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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' Fourth Quarter and Full Year 2019 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, January 23rd, 2020.
I would now like to turn the conference over to Brian Heller, Senior Vice President and Corporate Counsel of Cohen and Steers. Please go ahead.
Thank you and welcome to the Cohen & Steers' fourth quarter and full year 2020 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 statements.
Furthermore, none of our statements constitute an offer to sell or the solicitation of an offer to buy to securities of any fund. Our presentation also contains non-GAP 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.
Thanks, Brian, and good morning, everyone. Thanks for joining today. My remarks this morning will focus on our as-adjusted results. A reconciliation of GAAP to as-adjusted results can be found on Pages 19 and 20 of the earnings release or on Slide 16 and 17 of the earnings presentation.
Yesterday, we reported earnings of $0.74 per share compared with $0.56 in the prior year's quarter and $0.65 sequentially. The fourth quarter of 2019 included cumulative adjustments to lower compensation and benefits and to increase income taxes.
Revenue was a record $109.8 million for the quarter compared with $93.6 million in the prior year's quarter and $104.9 million sequentially. The increase in revenue from the third quarter was primarily attributable to higher average assets under management. Average assets under management were a record $71 billion compared with $60.8 billion in the prior year's quarter and $68.6 billion sequentially.
Our effective fee rate was 56.5 basis points for the fourth quarter compared with 55.9 basis points last quarter. The increase was primarily due to the recognition of performance fees which was crystallized during the fourth quarter.
Operating income was a record $47.4 million in the quarter compared with $34.5 million in the prior year's quarter and $40.7 million sequentially. Our operating margin increased to 43.1% from 38.8% last quarter, primarily due to lower compensation and benefits, when compared to revenue.
Expenses decreased 2.6% on a sequential basis, primarily due to lower compensation and benefits, partially offset by higher G&A. The compensation to revenue ratio for the fourth quarter was 31.54% lower than guidance we provided on our last call. The decrease in the ratio was primarily due to the deferral of certain open positions into 2020 higher fourth quarter revenue growth than we had projected and an adjustment to reflect actual incentive compensation to be paid.
For the year, the compensation to revenue ratio was 34.62% compared with 34.51% in 2018. The increase in G&A was primarily due to higher travel and entertainment expenses and an increase in sponsored wealth management conferences. Our effective tax rate was 26.11% for the fourth quarter, which included a cumulative adjustment to bring the rate to 25.5% for the full year.
Page 15 of the earnings presentation sets forth our cash, corporate investments and U.S. Treasury securities and seed investments for the current and trailing four quarters. Our firm liquidity totaled $204 million at quarter end compared with $246 million last quarter and our stockholders equity at quarter end was $214 million compared with $275 million at September 30.
Firm liquidity and stockholders equity as of December 31, reflected the payment of a special dividend in December of approximately $94 million, or $2 per share. Over the past 10 years we have paid a total of $13 per share in special dividends. We remain debt-free.
Assets under management totaled a record $72.2 billion at December 31, an increase of $1.3 billion, or 2% from September 30. The increase was due to net inflows of $1.6 billion, and market appreciation of $1.1 billion partially offset by distributions of $1.4 billion.
Advisory accounts had net inflows of $91 million during the quarter, which included five new mandates totaling $263 million four of which were included in last quarter's pipeline. The mandates were into global real estate, U.S. real estate, global listed infrastructure and preferred portfolios. These inflows were partially offset by outflows from certain global real estate preferred and global listed infrastructure portfolios, primarily due to client rebalancing. Bob Steers will provide an update on our institutional pipeline of awarded unfunded mandates.
Japan subadvisory had net inflows of $341 million during the fourth quarter compared with $9 million of net inflows during the third quarter. This marks the second consecutive quarter of net inflows from Japan's subadvisory after eight straight quarters of net outflows.
Distributions from these portfolios totaled $308 million compared with $304 million last quarter. Subadvisory excluding Japan had net inflows of three – net outflows of $302 million, resulting from the termination of three non-strategic relationships that we initiated, as well as client rebalancings, primarily out of preferred global real estate and global listed infrastructure portfolios.
