DWS Group GmbH & Co KgaA

XETRA:DWS

Earnings Call Analysis

Firm Maintains Stability Amid Market Challenges

In a tough market, the company reported performance and transaction fees contributing 3% to 6% of total adjusted revenues, in line with Q3 figures, and floated expectations to sustain this in the medium term. Total adjusted costs saw a slight increase from Q2 but dropped 4% year-on-year, with a Q3 adjusted cost income ratio at 63.1%, steered by efficient cost actions from early in the year and consistent with the full-year target of below 65%. Investments into infrastructure transformation amounted to EUR 26 million in Q3. Despite challenges, the company achieved positive inflows across all regions, with Alternatives earmarked as a strategic priority, indicating disciplined cost control and reliance on its financial stability for future growth.

Continued Revenue Streams Amidst Rising Costs

The company reported a robust quarter with alternative performance fees peaking in Q2 and a revenue increase to EUR 44 million in Q3. This upswing was driven by higher net interest income and a contribution from the Chinese market worth EUR 13 million. For the future, performance and transaction fees are projected to bring in 3-6% of total adjusted revenues, similar to the levels seen in Q3.

Cost Efficiency Measures Yielding Results

Even though overall adjusted costs rose slightly from the previous quarter, they demonstrated a year-on-year decrease by 4%. The culprits for the quarterly uptick were primarily increased general and administrative expenses, influenced by seasonal marketing efforts for the Xtrackers brand and augmented service charges. Yet, due to efficiency measures taken earlier, such as delayering and restructuring, the adjusted cost-income ratio remained resilient at 63.1% for Q3, aligning with the year's target of staying below 65%.

Strengthening the Investment Portfolio

The company is continually refining its investment strategies within value asset areas like active fixed income, equity, and multi-asset. The goal is to boost investment performance to help clients steer through the macroeconomic flux. The launch of the Global Insurance Council has borne fruit, resulting in sustained positive inflows and robust investment performance for fixed income insurance products. These strides form part of a larger initiative to foster deeper collaboration across the investment platform.

Significant Inflows from Xtrackers and Alternatives

Passive assets including Xtrackers and Alternatives have become the firm's strategic vanguard, accounting for 86% of the year-to-date net inflows which amount to EUR 20.8 billion, excluding cash. The Xtrackers brand in particular has thrived, charting positive inflows across all regions in the third quarter. The company intends to further this momentum with innovative product launches, especially in the Americas, to broaden the brand's footprint.

Venturing into Digital Assets

A strategic partnership with Galaxy Digital has been formed to train personnel on digital assets, setting the stage for the anticipated cryptocurrency ETCs. Furthermore, the company is delving into tokenized money, which could potentially lead to the introduction of a euro stablecoin, indicating a firm step into the evolving digital currency space.

Expansion Ambitions in Asia-Pacific

Looking to bolster its presence in the Asia-Pacific region, the company established an alliance with Bank of China Hong Kong Asset Management and welcomed new leadership in Japan. Ambitious plans are afoot to delve into the growing markets of China and India, with updates on these initiatives expected in future quarters. This expansion strategy, underpinned by the company's financial stability, underscores an unwavering focus on growth and disciplined cost management.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I am Sherry, your Chorus Call operator. Welcome and thank you for joining the DWS Group Q3 2023 results with investor and analyst conference call. [Operator Instructions]I would now like to turn the conference over to Oliver Flade. Please go ahead, sir.

[Oliver Flade, executive]

Yes. Thank you, Sherry. And good morning everybody from Frankfurt. This is Oliver Flade from Investor Relations and I would like to welcome everybody to our earnings call for the third quarter of 2023.Before we start, I would like to remind everybody as usual that the upcoming Deutsche Bank analyst call will outline the Asset Management segment's results, which has a different parameter basis to the DWS results that we're presenting here. Today, I'm joined by our CEO, Stefan Hoops, who will lead you through the entire presentation and will take all the questions afterwards. So if you ever had questions which a CFO wouldn't answer, now is the time to raise them.More seriously for the Q&A please would you limit yourself to the 2 most important questions, so that we can give as many people a chance to participate as possible? And I would also like to remind you that the presentation may contain forward-looking statements, which may not develop as we currently expect. Hence, I therefore ask you to take note of the disclaimer and the precautionary warning on the forward-looking statements at the end of our materials. And with that I would now like to pass on to Stefan.

[Stefan Hoops, executive]

