Cohen & Steers, Inc. (CNS) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers Third Quarter 2016 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, October 20, 2016. I would now like to turn the conference over to Adam Johnson, Senior Vice President and Associate General Counsel of Cohen & Steers.

Thank you and welcome to the Cohen & Steers Third Quarter 2016 Earnings Conference Call. Joining me are, Chief Executive Officer, Bob Steers; our President, Joe Harvey; and our Chief Financial Officer, Matt Stadler. Before I turn the call over to Matt, I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. We believe that some of these factors are described in the Risk Factors section of our 2015 Form 10-K, which is available on our Web-site at cohenandsteers.com. I want to remind you that the Company assumes no duty to update any forward-looking statements. Also, the presentation we make today contains non-GAAP financial measures, which we believe are meaningful in evaluating the Company's performance. For disclosures on these non-GAAP financial measures and their GAAP reconciliations, you should refer to the financial data contained in our third quarter earnings release and presentation, which are available on our Web-site. Finally, this presentation may contain information with respect to the investment performance of certain of our funds and strategies. I want to remind you that past performance is not a guarantee of future performance. This presentation may also contain information about funds that have filed registration statements with the SEC that have not yet become effective. This communication does not constitute an offer to sell or the solicitation of an offer to buy these securities. For more complete information about these funds, including charges, expenses and risks, please visit our Web-site. And with that, I'll turn the call over to Matt.

Thanks Adam. Good morning, everyone, and welcome to our third quarter conference call. As a reminder, my remarks this morning will focus on our as-adjusted results, which exclude the after-tax financial results from seed investments such as realized and unrealized gains and losses, interest and dividends, and the effective deconsolidating open-end mutual funds. Yesterday, we reported net income of $0.51 per share, compared with $0.42 in the prior year's quarter and $0.46 sequentially. Page 4 of the earnings presentation, which is available on our Web-site, reflects the current and trailing four-quarter trend in revenue and breaks out investment advisory fees by vehicle. Revenue was a record $94.4 million for the quarter, compared with $79.7 million in the prior year's quarter and $86.4 million sequentially. The increase in revenue from last quarter was primarily attributable to higher average assets under management and one more day in the quarter. Average assets under management for the quarter were also a record at $60.5 billion, compared with $50.7 billion in the prior year's quarter and $55.9 billion sequentially. Operating income was $37.3 million, compared with $31.5 million in the prior year and $34.2 million sequentially. Our operating margin decreased slightly to 39.5% from 39.6% last quarter. Page 5 of the earnings presentation reflects the current and trailing four quarter trend in expenses, which increased 9% on a sequential basis, primarily due to higher compensation and benefits, distribution and service fees, and G&A. The compensation-to-revenue ratio remained at the 32.75% for the quarter, consistent with the guidance we provided last call. The increase in distribution and service fee expense was consistent with the growth in average assets under management in our U.S. open-end funds. And the G&A increase was primarily due to higher IT costs, sponsored wealth management conferences and a hosted real assets investor conference. As a result of a change in estimate for certain permanent differences, the full-year effective tax rate as-adjusted declined to 37.75% from 38%. The third quarter tax rate of 37.3% included the cumulative effect of this rate adjustment. Page 12 of the earnings presentation reflects our cash, cash equivalents and seed investments for the current and trailing four quarters, and specifies that portion of our cash and cash equivalents held outside United States. Our firm liquidity totaled $224 million compared with $207 million last quarter, and stockholders' equity was $272 million compared with $255 million at June 30. We remain debt free. Assets under management, which can be found on Page 6 of the earnings presentation, totaled a record $60.5 billion at September 30, an increase of $1.7 billion or 3% from June 30. Assets under management in institutional accounts totaled $29.9 billion at September 30, an increase of $367 million or 1% from last quarter, and open-end funds had assets under management of $21.2 billion, an increase of $1.4 billion or 7% from last quarter. Assets under management in closed-end funds remained steady at $9.4 billion. For the quarter, we recorded total net inflows of $2.2 billion, an annualized organic growth rate of 15%. This marks the eighth consecutive quarter in which we have recorded net inflows. Page 9 of the earnings presentation reflects net inflows by investment vehicle. Institutional accounts recorded net inflows of $967 million in the third quarter, an annualized organic growth rate of 13%. During the third quarter, sub-advised portfolios in Japan, which are now reflected separately in our assets under management tables in the earnings release, recorded net inflows of $988 million compared with $848 million of net inflows last quarter. Net inflows were primarily from U.S. REIT portfolios. Distributions increased by $76 million to $828 million, from $752 million last quarter. The increase in distributions from last quarter was due to net inflows in the underlying sub-advised funds combined with the strengthening of the yen. Sub-advised accounts excluding Japan recorded net inflows of $151 million, with inflows of $209 million from global real estate, preferred securities and global listed infrastructure portfolios being partially offset by outflows of $80 million from large cap value. Advised accounts recorded net outflows of $163 million during the quarter, primarily from global real estate portfolios. Bob Steers will provide some color on the level of activity and our institutional pipeline in a moment. Open-end funds recorded net inflows of $1.3 billion during the quarter, an annualized organic growth rate of 26%. This marks our highest quarter of open-end net inflows since the first quarter of 2007. Distributions totaled $157 million during the quarter, of which $114 million were reinvested. Let me briefly discuss a few items to consider for the fourth quarter. With respect to compensation and benefits, we expect to maintain a 32.75% compensation-to-revenue ratio. We anticipate that fourth quarter G&A will approximate the amount recorded in last year's fourth quarter. And finally, we project that our effective tax rate as-adjusted will remain at approximately 37.75%. Now, I'd like to turn it over to Bob Steers.

