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Cohen & Steers Inc  (NYSE:CNS)
Q4 2018 Earnings Conference Call
Jan. 24, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers Fourth Quarter and Full Year 2018 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, January 24, 2019.

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 -- Senior Vice President and Corporate Counsel

Thank you and welcome to the Cohen & Steers fourth quarter and full year 2018 earnings conference call. Joining me are our Chief Executive Officer, Bob Steers; our President, Joe Harvey; and our Chief Financial Officer, Matt Stadler.

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 most recent annual report on Form 10-K and other SEC filings. We assume no duty to update any forward-looking statement.

Also, our presentation contains non-GAAP financial measures that we believe are meaningful and 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. 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 S. Stadler -- Executive Vice President and Chief Financial Officer

Thank you, Brian. Good morning everyone and thanks for joining us. Our remarks this morning will focus on our as adjusted results. Reconciliation of GAAP to as adjusted results can be found on pages 19 and 20 of the earnings release or on slide 16 and 17 of the earnings presentation.

Yesterday, we reported earnings of $0.56 per share, compared with $0.55 in the prior year's quarter and $0.64 sequentially. Revenue was $93.6 million for the quarter, compared with $99.3 million in the prior year's quarter and $98.2 million sequentially. The decrease in revenue from the third quarter was primarily attributable to lower average assets under management. Average assets under management were $57.6 billion, compared with $62 billion in the prior year's quarter and $60.4 billion sequentially.

Operating Income was $34.5 million in the quarter, compared with $41.2 million in the prior year's quarter and $39.4 million sequentially. Our operating margin decreased to 36.8% from 40.2% last quarter, primarily due to higher compensation and benefits and G&A, when compared to revenue.

Expenses increased less than 1% on a sequential basis, primarily due to higher compensation and benefits in G&A partially offset by lower distribution and service fees. The compensation to revenue ratio for the fourth quarter was 36.85%, which is higher than the guidance we previously provided of 33.75%. The increase in the ratio is primarily due to lower than forecasted revenue combined with a crude severance costs. For the year, the compensation to revenue ratio was 34.51%.

The increase in G&A was primarily due to higher professional fees, travel and entertainment expenses, and sponsored and hosted conferences. We did not incur previously anticipated revenue-sharing and sub TA fees on retirement accounts at one of our intermediaries. The decrease in distribution and service fee expense was primarily due to the reversal of these accrued fees during the fourth quarter, as well as decreased expenses associated with lower average assets under management in US open-end funds. Our effective tax rate for the quarter was 25.25% consistent with our prior guidance.

Page 15 of the earnings presentation displays our cash, corporate investments in US Treasuries and seed investments for the current and trailing four quarters. Our firm liquidity totaled $213 million, compared with $291 million last quarter and stockholders equity was $223 million, compared with $324 million at September 30th. The amount of firm liquidity and stockholders equity as of December 31st, reflects the payment of a special cash dividend in December of approximately $117 million or $2.50 per share. Over the past nine years, we have paid $11 per share in special dividends, we remain debt free.

Assets under management totaled $54.8 billion at December 31st, a decrease of $5.3 billion or 9% from September 30th. The decrease was driven by market depreciation of $3.2 billion, net outflows of $1.2 billion, and distributions of $842 million.

Subadvised portfolios in Japan had net outflows of $304 million in the quarter, compared with $314 million in the third quarter. Outflows decelerated in the fourth quarter, when compared to August and September, the two months immediately following the last distribution rate cut.

Total distributions on these portfolios totaled $363 million, compared with $433 million last quarter. Subadvised accounts excluding Japan had net outflows of $185 million primarily from client rebalancing out of global real estate, US real estate and global listed infrastructure portfolios.

Advised accounts had net inflows of $300 million during the quarter, primarily from inflows into preferred and global real estate portfolios, partially offset by outflows from international real estate portfolios due to client rebalancing. Bob steers, will provide an update on our institutional pipeline and new business activity.

Open end-funds had net outflows of $1 billion during the quarter, as the market decline triggered tax loss selling and retail investor redemptions.

Distributions, which included the payment of year-end capital gains totaled $351 million, $251 million of which were reinvested. Looking ahead, although we remain confident in our pipeline, positioning and opportunities, we recognize we are in a challenging revenue environment resulting from lower assets under management going into 2019. I will briefly discuss some of the steps we are taking to manage our expense base.

We believe that our current headcount, which includes a number of strategic hires made over the past few years, provides us with meaningful operating leverage. So we are taking a deliberate and measured approach to new and replacement hires. Although, we believe this approach will control headcount growth, lower assets under management resulting from the fourth quarter market decline, combined with the full year impact of 2018 new hires will result in an expected compensation to revenue ratio of approximately 35.75% in 2019.

