Good morning, everybody. Thank you for joining us on day two of our conference. Again, I'm Manav Patnaik, I come back as Business and Information Services Analyst. We're really happy to kick off today with MSCI, and as always, we have Baer Pettit, who's the COO. Baer, thank you again for being here.
My pleasure.
Hopefully, the layout and the shining lights is better this time around versus last year. Just to kick it off, just on a really high level, Baer, obviously, needless to say, a lot of noise out there in the world, a lot of uncertainty. From your business, from your standpoint, from your conversations, what are some of the impacts, if any, that you've seen from your clients?
Yeah, look, so I don't know if this is a slightly maybe surprising answer, but I think what's striking at this very moment, and in view of the interesting, in quotes, things that have been happening in the world, it could be a different story by next Tuesday. I think after a period of initial volatility and randomness, I think what's striking from our clients right now is the degree to which they're not taking any very specific or exact actions in view of recent events.
That, I think, can be taken as either a negative, a positive, or a neutral, because I do think that we're in kind of a slight holding pattern, both as relates to clearly the tariff topic and the degree to which that affects the investing landscape. I think also just the general approach of the administration to, if you want to call it crudely, its approach to capital markets and the degree to which it cares or not as to what's happening in the capital markets, of which clearly the most, I would say, notwithstanding the fact that the world we chiefly live in is more driven by equities than by fixed income, I think that the epicenter of the spookiness or the thing that really chilled people was when there was clearly a pretty large sell-off in treasuries at the longer end of the curve.
I think that that was the thing more than the correction in equity markets that made people feel like, "Do we have some really systemic risks here?" It seems like for the moment, we've taken a step back from that. Consequently, we're carrying on as normal. We're trying to, well, trying to provide the best services we can to our clients. We'll have to wait and see where the next iteration of this, the market volatility, plays out or not.
Got it. It almost sounds like the 90-day pause had clients just pause on what they were doing too. You also talked about deals that could have closed Q1, that went to Q2. Was that separate of this noise, or can you just give us some color?
Yeah. Look, again, I do not want to be excessively cute, but since this happened to have come up in the earnings call, and just as a follow-up to that, a few of those deals have already closed. Two of them that I was personally involved in, I mentioned that on the call, that some things had been delayed. As a slight bit of positive news, already now, some of those deals have closed in the last few weeks. The way I would say it is, again, keeping us thematically, that is not unusual. It might have happened last year or the year before or what have you. If we look at our kind of our pipeline formation right now, it does not look unusual.
We clearly, we always have a slight waiting towards the end of the quarter in terms of deals coming in, which, by the way, we're trying to specifically mitigate that. I won't go into arcane internal management stuff, but we're trying to make sure that happens less and try to get more things done earlier in the quarter. I think overall, again, we're in highly unusual circumstances, but I think in terms of the markets, but in terms of the business, not really that unusual in terms of what we're seeing.
If things hadn't changed, maybe just help us appreciate what the start of the year looked like. Last year was a tough new business year with the lag from some of the outflows we saw. Things got better. I think everyone was looking forward to maybe some pickup in new business, but we didn't really see that in the first quarter to the extent we wanted. Help us, are we getting carried away? Are we too early?
No, no, look, I think there's some, look, in my prepared remarks in the last quarter were around the differing performances of the client segments and the general underperformance of the active managers and the outperformance of the other client segments. I mean, almost universally, all the other client segments were above the average growth rate, and the active managers were below it. I don't think that that pattern will change dramatically. Hopefully, it'll get a little better on the active managers, and we'll continue on the other client segments. I think the only element in that narrative that I want to correct a bit is I don't want to place excessive emphasis on the environment. I think we have a lot of the, if you like, the tools in our own hands.
