We will go ahead and get started. Thanks to everybody for joining us this afternoon. I'm Patrick O'Shaughnessy, Capital Markets Technology Analyst here at Raymond James. Up next, we have MSCI. On MSCI's behalf, we have CFO, Andy Wiechmann. Andy is gonna go through a couple brief slides real quickly just to provide a company overview, and then we'll go into the Q&A. With that, Andy, welcome.
No, thank you, Patrick. Thank you for having me. This is really a great event. Always enjoy being here. Great lineup of meetings and great discussion as always. As you alluded to, I thought it'd be helpful to spend a couple minutes just providing a high-level overview of who MSCI is for those that are less familiar with the story. I would highlight three things about MSCI.
We are uniquely compelling in terms of our focus and our business model, uniquely compelling on the market opportunity in front of us, and uniquely compelling on the financial model of the business. We are the only company that is uniquely and intensely focused on helping investors with their most important job, which is building and managing portfolios.
We are focused on delivering really mission-critical tools that help investors understand the drivers of performance of risk, and ultimately build portfolios to achieve their objectives more effectively. We serve the who's who of investors throughout the entire investment process, from asset owners through to managers, as well as intermediaries, like broker-dealers, exchanges, consultants.
We serve 6,600 organizations across over 95 countries, so we very much are embedded in that investment process, talking to the who's who of not only organizations, but the key investment decision-makers at those organizations. That, as a result, leads to many of our solutions being embedded within the process such that they become common languages.
These IT-based solutions that are used to understand performance and risk, other attributes, understand market sizes, and ultimately construct portfolios to achieve objectives, become almost market standards, which leads to a very compelling opportunity for us. On that front, when you look at the trends taking place in the investment industry, we are in the sweet spot or in the strike zone of many of those trends.
At the highest level, you have more savings, more global savings by individuals, by governments, and by institutions. Those savings are looking for productive returns, and so they're put into professional management or what we call the investment industry. You have a growing pool of investable assets chasing a more complex opportunity set.
You have more markets that are becoming accessible, more asset classes, more security types, more vehicles, and across all of those, you have a richer data set of information and more information about them. This is MSCI's sweet spot, where we provide structure to that enormous data set, to that additional information to allow investors to navigate the complexity and ultimately achieve better outcomes.
When you drill down a layer and look at the trends that are happening in the investment process, you see a move towards more outcome-oriented, rules-based, customized type solutions, which is driving what we call indexation. Indexes are a very efficient mechanism to reflect a systematic rules-based strategy. You're seeing growth in the use of indexes across many different client segments and use cases.
You see, as I alluded to, more outcome-oriented strategies that are looking across asset classes. To build those, you need a consistent framework to understand the drivers of performance and risk across all these asset classes. Our analytics tools are best in class on that front. You see more sustainability-oriented strategies in areas like ESG and climate objectives, where our tools are in a leading position.
You see an increasing allocation of private assets, an area where we are creating and providing the tools that allow investors to navigate that opaque asset class. We are in the strike zone of those trends, and all that leads to a very compelling financial model where 97% of our revenue is recurring. About 75% of that is recurring subscriptions.
These, because we are in the sweet spot of these trends, the revenue growth and trajectory have been quite compelling. We're licensing generally IT-based solutions, where under annual subscription contracts, for the most part, where we get paid annually in advance, which leads to very compelling cash flow dynamics.
Because we're producing things once and selling it to many different users for many different use cases, there's inherent operating leverage within these products that we're selling, which leads to a very attractive profitability profile as well as a very attractive cash flow growth profile. Ultimately, because we have a very disciplined approach to capital allocation on top of that, we get this very attractive trajectory of adjusted EPS. Very compelling, company and opportunity across not only the business model, but also the market opportunity in front of us and ultimately the financial profile of the company.
Great. I appreciate that lead off. You touched on this a little bit, but maybe can you go a little bit deeper into what do you think is MSCI's key competitive advantage, and how does that advantage extend across the company's four segments?
There are probably a number of competitive advantages, cutting across areas like our unique data sets that we continue to build, our broader data capabilities. We're an organization that is ingesting, cleaning, interpreting, massive amounts of data, and creating derived content from it. We have very advanced analytical engines, calculation engines that are ahead of competitors out there.