We are actively reviewing all controllable expenses and are committed to reducing our non-client related costs. We are focused on inter-office travel, application licenses, market data services, and professional fees among other items. We believe these efforts will allow us to hold the line on overall costs, if not reduce them. As a result we project G&A for 2019 will be in line with the $46 million we recorded in 2018, but with a downward bias. And finally we expect that our effective tax rate will remain at 25.25% in 2019.

Now, I'd like to turn the call over to our President, Joe Harvey, who will provide commentary on our investment performance.

Joseph Harvey -- President and Chief Investment Officer

Thank you, Matt and good morning everyone. I'm going to discuss our investment performance and then summarize our 2019 priorities for the investment department.

In the fourth quarter our asset classes with the exception of midstream energy and resource equities defended much better than the S&P 500, which loss 13.5%. The drawdowns in US and global REITs were less -- they were half or less of the S&P 500's decline, while global infrastructure experienced even greater resistance with the decline of just 19% of the S&P 500's drop. Preferred's return negative 3.7%, which reflected widening credit spreads, which more than offset the decline of Treasury yields.

Looking at our relative investment performance, in the quarter 6 of our 10 core strategies outperform their benchmarks and for the full-year, 9 out of 10 core strategies outperformed. Keep in mind that beyond our core strategies, we typically have several versions of portfolios across the spectrum of risk and return, as well as portfolios that represent more targeted subsets of the core strategy. For example, within preferred's which is counted as a single core strategy, we have seven composite track records managed by our preferred and fixed income group; including low duration preferreds, REIT preferreds and contingent capital securities.

Measured by AUM 93% of our portfolios are outperforming on a one year basis, 97% are outperforming over three years and 98% are outperforming over five years. 83% of our AUM are in open-end funds that are rated four or five star by Morningstar.

Market activity in the fourth quarter indicates that we are late cycle and is likely a Harbinger of the next phase in the markets. Over a year ago we believe the biggest investment risk would be the transition from quantitative easing to quantitative tightening. In late 2018, the market clearly became focused on the potential for a policy mistake by the Fed. Our view is that economic growth and corporate profits have likely peaked, which together with the transition from quantitative tightening to -- from quantitative easing to quantitative tightening could result in a stretch of higher market volatility and lower negative returns.

Historically, in late stages of the economic cycle real assets have performed well relative to stocks. Looking at late cycle periods going back to 1973, commodities, infrastructure, resource equities and REITs in that order have outperformed US stocks by meaningful margins. Looking at the current environment as growth and return expectations decline, the income provided by our REIT and infrastructure strategies represents a larger proportion of return potential and together with their relative earnings stability become more attractive factors for investors. In addition, we believe these strategies have less risk of multiple compression as growth slows and quantitative tightening takes hold.

Turning to the performance of our asset classes. We outperformed our benchmarks in all of our REIT strategies for both the fourth quarter and the full year 2018. This includes stand-alone regional strategies in the US, Asia and Europe, as well as our global and international portfolios. Real estate was the second best performing gig sector in the S&P in the quarter, lifting real estates rank for 2018 to 5 out of 11 sectors after lagging the market significantly in early 2018.

In infrastructure, we underperformed in the quarter in part due to our overweight midstream energy and outperformed by 160 basis points for the year. The asset class defended well versus stocks in part due to the utilities component of the strategy. Adding analyst to our infrastructure and midstream teams was a priority in 2018, and we are pleased with the calibre of new additions and our overall team size at this point. We are well positioned to compete for what continues to be an active market for institutional searches and infrastructure.

Midstream energy, which was down 17% in the quarter was driven by falling oil prices and rising credit spreads. Tax loss selling was the factor driving many markets lower late in 2018, and it hit the midstream sector disproportionately. We were surprised that midstream did not defend better, because it had already undergoing a fundamental down cycle and now has accelerating fundamentals, attract evaluations and yield support. We underperformed in the quarter, but overall had a strong year with 310 basis points of outperformance.

Midstream shares have had a nice bounce so far in 2019 providing some resurgence in our fundamental view. Resource equities decline 17% on slowing economic expectations, trade wars and oil price declines. We outperformed in the quarter and by a 140 basis points for the year.

Our real assets allocation team believes resource equities are statistically cheap. Our multi-strategy real assets portfolio was down 7% for the quarter, showing its diversification potential versus stocks and reflecting strong relative performance of the dispensive sectors of real estate, infrastructure and high grade credit. We underperformed slightly against our benchmark in the quarter, but we're in line for 2018.

