MSCI Inc
NYSE:MSCI
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MSCI Inc
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Good day, ladies and gentlemen, and welcome to the MSCI First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, where we will limit participants to one question and one follow-up. Further instructions will follow at that time. As a reminder, this conference call is being recorded.
I would like to now turn the call over to Mr. Jay Penn, Interim Head of Investor Relations. You may begin.
Thank you, operator. Good day and welcome to the MSCI first quarter 2019 earnings conference call. Earlier this morning, we issued a press release announcing our results for the first quarter, which is available on our website, along with our earnings presentation and a first quarter update. A copy of the release, first quarter update, and the slide presentation that we have prepared for this call may be viewed at msci.com under the Investor Relations tab.
Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For a discussion of additional risk and uncertainties, please see the Risk Factors and forward-looking statements disclaimer in our most recent Form 10-K and our other SEC filings.
During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures, including, but not limited to, organic operating revenue growth rates, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS, and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide insight into our core operating performance.
You'll find a reconciliation to the equivalent GAAP measure in the earnings materials and an explanation of why we deem this information to be meaningful, as well as how management uses these measures, on pages 21 to 27 of the earnings presentation. We will also discuss organic run rate growth figures which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.
On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President; Andy Wiechmann, our Interim Chief Financial Officer; and Linda Huber, who will be joining MSCI as our new Chief Financial Officer officially this Monday, May 6.
With that, let me now turn the call over to Mr. Henry Fernandez. Henry?
Thank you, everyone, for joining us today. Before I provide my comments for the quarter. I would like to take a minute and welcome Linda Huber to the MSCI family. As many of you know, Linda previously served as a Chief Financial Officer of Moody's Corporation for 13 years. We're very excited to have her join MSCI and help us continue to build this incredible franchise. I would also like to take a moment to thank Andy for his leadership within our finance organization and congratulate him for his appointment as our Chief Strategy Officer.
2019 is off to a great start. We delivered our sixth straight quarter of 10-plus percent organic subscription run rate growth, demonstrating the resiliency of our franchise and the strength of our business model. In Q1, we also hosted our first Investor Day in five years. It was a great success and we had a very significant turnout. I want to thank all of you that were able to join us. We appreciate your participation and your strong support. We had over 250 people join us in person or via webcast.
We hosted this Investor Day to provide you with a deeper understanding of our key strategic initiatives, to highlight the achievement of our financial performance over the last several years, and to provide you with an update of our long-term financial outlook. This event also gave us the opportunity to highlight more succinctly who we are, how we view ourselves, what is the role that we play in the investment process, and what is it that we're building in this great franchise.
Our mission at MSCI is to provide content and tools to help global investors build better portfolios for a better world. We are a provider of investment solutions designed to help institutional investors better understand both the market in which we operate and their portfolios. Through our unique data, analytical tools and research, investors can compare investments in a U.S. publicly traded stock, a high yield bond from an emerging market like Argentina, and an office tower in Japan as a way of an example.
Therefore, investors can have a much better understanding how these seemingly disparate assets relate to their portfolio. Our solutions help investors evaluate their asset allocation and portfolio construction decisions, bringing increased transparency to the opaque and complex nature of their investments from all over the world.
The Investor Day also gave us the chance to showcase several key areas of our company and our long-term growth potential, including our value proposition, which is built around actionable client solutions, differentiated content, and flexible technology. Our key pillars of our strategy, which include growing our core, executing on in-flight opportunities and capturing the next wave of opportunity, so that we can put additional layers of growth in our company.
Our enormous growth potential in the market of professionally managed assets around the world, which currently stand around $100 trillion and we're only scratching the surface of servicing the owners and the managers of those assets. Our go-to strategy – our go-to-market strategy, an ability to provide solutions to our clients to help them make better investment decisions.
Investor Day also allows to illustrate key industry trends that are creating enormous opportunities for us, including the growth of global investing whether it's develop markets, or emerging markets, or different asset classes; the increase in passive management of assets; the incorporation and integration of factors and ESG into their investment processes; the need for investment differentiation and operational efficiency of our clients; and of course, the shift of the asset allocation towards private assets, including private equity, private real estate. These are just a few of the trends that are propelling our growth in the company.
Finally, on Investor Day, we updated our long-term company target, which includes low double-digit revenue growth, excluding asset-based fees, which obviously vary depending on the market cycle; high single-digit adjusted EBITDA expense growth; mid-teens adjusted EBITDA growth; and mid-to-high 50s adjusted EBITDA margin rate. These financial targets underscore our belief in the significant opportunities in front of us at MSCI, and our confidence in our ability to generate long-term growth for the benefit of our clients and for the benefit of creating shareholder value. If you did not get a chance to join us during the Investor Day, please listen to the replay of the webcast, which is available in the Investor Relations section of our website.
