Cohen & Steers Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2023

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen and Steers Third Quarter 2023 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded Thursday, October 19, 2023.

Operator

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

Speaker 1

Thank you, and welcome to the Cohen and Steers' 3rd quarter 2023 earnings conference call. Joining me are our Chief Executive Officer, Joe Harvey our Chief Financial Officer, Matt Stadler and our Chief Investment Officer, John

Speaker 2

Chae. I want

Speaker 1

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 accompanying Q3 earnings release and presentation, our most recent annual report on Form 10 ks and our other SEC filings. We assume no duty to update any forward looking statement. Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund or other investment vehicle. Our presentation also contains non GAAP financial measures referred to as adjusted financial measures that we believe are meaningful in evaluating our performance.

Speaker 1

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 to the extent reasonably available. The earnings release and presentation as well as links to our SEC filings are available in the Investor Relations section of our website atwww.cohenandsteers.com. With that, I'll turn the call over to Matt.

Speaker 3

Thank you, Brian. Good morning, everyone. Thanks for joining us today. As on previous calls, my remarks this morning will focus on our as adjusted results. A reconciliation of GAAP to as adjusted results can be found on Pages 18 19 of the earnings release and on Slide 16 through 20 of the earnings presentation.

Speaker 3

Yesterday, we reported earnings of $0.70 per share compared with $0.92 in the prior year's quarter and $0.70 sequentially. The Q3 of 20 quarter compared with $140,200,000 in the prior year's quarter and $120,300,000 sequentially. The increase from the Q2 was primarily due to the recognition of performance fees from certain institutional accounts as well as one additional day in the quarter. Our effective fee rate was 57.6 basis points in the 3rd quarter compared with 57 basis points in the 2nd quarter. The recognition of performance fees in the 3rd quarter accounted for the majority of the increase in our effective fee rate.

Speaker 3

Operating income was $43,900,000 in the quarter compared with $60,100,000 in the prior year's quarter and $43,800,000 sequentially. And our operating margin decreased to 35.5% from 36.4% last quarter. Expenses increased 4.2% from the 2nd quarter, primarily due to higher compensation and benefits, partially offset by lower G and A. The compensation to revenue ratio for the 3rd quarter, which included the adjustment referred to earlier, increased to 42.5% and is now 40.5% for the 9 months ended, 100 basis points higher than our previous guidance. Market depreciation in our asset classes late in the 3rd quarter resulted in quarter end assets under management being approximately 6% lower than our average assets under management.

Speaker 3

We expect this to result in lower full year revenue than we had forecasted when providing our compensation guidance last quarter, which led us to increase the compensation to revenue ratio in the Q3 in order to balance employee retention with results to shareholders. The decrease in G and A was primarily due to lower than projected costs associated with the now completed implementation of our new trading and order management system as well as lower recruitment costs, partially offset by increases and business related travel and entertainment and hosted conferences. Our effective tax rate remained at 25.25 percent consistent with the guidance provided on our last call. Page 15 of the earnings presentation sets forth our cash and cash equivalents, Corporate investments in U. S.

Speaker 3

Treasury Securities and liquid seed investments for the current and trailing 4 quarters. Our firm liquidity totaled $279,900,000 at quarter end compared with $257,900,000 last quarter, And we have not drawn on our $100,000,000 3 year revolving credit facility. Assets under management were 75 $200,000,000 at September 30, a decrease of $5,300,000,000 or 6.5 percent from June 30. The decrease was due to market depreciation of $4,600,000,000 net outflows of 47,000,000 and distributions of $604,000,000 Joe Harvey will provide an update on our flows and institutional pipeline of awarded unfunded mandates. Let me briefly discuss a few items to consider for the Q4.

Speaker 3

With respect to compensation and benefits, all things remaining equal, We expect that our compensation to revenue ratio will remain at 40.5%, consistent with the year to date ratio I just provided earlier. We expect G and A to increase 5% to 7% from the $52,600,000 we recorded in 2022, which is lower than the 9% to 11% increase noted on last quarter's call. Excluding cost projections associated with our new corporate headquarters And the establishment of a new data center, we would expect G and A to be flat when compared with last year. And finally, we expect our effective tax rate will remain at 25.25%. Now I'd like To turn it over to our Chief Investment Officer, John Choe, who will discuss our investment performance.