I think notably for the rest of this year, which has been a big personal focus of mine, even in the last few weeks, is I think our new product pipeline is looking stronger, bringing more products and enhancements to market. If I look, going back to being at this conference, let's say a year ago, and leaving the environment aside for a moment, I think our new product pipeline is stronger than it was a year ago. I think we're bringing out more things in index, in analytics, in sustainability and climate, notably in climate, definitely in private markets. I think that while, of course, we have some dependency on the market and the environment, I also like to think that we have a lot of tools within our own control in terms of new product development to improve the path that we're on.
Got it. Maybe can you just help? You talked about strong sales pipeline. You talked about strong new product pipeline. What's the convert? Is it a long sales cycle, perhaps?
Yeah. Look, I think, again, it depends on the product area and the client type. I might go through every client type and every product. It's like a grid. Clearly, if you are selling a large multi-asset class risk system to go across an entire asset management firm globally, it's by definition a much longer sales pipeline than selling some new interesting data set to a hedge fund who thinks they can monetize it in the next few weeks. I do think it's hard to generalize across what we do to get, in quote, one answer. The way I would say it is I wouldn't say the pipeline is strong, but I would say it's normal. I would say that we are definitely objectively looking at what we're bringing to market.
We will be bringing more products to market in the next six months than we did in the last six months and in the six months before that. Some of those are things which I think are more immediately monetizable, like bringing a lot of the custom index capabilities online is not instant monetization, but very close, rapid monetization. There are others which then are like, "Oh, you guys are doing that." There is a longer sales process.
You mentioned how the asset manager population was growing below the average and probably will be there. Is that the difference between getting back to 10% subscription on the index side?
Look, I put it this way. We definitely want our aspiration and our plans are definitely to grow more than 5% in that segment. If you add up the sum of our plans in which we've been going through, we actually happened to have a long management committee plus meeting on this yesterday. Looking forward to the rest of the year, our goal and our plan is to do better than that number. We're in volatile circumstances. I don't know what will I, but our goal and our aspiration is to do better than that number. For sure, we want to continue to do the stronger kind of low, low, mid-teens numbers depending on the other segments that we've been through in the other client segments. We don't see reasons now why those numbers won't be sustainable.
The way I would say, to put all of that in a nutshell, one, we think we can do better than 5% for sure on active managers. We believe we can continue the growth rates we currently have in the other segments.
Okay, fair enough. New business was one side. On the cancellation side, obviously last year was elevated. Just help us with what do you think the environment on the cancellation side could look like now?
Yeah. Look, again, always a little note of caution. I'd rather underpromise and overdeliver. We had very strong cancellation numbers in the previous quarter. I think generally we have strong client relationships. Our tools are often as needed or more needed in a volatile environment than in a calm one. It's not like people wake up in the midst of crazy market volatility and start canceling their risk systems. That should be a little facetious. We have a lot of demand from clients for stress testing, for understanding drivers of risk and return. We've actually even got our website. We've been doing a lot of works around the tariffs and stress testing around the tariffs and all of that. I think, allowing for the fact that there can be a merger that happens that we can't foresee.
There can be a client distress event. Normalizing for all of that, I think we should have decent retention rates. I can't give you an exact percentage, but I don't see right now evidence that we're going to have bad cancellations or something of that kind. I think our client relationships are good. The question of where does the number exactly land may depend on the quarter and circumstances, but I think we're generally sticky and our clients like our products and are using them intensely.
Got it. Okay. Maybe taking a little bit step back as well. I think when you report your geographic breakdown is based on where the clients are. But when people think of MSCI, we think of the ACWI, Emerging Markets Index. I guess my question is, how would you frame how much of a non-U.S. index business are you? Or is that not a fair characterization?
Look, the way that I would say it is, which is the way that I would frame it is when the U.S. equities have a sustained outperformance, it tends to help some of our competitors, notably S&P, a bit more than us. When there is a slight reallocation to more ex-U.S. exposures at the margin, it is beneficial for us. Now, those things do not necessarily filter through immediately. Sometimes in ETF flows, it may. If there are flows clearly from U.S. exposure ETFs to non-U.S. exposure ETFs at the margin, it will impact us. I think generally some of those things are more slower burn type of things where people issue more funds or buy more products that are ex-U.S. analytics data type of products from us. The way that I would say it is, it is not a speedboat. It is not like a switch that hits us.
