Good morning, everybody. Thank you for joining us on day 2 of our conference. Again, I'm Manav Patnaik, I'm Barclays' business and information services analyst. We're really happy to kick off today with MSCI, and as always, we have Baer Pettit, who is the COO. So Baer, thank you again for being here.
My pleasure.
Hopefully, the layout and the no shining lights is better this time around versus last year. But just to kick it off, just on a really high level, Baer, obviously, needless to say a lot of noise out there in the world, a lot of uncertainty from your business, from your standpoint, from your conversations, what are some of the impacts, if any, that you've seen from your clients?
Yes. Look, so I don't know if this is a slightly maybe surprising answer, but I think what's striking at this very moment. And in view of the "interesting" things that have been happening in the world, it could be a different story by next Tuesday. But I think after a period of initial volatility and randomness, I think what's striking from our clients right now is the degree to which they're not taking any very specific or exact actions in view of recent events, right?
And that, I think, can be taken as either a negative, a positive or neutral because I do think that we're in a -- in kind of a slight holding pattern both as relates to clearly the tariff topic and the degree to which that affects the investing landscape, but I think also just the general approach of the administration to if you want to call it crudely, its approach to capital markets and the degree to which it cares or not as to what's happening in the capital markets of which clearly the most, I would say, notwithstanding the fact that the world we chiefly live in is more driven by equities than by fixed income.
I think the epicenter of the spookiness or the thing that really chilled people was when there was clearly a pretty large sell-off in treasuries at the longer end of the curve. And I think that, that was the thing more than the correction in equity markets, that made people feel like could -- do we have some really systemic risks here. But it seems like for the moment, we've taken a step back from that. And so consequently, we're carrying on as normal. We're trying to provide the best services we can to our clients. And we'll have to wait and see where the next iteration of this -- the market volatility plays out or not.
Got it. It almost sounds like the 90-day pause had clients just pause on what they were doing, too. But you also talked about deals that could have closed in Q1, that went in Q2, so was that separate of this noise? Or can you just give us some color on that?
Yes. So look, again, I don't want to be excessively cute, but since this happened to have come up in the earnings call, and just as a follow-up to that, a few of those deals have already closed. Two of them that I was personally involved in, I mentioned that on the call that some things have been delayed. And so as a slight bit of positive news already now, some of those deals have closed in the last few weeks.
So the way I would say it is, again, keeping us thematically, that's not unusual. It might have happened last year or the year before or what have you. And if we look at our kind of our pipeline formation right now, it doesn't look unusual. And we clearly -- we always have a slight weighting towards the end of the quarter in terms of deals coming in, which, by the way, we're trying to specifically mitigate that. I won't go into arcane internal management stuff, but we're trying to make sure that happens less and try to get more things done earlier in the quarter. But I think overall, again, we're in highly unusual circumstances, but I think in terms of the markets, but in terms of the business, not really that unusual in terms of what we're seeing.
So if things hadn't changed, maybe just help us appreciate what the start of the year looked like. So last year was a tough new business year with the lag from some of the outflows we saw, things got better. I think everyone was looking forward to maybe some pickup in new business, but we didn't really see that in the first quarter to the extent we wanted to. So help us like were we -- are we getting carried away. Are we too early?
No, look, so I think there's some -- look, in my prepared remarks in the last quarter, were around the differing performances of the client segments and the general underperformance of the active managers and the outperformance of the other client segments. I mean, almost universally all the other client segments were above the average growth rate and the active managers were below it. So I don't think that, that pattern will change dramatically. Hopefully, it will get a little better on the active managers, and we'll continue on the other client segments.
I think the only element in that narrative that I want to correct a bit is I don't want to place excessive emphasis on the environment. I think we have a lot of the, if you like, the tools in our own hands. And I think notably, in -- for the rest of this year, which has been a big personal focus of mine even in the last few weeks, is, I think our new product pipeline is looking stronger, bringing more products and enhancements to market.