We have a very unique global employee footprint and culture. All those are competitive advantages, but maybe I can drill into I'd say three competitive advantages that relate to one of the points I made in the introductory comment, which is our client relationships and our client footprint.
One, we very much, as I alluded to earlier, we're working with the who's who of investors, and whether it's through just the informal discussions that we're having with our client organization and our researchers engaging with these investment decision-makers or more formally through things like our client advisory boards that we have or industry consultations that we run, we are continually understanding from our client base what objectives they are trying to achieve or getting insight into the direction of demand and direction of trends in the investment industry.
It's a very important source of innovation and insight for us. That's why we are at the forefront of investment trends, whether it was factor investing, ESG investing, climate investing, private asset investing, increasingly areas like thematic investing or outcome-oriented investing.
The solutions that we are delivering are not just because we think they're important, because we hear. It's more because we hear from our clients that they need these tools to achieve their objectives. Related to that, related to that ecosystem that has developed around our tools, I alluded to in the beginning that we've delivered these common languages that facilitate conversation, facilitate communication, facilitate objectives across the investment industry. Within that ecosystem, there's one constituency where we have a very strong position, which is with asset owners.
We serve the largest pension funds in the world, the largest insurance companies, the largest sovereign wealth funds, endowments, foundations, and we are helping them think about their portfolio, not only how to view the investment opportunity set using our frameworks, but also how they're gonna allocate assets, and then ultimately adopt things like our policy benchmarks or think about their climate objectives along the lines of our climate tools or our ESG ratings.
When they start to adopt things like a factor overlay on a strategy, they're using our factor tools to do that. As a result, throughout the ecosystem, the managers that are managing money on their behalf, as well as the intermediaries that are facilitating capital flows need to use those same frameworks and languages.
This strong position we have with asset owners in particular, but the entire ecosystem facilitates driving standardization and the use of our tools throughout the industry. The last thing I would touch on quickly, which relates to the prior two, is the interoperability of our tools. The fact that our ESG and climate indexes are built on our leading ESG and climate ratings research and data tools, our factor indexes are built on our industry-leading factor models and risk models and analytics tools.
The fact that our analytics are using the same universe of securities and classification systems that our leading index franchises are built on creates this reinforcing ecosystem of driving standardization, but also, creates synergies across products, where clients that are trying to achieve specific objectives around performance, while managing risk and achieving specific objectives overlaid on it, can use all of our tools together to achieve those objectives.
We're unique in being able to offer analytics, ESG and climate insights, indexes, private asset insights in a cohesive singular language to achieve a multitude of outcomes and objectives for investors, which just leads to natural upselling.
You talked about how you work closely with your clients. What are you hearing from your clients right now in terms of how comfortable they are with their budgets and how concerned they are with the recession? As it pertains to MSCI, how does that inform your outlook for your sales pipeline as well as client retention?
Yeah. We've been quite encouraged by the performance during 2022. You know, both the growth with organic subscription run rate growth of 13% as well as the retention rate with retention rates across the business for the year north of 95% have been quite remarkable despite the market volatility.
I think that speaks to the fact that we are serving these mission-critical use cases that are deeply associated with, you know, the core function of our clients, which is investing and trying to differentiate themselves, achieve better returns, better risk-adjusted returns. They're not gonna cut our tools. We're the last thing they wanna cut, and when they are spending, they're prioritizing areas where we have tools. We've been very encouraged by that.
To your point, we are pretty sober about the backdrop here. We have seen in past environments that when you have a sustained period of equity market pullbacks, you tend to see clients tightening budgets, downsizing, and we have seen some layoffs in the investment industry, restructurings, changing of strategies, closing desks, closing funds.
All those things do lead to a pickup in cancellations, and they can lead to as well as things like budget tightening, which we know some organizations have tightened budgets, as they've reset budgets for 2023, can lead to lengthening sales cycles. We are cautious on the outlook here for all those reasons. Overall, I'd say the pipeline remains fairly healthy across the business and large in absolute terms. We've got a very strong pipeline, very healthy dialogue, but we recognize there are gonna be some environmental pressures that we'll see likely throughout this year.
How are you thinking about MSCI's margin outlook at this point, and how big of a tailwind was the stronger US dollar last year?
