Cohen & Steers, Inc. (NYSE:CNS) Q2 2024 Earnings Call Transcript

Cohen & Steers, Inc. (NYSE:CNS) Q2 2024 Earnings Call Transcript July 18, 2024

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers’ Second Quarter 2024 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 call is being recorded Thursday, July 18, 2024. I would now like to turn the conference over to Brian Heller, Senior Vice President and Corporate Counsel of Cohen & Steers. Please go ahead.

Brian Heller: Thank you, and welcome to the Cohen & Steers’ Second Quarter 2024 Earnings Conference Call. Joining me are Joe Harvey, our Chief Executive Officer; Matt Stadler, our Executive Vice President; and until late June, Chief Financial Officer; Raja Dakkuri, our new Chief Financial Officer; and Jon Cheigh, our Chief Investment Officer. I want to remind you that some of our comments and answers to your questions may include forward-looking statements. We believe these statements are reasonable based on information currently available to us, but actual outcomes could differ materially due to a number of factors, including those described in our accompanying second quarter earnings release and presentation, our most recent annual report on Form 10-K and our other SEC filings.

We assume no duty to update any forward-looking statement. Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund or other investment vehicles. Our presentation also includes non-GAAP financial measures referred to as-adjusted financial measures, that we believe are meaningful in evaluating our performance. These non-GAAP financial measures should be read in conjunction with our GAAP results. A reconciliation of these non-GAAP financial measures is included in the earnings release and presentation to the extent reasonably available. The earnings release and presentation as well as links to our SEC filings are available in the Investor Relations section of our website at www.cohenandsteers.com.

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

Matthew Stadler: Thank you, Brian. Good morning, everyone. Thanks for joining today. Before we begin the call, I’d like to welcome Raja Dakkuri, our new CFO, who joined us on June 24th. Raja will be reviewing the financial results on our earnings calls going forward. As in previous quarters, my remarks will focus on our as-adjusted results. A reconciliation of GAAP to as-adjusted results can be found on Pages 17 and 18 of the earnings release and on Slides 16 through 20 of the earnings presentation. Yesterday, we reported earnings of $0.68 per share compared with $0.70 in the prior year’s quarter and $0.70 sequentially. Revenue was $122 million in the quarter compared with $120.3 million in the prior year’s quarter and $122.9 million sequentially.

The decrease in revenue from the first quarter was primarily due to lower average assets under management. Our effective fee rate was 58 basis points in the second quarter, consistent with our rate in the first quarter. Operating income was $42.5 million in the quarter compared with $43.8 million in the prior year’s quarter and $43.7 million sequentially. And our operating margin decreased slightly to 34.9% from 35.5% last quarter. Total expenses were essentially flat when compared with the first quarter as an increase in G&A was partially offset by a decrease in compensation and benefits. The increase in G&A was primarily due to higher recruitment costs as well as an increase in professional fees. And the decrease in compensation and benefits was in line with the sequential decline in revenue as the compensation to revenue ratio for the second quarter remained at 40.5%.

Our effective tax rate was 25.4% for the second quarter, consistent with our prior guidance. Page 15 of the earnings presentation sets forth our cash and cash equivalents, corporate investments in US treasuries and liquid seed investments for the current and trailing four quarters. Our firm liquidity totaled $325.1 million at quarter end compared with $233.1 million last quarter. The second quarter amount included net proceeds of $68.5 million from our recently completed registered stock offering, which closed in April. And we have not drawn on our $100 million revolving credit facility. Assets under management were $80.7 billion at June 30th, a decrease of $526 million or about 1% from March 31st. The decrease was due to net outflows of $345 million and distributions of $673 million, partially offset by market appreciation of $492 million.

Joe Harvey will provide an update on our flows and institutional pipeline of awarded unfunded mandates. Let me briefly discuss a few items to consider for the second half of the year. With respect to compensation and benefits, we maintain a disciplined and measured approach to both the acquisition of new talent for strategic initiatives and replacement hires so that all things being equal, we would expect the compensation to revenue ratio to remain at 40.5%. We still expect G&A to increase 5% to 7% for the year from the $55 million we recorded in 2023. As a reminder, 2023 G&A included an adjustment to reduce accrued costs associated with the implementation of our trade order management system. Excluding that adjustment, we would expect G&A to increase 3% to 5% year-over-year.