In summary, our franchise remains incredibly strong as evidence to the performance that we had in Q1. And we feel confident of our prospects in 2019 and beyond.
With that introduction and a review of what we covered in Investor Day to remind us all of what we did and where we are and where we're headed, let me now turn the call over to Baer.
Thank you, Henry. I'm pleased to share with you some key accomplishments from the first quarter. The long-term trends we have discussed in the past are all creating opportunities for us. These trends include the continued globalization of investments with investors shifting from a strong home bias to diversified global portfolios, increasing allocations to private assets, and the need for greater transparency in these markets, as well as a growing focus on sustainable and factor investing.
Investments we are making in technology, such as our analytics platform, which we recently branded as Beon, will further enable the use of all of our MSCI content to help clients build portfolios and understand the drivers of risk and performance.
We also continue building out our capabilities in content in areas like fixed income. We now have industry-leading researchers and differentiated content which we continue to expand and complement with platform enhancements.
These capabilities have been instrumental in fueling some of our largest analytics transactions and can be seen by the 8% organic subscription run rate growth for multi-asset class analytics. And these capabilities, together with investments we have made in areas like ES&G, have been instrumental in helping us win some recent large transactions with global asset owners. In fact, we have one of our best quarters for sales within the asset owners segment in the first quarter of 2019.
Organic subscription run rate growth was 13% for asset owners in the first quarter. Growth within asset owners was fueled both by investors taking a much more proactive role in monitoring externally managed portfolios as well as directly managing portfolios themselves.
Our wins in the first quarter were the result of our continued focus on developing and deepening our relationships and engagement with large asset owners. In the first quarter, several asset owners selected MSCI to deliver indexes designed to help them achieve specific investment objectives. As an example, a client added minimum volatility equity ETFs linked to MSCI indexes to a U.S. portfolio to help lower its overall volatility with a plan to allocate to other factor ETFs over time. An endowment (00:12:03) used an MSCI ACWI ex-Fossil Fuels, ex-coal generation custom index to benchmark an allocation to a climate change strategy.
A major plan seeking to simplify reporting selected the MSCI ACWI Index for a policy benchmark, which previously was a combination of Russell 1000, Russell 2000, MSCI EAFE World EM and EAFE Small Cap. Our indexes were also selected by a client to manage a longstanding divestment policy on tobacco, using the MSCI USA ESG Universal ex-Tobacco and the MSCI World ex-USA ES&G Universal ex-Tobacco indexes for two passive mandates totaling $375 million.
Finally, I'd like to highlight our regional growth. In the first quarter, Asia was our fastest-growing region, reinforcing the emphasis we put on Asia at our Investor Day. Organic subscription run rate growth in Asia was 13%. We had several notable wins in Asia in the first quarter of 2019, including one asset owner with well over $100 billion in assets, who enhanced its risk management capabilities and developed deeper performance and risk insights using MSCI products and services.
This client selected our multi-class analytics to help them better understand exposures, run scenario analyses, and position its portfolios in the face of volatile markets. Overall, we're very pleased with our consistent execution. I look forward to providing further updates on future calls.
And with that, I'll turn it over to Andy to provide some financial highlights. Andy?
Thanks, Baer, and hello to everyone on the call. As Baer and Henry highlighted, this was a strong quarter that highlighted our continued success in executing our strategy. The double-digit organic subscription run rate growth in the quarter was driven by strength across all regions. The Americas were up 9%, EMEA was up 11%, and Asia up 13%. Asset owners and asset managers, which together comprise about two-thirds of our subscription run rate, had organic subscription run rate growth of 13% and 10%, respectively.
More broadly, many of the areas where we are seeing the strongest momentum are areas where we have been investing over the past couple of years. Areas such as ESG, wealth and Asia all have run rate growth rates above 12%. While continuing to fund and expand these long-term opportunities remains a top priority, we're also looking to add layers of growth for the future.
For example, in real estate, we continue to develop our enterprise analytics platform. This platform is allowing clients to more easily access and interact with our real estate benchmarks, analytics and market information, as well as to much more easily contribute their proprietary data which underlies those tools. We also continue to invest in data science capabilities.
In addition to driving productivity and operating leverage across the firm, these capabilities are enhancing the breadth, richness and quality of our content across areas like analytics models and our ESG Research. Additionally, recurring subscription sales and net new recurring subscription sales were quite strong for the first quarter, up 16% and 34%, respectively, as we were successful in closing a number of deals in the pipeline. As you know, timing of deals can lead to some lumpiness in net new quarter to quarter.
