明晟 (MSCI) 2020 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to Salli Schwartz, Head of Investor Relations and Treasurer. You may begin.

Thank you, operator. Good day, and welcome to the MSCI Third Quarter 2020 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the third quarter 2020. This press release, along with an earnings presentation we will reference on this call as well as the brief quarterly update are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, and are governed by the language on the second slide of today's presentation.

For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings.

During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures, including, but not limited to, organic operating revenue growth rates, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide insight into our core operating performance. You'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation.

We will also discuss run rate, which estimates at a particular point in time the annualized value of the recurring revenues under our client agreements for the next 12 months, subject to a variety of adjustments and exclusions that we detail in our SEC filings. As a result of those adjustments and exclusions, the actual amount of recurring revenues we will realize over the following 12 months will differ from run rate. We, therefore, caution you not to place undue reliance on run rate to estimate or forecast recurring revenue. Additionally, we will discuss organic run rate growth figures which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.

On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our CFO and Chief Strategy Officer.

(Operator Instructions) With that, let me now turn the call over to Henry Fernandez. Henry?

Thank you, Salli. Hello, everyone, and thank you for joining us today. My colleagues and I hope you and your families are remaining safe and healthy. During the third quarter, and despite the challenging environment for our clients, MSCI had strong financial performance, including total revenue growth of nearly 8%, run rate growth of 11%, adjusted EBITDA growth of 13% and adjusted earnings per share growth of 31%.

MSCI continues to play a central role helping investors build better portfolios for a better world. We are executing our mission in 2 key interrelated ways. Creating indices that serve as underlying components for client portfolios and equipping our clients with the essential ingredients for them to build their own optimized portfolios. Indices as underlying components for client portfolios include benchmarks for active managers, replication tools for indexed managers and underlying indices for listed futures and options, structured products and OTC derivatives.

These indices can cover a very wide spectrum of client portfolio construction needs from equities to fixed income, from market cap weighted to ESG and climate overlays, and from factor tilts to thematic megatrends.

Consequently, indices as underlying components have a vast number of use cases, and therefore, our business opportunities in this area are enormous. The essential ingredients to equip our clients to construct their own optimized portfolios, include our factor, risk and performance models, our ESG ratings and screenings, our climate metrics and Value-at-Risk models, and tools for thematic and megatrend exposures. Across these 2 interrelated offerings, we see incredible opportunities that expand new product areas, new client segments and new capabilities. New product areas include fixed income, ESG and climate and derivatives, to name a few. New client segments include wealth management, corporates for ESG offerings and insurance companies for fixed income offerings. New capabilities in support of our new product areas and new client segments include the enabling technology, and the strategic partnerships that we're looking in a wide variety of different areas and with different entities.

In my comments today, I will focus on opportunities in 4 new product areas, including ESG and climate, fixed income and liquidity, thematic investing and derivatives. In future calls, I will comment on other areas of a strategic focus for MSCI.

I'll start with our ESG and climate franchise. This quarter, it reached a run rate of $192 million, growing nearly 50% year-on-year. Approximately $15 million of this run rate relates to climate and has grown over 100% year-on-year. We continue to firmly believe there will be a large-scale reallocation of capital and repricing of financial assets over the next few years.

Climate change, the move to a low-carbon economy, diversity and inclusion in the workplace and other environmental, social and governance shifts will deeply impact where capital is invested. MSCI is uniquely positioned to deliver the solutions to navigate these massive shifts. Specifically, in the ETF marketplace, we continue to see the launch of new ESG and climate equity ETFs linked to MSCI indices. At the end of the third quarter, assets under management in this ETFs have grown an incredible 186% year-on-year, reaching $71 billion. Our acquisition of Carbon Delta a year ago has also helped us to supercharge our climate capabilities. We now offer climate Value-at-Risk for investors across multiple asset classes, including most recently for real estate investors. As you can see, we're aggressively expanding our capabilities in ESG and climate and we'll continue to build on an established leadership in this space.

Our fixed income franchise continued to grow this quarter as our strong position in ESG and climate enabled us to capture more opportunities. AUMs in ETFs that are linked to Bloomberg Barclays MSCI ESG fixed income indices, ended the third quarter at nearly $12 billion, more than doubling from a year ago.

During the quarter, we launched 22 MSCI proprietary fixed income indices, including 8 ESG and climate change indices. With this launch, we now offer the market a total of 40 MSCI proprietary fixed income indices across ESG, climate, factor and each one's weighted.

As you can see, our strategy in fixed income indices is to partner with other index providers, including Bloomberg Barclays, iBoxx, iTraxx and others and to launch our own proprietary indices.

In fixed income, we have also seen great progress with our liquidity analytics. We and our partner, IHS Markit, are delivering must have solutions that help investors understand and manage fixed income liquidity risk. This has been critical for investors to meet growing regulatory requirements. MSCI has already been well positioned to support our clients with ESMA liquidity regulations in Europe that went into effect in the third quarter.

