All right, good morning. Thank you, everyone, for being here on a Friday morning. I'm David Smith. I'm the analyst covering the trust banks at Autonomous, and I'm delighted to be introducing the executive team here at State Street. State Street is one of just eight globally systemic banks in the U.S. and also one of the world's biggest asset managers. With me are Ron O'Hanley, CEO since 2019, and been at State Street for about a decade. He has a long tenure as a senior executive in asset management and financial services. Also CFO, Eric Aboaf, been with State Street 8 years, and he was previously CFO at another major bank and a host of other senior financial roles across the bank industry before that. So thank you both for being here.
Happy to be here.
Thanks, David. Just our traditional legal disclaimer, just to remind the audience that today's discussion may contain forward-looking statements and that actual results may differ materially from those statements due to a variety of important factors, including the risk factors in our Form 10-K and our other SEC filings. Our forward-looking statements speak only as of today, and we may not update them even if our views change.
Thanks, Eric. Ron, to kick things off, could you tell us a little bit about State Street, for those of the conference who may not be as familiar with the organization, and tell us a bit about how the company's evolved in recent years, and how you find that you're positioned strategically with everything that's going on in the industry?
Yeah, sure. David, thanks for hosting us here, and thank you all for being here. As David noted, we are one of the 8 G-SIFIs in the U.S. and 29 worldwide, but we look very little like any one of them. I start with that, we have a single client base. Our client base is large institutional investors, and that client base sits over all in everything that we do. In terms of just the, you know, the numbers here, as David noted, second-largest custodian in the world, fourth-largest asset manager in the world, largest bank-owned asset manager in the world, number one provider of FX services to asset managers, number three provider of agency securities lending.
So you can tell a little bit by that, that we are very focused on this, on this institutional asset management area. So the way I would think about how the business has evolved, and by the way, the evolution started well before Eric and myself, but we have absolutely propelled it. And if you think about that, that focus that I described, let me start with the services business. It's the largest business that we have. It is a, it started out as a traditional custody back office kind of business, fund servicing. A pivot was made by our predecessors, as it started out like most custodians, working with large pension funds and things like that. We made the...
State Street made the pivot, really starting in the 1990s and 2000s towards the asset managers. And it wasn't to exclude the asset owners, but recognizing that where the real activity was asset managers. And so that business has grown really commensurate with asset managers. What we have done is, while continuing to serve those various segments, really expanding the definition of what we were doing. I think if you look back even as recently as five, seven years ago, our business was really around providing products, back office products to the asset management and asset owner space. Now it's really a true services and software business. That started in earnest, when we launched our Alpha product, which was a front to back.
Let's serve the investor from pre-trade through, right through trade, the actual construction of portfolios, and to the reporting of what they do. We acquired Charles River then as part of that, to enable us to really be not just relevant in the front office, but to establish the leading position. But where we moved ahead and distinguished ourselves from the other asset services was knitting that all together and providing a front to back kind of solution. Why is that important? I mean, the obvious one is that there's, we just have more to offer that client base. But more importantly, we're now a services and software provider, we really are an enterprise outsourcer to these investors.
As they think about what do they want to keep inside versus what do they want to put outside, we've become their essential partner in terms of how they think about their operational stack and their technology stack. In software, which I'm sure we'll talk about more in this conversation, has become a very, very major part of our business. Last year, it was nearly $600 million in revenues. In the asset management side of the business, State Street Global Advisors has always had a focus on index and systematic exposures. That's been the right place to be now for a long time. We've launched the first ETF back 30 years ago.
This is the 2024 is the 30th anniversary of the launch of the ETF, and we've grown since then. Our focus initially had been on institutions who were the initial buyers, and, and we by far are the leading provider to, to institutions there. But that, that vehicle has really become, and is becoming the investment vehicle of choice worldwide. It started out in the U.S., largely because, it had some peculiar tax advantages. Those tax advantages don't exist outside the U.S., but the other elements of the, of the vehicle are, are quite important. The most important one being that in, in times of stress or times of illiquidity, there's the ability in an ETF, which there isn't in an open-ended mutual fund, to just say, "You're going to get...
Actually, if you want to redeem, you're going to get a slice of the fund... as opposed to just taking all the liquidity out of the home. So it's been a great vehicle in which to put fixed income in. It's also a great vehicle for the wealth business, because increasingly, as whether you're a large wirehouse or you're a small RIA, if you want to think about what's the freedom you want to give the, the individuals that are actually making the choice for the clients, ETFs become a very good vehicle to do that. They're low cost, they're identified by the end user client base as being low cost. And then finally, on the, we are still a bank. And that gives us some advantages, and obviously puts us in a regulatory spot that has some advantages and disadvantages.