Thanks, Matt, and good morning everyone. As we've all been reading almost every day in the press and as we discussed in our 2015 Letter to Shareholders, most active managers are battling significant headwinds. Disruptive innovation, waves of new regulations and unprecedented market interventions are adversely affecting broad swath of active only, active long only and alternative managers. This has manifested itself in persistent organic decay and fee pressures for a majority of these managers, but especially for those that are focused on core style boxes. We are anticipating that going forward these trends will intensify rather than abate. In contrast to these trends, we believe that our unique strategic positioning will enable us to be among the small number of managers that have the potential to benefit from the evolving investment environment ahead. Active management has worked well in certain satellite strategies such as real assets and alternative income, and our consistently superior investment performance exemplifies this. Equally important and central to our growth plan is that real asset strategies are poised to gain a significant share of asset allocations almost everywhere, but especially in retirement markets. In fact, we anticipate that the implementation of the DOL fiduciary rule will accelerate the move to model-based delivery of advised and more open architectures in the retirement channel. This represents one of the most important opportunities for us to gain share of asset allocations, which increasingly favor our core real asset strategies. Going forward, we're convinced that success will depend more on unique and innovative investment strategies, consistently superior performance and brand, rather than supermarket-like product arrays and distribution. So, no matter how you slice it, it was a very good quarter for investment performance and flow trends. With regard to investment performance in the quarter, eight out of 10 of our core strategies met or exceeded their benchmarks, and over the last 12 months, seven of 10 have outperformed. After a slow start to the year, all three REIT strategies, U.S., international and global, performed well in the quarter; and year-to-date, our commodity, MLP and natural resources real asset strategies have outperformed their benchmarks by 220, 600 and 360 basis points respectively. Currently, 82% of our OUS open-end fund assets under management are rated with four or five starts by Morningstar. Firm-wide, net inflows of $2.2 billion translated into 15% organic growth for the quarter. Net inflows in the wealth channel totaled $1.3 billion, a 26% organic growth rate, and as Matt mentioned, the best quarterly results since the first quarter of 2007. Specifically, open-end fund flows continued to benefit from demand for our U.S. and preferred securities strategies. In addition, DCIO net inflows for the quarter increased significantly to $199 million, a 10.8% organic growth rate. Last year we identified the DCIO market as the biggest and best opportunity for our real asset strategies to gain share of asset allocations and benefit from the expected pressure to open up closed architectures. At that time, we committed to bringing new senior leadership to direct these business development efforts. We plan to continue to grow our teams focused on this opportunity. Our subadvisory ex-Japan net inflows increased to $151 million, a 10% organic growth rate. Much of this growth is attributable to our expanded business development team in Europe and our growing subadvisory business in the region. In Japan, subadvisory net inflows grew to $988 million, a 27% organic growth rate. Even after factoring in distributions, net inflows were a positive $160 million. This represents the third consecutive quarter of net inflows after distributions. Lastly, although the advisory channel experienced net outflows of $163 million, we are optimistic about the fundamental trends for our institutional business. Net outflows in the quarter were solely attributable to a single European institution, which elected to go passive with their $267 million global real estate portfolio. On a positive note and as expected, our awarded but unfunded pipeline grew to $600 million, from $243 million in the second quarter, which was mainly attributable to mandates targeting global real estate and multi-strategy real assets. In addition, RFP activity remained strong. Year-to-date, the volume of RFPs has increased by approximately 70% compared to last year, with the bulk of the searches focused on U.S. and global real estate preferred securities and global listed infrastructure. Looking ahead and taking into account current industry trends, we are planning to closely manage expenses while also selectively investing in people and new products to compete globally for share of asset allocations. This will mean adding select investment vehicles and fund share classes, both here and internationally, selectively adding depth to our existing investment teams, and being competitive and forward-looking with regard to investment management fees and expenses. If we're successful in maintaining our performance advantage and delivering output in the appropriate vehicles with competitive fee structures, we have a great opportunity to gain share of asset allocations globally. At this time, we'd open it up to questions.