Overall, the business landscape looks solid and our subscription business remains on track. AUM and equity ETFs linked to our indexes are touching all-time highs, driven by healthy cash inflows and favorable market movements. Of the $28 billion of inflows during the quarter, about a third or $9 billion came from funds based on U.S. exposure indexes. That represented over 100% of all flows into U.S. exposure ETFs during the quarter. Much of these flows into U.S. exposure products was in the ETFs based on our Factor Indexes, where we witnessed strong flows into low volatility and quality products. Overall, we saw close to $12 billion of flows into ETFs based on our Factor and ESG Indexes.
Now, before we open the line to questions, I wanted to draw your attention to a few points, including some comments on our guidance for the year. Given the strong business landscape, the strong momentum we are seeing in key growth areas and the elevated levels of AUM and equity ETFs linked to our indexes relative to where we were at the beginning of the year, we plan to capitalize on some of the attractive growth opportunities in front of us and plan to make some modest incremental investments. As a result, we expect adjusted EBITDA expenses to be toward the top end of the guidance range of $685 million to $705 million. We believe these are high-returning investment areas and will continue to fuel the long-term growth of the company.
I want to underscore that long-term positive operating leverage remains important to us. Overall, our guidance reflects our disciplined approach to improving productivity and becoming more efficient, while still funding investments. It's an approach that's paid off over the last few years with high subscription growth rates and margin expansion.
With regards to our tax rate guidance, based on the $67 million income tax windfall benefit related to the vesting in the first quarter of the multi-year PSUs granted to certain executives in 2016, we are lowering our full year 2019 effective tax rate guidance to be between 9% and 12%. This benefit from multi-year PSU awards represents a full-year benefit of approximately 11 percentage points and will be excluded from adjusted EPS. Excluding this benefit, we expect the effective tax rate used for our adjusted EPS to be more in the range of 20% to 23%.
Lastly, I want to comment on one reporting update. We've historically posted the prior month's end AUM and average monthly AUM in ETFs linked to our indexes on our Investor Relations homepage on the second business day of the month. For the April figures, we will be posting the information on or about May 15th. We've recently made some changes to the data vendors we used to track this data, and as a precaution, we are allowing for sufficient time for testing and transitioning of the data to ensure it meets our quality standards.
With that, we will now open the line to take your questions.
Thank you. And our first question comes from Toni Kaplan with Morgan Stanley. You may proceed.
Thank you. First, congratulations Linda and Andy, on the new roles. Andy, you just mentioned that you're going to be at the higher end of the expense guidance because you're investing in some of the opportunities, and you mentioned a lot of those opportunities at the Investor Day. Just wanted to get a sense of which ones in specific that you're most excited about that you're going to be spending the incremental money on versus where you originally expected? Thanks.
Hi, Toni. It's Baer here. So, these are all previously prioritized investments that we feel strongly about and we've discussed previously. The three main buckets we're going to be putting some incremental money in are ES&G, fixed income, and our technology investments, notably in our platform, in Beon. So, those are the main areas we're focused on at present.
That's great. And then, separately, in ESG, we're hearing all the time about companies trying to get into that area just given the fast growth in the market. And Moody's, for example, recently acquired a majority stake in a provider of ESG research and assessments and, basically, wants to create standards in ESG, and I know you're already doing that.
So I just wanted to get a sense of if you're feeling like the market's getting more competitive. I imagine that your being a first-mover really helps, but just want to understand a little bit better the competitive environment and your differentiation from competitors and sustainability of growth in that area. So, thank you.
Yeah. Yes, Toni. So, clearly, MSCI is the leader here in this space, and we want to continue to drive for that leadership in terms of, clearly, investments and revenue growth and profitability of this product line. A major area of differentiation that MSCI is trying to bring to this market is to have an integrated, comprehensive product line for sustainable investing, from the research that is needed for investors to screen or exclude different type of investments to the ESG ratings. We currently rate about 15,000 issuers around the world and counting.
The ESG indices that can serve as the basis for portfolios of equity or fixed income instruments, and also the ESG as factors in our equity and multi-asset class risk models to understand risk and performance and portfolio given ESG characteristics.
And lastly, to be able to put all of that content, all of that ESG content in our analytics platform, especially Beon, the new branded analytics platform. So, that's an area of significant differentiation, but obviously to drive that leadership and to drive that growth that we have experienced, we need to be at the forefront of security coverage, of having client coverage personnel participating in conferences and the like. And there, to do – put a lot of new technology in terms of data science and the newer technologies of AI and machine-learnings to capture a lot more data for the input into ratings. So that is the reason why we are stepping up a bit the investment in ESG going forward.