Perfect. Thank you, Oliver. And good morning, ladies and gentlemen, and welcome to our Q3 2023 earnings call. Last quarter, we continued our steady climb up the mountain. Obviously, all of you are aware of the headwinds in the current environment, geopolitics, a volatile markets, a difficult year for active asset management and competition from high yielding bank deposits make the path ahead demanding. Yet, we recorded another productive quarter in Q3.We attracted positive net inflows with Xtrackers in particular displaying its competitive strength. We kept our costs under control and we settled with the SEC. Clearly, building and maintaining annuity businesses is not easy, nor is it glamorous. However, we continue to push forward with determination and with a sense of urgency.One topic that is keeping us busy, and that we want to provide transparency on is our ongoing multiyear project to enhance our operations setup as a listed asset manager. As you know, the objective is for us to become less dependent on Deutsche Bank across 3 key areas, policies, corporate functions, and IT infrastructure including cloud and cybersecurity. In terms of policies, we are making good progress towards DWS operating and a policy framework that is suitable for an asset manager and in line with our competitors.When it comes to corporate functions, we reviewed those again over the last few weeks and continue to believe that whatever we can do ourselves and can do cheaper than Deutsche Bank will be done in-house. While this applies to most functions, there are some exceptions. For example, we decided to keep payroll and benefits with Deutsche Bank. As this is not a differentiating factor for an asset manager, separation would expose us to operational risks and it is a pure scale game.However, to be frank, when we faced most challenges over the last few weeks and months is in IT, as it is not uncommon with such IT transformation projects, original estimates and plans were to a certain extent, too optimistic on timing and costs. Some complex in the dependencies in the project only became apparent along the way. And we underestimated the need to build up enough capabilities in-house to replace the vendors we've previously relied heavily on.We reviewed these parts of the project rigorously during the past months and agreed on mitigation steps to address the matter. At this stage, it is clear that we will have another year of substantial IT bid costs in line with 2023 leading to more transformation costs in 2024. As a result of this, the transformation benefits will likely arrive later. However, we've already identified further cost reduction measures to compensate for this.For now allow me to switch into CFO mode and present our Q3 results, starting with the key financial highlights. In the third quarter, net inflows totaled EUR 2.3 billion and EUR 1.6 billion excluding cash. The adjusted cost income ratio stood at 63.1%, in line with our guidance ratio of below 65% for the full year 2023. And the adjusted profit before tax totaled EUR 246 million, supported by higher management fees in the third quarter.Moving on to the financial performance snapshot. Starting at the top left, assets under management was slightly up from Q2, supported in part by our positive flow performance in Q3. On the top right, adjusted revenues were more or less unchanged from the last quarter supported by strong management fees. On the bottom left, adjusted costs were slightly up quarter-on-quarter mainly due to higher general and administrative costs compared to Q2. As a result, the adjusted cost income ratio increased to 63.1% and the adjusted profit before tax decreased to EUR 246 million in Q3.Let's recap on the market environment. After rallying in the first half of the year, all major equity indices started to slow in the third quarter amid rising interest rates and concerns of potential recession. Volatility levels also increased towards the end of Q3, mainly in bond markets due to shifting expectations about Fed policy and other central banks hawker stands. Overall, central bank's messaging drove U.S. and European government bond yields higher in the third quarter. Investor risk appetite decreased in the third quarter and the U.S. dollar strengthened against the euro. Together, these developments had an impact on our quarterly AUM development, which I will outline now.Assets under management totaled EUR 860 billion in Q3, marking a marginal increase from the second quarter and up 3% year-on-year. While there was a negative market impact in the third quarter, this was offset by favorable FX movements and positive net flows, which I will now outline in more detail.In the third quarter, we reported total net inflows of EUR 2.3 billion and EUR 1.6 billion, excluding cash. This total also includes quarterly ESG inflows of EUR 1.7 billion in Q3, driven by both institution and retail demand for our passive ESG offerings. Overall, passes, including Xtrackers, reported another solid quarter, attracting EUR 6.2 billion of total net inflows with strong contributions into our ETPs across all regions. In our home market in EMEA, Xtrackers continues to rank #2 by ETP inflows with Q3 net flow growth far outpacing our AUM market share. Our strong passive flows played an important role in enabling us to sustain another quarter of positive flow momentum overall in the third quarter.Active fixed income also saw net inflows for the third quarter in a row in Q3, driven by our flagship retail fund, DWS floating rate notes and further supported by 2 insurance mandate wins. Cash returned into positive territory with EUR 0.6 billion of net inflows in Q3, mainly driven by institutional inflows in the Americas. Collectively, inflows into these asset classes more than offset outflows across our other actively managed asset classes as well as in Alternatives. Alternatives were mainly impacted by redemptions from liquid real assets and real estate amid lower valuations and reduced transaction activity in Q3.However, infrastructure sustained its positive flow momentum, reflecting continued client demand for such strategies. Active multi-asset outflows were primarily due to institutional redemptions in low-margin mandates in EMEA, a trend we also play out in SQI in the third quarter. Meanwhile, active equity reported a mix of retail and institutional outflows in Q3, reflecting weaker investor risk appetite in the quarter. Overall, our diversified portfolio has served us well in the current market environment and we will continue to strengthen this through our product innovation.Moving on to new fund launches. Since our IPO in Q1 2018, new product launches have attracted EUR 55 billion of cumulative net inflows and averaging an overall management fee margin of 35 basis points. In the third quarter, much of our product innovation was focused on our targeted growth areas of Alternatives and passive including Xtrackers. In Alternatives, we started