[Operator Instructions] Our first question comes from the line of Michael Carrier with Bank of America. Please go ahead.

Bob, maybe just a question on some of your comments on the industry trends, both the shift from active to passive and some of the regulatory changes, both in the U.S. and Europe. You guys obviously have been differentiated and have been able to be on the other side of that trend. I just wanted to get your sense, when you look at say the U.S. business, how exposed are you to say the retirement part of the market, that maybe some of the products could go to lower fee products versus where do you see that what you mentioned is the open architecture opportunity given the increased allocations to real assets, so meaning how much is that in the U.S. versus how much is it outside the U.S. and what's that potential opportunity going forward?

Mike, that's a great question. It's really key or core to our growth strategy. As I mentioned a few times in my comments, our focus is gaining share of asset allocations. We're not looking to displace managers. For the most part, we don't think we're even competing with passive. We're positioning ourselves in front of what we think is a gigantic wave of change, and DOL actually accelerates this. So, DOL and other trends in place today are without a doubt going to accelerate, in the wealth channel, are going to accelerate the move to model-based delivery of investment advice, which means – so for example, corporate pension plans have 10% to 20% allocations to real assets, larger endowments have 20% to 30% allocations to real assets, the wealth channel depending on where you look at it is somewhere between zero and 1%. As in the wealth channel, and in particular in the retirement channel, with target dates in the broader wealth channel with model-based delivery and fewer and fewer active fund offerings being available on platforms, we fully anticipate that asset allocations to real assets is going to skyrocket because model-based delivery is going to incorporate more thoughtful, more institutional type asset allocations. So, in the wealth channel, I think real assets will see significant increases in allocation. For target dates, I think you'll see both rising allocations but more importantly there's absolutely no doubt that closed architecture is over. Litigation, even in advance of DOL being implemented, has spiked and DOL is relying on litigation for enforcement. So, record-keepers that have closed architecture have clear conflicts. The bar for them has been raised significantly. So there, I think asset allocations to real assets are going to increase and the opportunity for us to gain share from proprietary product is significant. And then lastly, as inflation begins to migrate higher, which we anticipate has already begun or we think has already begun and may accelerate next year, will motivate both institutions and the wealth and the retirement channel to increase allocations to real assets. And so, it's not unimportant that I mentioned the outstanding performance of our resource equity, commodities, MLP and real asset portfolios. It's really I think we believe the right place to be looking forward. In Europe, we think we're similarly well-positioned with regard to our product line-up, but what's new is we have a significant and talented team devoted to both the institutional but also the financial intermediary channel over there, and we are fully planning and anticipating to have our existing and some new structures which are in the pipeline to gain access to platforms there and benefit from the same opportunity to gain share of asset allocations.

Okay, thanks a lot. And then Matt, just a quick one, you mentioned the expense outlook for the fourth quarter. Just when you look into 2017, and like assuming that maybe we do get a rate hike in December and sometimes you see some pressure on REITs as we kind of go through that process, so if the market side is a little bit weaker, just wanted to get your sense on how much flexibility do you have on the cost structure given some of the investments that you alluded to, to take advantage of some of these structural changes in the industry?