Speaker 4

Thank you, Matt, and good morning. Today, I'd like to cover our performance scorecard and the market environment during this quarter. And then I'd like to provide our investment viewpoint on what we call the global energy addition as opposed to transition. We believe the consensus on this topic is in the early stages of shifting, and this will help generate strong returns And new investor allocations for our real assets, natural resources and energy oriented strategies. Turning to our performance scorecard.

Speaker 4

For the quarter, 39% of our AUM outperformed, a drop from last quarter's 98%. While a slight disappointment, we would caution reading too much into the short term. First, philosophically, we believe our 3 And 1 year performances in that order are most important to our clients and prospective investors. 2nd, The quarterly alpha pullbacks we experienced occurred in strategies where we are still outperforming over the 1 in 3 years. Positively, our performance this quarter was led by preferred securities, most notably low duration preferreds, which outperformed by 100 basis points and is now up 60 basis points for the year.

Speaker 4

Following a challenging Q1 for our preferred strategies, we have now seen 2 quarters in a row of both absolute and relative performance recovery after the banking crisis earlier this year. For the last 12 months, 83% of our AUM outperformed, which is the same as Q2. For the last 3, 5 10 years, Our performance track record remains nearly perfect at 95%, 97% and 100%, respectively. From a competitive perspective, 88% of our open end fund AUM is rated 4 or 5 star by Morningstar, which is consistent with last quarter. Turning to the market environment, the quarter was challenging for most asset classes With global equities down 3.3% and global bonds declining 3.6%.

Speaker 4

For the 1st 7 months of the year, Pooling inflation and rising prospects for a soft landing drove positive listed market returns. But this quarter, Market attention shifted back to concerns about stubborn inflation and high rates, along with new concerns over fiscal deficits and debt sustainability. Our largest asset class U. S. REITs declined by 8.6% for the quarter, underperforming U.

Speaker 4

S. Private real estate as measured by NCREIF, which declined 2.2%. Real estate, in our view, had already We view the underperformance of listed versus private to be a matter of timing and not a new fundamental trend. This quarterly decline in listed markets implies that we should expect continued write downs within private markets. Amidst this latest rate induced pullback in listed REITs, we still see low comparative supply of space, pricing power and strong balance sheets.

Speaker 4

Considering valuations and the fundamental picture, we believe investors have an attractive entry point over a multi year horizon. Indeed, we maintain our conviction that listed markets today are priced for strong forward returns and particularly so versus private markets. Real assets modestly declined during the quarter, but outperformed a sixty-forty portfolio. Commodities were the big story, up 4.7% as energy in the petroleum complex surged On deeper OPEC plus production cuts as well as falling Russian crude oil exports and stronger global demand, which pushed Brent crude oil prices to 10 month highs in the mid-90s. In addition, after 5 straight quarters of surpluses, the quarter's expected deficit of 1,500,000 barrels per day was the largest since the Q4 of 2021 and drove OECD supply inventories further below their 5 year average.

Speaker 4

As expected, these same developments drove a 4.4% quarterly return for natural resource equities. We are closely monitoring developments in the Middle East following the terrorist attacks on Israel and the war which has ensued. While oil fundamentals have remained unaffected, at least for the moment, tail risk for the global economy and certainly commodity prices Moving to listed infrastructure, the asset class fell nearly 8% during the quarters. Utilities, particularly in North America, tend to be the most rate sensitive part of our universe and led the decline. All major utility subsectors, electric, gas and water were down between 7% and 11% during the quarter.

Speaker 4

Also impacting the electric space has been the likely negative impact of both higher cost of capital And lingering supply chain issues impacting returns for new renewable energy projects. Cell tower companies We've also been impacted by both higher interest rates as well as lower customer leasing activity. Offsetting these dynamics, Midstream Energy continues to perform well with the industry up 2.5% on the quarter and now up 7% on the year as investors appreciate the scarcity value of U. S. Energy infrastructure and the attractive free cash flow generation.