raising capital for our European real estate transformation fund. And in Xtrackers, we rolled out a first range of thematic ETFs in the U.S., focusing on green infrastructure, semiconductors and cybersecurity.We also continued to set up a cryptocurrency ETC platform in Switzerland out of our planned launches with our strategic ally Galaxy Digital. Looking ahead, both growth areas of Alternatives and Xtrackers remain a key feature of our product pipeline for Q4. During the fourth quarter, we will launch a new range of target maturity euro corporate bond ETFs in response to growing client demand for such products. In addition, we will expand our suite of Alternatives offerings with a new European infrastructure strategy.Furthermore, we continue to enrich the value part of our portfolio with a focus on sustainability theme products, including the DWS invest conservative sustainable bond funds. Collectively, our new product launches remain important for DWS to not only meet client demand, but to also sustain positive flow momentum and revenue growth.Moving on to revenues. Total adjusted revenues were EUR 666 million in Q3, essentially flat compared to the second quarter and with a management fee margin of 27.2 basis points while management fees and other recurring revenues increased by EUR 13 million in the third quarter. Performance and transaction fees were slightly down as these benefited from the recognition of strong alternative performance fees in Q2. Other revenues were also up in Q3, growing to EUR 44 million, supported by higher net interest income, together with a EUR 13 million contribution from our Chinese investment harvest.Looking forward, we expect performance and transaction fees to continue contributing 3% to 6% of total adjusted revenues in the medium term as they did in the third quarter.Moving on to costs. In the third quarter, total adjusted costs were up from Q2, but down 4% year-on-year. The quarterly increase can be mainly attributed to slightly higher adjusted general and administrative expenses, which were impacted by seasonal effects, including increased marketing spend for our Xtrackers brand push and higher service charges in Q3. Meanwhile, total adjusted compensation benefit expenses remained stable, supported by cost efficiency actions taken early in the year, such as organizational delayering and restructuring.As a result, the adjusted cost income ratio stood at 63.1% in Q3, supported by stable Q3 revenues and in line with our guided target of below 65% for full year 2023. As a reminder, the total adjusted cost base excludes EUR 26 million of investments into our infrastructure platform transformation in Q3 in addition to other nonrecurring expenses.To conclude with the strategic outlook. Overall, a pleasing third quarter, given the tough market environment. Net flows remained positive. Revenues were stable and costs were under control. Looking forward to Q4 and the year ahead, we will continue our steady climb up the mountain to ensure we are well positioned in our 4 key categories of reduced value, growth and build. In the reduced category, we've delivered on what we promised at the Capital Markets Day by restructuring and delayering our organization to achieve efficiencies. We've already seen the benefits of this starting to come through in the third quarter.Looking ahead, we've identified further measures to take active action on our cost base and with ongoing inflationary pressures. Looking at the value part of our franchise, active fixed income, equity and multi-asset, we continually assess how to increase our investment performance so that we can help navigate our clients through the current challenging environment. As mentioned in Q2, we remain fully focused on cultivating an even stronger collaboration across the entire investment platform by connecting the dots further between our experts, clients, regions and asset classes.Notably, our new Global Insurance Council is serving us well, enabling us to sustain positive inflows into fixed income insurance products in the year-to-date as well as strong investment performance. We are also enhancing processes within our actively managed portfolio such as [ moderlizing ] our multi-asset platform so that we can increase potential for scaling these strategies further.In the growth category, passive including Xtrackers and Alternatives remain top strategic priorities. Both asset classes have collectively contributed 86% of our total EUR 20.8 billion of net inflows, excluding cash year-to-date. In particular, our Xtrackers franchise is going from strength to strength, reporting positive inflows across all regions in the third quarter. We will continue to build on the success through a solid pipeline of innovative products, including exciting new ETF launches in the Americas, where we are intensifying efforts to expand our brand.In Alternatives, we are continuing to develop and diversify our portfolio so that we can meet client demand and navigate some of the industry headwinds we are currently facing, especially in the real estate space. Notably, we are strengthening our infrastructure offering by supporting the European transformation and defined a clear path ahead. In Q3, we acquired one of the largest open space solar parks in Germany, marking our first investment into the European infrastructure strategy, which allows German retail investors to invest directly into infrastructure projects for the first time. Furthermore, we're expanding our Alternatives franchise into new areas. We will soon announce a new head of Alternative credit in Europe, and we are strengthening our real estate debt capabilities in the Americas.Finally, in the bid component of our strategy, we're moving forward with digital assets. We launched an educational program with Galaxy Digital to upskill our colleagues on digital assets before bringing our planned cryptocurrency ETCs to the market. In addition, we have moved into the next phase of our strategy, focusing on tokenized money, which brings us one step closer to the creation of a euro stablecoin. We'll give an update on this in due course.This quarter, I would also like to talk about Asia-Pacific, where we continue to build out our local profile. As part of these efforts, we formed a strategic alliance with Bank of China Hong Kong Asset Management, one of the fastest-growing asset managers in the region. We also hired a new Chief Country Officer and a Head of Real Estate in Japan. Furthermore, we plan to explore new opportunities for growth in China and in India, which I hope to update you on in the coming quarters.To summarize, we remain laser-focused on growth to become even stronger as a franchise and we maintain our cost control and discipline. While the path ahead may be demanding, our financial stability gives us confidence that we can remain front-footed and continue our steady climb up the mountain.Thank you. I will now pass over to Oliver for the Q&A.

