Cohen & Steers Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 5 speakers on the call.

Operator

Gentlemen, thank you for standing by. Welcome to the Cohen and Steers Second 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 call is being recorded Thursday, July 20, 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 2nd quarter 2023 earnings conference call. Joining me are our Chief Executive Officer, Joe Harvey Our Chief Financial Officer, Matt Statler and our Chief Investment Officer, John Shea. I want to remind you that some of our comments and answers to your questions may include forward looking statements. We believe these statements are reasonable based on information currently available to us, but actual outcomes could differ materially due to a number of factors, including those described in our accompanying Q2 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.

Speaker 1

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 as adjusted financial measures that we believe are meaningful in evaluating our performance. These non GAAP financial measures should be read in conjunction with our GAAP results. A reconciliation of these non GAAP financial measures is included in the earnings release and presentation 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 at www.cohenandsteers .com.

Speaker 1

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

Speaker 2

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

Speaker 2

Yesterday, we reported earnings of $0.70 per share compared with $0.96 in the prior year's quarter and $0.76 sequentially. Revenue was $120,300,000 for the quarter compared with $147,700,000 in the prior year's quarter and $126,300,000 sequentially. The decrease in revenue from the Q1 was primarily due to lower average assets under management across all three types of investment vehicles, partially offset by one additional day in the quarter. Our effective fee rate was 57 basis points in the 2nd quarter compared with 57.6 basis points in the 1st quarter. The decline was primarily due to mix as open end funds represented a lesser portion of our average assets under management in the second quarter than they did in the Q1.

Speaker 2

Operating income was $43,800,000 in the quarter compared with $64,000,000 in the prior year's quarter and $48,000,000 sequentially. And our operating margin decreased to 36.4% from 38% last quarter, due primarily to a 2nd quarter adjustment to compensation that increased the compensation to revenue ratio. Expenses decreased 2.2% from the Q1, primarily due to lower distribution and service fees and a decrease in G and A. The decrease in expenses related to distribution and service fees was primarily due to lower average assets under management in U. S.

Speaker 2

Open end funds, partially offset by one additional day in the quarter. The decrease in G and A was primarily due to lower non client related travel and entertainment and a decrease in recruitment fees. Although compensation and benefits were essentially flat when compared with the Q1, The compensation to revenue ratio increased to 40.5% for the 2nd quarter, 200 basis points higher than our previous guidance. The increase, which included an adjustment to bring the compensation to revenue ratio to 39.5% for the 6 months ended, was primarily due to lower revenue than originally forecasted and recorded severance costs. Our effective tax rate remained at 25.25 percent consistent with the guidance provided on our last call.

Speaker 2

Page 15 of the earnings presentation sets forth our cash and cash equivalents, corporate investments in U. S. Treasury Securities and liquid seed investments for the current and trailing 4 quarters. Our firm liquidity totaled $257,900,000 at quarterend Okay. With $247,600,000 last quarter and we have not drawn on the 100,000,000 3 year revolving credit facility that we entered into at the beginning of the fiscal year.

Speaker 2

Assets under management were $80,400,000,000 at June 30, Up slightly from $79,900,000,000 at March 31. The increase was due to market appreciation of $1,800,000,000 partially offset by net outflows of $512,000,000 and distributions of 757,000,000 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 second half of the year. With respect to compensation and benefits, all things remaining equal, We expect that our compensation to revenue ratio will remain at 39.5% consistent with the year to date ratio I referenced earlier. Next, based on our ongoing review of non client related expenses, we expect G and A to increase 9% to 11% from the $52,600,000 we recorded in 2022, which is lower than the 12% to 14% increase noted on last quarter's call.

Speaker 2

The increase relates primarily to cost projections associated with our new corporate headquarters as well as certain other strategic initiatives such as the establishment of a new data center and a pending upgrade to our trading and order management system. Excluding these costs, We would expect G and A to increase 2% to 4%. 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 Shea, who will discuss our investment performance.

