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MSCI Inc (NYSE:MSCI)
Q3 2019 Earnings Call
Oct 31, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 2019 Earnings Conference Call. [Operator Instructions].

I would now like to turn the call over to Salli Schwartz, Head of Investor Relations and Treasurer. You may begin.

Salli Schwartz -- Head of Investor Relations

Thank you, operator. Good day and welcome to the MSCI third Quarter 2019 Earnings Conference Call. Earlier this morning we issued a press release announcing our results for the third quarter. This press release along with our earnings presentation and a brief 3rd quarter update are available on our website MSCI.com under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation.

For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of US GAAP, we also refer to non-GAAP measures, including but not limited to, organic operating revenue growth rates, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow.

We believe our non-GAAP measures facilitate meaningful period to period comparisons and provide insight into our core operating performance. You will find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures on pages 21 to 29 of the earnings presentation. We will also discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.

On the call today are Henry Fernandez, our Chairman and CEO, Baer Pettit, our President and COO and Linda Huber, our Chief Financial Officer. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. With that let me turn the call over to Henry Fernandez. Henry?

Henry Fernandez -- Chief Executive Officer

Thank you. Salli. Hello everyone, and thank you for joining us today. Before I start, I would like to say that we are very pleased to have Salli with us on her first earnings call at MSCI. So congratulations to you Salli, and we're fortunate to have you.

Salli Schwartz -- Head of Investor Relations

Thank you.

Henry Fernandez -- Chief Executive Officer

In the 3rd quarter, we again saw strong performance across our franchise, with year-over-year growth of 10% in revenue or 12% on an organic basis, 13% in adjusted EBITDA and 24% in adjusted EPS.

In addition to this exceptional financial results we achieved several significant milestones. We struck new long-term agreements with BlackRock, Intercontinental Exchange, Deutsche Borse and Charles River Development and we acquired Carbon Delta. These agreements aligned us well with key strategic partners and provide us with important capabilities that will continue to enhance our growth and competitive differentiation.

On BlackRock, we extended our successful strategic relationship with them for another 10 years through March of 2030. As you are well aware, there are strong secular drivers of assets into ETFs, and this new agreement creates a tremendous opportunity for MSCI. Our renew contract with BlackRock aims to maximize long-term revenue growth by further balancing and aligning the price volume mix in our arrangement with them. More specifically on the deal, the current license fee rates BlackRock base to MSCI will be reduced for ETFs with total expense ratio below certain levels according to a phase implementation period.

In these ETFs, our current fee rates have become a much larger percentage of total fees than originally anticipated. Therefore, the new agreement corrects for that. The aggregate reduction to our total asset-based fee run rate as of September 30 of this year associated with this adjustment is not material. Based on the AUM as of September 30th and based on the most recently confirmed total expense ratios of these ETFs that are subject to this adjustment.

Any potential future reductions in total expense ratios of licensed BlackRock ETFs may reduce the license fee rates payable to MSCI for those ETFs. This fee reductions are balanced by the potential for incremental assets to flow into licensed BlackRock ETFs. As you know well, we have seen substantial growth in ETFs over the past decade with the global ETFs assets up again thus far in 2019 by approximately 20%.

Our continued aim with BlackRock has been to more closely align our mutual opportunities and successes in the ETF marketplace and this agreement fully reflects that approached by them and by us. We are very excited about the path we see in front of us and we believe we're extremely well positioned to benefit from MSCI's ongoing innovation and product development as well as the underlying trends that supports the continued flows into ETFs.

We also recently expanded our strategic relationship with the Intercontinental Exchange or ICE who as you know is a leading operator of global derivatives exchanges and clearing houses and a provider of fixed income data. In addition to extending the existing license agreement for listed futures based on MSCI indexes, we license to ICE our ESG data for their fixed income index construction and we licensed for ICE fixed income pricing and reference data to use across MSCI including for MSCI fixed income indices.

We similarly just renewed our strategic relationship with Eurex. One of the world's leading derivatives exchanges and part of Deutsche Borse Group in Germany. We not only extended the terms of our license agreement for the existing MSCI index listed futures in Europe , but also expanded the agreement to include futures on MSCI ESG indexes to capitalize on the growing interest in sustainable investment. This type of a strategic relationships are mutually beneficial. They drive innovation and they deliver increased value for our clients and the industry as a whole.

Similar to our focus on driving value through close strategic relationships with a wide variety of leading industry players, we continue to selectively pursue highly strategic bolt-on acquisitions of companies like Carbon Delta which enhance our capabilities in key growth areas, generate attractive returns and drive long-term growth and differentiation for MSCI. We're extremely excited by the opportunities that will result across all of these developments.

I will now turn the call over to my partner Baer Pettit who will provide more color on our continued progress in those 2 areas of index derivatives and ESG including the Carbon Delta acquisition.