The majority of the increase is related to investments in technology as well as costs associated with the relocation of our London and Tokyo offices. And finally, we expect our effective tax rate will remain at 25.4%. Now I’d like to turn it over to our Chief Investment Officer, Jon Cheigh, who will discuss our investment performance.

Jon Cheigh: Thank you, Matt, and good morning. Today, I’d like to first cover our performance scorecard and then discuss the investment environment for the quarter, including recent market shifts, which we believe favor our asset classes. Last, I’d like to discuss rising global energy demand and how we are taking advantage of this trend within our investment portfolios and how this should drive investor interest into our strategies. Turning to our performance scorecard. For the second quarter, 96% of our total AUM outperformed its benchmark, maintaining our exceptional performance from the previous quarter. On a one-year basis, 98% of our AUM outperformed its benchmark, while our three, five and 10-year outperformance now stands at 96%, 97% and 99% respectively.

From a competitive perspective, 94% of our open-end fund AUM is rated four or five star by Morningstar, which is up modestly from 93% last quarter. Our AUM weighted alpha over the last year has been 270 plus basis points, an acceleration versus our longer-term numbers. Put simply, our short and long-term performance are compelling and we keep getting better. Transitioning to investment market conditions. On one hand, the second quarter was more of the same. Global Equity saw a gain of 2.6% and the market fretted daily over the precise timing and amount of interest rate cuts for 2024 and 2025. Equity momentum during the quarter remained highly concentrated in select large-cap growth stocks, leaving behind the majority of the market, including value, small and mid-cap stocks.

Our equity-oriented asset classes all continued to lag cap-weighted indices with US and global REITs and global listed infrastructure all modestly negative for the quarter. Taking a step back, over the last five years, while listed REITs and infrastructure have had periods of outperformance, overall, performance differences versus equities are stark. For example, over the last five years, US REITs have underperformed US equities by 1,160 basis points annualized and global listed infrastructure has underperformed global equities by 820 basis points annualized. The trailing absolute returns of our asset classes have been disappointing. But there are three key factors that make us very positive about the forward prospects for these asset classes in our business.

First, the majority of the underperformance has resulted in the valuation or multiple expansion of equities versus the multiple contraction seen in our asset classes. Earnings growth differences have been a small part of the performance difference relative to just changes in valuation. Today, by some measures, equity valuations are somewhere in the bottom quintile or decile versus history, while valuations of our asset classes look historically normal or in some cases, more attractive relative to history. Second, while valuation is a wonderful long-term signal, we know that value may not matter in the short run. Fortunately, in our view, the inflation report of last Thursday will likely go down as a so-called all clear sign that growth in inflation have slowed and that we are entering a rate-cutting cycle.

This shift will alter market leadership and we already see this with our asset classes outperforming. US REITs, as one example, have outperformed the S&P 500 by 680 basis points over the last five trading days. Third, while we believe attractive valuations, coupled with a market shift or sufficient preconditions for return outperformance. In our view, the under ownership and money sitting on the sidelines represent a significant available opportunity for our asset classes. According to one major sell-side survey, investors are the most underweight real estate they have been since January of 2009, which was the middle of the global financial crisis. We further believe cuts in Fed funds will drive the trillions of dollars currently in money markets to seek higher returns.

Given the attractive valuation of our asset classes and their lagged trailing performance, we believe our strategies are a natural opportunity for fresh capital to take advantage of a market rotation into relative value and yield. Not to be ignored, private real estate as measured by the preliminary results for the NCREIF ODCE index had modest declines for the quarter of negative 0.5%. This is the seventh quarter in a row of declines which is consistent with the lead lag relationship with listed real estate, which bottomed in Q3 2023. We continue to believe that other funds and investment teams are focused on playing defense on their last cycle private portfolios and redemptions. However, we are focused on taking advantage of repriced real estate and improving debt cost of capital versus 9 to 12 months ago.