I think as Bob mentioned, we're serious about looking at our expenses. We're keeping our G&A with the guidance that I gave, about 1% to 2% up from last year, where our revenue is most likely going to be higher than that. So, I think a lot of our controllable expenses, we're looking at them, we're handling them as prudently as possible. And so I think there's a little bit of room there where we can pull down expenses, but the non-controllable expenses, there's really not much you can do.

All right, thanks a lot.

Our next question comes from the line of John Dunn with Evercore. Please go ahead.

Mike kind of referred to it, but we've seen a movie about rate hike speculation before, taper tantrum, last year or more recently. Can you talk about the actual correlation you see between hikes and the underlying performance of REITs, and then also the correlation with institutional demand?

Sure. This is Joe Harvey. I'll address that question. We've published a lot of research, you can look at our Web-sites, on this topic and particularly as it relates to real estate securities and how they perform in different interest rate environments. And I guess if you look at it over the long-term, we've always felt that there's not a real high correlation because the economy is one of the most important drivers of the underlying fundamentals for real estate securities, and if you have a rising interest rate environment, typically it's accompanied by improving economic growth, and that positively influences fundamentals for real estate securities. But as things go in investment market, things aren't always the same, and we're in an environment where interest rates have been pinned to zero and we have an experience in 2013, you referenced it, the taper tantrum, where because quantitative easing has influenced security pricing in just about every area, not every single one but most, we had an experience back then where REITs sold off on the so-called taper tantrum. So, what we've had over the past couple of years is a rising correlation of REIT security prices to the bond market, and you saw a little bit of that over the past month and October, REIT share price isn't as other interest-rate sensitive security prices have gone down. So, you've got to think about this in the short term but also the long-term. As it relates to REITs, we're still at a good part of the real estate cycle. While growth is slow compared with history, we don't see any risk of a recession on the horizon. So, we may have a period where REIT prices soften if interest rates or bond yields move up, but ultimately you need to look at the fundamentals, and the growth profile for those companies will help insulate that over a longer period of time.

Got you. And then…

I will say, we also as you know have a preferred securities business, and that while not directly comparable to some fixed income categories because there's a greater credit aspect to preferred securities, that's another area of our business that could be impacted in the short-term by any dramatic move in rates. But what we've seen historically is, because of the high coupons on these securities, which relates to the credit aspect of it, depending on the circumstances they can do better relative to other fixed income. I believe that for several of our other real asset strategies, while they are lower percentages of our AUM, we have some strategies that are different and would benefit from a rising interest rate environment, and the one I'm thinking about most is commodities. We think we've entered a new bull market for commodities, and because commodities have been in a six-year bear market and don't have an income component, we don't think they've been influenced like some other asset classes have by quantitative easing.

All right, got you. And then can you talk a little bit about what you think the demand picture might be for closed-end funds over the next couple of years, just in a post-DOL world?

It's our impression that the closed-end fund market window has been closed basically for a while, and with some modest exceptions with maybe some term trust, that sort of thing, we don't really think about closed-end funds as a growth business going forward.

Got you. Sounds good. Thanks guys.

John, I would just add to Joe's comments on September where we saw a slowdown in flows into a more yield-oriented or short-term yield oriented strategies like REITs or preferreds, we have seen an uptick in flows into our multi-strat real asset portfolio, MLPs, and as Joe suggested, I think that's sort of the pivot that is likely to occur when the market transitions.

Our next question comes from the line of Ari Ghosh with Credit Suisse. Please go ahead.

I was wondering if you could provide a little color on the conversations that you've been having with your distribution partners, just given that distributors have been limiting funds on platforms, certain asset managers have been lowering fees all ahead of the DOL rule, and then also, if you're thinking of repricing any of your funds or introducing new fund share classes within the U.S. retail sleeve?

This is Todd Glickson. I just wanted to comment on a few things as it relates to our partners. I think one of the things that we've seen, and you've talked about it, is there is a rationalization of product lines at most of the major wires, and a lot of that relates to the brands that are out there, the number of products that they have in this space, and of course the performance in their assets under management. I think because we've been very focused on our product line over time as it relates to the number of products that we have in terms of what our brand looks like and how we'd expand it, our work with our key partners has really been very positive in terms of their work on the rationalization side. What we're looking to do is make sure that our price points also are competitive. If you looked at databases like Morningstar, what we've seen over time is that Cohen & Steers has really been very competitive versus our peers. We've got an eye on that for the future. So whether it's the current products we have or the ones we bring out for the future, I think we'll continue to keep a close eye on it with the knowledge that prices are going in – price points are very sensitive and are really going in one direction.

