietary fixed income indices And the total was 40%. I think this quarter, I think B. A.
Mentioned that the run rate was about 10% in 2020. So it looks to me the pace has been quite strong in this area. Could you please talk about the pipeline in the fixed income products? Are you still in the investing mode to introduce more products? Or you think you have most of the products you like and are focused more on the sales and distribution So that investors can feel in a runway pretty soon.
Thank you.
I see. Yes. So
the I think what
I can tell you on fixed income indices Is that our monetization of fixed income indices is made up of our own indices And the partnerships that we have with others. So therefore, a big part of our Success thus far has been in ESG and climate change, fixed income indices In partnership with Bloomberg Barclays and that has had significant run rate, a lot of I've gone into those ETFs and a significant amount of run rate associated with that. We are building partnerships with others as well that are that have fixed income indices for us to support them with the content of ESG and climate and factors And the like. In addition to that, we obviously have started building our proprietary, our own proprietary fixed income indices in areas that We believe that it will have high potential as well and that's what you see us launching and that's what the first The absolute run rate On our own proprietary fixed income is still very, very small because we're just getting going on this and the like. In terms of the product Span, we for sure have ambitions to create a very large number Of products, MSCI label fixed income indices in a lot of different varieties.
We will try to avoid being in the issuance weighted type of indices, the market cap weighted type of indices and focus enormously on the Things in which we have a proprietary and value add content, so there's factors such as ESG, such as Climate and thematic investment themes.
Got it. That's very helpful. I would highlight we do have
a very healthy pipeline of new opportunities, Owen, so I think you'll continue to see hopefully new ETFs and other passive products launched on our indexes and We've got a healthy pipeline also of subscription type deals on the fixed income index side. So it's very early days this year. As you know, we just launched Our index is about a year ago, but we continue to see pretty healthy demand.
Got it. That's very helpful. And then my next question is, I understand that most of the demand of your ESG products come from like Investors like asset managers and asset owners, I think Henry you mentioned that your traction on corporates, It's quite strong. I think you have 80 clients right now, if I remember correctly. Do you think the recent NASDAQ Board diversity and disclosure proposal can further accelerate the demand of your ESG products from corporates in the United States.
Can you talk about your recent conversation with them in terms of subscribing into more MSCI ESG offerings maybe both within U. S. And outside U. S? Thank you.
Yes. So I think the there are Potentially 2 different things there, if I understood the question correctly. On one hand, What you have is a whole range of fixed income product offering from indices To fixed income risk models, to fixed income analytics, liquidity and all of that that are geared initially towards The asset managers that focus on fixed income and some asset owners, the plan there is to And that offering to insurance companies, which obviously, as you know well, are very heavy investors and fixed income products Around the world, so that is our entry into that client segment that traditionally has been more difficult for us because we haven't had a very expansive Fixed income product line, so we're very hopeful that we can expand significantly into life and property and casualty insurance for their own account with respect to fixed income indices and analytics. And that will have also an overlay Value add in terms of ESG, in terms of climate and in terms of factors And in terms of themes, because that's where we can differentiate ourselves. Climate change, that's very separate, right?
And the strategy there is that as climate change particularly and ESG in general It's getting more and more focus and attention on behalf of investors. A lot of corporate clients have come to us and say, How can you help us? How can we understand the kind of disclosures that are required for the ratings to Dan, where we stack up relative to the rest of the industry, what kind of data should we be producing, how do we transmit that data to investors And all of that. So what we're doing, therefore, the initial cut of this thing is to make sure that We sell the industry, the ratings and the industry data to corporates and therefore we have established a corporate sales force to do that. We're working with partners to figure out if there is a mechanism by which we can create a technology platform for a lot of the Data to be easily transmitted between investors and the providers of capital and the users of capital and all of that.
So We see significant potential of expanding into the corporate suite, the issuer suite. And when we say corporate, it's just not Not only corporations, it's also other issuers of fixed income instruments, for example. We see a significant way to expand in that client segment, Starting with a lot of their demands for ESG understanding, climate change understanding, the data that they need to produce, The way that they need to look at the ratings and so on and so forth.
Okay. That's very helpful. Thank you very much.
Thank you. Our next question comes from the line of Chris Shuttler from William Blair. Your line is now open.
Hi, good afternoon. Henry, we've recently seen a couple of big direct indexing or custom indexing related acquisitions across the space. I know There are some puts and takes for MSCI as that phenomenon grows. But just curious the degree to which you're having conversations With brokers, asset managers and technology providers to license your indexes and Just how you're thinking about that phenomenon more broadly? Do you think the hype is justified?