Speaker 4

Lastly, our core preferred security strategy was up 1% for the quarter, beating its benchmark by 90 basis points And outperforming the Bloomberg global aggregate, which was down 3.6%. Factors that aided our outperformance included Our focus on more defensive securities with features such as shorter durations, fixed to reset coupons and higher yield cushions. From a sector standpoint, security selection in banking, insurance and utilities contributed to Alpha, highlighting our sector diversification. In the near term, we believe preferreds will continue to perform well due to attractive yields, the potential for strong total returns as we approach the peak of monetary policy tightening and solid fundamentals as highlighted by healthy bank earnings this quarter. Shifting gears, on our last earnings call, I spent time discussing the strategic case for real assets in both individual and institutional portfolios and how we are in the early stages of a significant and far reaching macroeconomic regime change defined by higher inflation, lower growth and greater market volatility.

Speaker 4

Today, I want to speak on the so called Last month, our Natural Resources and Infrastructure Portfolio Manager, Tyler Rosenich, Published an important piece of research entitled Changing the Imperative from Energy Transition to Energy Addition. You as investors and analysts should expect to see more thought pieces from us that will delve into this theme over time and how it will be a tailwind for real assets, natural resources and energy. In short, We believe that while the global economy will certainly become much more energy efficient, global energy consumption will still increase in the aggregate to support a growing population, economic growth and most importantly, rising standards of living in the developing world. In fact, we forecast a 20% increase in aggregate energy demand by 2,040. The world will need both alternative and traditional energy to meet this increased demand.

Speaker 4

And we believe this future will create attractive investment opportunities on both sides of the equation. The energy industry is changing dramatically With new efficiencies coming to market, old technologies facing obsolescence and companies reacting to the significant disruption, Some incumbent companies will navigate the change well, while others will not. In either case, The old definition of energy is now obsolete. The expectation that renewables such as wind and solar Are ready to fully meet the world's rising energy demands on their own is at least premature, if not optimistic. At the same time, the demise of traditional carbon intensive energy such as crude oil and natural gas has been greatly exaggerated.

Speaker 4

To be clear, alternative energy is the future and we expect its production to grow by 155% over the next several decades, which will help satisfy growing energy demand. However, we estimate this still will only cover roughly 35% of future energy needs, which showcases why the world will continue to rely on and invest in traditional energy. The marketplace cannot and will not be dependent on one energy source to the exclusion of others. With the exception of coal, We are likely in a more of everything world for the next few decades. Indeed, We believe investing in both traditional and alternative energy is the way forward as it replicates what the world will need to lift an ever growing population to a higher standard of living and economic equality.

Speaker 4

When looking at We believe that blending traditional energy with alternative investments can also create a compelling risk return profile for investors. This emerging energy addition consensus will be a key driver of returns and increased allocations into our energy, natural resource equities and broader real asset strategies. With that, let me turn the call over to Joe.

Speaker 2

Thank you, John. Good morning, everyone. I'd like to first briefly touch on the macro environment, then discuss our Q3 business fundamentals and outlook. During the Q3, the emergence of bond vigilantes focusing on the U. S.

Speaker 2

Federal deficit and potential for sticky inflation caused bond yields to rise, furthering the higher for longer view And pressuring valuations on risk assets. While our average AUM for the quarter was $80,000,000,000 We ended the quarter at $75,000,000,000 Our largest asset classes had greater depreciation than the S and P 500's Decline of 3.3%. For example, U. S. REITs declined 8.6%.

Speaker 2

Energy was the winner in the quarter with oil prices up 29% and energy equities up 12%. Our interest rate sensitive assets represent a much larger percentage of our total AUM than does the energy sensitive components. Our flow results were better than what may have been expected considering the market environment. Firm wide net outflows were $47,000,000 in the 3rd quarter, an improvement from the 2nd quarter when we had $512,000,000 of outflows. Year to date net outflows have totaled $1,060,000,000 an annualized decay rate of 2%.