Creating attractive cash yields to equity investors relative to long-term history. The last topic I want to discuss is global power, the impact on energy markets and how we have been capitalizing on our forward view on this trend. Most of you have likely seen the many recent headlines on this topic. But simply, the world needs more energy. Power demand in the United States has been flat for nearly two decades, but that is beginning to change, and energy efficiency can no longer offset rising power needs. Perhaps the most topical driver of higher electricity demand is data centers with particular focus on AI, which requires substantial computing power, storage capacity and cooling technologies. But it’s not just data centers driving higher demand, onshoring of energy-intensive activities like precision manufacturing as well as shifts related to the energy transition will play a significant role in power demand growth over time.

Increasing adoption of electric appliances coupled with the growing number of electric vehicles on the road will further expand electricity needs. The title of our recent white paper says it best. This is about changing the narrative from energy transition, energy addition. We see significant investment opportunities for existing and new investors here. First, we launched the Future of Energy Fund in March of this year. Thesis behind this strategy is that there will be a rise in global energy consumption through at least 2040. Last year, we diverge from consensus in proposing that even though the global economy is becoming more energy efficient, these gains will not be enough to offset rising energy demands resulting from global population and economic growth.

Rising electricity demand from data centers have only since made this a more mainstream conversation. We believe that traditional and alternative energy will both play meaningful roles in responding to the world’s power demands. The Future of Energy Fund is well positioned as we believe that both traditional and alternative energy creates the ability to generate superior investment outcomes in an area requiring active management. Our client-facing teams have been excited to deliver this strategy to potential investors and the feedback has been quite positive in both wealth and institutional markets. The second opportunity we see is that nearly half of our infrastructure portfolios will benefit or seek incremental investment opportunities from this acceleration in power demand growth.

This will include companies that own and operate power generation, those that build, operate and maintain our electric grid and midstream energy for the pipeline companies that supply power generators. At the same time, the power demand story is part of a wider backdrop that we think is favorable for listed infrastructure. The need to invest tens of trillions of dollars in the world’s infrastructure, where power demand is just one driver can provide a tailwind for years to come. Meanwhile, listed infrastructure trades at a rare discount to global equities and at a steep markdown to its historical enterprise multiple. The third area where we see power demand as a tailwind is within natural resource equities, which, as a reminder, focuses on three major sectors agribusiness, metals and mining and energy.

We believe that the world has underinvested in natural resources discovery over the last 10 years and that this will create an era of scarcity over the next decade with a track record since inception more than 10 years ago, about performing by more than 200 basis points and 400 plus basis points over the last five years. We believe natural resources will be an exciting area for absolute returns and will remain right for very active management. With that final comment, let me turn the call over to Joe. Thank you.

Joseph Harvey: Thank you, Jon, and good morning. Today, I will review our second quarter key business metrics and trends, then discuss our current positioning and growth initiatives for the future. Our asset classes lagged the stock market in the second quarter. In terms of flows, some of our clients continue to react to broader challenges they are facing related to funding obligations and portfolio reallocation as the regime change in markets continues to play out. As to factors we can control such as investment performance, client education on our asset classes and resource allocation, we are performing well and continue to innovate and invest for the future. I remain optimistic about our positioning. For most of the second quarter, the macroeconomic environment was dominated by the higher for longer expectation for interest rates.

The 10-year treasury yield averaged 4.44%. However, after quarter end, we finally saw inflation continuing to ease. The focus has now turned back to the potential for rate cuts later this year with yields on the 10-year treasury declining. If our flow patterns since 2017 are any indication, the onset of this easing cycle, combined with our strong investment performance, could portend a shift in our flows. That is from outflows to the longer-term trend of organic growth. This perspective is supported by our flows over this current interest rate cycle, up until the first Fed rate hike in the second quarter of 2022, which took Fed funds from 25 to 50 basis points. We had experienced 11 straight quarters of net inflows, averaging $2.15 billion per quarter.

