Cohen & Steers Inc (CNS) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, January 24, 2019.

I would now like to turn the conference over to Brian Heller, Senior Vice President and Corporate Counsel of Cohen & Steers. Please go ahead.

Thank you, and welcome to the Cohen & Steers Fourth Quarter and Full Year 2018 Earnings Conference Call. Joining me are our Chief Executive Officer, Bob Steers; our President, Joe Harvey; and our Chief Financial Officer, Matt Stadler. I want to remind you that some of our comments and answers to your questions may include forward-looking statements. We believe these statements are reasonable, based on information currently available to us. But actual outcomes could differ materially due to a number of factors including those described in our most recent annual report on Form 10-K and other SEC filings.

We assume no duty to update any forward-looking statement. Also, our presentation contains non-GAAP financial measures that we believe are meaningful in evaluating our performance. These non-GAAP financial measures should be read in conjunction with our GAAP results. A reconciliation of these non-GAAP financial measures is included in the earnings release and presentation. The earnings release and presentation as well as links to our SEC filings are available in the Investor Relations section of our website at www.cohenandsteers.com.

With that, I'll turn the call over to Matt.

Thank you, Brian. Good morning, everyone, and thanks for joining us. My remarks this morning will focus on our as-adjusted results. A reconciliation of GAAP to as-adjusted results can be found on Pages 19 and 20 of the earnings release or on Slides 16 and 17 of the earnings presentation.

Yesterday, we reported earnings of $0.56 per share compared with $0.55 in the prior year's quarter and $0.64 sequentially. Revenue was $93.6 million for the quarter compared with $99.3 million in the prior year's quarter and $98.2 million sequentially. The decrease in revenue from the third quarter was primarily attributable to lower average assets under management. Average assets under management were $57.6 billion compared with $62 billion in the prior year's quarter and $60.4 billion sequentially.

Operating income was $34.5 million in the quarter compared with $41.2 million in the prior year's quarter and $39.4 million sequentially.

Our operating margin decreased to 36.8% from 40.2% last quarter, primarily due to higher compensation and benefits and G&A when compared to revenue. Expenses increased less than 1% on a sequential basis, primarily due to higher compensation and benefits and G&A, partially offset by lower distribution and service fees. The compensation to revenue ratio for the fourth quarter was 36.85%, which is higher than the guidance we previously provided of 33.75%. The increase in the ratio was primarily due to lower-than-forecasted revenue combined with accrued severance costs. For the year, the compensation to revenue ratio was 34.51%.

The increase in G&A was primarily due to higher professional fees, travel and entertainment expenses and sponsored and hosted conferences. We did not incur previously anticipated revenue sharing and sub-TA fees on retirement accounts at one of our intermediaries. The decrease in distribution and service fee expense was primarily due to the reversal of these accrued fees during the fourth quarter as well as decreased expenses associated with lower average assets under management in U.S. open-end funds. Our effective tax rate for the quarter was 25.25% consistent with our prior guidance.

Page 15 of the earnings presentation displays our cash, corporate investments in U.S. treasuries and seed investments for the current and trailing 4 quarters.

Our firm liquidity totaled $213 million compared with $291 million last quarter, and stockholders' equity was $223 million compared with $324 million at September 30. The amount of firm liquidity and stockholders' equity as of December 31 reflects the payment of a special cash dividend in December of approximately $117 million or $2.50 per share. Over the past 9 years, we have paid $11 per share in special dividends. We remain debt free.

Assets under management totaled $54.8 billion at December 31, a decrease of $5.3 billion or 9% from September 30. The decrease was driven by market depreciation of $3.2 billion, net outflows of $1.2 billion and distributions of $842 million. Sub-advised portfolios in Japan had net outflows of $304 million in the quarter compared with $314 million in the third quarter. Outflows decelerated in the fourth quarter when compared to August and September, the 2 months immediately following the last distribution rate cut.

Total distributions on these portfolios totaled $363 million compared with $433 million last quarter. Sub-advised accounts excluding Japan had net outflows of $185 million, primarily from client rebalancing out of global real estate, U.S. real estate and global listed infrastructure portfolios.

Advised accounts had net inflows of $300 million during the quarter, primarily from inflows into preferred and global real estate portfolios, partially offset by outflows from international real estate portfolios due to client rebalancing. Bob Steers will provide an update on our institutional pipeline and new business activity.