Open-end funds which had record assets under management of $30.7 billion at December 31 recorded net inflows of $1.6 billion during the quarter. Distributions which included the payment of year end capital gains totaled $947 million, $751 million of which was reinvested.
And now I'd like to briefly review a few items to consider as we begin the New Year. As you are aware, we recently hired Dan Charles, as Head of Global Business Development. Dan's initial focus is on assessing, reorganizing and expanding our institutional distribution efforts and we expect that he will be adding strategic hires to this core business channel.
We project that the impact of these strategic hires combined with an increase in stock amortization, the filling of the open positions that were deferred from 2019 and the full year effect of last year's new hires will result in a compensation to revenue ratio of 34.75% slightly higher than 2019. We expect G&A to increase by about 5% from the $46 million we recorded in 2019.
After finishing last year essentially flat to 2018, we intend to make incremental investments this year in technology which will focus on the automation of certain manual processes as well as marketing which will support our efforts to expand institutional distribution. We expect that these investments over time will improve both our efficiency and profitability. We expect our effective tax rate will increase to 25.75% in 2020.
And finally we made two filings during the fourth quarter. The first one was to register a rights offering for Cohen & Steers quality income realty fund, one of our closed-end funds. Assuming the rights offering which expires in mid-February is fully subscribed the fund's assets under management would increase by approximately $625 million including leverage. The costs associated with rights offering will be borne by the company.
The second filing was to register a new closed-end fund. The closed-end fund market has moved to a place where typically the costs and expenses associated with IPO are covered by the issuer. We would expect to do the same if the new closed-end fund offering moves forward. We expect that any company-borne costs associated with these offerings would be excluded from our as-adjusted results.
And now I'd like to turn it over to Joe Harvey who will discuss our investment performance.
Thank you, Matt and good morning. This morning I will address our investment performance and talk about our vision for sustaining investment excellence. For most of 2019 several of our asset classes led markets due to just rights goldilocks conditions of slow but positive economic growth, low interest rates and favorable credit spreads.
The macroeconomic environment began to shift in the fourth quarter as monetary easing by central banks globally along with the increasing likelihood of a China trade deal bolstered expectations for improving global growth. While our asset classes performed solidly in the fourth quarter, they lagged higher beta segments of the market such as tech as well as the S&P 500 which returned 9% on the powerful macro upturn.
Among our asset classes resource equities and commodities performed best in the quarter anticipating the upturn in growth and global and international strategies outperformed U.S. strategies. Looking at the combination of both absolute returns and our relative performance 2019 was one of our best performance years I can remember. This reflects the favorable environment that I just described plus strong execution by our investment teams.
In the fourth quarter, seven of our nine core strategies outperformed their benchmarks. For the past year, eight of nine core strategies outperformed. We produce some terrific alpha for the full year well in excess of our targets. U.S. real estate exceeded its benchmark by 610 basis points, global and international real estate exceeded each by over 400 basis points, resource equities exceeded by 570 basis points and low duration preferreds exceeded by 650 basis points.
The one strategy that underperformed for the full year was midstream energy which fell short of its benchmark by 160 basis points. Measured by AUM, 96% of our portfolios are outperforming on a one year basis, 97% are outperforming over three years and 98% are outperforming over five years. 89% of our open-end fund AUM are rated four or five star by Morningstar.
Looking forward I'd like to touch on three areas. The ramifications of low interest rates for our asset classes, our focus on sustaining performance through our next-generation investment team initiatives and our initiatives for investment strategy innovation.
If interest rates stay low and so long as economic growth is positive, our asset classes should be positioned for attractive relative returns. Underlying asset values in real estate and infrastructure should have a stable to upward bias. Then factoring in diversification benefits, our asset classes should continue to experience rising investor allocations thereby driving flows and further supporting performance. This view is driven by our assessment of investors' needs.
Starting with returns. The 7% return bogie that most pension funds have is a high hurdle considering the current interest rate regime. Second in the sustained low interest rate environment, the thirst for income is acute.
Third and importantly, investors' de-diversification amidst the pricey bond market while recognizing that hedge funds have fallen short of the return part of their value proposition as diversifiers. And for the tax sensitive investor, the need for tax-advantaged returns would be even more valued in what could be a rising tax regime in the future.