Baer Pettit -- President

Thank you Henry. We spoke about index derivatives on our second quarter earnings call and I'd like to briefly update you on our ongoing progress. Index derivatives including futures and options continue to gain traction as the investment community views them as effective tools to implement hedging and other strategies. The extension of our contracts with ICE and Eurex that Henry mentioned will strengthen our footprint in this area of our index franchise.

In the past quarter, we saw asset-based fee revenue or ABF from futures and options more than triple, and the notional value traded in listed futures and options linked to MSCI indexes reached a record level of $1.5 trillion. Listed futures and options based on our flagship indexes continue to gain traction with open interest in futures and options linked to our emerging market and EAFE indexes together growing 31% year-over-year. Henry also referenced ESG a topic of significant interest, not only to the investment community but also to governments, corporations and various other constituencies. We have seen significant growth in interest in MSCI's ESG ratings, research and other products. We continue to enhance our offerings and recently announced the release of ESG ratings for over 34,000 funds and ETFs in the equity and fixed income universe.

ESG considerations are relevant not only to traditional asset owners and asset managers, but also to wealth managers, retail investor platforms, hedge funds, broker-dealers and corporations. Within all of these institutions, we continue to see demand from a growing variety of user types including CIOs, portfolio managers, risk officers, governance teams, compliance teams and ESG specialists. ESG factors also impact a range of asset classes extending from equity to fixed income to private assets like real estate and private equity.

One area where we're seeing significant demand for new product capabilities is climate risk. As various market constituencies look to understand and evaluate potential climate change. We intend to be the largest provider of tools for evaluating the impact of climate risk on investment portfolios. To that end, you saw us acquire Carbon Delta, which is a Zurich-based environmental FinTech and data analytics firm. Together MSCI and Carbon Delta will offer climate value-at-risk, an innovative and pioneering climate risk metric that calculates the impact of climate change on the company's market value and helps investors understand and quantify these risks within their portfolios.

MSCI's growing set of climate change offerings together with our research allows investors to more effectively achieve specific climate objectives including avoiding or diversifying carbon risks, gaining exposure to clean technologies and engaging with companies. We will keep you apprised on our ongoing progress in ESG which is very clearly becoming an integral part of portfolio construct. And with that, I'll turn it over to Linda to take us through the financial highlights and discuss our current guidance for 2019. Linda?

Linda S. Huber -- Chief Financial Officer and Treasurer

Thanks Baer, and hello to everyone on the call. MSCI continued its momentum for the 8th straight quarter of organic subscription run rate growth around 10%. This growth was driven by strength across both our geographic regions and our major client segment. Looking first at geographic regions, our organic subscription run rate was up 8% in the Americas, 11% in EMEA and 13% in Asia. For asset owners and asset managers, which collectively comprise about 2/3rd of our subscription run rate, we saw organic subscription run rate growth of 12% and 10% respectively.

MSCI continues to provide us clients with mission-critical products and superior customer service leading to healthy mid '90s retention rates across our segments. For recurring net new sales 9 months 2019 was up 8% with the third quarter specifically up 3%, while index and ESG saw growth of 12% and 31% [Technical Issues], analytics had lower growth as it left a strong 3rd quarter in 2018. I'd like to draw your attention to non-recurring sales, which were up 32% year-over-year to $14 million, primarily driven by increased sales in our BarraOne and Risk Manager product offerings and in our Index derivative product offerings. This was the 6th straight quarter of non-recurring sales greater than $8 million. On a year-to-date basis, total non-recurring sales were up 27% including analytics up 45% and index up 26%.

Turning to our performance in ABF, we continue to benefit from our focus on derivatives with listed futures and options revenue tripling as Baer referenced earlier. We also note that ABF revenue from futures and options was up 100% year-over-year even excluding approximately $5 million of additional fees associated with prior periods attributed to a retrospective price increase from a renegotiated contract.

ETF ABF revenue was up 5% with a 7% increase in year-over-year average assets under management or AUM in equity ETFs linked to MSCI indexes, partially offset by year-over-year decline in average basis points. Finally non-ETF passive fund revenue was up 11% driven by increased contributions from higher fee products. Equity ETF AUM linked to MSCI indexes ended the quarter at $815 billion, up 6% versus the prior year. Average fees continued to gradually decline as lower fee products capture a disproportionate share of new flows into equity ETFs.

With regard to geographic market exposure, there were $13 million in inflows into funds based on US exposure indexes with more than half in ETFs based on MSCI's factor indexes primarily in the low volatility and quality products and about 1/5th in ETFs based on MSCI ESG indexes. MSCI operating revenue continue to pace in the 3rd quarter with growth across all product segments as we described in our earnings release published this morning.

Our strong execution in the quarter resulted in high quality earnings growth mainly driven by operating momentum. We had no share repurchases during the 3rd quarter, but our earnings continued benefit from the significant share repurchase activity in late 2018. Free cash flow from the 3rd quarter was $174 million , up $43 million a year-over-year primarily driven by higher cash collections and lower income tax payments partially offset by higher payments of cash expenses and higher capital expenditure costs.