Since then, as rates increased to 5.5%, we had nine straight quarters of outflows, averaging $745 million per quarter. If the yield curve normalizes at a higher level with less monetary policy extremes, it is possible that our flows and the relative attractiveness of our asset classes could be less influenced by rates and more by our performance. Our relative investment performance has been strong for a long time and continued in the second quarter. As a result, we have had good success at taking share from our competitors as well as competing for new mandates. Our weighted average excess return over the past year was 273 basis points compared with 309 basis points last quarter. The three-year excess return was 195 basis points. So recent performance has trended higher.

This performance helps us maintain our fee rates, which overall are 58 basis points compared with 57 basis points the same quarter last year. Over the past several years, many of our traditional asset manager peers have experienced fee rate compression. Asset owners continue to face challenges balancing portfolios amidst a changing and dynamic market environment. These challenges range from inflationary pressures on funding obligations to building more efficient return risk profiles, considering the more attractive menu of fixed income opportunities and the liquidity constraints from private allocations and associated capital commitments. Looking at firm-wide flows. We had net outflows of $345 million in the second quarter compared with $2 billion in the first quarter.

By strategy, preferred securities had outflows of $366 million and Global Real Estate had outflows of $127 million, which were offset by inflows of $152 million into US real estate. The majority of the outflows were from subadvisory and Japan subadvisory segments. Institutional advisory had $73 million of net inflows. Subadvisory ex-Japan had $134 million in outflows. Both segments were active with fundings and redemptions. Now that the macro regime is normalizing, there have been a lot of adjustments to client portfolios. Categorizing our client redemptions in advisory the past several years. 33% was from rebalancing and raising cash, 35% was from eliminating our strategy from the strategic allocation, 17% was profit taking and 15% was to fund a private allocation.

Many of these portfolio shifts are cyclical or aimed at capturing perceived opportunities that have emerged during the regime change. We still believe that many investor types are underallocated to our asset classes based on the fundamental merits of risk and return. Japan subadvisory had outflows of $185 million compared with $312 million of outflows in the first quarter. Last quarter, I characterized the environment in Japan as an investing Renaissance. Yet so far, equities have dominated the flows versus interest rate-sensitive asset classes, while Japanese investors are also showing a wariness about the strength of the US dollar and an aversion to yield oriented funds. Reforms to the country’s retirement program called NISA are resulting in modest, but steady inflows, yet passive has seen in greater inflows than active strategies to date.

Our one unfunded pipeline was $1 billion compared with $1 billion last quarter and a three-year average of $1.17 billion. Tracking the change from last quarter, $181 million funded from five accounts, and there were newly awarded mandates from six clients totaling $300 million. The majority of the pipeline is in global and US real estate. Offsetting the pipeline will be $558 million of expected redemptions, mostly in global real estate strategies across three accounts, two of which are eliminations from the clients’ strategic allocation and one of which is with an OCIO provider who lost a client relationship. I thought it would be helpful to share a recent new real estate mandate we’ve been funding for an Asian institution. The plan is $200 billion in size, and they have $10 billion allocated to real estate.

Of that, we have allocated $300 million to REITs which represents just 15 basis points of their overall plan. We believe that this is representative of many investors under allocations to listed REITs and the growth potential for this asset class. We believe we are well positioned to capitalize on the opportunity in our listed real asset classes while we continue to invest in new opportunities and innovate for the future. While the macro headwinds have been difficult since mid-2022, when the Fed began normalizing interest rates, we believe we are close to a turn toward easing. In fact, markets are pricing in six rate cuts starting this fall and into next year. Our number one priority is to continue our excellent investment performance and advise clients how to allocate to our asset classes over the next phase of this cycle.

Our core strategies, REITs and preferreds should be aided by the rate cycle. Also, our multi-strategy real asset portfolio, in my view, is very underallocated to as investors are underweight inflation-sensitive instruments in a world where inflation will be more persistent. As Jon discussed, listed infrastructure should get more attention as a lower beta real asset with secular themes due to underinvestment and plays on artificial intelligence through power and data centers. We have also planned for greater adoption of listed real estate and infrastructure allocations in Asia. Other growth initiatives include the Future of Energy open-end fund, scaling our offshore CCAP funds now that we’ve hit $1 billion in size, launching active ETFs and capitalizing on the Japan Renaissance considering our 20-year presence in that market.