[Oliver Flade, executive]

Yes. Thank you, Stefan. And operator, we're ready for Q&A now. If I just may remind everybody to limit yourself to the 2 most important questions, that would be very nice. Thank you.

[Operator]

[Operator Instructions] The first question is from Jacques-Henri Gaulard of Kepler Cheuvreux.

[Jacques-Henri Gaulard, analyst]

Congratulations for getting the greenwashing with the SEC done. Just maybe a quick question about for what's left to be sorted there in Germany, in particular. Are you expecting any sort of like major, I would say, monetary consequences or not really? Should we consider that more or less totally filed? And the second question also on your alliance with Bank of China, Hong Kong, which is great news. Can you give a bit more detail about whether that could be capitalistic at some point? And if that interferes with your dividend exceptional that you consider as more likely than not last quarter?

[Stefan Hoops, executive]

Okay, Jacques. Thank you very much for your questions. So firstly, on greenwashing. So the SEC is behind us, as you know, I mean, that is resolved. In Germany, we still have the ongoing process with the German prosecutor, there's nothing new to report. So this remains utmost priority for us as management. I think I can just emphasize that we're sharing everything that's expected of us and more. However, we operate under the time line of the prosecutor, so really no update.I would make 2 additions. One being that when you look at our reserves for potential penalties, we feel confident and comfortable with the reserves we have built. And secondly, there's always the question of could this lead to lawsuits from retail investors potentially. There's a question that I've been asked a couple of times. I think when you look at the SEC resolution that really criticized us for exuberant marketing and certain processes and controls at that point in time, policies and procedures. However, there were no facts that would make us think that it kind of implies that any retail investors were impacted. So we see no effect and no basis for any potential lawsuits. So that's kind of on the greenwashing.On Bank of China Hong Kong, I wouldn't call that partnership a major catalyst. That partnership is one of joint product development, joint marketing partnership and so on. It does not include any potential capital contribution, meaning when it comes to our dividend or the extraordinary dividend of up EUR 2 billion to be paid after the AGM in 2024, that remains more likely than not. So that specific Bank of China Hong Kong has no impact on the dividend, right? I think it just shows that Asia remains a very interesting space for us and one in which we feel we have a pretty ambitious but also strong organic growth path ahead.

[Operator]

The next question is from Mike Werner of UBS.

[Michael Werner, analyst]

Just 2 questions from me. One, if you could just provide a little bit more maybe disclosure with regards to some of the financial impacts of your decision to, I guess, adjust the IT infrastructure progress in terms of your separation from the parent company? And then second, I think you noted that some of the benefits might arrive a little later in terms of the economic benefits of this transformation. Does that have any impact on your 2025 cost-to-income ratio target of being less than 59%?

[Stefan Hoops, executive]

Thank you, Mike. To answer your second question first, we remain committed to our 2025 financial targets. So that just to answer that right away. I think the way to look is as follows. What we're doing is to build an own IT framework and IT infrastructure, mainly for our corporate functions. So I think the one thing which is quite important to keep in mind, this has virtually zero impact on our clients, on our portfolio managers on the ability to create products. It's really solely for corporate functions, right? So when your first question was on financial impact, I would expect zero financial impact on revenues, performance and so on.Now I think the way to think about it is the IT side of things simply has more bid costs in 2024, which I recognize is annoying for you as shareholders, right? I'm not trying to belittle that fact. Obviously, this is not part -- it's transformation, so it's not part of our adjusted cost income ratio, but I appreciate that for our shareholders that is bad because it's more bid cost. However, the benefits, we still target to be in line with what we initially assumed or lower, but for which we will have other measures, meaning the benefits will arrive one way or the other.So therefore, the way that I would look at it is more bid cost in 2024, but still the same financial targets for 2025, right? And I just want to repeat the fact that this has nothing to do with our client franchise, nothing to do with our portfolio managers, nothing to do with the ability to do something in Asia to do digital assets or so on. It's solely essentially discontinuing using the network of Deutsche Bank having our own, that obviously has build cost, but no impact, no financial impact on franchise and we remain committed to the 2025 financial targets.

[Operator]

The next question is from Nicholas Herman of Citigroup.

[Nicholas Herman, analyst]

Two questions from my side, please. Just I guess, beyond saying overly optimistic on cost and timing of the IT projects, I guess what specifically what was overly optimistic? And also could you provide a bit more detail on the offsetting factors, the fact that you had to roll them out I guess suggest that is somewhat material. The second question, please, on investment performance. So it seems there have been a notable improvement in performance in equities across both retail and institutional. Just curious which products [indiscernible], just which products has that come from? And then within Alternatives, like there's been another couple of billion of negative market effects. Could you please just segregate that, please, I guess, presumably within the liquid real assets and real estate?

[Stefan Hoops, executive]