Turning to our capital position. Our cash balance at the end of the 3rd quarter was $881 million. Our approach to capital allocation remains the same with no changes to first, our dividend policy of 40% to 50% payout of adjusted EPS; second our leverage target of 3 times to 3.5 times total debt to adjusted EBITDA and 3rd our approach to mergers, partnerships and acquisitions and share repurchases both of which remain very opportunistic.

I'd like to now provide an update on our guidance for the remainder of the year. As we remain focused on driving growth. We will keep investing in a number of high return opportunities. We continue to expect adjusted EBITDA expenses and capex will be toward the high end of our guidance range of $685 million to $705 million for adjusted EBITDA expenses and $45 million to $55 million for capex. With regard to our tax guidance, we are lowering the range of our full year effective tax rate and now expected to be between 6% and 9%. As you are aware of this range includes an income tax benefit related to divesting of certain multi-year performance stock units in the first quarter, which has been excluded from adjusted EPS.

Excluding this benefit of approximately 11 percentage points, we now expect the effective tax rate used for our adjusted EPS to be in the range of 17% to 20% and with regard to free cash flow we expect to be at or slightly above the high end of the guidance range of $545 million to $585 million and before we move to Q&A, I'd like to turn the call back over to Henry.

Henry Fernandez -- Chief Executive Officer

Thank you Linda. I wanted to highlight a press release we issued this morning announcing the promotion of Alvise Munari to Global Head of Client Coverage effective January 2 of next year as well as the retirement of Laurent Seyer, MSCI's Chief Operating Officer and Chief Client Officer. I would like to reiterate my deepest appreciation and gratitude to Laurent for his leadership and dedication to MSCI and to our clients. Laurent has led the transformation of our global client coverage organization and positioned us well to realize the many growth opportunities we have across our businesses.

I would also like to congratulate Alvise on his promotion. Alvise has spent a great deal of time in the last few years with Laurent visiting clients. I can attest that he will further develop and expand our global client relationships as we continue to focus on powering better investment decisions made by those same clients.

We will now open the line to take your questions.

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from the line of Toni Kaplan with Morgan Stanley, your line is now open.

Toni Kaplan -- Morgan Stanley -- Executive Director

Thank you. This is probably a 5-part question, but one is about BlackRock contract extension. So just assuming that expense ratios keep coming down in the industry. Would this sort of enable your fee rate can move more quickly. Also you mentioned phased implementation period, how long will that be? You mentioned the first adjustment in March, but how many phases are there? And then the license fee rates MSCI I know it will be reduced for a certain ETFs in March. How much of an impact will this to the average fee rate at that time? And then I wanted to ask about the $5 million, if that's related $15 million addition to run rate and just because you're putting it in the asset-based fee run rate, are you expecting that this $15 million recurs overtime? I'll leave it at that.

Henry Fernandez -- Chief Executive Officer

Yeah. So obviously, we will give you some directional comments of what our arrangement with Blackrock is, but we will not be able to comment on very specific given our policy of not commenting on the specific matters pertaining to one client. So, it's important to understand the comments and the disclosure that we have made in the following sentence. The agreement calls for a series of fees that appears depending on the total expense ratio of each one of these funds, the adjustment that we mentioned that is phase 10 over about 10-month period from March of next year relates to those ETFs that as I mentioned in my remarks had a normally high percentage of their fees being the MSCI fee. So that takes care of those things and that adjustment based on current AUM and current total expense ratio is relatively immaterial to our asset-based fees.

The second part of obviously what we're trying to do is for the next 10 years prepare the relationship with BlackRock to be totally aligned with market dynamics that to the extent that there are meaningful changes in the total expense ratio of each fund. So in this case obviously coming down, that our fee then gets to be commensurate to the level of split that we were intended to from the very beginning in many of those funds and therefore it appears [Phonetic] down depending on the total expense ratio, associated with that. And the goal in full alignment with BlackRock is to ensure that they have the flexibility in their own ETFs to trade off the volume versus price to gain market share and acquire new assets under MSCIs fees are not in the way of creating a disproportionate amount of our fees to the total expense ratio.

Linda S. Huber -- Chief Financial Officer and Treasurer

Toni, it's Linda, you further asked about the 15 million addition to asset-based fees, and the run rate that we spoke about. And as you're probably aware, we are open to working with a wide range of partners so that we can best help clients achieve their investment objectives. As we had noted we recently renegotiated a few of our agreements as Henry spoke about and based on the 3rd quarter 2019 trading volumes, we expect that those will add approximately $15 million to our asset base fees run rate, now some of this addition is already in the 3rd quarter ABF run rate and the rest will come into play in the next 6 months. That is separate from the impact of the amended BlackRock agreement and we're not able to provide more detail on which companies any of that relates to given confidentiality agreements. So hope that's helpful. And that is about all we can say.