Speaker 3

Thank you, Matt, and good morning. Today, I'd like to first cover our performance scorecard and how our major asset classes performed during the Q2. And second, I'd like to remind investors of the strategic case for real assets and why we continue to expect And to play a meaningful role for investors over time. Turning to our performance scorecard. For the quarter, 98% Our AUM outperformed a meaningful improvement versus last quarter's 68%.

Speaker 3

For the last 12 months, 83% of our AUM outperformed versus 66% as of the end of Q1, again a significant improvement. For the last 3, 5 10 years, our performance track record remains nearly perfect at 96%, 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 down marginally from 90% last quarter. Our strong performance this quarter was led by our largest asset class U. S.

Speaker 3

REITs, where our flagship strategy outperformed by 2 10 basis points and is now up 3 10 basis points for the year. Not to be ignored, our flagship global real estate strategy outperformed for the quarter year by 180 basis points and 260 basis points respectively. Over nearly every time frame, We have demonstrated that our real estate investment team has competitive advantage. Our culture, our market position, Our ability to develop and promote new leaders and our investment track record both reflect And drive our standards of excellence. We believe that our real estate platform both listed and private We'll deliver for our current and future clients who recognize our unique capability to generate and sustain Great results at scale.

Speaker 3

For the quarter, risk assets continued their recovery With global equities up 6.3% compared to the Barclays Global Aggregate Bond Index, which was down 1.5%. Commodities notably continued their underperformance down 2.6% as inflation declines. Global equity markets continue to be quite bifurcated reflecting a sharp leadership reversal versus 2022 with tech leading the way and sectors such as energy, utilities and healthcare generally lagging. Preferreds were up 2.1% in Q2 And significantly outperformed other fixed income asset classes, including IG and high yield corporates, munis and treasuries. Returns are still lagging year to date, creating relative value attractiveness.

Speaker 3

Plus, the general momentum in the preferred market has greatly improved as banking sector volatility has subsided as we anticipated on our last call. As I said then, we believe material credit troubles in significant banks are behind us. And while there are some relatively weaker banks, there are no meaningful banks with significant risk factors. Bank regulators proposing more stringent capital and funding regulations will be a tailwind for credit over time. New preferred issuance is picking up at attractive levels with IG yields at 7.5% and 8.5% plus for below IG deals.

Speaker 3

Today, subordination premiums are wide and they should be given the environment. The prospects for above average returns for long term investors are good. Our alpha for our preferred strategy over the last 3 months has been positive and improving, a testament to our deep and experienced team. Generating superior performance is our number one priority. So we plan to add 2 more investment professionals to our existing dedicated fixed income team to make sure we are taking full advantage of all investment opportunities.

Speaker 3

U. S. REITs Roughly 1.5% for the quarter and outperformed private real estate by 4% as measured by the Odyssey Index, but underperformed the S and P by roughly 6%. At the end of the Q3 of last year, REITs were down for the year, while reported private values were positive. We highlighted this as being the normal lead lag relationship between listed and private.

Speaker 3

Since then, U. S. REITs are up 7%, while private values have declined by approximately 11%. While some of the reversion process has already occurred, we continue to believe that this trend Of listed outperforming will continue. So we recommend investors to take advantage and invest more in listed at the expense of their private allocations.

Speaker 3

Given underperformance versus equities, the global REIT market on a multiple basis Is looking as attractively valued as it has been over the last 20 years outside of the GFC in the middle of the pandemic. REIT fundamentals generally remain very sound as it relates to occupancy, limited new supply, Pricing power and balance sheets. As a reminder, traditional office is roughly only 3% of our primary benchmark. And while fundamentals and financing in that sector remain very difficult, it is less than 2% of our flagship U. S.

Speaker 3

REIT strategy. Listed Infrastructure following material outperformance in 2022 lagged equities this quarter with total returns of negative 0.3%. Utilities in particular were hurt by rising interest rates Investors pivoting back to growthier sectors of the market. To put this in context, U. S.