Looking forward, we're also favorably positioned to help clients with potential liquidity reporting requirements in other jurisdictions around the world. Another product area of strategic focus for us is thematic investing. MSCI has built partnerships with ARK Invest and a number of other experts specializing in thematic investing. These relationships have generated indices focused on disruptive innovation and long-term structural changes or megatrends.

We are seeing excellent traction across a range of use cases from ETF licensing to structure products, which Baer will discuss.

Finally, I will comment on derivatives. We continue to drive the strong growth of multi-country, multicurrency MSCI index derivatives. This is a massive opportunity in its own right, but it would also reinforce the strength of our indexed franchise for both active and indexed investing. We are experiencing great success with these partnerships and listed features and options with some of the world's most prominent global exchanges.

Additionally, we're seeing tremendous opportunity to license our indices to broker-dealers and banks for the creation of OTC derivatives and structured products. These efforts reinforce the virtuous ecosystem of MSCI exchange-traded products.

Before I turn the call over to Baer, I am excited to announce we're planning a virtual Investor Day event for February 24 next year. Please hold that morning in your times open on your calendars. We'll have additional event details for you over the coming weeks. We very much look forward to sharing with you the many significant opportunities MSCI has to serve our clients' needs globally and to grow with the investment industries a strong underlying secular trends that create tremendous shareholder value opportunities for us.

We will talk about our expansion plans in products and client segments and the capabilities we need to build out at MSCI to capitalize on this significant potential. To make the event as complete as possible, we will continue our active dialogue with all of you and all of our investors, including through surveys and listening tours. We look forward to hearing your views and how we can continue to optimize the MSCI franchise to achieve even greater shareholder value.

Let me now turn the call over to Baer.

Thank you, Henry, and greetings, everyone. I'll start by noting an exciting milestone for our index segment, which reached $1 billion in run rate for the first time. We achieved this through growth in both the new product areas that Henry discussed and more established products like our market cap weighted indexes. Across MSCI, we continue to find many opportunities to produce content once and to find multiple uses for it to address a number of different client needs.

I'll give a few examples within some of the product areas that Henry highlighted. Leveraging our broad ESG and climate content has enabled MSCI to contribute to further transparency and standardization in ESG disclosures.

In September, we launched a tool to help investors evaluate their portfolio exposures and alignment across the 17 United Nations Sustainable Development Goals. Our real estate climate VAR service has gained immediate traction with several new sales during this quarter. This combines our real estate data with climate change related calculations to create new value for real estate investors. An added benefit to the launch of real estate climate VAR is that many of our real estate clients now view MSCI in a new and innovative light.

As a second example, this quarter, we launched a new suite of MSCI fixed income climate change indexes, which leverage our existing data in ESG and climate and apply them to fixed income benchmarks. These indexes enable institutional credit investors to build more climate-resilient portfolios. They also allow investors to implement strategies that consider opportunities and risks associated with the ongoing transition to a lower carbon economy.

Another product area we have frequently referenced on these calls is the relicensing of existing MSCI indexes for the creation of listed and OTC derivatives and structured products.

As an example, this quarter, we saw new OTC product creation from our broker-dealer clients in the form of total return swaps on our ESG leaders indexes. This activity was soon followed by the establishment of new positions in listed derivatives on MSCI emerging market ESG leaders futures. We believe the potential for further growth in the ESG derivative space is very strong. Another great area for derivatives growth is thematics. Earlier this year, I mentioned we were working with a partner on a series of thematic indexes focused on the important areas of innovation in genomics and robotics.

During this quarter, we won a license with a European bank for a new OTC swap based on an MSCI thematic index related to the circular economy and renewable energy. This swap is expected to drive structured product issuance in the region and is another good example of the MSCI linked derivatives opportunity. As of the end of the third quarter, run rate for exchange-traded futures and options contracts linked to MSCI indexes was $49 million, growing over 60% year-on-year. We see significant potential in this space and believe the opportunity could represent hundreds of millions of revenue several years from now. Just as we are leveraging our content for multiple use cases, we are actively pursuing an open architecture strategy to push that content to clients through a variety of distribution channels.

Earlier this month, MSCI ESG ratings were introduced on Bloomberg terminals, which are already a major distributor of our index data. Clients now have another ready mechanism to incorporate MSCI's ESG ratings into their portfolio analysis and investment processes. MSCI has adapted quickly and well to the remote working and virtual engagement model. In the third quarter, across the company, we drove over 10% subscription run rate growth. This result reflected strong contributions from across our client base, including both established and emerging client segments. MSCI's client-centric approach has provided ongoing benefit, not just the sales, but also to the retention of our existing business. MSCI's overall retention rate for the third quarter was 94.5%, improving approximately 100 basis points compared to the second quarter. Analytics retention rate had a notable improvement, increasing 180 basis points sequentially and 20 basis points year-over-year.

Our team's creativity and dedication to solving problems for clients has been critical as global engagement models continue to evolve during the ongoing pandemic. We have previously spoken with you about our senior account manager and key account manager programs to engage with the C-suite level executives that are our largest clients. These clients collectively represent 65% of MSCI's total run rate. And the retention rate for those clients was over 96% in the quarter, clearly demonstrating the power of our focused and integrated client approach.