Speaker 2

In the quarter, open end funds had outflows of $360,000,000 led by U. S. Open end funds, including our 2 preferred stock funds, which accounted for $222,000,000 of outflows. The institutional channel was positive in the quarter with $190,000,000 of net inflows in advisory and $123,000,000 of net inflows through sub advisory. The wealth channel had net outflows across All vehicle types including open end funds, SMA, UMA accounts and offshore USITS vehicles.

Speaker 2

In U. S. Open end funds, 7 of 11 funds had outflows, reflecting the current risk off market sentiment. We did see inflows into 3 of our REIT funds totaling $67,000,000 The greatest outflows came from our low duration preferred stock fund, symbol LPX, which had $138,000,000 out As short term treasury yields of 5.5 percent now exceed the 5.2% yield on LPX. Net outflows from our core preferred fund CPX were $84,000,000 which reflects steady improvement following the turmoil in the U.

Speaker 2

S. Regional banking sector earlier in the year. We also saw outflows from our infrastructure fund CSU at $65,000,000 and from our multi strategy real assets fund, RAP at $70,000,000 which is the highest they've been. Institutional advisory had net inflows of $190,000,000 the first positive quarter since the Q2 of 2021. We had $274,000,000 of inflows into 2 existing accounts and outflows of $141,000,000 associated with 3 account Terminations, the lion's share being a preferred allocation in our limited partnership vehicle.

Speaker 2

This redemption should be completed in the 4th quarter with another $184,000,000 out. The sub advisory ex Japan net inflows were driven by 3 new mandates totaling $234,000,000 partially offset by TRIMS and 3 existing strategies totaling 107,000,000 The 3 new mandates included a REIT completion strategy and 2 multi strategy real assets portfolios. Japan sub advisory was virtually flat with outflows equal to $2,000,000 Japan has been a source of relative strength led by one of Daiwa Asset Management's U. S. REIT Mutual Funds.

Speaker 2

Japanese interest rate increases have not Kept pace with the rise in global rates and the U. S. Dollar has been strong versus the end, both dynamics helping REIT flows in Japan. In addition, our partner, Daiwa, has stepped up marketing efforts for those funds. Our 1 unfunded pipeline was $784,000,000 compared with $1,100,000,000 last quarter and the 3 year average of $1,300,000,000 Tracking the change from last quarter, dollars 532,000,000 funded into 6 accounts, $415,000,000 was added to the pipeline from 5 new mandates, including $161,000,000 for our private real estate vehicles and $233,000,000 was terminated, mostly from 1 OCIO client where the underlying client's strategic allocation was derisked.

Speaker 2

While client decision making has been slow, activity picked up in the Q3 and continues. Turning to our outlook. We believe we are well positioned by way of our corporate strategy, how we're organized and the clarity of our priorities. In terms of the things within our control, our relative performance continues to be strong And we have invested prudently in new strategies such as private real estate and have seeded new strategies such as infrastructure opportunities and the future of energy. We have also expanded our distribution capabilities to include private real estate and have allocated more resources in Asia and have invested in our corporate infrastructure to accommodate more and increasingly sophisticated clients.

Speaker 2

We are better organized to strategically partner with investors and help them build better performing and diversified portfolios. What's challenging is the regime change in the macro economy. This shift is taking a very long time, which with reflection It's understandable considering that the cumulative effects of 12 years of monetary stimulus cannot be unwound in a quarter or 2. Factor in geopolitical tensions and in some cases outright conflict, including 2 wars And the entirety of that macro landscape is less predictable and potentially fragile. Normalization of interest rates At the end of the day, it's good for the economy and capital allocation, but the increase in the cost of capital and multiple compression presents challenges for businesses and asset owners.

Speaker 2

To date, that process has mostly manifested in the listed market, but is now developing in the private markets as well. De globalization and the shifting geopolitical world order Provide added catalysts for our view that inflation will be more prevalent, interest rates will be higher for longer and central banks will continue to be reactive. As a result, the global economy should experience more volatility. The regime change continues to affect asset allocators' decision making. The fact that investors can sideline their capital and earn over 5% in a riskless treasury bill While they wait to see how valuations and the economy evolve makes sense for now.