Open-end funds had net outflows of $1 billion during the quarter, as the market decline triggered tax loss selling and retail investor redemptions.

Distributions, which included the payment of year-end capital gains, totaled $351 million, $251 million of which were reinvested.

Looking ahead, although we remain confident in our pipeline, positioning and opportunities, we recognize we are in a challenging revenue environment resulting from lower assets under management going into 2019. I will briefly discuss some of the steps we are taking to manage our expense base.

We believe that our current headcount, which includes a number of strategic hires made over the past few years provides us with meaningful operating leverage. So we are taking a deliberate and measured approach to new and replacement hires. Although we believe this approach will control headcount growth, lower assets under management resulting from the fourth quarter market decline combined with the full year impact of 2018 new hires will result in an expected compensation to revenue ratio of approximately 35.75% in 2019.

We are actively reviewing all controllable expenses and are committed to reducing our nonclient-related costs. We are focused on interoffice travel, application licenses, market data services and professional fees among other items. We believe these efforts will allow us to hold the line on overall costs, if not reduce them. As a result, we project G&A for 2019 will be in line with the $46 million we recorded in 2018, but with a downward bias.

And finally, we expect that our effective tax rate will remain at 25.25% in 2019. Now I'd like to turn the call over to our President, Joe Harvey, who will provide commentary on our investment performance.

Thank you, Matt, and good morning, everyone. I'm going to discuss our investment performance and then summarize our 2019 priorities for the investment department. In the fourth quarter, our asset classes, with the exception of midstream energy and resource equities, defended much better than the S&P 500, which lost 13.5%. The drawdowns in U.S. and global REITs were less -- they were half or less of the S&P 500's decline, while global infrastructure experienced even greater resistance with a decline of just 19% of the S&P 500's drop. Preferreds returned negative 3.7%, which reflected widening credit spreads, which more than offset the decline in treasury yields.

Looking at our relative investment performance. In the quarter, 6 of our 10 core strategies outperformed their benchmarks, and for the full year, 9 out of 10 core strategies outperformed. Keep in mind that beyond our core strategies, we typically have several versions of portfolios across the spectrum of risk and return as well as portfolios that represent more targeted subsets of the core strategy. For example, within preferreds, which is counted as a single core strategy, we have 7 composite track records managed by our preferred and fixed income group, including low-duration preferreds, REIT preferreds and contingent capital securities.

Measured by AUM, 93% of our portfolios are outperforming on a 1-year basis, 97% are outperforming over 3 years and 98% are outperforming over 5 years. 83% of our AUM are in open-end funds that are rated 4 or 5 star by Morningstar.

Market activity in the fourth quarter indicates that we are late cycle and is likely a harbinger of the next phase in the markets. Over a year ago, we believed the biggest investment risk would be the transition from quantitative easing to quantitative tightening. In late 2018, the market clearly became focused on the potential for a policy mistake by the Fed. Our view is that economic growth and corporate profits have likely peaked, which together with the transition from quantitative tightening to -- or from quantitative easing to quantitative tightening could result in a stretch of higher market volatility and lower negative returns.

Historically, in late stages of the economic cycle, real assets have performed well relative to stocks. Looking at late cycle periods going back to 1973, commodities, infrastructure, resource equities and REITs in that order have outperformed U.S. stocks by meaningful margins.

Looking at the current environment, as growth and return expectations decline, the income provided by our REIT and infrastructure strategies represents a larger proportion of return potential, and together with their relative earning stability, become more attractive factors for investors. In addition, we believe these strategies have less risk of multiple compression as growth slows and quantitative tightening takes hold.

Turning to the performance of our asset classes, we outperformed our benchmarks in all of our REIT strategies for both the fourth quarter and the full year 2018. This includes standalone regional strategies in the U.S., Asia and Europe as well as our global and international portfolios. Real estate was the second best performing GICS sector in the S&P in the quarter, lifting real estate's rank for 2018 to 5 out of 11 sectors after lagging the market significantly in early 2018.

In infrastructure, we underperformed in the quarter in part due to our overweight in midstream energy and outperformed by 160 basis points for the year. The asset class defended well versus stocks, in part due to the utilities component of the strategy. Adding analysts to our infrastructure and midstream teams was a priority in 2018, and we are pleased with the caliber of new additions and our overall team size at this point. We are well positioned to compete for what continues to be an active market for institutional searches and infrastructure.