I'm encouraged by these milestones and look forward to keeping you updated as we continue to make progress on our key growth areas.

Let me now turn the call over to Andy, who will discuss more specifics of the financial aspects of our quarterly performance. Over to you, Andy.

Thank you, Baer. And hello to everyone on the call this morning. As I step into the CFO role, I'm excited to lead our talented finance organization and reengage with our shareholder and analyst community. I will be especially focused on further aligning strategy and finance to deliver even greater value to our clients, our employees and our shareholders.

As Henry and Baer have noted, the third quarter was another quarter of strong execution for MSCI. Operating revenues grew nearly 8% and recurring subscription run rate grew over 10%, reflecting solid performance across the business. Assets under management and equity ETFs linked to MSCI indexes ended the third quarter at $909 billion. This reflects strong cash inflows of nearly $27 billion across all geographic exposures during the quarter. Over 75% of these inflows were allocated to ETFs with international exposures, which is a reversal of the trend we saw in the first half of the year.

Approximately $7 billion of the inflows into MSCI-linked funds went into U.S. exposure funds where we continue to have strong market share capture of flows driven by continued flows into ESG and factor products. In fact, equity ETFs linked to MSCI ESG and climate indexes experienced cash inflows of $11.4 billion during the quarter.

Additionally, AUM levels were supported by improvements in equity market levels with $57 billion of appreciation from the end of the second quarter. As an update since the third quarter, as of October 21, assets under management and equity ETFs linked to MSCI indexes have further improved to approximately $942 billion.

I'll now review our asset-based fee revenue results, which were up 4.5% year-on-year, reflecting higher results across the board, including from ETFs, non ETF products and futures and options. Sequentially, the nearly $117 billion improvement in quarterly average AUM levels and equity ETFs linked to MSCI indexes aided in driving 15% higher asset-based fees from ETF products versus the second quarter. The average basis point fee on equity ETFs linked to MSCI indexes remained unchanged quarter-over-quarter at 2.67 basis points. A proportionally higher mix of AUM and international exposure funds provided support to maintain this level. Additionally, asset-based fees from futures and options increased sequentially with results reflecting improvements in the economics we receive from our exchange partners.

I'll now turn to our adjusted earnings per share growth year-over-year. Underlying business performance drove nearly half of our $0.52 improvement in adjusted EPS. This included both operating revenue growth, and relatively flat year-over-year expenses as the expense controls we put in place earlier in the year as well as continued benefits from lower travel and entertainment expenses have largely offset our ongoing investment initiatives. The balance of the adjusted EPS improvement was primarily driven by a lower tax rate and our third quarter and year-to-date repurchases of MSCI shares. The lower tax rate in the quarter was primarily due to a change in estimates as regulations were released relating to 2017 tax reform.

Turning to our balance sheet. We continue to have strong confidence in our capital position and liquidity. Client collections have been healthy, as you've seen from our results. Investors continue to turn to MSCI for mission-critical tools. This strong liquidity position affords us the flexibility to continue to be highly opportunistic in pursuing our capital allocation strategy as we've done in the past.

During the quarter, we completed nearly $207 million of share repurchases and returned over $65 million in dividends to our shareholders. Since the end of the quarter and through October 23, we've repurchased an additional $51 million of our shares.

Before we move to Q&A, I will highlight some of the changes to our outlook for full year 2020, which we announced in our earnings release earlier today. We now expect adjusted EBITDA expenses to be lower for full year 2020 in the range of $710 million to $730 million. Our expense outlook reflects lower expenses in areas like travel and entertainment as well as the impact of the continuation of triple crown investments that we are pursuing as the environment stabilizes.

Our continued investment in these triple crown opportunities could result in an uptick in expenses relative to the last couple of quarters. We also expect a lower effective tax rate for 2020 in the range of 11.5% to 13.5%. Our adjusted tax rate should run approximately 1 percentage point higher than our effective tax rate as it has year-to-date through the third quarter.

CapEx will now be in the range of $50 million to $55 million. And for free cash flow, we now expect to be in the range of $650 million to $700 million, primarily reflecting stronger cash collections. Full year interest expense is still expected to be approximately $158 million, however, as we've pointed out to you before, the ongoing low rate environment is also likely to drive quarterly interest income earned on cash balances to be at similar levels to this quarter for the foreseeable future. From where we stand today, the sales pipeline remains strong and client engagement remains robust and dynamic.

Nonetheless, we remain cautious given that the operating environment remains unpredictable. With just a couple of days to go before the U.S. elections as well as the backdrop of the ongoing pandemic, the range of outcomes in global markets and operating environment remains broad. In any case, we continue to believe our durable all-weather subscription-based business model will hold up well as it has to date. We, therefore, remain focused on continuing to support our clients, innovate and ultimately drive forward MSCI's growth algorithms, creating compounding value for all of you.

And with that, operator, please open the line for questions.

(Operator Instructions) Our first question comes from Manav Patnaik with Barclays.