So look, if I look -- going back to being at this conference, let's say, a year ago, and leaving aside the environment aside for a moment, I think our new product pipeline is stronger than it was a year ago. I think we're bringing out more things in index, in analytics, in sustaining climate, notably in climate, definitely in private markets. So I think that while, of course, we have some dependency on the market and the environment, I also like to think that we have a lot of tools within our own control in terms of new product development to improve the path that we're on.
Got it. And maybe can you just help -- you talked about strong sales pipeline, a strong new product pipeline. Like what's the -- like is it a long sales cycle perhaps which...
Yes. So look, I think, again, it depends on the product area and the client type. So I'm not going to go through every client type and every product. It's like a grid. But clearly, if you are selling a large multi-asset class risk system to go across an entire asset management firm globally. It's, by definition, a much longer sales pipeline than selling some new interesting data set to a hedge fund, who thinks they can monetize it in the next few weeks, right?
So I do think it's hard to generalize across what we do to get "one answer". But the way I would say it is, I wouldn't say the pipeline is strong, but I would say it's normal, and I would say that we are definitely objectively looking at what we're bringing to market. We will be bringing more products to market in the next 6 months than we did in the last 6 months, and in the 6 months before that.
And some of those are things which I think are more immediately monetizable like bringing a lot of the custom index capabilities online is not instant monetization but very close, rapid monetization. And then there are others which then are like, "Oh, you guys are doing that, and there's a longer sales process".
You mentioned how the asset manager population was growing below the average and probably will be there. Is that the difference between getting back to 10% subscription on the index side?
Yes. Look, I put it this way, we definitely want -- our aspiration and our plans are definitely to grow more than 5% in that segment. So if you add up the sum of our plans and which we've been going through, we had a whole -- we actually happen to have a long management committee plus meeting on this yesterday. So looking forward to the rest of the year, our goal and our plan is to do better than that number. We're in volatile circumstances. I don't know what -- but our goal and our aspiration is to do better than that number.
And for sure, we want to continue to do the stronger kind of low mid-teens numbers depending on the other segments that we've been through. In the other client segments, and we don't see reasons now why those numbers won't be sustainable. So it's like the way I would -- so to put all of that in a nutshell, one, we think we can do better than 5% for sure on active managers, and we would continue -- we believe we can do continue the growth rates we currently have in the other segments, right?
Okay. Fair enough. So new business was one side. On the cancellation side, obviously, last year was elevated. Just help us with what do you think the environment on the cancellation side could look like now?
Yes. So look, again, always a little note of caution, I'd rather under promise and over deliver. So we had very strong cancellation numbers in the previous quarter. I think generally, we have strong client relationships. Our tools are often as needed or more needed in a volatile environment than in a -- than in a calm one. So it's not like people wake up in the midst of crazy market volatility and start canceling their risk systems should be a little facetious.
So we have a lot of demand from clients for stress testing, for understanding drivers of risk and return. We've actually -- you can go on our website. We've been doing a lot of works around the tariffs and stress testing around the tariffs and all of that. So I think, look, allowing for the fact that there could be a merger that happens that we can't foresee. There can be a client distress event.
But normalizing for all of that, I think we should have decent retention rates, and I can't give you an exact percentage, but I don't see right now evidence that we're going to have bad cancellations or something of that kind. I think our client relationships are good. And then the question of where does the number exactly land may depend on the quarter and circumstances, but I think we're generally sticky and our clients like our products and are using them intensely.
Okay. Maybe taking a little bit step back as well. I think when you report your geographic breakdown is based on where the clients are. But when people think of MSCI, we think of the equity, emerging markets index. I guess my question is, how would you frame how much of a non-U.S. index business are you? Or is that not a fair characterization?
Look, so the way that I would say it is, which -- the way that I would frame it is when the U.S. has a -- U.S. equities have a sustained outperformance, it tends to help some of our competitors, notably S&P, a bit more than us. When there is a slight reallocation to more ex U.S. exposures at the margin, it's beneficial for us.
Now those things don't necessarily filter through like immediately. Sometimes, like in ETF flows, it may, if there's flows, clearly from U.S. exposure ETF to non-U.S. exposure ETFs at the margin will impact us. But I think generally, the -- some of those things are more slower burn type of things where people issue more funds or buy more products that are ex U.S. analytics, data type of products from us.
