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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers First Quarter 2019 Earnings Conference Call. During the presentation, all participants will be in the listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, April 18, 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.
Thank you, and welcome to the Cohen & Steers first quarter 2019 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 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. 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.
Thank you, Brian. Good morning, everyone. Thanks for joining us. My remarks this morning as usual will focus on our as-adjusted results. A reconciliation of GAAP to as-adjusted results can be found on Pages 13 and 14 of the earnings release, and on Slide 16 and 17 of the earnings presentation.
Yesterday we reported quarterly earnings of $0.58 per share compared with $0.62 in the prior year's quarter and $0.56 sequentially. Revenue was $93.9 million for the quarter compared with $94.4 million in the prior year's quarter, and $93.6 million sequentially. The increase in revenue from the fourth quarter was primarily attributable to higher average assets under management, partially offset by 2 fewer days in the quarter.
Average assets under management were $59.5 billion for the quarter, compared with $59.2 billion in the prior year's quarter, and $57.6 billion sequentially. Operating income was $35.8 million compared with $38.3 million in the prior year's quarter, and $34.5 million sequentially. Our operating margin increased to 38.1% from 36.8% last quarter.
Expenses decreased 1.7% sequentially primarily due to lower compensation and benefits and G&A, partially offset by higher distribution and service fees. The compensation to revenue ratio was 35.75% for the quarter consistent with the guidance we provided on our last call. The decrease in G&A was primarily due to lower travel and entertainment expenses, and a reduction in sponsored and hosted conferences. And the increase in distribution and service fees was primarily due to the commencement of billing, for revenue sharing and sub-TA fees on certain retirement accounts by one of our intermediaries.
These fees were accrued last year but were reversed in the fourth quarter when they were not billed. Our effective tax rate for the quarter was 25.25%, consistent with our previous guidance. Page 15 of the earnings presentation displays our cash, corporate investments in U.S. treasuries and seed investments for the current and trailing four quarters.
Our firm liquidity totaled $183 million, compared with $213 million last quarter and stockholders' equity was $235 million compared with $223 million at December 31. And we remain debt free.
Assets under management totaled $62.6 billion at March 31, an increase of $7.8 billion or 14% from December 31. The increase was primarily due to market appreciation of $7.5 billion, and net inflows of $1 billion, partially offset by distributions of $695 million.
Sub-advised portfolios in Japan had net outflows of $260 million during the quarter compared with $304 million during the fourth quarter. And distributions on these portfolios totaled $361 million compared with $363 million last quarter.
Sub-advised accounts excluding Japan had net outflows of $72 million, primarily from the termination of a large cap value account, partially offset by the funding of a new global real estate mandate. Advised accounts had net outflows of $30 million during the quarter primarily from the termination of a large cap value account, partially offset by inflows into an existing U.S. real estate portfolio.
Bob Steers will provide an update on our institutional pipeline of awarded unfunded mandates. Open-end funds had net inflows of $1.4 billion during the quarter, primarily into U.S. real estate and preferred funds. Although it is difficult to quantify the exact amount, we believe a portion of these inflows were the result of reinvestments from the tax loss selling that occurred last quarter.
Distributions totaled $207 million, a $154 million of which was reinvested. Let me briefly discuss a few items to consider for the second quarter and the remainder of 2019. With respect to compensation and benefits, we expect to maintain a 35.75% compensation to revenue ratio. We continue to actively review our controllable expenses and remain committed to reducing non-client-related costs.
As a result, we project G&A for 2019 will be in line to modestly lower than the $46 million we recorded in 2018. We expect that our effective tax rate will remain at approximately 25.25%. And finally, as a reminder, we expect the termination of the $870 million non-strategic sub-advisory relationship mentioned on our last call to occur on or about June 30.
Now, I'd like to turn the call over to our President, Joe Harvey, who will discuss our investment performance.
Thank you, Matt, and good morning. In addition to an overview of the absolute and relative performance for our asset classes, I'm going to highlight three topics that are timely. First, we are seeing interesting and positive dynamics for REIT allocations. Second, some of our asset classes offer meaningful tax benefits for taxable investors that are not widely understood, a timely topic considering individuals who are feeling the effects of tax reform this month.
And third, we have a commitment to going deeper with our clients by sharing our investment convictions. And over the past year, we've had some great examples of this in action, thanks to our investment and writing teams.
Absolute performance for our asset classes in the first quarter was strong across the board, catalyzed by a powerful shift in the macro-environment towards slower global growth, peaking bond yields and a flip in the fed's posture from hawkish to dovish. That gave investors the all-clear signal to buy risk assets.