We can talk about that later if you want to. But the point being is, we deploy our balance sheet at a very, I think, capital light and shareholder-friendly way. We don't need to, and don't take on a lot of credit exposure, and the deposits that we gather typically are related to these activities that I've just described to you, particularly asset servicing. So what we do on the balance sheet is really to support the businesses like foreign exchange, and securities lending, and then do some targeted credit extension related to our client base. One example of that would be private equity capital call lending, where it's important to our clients.
We know these businesses well, we know the clients well, and hence you see that, through kind of all sorts of credit cycles, we typically aren't exposed to that. So that's the way the business has pivoted over the last five years.
Thanks, Ron. Just thinking about all those businesses, do you think the combination of an asset servicer and investment manager creates any strategic advantages for State Street? And can you talk about the shared customer bases and any benefits State Street and its clients get from having these businesses sit together?
You know, there's a lot of advantages. I mean, surely the businesses could exist on their own. I mean, as the fourth largest asset manager, of course, SSGA could sit on its own. But you started with where I would start, which is the shared client base. That's actually less important in the U.S. That's really important outside the U.S. The U.S. has grown up over the last 30 years of seeing asset management businesses being quite separate and distinct from the banking business. That's really not the case in the rest of the world, and in fact, in many parts of the world, the fact that an asset manager is bank-owned and has, if you will, the umbrella and safety and soundness of a bank, is an advantage. So that would be the starting point.
But, but more importantly, if, if you think about us owning the fourth largest asset manager, has really helped us understand what is our largest client segment, which is asset managers. In fact, when I talked about that pivot that we made starting in 2018, in terms of let's become the enterprise outsourcer, much of that was informed by what I saw when I got to SSGA and my experience at other asset managers. I mean, asset management started out as a business that was quite simple. You had a product, you went after a few institutions, so the real investment was in portfolio management, portfolio construction. You might have had a salesperson or two. It's become highly complex, multi-channel, multi-geography, multi-product, multi-vehicle.
That has led to a lot of complexity, which we as we were designing this Alpha front-to-back product, who did we design it with early on was SSGA. Thirdly, there are some very real revenue synergies that come out of it. So for example, in securities lending, we're a large securities lender, I just talked about that. At SSGA, we're also one of the largest cash managers in the world, so the securities lending cash collateral, it's managed in a highly professional way by SSGA. So, there’s a series of those kinds of things that we think provide the kind of synergies. Having said that, we think there's also opportunity to do more.
So for example, there's a little bit of a return to the past, and that if you go back 30 years, 40 years, 50 years ago, much of so-called asset management was done by trust banks that were providing custody services and asset management. What we're finding now is that there are some opportunities where we can either provide those in conjunction with each, with each other, or provide a way in which we can give a pricing advantage to our clients if we, in fact, are getting the entire share of wallet, both the asset servicing side and a good chunk of the asset management side. And we think there's more that we can do in that regard.
David, I'd just add that, it also gives us a way to, serve our clients through a cycle, right? So, you know, interest rates continue to be on everyone's minds, but if you think about how we go to market, we, we want to be, where our clients are with their cash, as an example, not just their investments and servicing and their funds. And so with an asset manager, we can offer a range of services, right? As a bank, we offer, you know, cash on deposits of various, forms. We, offer repo activity for, for excess cash. We can offer money market sweeps, right? Really, our platform, which is multi-dealer, or directly through our asset management arm.
We found increasingly that facing off against clients with that array is actually something that draws them in to the broader franchise and helps them connect with us and realize we'll be there through different cycles and different needs that they have.
... Thanks, Eric. I think that's a great segue to, you know, shift from talking about the company to the environment that we're in. You know, Ron, we're obviously in a very dynamic operating environment in the past few years. What are your thoughts on the current macro environment as we look ahead? Then, I guess, on that note, is there an ideal macro environment that you see for State Street across rates, inflation, equity markets, FX volatility, or any other aspects that you'd highlight with regard to that?
Well, let me start a little bit with the second part of that, of the question, David, because the advantage we believe of this model that we have here is that it's highly resilient, and I mean, I'd describe it almost as all weather. We are not subject, for example, to credit cycles. And if you think not just back over the last couple of years, but think back over the last, you know, decade and a half, there have been lots of extremes that have hit the banking industry that simply haven't hit State Street.