Got it. And as a quick follow-up, just moving to the institutional ex-Japan segment's quarter, so a nice little uptick over there, so I was hoping that you could delve maybe a little deeper into the demand trends that Marc and team have been seeing in terms of regions, products, new mandates, as you look to expand the footprint in those markets, the ex-Japan market?

Could you repeat the question please? We didn't hear a portion of it.

Sure. So just had a couple of questions on the nice uptick that you've seen in the institutional ex-Japan segment this quarter, and I was hoping that you could delve a bit deeper into the demand trends that Marc and team have been seeing and if you can touch on either the regions, products and some of the mandates? Can you hear me?

Are you referring to some of the awarded but unfunded mandates and the trends related to that?

Sure. And then in particular to the ex-Japan segment.

Of advisory?

Yes.

Okay. As I mentioned earlier, the increase in awards awarded but unfunded falls into two buckets, global real estate and real assets, and the RFP activity has generally mirrored that along with global listed infrastructure. Our subadvisory business is improving, ex-Japan is improving gradually and there again it's mainly global real estate and U.S. real estate. There isn't anything dramatic that's changed there over the last several quarters.

Got it. Thanks guys.

Our next question comes from the line of Ann Dai with KBW. Please go ahead.

I was hoping to bring the conversation back to DOL quickly. I appreciate the color on the conversations you've had with distribution partners and talking about maybe some potential changes to product structure, fees or just keeping an eye on things. What I'm curious about is maybe not so much the fees on products themselves, but other fees, things like revenue sharing, and what conversations around that has been like. It's my impression that there's been a lot of confusion about how revenue share, what that looks like in a post fiduciary rule environment for retirement assets.

It's a great question. I don't think we yet have an answer for you. We've heard a lot of rumors. We've had some preliminary conversations. But whereas I think a number of our partners have already begun to and in some cases aggressively rationalize their product line-ups, we really have not had any substantive discussions with them regarding the future of revenue sharing.

Okay. Maybe moving on to investment performance then, just looking at that slide that you provide in the presentation, the products continue to outperform pretty solidly in the three, five and 10-year buckets, but it just looks like there continues to be some strategies that are struggling at the one-year mark. And so can you just give us some update on that, some color around which strategies are driving that decline in performance I guess in the performance metric, and then in those strategies, how you've been positioned relative to the market?

Sure, Ann. This is Joe Harvey. So the one-year performance figures where we show that 50% of the strategies by AUM are outperforming, so 50% by definition are underperforming, it's really driven by two strategies, our U.S. real estate strategy and our global listed infrastructure strategy. And U.S., with the AUM that we have in that strategy, is going to be the biggest driver of that. As Bob discussed in his comments, we had a rough start to this year, but our performance in the third quarter was stellar and we think that we're back on track on that strategy. As you can see in the three and the five-year numbers, we're very competitive and when you look at our U.S. REIT strategies relative to our peer groups, one, three, five, and increasingly now on 10, we're very, very competitive. The other strategy which has underperformed on a one-year basis is our global listed infrastructure strategy. That strategy in the third quarter also underperformed, so we're still struggling a little bit there, and a strategy that has high priority and focus here to get performance turned around. But on a percentage basis, by AUM, it's much smaller than the U.S. strategy, and so we'd expect that as – assuming our U.S. strategy continues to perform like it has in the third quarter, then that chart that you see will look better as time passes.

Thanks for the color, Joe.

[Operator Instructions] Our next question comes from the line of Mac Sykes with Gabelli. Please go ahead.

I have two questions. First, given your rapid growth this year on the asset gathering, do you think there is more risk to churn as we go out the next couple of quarters?

Churn, I'm not sure I know what you mean by churn.

So in terms of – you've had pretty rapid inflows of net new assets and I was wondering maybe you could break it out between people that are rotating to the asset class because of some of the dynamics you've talked about versus perhaps chasing performance?

