Earnings Call Transcript - CNS Q2 2024

Brian Heller, Senior Vice President and Corporate Counsel

Thank you, and welcome to the Cohen & Steers' Second Quarter 2024 Earnings Conference Call. Joining me are Joe Harvey, our Chief Executive Officer; Matt Stadler, our Executive Vice President; until late June, Chief Financial Officer; Raja Dakkuri, our new Chief Financial Officer; and Jon Cheigh, our Chief Investment Officer. I want to remind you that some of our comments and answers to your questions may include forward-looking statements. We believe these statements are reasonable based on information currently available to us, but actual outcomes could differ materially due to a number of factors, including those described in our accompanying second quarter earnings release and presentation, our most recent annual report on Form 10-K, and our other SEC filings. We assume no duty to update any forward-looking statement. Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund or other investment vehicles. Our presentation also includes non-GAAP financial measures referred to as adjusted financial measures, that we believe are meaningful in evaluating our performance. These non-GAAP financial measures should be read in conjunction with our GAAP results. A reconciliation of these non-GAAP financial measures is included in the earnings release and presentation to the extent reasonably available. The earnings release and presentation as well as links to our SEC filings are available in the Investor Relations section of our website at www.cohenandsteers.com. With that, I'll turn the call over to Matt.

Matthew Stadler, Executive Vice President

Thank you, Brian. Good morning, everyone. Thanks for joining today. Before we begin the call, I'd like to welcome Raja Dakkuri, our new CFO, who joined us on June 24th. Raja will be reviewing the financial results on our earnings calls going forward. As in previous quarters, my remarks will focus on our adjusted results. A reconciliation of GAAP to adjusted results can be found on Pages 17 and 18 of the earnings release and on Slides 16 through 20 of the earnings presentation. Yesterday, we reported earnings of $0.68 per share compared with $0.70 in the prior year's quarter and $0.70 sequentially. Revenue was $122 million in the quarter compared with $120.3 million in the prior year's quarter and $122.9 million sequentially. The decrease in revenue from the first quarter was primarily due to lower average assets under management. Our effective fee rate was 58 basis points in the second quarter, consistent with our rate in the first quarter. Operating income was $42.5 million in the quarter compared with $43.8 million in the prior year's quarter and $43.7 million sequentially. Our operating margin decreased slightly to 34.9% from 35.5% last quarter. Total expenses were essentially flat when compared with the first quarter as an increase in G&A was partially offset by a decrease in compensation and benefits. The increase in G&A was primarily due to higher recruitment costs as well as an increase in professional fees. The decrease in compensation and benefits was in line with the sequential decline in revenue as the compensation to revenue ratio for the second quarter remained at 40.5%. Our effective tax rate was 25.4% for the second quarter, consistent with our prior guidance. Page 15 of the earnings presentation sets forth our cash and cash equivalents, corporate investments in US treasuries, and liquid seed investments for the current and trailing four quarters. Our firm liquidity totaled $325.1 million at quarter end compared with $233.1 million last quarter. The second-quarter amount included net proceeds of $68.5 million from our recently completed registered stock offering, which closed in April. We have not drawn on our $100 million revolving credit facility. Assets under management were $80.7 billion at June 30th, a decrease of $526 million or about 1% from March 31st. The decrease was due to net outflows of $345 million and distributions of $673 million, partially offset by market appreciation of $492 million. Joe Harvey will provide an update on our flows and institutional pipeline of awarded unfunded mandates. Let me briefly discuss a few items to consider for the second half of the year. With respect to compensation and benefits, we maintain a disciplined and measured approach to both the acquisition of new talent for strategic initiatives and replacement hires so that all things being equal, we would expect the compensation to revenue ratio to remain at 40.5%. We still expect G&A to increase 5% to 7% for the year from the $55 million we recorded in 2023. As a reminder, 2023 G&A included an adjustment to reduce accrued costs associated with the implementation of our trade order management system. Excluding that adjustment, we would expect G&A to increase 3% to 5% year-over-year. The majority of the increase is related to investments in technology as well as costs associated with the relocation of our London and Tokyo offices. Finally, we expect our effective tax rate will remain at 25.4%. Now I'd like to turn it over to our Chief Investment Officer, Jon Cheigh, who will discuss our investment performance.