You go back to the end of the, you know, to the, the post-2008 fallout and the all the credit activities and credit cycle that we saw then, it just didn't hit us in that. If you think about, you know, the year past, you know, what have we seen, right? We've seen a global pandemic, we've seen war breakout, we've seen rapidly rising interest rates, we've seen inflation. And through that, this model has actually chugged along, which I think is quite important as you think about that. Because the many financial services firms, particularly banks, much of what they have to manage through is not within their control. Certainly, we have things that aren't in our control, and I'll come back to what the ideal is.
But we have lots of levers that are inside that we can manage ourselves to get through these kinds of things. So coming to the current environment, you know, we are in this mode of persistent inflation. I mean, saw the numbers this morning, and it's looking a little better, but we've seen lots of volatility around that. So, you know, we have a view that interest rates will... We're not likely to see cuts in the near term, that the Fed, or at least my personal view, would be that if the Fed has a bias, it's going to be to not cut in the near term because I don't think they want to mistake in that.
At the same time, we're also in an environment where we might see, in fact, not the coordination that you've seen across across central banks, but it's highly likely that you'll see rate cuts coming sooner or faster elsewhere, simply because the U.S. economy, one, is performing much better, and two, disinflation is occurring at a more steady rate outside the U.S. than it is in. So what does that mean for us in terms of the environment? I mean, I think we're actually approaching an environment that could be actually the ideal. Obviously, like any other bank, we'd like a little rate. So having rate, particularly on the short term, is good for us. We'd like to see a situation where there's a positively sloping yield curve, for obvious reasons.
Again, we're not as subject to that as most others are, but much of our deposit base is actually quite persistent and quite core. So to be able to do a little bit there with some positive rate. And then maybe most importantly, it's really the investment environment that's important to us. And it's not so much that you need to see rapidly rising equity markets, but what you need, what we'd like to see is an environment in which investors are active. You saw an environment through really much of 2022 and 2023, where investors were on the sidelines. Now, to Eric's point, we benefited from that because all that money flowing into cash helped us both in money market funds and in deposits.
But for the core business, we'd actually like to see investment activity, and usually that's really a function of our investors willing to put money to work. Last thing that I would say is, we are a global firm. Our revenue base now is roughly 60/40 U.S., non-U.S. It actually was closer to 55/45, the strength of the dollar has actually changed that. But the point being is, to the extent to which there's investment activity outside the U.S., whether it's Europe, Asia, Pacific, and emerging markets in particular, that also is very beneficial to us, just because we're active, we service those markets, and the fee rates tend to be a little higher there.
In your conversations with clients, what do you think they need to see to, you know, be more willing to get more active and come off the sidelines in earnest?
I think some kind of a view, an accepted view on where inflation and where rates are going. I think that, I mean, we've all seen what's happened over the past six to nine months. You got to the end of December, well, go a year ago, the rates were still rising, and the view was that there was no end in sight. You go to November, December, and the view was that, rate cuts were imminent, and there were going to be many, and in fact, the Fed signaled three, so let's call it six. And obviously, those beliefs have been shattered. So I think a view that we're in a stabilized form, it almost doesn't matter where it stabilizes.
I mean, obviously, there's a preferred spot for it to stabilize, but to the extent to which it's stabilized, because investors then can make decisions.
Right.
Where investors have a hard time, and whether it's the retail investor or the institutional investor, if you're not sure, you stay on the sidelines, you have more cash....
So Eric, shifting, you know, gears from the environment now to, you know, the more direct impacts on your balance sheet. Obviously, there's a lot of moving parts in the economic backdrop, as Ron just mentioned, but I think in some ways for you, particularly on the balance sheet, the most impactful is the Fed's recent decision to start tapering down quantitative tightening and slow the shrinkage in its balance sheet, which I think is scheduled to actually start tomorrow as we get into June.
Can you talk to us about the impact that you see, the wind down of QT driving on your balance sheet in terms of mix, size, and also beyond the balance sheet, any, any, you know, impacts that you see in the rest of the business?
Sure, David, and I'd start with how we face off against clients, because we need to operate through a range of different cycles and Fed actions. And so I go back to a little bit of where I started, which is over the last five years, we've really sharpened our ability and our client executive team's ability and capabilities to actually talk not only as a servicing provider or asset management providers or software providers for the front office, but also as bankers, right? How to help a client with their cascade of cash that they have in various forms, sometimes in funds, sometimes to support their own activities. And so we started there, and over time, have developed a view that we should be there for our clients.