It is important to highlight that a couple points around that. Firstly, we don't target a specific margin or rate of margin expansion. We are much more focused on balancing two main objectives. One is investing in the long-term growth of the business. We very much prioritize continuing to invest in these areas of attractive secular demand and where we can be a leader and capture a massive part of those big markets.
At the same time, also delivering attractive EPS growth. Margin is a little bit of a byproduct of both of those inputs here. We're really trying to deliver attractive EPS growth in all environments while continuing to invest selectively in those key growth areas.
In the areas outside of those key growth areas, we will flex our expenses up and down quite significantly, like as you saw us do in the back half of 2022. I would say, just because you mentioned FX, it is worth highlighting, we do have this very nice natural hedge embedded in our expense base or sorry, in our financial model, where about 11.5%-12% of our revenue is exposed to non-U.S. dollar contracts or revenue, and it's about 40%-45% of our expense base is exposed to non-U.S. dollar expenses. Given the relative sizes of revenue and expense and the concentration of currencies within there, they tend to move together. The net impact on EBITDA tends to be relatively muted.
If you look at 2022, I think we had a revenue headwind from the appreciating dollar of about $35 million throughout the year, but we had a benefit on the expense side of about $38 million. You can see the net impact on EBITDA was relatively small, a few million dollars.
The margin did get some benefit from that, not only because there was slightly more contribution from the benefit on expenses, but also the relative sizes of revenue and expense and our margin profile meant that we got some margin benefit. If the US dollar does, you know, does depreciate or begin to depreciate, that will move in the other direction. Again, the net impact is relatively muted at the profitability line.
Just because we're talking about expenses, I did wanna highlight, you know, a couple things just around the seasonality of expenses. We commented, and we've seen this in past years, the Q1 is seasonally a high quarter for expenses for us because of certain compensation and benefit-related expenses.
We tend to see elevated expenses to the tune of $15 million-$20 million associated with the fact that we're paying bonuses or other payroll-related expenses and benefits expenses that are elevated there in the Q1. We expect that this quarter. On top of that, in the Q1 of this year, so the current quarter, there are a couple other items on top of that.
One is, because last year because of the AUM pressures that we saw, our bonus accrual was tracking below 100%. When we roll into a new year, at the beginning of the year, we start to track back towards 100% accrual on the bonus. That moved from accruing at a level below 100% back up to 100%, combined with some executive award expenses associated with some executive awards that were granted, is leading to another $5 million or so of incremental expenses on top of that $15 million-$20 million.
I just wanted to make the market aware of that elevated expense we're expecting here in the Q1. This is all within the guidance that we put out and continue to have the same guidance we put out with our year-end results here.
Circling back to the earlier discussion on your competitive advantages, how would you evaluate the competitive landscape that MSCI faces, and maybe with a focus on your analytics segment as well as your ESG and climate segment.
Yeah. For all the reasons I highlighted at the beginning here, we are the premium offering in the market, and we tend to be the premium price solution provider in the market. The solutions we're delivering, as I mentioned, are mission-critical to these organizations and usually closely tied to not only the investment mandates that our clients have, but they are closely tied to what their clients are trying to achieve and how they're trying to differentiate themselves.
We are in a strong position there. There are competitors across most of our offerings, and often they are competing on cost. They are offering a lower cost alternative to what we do. Because you mentioned analytics, just to use some examples there are a small subset of providers out there that do offer similar performance and risk analytics and insights across the various solutions that we have, and they are usually trying to compete at a lower price point.
They are also trying to deliver that efficiency or that cost saving to their clients by delivering a broader solution set. Oftentimes they are offering it to clients at a much lower cost because those clients might have already a broad license to or subscriptions to terminals or workstations.
The client might be looking to outsource all of their investment system architecture. They find it easier to use a provider that has a front-to-back solution set, even though their risk and performance analytics and risk and performance management measurement tools are inferior to us. Sometimes the competitors are trying to offer a value proposition where they can do it at a cheaper cost and save the client an enormous amount of money.
Occasionally on the analytics side, we do lose to competitors for cost. You can tell by the retention rates that is the exception. I do wanna highlight some of the trends that are happening within investment technology that are breaking down some of those value propositions of those lower cost competitors.