Toni Kaplan -- Morgan Stanley -- Executive Director

Very helpful and then my second question is very short, trying to address the agreement with ICE, I thought it was really interesting and I just wanted to understand sort of long-term where that relationship could go?

Henry Fernandez -- Chief Executive Officer

We have great relationship and increasing one with ICE in 2 areas, in two major areas, a lot of other areas but in 2 major areas. One is clearly the listed futures and options part, which we have had for quite some time. So we renew that agreement and we renewed our commitment to create new indices for them or license existed indices to them so that they can continue to launch listed futures based on our IP. The second part of the agreements has to do with their fixed income data business, the former IDC or interactive data corporation business in which they have, as you know, they have evaluated prices and terms and conditions on an extremely large universe of bonds around the world. So we are going to be licensing from them that relevant data for us to use across a lot of our products on MSCI including potentially MSCI fixed income indices. Likewise they are licensing from us our ESG data, ESG ratings, ESG indicators and all of that so that they can incorporate ESG criteria into the construction of their own fixed income indices so that they can create ICE-branded ESG fixed income indices.

Toni Kaplan -- Morgan Stanley -- Executive Director

Thanks very much.

Operator

Thank you. And our next question comes from Manav Patnaik with Barclays. Your line is now open.

Manav Patnaik -- Barclays -- Equity Research Analyst

Thank you. My first question is just around the flows and I think there's a lot of numbers out there so correct me if I'm wrong, but yesterday I think S&P talked about how [Indecipherable] billion of inflows were there into the non-US side, I think you guys said there was $5 billion of inflows and I believe in the comments you also said there was positive US inflows so does that mean non-US was negative, or am I just not comparing the right numbers there?

Linda S. Huber -- Chief Financial Officer and Treasurer

Manav, its Linda. I don't think we want to comment on what other companies have quoted in their earnings release. I think what you have pointed out is correct. The bulk of inflows was into US funds in the third quarter and a smaller share went into emerging market fund. For us, we are stronger in the emerging markets. So the balance was less helpful to us, frankly. So I can't comment on the other specific numbers, but you certainly have the trends right.

And just wanted to make sure that you understood the emerging market fees, which have been weaker.

Henry Fernandez -- Chief Executive Officer

So while Linda was talking, I was pulling out here the data, hard to do that while talking right, so for third quarter and related to MSCI linked ETFs, the total according to our numbers, the total amount of flows into equity ETFs related to MSCI was about 5 billion and that was made up of increasing flows to US exposure ETFs. So about, let's say about $13 billion, slight negative to developed markets exposure excluding the US and a $13 billion negative or outflows to emerging markets.

Manav Patnaik -- Barclays -- Equity Research Analyst

Okay, got it. And then just a quick follow-up. Congrats on renewing a lot of the contracts that you mentioned. Are there any other notable moving ones coming up that we should be aware of?

Henry Fernandez -- Chief Executive Officer

Nothing on the scale of the ones that we mentioned, I mean clearly we are in continuous discussions with many of our clients and we don't eventually discuss specific contracts on this call as you're aware. So, I think generally we've got a lot of things going on, but nothing that's noteworthy or that stands out.

What I would add Manav is that just to add some strategic commentary is that as you have heard those talk about in the past, we are intensely focused on developing the Index Licensing Franchise of MSCI into derivatives, all forms of the derivatives and across the world. So obviously that's made up of list of derivatives , listed in exchanges, futures and options and therefore we have a number of partners in the world, the three major ones are ICE and Eurex and the Singapore Exchange in Asia and the second point so we're very focused on focused on the over-the-counter or restructure products derivatives market with broker dealers and all of those things are significant areas of incremental growth for MSCI because on the structure product side, we haven't been that sort of present and on the derivative side we are getting excited because the market for multi-country and multi-currency index futures is developing fast and we are obviously the largest provider of indices in that space.

Manav Patnaik -- Barclays -- Equity Research Analyst

Got it. Thank you very much.

Operator

Thank you. And our next question comes from the line of Hugh Miller with Buckingham. Your line is now open.

Hugh Miller -- Buckingham -- Analyst

Hi, good morning. Thanks for taking my questions. I had one on the cost savings. Given the hiring you made on the head of lean practices, I know it's early days and then it's a recent hire, but if you could just give us a sense on kind of the expense saving opportunities that you foresee, maybe in 2020 and any key areas that you see as an opportunity to focus on?

Baer Pettit -- President

The way I would characterize that opportunity and that hire is really part of our ongoing business management, which we have discussed on this call over a number of years. So I don't think that there is any particular area that we view as sort of particularly a target, if you like, the one thing I would say is that we have been consistent in saying that our one MSCI strategy which brings together a lot of our intellectual property as a benefit to our clients is also an efficiency story. So as we reduce duplication of different technologies as we consolidate databases, as we [Indecipherable] standards in technology, all of those things will create efficiencies over time and we're very focused on that day in day out in the management of the business. So it's not really a specific category, it's just the culture of efficiency and the culture of road moving duplication and creating better standards across the firm.