In particular, when they need a flight to safety, we're there because we're a trust and custody bank, and that's kind of our heritage. And then when they do need to shift weight around pools, we wanna be there because it helps us solidify the relationship. And with that, you know, we bring the range of products I mentioned, right? Everything from sweeps to repo to we'll do fixed income rolls , you know, in treasuries, if that's what they're interested in, or take cash on deposits. I think the Fed actions are evolving here, as you described. In some ways, they had signaled and executed the accelerated, you know, pace of quantitative tightening over the last year and a half. I'd say if you look below the surface, it was actually partial tightening and partial loosening. And why do I say that?
It's because what the Fed effectively did was begin to bring down the size of their balance sheet, right? Which is a tightening action. But at the same time, they took down the size of their overnight reverse repo operation, which started at $ several trillion, right? And now it's $0.5 trillion. And that's an easing operation. And in fact, it's an easing operation that is most focused on our client base, the institutional investor, the institutional asset manager. And so those have created some offsetting effects.
And so that's why you've seen us actually, not only because of our posture with clients on deposits, but you've seen us actually add to our deposit base over the last, you know, 3, 6, 9 months, because clients have turned to us instead of doing repo at the Fed, right, with their excess cash. Going forward, as you say, you know, that'll continue. Seems like they're gonna continue to wind down the overnight repo operation. They don't want to be in the repo business. I think they prefer to leave that to banks and financial intermediaries. You know, they're slowing down on their tightening activities, and I think we'll have to see how long that goes on for. You know, it's not as significant as it was before.
I think the follow-on question is, when are they gonna slow down and pause? Because, you know, just like the Fed has to be careful of the rails they've hit in the past, oh, they all remember, you know, September of 2019, where they actually reduced the size of their balance sheet too much, and the money market, the money markets weren't operating as efficiently and smoothly as they'd like. So I think we're in a period of slowing tightening, and probably slowing tightening and pausing on tightening at some point. Either which way, it's not of the size that dramatically changes our deposit base at this point. I think our deposit base is quite comfortable. We like it that way because we're liquidity rich.
We could use that to lend for our clients, as Ron mentioned. And the mix shifts in deposits have largely worked through, you know, our system. 80%-90% of the shift in deposits across the different tiers of, you know, we've experienced, and, you know, that'll settle down in the second half of this year. And then our expectation is as the business continues to grow, we drive more custodial activity, Alpha sales continue, et cetera. That'll bring more assets under administration, and with that, there's a natural addition to deposits over time, which then creates another source of revenue growth for us.
I'd just add one thing on this, quantitative tightening. This is unknown territory for anybody in terms of how to actually do this. And the Fed's balance sheet, to oversimplify, right, it's got a bunch of treasuries, it's got a bunch of mortgage backs. The mortgage backs aren't rolling off for all the reasons that we know, because mortgages aren't being refinanced, so those securities are staying on their balance sheet for much longer. I suspect, I don't know, but I think part of the calculus here is, what's the percentage of mortgage backed versus Treasury, say, one on the balance sheet? And secondly, when treasury markets start to back up in any way, that creates lots of issues.
If you think about, you know, what could actually trigger a really bad event, it's some kind of a treasury market backup. With, you know, the size of of the deficit, the amount of treasuries that need to be issued, I think this is part of their calculus too, is that they don't want to be the ones to be disrupting the treasury market.
Sure. That all makes sense.
... Oh, and I should also mention, we are taking questions via the Pigeonhole app. So hopefully you all have access to that, and anything that comes up, feel free to type in a question. So now let's talk about the individual businesses a bit. The trust and custody business as an industry has seen a fair bit of pricing pressure for some time now. Can you talk about how State Street Alpha deepens your client relationships and creates a stickier product offering that helps you shift competition on other fronts besides just price?
Talk about what progress has been like so far there, and how do you think about the potential for this to accelerate as, you know, these new offerings become better tested and, you know, your process becomes more fine-tuned as you onboard more clients?
Yeah, I'll begin on this. So when we launched the Alpha product, the thought was that we would focus on our existing client base. We had this, and still have, the leading position amongst asset managers. We knew exactly what was going on with these firms because we understand them well. And the thought was, okay, we've now got an additional array of services that we can offer through Charles River, the pre-trade, trade, and post-trade for our middle-office business, which is by far the largest outsourcer of investment operations for investment managers. We had all that, and this was an ability for investment managers to actually variabilize a fixed cost and also basically future-proof their operations.