Jon Cheigh, Chief Investment Officer

Thank you, Matt, and good morning. Today, I'd like to first cover our performance scorecard and then discuss the investment environment for the quarter, including recent market shifts, which we believe favor our asset classes. Last, I'd like to discuss rising global energy demand and how we are taking advantage of this trend within our investment portfolios and how this should drive investor interest into our strategies. Turning to our performance scorecard. For the second quarter, 96% of our total AUM outperformed its benchmark, maintaining our exceptional performance from the previous quarter. On a one-year basis, 98% of our AUM outperformed its benchmark, while our three, five, and ten-year outperformance now stands at 96%, 97%, and 99% respectively. From a competitive perspective, 94% of our open-end fund AUM is rated four or five stars by Morningstar, which is up modestly from 93% last quarter. Our AUM weighted alpha over the last year has been 270 plus basis points, an acceleration versus our longer-term numbers. Put simply, our short and long-term performance is compelling and we keep getting better. Transitioning to investment market conditions. On one hand, the second quarter was more of the same. Global Equity saw a gain of 2.6% and the market fretted daily over the precise timing and amount of interest rate cuts for 2024 and 2025. Equity momentum during the quarter remained highly concentrated in select large-cap growth stocks, leaving behind the majority of the market, including value, small, and mid-cap stocks. Our equity-oriented asset classes all continued to lag cap-weighted indices with US and global REITs and global listed infrastructure all modestly negative for the quarter. Taking a step back, over the last five years, while listed REITs and infrastructure have had periods of outperformance, overall, performance differences versus equities are stark. For example, over the last five years, US REITs have underperformed US equities by 1,160 basis points annualized and global listed infrastructure has underperformed global equities by 820 basis points annualized. The trailing absolute returns of our asset classes have been disappointing. But there are three key factors that make us very positive about the forward prospects for these asset classes in our business. First, the majority of the underperformance has resulted in the valuation or multiple expansion of equities versus the multiple contraction seen in our asset classes. Earnings growth differences have been a small part of the performance difference relative to just changes in valuation. Today, by some measures, equity valuations are somewhere in the bottom quintile or decile versus history, while valuations of our asset classes look historically normal or in some cases, more attractive relative to history. Second, while valuation is a wonderful long-term signal, we know that value may not matter in the short run. Fortunately, in our view, the inflation report from last Thursday will likely go down as a so-called all-clear sign that growth in inflation has slowed and that we are entering a rate-cutting cycle. This shift will alter market leadership and we already see this with our asset classes outperforming. US REITs, as one example, have outperformed the S&P 500 by 680 basis points over the last five trading days. Third, while we believe attractive valuations coupled with a market shift represent sufficient preconditions for return outperformance, we believe that the under-ownership and money sitting on the sidelines represent a significant available opportunity for our asset classes. According to one major sell-side survey, investors are the most underweight real estate they have been since January of 2009, which was the middle of the global financial crisis. We further believe cuts in Fed funds will drive the trillions of dollars currently in money markets to seek higher returns. Given the attractive valuation of our asset classes and their lagged trailing performance, we believe our strategies are a natural opportunity for fresh capital to take advantage of a market rotation into relative value and yield. Not to be ignored, private real estate, as measured by the preliminary results for the NCREIF ODCE index, had modest declines for the quarter of negative 0.5%. This is the seventh quarter in a row of declines which is consistent with the lead-lag relationship with listed real estate, which bottomed in Q3 2023. We continue to believe that other funds and investment teams are focused on playing defense on their last-cycle private portfolios and redemptions. However, we are focused on taking advantage of repriced real estate and improving debt cost of capital versus 9 to 12 months ago, creating attractive cash yields to equity investors relative to long-term history. The last topic I want to discuss is global power, the impact on energy markets, and how we have been capitalizing on our forward view on this trend. Most of you have likely seen the many recent headlines on this topic. But simply, the world needs more energy. Power demand in the United States has been flat for nearly two decades, but that is beginning to change, and energy efficiency can no longer offset rising power needs. Perhaps the most topical driver of higher electricity demand is data centers with particular focus on AI, which requires substantial computing power, storage capacity, and cooling technologies. But it's not just data centers driving higher demand; onshoring of energy-intensive activities like precision manufacturing as well as shifts related to the energy transition will play a significant role in power demand growth over time. Increasing adoption of electric appliances coupled with the growing number of electric vehicles on the road will further expand electricity needs. The title of our recent white paper says it best: this is about changing the narrative from energy transition to energy addition. We see significant investment opportunities for existing and new investors here. First, we launched the Future of Energy Fund in March of this year. The thesis behind this strategy is that there will be a rise in global energy consumption through at least 2040. Last year, we diverged from consensus in proposing that even though the global economy is becoming more energy efficient, these gains will not be enough to offset rising energy demands resulting from global population and economic growth. Rising electricity demand from data centers has only since made this a more mainstream conversation. We believe that traditional and alternative energy will both play meaningful roles in responding to the world's power demands. The Future of Energy Fund is well-positioned as we believe that both traditional and alternative energy creates the ability to generate superior investment outcomes in an area requiring active management. Our client-facing teams have been excited to deliver this strategy to potential investors, and the feedback has been quite positive in both wealth and institutional markets. The second opportunity we see is that nearly half of our infrastructure portfolios will benefit or seek incremental investment opportunities from this acceleration in power demand growth. This will include companies that own and operate power generation, those that build, operate, and maintain our electric grid, and midstream energy for the pipeline companies that supply power generators. At the same time, the power demand story is part of a wider backdrop that we think is favorable for listed infrastructure. The need to invest tens of trillions of dollars in the world's infrastructure, where power demand is just one driver, can provide a tailwind for years to come. Meanwhile, listed infrastructure trades at a rare discount to global equities and at a steep markdown to its historical enterprise multiple. The third area where we see power demand as a tailwind is within natural resource equities, which, as a reminder, focuses on three major sectors: agribusiness, metals and mining, and energy. We believe that the world has underinvested in natural resources discovery over the last 10 years, which will create an era of scarcity over the next decade, with a track record since inception of more than 10 years ago outperforming by more than 200 basis points and 400 plus basis points over the last five years. We believe natural resources will be an exciting area for absolute returns and will remain right for very active management. With that final comment, let me turn the call over to Joe. Thank you.