I just wanted to ask how you guys were thinking or how we should think about this new wave of, I guess, consolidation that's starting to happen also or at least we talked about a lot in the press with the large asset managers or your big clients. I was just hoping you could help us understand how we should think through some of these as they get announced.

Manav, it's Baer here. So look, I think that our experience in this is somewhat mixed and certainly not as negative as it might look on the cover. So first of all, we -- the consolidation has not been that large this far. Insofar, as we have seen some cancellations, notably in index related to it. As a general rule, over time, when firms consolidate, we sometimes have initially a little bit of a negative hit. But then typically, we're able to grow the combined company, larger company in very healthy ways.

So as of today, we're not seeing a significant impact and as a general rule, historically, the outcomes have been pretty positive over time.

Okay. That's helpful. And if I could just ask around the investments, back in March, April, when you guys obviously cut some in response to the COVID pandemic. How are those investments doing today? Are they coming back? Are they still on hold, I guess, potentially in anticipation of further lockdown? Just curious how you're thinking about the comfort levels in going through with some of these investments?

So the first thing that it's important to note, Manav, is that the set of opportunities that we have to solve for client problems is very significant, and it has actually increased very largely since the start of the pandemic. Obviously, we can point to ESG as an example, but also in fixed income as well in thematic investing. Obviously, the pandemic and the economic dislocations have created significant changes in the way industries are structured and the business models and the likes of those shifts can get reflected in some of these megatrends and the emphasis that we're putting on that thematic megatrend investing in order to create indices and structured products and things like that. So the number of opportunities has increased.

Now at the start of the pandemic, like everyone else, we ramped in a bit the pace of investments that we had. A few months later, say, 2, 3 months later, we felt very comfortable with where we stood in the financials of the company and the outlook we were seeing this increased demand for our products and services, and therefore, we stepped up on the renewal or the rebasing of that investment program. Some of that increased hiring and increased investment is reflected in the EBITDA expenses in the third quarter, obviously, offset by decline of expenses in marketing and travel and entertainment and a lot of things due to the lockdown. But we did see a pickup on that. We will likely see an increased pickup on that in the fourth quarter and in 2021 because we feel that this significant opportunity that the operating environment is presenting to us need to be capitalized with a lot of new products, a number of new client segments and a lot of new capabilities in the company.

So yes, the investment plan continues. It is a few percentages point below where we wanted it to be at this point, but we're stepping up significantly on increasing it.

Our next question comes from Alex Kramm with UBS.

Just quickly on the retention rate, nice pickup quarter-over-quarter, as I think you had hoped for. But still, I think, on a year-over-year basis, I think cancels are still a little bit elevated. So just would be interested to hear some comments. Is this pandemic related? You made obviously some comments around asset management, M&A. I think it's a little so soon for that, but anything else that give us confidence that cancels will continue to trickle lower from here?

Yes. Alex, it's Baer here. Yes. So I think we -- the simplest way to answer your question is we're sort of continue the guidance from last quarter, i.e., we are doing everything we can to service our clients. We are in an environment that is still a bit choppy and noisy in various client segments. There can be some consolidation. As Manav mentioned, there can be some certain client-specific events, so directionally, we're clearly pleased with what happened this quarter. We're going to keep trying to do the best we can to keep the retention rate as strong as possible. But we are in circumstances where the market and what's happening to our clients may put a little pressure.

So hopefully, in the balance of all that, we'll get some good outcomes, and that's what we'll be working towards.

All right. Fair enough. And then second one, also a quick one here. On the asset-based fees. The ETF number is pretty self-explanatory. But can you talk a little bit more about the other 2 components on the, I guess, index mutual fund side, surprised to see that tick up quarter-over-quarter. I think that's usually on a delayed kind of like charging. And I think 2Q was obviously a bad quarter. So surprised to see that tick up quarter-over-quarter. And then on the futures and options, wondering how much there were any sort of onetime fees related maybe to the Hong Kong exchange coming online. Anything that may not be recurring because that was an outsized quarter again here on futures and options.

Alex, it's Andy. Maybe to start with the second question first on the futures and options run rate. As we noted in our remarks, we are benefiting slightly from improved economics from our exchange partners, most notably in Asia versus the prior quarter. I would highlight that we continue to be very optimistic and excited about the broader derivatives opportunity. Even though we saw volume tick down quarter-over-quarter, we are seeing big opportunities in both the listed derivatives market as well as the over-the-counter of the market, which is showing up in more of the index recurring and nonrecurring revenue side.

On the non ETF passive front, I would highlight it's more than just index-based mutual funds. Actually, a meaningful component of the revenue we see there is coming from what we call institutional passive revenue. And so it's more dynamic than just the index mutual fund trends that you might be seeing more broadly. As you highlight, we tend to recognize revenue on a quarter lag, where we depend on our clients to report to us average AUM levels. And usually, we get those AUM levels reported to us on generally a quarter, but it can be sometimes more than a quarter. And so it's not a kind of direct quarter lag correlation, if you will. The other thing that I would highlight is it's a very dynamic equation, where we can see some positive movements in price, particularly in some of the big growth areas like institutional passive mandates for ESG indexes or custom indexes or factor indexes where in many instances, we might have more attractive economics in those types of indexes. So winded way to say that it is a very dynamic equation. There is some relationship related to AUM moves in the prior quarter, but it's much more complex than that.