Speaker 2

The other question is where private valuation marks will settle out, which is slowing portfolio allocation decisions across the board. We continue to believe that listed real assets are underrepresented in investor portfolios based on their fundamentals, considering return, risk and diversification. That said, In the short term, the cyclical dynamics of investors sitting on treasuries and waiting for opportunities to become more visible continues to impact the pace of Strategic Asset Allocation Decision Making. Demand for our strategies is well grounded. We're seeing takeaway opportunities from Opportunity for optimization of listed and private real estate and emerging demand for real assets in Asia.

Speaker 2

We believe that the regime change is creating attractive entry points. We're advising clients that now is the time to begin averaging into listed REITs Then as private real estate furthers its price correction, we expect buying opportunities to open up in 2024. For preferreds, with the mini banking crisis in the rearview mirror and with yields in the 7% to 8% range, we expect preferreds to participate in the next Fixed income return cycle. As mentioned, with inflation likely to be a greater macroeconomic factor And the fact that investors are generally short inflation beta, we expect investors will increasingly want allocations So the strategies that constitute our multi strategy real assets portfolio, including natural resource equities and commodities. Our resource equity strategy is particularly well suited for the macroeconomic environment we envision.

Speaker 2

Finally, just as in real estate, Investors in infrastructure will look to complement private allocations with listed allocations. We continue to make progress with our new private real estate vehicles. Our non traded REIT, Cohen and Steers' income opportunities REIT has completed its registration and review process with the SEC and all 50 states. The next steps to become operational include Drawing from our corporate seed capital commitments and from multifamily office and commencing our investment strategy. We're ready to go, but we've been patiently waiting for prices to decline further in light of the increase in interest rates and slowing growth.

Speaker 2

Our expectation has been that prices need to decline 25% to 30% And to generalize, we believe we're about halfway there. Needless to say, our objective is to start the non traded REIT with a good track record while taking advantage of an attractive investment period. In terms of our closed end private equity opportunity fund, We continue to raise capital while waiting for private real estate prices to correct. Due to the duration of the regime change And the complexity of these vehicles, it has taken longer to get to market with them. However, this initiative is strategic And we're seeing the power of having both capabilities from an investing and client perspective.

Speaker 2

The cost structure supporting the initiative is in place And we believe private real estate is a strategic investment that will provide meaningful operating leverage. We're optimistic about business opportunities in Asia as investors adopt allocations to listed real assets. As a reminder, we opened a Singapore office to complement our Hong Kong office in Asia. We've hired heads of sales in Singapore for both The institutional and wholesale markets. We've identified initially $3,500,000,000 in potential allocations to our asset classes on the institutional side.

Speaker 2

For the wholesale channel, Singapore has become a destination for private wealth And will complement the distribution for our offshore open end CCAVS in Europe. Taking all of this into account, We are very busy, focused and excited about the investment opportunities for active managers amidst regime change. Our priorities for 2024 are centered around delivering great investment performance and working with clients to take advantage of entry points to initiate or add to allocations to our asset classes. I'd like to close by pointing your attention to an 8 ks we filed yesterday announcing that Matt Stadler will be retiring next year. He is a consummate professional and is passionate about our business, About leading our finance department as CFO and helping to lead the firm on our executive committee.

Speaker 2

We thank Matt for what will be 20 years of service to Cohen and Steers and note that his contributions and philosophies will be felt for many years to come. He has talked to you on 75 of these earnings calls and we'll look forward to another 3 or 4 based on the timing of finding his successor And executing a smooth transition. Congratulations, Matt. Thank you for listening to our earnings call. Julianne,

Operator

And our first question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open.

Speaker 5

Hi, guys. Maybe could you just talk a little more about how you see maybe the Slow demand story play out as we potentially get to peak rates for real estate and preferreds? Do people Need to get to that peak or do people start looking at before? And maybe afterwards, how you're thinking about how it plays out?

Speaker 2

Let me ask John Shea to talk a little bit more about how we See the return cycle evolving for real estate and preferreds, then I'll follow-up with some thoughts on to the extent that You can predict flows, which is not it's almost impossible, but we can maybe talk about how we've seen things in the past.