Finally we are deep into the private equity cycle and are seeing some investors begin to place a greater value on liquidity and become more cautious about WeWork type issues in private equity. Said simply, our strategies are in demand. There is no greater imperative that Cohen & Steers has been sustaining our excellent investment performance. We have many avenues to help achieve this objective and it starts with developing our next-generation investment talent.
In terms of leadership, in the fourth quarter we announced that Jon Cheigh succeeded me as Chief Investment Officer. Jon joined Cohen & Steers as a REIT analyst 15 years ago and has produced outstanding results since assuming leadership of our global real estate investment team in 2012.
Over the past few years he has also taken on leadership of our economic research and asset allocation teams. Jon's career path is a testament to what talent and professionals can achieve on our platform. It also illustrates our approach to succession planning which we consider to be an ongoing focused part of our culture rather than an event. We look forward to John leading our investment department to new heights.
We continue to develop next-generation portfolio managers by assigning portfolio management and leadership responsibilities to those that have what I call the It factor. That is portfolio managers who can consistently generate alpha and lead a team in doing so.
Furthermore, process-wise we will continue to incorporate quantitative research into our fundamental processes and continue to integrate research and decision-making across investment teams.
As a side note, this sounds simple, but there is both a science and an art to making cross team research effective in producing alpha. We will put the right players in the right seats, seeking diversity of experience thought and decision-making.
We will continue to focus our resources on factors we believe can be predicted consistently and have efficacy in producing alpha. And we will continue to use technology to expand our data sets and increase efficiency.
Over the past five years, the investments we have made in headcount have paid-off with Alpha. While this year we expect modest additions to headcount and investments, we will continue to add when we find areas where we can enhance alpha.
Accompanying our talent and process plans, we commenced a strategic review of our strategies and products and have identified several areas to round out our real asset and alternative income lineup.
Next step is to identify the best way to create or extend investment capabilities in those areas, whether it's through acquisition, team lift-outs, or hiring to supplement our internal teams.
The strategies we are targeting are extensions of our core strategies they generate attractive income and would help expand our multi-strategy capabilities. An example of what we are targeting broadly is real asset debt.
Meantime, we continue to build track records in thematic portfolio strategies including small cap infrastructure, digital infrastructure, and next-gen real estate, which focuses on new economy and specialty property types.
We believe this strategy will appeal to the pension market globally as e-commerce headwinds for retail real estate is a global challenge. We have developed other thematic portfolios for the wealth channels such as tax advantage preferreds for the closed-end fund market.
Our goal with strategy innovation is to provide new avenues for growth while keeping our PM teams on the cutting-edge and providing opportunities for our next-generation portfolio managers.
In closing, while our investment performance has never been better, our firm and investment team culture is one of continuous improvement. That culture will help guide our course as we navigate the next five years.
I'll now turn the call over to Bob Steers.
Thanks Joe, and good morning. Last year was characterized by the powerful one-two punch of macro tailwinds for real assets and alternative income strategies, and income and industry leading investment performance.
Asset flows and investment returns were strong from the start of the year and only got better as the year progressed. Steady economic growth accompanied by low inflation and interest rates presented the optimal environment for both the investing and gathering of assets in our strategies.
The numbers tell the story. For the year, net inflows were $3.7 billion for a 6.5% organic growth rate, driven by record gross flows of $16.5 billion. The wealth channel led the way setting records in both the quarter and for the full year and ended with peak momentum.
Last year also benefited from the emergence of three recent growth initiatives, EMEA advisory, DCIO and Japan Institutional. All three key channels delivered significant asset growth last year.
With the realignment of the subadvisory channel complete after the termination of multiple non-strategic relationships, we are now poised for future growth. Another trend last year was the steady rebound in the Japanese subadvisory flows, which ended the year net positive including distributions in the fourth quarter.
Lastly, although, the advisory channel did post positive net flows last year, the results in the U.S. were well below our expectations and we're taking action to regain our momentum in this important marketplace.