As we commenced 2019 reporting, we are updating the strategies which we categorize as core. We are removing large-cap value and commodities from our core metrics, and adding low duration preferreds, which takes us from 10 to 9 core strategies. We believe these changes better reflect the strategies which are in demand for us in the marketplace and where we want to devote resources.
Commodities will continue to be a component of our multi-strategy real asset portfolio. In the first quarter, 6 of our 9 core strategies outperformed. For the past year, 7 of 9 core strategies outperformed.
Measured by AUM, 71% of our portfolios are outperforming on a 1 year basis, 99% are outperforming over 3 years and 98% are outperforming over 5 years. Looking at the 1 year figures, our outperforming batting average declined 22 percentage points from 93% at yearend 2018. Half of the decline was attributable to our preferred strategies, heavily weighted in our core strategy, which underperformed by just 3 basis points.
The other half was attributable to one of our U.S. REIT strategies, which is more opportunistic than our core strategy and invest across the market capitalization spectrum. 85% of our open-end fund AUM are rated four or five star by Morningstar.
Illustrating the power of the transition in a macro-environment, U.S. REITs were the second-best performing sector in the S&P 500 in the first quarter recovery after defending well as the second-best performing sector in the fourth quarter downdraft. For the quarter, U.S. REITs returned 16.3%, and we outperformed. Global REITs returned 14.6%, and we outperformed in every region.
Taking a step back, over the past year, U.S. REITs returned 20.9% compared with 9.5% for the S&P 500. That is a dramatic turnaround from the prior two years, when the S&P had outperformed REITs cumulatively by 35 percentage points largely due to interest rate concerns.
In February of last year, we wrote a piece entitled Rate Reaction Opens a REIT Opportunity, in which we laid out a case that rate fears were already priced in and that REITs were attractively priced versus private real estate and stocks. It took a while for that thesis to work, but REITs began to outperform when the market declined late last year. We don't expect to precisely call market turning points, however, our goal is to express strong convictions in our portfolios and to our clients, and we rely on our analysis, we believe we can consistently add value over time.
Before turning to our other asset classes, I'd like to elaborate on a trend we see for real estate allocations globally. Pension funds and sovereign investors who have invested primarily in the private market are increasingly allocated to list - allocating to listed REITs. We believe several factors are at work here: first, core private real estate is priced for relatively low returns, say, 6% or so. At the same time value-added and opportunistic strategies are constrained by pricing levels and cycle considerations; next, many investors are fully weighted in the core four property types found in the typical real estate portfolio, but particularly, the retail component, which is challenged by e-commerce.
In contrast, listed REITs offer the same or better valuations across 15 property sectors and have liquidity, which will become more valuable as the cycle progresses. It's hard to quantify what this trend could mean in terms of capital flows, but the interest is consistent with rational fact-based reasoning.
During the first quarter preferreds benefited from spread compression of 70 basis points on top of a decline in the 10-year treasury yield to 2.4%. Core preferreds returned 7.5% in the quarter, while low-duration preferreds returned 5.8%. We underperformed in both strategies in the quarter, because we've been more balanced in credit quality out of respect for the cycle. Based on the shift in the macro to fed on hold, investors extended duration as evidenced by the powerful shift in our flows toward our core strategy over our low-duration strategy.
Consistent with our goal of sharing convictions with clients, in December of last year, after preferreds had their worst return year since the financial crisis, we published a report expressing our view that preferreds offered material value amidst a perfect storm. We were pleased when that view was realized for our clients in relatively short order. I referred at the outset to the tax benefits that exist with certain of our asset classes.
Preferreds generate meaningful amounts of qualified dividend income, also known as QDI. To quantify, core preferreds have a current yield of 5.9%. With the impact of QDI, the taxable equivalent yield for the highest tax bracket investor would be 7.2%, very attractive in the wealth channel. Meantime, institutional investors continue to discover preferreds as an alternative income allocation.
Global listed infrastructure returned 13.1% in the quarter, and we outperformed. If infrastructure were a GICS sector, it would have been the second-best performing sector in the fourth quarter of last year and fell just short of the S&P 500's return in the first quarter rally, demonstrated good downside defense and upside capture. Infrastructure's attractive dividend income and stable growth, as with REITs, are being more highly valued as economic cycle progresses.
Midstream energy and MLPs returned 16.8% in the quarter benefiting from positive developments in the two factors that best explain their performance: first, credit spreads improved; and second, oil prices rose 32%. We outperformed in our core midstream strategy. Our open-end fund, Cohen & Steers MLP and energy opportunity fund was a best-performing fund in the first quarter with a return of 20.5%.