Our next question comes from Toni Kaplan with Morgan Stanley.

Henry, I wanted to ask a broad question on ESG. The market's been growing really nicely. You grew your ESG and climate run rate at 46% this quarter and continue to be the first mover there. Could you just talk about what you view as your most important differentiators and how you've been able to build on those? I think the question that I get a lot is how MSCI can keep the #1 position as more competitors try to grow in the space. And so if you could just talk about what differentiates your data, capabilities on the index side, relationships, anything you want to add there?

So Toni, the competitive advantages that we have on ESG are now obviously a major step-up in climate change tools are significant. A lot of -- a multiple number of competitive advantages. As I indicated in my prepared remarks, a lot of what we do at MSCI gets captured in 2 big interrelated trends, right? When we take all of our capabilities and put them into indices, which form underlying components for portfolios on one hand. And on the other hand, provide all the ingredients, the essential ingredients to build portfolios by our clients themselves from scratch, so to speak.

So on ESG, think about all the capabilities we have. We are the largest rating agency in the world for ESG. So we provide huge amount of ESG ratings on an instrument or investment by investment basis. So all of that then gets -- so we're the largest equity -- cross-border equity index provider in the world. So we can combine the ESG ratings with the equity indices. We're now putting all of that, the ESG information that we get into risk models, which were the largest provider of equity risk models in the world, so we can monetize on that. We are putting all of that together into the fixed income space in which we're going to -- we take all the ratings on our fixed income and the fixed income instruments around the world and put it in there and the like.

So we have a whole product ecosystem that fits on one another from structured products to futures and options to indexed indices to single security of information about ratings and all of that to factor models in equity and fixed income. And on the other side, on the client side, we are -- compared to some of our other competitors, our client base is the investor, and therefore, where -- the highest demand for ESG tools is from investors, not from corporates at this point or issuers, the highest client demand is investors. There are very few people in the world like us. We are well positioned on the investor side to capitalize on that. But having said that, we're expanding into the corporate sector to provide a lot of these ESG ratings on a sectorial basis to a lot of our corporate -- to corporate entities so that they can look at it and figure out how to provide disclosures and improve the information that they provide in order to get better ratings from people like us. So multiple -- is a quiver of arrows that it's going to be very hard for anybody to break. That's a huge moat that we have in this business. And lastly, we have a first-mover advantage in the whole world, right?

That's great. And Andy, next one for you. Just congrats on your new role. I'm not expecting that there will be dramatic change in strategy, especially since you've been part of the leadership team for a while now. Just maybe you could talk about how you think about the potential for margin expansion from here over time, just given operating leverage, but also investment needs. Should we be thinking about sort of x basis points per year of expansion or EBITDA growth in low double digits? Or -- what kind of framework do you think of when you're thinking about margins and the potential for the business.

Thanks, Toni. I appreciate the remarks. And as you said, no real major change in strategy, particularly given my experience with the company and my role in strategy previously. If anything, I think the -- that the combination of strategy and finance creates opportunities for us to create even more value. I think where we are as a company right now is faced with enormous opportunities across all aspects of our company. And so the next leg of value creation for the company is going to be really prioritizing where we are placing our incremental bets and where we're placing our incremental investments to chase those opportunities. And as Henry just talked about with ESG, making sure we're being proactive in capturing these very attractive markets and really continuing to differentiate ourselves. And so, if you will, the financial algorithm, I'd say is not changing significantly at this point other than to say we have an intense focus on investment here.

Going back to Henry's comments to the first question, the margin in this current quarter was higher than what we would like. I think that's a reflection of some of the activities we took earlier in the year and reduced expenses in areas like T&E and professional fees and marketing, but those are masking some of the accelerations and investments we're making.

And so as we continue to make those accelerations in these investments, we go to our upturn playbook, and we're intensely focused on our triple crown framework where we are investing in those opportunities that have the highest return, the shortest payback and are most valuable to us and our shareholders. We are going to continue to invest in those attractive opportunities. So I think you'll see likely a pickup in expenses in the fourth quarter, and that will trickle through to next year where you will continue to see, I think, an acceleration in investment through next year and a higher expense growth. And so it's not a dramatic shift other than to say the emphasis is really on driving investment here. And I think that's going to be the core source of long-term value for us. And as you'd imagine, we'll probably talk more about this at Investor Day in February.

Our next question comes from Chris Shutler with William Blair.

Question on ESG. So many large asset managers are using multiple providers of ESG data as kind of an initial screen which then feeds into more proprietary ESG analyses that they put in place in-house. So the question is, do you think that the ESG business remains fairly fragmented with asset managers using several providers at the same time, just given how subjective ESG is and how different some of the ratings can be amongst the providers? Or do you see that changing over time? And do you think that the desire to work with multiple providers places any kind of cap on how much asset managers are willing to spend on ESG?