Joseph Harvey, Chief Executive Officer

Thank you, Jon, and good morning. Today, I will review our second quarter key business metrics and trends, then discuss our current positioning and growth initiatives for the future. Our asset classes lagged the stock market in the second quarter. Some clients continue to respond to broader challenges related to funding obligations and portfolio reallocation as market dynamics evolve. In areas we can control, such as investment performance, client education on our asset classes, and resource allocation, we are performing well and remain committed to innovation and future investment. I am optimistic about our positioning. The macroeconomic environment for most of the second quarter was influenced by expectations of sustained high interest rates, with the 10-year treasury yield averaging 4.44%. However, we saw inflation begin to ease after quarter end. Attention has shifted back to the possibility of rate cuts later this year, marked by a decline in 10-year treasury yields. If past flow patterns since 2017 serve as any guide, the combination of easing inflation and our strong investment performance could signal a transition from outflows to long-term organic growth. This outlook is bolstered by our flows throughout the current interest rate cycle before the first Fed rate hike in the second quarter of 2022, which raised Fed funds from 25 to 50 basis points. We had 11 straight quarters of net inflows averaging $2.15 billion quarterly. Following that, as rates rose to 5.5%, we experienced nine consecutive quarters of outflows averaging $745 million per quarter. If the yield curve normalizes at a higher level with less extreme monetary policy, our flows and the appeal of our asset classes might be influenced more by our performance than by rates. We have maintained strong investment performance, which continued into the second quarter. Consequently, we have successfully captured market share from competitors and attracted new mandates. Our weighted average excess return over the last year was 273 basis points, down from 309 basis points last quarter. The three-year excess return was 195 basis points, showing a positive trend in recent performance. This performance allows us to sustain our fee rates, which averaged 58 basis points compared to 57 basis points in the same quarter last year. Over recent years, many traditional asset managers have faced fee rate compression. Asset owners are grappling with challenges in balancing portfolios amid a shifting and dynamic market. These challenges range from inflationary pressures on funding obligations to the need for more efficient return-risk profiles, given attractive fixed income opportunities and liquidity constraints from private allocations and capital commitments. Looking at our overall flows, we recorded net outflows of $345 million in the second quarter, a significant reduction from $2 billion in the first quarter. By strategy, preferred securities had outflows of $366 million, and Global Real Estate had outflows of $127 million, which were partially offset by inflows of $152 million into US real estate. The bulk of the outflows originated from subadvisory and Japan subadvisory segments. Institutional advisory saw $73 million of net inflows, while subadvisory ex-Japan had $134 million in outflows, with both segments actively participating in fundings and redemptions. As the macro regime stabilizes, clients have made many adjustments to their portfolios. Analyzing our advisory client redemptions over recent years, 33% was attributable to rebalancing and cash raising, 35% was due to removing our strategy from their allocation, 17% was profit-taking, and 15% was for private allocations. Many of these shifts are cyclical or aimed at seizing perceived opportunities that have emerged during the changing environment. We still believe that many investor types remain underallocated to our asset classes based on fundamental merits of risk and return. Japan subadvisory saw outflows of $185 million compared to $312 million in the first quarter. Last quarter, I described the investment environment in Japan as a Renaissance. However, equities have predominantly attracted flows compared to interest rate-sensitive asset classes, while Japanese investors display caution regarding the strength of the US dollar and a reluctance for yield-oriented funds. Reforms to the country's retirement program known as NISA have been yielding modest yet steady inflows. Nonetheless, passive strategies have outperformed active ones regarding inflows so far. Our unfunded pipeline stands at $1 billion, unchanged from last quarter, with a three-year average of $1.17 billion. Since last quarter, $181 million was funded from five accounts, with new mandates awarded from six clients totaling $300 million. The bulk of the pipeline is focused on global and US real estate. This pipeline will be somewhat offset by $558 million of expected redemptions, primarily in global real estate strategies across three accounts—two of which are eliminations from clients' strategic allocations and one is with an OCIO provider that lost a