Our nontraded REIT — CNS REIT is gaining momentum. Recall that we have seed capital to deploy and CNS REIT made its first real property acquisition this past January. We have been opportunistic waiting for prices to adjust downward to reflect the change in the cost of capital. We have several other properties under contract and have gained momentum assembling the portfolio. As a vehicle with fresh capital to invest, CNS REIT is not contending with performance headwinds tied to NAV market downs of legacy real estate assets. While it has been a relatively short time period, our initial performance has been positive, driven primarily by two factors. First is our focus on open-air shopping centers, which have very strong fundamentals and are mispriced in our view.

Second is our focus on using listed REITs as an alpha driver to complement the private portfolio. As Jon discussed earlier, our listed real estate performance has been outstanding this year, further contributing to CNS REIT’s momentum. Other milestones include going live on the Schwab alternative investment platform, which is the most used platform for registered investment advisers who are our initial target allocators for CNS REITs. As Matt mentioned, Cohen & Steers raised $68.5 million in a registered offering that was conducted in conjunction with our company being added to the S&P 600 Small Cap Index. This new capital has made our balance sheet even stronger. We would envision using a portion of the capital to seed new investment vehicles potentially active ETFs. Meantime, with attractive yields on short-term treasuries, we are able to invest this additional capital on a neutral basis to current earnings.

We had two key leadership additions in the quarter. First is Raja Dakkuri as CFO, succeeding Matt Stadler, who is retiring. Raja was a named Executive Officer and Chief Risk Officer at Valley National Bank where he joined through Valley’s acquisition of Bank Leumi, where Raja was CFO. He is tasked with taking a strong finance department and lifting it to the next level. Further integrating with the heads of our teams to strategically measure and manage the business. Second, Dan Noonan has joined as Head of Wealth Distribution. Dan had been Head of Enterprise Wealth and the Private Capital Group at Nuveen. And before that, he was with PIMCO. Dan, in addition to running our core wealth business in the US will be focusing on shifting and adding resources to the registered investment adviser market and multifamily office segments, contributing or distributing our nontraded REITs and launching active ETFs. With the transition to Raja as CFO nearly complete, we are turning to celebrating Matt Stadler’s retirement and contributions to Cohen & Steers.

This was Matt’s 77th and final earnings call. For over 19 years, Matt made contributions to numerous account as CFO and as an Executive Committee member. His greatest leadership was felt in running a tight financial ship, focusing on critical business factors, asking the hard, but necessary questions and believing passionately in our business. Please join me in saying farewell to Matt. I know he’ll be cheering for us. Thank you, Matt. We wish you well in retirement. At this point, I’ll turn the call back to the operator, Julianne, to facilitate Q&A.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open.

John Dunn: Hi and congratulations, Matt. Maybe just a little more on the wealth management channel for US REITs and preferreds. Are you starting to see those conversations shift? And then also the 15% of redemptions from private markets? Thanks for delineating that. Can you update us on the push and pull of demand for public versus private in the wealth management channel.

Matthew Stadler: Sure. Let me start and maybe Jon can add some things here. Just in terms of the wealth flows this year, if you recall in the first quarter when there was anticipation about rate cuts, we had some very strong months early in the quarter and that included both inflows into REITs as well as preferreds. In the second quarter as the expectations got pushed out, we then saw some redemptions in preferreds. However, we’ve continued to see inflows into our open-end refunds. Now most of the flows have come from our what we call our institutional version of our core real estate strategy. And so driving those flows have been some important large RIAs, which is a market that we’ve been targeting. And they’ve been averaging into this process of REIT starting to signal a new return cycle.

So I would expect that, again to the extent that you can have an expectation for flows, they are impossible to predict. But if you go back to my comments about what we’ve seen over the long-term, if we’re entering an easing cycle, I think, that’s positive for both of those strategies in the wealth channel. As it relates to the our institutional advisory clients redeeming to fund private investments, taking a step back, the bigger picture is private allocations have been going up in portfolios for some time and that’s being turbocharged recently with the love fest with private credit. So as we — as these asset owners navigate the regime change, they’ve made commitments to private investments. And so it’s — the money’s got to come from somewhere.