So definitely, a good question, and let me try to explain how we view it. In everything that we do at MSCI, we want to position ourselves as close to the investment decisions by our clients as possible. And therefore, what we're trying to do is to give clients readymade, already analyzed, already thought through solutions to some of their problems and to capitalize on their opportunities. So we are uniquely positioned to do that in creating ESG equity indices, ESG fixed income indices, ESG risk models in -- as I said, in equities and fixed income, and we're starting to look into and develop plans to do that in the private asset classes as well and all of that. In order to achieve that, you clearly need the underlying data, the underlying ratings and all the research associated with those ratings. You need the screenings and the exclusion research that we do and all of that. But it is not sufficient. It's a necessary condition, but it's not sufficient for success. So where you see competition for us is in the provision of the underlying data. And a lot of our clients are subscribing to various sources of data, for sure.

But ultimately, that data needs to be translated into a tool for an investment decision. And therefore, we'll see some competition in providing underlying data and it's perfectly fine with us. But we are -- where our position is very leading and very prominent is in providing the derived -- the tools that are derived from that data in order to help people make better investment decisions. In that space, there are not going to be too many people like us.

Henry, just a quick follow-up on that. Would you be -- I mean as you think longer-term around the ESG franchise, do you see yourselves developing some kind of a tool that integrates other third-party ESG data with yours and combines it all as a solution?

Definitely, that could definitely happen. We're not working on that at this very moment, but that definitely happened and this is in the spirit of the strategic partnerships that are the core of our MSCI strategy. We want to partner up with everyone in the world that wants to do that with us in order to serve our clients and for everyone to win and to make money in all of this, and that will definitely be the case in ESG data. We already are partnering up with smaller institutions that provide data. An example of that is the Carbon Delta acquisition is started as a partnership in which Carbon Delta was providing us with climate metrics and climate value to create joint products.

As we developed that partnership, we became very close to one another and the Carbon Delta management team and the shareholders decided that it was better that they would join forces with us. That didn't have to happen, but that was an example of a partnership. And we have a few more of those, and we would like to do those with the bigger providers of ESG information as well. But obviously, they may view us as competitors, and they may not want to do that, but our intent is to do that one.

Our next question comes from Craig Huber with Huber Research.

A couple of questions. One, can you talk a little bit about the pricing environment from your perspective? I mean your revenue growth speaks for self. Can you just talk about the pricing, both within analytics that you're able to get in this environment and also within your index subscription area, please? I have a follow-up.

Yes. Craig, yes. So look, my simple headline is great stability in pricing. We're not really seeing any, I would call it, unusual pressure or any fundamental changes in the pricing environment at present. So look, that could change in the future, but right now, nothing to suggest that our pricing power has been affected in any material way.

And then secondly, can you size for us your institutional passive products area, I guess, including a direct index scenario, whether it be on AUM basis or as a percentage of your revenues within indices, for example?

Yes, Craig, it's Andy. So we haven't put out the institutional path of AUM levels in the past. I can say that it is larger than the ETF AUM, just the nature of that market. These are big assets, and the fees tend to be lower generally than the pricing we get on ETF. You've obviously seen the revenue that we put out, so you can dimension how big the revenue is to us. But this is a significant opportunity, particularly on the institutional passive front that I alluded to earlier, where, increasingly, institutions are investing directly into an index and in many instances, those are kind of customized indexes to help them achieve their objectives.

And so many times those will involve ESG overlays, factor overlays, increasingly things like thematic type considerations. And so we're very excited about that opportunity. You alluded to the direct indexing opportunity. I think it's very similar, but for a different client base. So with the rise of direct indexing, particularly in channels like the wealth channel, we are in a very unique position to -- as Henry was talking about in his opening remarks, either provide the index that the client can invest directly in or provide the ingredients that the wealth manager can use to create an index that's directly suited to that client. And so we think we're very well positioned to capitalize on both opportunities.

Our next question comes from Owen Lau with Oppenheimer.

Could you please give us an update on your partnership with Burgiss? So what are the new products in the pipeline? And maybe which product do you think can move the needle longer term?

Yes. So at the beginning of this year, as you know, we announced the equity investment in Burgiss and we had spent a meaningful amount of time in the prior years working with Burgiss databases to create risk models in private equity, for example, for our multi-asset class enterprise risk and performance product line. So on the heels of that equity investment, we have now launched into a wide-ranging discussion about many other areas where we can partner in the use of that data. And that got slowed down in the second quarter. We started in earnest in the first quarter, it slowed down in the second quarter and through the summer because of the disruptions of the pandemic, but it's now back on track.

And examples of that, in the last, say, 1.5 months or so, we have held very significant, very senior level discussions with the biggest and alternative investment managers in ways in which we can partner up with them strategically and help them with a lot of their needs on data and analytics to capture a bigger pie of investment opportunities from the institutional investors or the LP clients. So that has not yet monetized. But for sure, the dialogue that we have is at the most senior level, extremely high levels of interest to do this and the like.