As I said the wealth channel set multiple records in the quarter and for the year. Net inflows of $4.7 billion for the year exceeded the previous record of $3.2 billion by almost 50%.
Gross inflows increased 39% to $12.5 billion despite the soft close of our largest U.S. REIT fund and redemptions declined to $7.7 billion down from $9.4 billion in the prior year.
In addition to strong demand for our REIT and preferred security strategies, the wealth channel was the direct beneficiary of two of our three key growth drivers DCIO and bank trust and insurance companies.
DCIO open-end fund net inflows last year were $676 million, compared to only $9 million in the prior year with positive flows at every key intermediary. Net asset growth derived from bank trust and insurance companies increased 27% and generated $877 million of net inflows for the year.
Also last year the RIA market became our largest open-end fund channel, achieving 19% organic growth and total assets of $8.7 billion. Encouragingly the year ended with accelerating momentum. Open-end fund net inflows in the fourth quarter were $1.6 billion, which was the highest since the first quarter of 2007.
U.S. REIT open-end fund net inflows in the quarter were a record $643 million, again even with the soft close of our largest and best-selling fund. And DCIO net inflows were a record $245 million, capping a breakout year for this important channel.
We anticipate that the RIA market will continue to experience rapid growth and in response we are growing and transitioning our broker dealer relationship management team to a hybrid model, which will allow us to maintain continuous coverage of investment teams regardless of the platform.
For the year the advisory channel delivered $567 million of net inflows. Peeling back the onion there was both good news and bad news. The good news was that EMEA and Japan booked $622 million and $178 million of net inflows, respectively. And the outlook for both regions is positive. However, in North America we had $303 million of net outflows for the year, which was obviously disappointing.
As was mentioned already Dan Charles joined us last year as Head of Global Business Development and he's focused on implementing a reorganization plan to return the U.S. advisory business segment to positive organic growth, which should be in place by midyear.
In the quarter, advisory net inflows were $91 million generated from five new fundings, totaling $263 million. Of note is the geographic diversity of these new client relationships with two U.S., two Japanese and one German mandate. We ended the quarter with a pipeline of awarded, but unfunded mandates of approximately $700 million, up from $578 million last quarter and with a healthy backlog of undecided finals.
As I mentioned at the outset, it was a transitional year for our subadvisory business. Of the $1.3 billion of full year net outflows, $1 billion was initiated by CNS and an additional $420 million represented the final exit from our large-cap value strategy. With large-cap value and nonstrategic partners behind us, our focus going forward will remain on developing deeper and more sustainable strategic relationships, primarily with financial OCIOs. In the quarter, of the $302 million of net outflows, $148 million represented the termination of our last three nonstrategic relationships with the remainder of the net outflow simply year-end rebalancing.
Looking ahead, the stage is now set for a resumption of growth for subadvisory ex-Japan channel. Japan's subadvisory flows showed persistent improvement throughout the year and ended the year net positive even including distributions. After distributions, net inflows for the full year were $1.4 billion, down by more than half from $3.1 billion in 2018. Momentum is turning increasingly positive with the last two quarters generating positive net inflows before distributions and capped by the $33 million of net inflows after distributions in the fourth quarter. We are cautiously optimistic looking into 2020 that the current trends will persist.
In addition, we expect to announce several new product and distribution launches early this year, which should be additive to our existing relationships in Japan. Given the current environment, growth prospects for this year appear very favorable. The positive macro tailwinds that sustained strong demand for our strategies have continued into this year. We believe that subadvisory and Japan subadvisory, both of which experienced significant organic decay after distributions last year are now poised to deliver materially improved results going forward. All things being equal, we also expect much improved results from the advisory group, led by a return to positive organic growth in the U.S.
Lastly, the wealth channel began 2020 with strong momentum and should also benefit from several new growth opportunities. In addition to the rapid acceleration in growth from the DCIO, bank trust and RIA initiatives, we are poised to add significant new assets from the recently reborn closed-end fund market.
As Matt indicated, we are currently in the market for a shareholder rights offering for the Cohen & Steers quality income realty fund and have filed for a tax advantage preferred securities fund IPO, which is tentatively scheduled for this coming April. If the current macro conditions remain intact, we are poised for a continuation of last year's growth trends with improved results from our laggard business segments and supplemented by multiple incremental sources of growth.