Thank you, Nicholas. I think it was very smart to follow the couple of questions into what you call 2 questions. But I'm enjoying being CFO and CEO at the same time.So on the first one, so more on our transformation project. Look, I think typically, and hopefully, that doesn't make me come across as cynical, but if somebody shows me a project which is supposed to take out cost, I typically double what the person thinks they will spend on building it and a half the cost benefit, right? I think that's typically a rule of thumb which serves us well. Unfortunately, that's not far from what we're experiencing in on this particular IT project, where don't take the double and half. It's like for precise math. But we are just a little bit optimistic on how quickly we could build things.When you think about what we're doing. So we basically create our own corporate functions across finance, tax, legal compliance, own network, own cloud, own cybersecurity and so on. And I think at the beginning, one was a little bit optimistic on, let's say, the lack of interdependence between the different work streams. Obviously, inflation came in so that made all the vendors much more expensive. The threat from cybersecurity increased. So in that case, one was -- I think there's nothing that one could have expected in 2020, when it comes to cybersecurity. So a couple of assumptions in the changed because of the market context, in a couple of instances one was simply slightly too optimistic, right?I step in like late July, early August, I took over accountability for the transformation project overall. So I've been quite involved. And then like, unfortunately, when I also had to step in as the Interim CFO, I spent even more time on the numbers. So I have good confidence in -- well, this really being a question of more build costs in 2024, but not a substantial deviation from the overall trajectory.When it comes to the cost benefit, at the Capital Markets Day, we said that we would have EUR 40 million, EUR 45 million of lower operating costs going forward versus what we would have been allocated from Deutsche Bank. Honestly, I would expect that to be lower. I don't know how much lower, but what I can tell you is that given that we've made more progress than we had hoped on our reduced part by delayering and taking out cost, we will simply continue on that path.Now as you would expect when you have a 3-year plan, you always have certain buffers and you hope that you don't need to use them. So could we take out more cost is always something which we had as a buffer. Now we need to use the buffer to make up for potentially later or lower cost benefits. But I think the point I want to get across and obviously, I don't want to suggest how you run your models, but that you treat it as more build costs, essentially adjusted cost transformation costs in '24. But again, we remain committed to our financial targets, our EPS target, our cost/income ratio target for 2025.Now your second question, I didn't fully hear the second part of your first sentence, whether it was investment performance or flows on equities and Alternatives.

[Nicholas Herman, analyst]

So yes, it was on the investment performance. So within equities, investment performance improved quite notably on a particular 1-year basis across both retail and institutional. So I was just curious, which products that improvement has come from and within Alternatives, I'm presuming that the couple of billion or so of negative market effects, excluding FX, has come from LRA and real estate. So just curious if you could just please -- rather than infrastructure, so I was just curious if you could also just disaggregate that for us, please?

[Stefan Hoops, executive]

Perfect. Yes. So that's actually the fun part of my portfolio because I do oversee an investment division. And one of the things we've changed is that every meeting starts with the performance review. So every Executive Board meeting, every global leadership team meeting, whatever you want to call it, always starts with performance and it has improved. So once you attract something much closer, everybody is probably slightly more on the case. So in equity, over 1 year, the outperformance increased by about 50 percentage points to 73%, mainly due to 2 of our large funds. One is the DWS for Morgans Buildings Fund, which has about EUR 12.3 billion. And also the DWS ESG Akkumula, which is about EUR 7.7 billion. They're both now additionally outperforming their benchmark.So the 3-year rose by 22 percentage points, mainly due to the [indiscernible] fund. Again, I think the way to look at it is when we disclose the outperformance, some of our mega funds like the top dividend, they're not part of it because they don't really have a benchmark. And some of the really large ones that we have, they were below the benchmark in the past, and now they are above benchmark and they are just like massively flipped it, right? So that's probably the best way to think of it.In liquid real assets, we, quite honestly, got the rates call wrong in late '22. So we were slightly more optimistic on inflation not being that high, meaning also rates not going up as much. That turned out wrong. We've changed our approach. We changed our -- not really our strategy because it's really, really competent people. Might change a bit, I think what you have seen is that specifically listed real estate and natural resources, we've done really well over the last couple of quarters, really creating [ ISL ] for our clients.So I feel so far so good, both for equities and essentially, let's call it, equities component of our Alternatives franchise because obviously, it's listed, it's real assets.I think the fund because like your half sentence was also on flows. Yes, the outflows, which we've seen in Alternatives were roughly half liquid real assets and roughly half real estate Americas and a bit real estate Europe. We feel quite confident about future flows. One, because when it comes to kind of the negative sentiment around real estate, that seems to have improved a bit. So when you look at some of the outflows of competitors that are disclosing retail flows, I mean, that has improved. It looks like rates have stabilized. People are more optimistic on us having seen peak rates. So I think that's helpful for real estate. And we've seen our performance improve for liquid real assets and that is also something which got noticed by institutional investors, so also pretty optimistic on fund outlook for that.

[Operator]

The next question is from Bruce Hamilton of Morgan Stanley.

[Bruce Hamilton, analyst]

Two sort of follow-ups. On the cost point, just to check then. I mean I noticed that consensus has a fairly stable line to the cost income, 64% this year and then 62% next and 60% the following year or 59% the following year. Is your guidance basically that we should expect that it's going to be kind of at around these levels more likely through '24 and then a more meaningful drop in '25? Or are all of these increased costs sort of below the line items, but obviously, it would be a cash cost, which is why you're flagging them just to check?And then secondly, on the M&A environment, you've sounded as though there weren't that many interesting opportunities in the past. Is there any kind of change to that? Is the dislocation driving any improvement in opportunities and pricing levels? Or is it still pretty sort of patchy?