If there is a rebalancing towards a more diversified global portfolio by many investors and a reduction in their often overweight position to the U.S., that will at the margin benefit us.
Got it. I think your answer is, but let me ask it another way. I guess help us from not getting too carried away on if there is a difference away from the U.S. How slowly, how gradually does this usually start benefiting you guys?
Look, it's been a sustained movement now for quite a long time. I think I'm trying to even think when it was the last time that it was moving in the other direction. It's been a very long-term trend now, which is why the U.S. got up to its peak weight in ACWI that it's ever been. I think that it's hard to extrapolate exactly because all these market circumstances are somewhat different. I think it would be highly speculative to say it takes three months, it takes six months. As a general observation, the more that clients have globally diversified portfolios and are looking at a whole range of different exposures, it benefits MSCI over time.
Got it. You mentioned your new product pipeline is going to be stronger the next six to twelve months than it was the last six to twelve months. Even within that, I think you said at one point that the next two quarters are going to see a lot more index innovation. Can you just elaborate on that?
Yeah. So basically, we acquired this company called Foxberry, who have a very sophisticated, very flexible index construction and back testing engine. We had to basically think of it as a flexible, attractive, modern front end. We have our whole back end index production environment, which is like the heavy-duty environment that produces the index every day where all the corporate actions are done, which is the trillions and trillions of dollars of benchmarks. Basically, once we acquired them, we had to take their front end and engineer it into our index production back end. You do that basically through different index methodologies. The most simple ones, trying to do a country fund, trying to do a, and then you go to the more complex methodologies using an optimizer, using constraints, blah, blah, blah. We're working through all of those.
In the next few months, basically that work will be done. We will be able to go out to clients and fully market all of those capabilities. I think it is one, we can do a broader range of things than we could previously. It has given us more flexibility, but also extremely importantly, it is speed to market. One of the things is, in traveling around in various places, I was in Dublin a few weeks ago and a client said, "Look, we want to work with you guys, but your back testing and simulation was too slow." This is basically an Italian fintech type of distribution where they want to bring products that they are like, the sales force gets an idea, they want to bring a product like 48 hours later.
It is not like a pension fund where you have got time to talk to them and whatever. Using that as an example, we should be able to win more of that type of business because our ability to back test, to do simulations on different types of methodologies, and then deliver that for the clients will be orders of magnitude faster than in our previous environment.
Got it. In terms of the non-index new product innovation, any key?
Yeah, look, I think we're bringing a lot of we will be doing a lot more things in private markets. You saw our announcement about the private credit partnership with Moody's, which will come online later this year. Maybe we'll, I would say the next three to four months probably we need to do that. We're going to be bringing out more private equity analysis there. We're bringing, so we're deepening in private markets in a variety of ways. We're actually doing a lot more a variety of macroeconomic stress testing, which we actually we had launched, I think it was at the very end of last year, but has been great timing in analytics. We're able to integrate kind of macroeconomic stress testing with our traditional risk modeling, which is a very huge focus for our clients now.
We are going to be bringing a lot more capabilities to market in climate as well. You notice we had announced the partnership with Swiss Re, which is but one aspect of that. We are doing a lot more things in physical risk in climate, expanding our geolocation tools. I think just generally across the board, there will be more of a product pipeline than there has been.
Baer, I think last year as well, I think you talked about how you were going to pick up the new product pipeline and you could maybe to a certain extent taken the foot off the gas pedal and now you've been able to.
Yeah. I think we're finally, look, some of these things, if you take the index example, and I'm just being very transparent, during this whole period that we're re-engineering the Foxberry front end into our back end, unless we hire a whole bunch more people, which we didn't want to do in the current circumstances, we're taking people away from doing maybe some other type of index innovation. There are a number of these type of categories. I would say to a degree that was true also with Fabric, our wealth, what we now call MSCI Wealth Manager, which again, we had a period of bringing that online and now we're starting to bring it to market more.