In preferreds, we outperformed for the full year, albeit by a smaller margin than usual. Looking at our full range of strategies and preferreds and in fixed income, we outperformed in six out of seven strategies for both the quarter and year. Considering the Treasury yields may have peaked and the credit spreads have widen to more normal and supportive levels. Our team is more confident that our core preferred strategy will deliver at least its current yield of 6% this year, if not a bit more in total return.

In 2018, our best performing strategy was European real estate, which outperformed by 770 basis points. Our European real estate open-end users fund is rated five stars. Our worst performing strategy was commodities, which underperformed by 260 basis points. As we have discussed on prior calls our protocol when we underperform is to activate performance remediation and improvement plans. In the case of commodities, we have responded by integrating quantitative techniques into our fundamental process and the initial results are promising.

I'll conclude my discussion today with an overview of our investment department priorities, across all teams we continue to manage and prepare for the late stage environment and as a result have more balance in our portfolios. I believe it is critical for active managers to outperform in the next down cycle, left the industry lose more market share to index strategies.

While our outperformance statistics are strong, we always have strategies that can do better and as mentioned, commodities are our focus. Another goal is to deliver greater alpha from asset allocation considering that we are seeing more demand for multi-strategy portfolios. Our three year old alpha mining project provides the foundation for performance enhancement and this year as a component of alpha mining we will dedicate resources in conjunction with our IT department to quantitative techniques and data sources to complement our fundamental processes.

In terms of innovation we are excited by the opportunity to develop strategies for the endowment, family office and RIA markets. These investors require strategies that are unique by virtue of having higher concentration, being more targeted or having unique income or volatility profiles. Examples; include are concentrated portfolios in real estate and midstream energy, small cap infrastructure, hedged real estate, and an opportunistic real estate strategy. We have seeded five track record accounts in these areas over the past year and are developing LP and other structures as we engage with prospective investors. Allocating firm resources to those areas were active management is in demand and appreciate it will provide growth for our firm, as well as career paths and creative outlets for our investment professionals.

Finally, we will continue to optimize our use of external research and manage toward lowering these costs. We have made meaningful progress on this front over the past two years, spurred by method regulations and market practices in Europe and we will transition to the last phase of this initiative as the SEC evaluates commission versus hard dollar arrangements in the United States. In summary, our investment department is well positioned for 2019.

I will now turn the call over to Bob Steers.

Robert H. Steers -- Chief Executive Officer

Thank you, Joe. And good morning everyone. As we all know by now last quarter and especially December saw capital markets and asset flows that were volatile, complex and influenced by tax considerations. These conditions induced investors across the spectrum to initiate risk reduction, tax loss and rebalancing strategies with the end result in high levels of money in motion. This market reaction also compressed and illuminated both the cyclical and secular challenges facing the active management industry. Although we were not immune from these market conditions, we remain well positioned and confident that market conditions notwithstanding, we will generate positive organic growth this year.

As reported, we experienced net outflows of $1.2 billion in the quarter, the overwhelming majority of which was derived from our open-end funds. It's our belief that the retail outflows were predominantly a year-end phenomenon, which will be at least partially reversed in the first quarter. Consistent with the trends in recent quarters, the institutional advisory segment enjoyed robust investor demand and continued positive net flows, but our subadvisory flows in the aggregate remain challenged in the quarter.

Specifically with respect to the wealth channel, tax loss, selling and concerned regarding the widening of yield spreads had a major impact on our preferred securities open-end fund flows in the quarter.

In total, our open-end funds had $1 billion of net outflows with the two preferred security funds accounting for virtually all of that amount. Flows into our real estate and infrastructure funds were essentially flat. However, our industry leading midstream energy fund buck the sector trends and delivered $42 million of net inflows.

Our optimism regarding the wealth channels returned positive flows this quarter and year is grounded in a number of relevant fundamental factors. First, we expect a not insignificant portion of the tax loss motivated redemptions out of our preferred securities funds to return. Secondly, consistent alpha generation across the range of our real asset and alternative income strategies has resulted in seven of our funds being added to 23 recommended list across 11 distribution partners during 2018. And importantly, that positive trend has continued into this year. Third, given the recent market and economic backdrop, defensive dividend paying equity strategies have been upgraded and recommended by some of our biggest distribution partners. Although, it's early flows this -- thus far this month are validating these expectations.

Similar to the wealth channel, advisory flows were also elevated in the quarter, but ended with $300 million of net inflows. As you may recall, we began the fourth quarter with a $1.175 million pipeline of awarded, but unfunded mandate. During the quarter, $255 million of that pipeline backlog was funded. In addition to that amount, $545 million of new mandates mainly in global real estate and multi-strat real assets were both awarded and funded in the quarter for an aggregate realized funding of $800 million.