[Stefan Hoops, executive]

Thank you, Bruce. So on '24, yes, this is below the line, right? And I didn't want this to come across as I don't care because it's below the line. I appreciate it's a real cash impact for you for our shareholders. So that's why I wanted to provide transparency. So we didn't give guidance for '24. And one of the things I had to learn as the Interim CFO is to not get ahead of myself and say things which I know, but we don't want to disclose to the market. So we have below 65% for '23. We have below 59% for '25. We are sticking to that.Now obviously, we have assumed a certain path in getting from 65% to 59%, which is not necessarily linear, but also not cliff, right? We obviously -- this is annuity business, so we want to make steady progress. I think you've seen us kind of get to low 63% this year so far in the first 9 months, right? So 63.1% third quarter, 63.4% for the first 9 months. So let's just assume that the quarter doesn't have any major surprises in Q4. So you, I think, get a good idea of what '23 should look like.We want to improve from here. That's always our ambition, but I wouldn't want to give any outlook for '24. But I can just reemphasize the point that you really have made, Bruce, is that the additional build cost is a transformation item so below the line. But still I'm trying to minimize it for the benefits of our shareholders. But we remain fully committed to our 2025 financial targets.Now on M&A, I don't know if it's fortunate or not fortunately, depending on whether you would like to have a dividend or want us to deploy it for other means. But nothing has really changed over the last couple of months, right? So we're actively following the market. I think my view is still that when it comes to big transformative opportunities, that insurance companies seems to have like re-found the love for asset managers. So it doesn't seem that any large insurance company wants to part way. Like in an environment of EU retail regulation and like focus on not having captive access to retail clients, it seems that buying a bank-owned asset manager is probably not as attractive as it may have been in the past.And when you look at the standalone large asset managers, essentially the third opportunity for something transformative, I've also not really seen any increased, let's say, need for somebody to be bought, right? So when it comes to the big transformative opportunities, it's not for lack of trying, but it just doesn't seem that something interesting opens up.Now when it comes to more bolt-on acquisitions, one of the things that you and other people asked in the past was on private credit. There, we've now decided to go organically. So we found the right person to run it for us. I actually spent 3 days with him last week. So I think I just disclosed that it's a male. We obviously tried to find a woman. But in that case, we found a really good person that we trust to run it for us organically. We will be quite ambitious in that space. So you will hear more from us, but it will be an organic strategy.When it comes to other parts of Alternatives, we're still looking, maybe infrastructure debt, but these would be smaller acquisitions. So therefore, we continue emphasizing what we said last quarter that us paying the extraordinary dividend of up to EUR 1 billion remains more likely than not.

[Operator]

The next question is from Hubert Lam of Bank of America.

[Hubert Lam, analyst]

I just got one question. I think you mentioned it already around alternative flows. I know you lost some in the liquid real assets and real estate. I guess my question was like how much of it would you think was due to just a general slowdown? And how much of it was specific to your performance, your underperformance in these sectors? And also can you talk about any new launches in the pipeline in the alt space?

[Stefan Hoops, executive]

Thanks, Hubert. So on all in real estate, essentially private real estate, we've actually done pretty well when it comes to performance. So I feel that outflows we've seen in private real estate equity is simply in line, actually better than the market, but there was simply market sentiment-driven, right? I mean, as you know, when you think of our overall Alternatives franchise of roughly EUR 120 billion, we are unfortunately exposed to those parts which were toughest over the last 18 months, right? So EUR 70 billion in real estate equity, EUR 15 billion in infrastructure equity, just under EUR 30 billion of liquid -- sorry, of listed real assets. That was essentially the tougher part. So for our EUR 70 billion of real estate equity, we've seen some outflows in Germany, some outflows in the U.S., but I think this was really sentiment-driven and seems to have improved.When it comes to our LRA business, obviously I'm challenging my PMs to show outperformance and it's probably not helpful. If you -- essentially the component of the Alternatives franchise where investors can reduce exposure, right? So when you think about the denominator effect, it was very difficult for institutional investors to sell private equity or anything private. Listed real assets you can sell. So I think what happened to that part of our franchise, which makes up a greater proportion of our Alternatives franchise and for other asset managers, it was frankly speaking, simply the easiest way for institutional investors to simply reduce the exposure, right?So I think that this irrespective of our individual performance probably had an impact. We've seen this improve. And with our performance improving and I think people feeling that we may have reached peak rates, I'm more optimistic on that part of our franchise.When it comes to fund launches, Hubert, I think what I'm excited to looking forward to is our Pan-European Infrastructure Fund IV. That's the fourth of our big flagship series, which will begin marketing this year and we plan to launch first half 2024. So this is going to be substantial and we see good interest from investors. With a couple of other launches in infrastructure, the fund focused on German retail investors that's going well with continued inflows and that was the fund that we've made a major acquisition for. We have a bunch of launches here and there in real estate. I think what will be significant in real estate is our focus on debt for the Americas. That is something which has been unfortunately underdeveloped at DWS.But when you think about our history in managing real estate equity, we should know 1 or 2 things about managing real estate debt, which is more like equity than in infrastructure, where equity and debt are quite different in real estate, especially in this environment in which you may lend and then end up owning something. We feel that our knowledge translates quite well and this is why we're focused on that.I think lastly, in alternative credit, Europe, and just to be clear, we will be very specific. So I think you know us by now, we are quite specific in the things we want to invest in and remain -- and we'll continue to do that. So we will be ambitious in becoming one of the major providers of alternative credit in Europe. I think our approach will be a bit different. We feel that our focus on real economy corporates, so not just PE-owned corporates, but real economy corporates, with the help of origination through Deutsche Bank's Corporate Bank and other bank partners is going to be different than what our competitors are showing. And the person we're bringing in is a very experienced CLO manager. So I will give an update in the next quarterly earnings call. But we want to start launching CLOs in 2024.

[Operator]

The next question is from Pierre Chedeville of CIC.

[Pierre Chedeville, analyst]

Yes.

[Operator]

Mr. Chedeville, I'm sorry, we do not hear you. Can you please use the handset?