What we found was that it was equally appealing to non-clients, in the sense that clients came to us, or they weren't clients at the time, but institutions came to us and said: "We wanna understand what you can do for us." And that's been very powerful because, one, the conversation begins right at the top of the house, typically the CEO and the Chief Operating Officer of these firms. Secondly, it was a way for us to say, "You know, we can help you here. The offering actually works better, though, if we have not just the front and the middle, but also the back office." So it's been a way to move custody and shift share from competitors to us. And I think the numbers bear it out.
We had seven new Alpha wins last year. We've said over the last couple of years that to meet our growth targets, we need six to eight, so that's right in the middle there. We've got a fair amount that we need to onboard, which we will onboard. But the point about this is that price competition is still out there, but it's just a different conversation when you're doing everything or multiple things for the client in terms of how that works. It's not just a you know, lowest price wins. Secondly, there's virtually nobody that can do what we do from a front-to-back basis, so it's a different conversation.
Then thirdly, and maybe most importantly, these are much longer term, much longer term contracts than typical back office. The typical back office contract is a 3-year contract. The typical kind of Alpha contract that we're doing now is a 10-year contract. So it's much steadier, it's much more predictable. And it, because we are so involved with our client, again, from their pre-trade activities right to the end, we truly are an essential partner to them.
Eric, staying on the topic of new business and pipeline, you had almost $0.5 trillion of AUC and AUA wins last quarter, and I think there was a backlog of $2.6 trillion to be installed as of March, almost $300 million of servicing fee revenue wins that are yet to be installed. How should we think about the way these wins are going to flow through the P&L in the coming quarters? It does seem like a nice tailwind.
Yeah, David, and you know, the background on this is that we've been accelerating our sales efforts the last couple of years, both in terms of AUCA and in particular in servicing. You know, we describe this past year, we were up at about $300 million of sales, servicing fee sales. This year we've set a target for $350 million-$400 million, and that's up, you know, comfortably from where we were two years ago. And so we're accelerating that while continuing, as Ron described, to focus on retention, which is increasingly strong, you know, with our Alpha proposition. And then, you know, developing obviously the continued array of products to drive that.
In terms of installations, you know, it's a large AUCA backlog, the 2.6 trillion that you, you quote. You know, we expect that, that'll. We'll have about 40%-50% of that come through this year and the rest the subsequent year. And then on the revenue backlog, which is even more important because it's revenues, not just volumes that count, you know, we've got almost a $300 million servicing fee backlog, and we actually expect about a third of that to come in this year after already you know, implementing a nice chunk in the first quarter. So it'll create a nice pickup. But over time, we'd like to implement even more of that and more quickly as we continue to build the sales throughput.
As we think about this shifting your business mix and winning more, you know, full front to back office relationships, does that change the timeline for implementing business as you win it at all?
It does, and I think we've been through phases here. You know, early on when we had developed that, that first front-to-back offering in 2019, 2020, we had two development partners really to sharpen the offering to modularize it over time across different fixed income, equity, and other investment areas. And so over the last year and a half, we've really spent time accelerating the process of implementation as we've modularized it and sharpened the components, and clear with clients about what it is they need to do to implement, because it's not only us that we need to install, they need to actually implement and connect it to their own systems.
And then at the same time, as we've done that, we've also shifted some of our sales and client development focus, not just on front to back, which was a, you know, open architecture as well as a full suite, but to make sure that the back office custody comes through early and often as part of those sales. Because that- those back office custody sales and offerings, they can be implemented in 3, 6, 9 months, which would then accelerate our, you know, our revenue realization. And so both the full front to back is being accelerated, and then the mix, I think, is gonna help us as well.
Yeah, this last point that Eric's making is really important, and this has been part of our learning, too. When a client comes to us and is asking us to outsource to take on their operation, I mean, we understand this. We're by far the largest in that business, but nonetheless, you know, we may do it 10, 15 times a year. They're gonna do it once in the lifetime of their firm. And this decision to go from inside to outside is a very big one, and it takes time to do that. We build a lot of the engineering in the sales process, but nonetheless, when the implementation comes, it's, you know, a little bit like letting go of one of your children. It's just not something that you do easily.