Midstream energy, which was down 17% in the quarter, was driven by falling oil prices and rising credit spreads. Tax loss selling was a factor driving many markets lower late in '18 and it hit the midstream sector disproportionately. We were surprised that midstream did not defend better because it had already undergone a fundamental down cycle and now has accelerating fundamentals, attractive valuations and yield support. We underperformed in the quarter, but overall had a strong year with 310 basis points of outperformance.

Midstream shares have had a nice bounce so far in 2019, providing some reassurance in our fundamental view. Resource equities declined 17% on slowing economic expectations, trade wars and oil price declines. We outperformed in the quarter and by 140 basis points for the year. Our real assets allocation team believes resource equities are statistically cheap. Our multi-strategy real assets portfolio was down 7% for the quarter, showing its diversification potential versus stocks and reflecting strong relative performance of the dispense of sectors of real estate, infrastructure and high-grade credit.

We underperformed slightly against our benchmark in the quarter, but we're in line for 2018. In preferreds, we outperformed for the full year albeit by a smaller margin than usual.

Looking at our full range of strategies in preferreds and in fixed income, we outperformed in 6 out of 7 strategies for both the quarter and year. Considering the treasury yields may have peaked and the credit spreads have widened to more normal and supportive levels, our team is more confident that our core preferred strategy will deliver at least its current yield of 6% this year, if not a bit more, in total return.

In 2018, our best-performing strategy was European real estate, which outperformed by 770 basis points. Our European real estate open-end usage fund is rated 5 stars. Our worst-performing strategy was commodities, which underperformed by 260 basis points. As we have discussed on prior calls, our protocol when we underperform is to activate performance remediation and improvement plans. In the case of commodities, we have responded by integrating quantitative techniques into our fundamental process, and the initial results are promising.

I'll conclude my discussion today with an overview of our investment department priorities. Across all teams, we continue to manage and prepare for the late-stage environment, and as a result, have more balance in our portfolios. I believe it is critical for active managers to outperform in the next down cycle lest the industry lose more market share to index strategies. While our outperformance statistics are strong, we always have strategies that can do better. And as mentioned, commodities are a focus. Another goal is to deliver greater alpha from asset allocation, considering that we are seeing more demand from multi-strategy portfolios. Our 3-year old Alpha Mining project provides the foundation for performance enhancement, and this year, as a component of Alpha Mining, we will dedicate resources in conjunction with our IT department to quantitative techniques and data sources to complement our fundamental processes.

In terms of innovation, we are excited by the opportunity to develop strategies for the endowment, family office and RIA markets. These investors require strategies that are unique by virtue of having higher concentration, being more targeted or having unique income or volatility profiles. Examples include our concentrated portfolios in real estate and midstream energy, small cap infrastructure, hedged real estate and an opportunistic real estate strategy. We have seeded 5 track record accounts in these areas over the past year, and are developing LP and other structures as we engage with prospective investors.

Allocating firm resources to those areas where active management is in demand and appreciated, will provide growth for our firm as well as career paths and creative outlets for our investment professionals.

Finally, we will continue to optimize our use of external resource and manage toward lowering these costs. We have made meaningful progress on this front over the past 2 years, spurred by MiFID regulations and market practices in Europe. And we will transition to the last phase of this initiative as the SEC evaluates commission versus hard dollar arrangements in the United States.

In summary, our investment department is well positioned for 2019. I will now turn the call over to Bob Steers.

Thank you, Joe, and good morning, everyone. As we all know by now, last quarter and especially December saw capital markets and asset flows that were volatile, complex and influenced by tax considerations. These conditions induced investors across the spectrum to initiate risk reduction, tax loss and rebalancing strategies with the end result being high levels of money in motion.

This market reaction also compressed and illuminated both the cyclical and secular challenges facing the active management industry. Although we were not immune from these market conditions, we remain well positioned and confident that market conditions notwithstanding, we will generate positive organic growth this year. As reported, we experienced net outflows of $1.2 billion in the quarter, the overwhelming majority of which was derived from our open-end funds.