And they can’t get it from private because realizations aren’t happening. Fixed income is gaining more share in portfolios. So it’s got to come from listed allocation and that’s been equities and in some cases are listed asset classes. As it relates to the real estate return cycle, we think that the price correction that we’ve been looking for in the private markets is about two-thirds of the way complete. And but it’s highly variable depending on the property sector. As I mentioned, we’ve been putting some money to work in the shopping center sector, which hadn’t had the cyclical top off that other sectors like apartments or industrial had as interest rates went to new lows and cap rates went to new lows. But we’ve started to put money to work and we feel that with the signaling that’s happened from the REIT market, that’s a good indicator of those bottoming process.

And if as both Jon and I talked about, we’re into a rate cutting cycle that will start to help on the cost of capital for real estate, but there still needs to be adjustments in seller expectations and the marks that they have in their portfolios.

John Dunn: Got it. And then on Japan, could you talk about how NISA actually could be end up being a significant tailwind down the road? And then maybe a little more on this idea of Japan going into renaissance and how you plan to take advantage of that across maybe multiple channel — distribution channels?

Matthew Stadler: Well, the renaissance stems from the very positive investing related trends that have been happening in Japan, including reflation starting in Japan and getting out of a deflationary environment, improved corporate governance, Warren Buffett blessing the market and global allocators wanting to find a different home rather than China. And so money has been going into Japan. And as I mentioned so far, it’s been going into equities, which is not inconsistent with what we’ve seen here with the leadership of some of the growth related technology companies. So but I think more importantly, if it, if this — and the regulators have been putting a focus on the investing markets and trying to improve the quality of the investment vehicles that are there and educating investors.

So if that as a whole is favorable for investing, we think we’ll get our share of portfolio allocations. And our partners, Daiwa, are optimistic about this and they wanted to market our strategies more and we’ve committed to giving them more sales resources. So it’s early days, but we’re — I think a transition in this renaissance context will take some time and we’re — we’ve been there for 20 years and we think we should get our fair share of that activity.

John Dunn: Thank you.

Operator: [Operator Instructions] Our next question comes from Adam Beatty from UBS. Please go ahead. Your line is open.

Adam Beatty: Hi. Good morning, and congrats to Matt. Fittingly perhaps, I’d like to kick it off with a question about sources and uses of capital. You did have the recent offering. Joe mentioned maybe seeding some funds. So just wondering how else you might deploy that capital and maybe whether or not M&A might be on the table just given some of the valuations around? Also, your stock has done very well. So I was wondering how you might think about maybe issuing some more shares to take advantage of that and then having maybe some dry powder for future initiatives? Thank you.

Joseph Harvey: Yes. Let me start and maybe Matt can add. So, yeah, our stock has done very well and that can be linked to this inflection point on interest rates and a shift as Jon talked about and market leadership for the small cap and value. And so we’ve seen a nice rally in the stock. As it relates to raising capital, our balance sheet is very strong. We’ve got plenty of capital. What we did earlier in the year was opportunistic. And with the context being — our business has become a little bit more capital intensive with the private real estate business, which requires more co-investment than a listed security vehicle would require. And those commitments include $125 million for our non-traded REIT and $50 million for our opportunistic traditional private equity vehicle.

So with that as a context and then thinking about launching active ETFs in light of the markets bouncing around, we just thought it would be a good insurance policy to be opportunistic and take advantage of the inclusion trade, which where the stock went up 10% overnight and show up the balance sheet. And right now it’s as strong as it’s ever been and — but as it relates to uses of capital, they’re going to be primarily organic. And at this time, we don’t have any acquisitions in mind as you know. We’ve been more of an organic growth oriented firm. And right now we have plenty of that opportunity with our private real estate business and with active ETFs.

Adam Beatty: Got it. Thank you. Yes and point taken on the private coinvest. Just shifting over a little bit to maybe real estate subsectors, Jon talked a lot about energy, obviously, and then Joe mentioned open air shopping centers. On the — and data centers as well. I’m just wondering about, in the context of a potential regime change here, any concern about growth areas like data centers, maybe being a little bit less robust? And then broadly, how you’re thinking about allocating to different real estate subsectors? Thanks.