The other thing that happened is, as you saw, Jay McNamara, who was a long time executive at MSCI was named President of Burgiss, and his mandate is to build a state of the art client coverage organization for Burgiss, in terms of sales and relationship managers and consultants and marketing people and commercial product management people and all of that. So Jay is very busy at work in building that. And with that front office organization in a much higher state is going to coordinate very closely with the MSCI client coverage organization in order to expand significantly the sales and the penetration that the Burgiss and MSCI have in clients around the world. So they are kind of true areas of collaboration. There is the sales and penetration with clients and the second one, on the product side, trying to do joint products in either value-added pricing or expansion of the data sets or risk models or the likes.

Got it. That's very helpful. And then for the demand from broker-dealer for OTC derivatives and structured products linked to MSCI indexes. Could you please help us understand the growth a little bit more here? And I think you mentioned 1 example for that, which is a new product. But was it -- was the growth mainly driven by volatility with the same client base? Or you can actually increase the penetration here?

Yes. Sure. So I think it's really a strategic shift clearly, market volatility doesn't hurt. But I would say that if we look back on this segment historically, our approach was much more to just take our existing indexes and license them. Today -- so it's more like a product sale type of relationship. Today, we're in much more of a service mode with these clients. We're typically involved much more in customization. Some of that customization is also involving our analytics tools as well as our indexes and on a variety of new methodologies. So I think it's really a pretty significant shift in focus, a step-up in servicing, and we hope to continue to be able to see pretty attractive growth from the segment based on that.

Our next question comes from Keith Housum with Northcoast Research.

I was hoping you might be able to provide some color on the sales environment in terms of how it compares now versus, say, a normalized environment? I mean it certainly looks like your sales are doing fine. But would you say that you're able to sell without any issue even with the work from home constraints that a lot of your geographies are still seeing?

The short answer is yes. I must say it has been both, I would say, a large effort and a pleasant surprise. So we've put enormous focus on ensuring that we have all the right focus. First of all, just purely keeping the teams together, keeping the teams motivated from a managerial point of view. We've enabled them with technology, so that pretty much everything that we can do in terms of demos of our products, et cetera, can be done online. And in many instances, we found that, for example, for client events, we actually have more attendance than we did in the sort of physical attendance days. So I think in terms of the sales process, we're -- things are going really well. I would say the mechanics of it. And I think that, that's reflected in pretty decent sales that we've been having in view of the circumstances.

Got it. And then, Andy, just little more geography here. You talked about the investments that you guys have made. If we look at the income statement, is most of that investment going to be in the R&D or in the cost of goods sold. But where can we kind of see that investment as it fluxes?

Yes. It's kind of spread across the board. So clearly, there is an element that shows up in R&D, and you've seen some modest growth there. But there is also an element that goes into cost of selling and sales and marketing as well. So when you think about the nature of these investments, it's mainly head count and the bulk of our costs are compensation related and that's the case for investments as well. So it's hiring technologists, it's hiring researchers and it's hiring salespeople to go after these new opportunities. And so depending on the exact roles, you'll see those spread across mainly those 3 buckets in the income statement.

What I would also add is that the -- over the next 2, 3 years, you're also going to see a geography change in terms of a move from our own data centers and our own production environment, in which a lot of the investment is CapEx to the Microsoft Azure cloud which we mentioned in the summer on our announcement. And therefore, we see a significant amount of savings and a significant amount of scalability of our production environment. And in terms of the expenses associated with that, they will go from CapEx and therefore, depreciation, more into EBITDA expenses as time goes by, and we'll keep you apprised of those changes so that there is no confusion in terms of what's happening to the EBITDA expenses.

Our next question comes from Henry Chien with BMO.

Congratulations, Andy, on the new role. I wanted to -- I mean I wanted to ask a little bit about the strategy. It sounds like, especially with the partnerships. And it seems like there's a lot of new solutions being developed with each call. Is this a significant -- or is it a -- is this a change in strategy in terms of how we should think about it in terms of going through more partnerships, I guess, it seems like it's more of a license model or is it more of a service model? So yes, if you could just explain that a little bit? And how should we think about that? And I guess with some of these new products, where do we see that in terms of the metric? I'm assuming most of it's in index, but just trying to understand how to track that as well.

It is definitely a -- I want to think of it as a quantum jump on strategy, but it's definitely a change in the evolution of this strategy. And you could think of it as in the -- first of all, in the concept that I mentioned in the prepared remarks, which is how do we capitalize on these 2 big areas that we are operating under, which is provide indices as underlines for portfolios. And the opportunities that -- there is immense because pretty much every portfolio in the world can have an index to serve as a guide, i.e., a benchmark could be a passive replication or could be for the creation of baskets for structured products or for OTC derivatives or obviously indices of any kind and all types for futures and options.

So that's -- and then what are all the ingredients, some of them are off the shelf, some of them are customized, some of them are market cap, some of them are factors and ESG, some of them are climate, some of them are thematic. In terms of the big megatrends in the world, they could be equities, it could be fixed income. And eventually, there will be private asset classes that can be used in a variety of ways. So that's a big -- I think it's more of a recognition of the role that we're playing in the investment industry and how that role can become even bigger by us having this mindset on this.