It's our belief that the retail outflows were predominantly a year-end phenomenon, which will be at least partially reversed in the first quarter. Consistent with the trends in recent quarters, the institutional advisory segment enjoyed robust investor demand and continued positive net flows, but our sub-advisory flows in the aggregate remained challenged in the quarter. Specifically, with respect to the wealth channel, tax loss selling and concern regarding the widening of yield spreads had a major impact on our preferred securities open-end fund flows in the quarter.

In total, our open-end funds had $1 billion of net outflows with the 2 preferred securities funds accounting for virtually all of that amount. Flows into our real estate and infrastructure funds were essentially flat, however, our industry-leading midstream energy fund bucked the sector trend and delivered $42 million of net inflows.

Our optimism regarding the wealth channel's return to positive flows this quarter and year, is grounded in a number of relevant fundamental factors. First, we expect a not insignificant portion of the tax loss motivated redemptions out of our preferred securities fund to return. Secondly, consistent alpha generation across the range of our real asset and alternative income strategies has resulted in 7 of our funds being added to 23 recommended lists across 11 distribution partners during 2018. And importantly, that positive trend has continued into this year.

Third, given the recent market and economic backdrop, defensive dividend-paying equity strategies have been upgraded and recommended by some of our biggest distribution partners. Although it's early, flows this -- thus far this month are validating these expectations.

Similar to the wealth channel, advisory flows were also elevated in the quarter but ended with $300 million of net inflows. As you may recall, we began the fourth quarter with a $1,175,000,000 pipeline of awarded but unfunded mandates. During the quarter, $255 million of that pipeline backlog was funded. In addition to that amount, $545 million of new mandates mainly in global real estate and multi -- real assets were both awarded and funded in the quarter for an aggregate realized funding of $800 million.

In total, we won $785 million of new mandates, leaving the end of quarter unfunded pipeline at approximately $1 billion. Beyond the existing pipeline, we are awaiting the outcome of a record $2.5 billion plus of undecided finals.

Current client net outflows totaled $495 million, of which $133 million were terminations with the remainder attributable to rebalancing or withdrawals for other purposes.

Anecdotally, institutional investors who have historically invested in real assets privately are now inquiring and/or allocating to listed strategies. It appears to us that the private market expected IRRs have declined sufficiently to make listed a more competitive risk-adjusted investment option. In addition, concerns regarding heightened volatility and slowing global growth rates are motivating institutional investors to favor more liquid alternative investments. In any event, search activities remain elevated globally.

There were several significant developments in the sub-advisory ex Japan channel in addition to the net outflows of $185 million, which reflect an evolution in that market and in our assessment and approach to this distribution channel. Fee pressures in combination with an absence of control over sales or marketing strategies, make certain relationships that are not strategic in nature less attractive relative to our proprietary business development opportunities. In Europe, as you know, we are actively growing our own fund and distribution capabilities aimed at the wealth channel, which has created a conflict over exclusivity with a current global real estate sub-advisory client. Given the choice between delegating our EMEA wealth business to a third party or further developing our own, we have elected to decline to grant exclusivity and to agree to terminate this relationship. Total AUM managed for this client is approximately $800 million, and we anticipate the transition to occur later this year.

It's our hope and expectation that in due course, we will generate sufficient sales in our own funds to replace these assets with competitive fees and greater control of our brand. Separately, as expected, the balance of our $425 million large cap value sub-advisory mandate has been terminated, which constitutes the remainder of our large cap value sub-advisory AUM. Partially offsetting these future outflows is an expected $320 million inflow into global real estate from a long-term and strategic sub-advisory client, which is also included in our pipeline. Japanese sub-advisory net outflows showed improvement both before and after distributions versus the third quarter, but remained elevated at $304 million and $667 million, respectively.

With REITs recently generating strong absolute and relative returns and with last year's top-selling funds, mainly technology focused, now out of favor, there appears to be an opportunity to regain investor interest. This year is off to a good start with positive net inflows into our U.S. REIT funds thus far in January.

In contrast to the well-documented headwinds facing long-only managers, which were highly visible last quarter, we are as optimistic as ever for this coming year. From a tactical standpoint, our real asset and alterative income track records are strong across the board. Retail allocations to these strategies are rising, and we are on more recommended and focused lists than ever before.

Institutionally, here too, our performance solidifies a leadership position in our liquid alternative strategies at a point in the economic and capital market cycles when allocations to our space are rising and listed appears to be as or more attractive than the private market alternatives.