Look, we had a number of years where we were so massively focused during the boom period of the growth of ESG and sustainability where we were basically putting enormous amounts of effort on that, tons of resources, putting that into index, putting it into analytics. We have just had to recalibrate the portfolio and redistribute some of the investment. Inevitably, there is a little bit of a period of hiatus when you say, "Okay, why do we not redeploy this capital here and start building more stuff over here or over here?" There is a little bit of a window of hiatus. I think we are getting through that now.
Fair enough. Just last question on the new product stuff. Obviously, from an expense standpoint, does this mean we should be expecting elevated expenses or is it?
No, no. Look, I mean, I think that's one thing, God bless us, that we're pretty disciplined about. We're being extremely disciplined about expenses. We're being extremely disciplined about efficiencies. Look, there are some areas, let's say in sustainability where we're deploying AI, where I think we're actually going to end up with a better quality product at a lower cost base. We're being extremely focused on financial discipline, particularly the period of the volatility that we just went through. The only thing that I would say was the immediate reaction, our immediate reaction was, "Look, we got to be financially disciplined." It's not so much that we know what the outcome will be, but this is not a period where we can be loosey-goosey. We've kind of tightened that up.
We actually had a meeting on this topic yesterday and we're just saying to people, "Look, by all means, find a way of re-engineering that, but it's going to have to come out of the budget you have today." We are being, I think we'll continue to be very disciplined. Right now, it does not feel like we're starving anywhere for capital. I think we're generally happy. There are a few areas we might want to put a bit more money into if we have a little bit more breathing space. I do not feel like we feel extremely excessively constrained in view of where we are.
Got it. I want to talk about the Moody's partnership. Before that, maybe just private solutions.
Yes.
The line item, can you just help us appreciate what's in there? I mean, we all think private credit, but it's part of.
Sure. Yeah, yeah, yeah. First of all, in both sustainability and climate and in private markets, we had two new leaders join us right at the end of last year. Luke Flemmer from Goldman Sachs to run our private market solutions. And Richard Mattison, who came from S&P, who was the founder of True Cost to run our sustainability and climate. In essence, they also, which is just life is tough, but such as they kind of inherited a whole, we'd had to do the 2025 budget and we kind of gifted it to them and said, "Here you go." They obviously came on board and they're like, "Okay, but I want to change this." I think that was part of the some changes being done there. Luke has brought in some new leadership people.
I think that it is a little bit of a tale of two cities. Unfortunately, we continue to struggle with the real estate side of it. That remains very painful. A fair amount of it is transaction-driven in real estate, so that is a little bit more abundant. In the total portfolio solutions for private markets, the Burgiss business is growing in the high teens. I think that is our de minimis goal for it. I think we can even do better than that. If you think about it, it has been a portfolio analysis tool for institutional LPs, right? What are we trying to do? We are trying to also make it more of a fund analysis tool for wealth LPs. Some of the largest wealth management organizations in the world are also the largest LPs.
It's taking the same solution and selling it to a different category of LPs. We're also trying to go more into, so it's basically been a fund cash flow, fund comparison, and then incorporating that into your total portfolio view across all asset classes. We're trying to go deeper in analysis of each individual asset class. One example of that is in private credit, which is the Moody's partnership, is but one thing. We actually have a few other things that we're trying to do in private credit with some other parties. We want to go deeper into the individual asset classes and provide more specific analytics for a given asset class for private credit or within private equity in buyout or in VCs.
We will be bringing more capabilities to, for example, look at how do you think about, so we will be able to put, for example, factor exposures on private equity exposures in order to compare them to public markets. We will be doing valuation type of analysis. Look, what is the dispersion of the marks on this particular company? And then how were the valuations of that type of company compare in public markets? A lot more analytics at the asset class level for direct investments. That is kind of the thing that we are going to be focused on.