So the way that I would say it is, it's not a speed boat. It's not like a switch that hits us. But if there is a rebalancing towards a more diversified global portfolio by many investors and a reduction in their often overweight position to the U.S. that will at the margin benefit us.
Yes. Got it. And I think you answered it, but let me ask it another way, like I guess, help us from not getting too carried away on if there is [indiscernible] in the U.S. how slowly like how much -- how gradually does this usually start benefiting you guys?
Well, look, it's been a sustained movement now for quite a long time, right? So I think I'm trying to even think when it would -- was the last time that it was moving in the other direction. It's been a very long-term trend now, which is why the U.S. got up to its peak weight in equity that it's ever been, right?
So I think that it's hard to extrapolate exactly because all these market circumstances are somewhat different. So yes, I think it would be highly speculative to say it takes 3 months, it takes 6 months. I'm just -- as a general observation, the more that clients have globally diversified portfolios and are looking at a different -- a whole range of different exposures, it benefits MSCI over time.
Got it. You mentioned your new product pipeline is going to be stronger in the next 6 to 12 months than it was the last 12 months. But even within that, I think you said at one point that the next 2 quarters are going to see a lot more index innovation. Can you just elaborate on that?
So basically -- so we acquired this company called Foxberry, who have a very sophisticated, very flexible index construction and back testing engine. And we had to -- so basically, think of it as a flexible, attractive, modern front end, but we have our whole back-end index production environment, which is like the heavy-duty environment that produces the index every day where all the corporate actions are done, which is the trillions and trillions of dollars of benchmark. So basically, once we acquired them, we had to take their front end and engineer it into our index production back end.
And you do that basically through different index methodologies, the most simple ones trying to do a country fund, trying to do -- and then you go to the more complex methodologies, using an optimizer, using constraints, blah, blah, blah. So we're working through all of those. And in the next few months, basically, that work will be done.
And so we will be able to go out to clients and fully market all of those capabilities -- and I think -- so it's one we can do a broader range of things than we could previously. So it's given us more flexibility, but also extremely importantly, its speed to market. So one of the things has been traveling around in various places. I was in Dublin a few weeks ago and a client said, "Look, we want to work with you guys, but your back testing and simulation was too slow", and this is basically an Italian fintech type of distribution where they want to bring products like the sales force gets an idea they want to bring a product like 48 hours later. So it's not like a pension fund where you've got time to talk to them and whatever.
So using that as an example, we should be able to win more of that type of business because our ability to back test, to do simulations on different types of methodologies and then deliver that for the clients will be orders of magnitude faster than in our previous environment.
Got it. And in terms of the non-index new product innovation, any key...
Yes. Look, I think we're bringing a lot of -- we will be doing a lot more things in private markets. You saw our announcement about the private credit partnership with Moody's, which will come online later this year, maybe we'll -- I would say, the next 3 to 4 months, probably we need to do that. We're going to be bringing out more private equity analysis there. We're bringing -- so we're deepening in private markets in a variety of ways.
We're actually doing a lot more -- a variety of macroeconomic stress testing, which we actually -- we had launched -- I think it was at the very end of last year, but as has been great timing in analytics. So we're able to integrate kind of macroeconomic stress testing with our traditional risk modeling, which is a very huge focus for our clients now, and we're going to be bringing a lot more capabilities to market in climate as well.
You noticed we had announced the partnership with Swiss Re, which is about one aspect of that, but we're doing a lot more things in physical risk and climate expanding our geolocation tools. So I think just generally across the board, we're -- there will be more of a product pipeline than there has been.
And Baer, I think last year as well, I think you talked about how you were going to pick up the new product pipeline and maybe to a certain extent, you've taken the foot off the gas pedal and now you...
Yes. I think we're finally -- look, some of these things -- so if you take the index example, and I'm just being very transparent, during this whole period that we're reengineering the Foxberry front end into our back end, unless we hire a whole bunch of more people, which we didn't want to do in the current circumstances, we're taking people away from doing maybe some other type of index innovation.