And there's also a tendency to say, "Well, I really, yeah, I really wanna get rid of this, but I want it to be exactly like it was before." Well, if you want it exactly like it was before, why are you coming to us? Now, obviously, that's not the way we talk to our clients, but there is that process that needs to take place. On the other hand, back office, in terms of custody and fund servicing, this is really easy to move over. So what we've learned over this process is that we need to move that first, right? It helps us from a revenue perspective. It also helps us... A lot of what we do now is data, data services and data management.
So, we can—while we're doing this engineering for them in terms of outsourcing their operation, we've got the back office in place that enables us to get the data models in place. So it lowers the elapsed time of the overall outsource and implementation, but it also changes the revenue picture for us. I mean, if you think about it from their perspective, they're indifferent, right? There's going to be a fee paid to a custodian and fund servicer, and whether it's us or somebody else, they're indifferent to us. So to move that over fast, we know how to move it over fast, helps in terms of the timing of revenue recognition.
That makes sense. Talking about from a client standpoint, one of the fastest growing areas of your business is private markets. Historically, private markets have been more fragmented, less standardized. Can you talk about the opportunity this creates for State Street? Do private markets provide another avenue to deepen relationships with your existing clients? I know you mentioned, you know, capital call lending earlier, for example, or does it open up, you know, a whole new range of potential partners for State Street?
Yeah, let me start. It's some of both, actually. It's an area that we're extremely excited about. You know, as you said, it's fragmented, it's heavily influenced, much like, you know, mutual fund accounting was, you know, 10, 20 years ago when, or, you know, when we had the birth of ETF. It's, it's at that stage of, of evolution, and it's also one where we've been in the business for 20 years. We had done some of the earliest lift outs on real estate, private real estate, servicing, some of the, private equity and, private credit servicing, BDC servicing. Just think about the range. There's a broad range of products. And then, as you've described, there's a broad range of clients that we serve today and can serve in the future, right?
There's the standalone alternative providers, right, who tend to have insourced, and so they're starting to look: How do I, how do I, refocus on what I really do, which is Alpha generation and not operations? There's the multi-line players. Some of them are $0.5 trillion, some of them are several trillion, some of them are $8 trillion or $9 trillion, and they are built to having active funds, passive funds, and alternatives. So we're serving those. And then there are asset owners, right, who in a way, have always been the leaders of alternatives with, you know, 35%-40% of their investments in that category. So there's a wide breadth of clients. It's an industry... The servicing industry for privates is large, and in our minds, growing quickly and could be a very, very big business for us.
Maybe to, you know, put some characterization on that, right now, it's 8%-9% of our servicing fees, so it's, you know, $400 million-$500 million of revenues. That industry is growing 10%, but just because of our anchor position in that, you know, we've committed to growing that at least 15% this year, and we'll continue to accelerate past that as we reinvest in business. And really, as we look out, we think this could be a billion-dollar fee business for us over the next 4 years-5 years, and really be one of the engines of growth for our franchise, and one that spans a broad set of our client base and draws them in even deeper into our ecosystem.
Yes. Again, to add to what Eric said, the private markets business is in spot today that the long-only business was in 40 years ago. If you think about the advent of the asset management business, again, it was very institutional, one product, very fragmented, serving institutions. The tickets were large, and it was a pretty simple business. And what happened? I mean, it was the rise of the retail investor, it was the rise of direct to the retail investor through the Fidelities of the world, the rise of the DC market, and you had what became a very complicated operation and technology to support that. If you think about what's happening in privates, there's still a lot of boutiques, and there will be a lot of boutiques.
But if you think about where the growth is occurring, it's in these large multi-asset class privates managers. And it's not just the different asset classes, but it's the fact that it's not just large tickets to big institutions, but increasingly, where much of the growth is, is in the high net worth and absolute. And so some of these large—I mean, you've heard some of these large PE and private firms talk, that 10 years ago, the average ticket size was $100 million. Today, the average ticket size is $100,000, right? Because they're working through the wirehouses and things like that. That adds a lot of operational complexity to these firms, and it's just really where they want to be spending their money. It's also a business that, in an industry that doesn't have standards.
The investors, end user investors, particularly the asset owners, are crying out for standards. But they don't actually want to have a set of documents for an identical product that looks very different from firm to firm to firm. So we think it's a place where, given what we do and given our track record, that we can actually provide that standardization, we can provide that operational scale, and so we see future of this business being very, very bright. I think what you'll also see is an ongoing blurring of the line between private and public markets. You'll see products that combine both. Those will be good for investors, but again, they're complex to do, and they need the kind of operational and technology intensity that a firm like ours brings.