Henry Fernandez -- Chief Executive Officer

One other comment that I would make on that is that the we categorize our EBITDA expenses into expenses that are to run the current business and continue to see [Phonetic] the revenues of the current business and expenses that are much more investment-type, which are to create new things and to change the business and change the direction of the business. So what we're trying to, as we said in Investor Day, what we're focused on is we have enormous opportunities to invest at MSCI on very high return projects given the nature of what we're doing and the demand for what we have. So we need investment dollars to achieve that. So what we're constantly doing as Baer indicated is creating high levels of efficiencies in what we do day-to-day to run our existing operations to free up resources, so that we can invest in those new things and continue to have a gradual margin expansion in the business. So we believe that that is a very strong discipline of MSCI, and it helps us grow the revenue line over time and continue to deliver high levels of profitability in the company.

Hugh Miller -- Buckingham -- Analyst

Great, thank you for the detail there, very helpful. And then I guess a follow-up question on the tax rate side understand that, we're not giving guidance for 2020 overall, but given the improvement we've seen this year, can you just give us a sense of how we should be thinking about the run rate that's realistic for 2020 for the tax rate?

Linda S. Huber -- Chief Financial Officer and Treasurer

Yeah, it's. Linda. I think we would prefer not to get into that. There is a world of tax changes happening right now and with a lot of discrete items in motion, I think we would prefer to wait until we move into the first quarter of next year to give our views on tax guidance for next year but please rest assured we will do it when we get to our first quarter earnings call.

Hugh Miller -- Buckingham -- Analyst

Understood. Thank you.

Operator

Thank you. And our next question comes from the line of Chris Shutler with William Blair. Your line is now open.

Chris Shutler -- William Blair -- Analyst

Hi guys, good morning. Back to the BlackRock agreement, so I think your fees go down as BlackRock reduces its expense ratios. How would that differ versus the way that your current agreement is set up. I thought that you currently price as a percentage of the expense ratio maybe tiered but was that not the case?

Henry Fernandez -- Chief Executive Officer

What's the difference is is that there were absolute floors [Phonetic] associated with all the funds and therefore what you now have is a number of tier floors [Phonetic] in various categories of total expense ratio.

Chris Shutler -- William Blair -- Analyst

Okay, you just have more tiers basically, that's the way to think about it?

Henry Fernandez -- Chief Executive Officer

Yes. So there was always a percentage of the total expense ratio, but there was an absolute floor in which it did not matter what the total expense ratio was, our fees could now go below that. So now what we've done is create a number of categories of tiers and each tier has its own percentage and its own floor, which reflects the fact that the market pricing or total expense ratios on EGF are far broader than 10 years ago. There is a much broader range of products at different price points serving different purposes.

Chris Shutler -- William Blair -- Analyst

For sure, makes sense. And then the other question I had was regarding the commentary in the press release around leverage. Current target 3 to 3.5 times gross debt to EBITDA. I think you are in the middle of that range today. It sounds like you're considering taking on more debt. Where would you expect to take the leverage target, where could you take it and what would you do with that extra capital?

Linda S. Huber -- Chief Financial Officer and Treasurer

Sure. As we had said at the quarter end, we had $2.6 billion of debt outstanding, which is 3.2 times our trailing 12-month adjusted EBITDA and our stated gross leverage target to adjusted EBITDA is 3 to 3.5 times. We do monitor the market and we'll be opportunistic as we think about potential financing. We also note that the Board has added another $750 million to our share repurchase authorization to bring us to [Indecipherable] and we're going to think about those things very opportunistically.

Chris Shutler -- William Blair -- Analyst

All right, thank you.

Operator

Thank you. And our next question comes from the line of Bill Warmington with Wells Fargo. Your line is now open.

Bill Warmington -- Wells Fargo -- Analyst

Good morning, everyone, and hello, and welcome to Salli. A question for you on the ETF side. There has been recently announced in how you publicize reductions in retail trading fees and I just wanted to ask what you thought the impact of that would be on ETF demand and pricing for MSCI?

Henry Fernandez -- Chief Executive Officer

Well, I think anything that reduces the friction for trading of financial instruments creates you know a lot more ability by investors to invest larger amounts in those instruments because they now have less friction to come out of them so that bodes well for ETF because ETFs are in a much more trading instruments than mutual funds for example and therefore, we anticipate that they will continue to be more assets coming into ETF over and above what is currently coming.

Bill Warmington -- Wells Fargo -- Analyst

And then for my follow-up question. I wanted to ask about the mega trend indices just what are you looking at these days in terms of AUM tied to those. How quickly are they growing? When do you think that will move the needle?