Strategically, we continue to shift and migrate products and personnel towards markets that understand and appreciate our value proposition. Over the last 3 years, institutional advisory assets under management have grown from $7.6 billion to $12.1 billion, while sub-advisory assets have declined from $18.5 billion to $12.5 billion, inclusive of today's disclosures. Within the wealth channel, assets under management derived from the rapidly growing independent RIA channel now stand at $7 billion and growing, which now exceeds our broker/dealer assets under management of $6 billion.

Not coincidentally, our average fee rate during this 3-year period has risen from 54.2 to 57.9 basis points. To support and accelerate these trends, this year, we will be offering, as Joe mentioned, a new series of focused and thematic strategies that will be unique and targeted at the endowment, foundation OCIO, RIA, single and multifamily office markets. We are confident that we can grow assets in those markets that value performance and diversification along with competitive fees.

This initiative in conjunction with our existing business development activity will enhance our ability to generate positive and profitable organic growth for the foreseeable future.

With that, I'll hand the call back to the operator and open the floor to questions.

(Operator Instructions) And our first question comes from Ari Ghosh of Crédit Suisse.

Maybe you can take the first one. Just on the 2019 comp ratio of 35.75% that you mentioned, is that projection based on full Q AUM levels? Or are you baking in any market improvement that we've seen over the last 3 weeks? And then just to confirm, like the starting point that you mentioned for G&A was $46 million and you expect that to remain flattish for full year '19, all else equal?

Yes. So with the comp ratio, I mean, we do our own internal forecasts but we are starting off at our year-end AUM levels, and we're making assumptions like you guys do on flows and markets and -- although, we are going to -- have a very tight control on headcount, there's always going to be 1 or 2 that need to be added for strategic and important asset gathering reasons. So our comp ratio is based on that. Obviously, it's January 24, so very early on, it's our best guess of where we are at the moment. And as the year unfolds, we'll react accordingly. But we feel good with that number just based on the $54 billion of where we're starting. The G&A, in my points, I've cited the non-GAAP G&A for the year because there is sometimes a little confusion since we don't provide a non-GAAP income statement. But yes, we expect G&A to be flat to 2018 but with a downward bias. So although we don't have quantified numbers, we're extremely busy looking at all of our expense base and would be disappointed, honestly, if we wound up flat to 2018.

If I could just add maybe a little color, starting the year with assets that were so depressed and with negative momentum in the marketplace, I think our philosophy, whether it's considering the inputs to a comp ratio or our approach to managing controllable expenses, has been to plan for the worst and hope for the best. So I would say that our approach to cost management, our approach to assessing or projecting net flows or market are very conservative.

Got it. That's helpful. And then just if you could provide any color on retail trends maybe that you've seen early in 2019, especially in your preferred funds? And then on the $2.5 billion of mandates in consideration that you called out, are these from new client relationships, existing clients? Is it lumpy in nature? Any -- if you could provide some information on that, that would be great as well.

Sure. The -- we've had positive flows into virtually all of our open-end funds so far this quarter. By a wide margin, the greatest inflows are into our preferred securities fund. And so as we anticipated ending the quarter and beginning the year, I think we're seeing a combination of some of the tax-loss selling coming back, but frankly, new investors excited about the investment opportunity there. We're seeing solid flows into real estate funds as well. So, so far so good. The pipeline or the $2.5-plus billion that we're waiting to hear from represents all new clients. It's a little lumpy in that, as I mentioned in my comments, what we're seeing is quite a number of very large institutions, both domestically and outside the United States who have heretofore invested in real assets almost exclusively through private investing are pursuing the public markets now for the reasons I mentioned. And so I think the $2.5 billion is a minimum. There's others in the pipeline that haven't gotten to the finals stage yet. So it's not just 1 or 2, but it is large and a little bit lumpy.

Our next question comes from the line of John Dunn, Evercore ISI.

You guys had gross sales go up, I think, in the 4 major categories up 33%, I think, quarter-over-quarter. So you guys are selling a lot of stuff. Can you talk about that side of net flows, maybe where that aggregate number could go? And maybe what a little better environment in 2019 would mean for it?