Maybe we've got a good segue before we go in and talk about your asset management business. We have an audience question. A lot of traditional asset managers are now making inroads into alternatives, given, you know, the growth opportunities there, also, you know, typically higher fee rates. Is that something that you see as interesting for State Street in some capacity down the line?
Is the question on the servicing side or the asset management side? I think on the servicing side, it's really what we just talked about.
Yeah, yeah. I think this is more on the, on the asset management side, is that-
Yeah. Yeah, so it's a really good question, because if you think about our asset management business, what are its characteristics? One, it's very institutionally driven. That's at the roots of SSGA. And when you're the index or systematic provider to an institution, typically, you're their number one or number two manager. So there is a seat at the table that occurs. Our client relationships are global, and they're tight. So the ability to bring more products to our clients is actually very, very high. Secondly, I talked earlier, the rise in global acceptance of the ETF and the increasing ability through engineering to actually put some non-standard kinds of assets into it. So think about bank loans. We, in conjunction with Blackstone, have the largest bank loan fund out there.
And we've been able to engineer that and put that out in an ETF. So I think we do see lots of opportunity there. The question for us will be: To what extent we manage it ourselves? To what extent we actually partner with others? In both cases, we make money, but there's certainly we will continue to look for areas where we are or mostly organically, right, where we can bring on a team, create a team, and to do things that are complementary to us. And maybe I'll finish with the point I made in the answer to the last question. That there's an incredible line between privates and publics, which we think is good for investors.
I mean, if you think about fixed income, traditional fixed income has the advantage of providing liquidity. But if you are an investor that actually, your liabilities or your horizon are long term, you have the ability to, basically sit and be patient and to get and take advantage of the illiquidity premium. So we actually see, if you want to call it multi-asset kinds of products that can provide the best of both private and public, and that's something we see ourselves being very well positioned to do.
Interesting. I guess as we're coming up on time, just turning to expense management briefly, does it take an increased focus in this kind of revenue environment? You know, you've got NII forecast to be down this year. How do you balance achieving positive operating leverage in any given year versus making investments where you see clear benefit, but it might only manifest over a multi-year time horizon?
Yeah, David, let me just put it this way. We want and need to continue to drive productivity on an ongoing basis to actually then reinvest even more substantially in our businesses from a feature functionality standpoint, and then to drive more revenue growth. So they're all connected together. That's the business model that we're at. And we really started our work on productivity within five years ago. I think the first year, you know, expenses actually came down, net. That's after additional investments, right? The second year, they were relatively flat. Now we've been in this band, a very low single-digit expense growth. Why? Because we've continued the productivity focus.
We're focused on this year, saving $600 million of expenses through a variety of different means, and then reinvesting $500 million of that into a set of growth activities. Some of the discussion we've had around Alpha and the front-to-back offering requires technology and connectivity. Private markets, rebuilding and deepening that software stack, right? Onboarding new clients brings a set of investments that we need, and core custody as well. Every one of those requires reinvestments. And our view is the way we run the company is to fund those reinvestments each year with more and more productivity. In fact, this year, we've taken our productivity efforts up by more than 60% higher than they were last year. Why? Because we wanted to invest more industriously.
And you'll see us continue to do that. In a way, we've turned, you know, what might have been a one-time effort on productivity into a, an ongoing cultural change. You know, we used to be asked, "Well, are you gonna do it again next year?" We don't ask that question anymore. We don't talk about it that way. When we do budgets on expenses, we do budgets on expenses with, in a way I describe as the proper way. You think about what are some of your inflationary and merit headwinds? What's the size of the investments that you want to make and where? And then how do I fund that through a set of, you know, hundreds or, you know, $500 million amounts of productivity each year?
So we'll continue to do that, and that'll be a range of initiatives. We've gone through a number of them over the years. More recently, we're consolidating some of our joint venture operations in India. That's a whole catalyst for a new set of opportunities. First, we take margin out that we used to pay the joint venture partners, and then now we can simplify operations end-to-end in a way that we hadn't been able to do before, reduce handoffs, automate, and so on and so forth. So there's a real ongoing opportunity, but it's all to drive the investment and in both sides of the business.