Yes. Hi, it's Baer here. I might take this one. So look, we think that this is Corey, with a lot of opportunity for us. You're referencing the BlackRock acquisition, Perio is a mix Using our tools across the board and we have a very strong relationship with them.
We had, I would say a very attractive sale recently in the Wealth segment, driven entirely by direct indexing as well as a few of them In some other segments. So we think that the component parts there, which are basically indexes, High quality portfolio analytics tools and clearly an overlay of various methodological things related to tax That's very well suited to us. And that's I would say our house view at this moment. I'm fairly confident that during the course of 2021, we'll be able to bring you New examples of what we're doing there, which will kind of give you more color on the nature of that opportunity, But we feel it really plays to a lot of MSCI's core strengths and at present we're viewing it as nothing but an opportunity.
Okay. Thanks, Per. And then just one other one on ESG strong momentum there. Curious if you could just talk a little more specifically about the wealth channel opportunity. I know that there's a good amount of skepticism around ESG with Financial Advisors.
So guessing the opportunity is more to sell your ESG solutions into With the home offices, maybe the custodians. So maybe just a little more color about how you're going to market there and with what solutions?
Sure. So actually we found that ESG and climate as well and we distinguish them now as you know on this call Have been really an accelerant of our dialogue with wealth organizations. Now there may be to a degree something to your point about the distinction between the home office and the advisor. And I think that that's particularly true in the perhaps in the United States, but I I think that that's true, for example, in wealth organizations across EMEA or even now in a nascent way in Asia, where I think the advisors also view This is an opportunity. And I see that already changing, I I would say that what we get from feedback both through intermediaries and on ourselves from the advisors even compared to a year ago, their view is changing.
So as in we're really excited by this opportunity. It's also giving us Dialogues not merely on ES and G and Climate, but on some of our other product lines. So overall, I think really a really attractive
Thank you. Our next question comes from the line of Craig Huber from Huber Research Partners. Your line is now open.
Great. Thank you. Henry, maybe if you could just touch on a little bit further the growth aspirations in the futures and options area and how that may differ in the U. S. Versus Overseas.
That's the opportunity for us. You probably remember 3, 4 years ago, me talking about we're making $5,000,000 on futures and options revenues. It will be $50,000,000 in no time and $100,000,000 $200,000,000 in the next 5, 7 years. So well, I was wrong. We are at a pace right now of even higher revenues that I thought will happen in the timeframe.
So I think the opportunity is significant in many, many respects. It's As I've said before, the futures and option the listed futures and option industry has typically been a national market made up of Single currency, single country exposures. And there's 1 or 2 exceptions The Euro Stock 50 is a multi country, but it's still single currency exposure. So the area where MSCI plays is in the multi country, multi currency exposure. And I think our exchange partners have cracked the code of how to create that and be traded in a time zone.
So we started in the U. S, then we moved the work to Europe and now obviously we're Spending a lot of time in Asia with the Hong Kong exchanges. So I view this on a 5, 10 year horizon Multiples of the run rate that we have today and obviously most of it is pure profit because it's all a byproduct of existing indices. And it will move from market cap indices alone to then ESG indices, climate change indices, thematic indices. At some point, we'll be experimenting with fixed income index exposure as well, so significant opportunity for us.
And that's great. This
is Andy. Sorry. Craig, one thing just to highlight just to keep in mind for the near term expectations. The run rate over the last six quarters or so has really benefited from the repricing of agreements with many of our exchange partners. I would say those are largely complete And we would expect the run rate growth to be more closely correlated with contract volumes going forward.
I appreciate that. The other question I wanted to ask you, Henry or someone, active versus Passive. What percent of the U. S. Equity market Henry do you think is passive now the data you study?
What is that number also in Europe? And maybe also just touch
Yes. Look, there is always a lot of debate and discussion about this. And part of the debate is, what point is it going to reach saturation and how point is it going to tilt the balance and At what point passing will create havoc and all of that, we don't believe in any of that. And therefore, we have not Spend that much of our time focusing on measuring how much is active, how much is passive and all of that. What I can tell you is that As it relates to our indices, there is about $3,500,000,000,000 Worth of money passively tracking our MSCI indices.
About $2,500,000,000,000 of that is What we call institutional passive, meaning non exchange traded, which is mostly institutional, some retail And the other Trillium Plus is obviously the ETF that we report. And that number keeps growing by leaps and bounds. And therefore, we believe that we're continuing to play on that theme.