On the tax front, MLPs passed through noneconomic return of capital, which defers the taxability of distributions, while midstream energy corporations pay dividends that receive QDI treatment. The universe yields 6.1%, and on a taxable equivalent basis that yield translates to 9.6%. In terms of thought capital, in midstream energy, we have been active making a case for the cyclical fundamental upturn and the positive structural changes for the midstream energy business.
Rounding out our core strategies, resource equities returned 11.5% in the quarter, and we underperformed, while multi-strategy real assets returned 10.3%, and we outperformed. Of the core sleeves in our multi-strategy real assets portfolios, the strong returns of REITs and infrastructure were offset by the solid but lower returns from commodities and resource equities.
In closing, for now, the market environment is positive for our asset classes. We are actively researching the global economy and credit markets, two factors that most influence our asset class performance. On top of the day-to-day of managing portfolios, we are focused on talent development and creating extensions of our core strategies. Today, we have more in the lab than ever before and are optimistic about the value propositions for our clients, while providing career opportunities for our teams.
With that, I'll turn the call over to Bob Steers.
Thank you, Joe, and good morning, everyone. Just to reiterate some of the comments that both Matt and Joe made, it was only a matter of days into the first quarter that the historically high mutual fund outflows of the fourth quarter reversed and turned strongly net positive. Prior investor concerns regarding rising inflation, interest rates and credit spreads abruptly reversed driven in part by newly dovish fed, solid but on spectacular GDP growth assumptions and more muted inflation expectations.
If sustained, this emerging goldilocks economic and interest rate scenario for real assets and alternative income strategies bodes well for both our wealth and advisory channels. Wealth's record results in the quarter benefited significantly from this change in investors' sentiments. Institutional advisory results in the quarter, though disappointing on the surface, were more about timing than lack of demand.
Our subadvisory ex Japan business saw a continuation of the managed transition out of large-cap value and non-strategic relationships, which is expected to be largely complete by the end of this quarter. Our hope is that the second quarter will mark the end of large non-core outflows from this business segment setting the stage for sustainable organic growth. Outflows from Japan continued to decline, but remain directionally unchanged.
As you may recall, the fourth quarter wealth outflows were exacerbated by a wave of tax loss selling, a portion of which we expected to recoup in the first quarter. We believe that did in fact occur, which together with the shift in investor sentiment, helped to produce exceptional quarterly results. Record sales of $3 billion resulted in net inflows of $1.4 billion, our second highest on record. And our open-end fund assets under management ended the quarter at an all-time high of $24.6 billion.
Both our preferred securities and U.S. real estate funds experienced strong inflows, with our preferred securities fund achieving a quarterly record $957 million of net inflows. In addition to the positive sales momentum that wealth is experiencing in our core real asset and alternative income strategies, going forward, we anticipate contributions from several new sources. First, after years of focus in investment, DCIO fund flows were a net positive of $155 million in the quarter, and we believe that this trend will be sustained.
Second, we are now entering the markets with our first separately managed account, or SMA offerings, which over time should generate significant incremental sales for our preferred securities, U.S. real estate and midstream energy strategies. Third, although our offshore SICAV funds booked $44 million of net outflows in the quarter, the underlying trends are beginning to turn positive.
Our top-performing European real estate fund had a $78 million rebalancing redemption. However, both our global real estate and preferred securities funds generated positive net inflows. While the rollout of our offshore SICAV strategies are still in the early stages it appears that we are now poised to generate consistent positive organic growth.
Looking ahead, we expect flows in the wealth channel to remain robust with incremental contributions from the DCIO, SMA and SICAV initiatives, which are now beginning to bear fruit.
On the surface, the advisory group had a disappointing quarter with $30 million of net outflows. However, the fundamental trends and outlook for organic growth remain favorable. The negative flow number in the quarter was impacted by a combination of a final $92 million large-cap value separate account termination and the delayed funding of several mandates from our pipeline, which we expect will occur this quarter.
Institutional investor interest across the range of our real asset and alternative income strategies remained strong, and the current pipeline of institutional unfunded mandate stands at over $900 million. As with the advisory channel, a previously announced $420 million large-cap value outflow led to total subadvisory outflows of $72 million in the quarter. This marks the end of any further large-cap value or core style box exposure.