Yes, look, it's hard to really get a trend of your gross inflows and outflows. I think it's encouraging that in the open-end funds, we saw a large increase in our inflows showing that there is interest in our -- in lot of our real estate funds that -- where we were seeing the inflows occur. The outflows were distortive, as we mentioned, because of the client redemptions and tax-loss selling. But yes, we're encouraged by that trend. I mean, I think we're looking to have lower outflows and maybe sustain the trajectory and the inflows, and that's where we're kind of optimistic in the wealth channel for 2019.

John, as we talked about, as you know the fourth quarter and particularly December was pretty wild and wooly, the volatility was extreme. And so it triggered all sorts of strategies, tax loss being kind of the most obvious. But there were plenty of others. So I think it's hard to extrapolate too much from there. I think it's more instructive to focus on the fundamental factors that I referred to. So, one, top quartile, top decile funds are selling, anything lower than that is not. Asset allocations to defensive dividend paying, uncorrelated asset classes like ours are rising. They are both in the wealth channel, which is, I think, you're seeing shifts away from high risk on, call it, technology and related strategies to more defensive strategies that accrues to our benefit and real estate infrastructure preferreds as well and the trends we're seeing institutionally. So we're -- it's only been 3 weeks, but with the exception of sub-advisory, we have solid positive flows in every channel. I'd like to extrapolate the rest of the year from that. But so far so good.

Got it. And then a little more on Japan. I mean, it looks to us like flows have improved in January. And if that holds, that would it be quicker than other recovery periods in the last couple distribution cut cycles? Are you guys seeing that? And is Daiwa doing anything different this time around?

There's a number of, I think, positive fundamental issues or developments. One is, and some of you have inquired, the regulatory pressure, which began 2 or 3 years ago on these monthly higher dividend-paying funds, appears to have waned and is no longer -- it's no longer depressing marketing activity. Two, the top-selling funds of last year were funds like robotics and AI, and what I would call, more speculative funds and they had a very poor end of year. Those funds are not selling any longer. The need for income continues to be extreme and unabated in Japan. And so -- and I would also add that one of the 2 U.S. REIT funds, the larger of the 2 has actually been in positive flows for several months now. So I think the time between the last cuts and now has helped the regulatory pressure dissipating, perhaps gone completely now. And the -- again, not unlike domestically, a shift in investor appetite more towards dividend-paying defensive strategies. I would also point out, as Joe alluded to, we were the #1 performing REIT fund in Japan last year ahead of a fairly large group of decent competitors.

Our next question comes from Michael Carrier of Bank of America.

Matt, maybe first one just for you. Just on the expenses, you mentioned forecasting it based on your outlook and obviously the tougher start with the December falloff. But just as we think about going through the year, maybe just update us on how you think about what portion is variable in case the revenue environment gets a little bit tougher? And I think you had some severance in the quarter. I just wanted to make sure we had the right amount just so we're thinking about adjusting that out.

Yes, on the comp side. So we said that the variation from the third to fourth quarter was primarily severance. It was about $0.025 if you're just thinking about getting a better run rate. Our ratio of controllable to noncontrollable is about 30% being controllable. That said, even in the noncontrollable expenses, as we had done a few years back, there's always opportunity with vendors, with number of users of a system and things of that nature. So we're looking at everything. That's why I say that at worst, we would expect it to be flat to '18. But we would be disappointed if we weren't able to achieve some saves year-over-year.

Okay. And then maybe 1 for Joe or Bob. So you -- when I look at -- and all your comments are helpful in terms of the outlook. But when you kind of look at the outlook, you have kind of the hardest thing. I mean, you have the performance with a lot of active managers and that's the challenge. So when you look at what you're hearing from some of the clients, both the wins and some of the reallocations or the redemptions, has some of the headwind been more from like a cyclical standpoint, I mean, maybe that is shifting, as Bob, I think you mentioned? Has it been new product competition that's been coming in, in some of the categories? Or has it just been changes in some of the distribution dynamics, I mean, where you're strong versus maybe where you have more kind of penetration or work to do? I'm just trying to get a sense on some of the drivers because obviously the performance is there. It sounds like your tone on the outlook is more favorable.

Mike, it sounds like your question is focused mainly on retail, is that right?

Yes. I think probably mostly on the retail side because on the institutional side, you gave a lot of color.

Sure. Well, look, it's no secret on the retail side, we compete with passive ETFs consistently. And we're one of the few managers that is in net inflows and the active long-only REIT space, for example, and passive continues to compete well. We see some other products. We have some private equity firms that are -- have been in the market with nontraded real estate products. And historically, the competition is mainly because we're competing against a brand name. Historically, those products do not perform well. So over a full cycle, we end up getting those assets back. But it is more competitive.