In total, we won $785 million of new mandates, leaving the end of quarter unfunded pipeline at approximately $1 billion. Beyond the existing pipeline, we are awaiting the outcome of a record $2.5 billion plus of undecided finals. Current client net outflows totaled $495 million of which $133 million were terminations with the remainder attributable to rebalancing or withdrawals for other purposes.

Anecdotally, institutional investors who have historically invested in real assets privately by now inquiring and/or allocating to listed strategies. It appears to us that the private market expected IRRs have declined sufficiently to make listed a more competitive risk adjusted investment option.

In addition concerns regarding heightened volatility and slowing global growth rates are motivating institutional investors to favor more liquid alternative investments. In any event, search activities remain elevated globally. There were several significant developments in the subadvisory ex-Japan channel, in addition to the net outflows of $185 million, which reflect an evolution in that market and in our assessment and approach to this distribution channel. Fee pressures in combination with an absence of control over sales or marketing strategies make certain relationships that are not strategic in nature, less attractive relative to our proprietary business development opportunities.

In Europe as you know, we are actively growing our own fund and distribution capabilities aimed at the wealth channel, which has created a conflict over exclusivity with a current global real estate subadvisory client. Given the choice between delegating our EMEA wealth business to a third party or further developing our own, we have elected to decline to grant exclusivity and to agree to terminate this relationship.

Total AUM managed for this client is approximately $800 million and we anticipate the transition to occur later this year. It's our hope and expectation that in due course we will generate sufficient sales in our own funds to replace these assets with competitive fees and greater control of our brand.

Separately as expected, the balance of our $425 million large cap value subadvisory mandate has been terminated, which constitutes the remainder of our large cap value subadvisory AUM. Partially offsetting these future outflows is an expected $320 million inflow into global real estate from a long-term and strategic subadvisory client, which is also included in our pipeline.

Japanese subadvisory net outflows showed improvement both before and after distributions versus the third quarter, but remained elevated at $304 million and $667 million respectively. With REITs recently generating strong absolute and relative returns and with last year's top selling funds, mainly technology focused now out of favor, there appears to be an opportunity to regain investor interest. This year is off to a good start with positive net inflows into our US REIT funds thus far in January.

In contrast to the well documented headwinds facing long-only managers, which were highly visible last quarter. We are as optimistic as ever for this coming year. From a tactical standpoint, our real asset and alternative income track records are strong across the Board. Retail allocations to these strategies are rising and we are on more recommended and focus list than ever before. Institutionally hereto our performance solidifies a leadership position in our liquid alternative strategies at a point in the economic and capital market cycles when allocations to our space arising and listed appears to be as or more attractive than the private market alternatives.

Strategically, we continue to shift and migrate products and personnel toward markets that understand and appreciate our value proposition. Over the last three years, institutional advisory assets under management have grown from $7.6 billion to $12.1 billion, while subadvisory assets have declined from $18.5 billion to $12.5 billion inclusive of today's disclosures.

Within the wealth channel, assets under management derived from the rapidly growing independent RIA channel now stand at $7 billion and growing, which now exceeds our broker dealer assets under management of $6 billion. Not coincidentally, our average fee rate during this three year period has risen from 54.2 basis points to 57.9 basis points. To support and accelerate these trends this year, we will be offering, as Joe mentioned, a new series of focused and thematic strategies that will be unique and targeted at the endowment foundation, OCIO, RIA, single and multi-family office markets.

We are confident that we can grow assets in those markets that value performance and diversification along with competitive fees. This initiative in conjunction with our existing business development activity will enhance our ability to generate positive and profitable organic growth for the foreseeable future.

With that, I'll hand the call back to the operator and open the floor to questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Ari Ghosh of Credit Suisse. Please go ahead.

Ari Ghosh -- Credit Suisse -- Analyst

Hey, good morning, everyone.

Brian Heller -- Senior Vice President and Corporate Counsel

Good morning.

Ari Ghosh -- Credit Suisse -- Analyst

Matt, maybe you can take the first one, just on the 2019 comp ratio of 35.75 that you mentioned, is that projection based on 4Q AUM levels. Are you baking in any market improvement that we've seen over the last three weeks. And then just to confirm, like the starting point that you mentioned for G&A was $46 million and you expect that to remain flattish for full year 2019 all else equal?