[Pierre Chedeville, analyst]

Can you hear me?

[Stefan Hoops, executive]

Yes. Now we can.

[Pierre Chedeville, analyst]

Just one question left. Maybe I'm an old-fashioned guy, but I was looking at the evolution of your margin, not quarter-on-quarter, but year-on-year and we can see that it has lost 1.8 points as far as I remember this morning presentation. I guess that it's due to development of cash and of course, Xtrackers. But how do you see it evolve in the medium term? Do you see a stabilization or continuing decreasing margin balanced by, of course, efforts on your cost? How do you see that evolving in the coming quarters?

[Stefan Hoops, executive]

Perfect. Yes. Thank you for your question. And by the way, I'm reading all of your analyst reports. You always compare it year-on-year, which is always painful for me. So next time, I'll give you 2 or 3 questions. So any questions you like if you also do quarter-on-quarter, but that's just like meant and just.To answer your question, so the Q3 average margin was a bit of an anomaly at 29 basis points. So for the full year 2022, we are at 28.1. So we were 27.2 this quarter. When you think about the full year, we will be slightly above that. So well within our guidance of roughly 1 basis points decrease year-on-year, right? So Q3 was a bit of an anomaly last year. The average last year was 28.1. We're targeting slightly above what you've seen this quarter for this year. So well within 1 basis point, and that's something which would also expect for the next couple of years. So margin decrease or margin compression of less than 1 basis point.Now in Q3, and you already gave the answer, I would say it was -- let me just call it, a good margin compression on average when you look at the portfolio because we had strong earnings per share increasing inflows and Xtrackers, right? So in Q3, we had no fee concessions, so no fee cuts of any meaningful impact on our revenues, right? So this was not fee concessions. It was really simply substantial inflows in Xtrackers. And they have -- you see it for our whole portfolio Xtrackers has roughly 17 basis points of average margin.If you assume that the inflows were roughly that equities is like low 20s, fixed income, maybe a little bit less. But if you assume that on average, it was more dilution than any fee concessions.And again, for '25, our most important target is the earnings per share. So therefore, any inflows that have positive earnings per share contribution at the competitive cost/income ratio we like. But more specifically, Pierre, to your question, this year, we will be within our guidance of 1 basis points compression. We feel for the right reasons of simply having outperformed on Xtrackers and we remain committed to the guidance for future years.

[Operator]

The next question is from Arnaud Giblat of BNP Paribas Exane.

[Arnaud Giblat, analyst]

I've got 2 follow-up questions, please. You've explained a lot about the changing costs, so I've got all that. I'm just wondering if you can give us a bit of a quantum in terms of exceptionals that are sought to be booked towards the IT transformational costs? And also, is there any seasonality in the adjusted cost you expected for Q4?And my second question is with regards to the redemptions that you've seen in real estate and liquid real assets. I'm just wondering if you could give us maybe a bit more color in terms of how these funds operate? Are there any maximum monthly gates or monthly redemptions that are imposed on investors? What sort of the redemption profile looking like? And on the real estate fund, are there any maturities coming up that we need to worry about?

[Stefan Hoops, executive]

Perfect. Thank you, Arnaud. I think those were 3 questions if I count them correctly. But look, amongst friends. So the first one on the build cost, what we're saying is roughly in line with '23. It can be a bit more, it can be a bit less, but I just wanted to be transparent. Again, it's, let's say, below the line, but obviously a cash item for our shareholders, and that's why we wanted to be transparent, right?I think a follow-up question may be, well, what are you paying this year? We're not specifically disclosing the components of our transformation cost. But I think we said it at the Capital Markets Day that would be roughly EUR 100 million. So again, it could be a bit more, it could be a bit less in '24. But I just wanted to kind of give you guidance on what sort of magnitude to expect. Again, there will be build cost in '24 and we remain committed to the '25 financial targets.In terms of seasonality for Q4, I wouldn't think -- nothing really comes to mind. So what we had in Q3 were really 2 items. One, which I wouldn't necessarily call seasonality, but obviously, we did that in the script, so that's why I'm sticking to it. But it was simply us investing more in our Xtrackers push. So what we've done in Q3 is launch a bunch of thematic ETFs in the U.S. I think we have a pretty exciting launch coming up, which hold me, keep me honest on that in the next quarterly earnings call. But I think I will comment on it as a blockbuster in the Q4 earnings call. And we're simply investing in a brand push in the U.S., right? So that will continue in Q4, but I would say it's good cost, right? We are fully focused on Xtrackers. We've said that and we're nicely growing.The other seasonality in Q3 has something to do with the change in management and essentially deferred compensation so on, so that wouldn't repeat in Q4. So therefore, I would probably see that as an anomaly in Q3, but the increased marketing spend in Xtrackers that will continue.Third question was essentially on, I guess, the question of liquidity as the way that I'm interpreting your question. So when you look at the European because you asked, is there any redemption date or so on. So liquid real assets don't really have that, meaning they are -- many institutional mandates, they have certain bespoke termination clauses and so on. But there's nothing especially like not this one big maturity date.In real estate, we have, if memory serves correctly, one fund with a redemption cap, which had hit a couple of months in a row, but we have enough liquidity. So this is not a question of can we pay, but simply, contractually, there's a redemption cap which we fit, but again, enough liquidity.Same in Europe. So the open-ended funds in Europe typically have a 12-month notice period. So if you invest, you are initially in for 24 months and then with -- you have a 12-month notice period. And therefore, we have enough liquidity. And for the lack of a better term, we see it coming if there were increased notifications. As you would expect, they were definitely more than we saw in '21 and '22, simply given the sentiment on real estate.But we have enough liquidity properly managing it. So therefore, from my perspective, not this one maturity date or this one event that would make me nervous or should keep any of you to focus on that topic.