Thank you.
Yes. I might just add one comment. Clearly, the category has become significantly redefined Compared to 10 or 20, let alone 20 years ago. So a lot of the indexes we're building Our rules based active portfolios, they are taking an active bet on the market, but based on rules. So I think that this distinction is also important because the it's much less black and white And the market for rules based indexes that have strategies, I think is potential besides clearly the market cap representations of them.
Craig, I'll throw out some rough numbers, because I know you've asked about it in the past and we'll continue to refine these and these are a little bit dated. But Broadly speaking, active equity active AUM is in the ballpark of 22,000,000,000,000 Equity indexed assets are in the ballpark of about $14,000,000,000,000 and these are global figures. On the fixed income side, Active is closer to $28,000,000,000,000 and on the passive side within fixed income $4,000,000,000,000 So the other point to underscore here is there are significant opportunities
Thank you. Our next question comes from the line of Simon Klinch from Atlantic Equities. Your line is now open.
Hi, everyone. Thanks for taking my question. I was wondering if you could go back to The points about the opportunity to reissue with corporate customers. And I was wondering if you could perhaps expand on The competitive landscape you see in that environment, how you think it might develop? And ultimately, what kind of size you think that opportunity might B, perhaps in the context of the size of the market you see on the more investor side of BSG.
So the opportunity really opened up in the sense of Initially more of a necessity in which the corporate client base wanted to know how they were rated by MSCI And how do those ratings compare to others in their industry or in other industries? So they asking questions and then we say, well, why don't we sell them the we're not going to give the information for free, why don't we sell them the sector rating profile To them, so there is a large market for that because we rate 10,000 issuers right now. Actually, we rate like 20,000 issuers, about close to 10,000 or so are in the 8,000 to 10,000 are in companies and another 10,000 12,000 are fixed income issuers and growing, right? And then we're going to get into ratings of private equity, private credit and all of that. So That opportunity by itself is just selling them data.
I think the area that we're now that is starting right That's already in flight, obviously, from a small base and all that. Then the next phase will be What do we do to help these people aggregate their data and display their data to investors? How do we connect them directly from us, from them to the investors and those MSCI play a role in that. That's still in the drawing board At this point, but that could present another opportunity.
Okay, thanks. That's helpful. And then just lastly, I was wondering if you could just go back and talk about the retention rates in the Analytics business. I know you referenced some of the challenges facing the industry. Obviously, it's been a tough year, but I was wondering if you could talk Give us a sense of how to think about that trend through 2021 and if there's anything in particular we should note about the dip that we saw this quarter.
Yes, sure. So, a couple of things to highlight and I mentioned this earlier. We obviously saw a dip in the retention rate this past year. It was primarily driven by 2 segments, hedge funds and Within hedge funds, the smaller hedge funds and then within banks. And it was particularly one large cancel in the quarter From a bank, we continue to see, we believe, relatively healthy sales within analytics and the pipeline right now Looks reasonably healthy for 2021 and so we're optimistic.
We think on the cancel side, A lot of these are not in the most core parts of the franchise. And so we are hopeful that those will continue to moderate and trickle through the growth Going into 2021.
Thanks. I would just clarify that the so the large bank cancellation was this quarter?
Correct. Yes. Okay. Thanks. Thank you.
Thank you.
Thank you. Our next question comes from the line of Henry Chien from BMO Capital Markets. Your line is now open.
Hey, good afternoon, everybody. Thanks for taking the question. So I wanted to ask a little bit About the investments that you're doing, I mean you talked a good amount of color on the discipline that you're carrying to enacted As well as some of the product and market and client segments. If I try to put that Together at a high level, I don't know if you have like a TAM or way of the world that you see in terms of The total type of addressable opportunity or maybe it's just like an entrepreneurial thing you just keep going out and finding new business? And any color around that would be great and maybe a comment on the regulatory environment as it relates to ESG and whether that's A big enabler as well.
Thanks. Yes.
I think what is sort of the latter than the former, We are in an industry in which we are creating the industry to a large extent creating the industry of An index for every portfolio and investment tools for every critical investment decision. And That's one. The second part is that we have a lot of demand. We have a lot of people coming to us and say, can you build me an instance for this? Can you do this?
Can Can you give me better software? Can you help me with my ESG? Can you help me with my risk, etcetera, etcetera? And there is a huge amount of client interaction on that. So we are at a stage in which It looks like the addressable market is large.