Matthew S. Stadler -- Executive Vice President and Chief Financial Officer

Yeah, so with the comp ratio, I mean, you know, we do our own internal forecasts, but, you know, we are starting off at our year-end AUM levels and, you know, we're making assumptions like you guys do on flows and markets and although we are going to have a very tight control on headcount, you know, there's always going to be one or two that need to be added for strategic and important data gathering reasons. So our comp ratio is based on that, obviously, it's, you know, January 24th, so very early on, it's our best guess, of where we are at the moment and, you know, as the year unfolds, you know, we'll react accordingly. But, we feel good with that number just based on the $54 billion, you know, of where we're starting.

The G&A in my points, I've cited the non-GAAP G&A for the year, because there's sometimes little confusion since we don't provide a non-GAAP income statement. But yes, we expect G&A to be flat to 2018, but with a downward bias. So, but although we don't have a quantified numbers we're extremely busy looking at all of our expense base and would be disappointed honestly, if we round up flat to 2018.

Robert H. Steers -- Chief Executive Officer

If I could just add maybe a little color, starting the year with assets that were so depressed and with negative momentum in the marketplace. I think our philosophy whether it's considering the inputs to a comp ratio or our approach to managing controllable expenses has been to plan for the worst and hope for the best. So I would say that our approach to cost management, our approach to assessing or projecting net flows or market are very conservative.

Ari Ghosh -- Credit Suisse -- Analyst

Got it that's helpful. And then just if you could provide any color on retail trends, maybe that you seen early in 2019, especially in your preferred funds. And then on the $2.5 billion of mandates and consideration that you called out, are these from new client relationships, existing clients, is it lumpy nature and any, you know, if you could provide some information on that, that'd be great as well. Thank you.

Robert H. Steers -- Chief Executive Officer

Sure, the -- we've had positive flows into virtually all of our open-end funds and so far this quarter by a wide margin, the greatest inflows are into our preferred securities fund. And so as we anticipated ending the quarter and beginning the year, I think we're seeing a combination of some of the tax law selling coming back, but frankly new investors excited about the investment opportunity there. But we're seeing a solid flows into real estate funds as well.

So, so far so good, the pipeline or the $2.5 plus billion that we're waiting to hear from represents all new clients, it's a little lumpy in that. As I mentioned in my comments what we're seeing is a quite a number of very large institutions, both domestically and outside the United States, who have heretofore invested in real assets almost exclusively through private investing, are pursuing the public markets now for the reasons I mentioned. And so I think the $2.5 billion is a minimum, there's others in the pipeline that haven't got into the finals stage yet. So it's not just one or two, but it is large and a little bit lumpy.

Ari Ghosh -- Credit Suisse -- Analyst

Very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of John Dunn, Evercore ISI. Please go ahead.

John Dunn -- Evercore ISI -- Analyst

Good morning. You guys had gross sales go up, yeah, I think in the four major categories up 33%, I think quarter-over-quarter, so you guys are selling a lot of stuff. Can you talk about that side of net flows maybe where that aggregate number could go, and maybe what a little bit environment in 2019 would mean for it?

Matthew S. Stadler -- Executive Vice President and Chief Financial Officer

It's hard to really get a trend of your gross inflows and outflows, I think it's encouraging that in the open-end funds we saw a large increase in our inflows showing that there is interest in our -- in lot of our real estate funds that we're -- where we were seeing the inflows occur, you know, the outflows were distorted as we mentioned because of the client redemptions and tax law selling. But yeah, we're encouraged by that trend, I mean, I think we're looking to have lower outflows and maybe sustain the trajectory and the inflows and that's where we're kind of optimistic in the wealth channel for 2019.

Robert H. Steers -- Chief Executive Officer

Hey, John, as we talked about, as you know, the fourth quarter and particularly December was pretty wild and woolly, the volatility was extreme, and so it triggered all sorts of strategies, tax losses being, kind of, the most obvious, but there were plenty of others. So I think it's hard to extrapolate too much from there, I think it's more instructive to focus on the fundamental factors that I refer to so one, you know, top quartile, top decile funds are selling anything lower than that is not, asset allocations to defensive dividend paying, uncorrelated asset classes like ours are rising, they're both in the wealth channel, which is I think you're seeing shifts away from high risk on call it technology and related strategies to more defensive strategies that accrues to our benefit in real estate, infrastructure prefers as well. And the trends we're saying institutionally so, you know, we're, you know, it's only been three weeks, but with the exception of subadvisory, we have solid positive flows in every channel. I'd like to extrapolate the rest of the year from that, but so far so good.

John Dunn -- Evercore ISI -- Analyst

Got it, and then little more in Japan, and it looks to us like flows have improved in January, and if that holds it -- would be quicker than other recovery periods in the last couple distribution cut cycles. Are you guys see in that and is (inaudible) would doing anything different this time around?