Great. To close things out, Ron, you've been leading the company for just over five years at this point. What's the biggest point of change since you took over in 2019? Then thinking ahead, what's your best guess of what will change the most at State Street five years out, and how is that informing the strategy that you're setting for the company today?
Yeah, so I've talked about some of this in terms of, you know, 5 years, 5.5 years ago, when Eric and I more or less started together, and we set an ambitious agenda. Much of it was focused on repositioning the core businesses. I've talked about what we did in asset servicing in terms of moving it from being just a back office provider to being the real essential partner, enterprise outsourcer, driven by software and services. In the asset management business, there was real issues that we needed to deal with on margin. We've done that, and we've taken advantage of those great assets that we do have, the systematic and indexing, plus the ETF franchise. We were underinvested at the time in the low-cost funds.
We are an institutional house with an institutional heritage. The ETF business started out as an institutional business, and like I said, we are, we are the major player of serving institutions, but we also launched a line now of low-cost ETFs. And you might say, "Well, why would you do that?" Institutions want liquidity, and the difference between nine basis points and three basis points, they don't care. They're looking for the best liquidity, sharp, narrower spreads, so they're going to pay the nine basis points. On the other hand, if the end user is a retail investor, they actually do care about that, and they actually don't care about the liquidity, right? Because they're not trading this day to day. They're not worrying about putting on a perfect hedge or anything like that.
So, that coupled with the investments that we've made in areas like private markets and this transformation that Eric talked about, because it's, it's not just about the cost reduction, and the cost reduction was important. Think about the first part of the last 5 years; we went at what was called low-hanging fruit. Where we're at now is fundamentally reengineering our businesses right through our end-to-end processes, through the injection of a lot of automation. Everybody now talks about AI. We've had an effort on deep learning now going on almost 10 years, and that's played out in what we do in terms of how we think about the basics of cutting NAVs, right? Machines do that now, not humans.
So as we look forward, it's building on that base, and there's a couple of areas that I would focus on. One is, software will continue to become a bigger and bigger part of our business. Charles River is the core of that, but there's other... If you think about what we're offering our clients, there's other software that we can provide, whether we build it out through Charles River or we built it out organically elsewhere. We've got, like I said, nearly a $600 million business. If things go right and go according to what we're trying to do in terms of adding capabilities there, that's another billion-dollar business. Private markets, we've talked about the fundamentals of that.
And again, it's playing out exactly how the asset management business played out 40 years ago, and so it will need the kinds of things that we can provide. So as Eric noted, again, getting that to a billion-dollar business, it doesn't take a broad leap of faith. On Global Advisors, what we talked about earlier, this mix of public and private, and really thinking about, for example, what is the role of bonds in a portfolio? And from an asset allocation perspective, how do we think about putting those portfolios together? We see that as more growth opportunity for GA. In terms of the markets business, we've done a really good job of being able to enable our clients to trade with us in the way they wanna trade.
You go back 10, 15 years ago, you wanted to do something, FX was on the phone, but, you know, the classic kind of thing that we all see in the movies now. There's 6 ways now that our clients can trade with us, some of that in an automated way, and to be able to continue to do that should enable us to, to build share there. Lastly, new areas, for us, or newer areas. The wealth business, and the wealth services business is still a cottage industry. Much of the services that are being provided to wealth managers are little applications. They're good, but they're small companies providing targeted applications.
As we go from an environment where it was a single fund, so build it once for many, it's this—we move towards this mass customization, the rise of the SMA. At the same time, you've got on the distribution side, you've got a highly fragmented distribution. Even if you happen to own that distribution force, you know, if you're an insurance company, you might have 8,000 brokers that are doing different kinds of things, and how do you control them? That's going to lend itself to a lot more technology and operations, and doing that at scale than we see now. We're already in that business through Charles River.
We have a wealth offering, so some of the country's largest private banks, they have that on their desktop, and we see the ability, again, in this case, we're starting from the front, to go to the middle and the back through that. So for us, the five years from now, I think we'd still be saying when we're sitting here, that we service the investor, but I think servicing more investors in more geographies, I think the 60/40 split will largely go to 50/50. Because if you think about where the growth is, I mean, investment economies tend to grow at a multiple of underlying economies. And as economies move from saving economies to investing economies, that is the area that benefits the kinds of things we do in investment management and in asset servicing.
We're really excited about where we are now. We're excited about where the world is going, and we think we're well positioned to take advantage of it.
All right. Well, Ron, Eric, thank you so much for joining us today.
Thank you. Thanks very much.