Speaker 3

Utilities Had their worst first half versus the market in over 35 years, underperforming the S and P 500 by 23%. As a result, valuations of infrastructure versus the overall equity market and private markets are reaching extremes that are very attractive for long term investors. We continue to see listed infrastructure As a growing and dynamic new allocation for institutional investors, given the unique combination of income, Total return, economic durability and inflation protection. Shifting gears, On our last two earnings calls, I spent most of my time discussing real estate in the preferred securities market. Today, especially in light Of inflation finally moderating, I want to come back to the strategic case for real assets in both individual and institutional portfolios.

Speaker 3

Last year, inflation was high and surprising and the sixty-forty portfolio performed historically poorly. Our concern is that years like 2022 may prove more frequent over the next 10 years than the recent history. This year, as years of inflation have come in from 9.1% in June of last year To 3% in June of this year, the market has too easily returned to the Transitory narrative with long term measures of inflationary expectations remaining in the low 2s. We believe there are good reasons to question the consensus view that a return to the old normal is just around the corner. Instead, it is more likely that we are in the early stages of a significant and far reaching macroeconomic regime change that was set in motion over the past 3 years.

Speaker 3

While we are past peak inflation, Risk of episodic bouts of inflationary shocks over the next decade has increased. This new period will be marked by labor scarcity, Commodity under investment, increased geopolitical uncertainty and a move away from globalization. Rather than a return to the old normal, higher inflation is the more likely result. History suggests that once inflation problems have taken root, they've remained a stubborn recurring issue Even if initial containment is achieved, the U. K.

Speaker 3

Inflation reacceleration may be a leading indicator of such challenges. While this is our view, even if one's base case is that long term inflationary risk will not come to bear, We believe the risk case alone is worth investors owning significantly more real assets than most do at present. A permanent full cycle allocation helps portfolios maintain expected returns while reducing overall volatility. Attempts to tactically time investments in real assets based on inflation forecast, whether over the short or long term, It is more likely than not a fool's errand. Inflation shocks have historically taken their toll on portfolios Precisely because investors in markets have failed to anticipate them, investing in ROE assets isn't a trade.

Speaker 3

It must be a permanent allocation. As it relates to valuations today, because investors heavily discount inflation risks, Real assets appear very attractively valued relative to stocks. Inflation is coming down today And that's a positive, but we expect the emergence of real assets as a major asset class will occur in multiple phases With perhaps 2022 best being viewed as the first phase, given attractive valuations, the upside case for inflation And a meaningful under allocation of real assets, we continue to believe that diversified real assets can be a significant and meaningful driver of our business growth over time. With that, let me turn the call over to Joe.

Speaker 2

Thank you, John, and good morning, everyone. I'd like to discuss the market environment and our 2nd quarter business fundamentals, then review how we are navigating the environment. The 2nd quarter market environment for us was a little more challenging than the first, But with inflation declining and monetary tightening nearing the end and with a lot of asset allocation shifts already made, we may be transitioning to a less Challenging phase of the cycle. Last quarter, we talked about how disruption in the commercial banking sector affected our largest asset classes, Preferred Securities and U. S.

Speaker 2

REITs. We told you that we didn't foresee a systemic issue with the banks, which would impair preferreds And that concerns about commercial real estate finance, while valid for the office sector, have been overstated on the whole. While we expect more credit and funding issues may arise over time, the pressure on bank balance sheets has abated for now. We still believe that U. S.

Speaker 2

Listed REITs have begun a new return phase as their prices typically bottom in recession And as the Fed ends a tightening cycle, we also believe the preferreds should enter a new return cycle as well. This phase in the macro environment and markets has been challenging, not for its depth of decline like in the global financial crisis, But for its duration, it is taking a long time for the cycle to play out as the economy across the consumer and corporate segments Had significant momentum going into this. We still expect some type of recession as signaled by the inverted yield curve And as higher debt costs ripple through the economy, and we still expect that private valuation marks will decline And together with economic slowing will result in some credit reverberations and asset allocation shifts and opportunities. Against that backdrop, I would give our company performance a solid B plus grade. Looking at investment performance, as John reviewed, our batting averages and alphas range from good to great And put us in a strong position to compete for new mandates.