Robert H. Steers -- Chief Executive Officer

You know, there's a number of, I think, positive fundamental issues or developments; one, is and some of you have inquired the regulatory pressure which began two or three years ago on these monthly higher dividend paying funds appears to have waned and is no longer, it's no longer depressing marketing activity to the top selling funds of last year were funds like robotics and AI, and you know, what I would call more speculative funds and they had a very poor end of year. Those funds are not selling any longer. The need for income continues to be extreme and unabated in Japan. And so -- and I would also add that one of the two US REIT funds the larger of the two has actually been in positive flows for several months now. So I think the time between the last cuts and now has helped the regulatory pressure dissipating, perhaps gone completely now. And the -- again, not unlike domestically a shift in investor appetite more toward dividend paying defensive strategies. I would also point out as Joe show alluded to, we were the number one performing REIT fund in Japan last year ahead of, you know, a fairly large group of decent competitors.

John Dunn -- Evercore ISI -- Analyst

Got you. Thanks very much, guys.

Operator

Thank you. Our next question comes from Michael Carrier of Bank of America. Please go ahead.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Thanks, guys. Matt, maybe first one just for you. Just on the expenses, you know, you mentioned forecasting it, you know, based on your outlook, and obviously the tougher start with the December follow. Because as we think about going through the year, maybe just update us on how you think about, what portion is variable in case, the revenue environment gets a little bit tougher. And I think you had some severance in the quarter -- I just wanted to make sure we had the right amount just so, we're thinking about adjusting that out?

Matthew S. Stadler -- Executive Vice President and Chief Financial Officer

Yes, on the comp side. So -- and we said that the variation from the third to fourth quarter was primarily severance, it was about $0.025, if you're just thinking about getting a better run rate. Our ratio of controllable to non-controllable is about 30% being controllable, that said even in the non-controllable expenses, as we had done a few years back, there's always opportunity with vendors, with number of users of a system, and things of that nature. So, you know, we're looking at everything, that's why I say that -- at worse, we would expect it to be flat to 2018, but we would be disappointed if we weren't able to achieve some sales year-over-year.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Okay, thanks. And then maybe one for Joe or Bob. So you see -- when I look at in all your comments, you're helpful in terms of the outlook. But when, you know, you kind of look at the outlook, you have kind of the hardest thing, I mean you have the performance with a lot bad manners, and it's a challenge. So, when you look at -- what you're hearing from some of the clients, both the wins and some of the either -- the reallocation or the redemptions. As some of the headwinds been, you know, more from like a cyclical standpoint and maybe that is shifting, as Bob you mentioned. Has there been, you know, new product competition that's been coming in, you know, into some of the categories or is it just been changes, you know, in some of the distribution dynamics, I mean where you're strong, you know, versus maybe where, you know, you have more kind of penetration or work to do. I'm just trying to get a sense, you know, in some of the drivers, because obviously the performance is there, I mean, it sounds like your tone on the outlook is more favorable?

Robert H. Steers -- Chief Executive Officer

Mike, it sounds like your question is focused mainly on retail, is that right?

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Yeah, I think yeah, probably, mostly on the retail side because on the institutional side you gave a lot of, you know, lot of color.

Robert H. Steers -- Chief Executive Officer

Sure. Well, look, it's no secret on the retail side, we compete with passive ATS consistently. And we're one of the few managers that is a net inflows in the active long only REIT space for example and passive continues to compete well. We see some other products we have some private equity firms that are -- have been in the market with non traded real estate products and, you know, historically the competition is mainly because we're competing against the brand name, historically those products do not perform well, so over a full cycle we end up getting those assets back.

But, you know, it is more competitive. That said, I think what's in our favor is as you know your firm and others are narrowing their list of managers and in particular much, much greater emphasis on recommended and even more important focus lists. And look, we're the category killer, we're on the recommended list, we're on focus list and so in many ways we have many fewer competitors, the generic REIT or infrastructure or even MLP mutual fund, which is a two, three or even four stars is not on the focus list, and so our partners actually helped to elevate our performance and really provide a much stronger platform for us to continue to gain market share. And I would point out, we continue to gain market share in the retail channel and virtually every strategy that we manage versus active manager. So to me, the winners are those that can deliver that kind of performance and passive and the losers are the active managers, who cannot deliver five-star performance.