client. I would like to share a recent new real estate mandate we have been funding for an Asian institution, which has a $200 billion plan with $10 billion allocated to real estate. From this, we have allocated $300 million to REITs, representing only 15 basis points of their total plan. We believe this illustrates the underallocation many investors have to listed REITs and the growth potential in this asset class. We see ourselves well-positioned to take advantage of the opportunities in our listed real asset classes while continuing to invest in new ventures and innovate for the future. Although we have faced significant macro headwinds since mid-2022 due to the Fed's interest rate normalization, we believe we are nearing a turning point towards easing. In fact, markets are anticipating six rate cuts beginning this fall and extending into next year. Our top priority remains delivering outstanding investment performance and guiding clients in their allocations to our asset classes throughout the next phase of this cycle. Our core strategies, REITs, and preferreds should benefit from the shifting rate cycle. Furthermore, I believe our multi-strategy real asset portfolio is significantly underallocated, as many investors are underweighting inflation-sensitive instruments in a world where inflation is likely to persist. As Jon mentioned, listed infrastructure should garner more attention as a lower beta real asset characterized by secular themes driven by underinvestment and trends related to artificial intelligence in power and data centers. We have also planned for increased adoption of listed real estate and infrastructure allocations in Asia. Additional growth initiatives include the Future of Energy open-end fund, scaling our offshore CCAP funds now that we've reached $1 billion in size, launching active ETFs, and capitalizing on the Japan Renaissance given our two-decade presence in that market. Our non-traded REIT, CNS REIT, is gaining momentum. We have seed capital to deploy, and CNS REIT made its first property acquisition this past January. We have been opportunistic, waiting for prices to adjust downward in line with changes in capital costs. We have several additional properties under contract and are gaining traction in assembling the portfolio. As a fund with fresh capital to invest, CNS REIT is not facing performance headwinds from NAV market downgrades tied to legacy real estate assets. Although it has only been a short period, our initial performance has been positive, primarily influenced by two factors: first, our focus on open-air shopping centers, which have strong fundamentals and are currently undervalued; and second, our strategy of leveraging listed REITs as an alpha driver to complement the private portfolio. As Jon highlighted earlier, our listed real estate performance has been exceptional this year, further driving CNS REIT's progress. Other significant developments include our launch on the Schwab alternative investment platform, which is widely used among registered investment advisers, our initial target allocators for CNS REIT. Additionally, Cohen & Steers raised $68.5 million in a registered offering coinciding with our company's addition to the S&P 600 Small-Cap Index. This new capital strengthens our balance sheet, and we envision using part of it to seed new investment vehicles, potentially active ETFs. Meanwhile, attractive yields on short-term treasuries allow us to invest this extra capital neutrally to current earnings. We welcomed two key leadership additions in the quarter. First, Raja Dakkuri has joined as CFO, succeeding Matt Stadler, who is retiring. Raja was previously an Executive Officer and Chief Risk Officer at Valley National Bank, having joined through its acquisition of Bank Leumi, where he served as CFO. He is charged with enhancing our finance department and better integrating with our team leaders to strategically measure and manage the business. Secondly, Dan Noonan has come on board as Head of Wealth Distribution. Dan previously led the Enterprise Wealth and Private Capital Group at Nuveen and worked at PIMCO before that. Alongside managing our core wealth business in the US, he will focus on reallocating and adding resources to the registered investment adviser market and multifamily office segments, particularly distributing our non-traded REITs and launching active ETFs. As the transition to Raja as CFO nears completion, we also will celebrate Matt Stadler's retirement and his contributions to Cohen & Steers. This was Matt's final earnings call after 77 calls in total. Over his nearly 20 years with the firm, Matt made significant contributions to numerous accounts as CFO and Executive Committee member. His leadership was notably impactful in maintaining tight financial oversight, emphasizing key business metrics, posing crucial questions, and deeply believing in our mission. Please join me in bidding farewell to Matt, who I know will continue to support us. Thank you, Matt, and we wish you a happy retirement. At this point, I'll hand the call back to the operator, Julianne, to facilitate the Q&A session.