Speaker 2

While our flows have been negative year to date, Our backlog of active searches is strong and we continue to enhance our organizational structure to stay abreast of distribution opportunities. We are executing well on corporate infrastructure investments and talent development. So when the return cycle really kicks in, We are already out front rather than playing catch up. We are building strategically while we are waiting for the cycle to play out. We continue to believe that most of our asset classes are underrepresented in investor portfolios based on their particular merits of return, Income, diversification and risk.

Speaker 2

That said, with a more normalized and attractive spectrum of bond yields, We expect to see greater allocations to fixed income, which will need to be sourced elsewhere. Equities, private equity And real asset allocations are all candidates. We recently published a capital markets analysis, which indicates That we enjoy attractive investment opportunity sets in our asset classes. Our outlook includes Higher inflation compared with the pre pandemic trend line, higher interest rates, greater volatility and higher risk premia. Notable shifts in our outlook include higher expected returns compared with the past 10 years for Global Real Estate, Commodities and Natural Resource Equities.

Speaker 2

Turning to our fundamentals. In the second quarter, we had firm wide net outflows of $512,000,000 about the same pace as the first quarter's $497,000,000 As in the Q1, preferred saw the largest net outflows at $365,000,000 yet at a slower pace than last quarter, with 54% of that from our low duration preferred strategy and the balance from our core preferred strategy. Notably, Flows in our flagship preferred mutual fund, Cohen and Steers preferred securities and income fund turned positive in June. Global listed infrastructure had outflows of $171,000,000 and global real estate had outflows of 90,000,000 A bright spot was net inflows of $114,000,000 into U. S.

Speaker 2

Real estate. By region, Our net outflows were concentrated in North America, whereas we had inflows in EMEA, Asia Pacific and Japan. Open end funds had net outflows of $508,000,000 led by U. S. Open end funds with $522,000,000 out, partially offset by our Offshore CCAP funds, which had their 12th straight quarter of inflows at 46,000,000 Reflecting investor uncertainty in the markets, U.

Speaker 2

S. Open end fund gross sales in the quarter were 38% lower than the pace In 2022 and redemptions were 33% lower. Our 2 U. S. Open end preferred funds Drove the outflows at $333,000,000 Institutional advisory net outflows were $214,000,000 The 8th straight quarter of outflows.

Speaker 2

We had one account funding for $53,000,000 offset by 4 account Terminations totaling $118,000,000 One of the terminations was performance related in our concentrated global real estate strategy. One was due to a change in an outsource CIO provider and the other 2 funded private commitments. We've been focused on improving our performance in our concentrated global real estate strategy, which is now performing in line with expectations. We had $228,000,000 of inflows from existing accounts, offset by $377,000,000 of outflows. These outflows were generally not strategic and instead were marginal adjustments across multiple accounts, which raised cash for asset allocation tweaks or other funding purposes.

Speaker 2

Japan sub advisory was the strongest channel in the quarter with net inflows of $194,000,000 for the 6th quarter of inflows, led by 1 of Daiwa Asset Management's U. S. REIT Mutual Funds. Our one Unfunded pipeline was $1,100,000,000 up from $995,000,000 last quarter. By strategy, 53% of the pipeline is global real estate, 31% is U.

Speaker 2

S. Real estate, 12% is multi strategy real assets and 4% is global listed infrastructure. By domicile, 51% is from North America, 40% is Asia Pacific and 9% is EMEA. During the quarter, there were 3 fundings totaling $86,000,000 and a newly awarded mandate of $250,000,000 One account of $53,000,000 was awarded and funded in the quarter. Finals competitions are picking up after a slow 1st quarter.

Speaker 2

As discussed last quarter, our opportunity set continues to be quite broad in terms of the number of prospects, Strategies and Markets of Domicile. The activity spans U. S. And Global Real Estate, Global listed infrastructure and multi strategy real assets. Demand drivers include takeaways from underperforming managers, Shifts from passive to active, catch ups on inflation protection, allocations for the next REIT return cycle And optimizations of listed and private real estate and infrastructure portfolios.