That said, I think what's in our favor is, as you know, your firm and others are narrowing their list of managers and in particular, much, much greater emphasis on recommended and even more important focus lists. And look, we're the category killer, we're on the recommended lists, we're on focus lists. And so in many ways, we have many fewer competitors. The generic REIT or infrastructure or even MLP mutual fund, which is a 2, 3, or even 4 stars is not on the focus list. And so our partners actually help to elevate our performance and really provide a much stronger platform for us to continue to gain market share. And I would point out, we continue to gain market share in the retail channel and virtually every strategy that we manage versus active managers. So to me, the winners are those that can deliver that kind of performance and passive and the losers are the active managers who cannot deliver 5-star performance.

I'd just add from a market appetite perspective, from an asset allocation perspective. Looking backward for the past 2 years, a lot of our strategies have been seeing headwinds from the specter of rising interest rates, whether it's REIT strategies or preferred strategies. Midstream energy not so much, it's -- the issues there have been more the fundamental cycle. But when you think about the comments I made on how the macroeconomic environment is turning and if we are in fact seeing a peaking process in the bond yields, that headwind could turn to tailwinds. Bob mentioned that we've seen several strategies put buy recommendations on defensive equity strategies that have high income components and earnings profiles that are more stable. And so it could be that if we get this -- if the macro plays out as we suspect, we could have some of those headwinds turn into tailwinds or maybe into neutral winds.

Mike, if I could also just add a little color on the institutional side. So whereas some of those private equity firms are trying to raise retail assets, as Joe and I outlined, and in -- consistent with our goal to be able to generate both positive net organic growth and rising fees, not declining fees. We are introducing early this year, some strategies that are not in '40 Act wrappers, that are going to be marketed to some of the same, whether it's family offices, OCIOs, the endowment foundation markets that heretofore have been mainly dominated by private equity firms. And so we think those investors have the deep knowledge of the value of an asset allocation to real assets and alternative income strategies. They like highly concentrated, focused, thematic, limited-capacity strategies. And obviously, we're not competing with passive fees in those channels. So we're very excited about this initiative.

(Operator Instructions) Our next question comes from Mac Sykes of G. Research.

So, you outlined some moving parts in Europe. But I just want to make sure I have this right. It sounds like the fee rates will benefit from a future product mix. So as you move wealth and away from sub-advisory there at the moment, so when I think about that aggregate contribution, will that be additive to the overall fee rate?

Yes, I think the combination of lower fee business sort of being flat and higher fee business showing the greatest organic growth, that is what we hope will be the engine that will keep our fee rates certainly from declining if not possibly even migrating a little bit higher.

Okay. And then could you just comment a little more on fund raise in Europe in general just given some of the noise around the Brexit? Assuming we do get some clarity on those politics in the next couple of months, could that be a catalyst for an acceleration in your progress there?

That's a tough question. We're -- institutionally, we're not -- we're seeing strong investor interest. There's been no diminution of accelerating demand on the institutional side. The wealth side, as we've talked about previously, has -- is coming along more slowly than we originally expected. But it is coming along. And part of that issue is there are some significant institutions that are not going to recommend or focus on our funds until they get to a critical mass of $200 million to $300 million, which we expect to achieve in our key funds this year. But I don't think we've really seen any impact from Brexit other than our own contingency planning there.

Okay. And then my last -- just 2 questions, 2-parter. The new series funds that you outlined, are they being launched with seeded track records? And then how are you thinking about the margins in that business versus the overall business?

Well, there's a wide range of approaches to those strategies. There are several strategies that are now very much in demand, our concentrated strategies in global and U.S. real estate that have 15- and 20-year track records. And for one of those, we're looking at an LP structure. And when we launch a new fund, we typically need to put in some capital. There are other strategies where -- that we've just newly developed them and we don't have long track records. But for the target markets that we talked about, we don't think you necessarily have to have a track record, especially if you are managing a spinoff strategy or an extension of the things that we're well known for. But we'll have a variety of approaches. There will be some vehicles involved, others will be offered as separate accounts. And in terms of the question of the profitability, we believe we can get attractive fees relative to our current fees. One of the issues, however, is that these investors like strategies that are unique and sometimes have limited capacity. So we may not be able to achieve the scale that -- in some of these strategies that we have historically with broader mainstream strategies.