The second part is, obviously, the ingredients that -- we use those ingredients ourselves to build those indices, so might as well have all those ingredients available to the client base on that. So therefore -- that's one part of it. The second part of it is that when we see others buying companies all over, and we say, should we be buying a lot of those companies, should we be buying all those capabilities, and in some cases we will, especially a smaller bolt-on acquisitions that will accelerate the work that I just described. But in many cases, our inorganic tools don't have to be an outright acquisition in a competitive bidding process with very high prices, lower returns sometimes, execution risks and all of that. We say, why don't we partner up with a lot of those firms. Many of those firms don't want to -- the number of firms that want to sell themselves, there are a lot more that would like to partner up with us to create joint opportunities.

So we have made that partnership central, partnership with clients, of course, we've always done that. But partnerships with people that give us data set that we don't have, partnership that give us distribution, partnership that gives us ability to have knowledge and expertise like in thematic investing that we may not have, let's say, biotechnology. We're not the world experts in biotechnology, why don't we partner it up with a biotechnology investment firm, so we can create those themes and those underlying the indices for underlying portfolios and all of that. So central to what we do is, our answer to -- we don't have to own the whole world, we're a small company with limited resources. So why don't we partner up with people in order to jointly serve the needs of our clients and everyone wins.

And maybe just to add, as Henry touched on M&A and the potential for tuck-in acquisitions or bolt-on acquisitions. As you know, we're extremely disciplined, financially disciplined, but also strategically disciplined to the points that Henry made. And capital, we are very protective of our capital. And we look at the returns we can get across all uses. And I would highlight that discipline, as you can see on the share repurchase front, where we've repurchased to date -- year-to-date, over $600 million of our shares at prices on average less than $300 per share. And so it's always a trade-off in terms of the uses of our capital.

Yes. Okay. Okay. Makes sense. Yes. It's like a vast expanded TAM. So I guess just a quick follow-up. So when you mentioned combining finance and strategy, I guess, what do you mean by that? Is it like the partnerships or taking minority stakes or just how to -- what -- I guess how should we think about that? I'm just don't know what that...

It's a fair question, yes. And probably a novel concept, but it's mainly focused actually on the organic prospects. And so when we think about what is going to drive the most value for the company over the next several years, there's -- there are some important trade-offs we're going to have to make. As we've talked about here, we have a wealth of opportunities in front of us. And so where we place every incremental dollar of capital is going to be extremely important. And so we need to have very robust frameworks that we use like our triple crown framework to think about what is going to be the best return on that incremental investment dollar and what's going to be most strategic for us over the long term. There's also an element of an intense focus on efficiency, and I'll call it, strategic efficiencies. So thinking about how we can position the company from an infrastructure standpoint, from a process standpoint, from a technological standpoint to create scale and really turn what we do into a competitive advantage for the company going forward.

Our next question comes from Jake Williams with Wells Fargo.

I appreciate the color on ESG provided. One follow-up question we had is within the ESG indexes revenue, can you break out what is asset-based and what is subscription-based or at least directionally?

So just to be clear, Jake, within the ESG research reporting segment, which shows up in all other, that is purely just our ESG research and ratings. So that's things like our screening tool, our ratings, there is no asset-based fee that is running through that segment. All of the asset-based fee revenue is coming from ESG indexes, which is reported within our index segment. Now when we show the integrated ESG run rate, which you've seen which is a run rate figure, the portion coming from index so the ESG index run rate does contain an asset-based fee component, but we have not broken out that detail at this stage.

Is it fair to assume that within that ESG index run rate section that it's half and half? Or is it more heavily weighted towards subscription or asset based?

I would say -- hopefully, we can give more detail in the future. I don't want to dimension it right now other than to say they're both meaningful. They are both growing. And just looking at the growth in the assets under management and ETFs linked to our ESG indexes, which have grown 100% year-over-year. You can imagine asset-based fee component is growing at a very robust growth rate within there. But the other point of reference, I would highlight, as you can see on our slides, we do highlight the index subscription run rate growth within ESG and factor modules and you can see that, that is growing at 21%. Now there's competing dynamics there between factors and ESG, but you can tell the subscription components growing at a very healthy growth rate as well.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Henry Fernandez for any further remarks.

So thank you very much, everyone, for attending. In the run-up to Investor Day in February of next year, as we said earlier in the call, we will be reaching out to many of you either directly ourselves in listening tour type of environment or some of our -- some of the people that we work with will be reaching out to you for surveys and opinions on how best to optimize our franchise. We encourage you to take full advantage of that to provide us with feedback, ideas and the like. And even if you don't get reached, please do not hesitate to reach us directly as well. If you have ideas and thoughts, we welcome them to put them all into our thinking as to the best way that we can describe our company, what we're doing, our opportunities, our investments during that [critical] Investor Day. Thank you very much, and stay well and safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.