Advancements in technology and things like, advanced APIs, more flexible user interfaces are making it easier for clients to use tools and access calculation engines and content in a much more cost-effective fashion and integrate that into the workflow regardless of the systems that they are using, you know, because of these modern interfaces.
This is an area where we have been investing heavily. Additionally, we've been investing and focused on heavily integrating with many different providers out there. This is our ecosystem of partners, and we are integrating our tools with complementary solutions like order management systems, like data management or accounting systems, to make it that much easier for clients to access our tools regardless of the tools that they are the broader tools that they're using.
We think the direction of travel works in our favor. Just quickly on the ESG and climate front, I will break it down between the two because I think the dynamics are a little bit different. On the ESG side, you know, it's really a couple providers, us as the largest provider of ESG ratings and research, and then there's one other provider, Morningstar Sustainalytics, which is probably the number two provider, less than half our size, providing solutions.
I think the nature of what we're delivering lends itself to a small group of broad providers, and we think we're in a very good position there and continue to see a number of very compelling growth opportunities which we are well positioned to capitalize on.
The climate opportunity is much more in its infancy, and it is very multifaceted. There's a wider range of providers there offering a wide range of solutions for that climate integration. If an investor is really just trying to integrate climate considerations into their investment process and understand how an investment or a portfolio is aligned with a transition to a low carbon economy, that is where we are a leader and strongly positioned, although it's still very early days, and we see a very rapid growth rate.
There are a whole host of other opportunities from just providing miscellaneous data sets through to helping corporates understand their emissions footprint, through to sustainability-linked notes and bonds where we haven't focused as much.
We could over time, but there's a number of providers that are focused on those areas as well. It's a massive market. It will be a massive market that we're in the very early days of, but we think we're well-positioned, not only in the areas where we have strong competitive positioning in the investment process, but also across some of these new frontiers for us.
Building off of that, where would you say that we are in the growth stage for ESG versus climate?
Well, it's always tough to calibrate this because they are both massive opportunity sets that are in the early days. Maybe I'll characterize it as this: ESG is still early days, and it is a massive opportunity. Climate is in its infancy, and it is a transformative opportunity, not only for the investment industry and as a result us as a provider to that industry, but for the economy more broadly. I think the world is early in that evolution and that journey, and so there will be massive opportunities. Just to provide some stats around where we stand on both those fronts. If we look at just ESG, there's about $355 million of total run rate we have just in ESG tools.
About $260 million of that is subscription, so subscription services that cut across all of our product lines. That $260 million of subscription run rate in just ESG is growing close to 30% per year. That's a big number growing at still a very healthy, attractive growth rate. If we look at climate, it's $79 million of run rate, of which about $56 million is subscription products. That $56 million is growing north of 80%. It's a smaller number growing at a much more compelling and as you can tell, much earlier in its lifecycle type growth rate for us.
We think there are so many dimensions of growth in climate that there's a long, many layers of growth that will continue that elevated growth rate for us for some time. Just to provide one more data point on the dimension where we are in that journey and help you to size where we stand. There's about call it $220 billion-$225 billion of assets. This is representative of kind of other parts of the investment industry, but $220 billion-$225 billion of assets in ETFs, equity ETFs linked to our ESG and climate indexes. That compares to about $1.3 trillion to all of the equity ETFs linked to our indexes.
It's still a relatively small part of the overall assets, and that compares to $7+ trillion in equity ETFs globally. It's still a small part of the market. By the way, that $220 billion is still the majority. We're capturing the majority of assets going into these ESG and climate ETFs. We see similar dynamics in the non-ETF passive market but also in the benchmarking market where institutions are adopting climate-aligned objectives and benchmarks or ESG-specific benchmarks, and we are in a leading position to capture those assets. We think, as I alluded to, that's a transformative move that will continue for some time, and we're in the strike zone there.
Turning to your index subscriptions business, which is your largest revenue line as you guys report. That business has grown 10% plus every year since 2014. While MSCI has seen particular strength in custom factor and ESG index subscriptions, even your market cap-weighted subscription revenue continues to grow high single digits or low double digits. Beyond pricing, what's driving the outsized growth in the bigger legacy market cap-weighted subscriptions business?