If I can just add quickly to that, what those strategies also do is, frequently, when we offer unique strategies like that, we end up managing 2, 3, 4 additional strategies with the same client. So even though a strategy may be capacity-constrained, often times, we end up adding assets in related strategies, global real estate infrastructure and so forth.

Our next question comes from Robert Lee, KBW.

Most of them have been answered, but I'm just -- couple of minor things maybe. But you'd mentioned that in distribution services, expenses in the quarter benefited from some prior reversals. Can you maybe just kind of size that for us so we can get a sense of kind of what the run rate is? And then maybe a follow-on, on the expense side, I'm assuming that Q1 will have some -- there's normally some seasonal upper pressure in comp just as you pay FICA taxes and things like that.

Right. So thanks, Rob. The -- with respect to the frictional cost on the payments of the bonuses and everything, we actually accrued those during 2018. So the comp ratio that we had mentioned would be a good comp ratio to use for the first quarter inclusive of paying out the bonuses, which all those costs have been previously accrued. So nothing unique for us there. On the distribution, we -- I would say, if you want to size it up, it's about -- it's between $400,000 and $500,000 a quarter. It was one of our larger intermediaries that had indicated towards the end of 2017 that they would be initiating rev share on certain retirement assets that we have with them, and they didn't bill us. And so whether or not it's going to get resurrected in 2019 is unclear. But we closed 2018 with a provision that we didn't need, so we reversed it.

Okay. Great. And then maybe just a follow-up question on the advisory. I mean, can you maybe -- and I apologize if you mentioned this early on, but give us a sense of kind of some of the geographic breakdown of where you're having the most success there? And maybe give us -- kind of update us, again, on kind of your view on kind of what's maybe driving that on a geographic basis?

Well, we're seeing demand mainly from North America, Europe and the Middle East. We're not -- there is very little of that -- of the pipeline or the pipeline we're waiting to hear about. Very little of that is from Asia. So it's really North America, Europe, Middle East. And I think what's driving it is the factors that Joe and I touched on already. Importantly, I think a significant part of that is sort of a multi-strat opportunities that we're seeing. And we're seeing it from public funds. We're seeing it from Middle Eastern entities. We're seeing endowments who are interested in not one of our strategies but 3 to 5 of our strategies. And some of the larger pools are interested in, in essence, outsourcing their listed real estate or infrastructure allocation to a single provider. And so it's really not too dissimilar from wealth, where, again, you're seeing the intermediary thing. We're going to identify the 2 or 3 top decile, top quartile managers and everyone else is going to not have shelf space. And I think you're seeing the same thing institutionally, where large institutions are looking to establish strategic relationships with people, with firms that dominate their asset classes. And they're handing over a wide swath of their portfolios, albeit, they have greater fee negotiating position. But these are great relationships because they're large and they're very long term, they're strategic. And that's the key to our thinking today is whether sub-advisory or elsewhere, we're focused on developing strategic relationships, not just any.

And maybe as a follow-up to the advisory channels. Just curious if you're seeing any increased interest or maybe demand from some institutional accounts to put in place some type of performance fee structure? Maybe a lower kind of ongoing management fee and then having some kind of performance fee on top of that, is -- are you seeing any of that?

It depends on the strategy. Yes, we're seeing some of that. And -- but again, I think there is -- historically in our experience, there's been 2 approaches that we've seen clients with respect to performance fees. One is the somewhat cynical approach of just cutting fees so that if you deliver massive alpha, you can get back to your base fee. And as you would expect, your ability to negotiate fees that are fair for both parties is a function of how strong your performance is, how unique your strategies are. And I think that's why if you're in core style boxes, you have no choice but to acquiesce. Whereas the types of strategies that Joe outlined, nobody else is doing and very few can do. So it's -- that's one of the reasons that we like the new areas and markets that we're focusing on. But yes, for the large cap, more generic strategies. There are clients who are interested in having that discussion.

There are no further questions at this time. I will turn the call to Chief Executive Officer, Bob Steers, for closing remarks. Please go ahead, sir.

Great. Well, thank you all for calling in this morning, and we look forward to speaking to you after the first quarter. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.