And Toni, you probably noticed, but the ESG run rate growth remains very healthy, both on the – what we call ESG content side or the rating side, as well as on the index side. And so, on the ESG ratings or Research side, or the content side, run rate growth, ex-FX was the mid-20%; and then, on the ESG Index side, 43%. And notably, among ESG Index subscriptions, the run rate growth was 53%. And we saw pretty strong health across geographies and particular strength in Asia, along the lines of Baer's comments earlier.
Great. Thank you.
And our next question comes from Alex Kramm with UBS. You may proceed.
Yeah. Hey. Hello, everyone. Wanted to shift gears quickly to the analytics side. I think at the Investor Day, that was one of the most aggressive increases in your medium-term guidance. But when I look at the quarter, and I know it's one quarter, but I think the subscription growth, it was fine, it wasn't great. But maybe just put that in context, what you're seeing out there, and what the environment is like for analytics, and where that really can ramp as you go through the year.
Yeah. Hi, Alex. Baer, here. So look, I think we've been pretty consistent in how we've talked about analytics over the last number of years, which is that we would expect to see a continued increase and a steady increase in the growth rate, which I think we've delivered. So, that fundamental message hasn't altered. I think the climate in which we're operating is the same as it was a quarter ago. So, I don't think you should read too much into this quarter. I think the strategic message is the same. I think we're confident that our investments are paying off whether they be in technology for analytics or in fixed income, as an example. So, the thesis is the same, a steady, continued growth, and the market opportunities, including in the comments I just made a few moments ago, we're very confident about them.
All right. Fair enough. But maybe staying on that business, just a couple of follow-ups. One, on the expense side, I mean, it seems like the expenses in analytics have been pretty a range-bound. So, that's a little bit surprising. Is that an area – you didn't highlight it as an area of increased spending. Now, some of the stuff like fixed income is in there. But just wondering if that needs to be a step-up that will surprise us?
And then, just secondly, real quick, on the pricing side in analytics, some discussions we've been having seem to suggest that you're getting maybe a little bit more aggressive in that business on pricing. Anything you can flesh out on pricing in that business will be helpful too. Thanks.
Sure. Okay. So, on the first point, for sure, of the three categories I mentioned, ES&G, fixed income and Beon technology, two out of the three are linked to analytics. Equally, we're for sure not planning any surprises on expense growth. We've been extremely disciplined for quite a number of years on analytics expense growth, so you should not expect any surprises there. And equally, on pricing, I think we have – probably, starting closer to 18 months ago or so, we started to be more, how shall I put it, direct on looking at those clients where we felt we were delivering more value than we were being paid for, and we've been kind of cleaning that up steadily over time, and I expect that to continue. But, again, it's not a seismic change type of thing. It's just a continuation of the strategy, which we have been communicating now for a few years.
Fair enough. Thank you.
And our next question comes from Manav Patnaik with Barclays. You may proceed.
Yeah. Hi. Good morning. I just wanted to ask about your thoughts on sort of the competitive landscape on the analytics side. Obviously, there was one acquisition of note in the last couple of months. But just curious how you guys would characterize that field today?
So, some of the M&A activity in this space has confirmed finally that the strategy that MSCI created some 15 years ago at the time of the acquisition of Barra and then subsequently through the acquisition of RiskMetrics is being copied by many other players in the marketplace. So, therefore, it's a good testament that what we started to build many, many years ago is working well and that is the convergence that is taking place in the world.
Secondly, we have a relatively large, large lead in working through that strategy of integrating content of indices, content of analytics, such as factors, for example in equity or fixed income, content obviously in ESG, and then delivering that through either analytics solutions or through index solutions; think of them as portfolio solutions to our clients. So, we have quite a lead and we intend to remain the leader in the marketplace, even though obviously there will be more actors in the space and there will be more competition.
We believe that this is going to be a big business, made up of bigger companies as opposed to the nichey small players in the marketplace. And we welcome competition, makes everyone good, and we intend to win in the context of that competitive landscape.
Got it. And just in terms of your latest thoughts on how active you guys are in terms of your own M&A pipeline. Obviously, in terms of all these other alternative areas you're growing in, there must be a bunch of niche things you could add on. So, I was just curious if you could update us on where you guys stand there.
Yeah. So, we see pretty much everything that is up there for sale, and we engage in some deeper due diligence in some and not in others. Everything that we want to do has to have a very strong strategic logic that is an extension of what we do rather than go sort of greenfield; and secondly, and extremely importantly, has to be predicated on very strong financial returns.
And given the frothiness of the markets right now, given the heat in this space and the willingness of players to throw a lot of money at incredible valuations with what we believe to be relatively low or negative financial returns, we are happy to stand out and let them take those companies. And the other thing about MSCI is that we really don't have to do a lot of the things. And so, a lot of these incremental acquisitions are really optional. So, we'll continue to look and see what we find, but it's got to be grounded on very strong strategic logic and a strong financial return.