So there's a number of these type of categories. I would say to a degree that was true also with fabric, our wealth what we now call MSCI Wealth Manager, which, again, we had a period of bringing that online, and now we're starting to bring it to market more. So look, we had a number of years where we were so massively focused during the boom period of the growth of ESG and sustainability, where we've basically put enormous amounts of effort on that, tons of resources, putting that into index, putting it into analytics.
And we've just had to recalibrate the portfolio and redistribute some of the investment. And inevitably, there's a little bit of a period of hiatus, when you say, okay, why do we redeploy this capital here and start building more stuff over here or over here, and there's a little bit of a window of hiatus, and I think we're getting through that.
Fair enough. And then just last question on the new product stuff. Obviously, from an expense standpoint, does this mean we should be expecting elevated expenses or it's not?
No. No. Look, I mean I think that's one thing God bless us that we're pretty disciplined about. So we're being extremely disciplined about expenses. We're being extremely disciplined about efficiencies. Look, there are some areas, let's say, in sustainability where we're deploying AI, where I think going to end up with a better quality product at a lower cost base. So we're being extremely focused on financial discipline, particularly the period of the volatility that we just went through.
The only thing that I would say was the immediate reaction, our immediate reaction was, look, we got to be financially disciplined. It's not so much that we know what the outcome will be, but this is not a period where we can be loosey-goosey. So we've kind of tightened that up. And we're just -- we actually had a meeting on this topic yesterday and we're just saying to people, "Look, by all means find a way of reengineering that, but it's going to have to come out of the budget you have today". So we're being -- I think we'll continue to be very disciplined.
And right now, I don't -- it doesn't feel like we're starving anywhere for capital. I think we're generally happy. There's a few areas we might want to put a bit more money into if we have a little bit more breathing space. But I don't feel like we feel extremely excessively constrained in view of where we are.
Got it. I want to talk about the Moody's partnership. But before that, maybe just private solutions, your line item. Can you just help us appreciate what's in there. I mean we all think private credit...
Yes, yes, yes. So look, first of all, in both sustainability and climate and in private markets, we had 2 new leaders join us right at the end of last year. So Luke Flemmer from Goldman Sachs to run our private market solutions and Richard Mattison, who came from S&P, who was the founder of Trucost to run our sustainability and climate.
So in essence, they also -- which is -- it's just -- life is tough, but such as they kind of inherited a whole. We had to do the 2025 budget, and we kind of gifted it to them and said, here you go. And then they obviously came on board and they're like, "Oh, okay, but I want to change this". And so I think that was part of the -- some changes being done there.
So Luke has brought in some new leadership people. And I think that -- so it's a little bit of a tale of 2 cities. Unfortunately, we continue to struggle with the real estate side of it. And that remains very painful and a fair amount of it is transaction driven in real estate. And so that's a little bit more abound. But in the total portfolio solutions for private markets, the Burgiss business is growing in the high teens. I think that, that is our de minimis goal for it.
So I think we can even do better than that. We're -- so if you think about it, so it has been a portfolio analysis tool for institutional LPs, right? And so what are we trying to do? We're trying to also make it more of a fund analysis tool for wealth LPs. Some of the largest wealth management organizations in the world are also the largest LPs. So it's taking the same solution and selling it to a different category of LPs.
And we're also trying to go more into -- so it's basically been a fund cash flow, fund comparison and then incorporating that into your total portfolio view across all asset classes. We're trying to go deeper in analysis of each individual asset class. So one example of that is in private credit, which is the Moody's partnership is but one thing. We actually have some a few other things that we're trying to do in private credit with some other parties.
So -- but we want to go deeper into the individual asset classes and provide more specific analytics for a given asset class for private credit or within private equity in buyout or in VCs. So we will be bringing more capabilities to, for example, look at how do you think about -- so we will be able to put, for example, factor exposures on equity -- private equity exposures in order to compare them to public markets. We will be doing valuation type of analysis.
Look, what is the dispersion of the marks on this particular company? And then how are the valuations of that type of company compare in public markets. So a lot more analytics at the asset class level for direct investments. So that's kind of the thing that we're going to be focused on.