To be honest, I don't see a lot of chasing of performance at all. So, I'm really not concerned about churn chasing performance. I think the ball to keep your eye on is interest rates, and if rates remain stable and in the current zip code, then I wouldn't expect anything to change. If rates become volatile, particularly on the upside, then I think you'll see, as I mentioned earlier, a pivot on the part of investors from a search for yield to a search for cyclical plays and inflation protection, inflation insurance, and I think that's what the market is wrestling with now and why it's going sideways. I think it's a bit of a standoff. I think there are those who are positioning themselves for higher rates, and so financials are doing better, yield-oriented strategies have kind of gone sideways or down, but I think we're just going to have to wait and see where the markets end up.

I would just add to that. In the scenario where we have a more volatile to the upside move on yields, one of our leading kind of flow strategies has been our preferred stock strategy. We also have a low-duration version of that strategy which we started late last year. So we're going to hit our one-year anniversary in that strategy. So, it's possible that we could see some shifting from our flagship preferred stock strategy into the low-duration version.

And then, Bob, you've talked about sort of the real assets universe. Do you think you could sort of holistically talk about within the realm of the real assets universe, what is the percentage that your platform covers in terms of strategies dedicated to that and what are you missing and does it matter at this point with some of those?

With respect to core strategies, we don't think we're missing anything. What we're working on is, in response to both our institutional and wealth partners, is a variety of versions, different versions, of our multi-strategy real asset approach. So, our core strategy is mostly all equity and it is real estate, infrastructure, commodities and resource equities. There are some institutions that would like to dial down the equity exposure and dial down some of the volatility, and then there are various other considerations. And so, I think our core strategies underpinning real assets, we have the full complement and we began working on that five or six years ago. So, we're extremely happy with our capabilities and our teams, and as we've talked about today, the investment performance for 90% of those strategies is overwhelmingly positive including our multi-strat portfolio. But we do recognize that our partners and investors have different risk tolerances and different goals. And so, we're going to be introducing a variety of different blends of multi-strat real assets.

Great. Nice quarter. Thank you for taking my questions.

Our next question comes from the line of Glenn Schorr with Evercore ISI. Please go ahead.

Follow-up on one of the earlier conversations, I hear you loud and clear about increasing allocation to real assets, and your performance is great, shows in your flows, I guess the question I have is, I want to draw a distinction in assets going your way through model-based advice and if there's a distinction between the more robo platforms that might point to more passive products? So just curious on how you're thinking about that, how you're positioned for that.

So those, I think those are going to be different channels. I'll give you one recent example. And I think, ultimately I think many of the wires are going to go really aggressively to model-based, and ultimately they're cutting the number of funds available on their platforms by half right off the bat and they're probably not going to stop there, and they are really only going to want their advisors to focus on the four or five-star or the equivalent thereof of funds. But they are also I think going to move aggressively to delivering advice in models. Most recently, one of the largest wire houses out there put out a piece on real assets that's strongly encouraging, significant allocation to real assets. A lot of their comments reflected our research. And they ended it with an implementation recommendation of our real asset portfolio. And I think you're going to see a greater formalization of that type of thinking where the systems, whether they are wire houses or other systems, where they know they can depend on their partner to be a thought leader, to have the capability to support their systems and their advisors, to deliver top-tier performance with fees that are actually extremely competitive, that the full robust package and noting that there aren't very many players today into real asset, in the bundled real asset category, in fact Morningstar doesn't even have a real asset category yet which we're working on, just puts us in a terrific position. And again, the concept is, real asset allocations are not just widely accepted but predominate in the pension endowment sovereign fund world. And most of the strategists in the leading wealth platforms are recommending high allocations, particularly given the outlook for global economies and inflation. And so, they're going to implement that increasingly going forward to a limited number of offerings and to model-based delivery mechanisms that will include firms like ourselves.

I agree with all of that. On the robo side specifically, do you feel you need a passive version product to participate on that front or is that just a part of the market where you're okay letting that trade away?

Philosophically, I think you're either an active manager or you're a passive manager. We obviously have a viewpoint. We think that the supermarket approach no longer will be effective because when partners like the wires and our partners abroad are looking to fulfill asset allocations, they're going to go with the industry leaders or the category killers and the brands and the folks who are delivering. Passive, as you all know as well or better than us, is just a very different business, and we and I think most active managers are not prepared or equipped to win the race to zero, and fees are going to go to zero in many passive strategies and we're not equipped and we're not interested in competing in that business.

I hear you. All right, thank you very much.

There are no further questions at this time. I will now turn the call back to Bob.

Great. Thank you all for dialing in this morning and we look forward to speaking to you after the year-end. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.