Baer Pettit -- President

Yeah . So we're still for sure at the ground floor in that. I mean these indexes are pretty much hot off the press as it were. So we've only just launched them. So I don't want to speculate on the exact category. As you can see many of these newer categories of what I would call precision exposure type of indexes whether they're in factors or in ES&G have shown very attractive growth and there is for certain a market of people who want to have certain market exposure is very precisely through indexes. So we would be delighted if they were to follow some of the precedence of the other specialized indexes we have, we don't want to speculate around that. So I think we'll just have to keep you apprised on those developments in the quarters going forward. But certainly from just from a client response point of view and the dialogus we've been having, it's very positive.

Henry Fernandez -- Chief Executive Officer

What I would add Bill is with the more strategic emphasis is that what we're moving into our MSCI in addition to the flagship market capped indices, the flagship factor indices, the flagship ESG indices that are more benchmark related to large portfolios, we are rapidly also moving in the direction of creating more narrow, more thematic exposures based on research that we do that translates into this indices and those could be significant demand by ETF providers, by wealth managers, by structured products, over-the-counter derivatives and the like and therefore this is a whole new growth area for MSCI over time in which we're just building the underlying indices that will be the basis of portfolios of every kind in the world.

Bill Warmington -- Wells Fargo -- Analyst

Got it. Thank you very much.

Operator

Thank you. And our next question comes from the line of Craig Huber with Huber Research Partners. Your line is now open .

Craig Huber -- Huber Research Partners -- Analyst

Yes, thank you. My first question, I guess for Linda, now you've been there a few months, Linda, I am just curious what your brief observations have been so far, what you think your investors might be interested and that you might be working on maybe perhaps to try to make company even more efficient. And I realize it's a very high bar to say that.

Linda S. Huber -- Chief Financial Officer and Treasurer

Thanks Craig coming up on 6 months here and it's been an amazing transition. My colleagues are all very impressive, very smart and we move fast here, it's mainly driven by Henry's blistering pace, but we continue to work on efficiencies as Baer had described because we want to be very sure that we're able to continue to make investments in what we call our Triple Crown investments, which will be the ones that have short payout periods, high returns and are in our fastest growing businesses which would be index and ESG and then our other businesses are also performing really, really well.

So incredible focus on where we're going to put our dollars as Henry has indicated this is my primary focus and I think the program we have to do that is moving very nicely. And as we move into next year, we'll have more to tell you about that, but I think that's the most important thing.

Craig Huber -- Huber Research Partners -- Analyst

And then my second question, I guess, Henry. Maybe just update us on the numbers you look at in the US, active versus passive, where is that breakdown right now the data you're looking at. And what's your best sense where you think that might be. I know it's a tough question to ask but I say in 2 years out here. What do you think sort of tops out if you hazard a guess?

Henry Fernandez -- Chief Executive Officer

Look, on a secular, on a structural basis clearly passive management continues to grow by leaps and bounds. For a variety of reasons it creates very easy exposures at a very low cost to an investor. There is a lot of research drawn that clearly those portfolios have performed, the majority of active portfolios. So we continue to see that for sure in an automated [Phonetic] way with some cycles, obviously a little passive investing can be deemed sometimes to be momentum investing because you're chasing, the things are going well. So I don't have the latest statistics of where we are, but I think that this debate as to where is the limit in the short term of passive is not a good one because there could be a significant amount of assets in the world that are passive, not to a point in which is the vast majority, because then, obviously it creates opportunities for passive to be able to create alpha. So that's a good runway for us. But bear in mind also that a lot of our revenue, more than half of our revenues and our clients are active managers and therefore we have spent been a great deal of time helping then create the tools and their portfolios, with the tools of portfolios to outperform passive and to run their businesses better so that they develop competitive advantage in the industry.

Craig Huber -- Huber Research Partners -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Henry Chen with BMO. Your line is now open.

Henry Chien -- BMO -- Analyst

Hey, good morning everyone. I had a question on the ES&G. So I understand that there is a bit of a secular headwinds or tailwinds to assets with ES&G mandates in US and Europe. Just with the context that there is a lot of other providers that are data providers that are going after ESG but it seems like MSCI is doing particularly well. I was just wondering like what would you characterize why is the data, the ES&G data, so compelling for investors or managers versus other datasets for MSCI?

Henry Fernandez -- Chief Executive Officer

So let me, let me first say that, because you read all these reports, all of these newspaper articles and all of that, how many data providers succeed and how competitive the market is and so on and so forth. It is very misleading. Obviously data is a completely necessary condition for success, we have no data, we can't create anything but on top of that what you need to build is what are you going to use this data for in the investment process, the mission criticality of let's say about the reality of the data, you've got a lot of data, but what is material to the investment process and what is material to the impact of a particular company or not. So what we consider ourselves is the leading provider of those mission critical tools in the investment processes that are taking a lot of these ESG into account, whether it's data per se, whether it's research, whether it's ratings, whether it's indices, whether it's risk models or whatever. And there are not too many providers in that space, there are not, We have an incredibly amount of runway to continue to lead in that space, and that's where we want to be.