Operator, Operator

Thank you. Our first question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open.

John Dunn, Analyst

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

Matthew Stadler, Executive Vice President

Sure. Let me start and maybe Jon can add some things here. Just in terms of the wealth flows this year, if you recall in the first quarter when there was anticipation about rate cuts, we had some very strong months early in the quarter, and that included both inflows into REITs as well as preferreds. In the second quarter, as the expectations got pushed out, we then saw some redemptions in preferreds. However, we've continued to see inflows into our open-end funds. Most of the flows have come from our what we call our institutional version of our core real estate strategy. Driving those flows have been some important large RIAs, which is a market that we've been targeting. They've been averaging into this process of REITs starting to signal a new return cycle. So I would expect that, again to the extent that you can have an expectation for flows, they are impossible to predict. But if you go back to my comments about what we've seen over the long-term, if we're entering an easing cycle, I think that's positive for both of those strategies in the wealth channel. As it relates to our institutional advisory clients redeeming to fund private investments, taking a step back, the bigger picture is private allocations have been going up in portfolios for some time, and that's being turbocharged recently with the love fest with private credit. So as we navigate this regime change, they've made commitments to private investments. The money has to come from somewhere. They can't get it from private because realizations aren't happening. Fixed income is gaining more share in portfolios. So it's got to come from listed allocation, and that's been equities and in some cases our listed asset classes. As for the real estate return cycle, we think that the price correction that we've been looking for in the private markets is about two-thirds of the way complete, but it varies depending on the property sector. We've started to put money to work in the shopping center sector, which hadn't had the cyclical top-off that other sectors like apartments or industrial had as interest rates went to new lows, and cap rates went to new lows. We've begun investing and feel that the signaling from the REIT market is a good indicator of that bottoming process. If, as both Jon and I talked about, we enter a rate-cutting cycle, that will help on the cost of capital for real estate, but there still needs to be adjustments in seller expectations and the marks they have in their portfolios.

John Dunn, Analyst

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

Matthew Stadler, Executive Vice President

Well, the renaissance stems from the very positive investing-related trends that have been happening in Japan, including reflation starting in Japan and getting out of a deflationary environment, improved corporate governance, Warren Buffett blessing the market and global allocators wanting to find a different home rather than China. Money has been going into Japan. As I mentioned, so far it's been going into equities, which is not inconsistent with what we've seen here with the leadership of some of the growth-related technology companies. But more importantly, if this trend continues, the regulators have been focusing on the investing markets and trying to improve the quality of the investment vehicles available, educating investors. So if that as a whole is favorable for investing, we think we'll get our share of portfolio allocations. Our partners, Daiwa, are optimistic about this and they wanted to market our strategies more; we've committed to giving them more sales resources. So it's early days, but we think a transition in this renaissance context will take some time, and we've been there for 20 years. We believe we should capture our fair share of that activity.