Speaker 2

The activity levels are encouraging. Under the theme building while waiting for the cycle to improve, we are investing in critical support initiatives for our long term growth, while deferring more market dependent opportunities. We will move into our new corporate headquarters in New York in December And next year expect to take on new space in both London and Tokyo. We recently opened our Singapore office, A strategic move to compete for emerging demand for real assets in the region, while providing another business location for our talent in Asia. We also continue to build new strategies and vehicles to drive organic growth.

Speaker 2

These range from simple extensions of our core strategies to more strategic areas such as private real estate, which we believe is both a new strategy and an extension of our traditional strengths. In terms of listed real estate, we continue to innovate with next generation and completion strategies and are developing strategies that use options to alter investment characteristics such as income or volatility. We've made significant progress with our private Real Estate Initiatives. We are ready to capitalize on the opportunities that are emerging from the macro regime change And the change in private real estate pricing that is now underway. Meantime, our listed and private real estate research, Strategy and investment capabilities are resonating with clients and prospects.

Speaker 2

Tied back to our view that a new return cycle and fixed income is emerging. We have recently ceded an account for a broader global preferred strategy and filed for an offshore short duration preferred vehicle. In addition, we are developing capabilities in commercial mortgage backed securities to complement our current income strategies. Our major distribution priorities include Capitalizing on our market position and wealth to participate in the increasing allocations to alternatives and focusing more on the registered investment advisor channel. In institutional, we are focused on the opportunities in our pipeline.

Speaker 2

In Asia, we've added resources for both institutional and financial intermediaries. We must be upfront educating as real assets are adopted in Asia. In the category of improvement, we need to do a better job with Commercializing strategies we have ceded. To wrap up, we continue to focus on the things we can control, which include our relative investment performance and gaining market share in our asset classes. We are optimistic about our asset classes and their power to enhance investor portfolios as well as our ability to outperform, innovate and gain market share relative to our peers.

Speaker 2

We look forward to reporting on our progress in the coming quarters. Thank you for your interest. Operator, please open the line for questions.

Operator

Thank you. Our first question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open. John Dunn, your line is open.

Speaker 4

Thank you very much. You guys you're now one of the few with both public and private real estate. So maybe it's and it sounds like there's a little more opportunity right now on the public side. But can you talk a little bit more about the interplay between those 2? And maybe looking further out, The opportunity for both when we get more flat rate environment?

Speaker 2

So let me start, John, this is Joe and I'll ask John, Jay to add on. The strategic view is that You can build better real estate allocations and investor portfolios if you use both listed And private allocations. We believe that for a long time. And what's happening in the institutional market Foremost and in the wealth market secondarily is that investors are increasingly willing to go to where the best opportunity is. And in John's comments, he set up kind of where the relative opportunity is Today and that's in the listed market because share prices have already declined, whereas prices in the private market Have just begun to correct.

Speaker 2

So that creates an arbitrage, so to speak. And For the marginal dollar, you want to be focused on where the best deal is and that's in the listed market today. That opportunity is most Extreme at turning points in cycles and we're at one of those turning points today. Furthermore, with those two markets, you have access to different types of real estate opportunities. In the listed market today, you've got more core type or in some cases core plus Opportunities and you have some property sectors which are harder to Gain access to in the private market, an example would be cell towers or data centers.

Speaker 2

Then In the private market, you have access to opportunities that might be tougher to get in The listed market. And you'll likely find better opportunities in opportunistic type situations, particularly now with where we're at in the cycle In the private sector. So just with that as a little bit of a sampling, we see an opportunity to help educate investors On the full spectrum of decision making points ranging from where we at in the cycle, okay, With that, where are the best opportunities? How would you want to combine different aspects of the listed and private market? And as I referred to in my comments, when you look at our in particular our pipeline, both our pipeline and our Shadow pipeline, as I call it, we've got a lot of those situations.

Speaker 2

We've got investors who are hiring us for completion Strategies to gain things that complement what they already own in the private market. You've got others who are trying to time The REIT cycle. So we see our role as being unique and being able to Provide advice on where those opportunities are without bias. And Now with our private real estate team, we can be helpful on the private side as well.

Speaker 4

Got it. And I thought it was interesting to see your U. S. Real estate franchise outperform The rest of the active industry where flows are a lot worse. What do you guys kind of chalk that up to?