Specific to the most recent Moody's partnership, please help us appreciate what you're contributing, what they're contributing, and how that development works.
Sure. In essence, in simple terms, they are obviously, so to be clear, we're not together providing an official credit rating, right? We're not in the, that's a whole regulated area. We're not providing an official credit rating. What we are doing is providing things like default probabilities and other types of credit analysis. In essence, what they're doing is they're providing the credit modeling, which they have by definition a lot of experience in, and otherwise they wouldn't be who they are. We are providing a lot of precisely that underlying data on the transactions, etc., that we have directly from the investors in our private markets database. It's also been a great category for us to apply on our data side. The use of AI has made it enormously more efficient to do that.
That goes to the point about is cost going to expand? We've taken a category where quite literally like last September, October, we had no use of AI. And with AI, we're able to read thousands of documents, parse them, and then present that data to an analyst in a way that is enormously more efficient. In the absence of us doing that, we wouldn't have been able to do this Moody's partnership. So it's basically Moody's analytics and our data to provide insights to people who are holders of private credit portfolios.
Got it. Just take a step back. The first partnership that you had with them was more on the ESG side. How's that going?
Yeah. Basically, the distinction there is in the first partnership, they basically were a provider of ESG analytics, which was not going that great. We basically replaced them. It was a kind of a different type of deal. Crudely, you could say, we got a new form of ESG distribution, and they got a solution that helped their P&L because what they were doing was not doing great there. That was more of a point in time. In turn, we took some of their private company data on a long tail of small companies, and we applied some what I would call high-level ESG analysis to it.
Whereas in a strict sense, the first deal was more like two transactions, one which was a little bit more in their interest and maybe one a little bit more in ours, whereas this is truly, strictly speaking, a partnership. We are building a product together, and then it will be a joint IP product. It is building a new thing together, whereas the previous deal was more an exchange of data for two different use cases. This is truly a joint product and joint IP. That is exciting.
Yeah, I mean, the partnership makes sense. Maybe just one more question on the partnership. Looking ahead, isn't perhaps the biggest opportunity between the two of you on the indexation side with their data? Is that what the vision is?
Yeah. Look, I think there's a number of things, right? I think we have an open mind in all these type of partnerships where we can go in combining our intellectual property. I think we typically want to make sure that we do each thing well, that we have a good outcome. This one is going to take quite a lot of focus. Going both to the Moody's and the Swiss Re case, it's a little bit of a cliché, but MSCI started in Geneva in 1969. We always say that we want to be the Switzerland of our industry, right? We want to be a neutral party. We want to try to have as many partnerships and alliances as we can. We will continue to try and do that.
Got it. Maybe just on that, I was going to ask it later, but the partnership angle, you guys have always talked about being good at M&A. Moody's, Swiss Re is a great example. Is there M&A aspirations as well?
Look, we did a fair number in the last year or so. As I mentioned, whenever you do these, you have to be conscious that they also have the proof of the pudding is in the integration and the marketing, right? It is a little bit like the Foxberry example that I was giving just a few minutes ago. I think the short answer is we do want to do more of those kind of smaller bolt-on acquisitions that we can add value. I think we need to pace ourselves a little bit because there is a little bit of a risk that you're trying to do too many of these things at once can slow you down. I think we definitely have an open mind.
are a few things that we are looking at right now, which may or may not pan out, but we are looking at a few different things right now in index and analytics. We keep an open mind. I think, look, one thing about the current environment, if it becomes a little tougher for some private companies, that is not necessarily a bad thing for us. There could be opportunities for us to do some smaller bolt-on M&A.
Got it. Maybe just one question specifically on Analytics. The run rate obviously has been trending nicely to the higher end of mid to high single digits. I know revenue, there were some accounting nuances. Anything particular in there that's driving that higher growth that you're taking share from competitors? Has that dynamic changed?