Joseph Harvey -- President and Chief Investment Officer

I just had from a market appetite perspective, from asset-allocation perspective. Looking back backward for the past two years, a lot of our strategies have been seeing headwinds from the perspective of rising interest rates, whether it's REIT strategies or preferred strategies, midstream energy, not so much, it's the issues there have been more the fundamental cycle. But, you know, when you think about the comments I made on how the macro economic environment is turning, and if we are in fact seeing a peeking process in the bond yields that headwind could turn to tailwinds. Bob, mentioned that we've seen several strategies may put by recommendations on defensive equity strategies that have high income components and earnings profiles that are more stable. And so it could be that if we get this -- if the macro plays out, as we suspect, you know, we could have some of those headwinds turn into tailwinds or maybe two neutral winds.

Robert H. Steers -- Chief Executive Officer

Mike, if I could also just add a little color on the institutional side. So, whereas some of those private equity firms are trying to raise retail assets, as Joe and I outlined and in consistent with our goal to be able to generate both -- positive net organic growth and rising fees, not declining fees. We are introducing early this year some strategies that are not in 40 Act wrappers, that are going to be marketed to some of the same whether its family offices, OCIOs, and the endowment foundation markets that, you know, here the four have been mainly dominated by private equity firms. And so, you know, we think those investors have the deep knowledge of the value of an asset allocation to real assets and alternative income strategies. They like highly concentrated, focused, thematic limited capacity strategies. And obviously, we're not competing with passive fees in those channels. So we're very excited about this initiative.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Okay, thanks a lot.

Operator

Thank you. (Operator Instructions) Our next question comes from Mac Sykes of G research. Please go ahead.

Mac Sykes -- G.Research -- Analyst

Good morning, everyone.

Matthew S. Stadler -- Executive Vice President and Chief Financial Officer

Hi, Mac.

Robert H. Steers -- Chief Executive Officer

Hi, Mac.

Mac Sykes -- G.Research -- Analyst

Bob, you outlined some moving parts in Europe, but I just want to make sure I have this right. It sounds like the fee rates will benefit from a future product mix. So as we move wealth and away from subadvisory there at the moment. So when I think about that accurate contribution, will that be additive to the overall fee rate?

Robert H. Steers -- Chief Executive Officer

Yeah, I think the combination of lower fee business sort of being flat and higher fee business showing the greatest organic growth, you know, that is what we hope will be the engine that will keep our fee rates certainly from declining if not possibly, even migrating a little bit higher.

Mac Sykes -- G.Research -- Analyst

Okay. And then could you just comment a little more on fundraising Europe in general just given some of the noise around the Brexit. Assuming we do get some clarity on those politics in the next couple months. Could that be a catalyst for an acceleration in your progress there?

Robert H. Steers -- Chief Executive Officer

You know, that's a tough question. Institutionally we're not, you know, we're seeing strong investor interest. There's been no diminution of accelerating demand on the institutional side. The wealth side, as we've talked about previously, is coming along more slowly than we originally expected, but it is coming along and part of that issue is there are some significant institutions that are not going to recommend or focus on our funds until they get to a critical mass of $200 million to $300 million, which we expect to achieve in our key funds this year. But I don't think we've really seen any impact from Brexit other than our own contingency planning there.

Mac Sykes -- G.Research -- Analyst

Okay, and then my last -- just two questions, two-parter, the new series funds that you've outlined, are they being launched with seeded track records, and then how are you thinking about the margins in that business versus the overall business?

Robert H. Steers -- Chief Executive Officer

Well, there's a wide range of approaches to those strategies. There are several strategies that are now very much in demand, our concentrated strategies in global and US real estate that have 15 and 20 year track records, and for one of those we're looking at an LT structure. When we launch a new fund, we typically need to put in some capital. There are other strategies where we've just newly developed them and we don't have long track records, but for the target markets that we talked about, we don't think you necessarily have to have a track record, especially if you are managing a spinoff strategy or an extension of the things that we're well known for. But we'll have a variety of approaches, there will be some vehicles involved, others will be offered as separate accounts.

In terms of the question of the profitability, we believe we can get attractive fees relative to our current fees. One of the issues, however, is that these investors like strategies that are unique and sometimes have limited capacity, so we may not be able to achieve the scale that in some of these strategies that we have historically with broader mainstream strategies.

Mac Sykes -- G.Research -- Analyst

Great, thank you very much.

Robert H. Steers -- Chief Executive Officer

If I just could add quickly to that, what those strategies also do is frequently when we offer unique strategies like that, we end up managing two, three, four additional strategies with the same client, so even though a strategy may be capacity constrained, oftentimes we end up adding assets in related strategies, global real estate, infrastructure and so forth.