All right. Got it. Thanks a lot.
Manav, the only point I would add on that is – and we've talked about this in the past, inorganic growth through partnerships continues to be an attractive area for us. And so, we are spending an increasing amount of time working with some of those technology and unique content providers as you alluded to as a way to enhance everything we do today and broaden what we do today. So, it's not always about owning outright or controlling some of these properties to get access to some of the key capabilities.
Got it. Thanks, Andy.
And our next question comes from Hugh Miller with Buckingham. You may proceed.
Hi. Thanks for taking my questions. Just wanted to start one on – as we think about the free cash flow of the business, obviously, very strong, the equity position that you're currently at right now and the stock's valuation where it is now, how do we think about kind of the appetite for share buybacks in the near term?
Yes. So, as we have repeatedly say for quite a number of years, we, one, believe that the long-term prospects of MSCI are enormous and, therefore, the potential for high valuations remains there. On a more short-term and tactical basis, we are opportunistic buyers of our stock, not because we don't see value here and there, it's just we will rather buy on weakness than on richness, and we have proven that that formula has worked. Last year, we bought $950 million or so at an average price of $1.47. We did a little bit at the very, very beginning of this quarter, $102 million at an average price of $1.48. So, we're going to be patient buyers of our stock and pounce when others are fearful, and stand out when others are greedy.
Hugh, the only other variable to factor in here is our cash position, which on the heels of all the repurchases that Henry alluded to, plus the first quarter, which is always a light cash flow quarter for us. Our cash balances come down to somewhere in the $650 million range, which means we have a more modest amount of cash; still a meaningful amount, but not as much as we used to. And so, we can be a little bit more opportunistic.
Sure. Very fair point. I appreciate the color there. And then, I guess as a follow up, as we think about kind of the advances that you're making with MSCI Beon, how do we think about kind of the monetization of that enhancement? Is that primarily a driver of kind of the ability to increase prices or is this more of an increased adoption within current clients as you get more people potentially using the platform and the product, or just like a new client penetration just with the stronger platform?
Yeah. Well, for sure, it's a large opportunity with our existing clients. So, as you know, many of our clients use a variety of our content and applications, and bring these together through many of their internal tools. And Beon will significantly improve the user experience and the flexibility in that regard. So, we think that with our existing clients, there's a lot of upside. Equally, the tool, the product will create a very attractive user experience, which we think will win new clients to MSCI and we're seeing some early evidence of that as well. So, I think really what it is, is it's an enhancement to our overall analytics strategy for existing and new clients, and also a very attractive distribution tool for all of our MSCI content.
And just a quick follow up, if I may, is there a timeframe that we should be thinking about in terms of the broad roll out of that?
Yeah. Well, this year we're rolling out the product for equities and have a pretty aggressive timeline for getting the full range of MSCI equity functionality on to the platform. And starting next year, the multi-asset class capabilities will start to be rolled out. And so, that's really kind of the plan; equities this year; multi-asset class, next year; and from that way forward.
Thanks.
And our next question comes from Henry Chien with BMO. You may proceed.
Hey. Good morning, guys. I just had a question on some of the trends that you're seeing on ESG. I mean, it sounds like there is a – if I'm thinking about it correctly, there's a sense of in-sourcing from the asset owners as well as growth in the wealth manager side. I was just wondering if you could just describe a little bit more how MSCI fits into this new world of ESG. Is it just index data or are you taking more of an active role in the investments?
So, we are clearly early in the process of sustainable investing in the world. At MSCI, we believe that over a period of time, all of these sustainable investment processes will become totally part of the mainstream process. So, it will converge or blur ESG sustainable investing into the mainstream investing, so that there will come a point in which investing already will capture sustainable investing in addition to, think of it as, financial investing or only looking at financial metrics of investing, right?
So, secondly, MSCI is a clear leader in providing research, guidance, tools of all types from research for exclusion, or to ratings, to indices, risk models, and all delivered in various platform of MSCI, plus other platforms in the world. We intend to be all over this opportunity. We think it's a very significant one. At MSCI, we have the organizational structure, we have the technology, we have the data science. A big part of all of this is capturing the right data, not only company reported data, but a lot of data from all over the world, unstructured or structured data. So, the scalability of this product line is something that we're very focused on and very confident about.
And lastly, we are called upon by asset owners and asset managers all over the world to help them think through this thing, to help them figure out how an asset owner should incorporate this. They're not going to do it rating by rating. They're not speaking stocks. So, that's more of a portfolio decision. So, this is where indices come in. Active managers are trying to incorporate this in a day-to-day stock or bond picking process. So, we work with them on that. Risk managers are trying to understand how to manage risk in their portfolio. So, this is where the ESG and factor model comes in, and all of that.