Jon Cheigh: Sure. I mean, obviously, there’s been big performance dispersions in the listed market over the last 12 months for a lot of different reasons. I think to your point, really it’s just going to be the fundamental drivers in the data center business, which has driven wholesale rents up meaningfully. It’s going to continue to drive wholesale rents up meaningfully over the next few years, mainly because there’s a lot of demand and there’s an absence of supply because frankly there’s just difficulty in sourcing power, which is the necessary ingredient, of course, for data center. So I’m not sure there’s going to be a big shift as it relates to some of the fundamental trends that we’re seeing. But, of course, there’s going to be differences as it relates to the listed market in terms of sector dispersion and things like that.

So we’ve moved our portfolios over time to capitalize on big dispersions and returns, for example, between the tower sector which was a darling, if you will, for many years, but frankly it’s been a big laggard over the last few years. So tower REITs for us, we see as a very big opportunity and data centers also continue to be a very big opportunity. So I think there’s certainly shifts like that. But most of the dynamic changes that I was referring to more relate to some of the multiple compression and expansion that’s happened within the different parts of the market. Large cap has beaten small really across all GICS categories. And the REIT market, when you look at it, has basically had very comparable earnings growth. It’s lagged a little bit versus the S& P over the last five years.

And that’s been surprising to people because I think the USA today view is real estate is bad. It must be an earnings story, but that’s fundamentally not true. And so a lot of our conversations have been about office is a very small part of our portfolios in areas like data centers, healthcare and towers are much bigger parts of the REIT market, much bigger parts of really what’s driving earnings growth. And as you expect, there’s a lot of tailwinds still in those areas.

Adam Beatty: That’s great. Appreciate the detail. That’s all I had today. Thank you.

Operator: Our next question comes from Mac Sykes from Gabelli. Please go ahead. Your line is open.

Macrae Sykes: I just want to reiterate, thank you to Matt and the team there. I mean, he’s been a great support to me and as well as Industry Insight. And I would note that’s been many years over the course of my coverage of the firm. So thank you, Matt, and best wishes. I had two questions, I just I’ll ask them together. On the active ETFs, are there any specific product areas that you’re targeting REITs versus preferreds etcetera? And then on the closed end fund side, I know you’re a pretty big provider there and we have this purging IPO coming up. I was wondering if that catalyst there is changing your opinion on opportunities in closed-end funds? Thank you.

Matthew Stadler: Sure. As we launch active ETFs, it will happen in several phases. And the product positioning question is a really complicated one in light of all the incumbent relationships that we and all of our peers have. But we will lead with our strength, with core strategies and it will include REITs and preferreds, and one other area that Jon talked about today, which we just feel very — very strongly about investment wise. So that’s how we’ll start. We’ll start not slow, but medium. And then as the market evolves and it’s evolving rapidly, we’ll see how the different technology evolves. You know that many firms have filed a lawsuit with the SEC to try to get ETF share classes of open end funds. But so this is going to play out over a long period of time, but we will lead with our strength.

As it relates to closed end funds, there hasn’t been a traditional closed end fund in a while and the reason is interest rates have been so high. One feature of the majority of new issue closed end funds is to have a leverage component to it. And with the cost of debt right now, it’s hard to create a positive spread on your portfolio relative to the cost of your borrowing. So that is still a pretty big headwind. What Bill Ackman and Pershing are trying to do is very different — they’re very different and it’s very different than the traditional closed end fund market, but it’s going to play to his market position and investing style, which isn’t an income oriented investment strategy that you’ll typically find in closed end funds. And that has been a differentiating factor as it relates to how closed end funds trade in the aftermarket.

Macrae Sykes: Great. Thank you.

Matthew Stadler: So we would love for that market to open up, but I don’t see it happening until we get some more relief on the interest rate front.

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

Joseph Harvey: Well, thank you, Julianne, and thanks everybody for taking time to listen to us today. We look forward to reporting to you next quarter. Have a great day.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.