Yeah. It's been encouraging to us to be frank about it. Just to put a finer point on that, the market cap-weighted modules within that index subscription base, in the Q4 grew at 11% year-over-year. That is the more established content area for us within indexes, and it's been, as I alluded to, very encouraging. There are a number of dynamics at play.
If I were to summarize it at a high level and tie it back to my opening comments to describe the trends you're seeing in the investment industry, you're seeing a move within both institutional investment processes, but also within the wealth-driven investment process to more systematic, rules-based, personalized investment products or solutions or strategies. An index is a very efficient mechanism to reflect ultimately that customized, rules-based strategy.
To be able to do that, in a systematic fashion, you need to understand a few things. You need to understand the investment opportunity set, which is what our market cap modules provide. It's the total opportunity set of investable securities. You need a systematic way to think about dividing up that opportunity set across sectors, styles, sizes, geographies, ultimately things like factors and ESG.
Our modules provide that kind of toolkit, if you will, or the frameworks that investors need to be able to make a allocation decision or an overweight, underweight decision across all those dimensions. The drive and need for our index content is very rich across many different use cases.
I talked about institutions that are trying to develop these personalized objectives or outcomes, which not only drives the need for our market cap modules and content, but it's also driving the need for our non-market cap-weighted modules. If they're trying to put things like a climate overlay on it or a factor overlay or exclude certain thematic considerations or overweight other thematic considerations, all these are driven by the need for our index content.
You see this trend of personalization and rules-based strategies showing up within broker-dealers that are creating solutions for their institutional clients. They want our index content. You see it within wealth managers that are increasingly building model portfolios to put their own clients into. You see hedge funds that are increasingly wanting to trade in or arbitrage certain index tradable products out in the market. This pro-proliferation of indexation and use of indexes is creating enormous opportunities for us across a number of dimensions.
Great. I think we have time left for one more question. Private assets, you mentioned kind of one of your core strengths is your great relationships with endowments and the pensions and the other asset owners. Those clients of yours have been demanding a solution in the private asset space. Why has it taken so long to really kinda have the momentum in that business match the ostensible opportunity?
Yeah. Listen, it's to your question, it's something that has probably frustrated us a bit. The growth rate has not been where we want it to be within our private asset segment. Listen, it's not too shabby. It was 12% organic subscription run rate growth in the Q4. We do have a high teens target, which we think is definitely achievable within that segment.
I'd say there's a couple factors at play. You alluded to, the reason we got into providing solutions for private asset investing is because the L.P.s or the asset owners, our client base, are increasingly allocating larger portions of their portfolio to private assets, and they're paying oftentimes the majority of their fees to private asset managers. As a result, they are screaming for these tools to help them understand.
those basic needs of what is the opportunity set? What is the performance of the market? What is the value that a manager is delivering to me beyond just the market, beyond just leverage? Those are the tools we're trying to provide. However, because they are allocating more, the managers have not felt the pressure to disclose more information or be benchmarked.
Most of the large private asset managers can raise as much capital as they want or need, and they don't need to provide additional disclosure. There hasn't been that axe there to push the GPs or the asset managers in the private asset space to disclose more, or comply with things like benchmarks or certain other standards that the asset owners want. That is something that is gradually changing, and we think one of...
that axe could be things like ESG and climate, where you're seeing the private asset managers start to embrace it, but they're doing it on a more bespoke, selective basis. I think the asset owners are saying, "Listen, I've committed to certain climate objectives. I need you to disclose these things, or I need you to confirm that you don't have these exposures." That's a place where we can help drive some standardization. We think that will help accelerate things.
The other factor that I would highlight is we have been building the solution set. Today for us, our private asset solutions are mainly in real assets, in large part property, the property market or real estate. Until a year and a half ago when we acquired RCA, our coverage of the market and the data we had was only part of the market, mostly that core real estate market.
With the acquisition of RCA, we now have a formidable data set, the most formidable data set across the entire property market, including the values of properties, which allows us to develop these insights that we are looking to deliver. We now have a solution set we think that should be able to drive, you know, very attractive growth.
We're continuing to expand into other asset classes as well together with some of our partners and believe we are in a position to, in the not so distant future, get to those high teens growth rates and be really a leader in providing that insight and structure to the private asset investing process.
Great. Well, on that note, we are out of time. Thank you everybody for attending, and thank you, Andy.
Yeah. Thank you, Patrick.