Look, I think we've done well. Maybe two things. In purely in equity analytics, we've done pretty well, notably with some of the newer segments. We've done well with hedge funds. We've done well with banks and broker dealers. I think we've and we will continue to we've brought I mentioned that we have kind of a next generation of models, which are incorporating a little more sort of AI-driven. If you think about it, we have the fundamental factor models, which have the traditional exposures, value, growth, and all of that. We're using AI to basically look at clusters of returns, which may be a little more volatile or more transient. That product is sold extremely well to more of the faster money segments, hedge funds, or the sell side. That's an example of an area where we've innovated.
We've brought some new products to market, and we've got good returns out of it. I think we're also, and look, this is an oil tanker rather than a speedboat. I don't want to get anyone too excited. It is an oil tanker that's been moving in the right direction as our credibility in fixed income continues to just steadily get better. We win more clients. We have more credibility. That is just, it's a slower burn thing, but it really helps over time. It helps also with our multi-asset class portfolio risk stuff. I think there's no fireworks right now, but I think we continue to execute reasonably well. We're frugal with our use of capital.
I think it will continue to be a good mixture of decent growth and very attractive, I think, margins, which are generally better than most comparables in the industry.
Got it. You renamed your ESG and climate business to sustainability and climate. Just some context on why the renaming. As a follow-up, I think from our end, it feels like at least the word ESG is dead.
Yeah, yeah. Look, I think candidly, I'm not a big fan of acronyms anywhere. Actually, I'm kind of always going around trying to whack acronyms on the head. Everywhere they show up, we have a lot of internal acronyms. I think it was always an inelegant acronym. It also became kind of not the best thing to put on a product. I think the concept of sustainability is broader. I think it genuinely is broader. I think that the notion of sustainable investing is sustainable. I wouldn't read too much into it, but I think we're basically saying this is a broader category, and it will continue to change and adapt over time.
Got it. Just for our help, your discussions with your clients on the ESG side, I mean, you're still growing. Obviously, it's decreased a lot. Just in context of you were going to reset your long-term target, just in context of that.
Yes. Okay. Maybe just generally, and I used this analogy in a previous meeting, and there were one or two people here who have to hear it twice. I do think there is a strong, what I would call Carney-Albanese effect going on, right? What is really striking, and I was discussing this with a client yesterday, is there are a lot of institutional investors globally in all countries, including the United States, who are very strongly reacting to the current noise coming from Washington, D.C., right? We have heard this across the board. Actually, New York City controllers has made some public statements about this, the large California funds, certainly in Canada, across Europe. I think we are hearing many large institutional investors across the world want to restate their focus on sustainable investing. We have been unequivocal in our commitment to this.
I think what that means is our belief is we can be, we are, I think, objectively, but we are committed to be the leader in this category, right? You say if the emphasis a number of years ago was heavily on ESG ratings, I think the emphasis will go more towards climate and more towards physical risk in climate and more towards looking at a variety of climate-related risks in portfolios. I think the sum of all of that is the category is important to us. We're continuing to efficiently, using AI, invest in it to make it high quality and transparent. We'll continue to do things like Swiss Re. We believe that there are very, very large pools of capital in the world who will continue to be focused on this. We think we'll be the leader in serving them.
Political noise will come and go, and hopefully, we'll get through that.
It sounds like you still think it'd be an above-company kind of growth rate, but you don't want to set that long-term target.
Yeah. Look, we're not revising the number yet. As I said, we had a new leader who came in. He's only been in the seat a few months. We didn't want to sort of have him come in and then having just revised the target or put a different number on his head. We will have to make a more kind of official statement about that at some stage. For now, we're just carrying on with those numbers.
Okay. I guess we're out of time. Just one rapid-fire question. Arsenal PSG score today?
Yeah. I was going to say 2-1 Arsenal, but then that means penalties. I do not know. We'll see.
We'll start with that. All right. Thank you very much, Baer. Thank you, everybody.