So, I could tell you that five years ago, maybe 10%, 15% of my dialogue with senior clients was ESG. Today, I always have to leave the ESG discussion to the second half of the meeting, because if I start with that, that's all we're going to talk about it the whole meeting.
Got it. Okay. Great. Thank you for the color.
And our next question comes from Chris Shutler with William Blair. You may proceed. If you have yourself on a mute, please unmute your line.
Hey guys, can you hear me?
Yes, we can hear you, Chris.
Okay, great. Sorry about that. At Investor Day, you mentioned asset managers centralizing their procurement efforts around indices and analytics products. What inning do you think that centralization trend is in and how should we think about the pros and cons of a centralized procurement for MSCI?
Look, I think we're a good part of the way there just purely from like the administrative point of view. So, I would say that in the last number of years, we've seen that – well, that centralized procurement has always existed to a degree. It's been strengthened in the last number of years. And I think we're pretty much there. I think there are relatively few firms where just investment teams make those decisions on their own, at least within larger asset managers. So, I think it's well-established. I think we're comfortable in dealing with it. So, in that sense, I don't think it's a change which will have much of a material impact going forward. It's kind of an established pattern that we're working with.
So, we also, Chris, anticipated this trend from four or five years ago. As you may remember, we said in Investor Day and other forum, we have built the MSCI and all the product lines largely on the basis of a subject matter expert at MSCI talking to the user at the client or the active manager, and then the user going up the hierarchy to get approval of the budget for them to buy the product or the service. So, that's how we've built it and we've done very well with that process and we'll continue to do well. But about four or five years ago, we anticipated this change – this pressure on the business model of active managers, obviously, because we were in that part. We were part of the entity putting the pressure on the – given our passive activities.
So, we developed this top-down approach of covering the client in addition to the bottom-up with the senior account managers going to people like Baer, and myself, Laurent Seyer going to the CEO and the CIOs, and the CROs, so that we can capture the part of that budget that is no longer controlled by the users or the middle manager. A lot of the budget in these active managers organizations that are being centralized are being determined in terms of their allocation by the C-level people. So, we need to have a seat at the table as to how that gets allocated and for MSCI to help them spend their money right .
Okay. Thanks. And then, you mentioned incremental investment in fixed income. Just maybe a little bit more detail there will be helpful. Thanks.
Sure. So it's quite – relatively straightforward. So, we have been really enhancing a lot of our modeling in fixed income, for example, in modeling in asset-backed securities and other areas of that kind. We're putting more investments also into fixed income indexes, notably Factor Indexes. There's actually an overlap with the ESG as we're doing a lot of rating of fixed income instruments and issuers in ESG. So, those are some of the main buckets of fixed-income investing that we're doing okay.
Okay. Thanks a lot.
And our next question comes from Bill Warmington with Wells Fargo. You may proceed.
Good morning, everyone. So, the Q1 net subscription sales, very strong and combined with the favorable cancellation rate gave you a very impressive net new, up 34%. And that's particularly strong for Q1. And I wanted to ask if there was a pull-forward of some demand there or whether that strength is something that we can expect to continue for the next few quarters.
Bill, as you know, Q1 of 2018 was relatively light. And generally, Q1s tend to be pretty light for us. And so, that gave us, firstly, a relatively easy comp on the growth rate. To your point, timing of sales, particularly some of the larger ones, as well as cancels on the net new side can have a factor in any given quarter. And as I mentioned in my remarks, we were successful in this quarter in closing a lot of the deals in our pipeline. And so, I'd say – my broad comments would be, quarter-to-quarter, as you've seen in the past, sales and cancels tend to be a little bit lumpy.
What I would add to Andy's comment is that if you notice the trend at MSCI over the last few years is we are doing more with the largest asset managers and largest asset owners and banks in the world. Secondly, our sales have gotten to a higher median of price – not price, but of total value, for sure, in analytics, a bit; and increasingly so in Index and in ESG. So, therefore, if that trend continues, in which we're doing a lot more with the biggest clients of the world which have deep pockets and we're selling them more things at much higher total dollar amounts relative to the base of sales, whether – if we put $5 million into one quarter at the end versus the $5 million that goes into the next quarter, as an example, is going to determine whether it's incredibly strong quarter or an average quarter.