Unidentified Speaker

And just maybe to add on and maybe reinforcing the points from both the broader point that Henry made and then a narrower example, the broader point is the topic of ES&G needs to be intelligently incorporated into the overall portfolio construction question whether it's at the total planned level for an asset owner or within a given fund and so I think it's the combination of the quality of our research and ratings, but also our ability to address the broader context.

The second thing I would say is and drawing on my observations about the Carbon Delta acquisition. I was in Tokyo for the task force climate related financial disclosure, which the Government of Japan sponsored a few weeks ago and there is dramatic change in the way that both governments and corporations are looking at that, one of the goals of that task force is precisely to look at portfolio impact of climate change, which I was alluding to in my scripted comments earlier, quite frankly, there is no one providing adequate solutions in this area, no one, and so I'm sure there are others attempting to do so. We believe we are ahead of that and we're able to do so, the term that they use is climate VAR, climate value at risk. Again this plays into all of the other expertise that we have in understanding portfolio risk, understanding portfolio construction and the broader context in which investors operate, so yes, there are many disparate "data providers." But I think MSCIs both leading there, but we are able to help with investors with the broader context of their [Indecipherable] allocation and portfolio construction and I think in that we have a unique competitive advantages.

Analyst

Got it, OK. That helps a lot. Thank you.

Operator

Thank you. And our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Your line is now open .

Joseph D. Foresi -- Cantor Fitzgerald -- Analyst

Hi. I wondered if you could give us an update on your wealth management product, we haven't talked about that, I think, in the call and any progress you're making , any quantifiable metrics ?

Henry Fernandez -- Chief Executive Officer

Yeah, just to clarify. We have a range of products and service which we sell into the wealth segment. And so all of our total sales into that segment, we only have one product that I would say was historically defined for it, which continues to say that the sales of that product, I would say are in line with our general growth. Overall, our growth into the wealth segment has been above average over the last year or two. This quarter, it's a little weak because we had a comparable from last year, which was an enormous sale. One of the biggest sales that we had last year into a very large broker dealer in Asia. So I would say that we're making steady progress, we'd like to see that growth is above average and this quarter it's a little below average.

So I would say there is no breaking news. We continue to be focused on the segment and we continue to put more resources there.

Joseph D. Foresi -- Cantor Fitzgerald -- Analyst

And then my follow-up. Linda you've been there for a while. What's missing. What are you looking for on the M&A front or what are you working on outside of the efficiency side of things?

Linda S. Huber -- Chief Financial Officer and Treasurer

Sure. We continue to look at bolt-on acquisitions. We continue to look at the private asset class space, Henry has talked quite a bit about that. I think we look at database sets which are attractive, that might be useful to us and we also are looking in the fixed income space to see if there's anything that might be helpful to us there. This is a very time intensive effort, my colleague Andy Wiechmann spends a lot of time focusing on the partnership part of things, you can probably see from what we've announced this quarter, we've worked very hard on these partnerships and they are clearly of great importance to us.

But eyes wide open in terms of potential acquisitions and we'd like to stress, we don't need to buy the entirety of companies, we're very happy to look at partnership structures and maybe I'll turn it over to Henry to see if he has anything else he would like to add.

Henry Fernandez -- Chief Executive Officer

Look, I think that you know we are building MSCI into various areas. So what is a lot of the work that remains here on the product side is private asset classes, fixed income, on the geographic area is Asia, we've done very well in Asia recently. We're putting an enormous amount of attention there because of the wealth creation that exists there with big pension funds wealth, sovereign wealth funds and the like. On the client segment, clearly wealth management was asked before, is an area that we need to put a lot more investments in, and there are smaller segments like life insurance for example that we're not very high on and that will correspond with our -- once we get a lot of these fixed income products that we're working on, that will be a great place to put a lot of effort, because as you know, life insurance companies buy a lot of fixed income.

Joseph D. Foresi -- Cantor Fitzgerald -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Keith Housum with Northcoast Research. Your line is now open.

Keith Housum -- Northcoast Research -- Managing Director

Good morning, guys, just a little bit clarification on your non-recurring revenue, specifically in the futures and derivatives indexes section. I know you guys obviously talked about the agreements with ICE and Eurex but the growth in the futures and listed options, was it relative to those agreements this quarter or was there a one-time nature that we should be thinking about the growth that you saw this quarter?

Baer Pettit -- President

So the question is fundamentally the ABF category is of a recurring characteristic, right. So the areas where the one-time is typically the largest are mostly related to Analytics, which has to do with the implementation of our deals and related service and then in index it can be certain sales of specific intellectual property and occasionally also in the over-the-counter derivative areas with brokers, we have various catch-up fees, the mechanics of which we won't go into here, but it essence those are, it's not in the listed derivatives area that we typically have one-time fees, that is overwhelmingly a recurring revenue business.