Speaker 4

And what's Maybe the demand temperature difference differences between the different channels.

Speaker 2

Well, I'll start with our outperformance, which John highlighted. And As an active manager, that's enabling us in the U. S. To continue to gain share versus our active peers. Our market share has actually increased to about 39%, which is impressive.

Speaker 2

But in terms of our flows, this quarter, we had positive U. S. REIT flows and that was led by Japan sub advisory and our relationship as a sub advisor with Daiwa Asset Management, Our flows in that channel have been positive as I noted for, I think I said 5 or 6 quarters and That's due to several factors. One is, I think, partially macro in terms of Retail investors shifting back toward value oriented versus thematic opportunities in Japan, but also We have new leadership at DIO Asset Management that's focusing on these vehicles and that's all Really exciting. Like in the U.

Speaker 2

S, our performance as a sub advisor For Dia was stellar. We're kind of a leader in most periods. Just thinking about where that's going, obviously flows are very difficult to project, But we've been advising investors that now is a good entry point for U. S. REITs.

Speaker 2

And when you look at our shadow pipeline, there's Activity on that front. So it's encouraging and time will tell.

Speaker 3

Right. Yes. And then

Speaker 4

I guess while we're talking about Japan, I mean, certainly been a bright spot for a while now and it seems to me there's more room to run it there. Which is maybe your view on where do you think we are in the distribution cycle for that space?

Speaker 2

Well, in Japan, it's been an area that we've been Wanting to allocate more resources to particularly in the institutional area. With COVID, they It's been more locked down for a longer period of time. So I'd say we're just getting back To business on the institutional side of things and I'll be honest, it's going to take a lot of education to help allocations grow in Japan. But I think the ingredients are there in terms of investor demand for income and diversification and Based by real assets. So it is an area where we're going to spend more time.

Speaker 4

Got you. And then on preferreds, you talked about how we've been through rapid rate hikes and concerns about regional banks And gross redemptions have improved some. Can you talk about the gross sales side of the equation where that is now? And maybe who are the natural buyers for that product?

Speaker 2

Well, wealth has been the largest investor in Preferreds and but starting 3 to 40 years ago, institutions began allocating and part of that was catalyzed by the very low Interest rate environment and the need for alternative income. So With that as a base and per my earlier comments that there's much more opportunity in fixed income across the board, I think that as we go forward, there's probably going to be Less overall demand for preferreds compared with the broader fixed income opportunity set, But because of where preferreds are valued and the fact that with the bank crisis earlier this year, there's Dislocations that we believe miss pricings, I think that there will be opportunities for us to Gain allocations in both the wealth and in the institutional channel.

Speaker 3

I would just add, I mean, when you look at our flagship strategy, CPX, Today, it's yielding 6%. But it's not just about the yield. It's also about we believe there's a total return opportunity In preferreds, that in the short term could be approaching double digits. The second quarter is a good example where The annualized return on CPX was more like 8%. And so Some may say, well, hey, I can I'm invested in T Bills, I'm getting 5%.

Speaker 3

That's risk free and that's the view. Now it is credit risk free, we believe, but it has a duration of 0. So what does that mean? That means that sometimes the duration of 0 is good, but because you're getting that 5%, but that 5% is more likely to decline over time. So It may go to 4, it may go to 3, it may go to 2.

Speaker 3

So, your as that process plays out, Investors will be missing a capital appreciation opportunity that they would be getting in preferreds or other Yield assets with more duration. I would also say as part of the education process, Of course, the issuers in preferreds, they're well known, well recognized banks. People read about them Versus say the high yield category where I believe defaults are rising to the 3%, 4%, 5%, 6% range, But they just tend to be companies that don't show up every day in the media. So The universe of preferreds, the majority, these are investment grade securities. And sometimes that can get lost because of 1 or 2 notable credit events.

Speaker 3

And so I think we need to remind investors there's a high yield opportunity in preferreds With a total return opportunity where majority are investment grade as opposed to sub investment grade. So I'd say that's really the education process that was in earnest in March April, but we feel As I said, the momentum in the market, if you will, and the confidence in the asset class Has certainly picked up meaningfully over the last 6 to 8 weeks.