Operator, Operator

Our next question comes from Adam Beatty from UBS. Please go ahead. Your line is open.

Adam Beatty, Analyst

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

Joseph Harvey, Chief Executive Officer

Yes. Let me start, and maybe Matt can add. Our stock has done very well, and that can be linked to this inflection point on interest rates and a shift as Jon talked about and market leadership for the small cap and value. We've seen a nice rally in the stock. As it relates to raising capital, our balance sheet is strong. We've got plenty of capital. What we did earlier in the year was opportunistic, and the context being our business has become a little capital-intensive with the private real estate business, which requires more co-investment than a listed security vehicle would require. Those commitments include $125 million for our non-traded REIT and $50 million for our opportunistic traditional private equity vehicle. With that context in mind, we thought it would be a good move to raise capital opportunistically given our inclusion in the S&P 600 Small Cap Index, which drove a stock price jump of 10% overnight. That action strengthened our balance sheet considerably at a time when we are focused on organic growth rather than acquisitions. We currently see plenty of opportunities there, with our private real estate business and active ETFs.

Adam Beatty, Analyst

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

Jon Cheigh, Chief Investment Officer

Sure. I mean, obviously, there's been big performance dispersions in the listed market over the last 12 months for a lot of different reasons. I think to your point, really, it's just going to be the fundamental drivers in the data center business, which has driven wholesale rents up significantly. It's going to continue to drive wholesale rents up meaningfully over the next few years, mainly because there's a lot of demand and an absence of supply, as there's difficulty sourcing power, which is vital for data centers. So I'm not sure there's going to be a big shift as it relates to some of the fundamental trends that we're seeing. However, there will be differences in the listed market regarding sector dispersion and other factors. We've adjusted our portfolios over time to capitalize on major dispersions in returns; for example, between the tower sector, which was a favorite in years past but has been a laggard recently. We see tower REITs as a significant opportunity, and data centers continue to be a major focus. Most of the dynamic changes I've mentioned are related to some of the multiple compression and expansion that has occurred across different market segments. Large caps have generally outperformed small caps across all GICS categories. When analyzing the REIT market, earnings growth has been strikingly comparable to the S&P over the last five years. This has surprised many since the common perception is that real estate is underperforming, which isn't fundamentally accurate. Many of our conversations have centered around the fact that office openings comprise a small fraction of our portfolios, while sectors such as data centers, healthcare, and towers are more prevalent and influential regarding earnings growth. Thus, there remain many encouraging trends in these areas.

Adam Beatty, Analyst

That's great. Appreciate the detail. That's all I had today. Thank you.

Operator, Operator

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

Mac Sykes, Analyst

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

Matthew Stadler, Executive Vice President

Sure. As we launch active ETFs, it will happen in several phases. The product positioning question is a really complicated one in light of all the incumbent relationships that we and all of our peers share. However, we will lead with our strength, including core strategies, which will consist of REITs and preferreds, alongside one other area that Jon discussed today, which we feel very strongly about from an investment standpoint. That will be our starting point. We'll approach the launch not slowly but at a moderate pace. As the market evolves and it is evolving rapidly, we will assess how different technologies improve. As you know, many firms have filed a lawsuit with the SEC to bring ETF share classes to open-end funds. So this situation will unfold over a while, but we will lead with our strength. Concerning closed-end funds, there hasn't been a traditional closed-end fund launched in a while because interest rates have been elevated. The majority of new closed-end funds carry a leverage component; yet, the current borrowing costs make it challenging to develop a positive spread between portfolio returns and borrowing costs. Nevertheless, what Bill Ackman and Pershing are attempting differs significantly from traditional closed-end funds and isn't geared toward income-oriented investment strategies, which generally characterize closed-end funds. This factor will be significant in how closed-end funds perform in secondary markets.

Operator, Operator

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

Joseph Harvey, Chief Executive Officer

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

Operator, Operator

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