Linda S. Huber -- Chief Financial Officer and Treasurer

And to further expand on that regarding the other parts of the business, just to add to Baer comments, on Analytics we've talked about lumpiness that we see in sales quarter to quarter before, this quarter that was particularly acute because Analytics had a very tough comparable compared to a strong 3rd quarter last year. As Baer had mentioned, we won a significant contract last year with a very large agent, Asian securities firm on our WealthBench offerings so the lapping was very, very difficult. On the pipeline front, though, we see a healthy pipeline and a relatively moderate cancels. You've seen overall for the firm cancels continue to run -- you continue to see that we're running at about 95% in terms of what we're able to do with our subscription revenue.

So we feel pretty good about all of that, and I hope that was able to answer your question.

Keith Housum -- Northcoast Research -- Managing Director

It was. Thank you.

Operator

Thank you. And our last question comes from the line of Patrick O'Shaughnessy with Raymond James. Your line is now open. Patrick. Your line is now open.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Apologies for that. In light of your new agreement with BlackRock, I was curious to what extent you think that the fees your ETF partners have had to pay in the past that precluded them from competing as aggressively on prices that might have otherwise.

Henry Fernandez -- Chief Executive Officer

I don't think so, in the past, all of these are, you notice in my comments, a lot of this initially is just cleaning up a few things here and there that are not material. More importantly, what this agreement is, is to prepare for the next 10 years and the market dynamics in those 10 years. I don't think there is any intent at this point to change fees or anything like that. It is just to be ready for that 10-year horizon to compete more aggressively in the marketplace on the price, volume mix, so that you know these ETF by BlackRock continue to acquire a significant amount of assets and a significant amount of market share. So to achieve that they need to look at their own expense ratios and management fees and we as a supplier of the IP to them, we cannot be the majority of that expense in our fees. We have to then be commensurate in our percentage or proportion of fees regarding their fees, but that has not prevented anybody from competing in the marketplace, the agreements that we had before worked really well. We're now sort of setting the stage for the next level of competition on assets and growth.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Great, thanks. And then, I seem to be hearing more about direct indexing these days in terms like Charles Schwab was talking about it, do you look at direct indexing as an opportunity, a threat or really a non-event for you guys ?

Henry Fernandez -- Chief Executive Officer

Look, I maybe putting this in the context of the earlier question about passive versus active, right. So we typically use the term index ourselves and there are both a range of different strategies, some of which are for the total market, some are for factors or ETFs or the mega-trends that we mentioned. Clearly direct indexing shows itself today as a basket of securities, so it's really a basket of securities created for an individual, so that is for the moment that is neither, I would say an opportunity nor a threat to us. And I think the question will be, is that structurally different than any other previous coming together of a universe of stocks for an individual. There could be opportunities for us there perhaps in providing overlays and portfolio construction and index methodology. But for the moment I would say it's fairly neutral for us.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Great, thank you.

Linda S. Huber -- Chief Financial Officer and Treasurer

Before we close, I'd like to make one last just quick housekeeping note. Everyone is looking to models for the fourth quarter, you might have noted that it's implied that our expenses might be a bit higher in the fourth quarter than they were in the 3rd quarter, that would be correct, it might be a number that is even around approximately $10 million higher. We wanted to really stress this is the first quarter were picking up expenses for our Carbon Delta acquisition. So we just wanted to make sure that everyone understands that, also we continue making very selective investments in our strong businesses and we have had a slight increase in head count, most of that in the emerging markets and as we are having a pretty good year we do look toward compensation to probably be quite reasonable given the strong financial results we've seen this year. So, as you're thinking about expenses for the fourth quarter, please note that those areas and just please be aware as we had spoken about before, we have closed Carbon Delta and we're picking up those expenses in the fourth quarter, and I hope that's helpful to everyone and I think that about concludes what we have in terms of our remarks.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Salli Schwartz -- Head of Investor Relations

Henry Fernandez -- Chief Executive Officer

Baer Pettit -- President

Linda S. Huber -- Chief Financial Officer and Treasurer

Unidentified Speaker

Toni Kaplan -- Morgan Stanley -- Executive Director

Manav Patnaik -- Barclays -- Equity Research Analyst

Hugh Miller -- Buckingham -- Analyst

Chris Shutler -- William Blair -- Analyst

Bill Warmington -- Wells Fargo -- Analyst

Craig Huber -- Huber Research Partners -- Analyst

Henry Chien -- BMO -- Analyst

Analyst

Joseph D. Foresi -- Cantor Fitzgerald -- Analyst

Keith Housum -- Northcoast Research -- Managing Director

Patrick O'Shaughnessy -- Raymond James -- Analyst

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