So, we want to stress over and over again to you that there will be lumpiness in quarter-to-quarter, more so – a little more so than in the past. We want to be very open and transparent with you as to how we see the pipeline and whether there's something to worry about, or something that is weakening, or something that is strengthening, so that you look at the thing on a aggregated version of a few quarters at a time, at rolling quarters. Because if not, you're going to take a strong quarter and extrapolate that we're knocking the cover off the ball, and you're going to take an average quarter and say things are slowing down and that may end up being the wrong conclusions.
Yeah. For my follow-up question, you'd highlighted ESG wealth in Asia as area that's growing above 12% organically. And I wanted to ask specifically about the wealth management segment there. Maybe you could talk a little bit about the pipeline of opportunities there. And it had been a place where you were investing in technology, and had you gotten your systems to the point where you feel you can and are winning net new business there with new clients?
Sure. So, I think most of the wealth sales that we're seeing are very much content-led, which is in Index, in ES&G and other areas. And including – I would say that if we're using our definition, which we've been consistent about content in analytics being our models and those type of capabilities, that's really what's continuing to drive our wealth growth. So, at present, we're not in the process of designing a wealth specific new application or product in that sense. But we do think that in addition to enriching all of our content, we will have both, one, in investments, in client coverage, which are extremely important. We've invested, for example, in client coverage of wealth in EMEA, in Europe, to mirror what we've done successfully in the U.S. And we also think that our new platform will give us openings into wealth going forward.
And just so, you have the stats, Bill, because I know we've given them in the past, the index subscription run rate to the wealth segment was 22%. And within ESG, it's in the high 20%. And so, we continue to get some very strong momentum in those key content areas within the wealth segment.
Got it. Well, thank you very much, and also congratulations to Linda and Andy on the new role.
Thanks, Bill.
Thank you.
And our next question comes from Joseph Foresi with Cantor Fitzgerald. You may proceed.
Hi. This is Drew Kootman on for Joe. Just one question for me. I was wondering if you could talk about any shift you're seeing in the demand environment. Obviously, with a lot of volatility in Q4 and then the strong market rebound in Q1, just to get any kind of sense you guys have about AUM shifting and what you expect moving forward.
So, let me address the overall market environment and then Andy can provide a little more granularity on the AUM and ETF, right? So, on the market environment, we made a conscious decision in the second half of last year that going into 2019 we did not believe that the world was going to continue to slow down dramatically, or go into recession, and that the market environment was going to be bad. So, therefore, we created a budget that was – an operating plan that was proactive in order to capitalize on a lot of the opportunities in 2019.
We obviously have what we call an upturn playbook and a downturn playbook. The downturn playbook means that if things get bad, we have a lot of levers to slow down investments and, therefore, slow down EBITDA expenses. And in an upturn environment, we have a plan, very explicit plan, which Baer alluded to, which is we can add a small amount of incremental investment to capitalize on those opportunities.
So far it's playing out exactly as we said. The correction in the fourth quarter was a completely overreaction by the market. We took advantage of that in our buyback. We kept our budget and our operating plan in place. The market environment is pretty benign to us. It's not galloping up or anything like that, but it's good. And therefore, we want to continue to capitalize on that and you see that in the subscription run rate – the organic subscription run rate.
Now, the ETF, obviously, there is a lot shifting back and forth. But, Andy, you want to provide some comments on the ETF, AUM?
Yeah. I would just highlight, firstly, before I touch on the AUM, the retention rate in the quarter, you probably saw, was 95.2%, which is close to the – if not the lowest rate we've had in a first quarter. And so, I think that's reflective of kind of the environment that we're seeing or at least the demand for our tools.
On the AUM side, clearly, you saw that, over the last quarter, the AUM has gone up for us over $100 billion. $28 billion of that was from inflows. And so, we definitely benefited from market appreciation. But the inflows look pretty healthy from our perspective. That $28 billion was about 70% of all the inflows during the quarter into ETFs.
I think a lot of that was driven by – as we talked about in the prepared remarks, we definitely saw some strength into ESG and factor products as well as U.S. exposure products, particularly our factor U.S. exposure products. We also saw, of that $28 billion, about $15 billion went into emerging market exposure ETFs, and the bulk of that was in the broad emerging market products. And that came from both U.S. and European listed products.
So I think part of the benefit was a little bit of a rotation back into emerging markets, which naturally we benefit from. But I think a lot of it was idiosyncratic to us based on some of the newer high growth areas like factors and ESG.
Perfect. Thank you.
And our next question comes from Craig Huber with Huber Research Partners. You may proceed.
Thank you. My first question, the subscription part of your business within index is up a very strong 12.8% year-over-year. Can you just break apart for us the volume component of that versus pricing year-over-year?