Partially offsetting the large-cap value outflow in the quarter was the funding of a previously awarded $343 million global real estate mandate from a longstanding strategic partner. As a reminder, we will be terminating a European global real estate subadvisory relationship later this quarter or early in the next quarter. Following that, we will have reduced the potential for any material additional non-strategic outflows to offset the otherwise solid growth prospects in our core strategies and relationships.
As I referenced earlier, in Japan, the trend inflows is improving, but remains directionally unchanged. Net outflows were $260 million, when combined with distributions of $361 million resulted in total net outflows of $621 million. This compares to $667 million last quarter and $936 million this time last year.
Over the past 12 months, U.S. REITs have been among the top-performing fund categories in Japan, especially after currency adjustments, and we are a top performer in the category, which gives us reasons to be optimistic that eventually these trends will reverse. As always, we are working closely with management to support their marketing and sales initiatives.
If the current consensus outlook for steady growth, modest inflation, and low and stable interest rates holds, our organic growth prospects are bright. We expect the strength in the wealth channel to be augmented by incremental positive contributions from our DCIO, SMA and SICAV initiatives.
In addition, going forward, net organic growth for both the advisory and subadvisory channel should improve due to the elimination of outflows derived from our legacy large-cap value and non-strategic subadvisory relationships. By eliminating the noise, focusing on our in-demand strategies and delivering strong investment performance, our outlook for sustained firm-wide organic growth is strong.
With that, I'll ask the operator to open the floor to questions.
Thank you. [Operator Instructions] The first question is coming from the line of Ari Ghosh with Credit Suisse. Please proceed with your question.
Hey, good morning, everyone. So just going back to your comments around the relative valuation returns between the private and public real assets, and how some of these institutions are taking notice, I'm just curious if you've seen any increased either allocations that you can talk about or you are having more conversations with some of your institutional partners, just given that there have been some large pension fund allocations announced this year, and this is typically the time that a lot of this is revisited from the institutional players. So curious what you're seeing? Is there anything tangible that you can call out on that front?
And then, just on the outlook for sustained growth in DCIO, this is something that you've been investing in and putting resources in as well. So maybe just talk about some of the factors driving some more positive growth outlook, whether it'd be some of the company-specific items or some macro changes and factors that's driving this. Thank you.
Sure, Air. So with respect to the real estate allocation dynamic, it's not seasonal, I would say, but it's been driven we believe by the progression of the cycle and pricing in the private markets and the fact that, as I mentioned, there are a lot of traditional real estate investors who are fully weighted or overweighted in what we call the core four property types; so industrial, apartments, office and retail. But the tangible part of it is in our flows and in our pipeline. And as I've mentioned it, this is a global dynamic. We're seeing it not just in the U.S., but also in places like Europe and the Middle East.
So in our flows and in our pipeline, we're seeing both allocations to U.S. real estate and to global real estate. And I think it's the spillover effect of a lot of allocations going to real estate generally and investors wanting to complement their private portfolios with the listed versions of it.
With respect to trends in DCIO, I'll ask Todd to elaborate. But we were pleased at the results in this quarter. Heretofore, we've spent several years at least in staffing up, doing the work to ensure that we had the right share classes and pricing and also developing relationships with intermediaries to ensure that our asset classes are included in their models and their products.
And so, it has taken us longer than expected, and we did have outflows during this process. But the shift into significant inflows this quarter seems to us to be the beginning of the return that we had been expecting when we initiated the project to grow in this sector, but Todd?
Thanks, Bob. I think at the root of everything we're talking about, Joe touched on it before, Bob touched on it here, it really relates back to our brand and education. So there was a building blocks approach in terms of getting into the marketplace, staffing up, putting all the infrastructure in place. And now, it really gets back to our brand and getting that message out to the right people, and looking at 401(k)s or DCIO lineups, the same way that people would look at a pension lineup.
And real estate of course has place at the table. And we're starting to see more and more adoption. And we think we'll continue to get more of a share going forward given the strategic investment we've put in.
Got it, very helpful. And then, just a quick one on the institutional pipeline, I believe you mentioned it's $900 million as of now. Last quarter, you called out the $2.5 billion that was of additional considerations. So, just curious how much of that is still in play right now? Thank you.
Good question. And so in that $2.1 billion that was mainly one search, and it was a finals at that point. Unfortunately, we did not win that. The ultimate winner won based on extremely aggressive fee strategy. But I will say that in the quarter, while we had fundings of a little over $500 million, we also had just under $400 million of new mandates won and virtually none of those was in that $2.1 billion number. So I bring that up to - the bad news is we did not win that mandate. The good news is as I mentioned in my comments, the trends are still very favorable.