Operator

Thank you. Our next question comes from Robert Lee, KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great, thank you. Thanks for taking my questions. Most of them have been answered, but just a couple of minor things, maybe. But you had mentioned that in distribution services, expenses in the quarter benefited from some prior reversals. Can you maybe just, kind of, size that for us so we can get a sense of, kind of, what the run rate is? And then maybe a follow-on on the expense side, I'm assuming that Q1 will have some -- there's normally some seasonal upward pressure in comp just as you pay FICA taxes and things like that?

Matthew S. Stadler -- Executive Vice President and Chief Financial Officer

Right, so thanks, Rob. We -- with respect to the frictional costs on the payment of the bonuses and everything, we actually accrue those during 2018, so the comp ratio that we had mentioned would be a good comp ratio to use for the first quarter, inclusive of paying out the bonuses, which all those costs had been previously accrued, so nothing unique for us there.

On the distribution, I would say if you want to size it up, it's about -- it's between $400,000 and $500,000 a quarter. It was one of our larger intermediaries that had indicated toward the end of 2017 that they would be initiating rev-share on certain retirement assets that we have with them, and they didn't bill us, and so whether or not it's going to get resurrected in 2019 is unclear. But we closed 2018 with a provision that we didn't need, so we reversed it.

Robert Lee -- KBW -- Analyst

Okay, great. And then maybe just a follow-up question on any advisory. I mean, could you maybe -- and I apologize if you mentioned this early on, but give us a sense of some of the geographic breakdown of where you're having the most success there, and maybe give us -- update us again on your view of what's maybe driving that on the geographic basis?

Robert H. Steers -- Chief Executive Officer

Well, we're seeing demand mainly from North America, Europe and the Middle East. We're not -- there's very little of that, of the pipeline or the pipeline we're waiting to hear about, very little of that is from Asia, so it's really North America, Europe, the Middle East. And I think what's driving it is the factors that Joe and I touched on already. Importantly, I think a significant part of that is sort of a multi-strat opportunities that we're seeing, and we're seeing it from public funds, we're seeing it from Middle Eastern entities, we're seeing endowments who are interested in not one of our strategies, but three to five of our strategies, and some of the larger pools are interested in essence outsourcing their listed real estate or infrastructure allocation to a single provider.

And so, you know, it's really not to dissimilar from wealth, where again you're seeing the intermediaries saying, we're going to identify the two or three top decile, top quartile managers, and everyone else is going to not have shelf space. And I think you're seeing the same thing institutionally, where large institutions are looking to establish strategic relationships with people, with firms that dominate their asset classes and they're handing over a wide swath of their portfolios, albeit they have greater feed negotiating positions. But these are great relationships because they're large and they're very long-term, they're strategic, and that's the key to our thinking today is, whether subadvisory or elsewhere, we're focused on developing strategic relationships, not just any.

Robert Lee -- KBW -- Analyst

And maybe as a follow-up to the advisory channel. Just curious if you're seeing any increased interest or maybe demand from some institutional accounts to put in place some type of performance fee structure, maybe a lower ongoing management fee and then having some kind of performance fee on top of that is. Are you seeing any of that?

Robert H. Steers -- Chief Executive Officer

It depends on the strategy. Yes, we're seeing some of that and, but again I think there is historically in our experience, there's been two approaches that we've seen clients with respect to performance fees. One is a somewhat cynical approach of just cutting fees, so that if you deliver massive alpha, you can get back to your base fee, and as you would expect, your ability to negotiate fees that are fair for both parties is a function of how strong your performance is, how unique your strategies are, and I think that's why if you're in core style boxes, you have no choice, but to acquiesce, whereas the types of strategies that Joe outlined, nobody else is doing and very few can do. So it's the -- that's one of the reasons that we like the new areas and markets that we're focusing on. But yes, for the large cap, more generic strategies, there are clients who are interested in having that discussion.

Robert Lee -- KBW -- Analyst

Great, thanks for taking my questions.

Operator

Thank you. There are no further questions at this time. I will turn the call to Chief Executive Officer, Bob Steers for closing remarks. Please go ahead, sir.

Robert H. Steers -- Chief Executive Officer

Great, well thank you all for calling in this morning, and we look forward to speaking to you after the first quarter. Thank you.

Operator

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. Thank you, and have a good day.

Duration: 60 minutes

Call participants:

Brian Heller -- Senior Vice President and Corporate Counsel

Matthew S. Stadler -- Executive Vice President and Chief Financial Officer

Joseph Harvey -- President and Chief Investment Officer

Robert H. Steers -- Chief Executive Officer

Ari Ghosh -- Credit Suisse -- Analyst

John Dunn -- Evercore ISI -- Analyst

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Mac Sykes -- G.Research -- Analyst

Robert Lee -- KBW -- Analyst

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