Speaker 4

Okay. Look, in terms of peak rates, of course, there's short rates and then there's long end. I think both preferred and REIT returns and their attractiveness, of course, have been impacted by More on the long end. And when we are talking to our current investors and prospective investors about preferreds And REITs, I would say we're educating them on what has historically happened when we've gotten to the end of this so called Rate hiking cycle. So preferreds, for example, some of the research we share is that Once the Fed has had its last rate hike over the next 12 months, you tend to see 14% returns for preferreds.

Speaker 4

This compares to more like 5% for treasury. So I think, and there's similar kinds of research that we've educated our investors on REIT. So I think most people Fully understand that when we get to peak, whether it's short or long rates, historically, that's tended to be Amongst the best opportunities within REITs and preferreds. We talk to people with that and we counsel them that, Of course, you never really know when you're there until after the fact, and so that you need to dollar cost average in. And so I think we've seen both on the fund side and on the advisory side, some amount of that rebalancing in, But certainly not investor behavior as we know.

Speaker 4

They want to see it happen and know it happens. So we've seen some Of that net flow demand come in, but certainly it's been more muted so far. Maybe I'll turn it back to Joe to talk about.

Speaker 2

Sure. Maybe just maybe break it down in terms of wealth Versus institutional advisory. So on the wealth side, historically, investors have typically been more coincident With how the markets move. But you should understand too that we have professional allocators The platforms who are using these vehicles, some of whom can be very move a large amount of money. And there are several that are looking for the cues and indicators that John mentioned on the REIT side, for example.

Speaker 2

On the institutional side, we would expect those investors to Be more anticipatory and if you kind of follow the past couple of earnings calls, you'll Remember that in the Q2, we felt like the activity just slowed very significantly just due to the significance of the regime change and Investors taking stock of their portfolios, but we've seen activity pickup that was evidenced Our Q3 pipeline numbers where we had a lot of fundings, some of those fundings were just sitting around waiting. We've seen some new accounts being won and our activity levels are good. So the institutional market is getting through the regime change process and I'd say activity is Maybe not normal, but it's getting closer to normal. Overlying all of this is the comments that I made about The fact that fixed income now presents a real return opportunity. And in particular, with treasury bills Being over 5% in the wealth channel that's enabling investors to sit and wait and watch to see how things play out.

Speaker 2

These changes are a process. This regime change, as we've talked about, has been one of the longest And dramatic that we've seen, but what I'm excited about, as I said, is The alpha opportunities that are going to come out of it and that's why our investment teams are highly focused and motivated To capitalize on these opportunities.

Speaker 5

Got it. And then On private markets, it sounds like we're getting closer, but it's going to be newer products on the block. Can you give us maybe a flavor of Like how the conversations are going, the demand, and eventually, like where might you envision it being As part of like the AUM base, like how much of a contribution?

Speaker 2

Well, we don't really I'll try to make projections on how much AUM it can represent. We focus on investment performance And providing strategies that are compelling and unique, that's where we spend our time. Clearly, the real estate Sector is one of the biggest asset classes in the world. So the potential if we Deliver on performance and deliver on distribution could be meaningful to the company. We have 2 different investment strategies.

Speaker 2

1 is a core strategy that would be executed through the non traded REIT vehicle. And as I mentioned, we are mobilized. We're ready to go. And we're just waiting for prices to decline to the point that Notwithstanding all the uncertainty in the world that we can say, look, these are going to be great investments over the next 5 to 10 years. So I think we're much closer to that and I would expect that As we get into early next year, it's going to be time to put money to work.

Speaker 2

The other strategy is an Opportunistic, higher return strategy that is focused on properties that Might have a over leverage situation or a vacancy situation. And There too, we're waiting for the dynamics of debt maturities and changing cost of capital to Present the opportunities. And so as I mentioned, we continue to raise capital, but it's probably going to take a little bit longer for some opportunities to It emerged there just due to the nature of the dynamics of how properties are financed and the process that Owners and lenders need to go through to ultimately make sale decisions.