Yeah. So, I'd say it's very consistent with what we've seen in the past. So, about a third roughly or even less than a third of the growth is coming from price increases, but we continue to fuel that growth mainly through volume. And so, we continue to see strong health in the key areas of growth for us. So, I mentioned already the subscription run rate growth from ESG indexes of 53%. For our factor – index factor module, it's 40%; our custom modules, 19%. And so, these have continued to be key growth areas for us.
I'd say, from a client segment standpoint, we are continuing to get strong traction in some of these new or I'd say higher growth client segments like wealth and asset owners, where among wealth managers, as I alluded to, 22% subscription run rate growth; and asset owners, at 27%. And so, those are areas that we continue to see a long runway of growth and continue to fuel – keep that elevated subscription run rate growth.
Then my follow-up question on the cost side of things. How would you categorize the labor market right now in terms of wage inflation out there? I know when you're out in the marketplace trying to hire all these high-end, well-educated folks. But is there any extra upward pressure on wages you have to pay to attract folks, anything out of the ordinary here?
Not really. We, at MSCI, benefit enormously by the global footprint of operations that we have. We have offices in 21 countries. As you saw in the reported material, we already are at 62% of our total employee base in emerging market centers from 59% at this time last year. So, we clearly are in a competitive market, but we can shift where we locate people in a lot of different locations and make sure that we extract the best talent possible. So, that has not changed that much, even though, in the U.S., which is – remember, we only have about 700-and-change, maybe 750 people in the U.S. compared to over 3,100 people that we have globally.
And our next question comes from Keith Housum with Northcoast Research. You may proceed.
Good morning. Congratulations, Andy and Linda. First question has to do regarding, I guess, the retention rate being as good as it is, understanding that MSCI has done a lot of things to make yourselves more important to the customer. But are we also seeing a stabilization in the overall market?
Yeah. I think that the retention rate on index has always been very strong and we're trying to take steps to make it even stronger, right? ESG, the retention rate was fairly high. And as the run rate grows on ESG, it's obviously going to not be as high, but within a high definition, right, similar to index, for example. On analytics, a lot of the efforts that we have put in place in the last 18 months have been to significantly increase our servicing capabilities to the client. Our analytics product line is made up of a lot of content that needs to be understood how to use that content, and then the technology that enables that content. Think of them as the platform, the technology, our applications platform that enable that content.
So, what we have found is that a lot of clients have this incredibly sophisticated content and tools, but they're only using a small part of it. And that sometimes when it leads to cancellation, so we have a strong push in helping clients understand how they can use it more broadly, deeper in their organization, and that will mitigate cancel.
Now, having said all of that, renewal rates and cancels will be lumpy, particularly in analytics. There will be some quarters that is going to appear a little higher, and there's some quarters that are going to appear a little lower. And we will endeavor to tell you whether you worry about – we should worry about or not worry about, but it is important not to extrapolate on a quarter-to-quarter basis. It's always better to take two, three quarters in aggregate and see where the trend is going.
Great. Thanks. And just a follow-up question, the tax rate for the quarter was obviously really low, even outside of the stock option units. Is there any drivers of that? And I guess, do we – I believe that the guys take them (00:59:05) down a little bit on the top side for the rest of the year. I guess, what's driving the tax rate, I guess, lower than expectations?
Yeah. It was almost entirely driven by the windfall benefits we saw in the first quarter on the vesting of stock-based compensation. So even outside of the multi-year award vesting which we're excluding from the adjusted EPS tax rate, the normal course stock-based compensation windfall benefit was higher than what we've seen in the past, largely driven by just the strong stock price performance. So, it was close to $10 million of windfall benefit that we saw outside of that multi-year benefit.
Great. Thank you.
Thank you. Ladies and gentlemen, this now concludes our Q&A portion of today's conference. I would now like to turn the call back over to Mr. Jay Penn for any closing remarks.
So, Henry's going to actually...
Yeah. I would just like to conclude by saying that you probably noticed that we've put in not only the slides in the website, but we've also put in a first quarter update that – few pages that goes over a review of the strategy that we went through Investor Day and I did a little bit of that in my comments, some of the client wins and where things stands on the client side, some of the product introductions that we did in the quarter, and a little bit on the inside MSCI, internally, what are the things that we're working on and that are salient to the quarter.
We did that in an effort to limit the prepared remarks so that you could read them ahead of time and then we can spend a lot more time on Q&A. We'll like to continue to push that envelope further in order to allow for a lot more discussion and a lot more answer to your questions as opposed to all of us sitting in a conference call reading the prepared remarks. So please give us a lot of feedback into that, what works for you, what doesn't, and like to make sure that we calibrate this correctly.
Back over to you, Jay.
Thanks, Henry. Just want to thank everyone for joining the call today. Really appreciate the continued support and look forward to keeping you posted on our progress. Have a great day.
Ladies and gentlemen, thank you for attending today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.