Speaker 4

Right. Okay. And then Maybe just to broaden out the gross sales discussion, where would you point to as most likely areas you can get gross sales Back to the place they were. And maybe some like the signposts for maybe the start of this new return cycle that you guys talked about?

Speaker 2

Well, the signpost, I think the biggest one is going to be When the Fed is done tightening and if we ultimately reach a point where they're easing That will help things further along. So when you look at the history of REITs, As we all know, the markets are anticipatory. So they tended to bottom in the middle of a recession Or right before the Fed stops seizing. So it could be that that process has started. As we've talked about in the past, our view is that the cycle is probably not going to be V shaped.

Speaker 2

And so in keeping with John's comments and mine, The this could play out over a longer period of time than it has in the past.

Speaker 4

And the gross sales areas you're most excited about?

Speaker 2

Listed REITs, infrastructure And multi strategy real assets. When you look at our Institutional pipeline, that's where there's the most activity. And as I said, It's broad, it's deep, it's I think well founded. And from the wealth channel, That's a little bit harder to have insight on because Those investors tend to be a little more coincident with what's happening in the market, but not to discount them, they We'll follow the same types of analysis. Hopefully, as they read our research, which You can go to our website and see what we're writing about entry points and REITs and preferreds.

Speaker 2

But just taking the cue from the institutional pipeline, it's in Real Estate, both global and U. S, infrastructure and multi strategy real assets.

Speaker 4

And you had just mentioned infrastructure. Maybe could you bring that A story to life a little more. Where are the most demand for those products are? Like what assets Are people interested in where are those assets? Are there going to be new ones to invest in over the next several years?

Speaker 3

So for infrastructure, I'd say generally the most demand is on the institutional side Rather than on the wealth side, these are new mandates. So in contrast to REITs where Some of REIT of our new REIT business is for new mandates, but some of it is more takeaway business. I think on the infrastructure side, a lot of these are new investors to infrastructure. So We're helping educate them on what is infrastructure, what are the different kinds of infrastructure and how we've been Successful investing in it. So, I think there's a lot of demand from frankly all different parts of the globe.

Speaker 3

And it's generally in our more diversified strategy. So when you look at our more diversified strategy, The bigger areas are within utilities, rail and cell towers.

Speaker 4

Got you. Maybe just a quick one on expenses. You talked a little bit about how you're able to pull back the range of G and A growth. But Could you maybe just reiterate how you're doing at that and like what stuff are stuff maybe on pause and could that have an impact In the medium term for flows you're potentially expecting?

Speaker 2

I think that's a good question. I mean, we focused on Obviously, the non client facing expenses, we've always been pretty adept at Reviewing expenses and we have a rigorous process around even though it's budgeted is the need still there. I think there are some Expenses that aren't in the forecast right now that are kind of waiting for triggers. So as we see the market open up and Flows increase. Some of these things that are deferred would come forward, but shouldn't really have an impact On the margins because you should see an increase in the revenue.

Speaker 2

So I think we're we've always been good with the expenses. I think we've In this period, not only on G and A, but also on hiring. The bar is very high now for new hires, has to be tied to Revenue growth and even replacement positions are now being required to come to a group To plead the case that it can't be deferred.

Speaker 4

Right. Okay. And you guys kind of referred to Your global real estate franchise not getting as much attention as the U. S, but like Could you talk about specifically there the demand, alpha opportunities maybe different any different trends from global versus U. S?

Speaker 3

Okay. So from an investor perspective, generally, the wealth channel Is very U. S. Centric. But just to clarify, we have a lot of global interest In global real estate, it tends to be more institutional and that's what you see in our business.

Speaker 3

Our U. S. REIT business tends to be more Funds and wealth oriented at the margin and our global real estate business and our global infrastructure business tends to be much more institutionally focused And we are seeing good interest there. In terms of what are the drivers, look I'd say just the top down macro In different markets, it's going to be the same set of drivers. In terms of things that are getting us more excited About the investment prospects within global real estate, a place like Japan.