[Arnaud Giblat, analyst]

Looking forward to Q4 and the slam-dunk.

[Stefan Hoops, executive]

Yes, maybe I should have said that. But now that I said it, I'm sure you will keep me honest.

[Operator]

The next question is from Angeliki Bairaktari of JPMorgan.

[Angeliki Bairaktari, analyst]

Just one left on my end, please. If I look at consensus expectations, consensus does seem to expect an uptick in revenues and also a commensurate sort of increase in absolute terms in the cost base for 2024 on an adjusted basis for 2024 and 2025. And I think if we look at the sort of the revenue progression, that's probably predicated on the expectation for a significant alternative net flows in line with the business plan that you presented a year ago.So my question is, if the alternative net flows remain below plan in 2024, given the environment that we're in at the moment, do you have any levers that you can pull in order to achieve the target? Could we actually be in an environment where the cost base in 2024 is lower in absolute terms relative to the cost base in 2023? Or would that be too optimistic?

[Stefan Hoops, executive]

Thanks, Angeliki. So I'm handing over to my CFO. I think that's a type of question I typically would have had [ Clair ] and obviously [ Marcus ] going forward. So look, I won't be able to give you specific numbers for '24, not because I don't know them, but because we wouldn't want to provide this outlook.So let me just stay slightly more conceptually. So when you look at our management fees, they were EUR 593 million in Q3, so they're ticking up. Whatever your assumption is for markets going forward, I think we are not massively optimistic, but also not too negative. So that will probably give you an idea of management fees going forward. So hopefully, we'll see EUR 600 million a quarter soon, and that probably gives you a certain indication.When you look at performance and transaction fees, we remain committed to the guidance of 3% to 6% of revenues. And that is something I would probably expect a bit fewer performance fees in '24 for the whole market, given that, for example, real estate obviously had difficulties in '22 and '23. But that's just whatever you assume within that guidance.When you look at other income, again, we're not a bank, so I'm not proud of our net interest income, but that is ticking up quite nicely, right? So we have about EUR 3.5 billion of liquidity. When you look at our average interest we're getting, that went from 1.5% in Q1, 2.5% in Q2, 3% in Q3. So the one thing I can promise you, give my background in cash management, we have the most optimized like cash management operation at DWS. So that can give you an idea of the other revenues and then you have harvest and a bunch of other things. So that's probably on revenues, whatever you make of it, but just wanted to give some guidance.I think on cost, I think you've seen us be quite disciplined, right? When you look at our comp and [ ben ], they are stable, right? Despite investments in growth, you've seen that we promised, the fact we promised to self-fund all of our growth investments that we've done. So we will -- I don't want to give a specific cost guidance. I think we made it clear that the build costs are essentially, again, not great, but below the line in transformation. And when it comes to normal costs, we'll continue to invest in the businesses we're committed to invest in, but you will continue to see us discipline on cost.Now you asked the question on all, do we have anything up our sleeve? Look, whenever you make such a plan, you have certain assumptions on markets, certain assumptions on inflation, on outlook and so on, outlook for different asset classes. I think we're doing materially better than we had expected in Xtrackers, right? So we have grown AUM by about 13% in the first 9 months and we had targeted 12% per annum CAGR. So we are nicely ahead. I think the markets have been doing better than what one could have expected in last December. So I think there we had. I think we're doing better than we had hoped on the cost side of things and not simply showing the discipline, frankly, to take out cost.And you're right, I think Alternatives has been more difficult to raise funds. And there we're behind the 10% CAGR. I think it would be unrealistic for me to say that we will be catching up on the 10% CAGR on Alternatives unless something changes. Now that something changes can be alternative credit. And there, we've made the hires. So obviously, we are ambitious for that. What could change is real estate debt Americas, which we are building up. And hopefully, the market will do better. Infrastructure had a rough year this year, which I would expect to be better next year. But I think overall, hopefully, you see the benefits of a very diversified franchise in which a market underperformance Alternatives we can make up for in Xtrackers and passive and other parts of our franchise.And maybe last but not least, I think you've seen the improvement in fixed income. It was maybe too negative on fixed income in last -- Q3, Q4 last year. So I think you've seen a notable improvement in investment performance and inflows. And fixed income has always been a key strength of DWS. So that is also something where we feel we can be more optimistic than we thought last year. So therefore, from a portfolio perspective, that gives us confidence to remain committed to our financial targets in '25.

[Operator]

There are no further questions at this time. I hand it back over to Mr. Flade for closing comments.

[Oliver Flade, executive]

Yes. Thank you very much, everybody, and please reach out to the IR team if there are any other open questions. Otherwise, I wish you a fantastic day. Thank you very much, and goodbye.

[Stefan Hoops, executive]

Thank you very much. Have a great day.

[Operator]

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephones. Thank you for joining and have a pleasant day. Goodbye.