We haven't spent any time and effort trying to measure how large it is because we're like We're cherry picking. We're picking all the fruits that we can as fast as we can and that will last a number of years. So why try
And Henry on the regulatory front, clearly it's headed in the right direction. I think with the change of administration in the U. S, it seems like it's going to be more conducive in terms of encouraging more ESG disclosure and better ESG practices, which naturally benefits us. I think you see some tangible examples of Regulation in Europe that are starting to impact us, including TCFD and the impending SFDR regulations, which require disclosures, which we are very well suited to do and we are well positioned to help financial institutions make the required ESG related disclosures and we expect those types of trends to continue. Got it.
All right.
Thank you. And I guess just a last follow-up. Sort of separately, but Looking at Pactiv just being such a large share of at least the U. S. Equity markets.
And I know it's not technically your role in terms of You provide the indices and the data, but do you ever think that there might be risks around just as passive starts to impact Equity market structure in a way that limits its growth?
I think we're far still from that at this point. I think the area that is obviously always of Question is that a big part of passive investing is momentum investing, obviously. I mean, the higher the weight of a company Into an index, the more people buy the company. But that can be said about a lot of different ways of investing, Right. That's not just attributed to passive at this point.
So I think we got to sort of peel the onion on that And look at the underlying purchases that people make. I think what Pasi has done is created a major revolution for people Focus on asset allocation, not just stock picking. And that is go from sectors to geographies To the fixed income versus equity and all of that and it's freed up an incredible amount of time. So it's created enormous value for society Because through these packages or bundles of securities into an ETF, for example, you can move around much more easily.
Thank you. Our next question comes from the line of Keith Kim from Northcoast Research. Your line is now open.
Good afternoon, guys. I know we're running long here, so I'll try to be quick. Andy, just following up on a comment you made in your script regarding, I think it sounds like There were some delayed deals and whatnot that you described. Can you press a little bit more color on that? Was this like a pull forward of business?
Or do you think this is business that you guys were able to close More because of the opportunities you're offering this quarter.
Yes, it was a little bit of both. I think it was a tool that was, I think instrumental in helping some clients right on the heels of the pandemic when it unfolded and was well received by certain clients. It's also a tool that has been helpful with, I'll call them, large strategic deals for clients who might be signing up for a significant purchase of 1 of our offerings And using it across their organization. And maybe just to provide a little bit more color on how these things are structured. And Firstly, before I do that, I just want to underscore, I don't want to overstate the impact of these.
This is just one component Of what drives the disconnect between run rate and revenue, but it is something that we used more this year. We will likely use them going forward, Although I think that the pace should not increase materially. But the way these work and maybe I can give you just a quick example So if a client signs up to an agreement to access one of our products, at the beginning of Contract term, we provide the client with access to the product for say 3 months at no cost. And let's say the client pays us $180,000 for the next 12 months. So in that case, we would recognize the Okay.
The sale when the run rate goes up when the client signs the contract. So that's at the beginning of the free trial period, if you will, We're that period where they're not paying, although we will recognize the revenue of the $180,000 over the 15 month time period. So we'll effectively be recognizing that $180,000 over 15 months, which works out to about $144,000 of revenue for the 12 months after the contract is signed. So when we book the sale, we take the full $180,000 but we only have revenue of $144,000 for the subsequent 12 months. When that client renews, so when they renew it's for an annual term, again this is all just illustrative, but when that client renews it's for an annual term, Assuming no price increase, they would stay flat at the $180,000 So the run rate revenue sync up on that renewal for the 2nd term.
Got you. And then is it possible to cross qualify, I think that was like 1% to 2% of your growth in your run rate business? Is that too much?
Yes. I don't want to give the specifics, but I would say it was something that and we've mentioned this in the past was used Within analytics, we've used it in analytics in part with some large telecom solutions type deals. We have used it selectively within ESG as well. But I would just to mention it a little bit, I would say the impact within analytics is not greater generally than the impact of implementations Where we won't start recognizing revenue until the implementation is complete even though we recognize the sale when the client signs the contract. And so that tends to have A bigger impact than these types of things, just to mention it.
But we did want to call it out as something that increased slightly in 2020 and may have an impact going forward.
Great. Thank you.
There are no further questions. I will now turn the
call over back to Henry Fernandez, Chairman and CEO, for closing remarks. Thank you very much everyone for attending today. We look forward to speaking with you again during our Investor Day event on February 24. In the meantime, please stay well and stay safe.