We are getting additional allocations from existing clients. We are getting new allocations from new clients. And those new mandates from new clients are encouraging, because they span a range of strategies and a range of geographies. As we have mentioned previously, we're making excellent inroads in the EMEA marketplace as well.
Thank you. Our next question coming from the line of Mac Sykes with G. Research. Please proceed with your question.
Good morning, everyone.
Mac, good morning.
I'm just curious about the expense guidance. It does seem like that the positive outlook that you could benefit from some additional investment spend at this point, and also given that you've probably had an unexpected rise in AUM just given your performance in the flows. So I'm just curious as to - perhaps - you still seem pretty conservative in that way and this seems like a time when you might want to be accelerating spend?
Yeah. I thought you'd be happy with that guidance, Mac. But I think that we've been making investments all along, not only in G&A-type areas, conferences, and the like but also, as you could see when you compare first quarter last year to first quarter this year, comp ratio and headcount. That's an ongoing assessment of our business to where we think it's going to be. And so I think the large amounts of spend necessary to position us to reap the benefits of the turn in the market is in place.
And so all things being equal, the downward bias on G&A year-over-year should be something we can achieve as well as perhaps some giveback in margin on headcount as well. So I think we're pretty well positioned on the expense side.
Mac, I would just echo Matt's comments that, as we mentioned last quarter, the investments that we deem necessary for - to support new initiatives to expand our investment teams, to invest in technology, to play a greater role in generating alpha expanding distribution, those investments have largely been made. And we had significant headcount and capital investments through last year.
And as we mentioned last quarter, we think that period of extraordinary investment and extra expense is largely behind us. It doesn't mean we are not going to continue to invest in IT, et cetera, but we don't see any dramatic headcount expansion in front of us. And so we think, we are pretty well positioned, particularly if markets remain favorable from a margin standpoint.
Great. And then, I think last few quarters, you had mentioned some more thematic infrastructure products, as I remember. Could you provide an update on how some of those…
Sure, Mac. And so, this is Joe. This is a major initiative for us to develop strategies for the family office and [dominant] [ph] foundation and outsourced CIO markets. And these investors want strategies that are more unique, capacity constrained, alpha-oriented or thematic. So we've got approximately 10 strategies that are in various stages of development. Some of them are more focused versions of what we do. But in the infrastructure area, we have already seeded 3 more thematic strategies ranging from, what we call, digital infrastructure to small-cap infrastructure. And we have others in the lab such as a renewable strategy.
So, this is a major undertaking by the company. It's very exciting, because it plays to our DNA as investors. I think it's very energizing for our investment department. It will take time to, in some cases refine the strategies, and in other cases, build the track records. But we think for the markets that we're targeting, we don't necessarily need long track records based on our capabilities and the core underlying strategies, and considering that some of these strategies are just extensions of it or applying different techniques, whether it's hedging or asset allocation to produce something that's more targeted.
Great. Thank you for the update. And I did enjoy the [letter this year] [ph]. Thanks.
Thank you. Our next question coming from the line of John Dunn with Evercore ISI. Please proceed with your question.
Thanks. Little more on the institutional pipeline, can you kind of give us a flavor of how the mix of fee rates, of what's in the pipeline, kind of compares to what's already in the advisory book?
I don't know. Matt, do you have that?
Yeah. Yeah, so the - I guess, the pipeline is kind of little bit lower than what our average would be, but it's somewhere in the low 40s.
Got you. And then, maybe just a little more on Europe, maybe could you kind of bring to life just what kind of products you think are going to have the most traction over there, particularly as you go more direct; and if any kind of differences in preferences versus the U.S. that you might encounter?
I think the level of interest will differ based on channel. So with respect to the wealth side and our SICAVs, we would expect strong interest in our preferred securities strategy, and also our European real estate strategy, because its performance is top percentile. It's just in the first place by a lot of games.
With respect to the institutional side, again, we are seeing demand in Continental Europe, in the Middle East. And that demand is largely focused on global real estate and global infrastructure.
Got you. Thanks very much.
Thank you. [Operator Instructions] Our next question coming from the line of Michael Carrier with Bank of America. Please proceed with your question. I'm sorry, Mr. Carrier, unfortunately, your line has a lot of static on it, so we won't be able to hear you. We will not be able to take your question. I'm going to be closing your line at this time, I'm sorry. Thank you.
[Operator Instructions] Mr. Steers, there are no further questions at this time. I will now turn the call back to you for your closing remarks.
Great. Well, thank you all for dialing in this morning. And we look forward to reconnecting next quarter. Thank you.
Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.