Got it. And then specific to the most recent Moody's partnership, just help us appreciate what you're contributing, what they're contributing and how that works?
So in essence, in simple terms, they are obviously -- so to be clear, we're not providing -- we're not together providing an official credit rating, right? So we're not in the -- we're not -- that's a whole regulated area. We're not providing an official credit rating. But what we are -- what we are doing is providing things like default probabilities and other types of credit analysis. And in essence, what they're doing is they're providing the credit modeling, which they have, by definition, a lot of experience in. And otherwise, they wouldn't be who they are. And we are providing a lot of the -- precisely that underlying data on the transactions, et cetera, that we have directly from the investors in our private markets database.
And it's also been a great category for us to apply for -- on our data side, the use of AI has made it enormously more efficient to do that. That goes to the point about is cost going to expand, we've taken a category where, quite literally like last September, October, we had no use of AI. And with AI, we're able to read thousands of documents, parse them and then present that data to an analyst in a way that is enormously more efficient.
In the absence of us doing that, we wouldn't have been able to do this Moody's partnership. So it's basically Moody's analytics and our data to provide insights to people who are holders of private credit portfolios.
Got it. And just take a step back, the first partnership that you had with them was more on the ESG side. How is that going?
Yes. So basically, the distinction there is in the first partnership, they basically -- they had a -- they were a provider of ESG analytics, which was not going that great. So we basically replaced them. So it was kind of a different type of deal. They were -- they -- crudely, you could say we got a new form of ESG distribution and they got a solution that helped their P&L because what they were doing was not doing great there. So that was more of a point in time.
And then in turn, we took some of their private company data on a long tail of small companies, and we applied some what I would call high-level ESG analysis to it. But whereas -- so in a strict sense, the first deal was more like 2 transactions, one which was a little bit more in their interest and maybe one a little bit more in ours, whereas this is truly strictly speaking, a partnership. We are building a product together and then it will be a joint IP product. So it's building a new thing together, whereas the previous deal was more an exchange of data for 2 different use cases. This is truly a joint product and join IP. So that's exciting.
And -- yes, I mean the partnership makes sense and maybe just one more question on the partnership. Looking ahead, isn't perhaps the biggest opportunity between the 2 of you on the indexation side with that data. Is that what the vision is?
Yes. Look, I think there's a number of things, right? I think we're -- we have an open mind in all these type of partnerships where we can go in combining our intellectual property. I think we want to -- we typically want to make sure that we do each thing that well that we have a good outcome. This one is going to take quite a lot of focus. But going both to the Moody's and the Swiss Re case, it's a little bit of a cliche, but MSCI started in Geneva in 1969. So we always say that we want to be the Switzerland of our industry, right? We want to be a neutral party. We want to -- we want to try to have as many partnerships and alliances as we can. And so we'll continue to try and do that.
Got it. And maybe just on that, I was going to ask it later, but the partnership angle, you guys have always talked about being good at MP&A, Moody, Swiss Re is a great example. But is there M&A aspirations as well?
Look, we did a fair number in the last year or so. As I mentioned, whenever you do these, you have to be conscious that they also have -- the proof of the pudding is in the integration and the marketing, right? So it's a little bit like the Foxberry example that I was giving just a few minutes ago. So I think the short answer is we do want to do more of those kind of smaller bolt-on acquisitions that we can add value.
I think we need to pace ourselves a little bit because there is a little bit of a risk that you're trying to do too many of these things at once, can slow you down. So -- but I think we definitely have an open mind. There's a few things that we're looking at right now, which may or may not pan out, but we're looking at a few different things right now in index and analytics. So we keep an open mind.
And I think, look, one thing about the current environment, if it becomes a little tougher for some private companies, that's not necessarily a bad thing for us, and there could be opportunities for us to do some smaller bolt-on M&A.
Got it. Maybe just one question, specifically on analytics. The run rate, obviously, has been trending nicely, the higher end of mid- to high single digits. I know revenue, there was some accounting nuances. But anything particular in there that's driving that higher growth? Are you taking share from competitors? Has that dynamic changed?