Speaker 5

Right. And maybe just a little like commentary on how you're finding the reception since You're kind of breaking into the channels? The

Speaker 2

Environment, fundraising wise is more difficult just for all the factors that we mentioned. The reception of our approach to investing in private real estate And also including some investing enlisted alongside of it It's being received very well. It's a unique approach by bringing both of our teams together To have an information advantage and an idea advantage and in some cases, Putting both types of investments in a vehicle is very compelling. So as it relates to non traded REIT, Our strategy is different than the ones that are out there. And that as we've been talking to gatekeepers over the past year and a half, What they're going to see is that we've been right on that strategy.

Speaker 2

And so as we Can then demonstrate what we can do on the investment side. I think They'll receive us very well. On the opportunistic vehicle side, It's a multi property sector strategy, which 3 years ago Maybe wasn't as popular, but now with the breadth of opportunities in the private market that are emerging, Investors are warming up to that approach to that approach as well as Including some listed opportunities in that vehicle.

Speaker 5

Got you. And maybe a couple on expenses. You guys gave the 4th quarter comp ratio. Any early thoughts on like the philosophy for next year? You mentioned retention versus keeping in check.

Speaker 3

Right. So John, we typically give the 2024 guidance in the 4th quarter. So, not prepared To signal where that is, but I think when as I said in my remarks, the market declines in the end of the third quarter Sets us up for a larger decline in full year revenue than what we had forecasted, so we needed to make an adjustment. And we did that keeping in mind like we always do retaining our employees and returning shareholder value. So We think where we have it set now is going to be where it needs to be, all things being equal, but All things are not always equal.

Speaker 3

So but for 2024, we'll give you that guidance on the next call.

Speaker 5

Got you. And G and A, maybe the core G and A flat year over year. Maybe Looking forward, what are some of the you've done a ton of investing over the for many years now. What are the kind of the levers You can pull to dial that up or dial it back and your willingness to do that, just also given that you have put a lot of things in place already.

Speaker 3

Right. I mean, look, we've our controllable G and A is about 30% to 35% of total G and A. We've always been very thoughtful about deploying capital towards Items that incur expenses and trying to keep those under control. I would say that the only variable in there that might Be a little higher would be, as John and Joe pointed out, client activity will start to increase. We might have more Business related travel and entertainment and conferences, which are important to do, But all the other things, interoffice travel and things that are not client facing are the things that we're Really paying a lot of attention to.

Speaker 3

So, I think achieving flat year over year, Excluding the build out, which as you point out, so are you going to be baked in the numbers 23 versus 24. I would say that The things that we can control will be pretty tight on that. But again, next call, We'll provide some guidance on where we think G and A will be.

Speaker 2

I'll just add that, we've The corporate infrastructure investments that we've made are going to set us up for many years of Growth and so those while they hit quite a bit this year, we're And we've rounded the turn and those are going to be behind us going forward. On the personnel and headcount front, We've got a lot of opportunities, but we're very mindful of where the markets are, where our AUM is and we're going to be very disciplined about On our hiring process, whether it's adding new people or replacing people, Until we get through this regime change. So we're very conscious of this on all fronts. However, based on our view on where the markets are, we are Going to position ourselves to capitalize on opportunities for our clients.

Speaker 5

Right. I did want to touch on advisory. I think it was positive first time in 8 quarters, I think. Like what clients Type of clients, what regions drove that and did U. S.

Speaker 5

Advisory participate?

Speaker 2

Well, absolutely. And U. S. Advisory, the people who are involved With on the sales side, touch on what we do in other regions as well. So it's a unified team.

Speaker 2

But in the quarter, the fundings came primarily from real estate. The biggest one Well, it was from an existing client in Global Real Estate, but we also had some smaller U. S. Real estate fundings, but it also includes sub advisory, which might include OCIO providers here in the U. S, but clients in other regions.

Speaker 2

So Interestingly, we had a couple of fundings from our multi strategy real assets portfolios, which is consistent with the comments John Made and I made about that strategy. So the Activity has picked up and it's U. S. Advisory, But again, it's in many cases, it's a global team and it requires contributions from different parts of the world.