Speaker 3

So Japan is So U. S. Is about 60% of a global real estate strategy. For the other 40%, Japan is by far the biggest market. Around 10% or 11% of that 40%.

Speaker 3

Japan was one of the best markets last year. It's The best market so far this year. I'd say we are seeing inflation pick up. We are seeing growth pick up. And I would also say that, Avanomics was a phrase that was tossed around 10 years ago talking about Improvements in corporate governance and capital allocation, these are changes that are slow to happen, But we are seeing those changes happen, which makes us more optimistic about the returns that are available To investors in Japan, of course, we've seen Warren Buffett make more of a take some actions over the last Few months and that's highlighted that valuations in Japan are very attractive versus other global equity markets Combined with perhaps some of this rerating opportunity for the market as corporate governance improves.

Speaker 3

So, I think That's a driver. The other thing I'd add is we all know that geopolitics has been in the news over the last 12 to 18 months. It's going to shift what the chessboard looks like, if you will, or where the growth may come from. Some may say, well, hey, China might not be the growth engine it was over the last 10 or 15 years, but you Need to look at who are the new growth engines. So for us, we're going to spend time in places like India, Southeast Asia, Middle East and Aventry Africa from an investment standpoint because you shouldn't focus on where the growth was.

Speaker 3

We want to be focused on where the growth is going. And so those are new avenues of investment opportunity. It's inefficient. You don't want to just buy the index. There isn't really an index.

Speaker 3

And so this is an avenue for both absolute And certainly relative returns versus you can't just buy an ETF to get those exposures.

Speaker 4

And I'd like to check-in on the advisory channel. I What are the crosscurrents going on in that channel? Can you give us a flavor of what consultants are asking about how the conversations with Investors are going, it sounds like you're in a lot of finals, but win rates, stuff like that?

Speaker 2

Yes. So let me start with we've had, I think, 2 years of outflows from advisory and That's obviously not where we want to be and not where we think our business stands today. I think those outflows have been catalyzed by the macro regime change, the change in asset allocations. I mean, it's being driven by The volatility in the markets, the higher fixed income yield curve, etcetera. However, our backlog is very strong.

Speaker 2

I think it gets back to my comment that we think that listed real assets, Real assets are underrepresented in investor portfolios and on a long term secular basis, they're going higher. Our institutional team is very well organized, very focused. And As I said, we've got a lot of activity and along with our performance, I think we're well positioned to See a turn in that trend in outflows toward inflows. And that's one of the most Important factors that we're focused on.

Speaker 4

Great. And maybe just one last one to finish. I think you touched on basically all the different geographies throughout the call, but Could you kind of thumbnail for us the strongest geographies for you guys and the products in each of those geographies so we get a sense of what's going to lead Over the next stretch?

Speaker 2

Well, as I said, our outflows have been in North America, And it is the biggest market. So that's the one to pay most attention to. We've had inflows Into the other major geographies EMEA, Japan and Asia Pacific. In terms of again, so North America is just it's the biggest. So We spend the most time there.

Speaker 2

And I think when the advisory flows turn, it's going to be Led by that. In terms of where the demand is newest and growing the most, It would be EMEA and also Asia, and that's why we're adding some resources to Asia. EMEA is pretty well along in the adoption phase. I'd say we're 3 years into that process And that those investment needs and allocations are becoming more sophisticated. So it is I'd say it's getting a little More difficult because just the needs, the desires Or higher.

Speaker 2

In Asia, I'd say it's a lot earlier. We're seeing Some major plant sponsors shift from passive to active. Others are Who have say private real estate allocations are adopting listed for the first time. So The demand for real assets is earliest In the Asia region and it is a big region, but it's more disparate than say North America.

Speaker 4

Thanks very much. Appreciate it. Very helpful. Thanks, John.

Operator

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

Speaker 2

Well, thank you, operator, and thanks everyone for tuning in this morning. We look forward to talking to you next quarter. Have a great day.

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Earnings Conference Call
Cohen & Steers Q2 2023
00:00 / 00:00