Look, I think we've done well -- so maybe 2 things. In purely in equity analytics, we've done pretty well, notably with some of the newer segments like we've done well with hedge funds, we've done well with banks and broker-dealers. So I think we've -- and we will continue to -- we've brought -- I mentioned that we have kind of a next generation of models, which are incorporating a little more sort of AI-driven -- the -- if you think about it, we have the fundamental factor models, which have the traditional exposures, value growth and all of that. And we're using AI to basically look at clusters of returns, which may be a little more volatile or more transient. But that product is sold extremely well to more of the faster money segments, hedge funds or the sell side.
So that's an example of an area where we've innovated. We've brought some new products to market, and we've got good returns out of it. I think we're also -- and look, this is an oil tanker rather than a speedboat, so I don't want to get anyone too excited, but it's an oil tanker that's been moving in the right direction is -- our credibility in fixed income continues to just steadily get better. We win more clients. We have more credibility. And that's just -- it's a slower burn thing, but it really helps over time. And it helps also with our multi-asset class portfolio risk staff.
So I think there's no fireworks right now, but I think we continue to execute reasonably well. We're frugal with our use of capital. And so I think it will continue to be a good mixture of decent growth and very attractive, I think, margins, which are generally better than most comparables in the industry.
Got it. You renamed your ESG and climate business to sustainability and climate, just some context on why they're renaming? And then as a follow-up, I think from our end, it feels like the word ESG is dead.
So look, I think candidly, I'm not a big fan of acronyms anywhere. And actually I'm kind of always going around trying to walk acronyms on the head, everywhere they show up. We have a lot of internal acronyms. So I think it was always an inelegant acronym, and it's also -- so then it became kind of not the best thing to put on a product. And I think the concept of sustainability is broader. I think it genuinely is broader, and I think that the notion of sustainable investing is sustainable. So I wouldn't read too much into it, but I think we're basically saying this is a broader category and it will continue to change and adapt over time.
Got it. And any -- again -- just for our help, like discussions with the old clients on the ESG side. I mean you're still growing, obviously, it's a lot. And just in context of you were going to reset your long-term target, just some context.
Yes. So -- okay. So maybe just generally, and I used this analogy in a previous meeting, I know there were 1 or 2 people here who have to hear it twice. But I do think there is a strong, what I would call, [indiscernible] effect going on, right? So what is really striking, and I was discussing this with a client yesterday is there are a lot of institutional investors globally in all countries, including the United States, who are very strongly reacting to the current noise coming from Washington, D.C., right? And we've heard this across the board, actually, New York City controllers has made some public statements about this, the large California funds, certainly in Canada, across Europe.
So I think we are hearing many large institutional investors across the world want to restate their focus on sustainable investing. And we have been unequivocal in our commitment to this. So I think what that means is we -- our belief is we can be -- well, we are, I think, objectively but we are committed to be the leader in this category, right?
And so then you say, if the emphasis a number of years ago was heavily on ESG ratings, I think the emphasis will go more towards climate and more towards physical risk and climate and more towards looking at a variety of climate-related risks in portfolios.
So I think the sum of all of that is the category is important to us. We're continuing to efficiently using AI, investing in it to make it high quality and transparent. We'll continue to do things like Swiss Re. And we believe that there are very, very large pools of capital in the world who will continue to be focused on this, and we think we'll be the leader in serving them. And then political noise will come and go, and hopefully, we'll get through that.
So it sounds like you still think it will be an above-company kind of growth rate, but -- you don't want to set that long-term target?
We haven't -- look, we're not revising the number yet. As I said, we had a new leader who came in. He's only been in the seat a few months. So we didn't want to sort of have him come in and then like having just revised the target or put a different number on his head. So we'll have to make a more kind of official statement about that at some stage. But for now, we're just carrying on with those numbers.
Okay. I guess we're out of time. So just one rapid fire question, Arsenal, PSG score today.
Yes, I was going to say 2:1 Arsenal, but then that means penalties. So I don't know we'll see...
We'll start with that. All right. Thank you very much, Baer, and thank you, everybody else.