Speaker 5

Got you. And then the non Japan sub advisories sometimes Doesn't get as much attention. It did better this quarter. Can you kind of remind us like Framed that business and like who are your clients there, what regions you're in a couple of years after you kind of Reframed it. And then, what should we be looking there to drive inflows in that channel?

Speaker 2

Yes. Historically, our flow results from sub advisory hasn't been great and It's just been a more challenging business, but in the quarter, we had a couple of New mandates and fundings from existing mandates, the 2 multi strategy Real assets portfolio as I referenced were sub advisory situations from different financial services firms, 1 in Canada And one in Taiwan and the other was an A CIO provider that is managing money for a Korean entity. So, I wouldn't say right now that there's necessarily a trend on that front, but It was certainly positive to see it improve recently.

Speaker 4

Look, I would only just add one thing. You see in the Wall Journal of the day, there's an article on, is a sixty-forty dead concerns on that. I think in 2022, People got worried about inflation and then in the first half of twenty twenty three, people thought, oh, that was just a bad year. I think with what's happening now, there's a greater appreciation of maybe investors need to get their act together for the next 5 years, 7 years, 8 years. And so I think we're going to see more of these in these cases were Slightly customized strategies in 2 different markets, but, I think the amount of Real asset solutions that we're going to be able to provide to different clients in different jurisdictions It's only going to increase because there's a greater appreciation that this is a regime change, not a 2022 was a bad year, A bad year for sixty-forty and the need for inflation protection or sensitivity.

Speaker 5

Right. And then on infrastructure, you talked about people potentially moving some of their private allocations into public. So maybe that's one. But what do you think the factors are going to be where that infrastructure can move to being a bigger contributor To and more consistently for flows.

Speaker 2

Well, let me start and then John can add Infrastructure is well understood as being an area that's been underinvested in globally. And then you have other things like the evolution of energy. And so there are huge capital investment needs. Investors have recognized that And there's been a lot of investment in infrastructure, mostly on the private side. But we have this view that you've heard it from us that investing in An asset like real estate or infrastructure can be enhanced if you use both the listed and the private markets.

Speaker 2

So we've talked earlier about the listed market in real estate is foreshadowing what's happening in the private market. The prices have already gone down. So right now, the place to put your money is enlisted real estate, not in private real estate, and that's to come. But the same thing will evolve, we believe, in infrastructure. There's a very Lead lag in listed versus private will continue to develop there.

Speaker 2

The same types of Conversation for private infrastructure is taking place as in real estate where Changes in interest rates are changing asset prices and so allocations are money being put to work in Private infrastructure has slowed. So that creates an opportunity for investors to allocate to the listed market. So we just think that The infrastructure asset class will evolve the same way real estate has in terms of Investors using both listed and private to make the best portfolios.

Speaker 5

Got you. And last one for me, but I do want to give a big congratulations to Matt and say thank you from everybody on the side of the phone. But Joe, my ears perked up when you said in your remarks, you saw some opportunities from passive to active. Anything you could share with us on that?

Speaker 2

I'd say maybe over the past A year we've had 6 situations where institutions have changed a passive A mandate to an active mandate and hired us. And I think the rationale is pretty simple, right? When you can generate 200 to 300 basis points of excess returns and compound that over a long period of time, It's very substantial. So it's just very interesting to see Investor behavior act like in a rational way, which is You should look at the excess returns net of fees and if in our asset classes where We've proven that we can consistently outperform and there's a reason for that. It may be a little bit different than core style box asset classes Where active managers don't have a great batting average of outperforming.

Speaker 2

So maybe a little unique to us. I'd say It's more prevalent in the institutional advisory channel than wealth, which is more dominated by The overall total fee structure, so but we're happy to see it happen in institutional.

Speaker 5

Great. Thank you very much.

Operator

We have no further questions in queue. I would like to turn Call back over to Joe Harvey for any closing remarks.

Speaker 2

Well, great. Thanks for spending time with us today and we look forward to reporting our Q4 results in January. So, have a great day. And Julian, thanks for moderating. Thanks.

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Earnings Conference Call
Cohen & Steers Q3 2023
00:00 / 00:00