With that, I'm going to stop and would ask the operator to open the floor to questions.
Thank you. [Operator Instructions] Our first question is from the line of Mike Carrier with Bank of America. Please proceed with your question.
Good morning and thanks for taking the questions. Maybe, first one, just on -- Joe, I think you were talking about just allocation trends. And then, I think, you guys gave some color around flows. You were also talking about rebalancing. I guess, just curious, given the strength of the performance, the strength of the asset classes, how do you think about like those two when you think about going forward? Flows and like client trends, meaning increasing allocations to some of the asset classes. I mean, you guys are winning the business versus rebalancing, just given the great performance that you guys have had, as well as some of the asset classes.
This is Joe. Yes, that's a tough question to answer, because it's all market dependent. But based on the strength, particularly, in real estate securities, last year we saw some clients take the allocations down a little bit. I wouldn't say it was significant. If our asset classes continue to perform well, we'll see a little bit of that.
But, I guess, what I was trying to say in my comments is that, when you look at the macro backdrop and you really think about the low interest rate environment that we have and that we're well into a cycle, there aren't too many asset classes that are dislocated. There's going to be a lot of pressure to generate the portfolio results that I talked about, whether it's returns or income or diversification.
So, I think, that provides a real strong tailwind for the things that we do. And one dynamic, as it relates to the real estate that we talked about on these calls, is that the low return environment also exists in the private markets. So, when you look at what we do relative to allocations size-wise in the private markets, we can be a big beneficiary of structural changes that are taking place there.
And I've talked in the past about how investors don't want to lock themselves up at low returns late in the cycle, or they don't want to allocate more to retail real estate. All of those trends are pushing some very major asset owners increasingly into the public markets.
Then on infrastructure, we've got the dynamic where it's tough to find private assets, so that money has been spilling over into the listed markets. So, I think, we have a lot of tailwinds. Clearly, market is regime dependent. But as both Bob and I have laid out, we're pretty positive about the demand for what we do.
Got it. That makes sense. And then, maybe, just as a follow-up. Just on some of the product comments that you had in terms of innovation. Just trying to get a sense -- yes, I think you mentioned the real asset debt, your strategy around that, some thematic areas. When you think about, like, making those decisions on these new products, I'm assuming you're seeing the demand by the clients. And you mentioned, they're somewhat similar to what Cohen & Steers has from a product and just like a skill set. When you think about the sizing maybe of those markets the opportunity relative to how well you guys have done in real estate or the preferred strategy. I don't know if there's a way -- I know these things can take many years to play out, but just trying to get a sense of why those strategies and what's that kind of market opportunity that you guys think is possible?
Well real assets are our large asset classes. But again, it's tough to quantify as you say. When you think back about -- to our preferred strategy, when we started it 14 years ago, it wasn't considered to be an asset class. And frankly in some circles, it's not considered to be an asset class today, but we've done a substantial business in an area where we saw an opportunity to create alpha in an inefficient market. And slow and steady has created a very big business.
So when we think about a broader real asset suite, particularly with the needs for income, we think there are some pretty exciting ways to -- if we had capabilities like real asset debt to mix and match that with our equity real asset strategies and create a range of product strategies that could be multi-strategy or across capital structure. And we have those types of mandates already. They're not significant parts of our business, but we see the demand for strategies like that. And if we can create these capabilities, it's just going to broaden our appeal to not all investors, but a wider range of investors.
Okay. Thanks a lot.
Thank you. Our next question is from the line of John Dunn with Evercore ISI. Please proceed with your question.
Good morning, guys. I wanted to ask about the retail funds. Now that CSI is closed and we're four months away from CSR lowering the expense ratio and new share classes. Maybe just talk a little bit about what the early innings of that kind of pivot you guys are seeing?
Thanks for the question John. We're seeing very good take up. We were pleased that the transition in September from a soft closed. And obviously we have been working on repositioning both CSR and our institutional fund in anticipation of the soft close. And fortunately, they're all four or five star funds. We got the share classes and expense ratios realigned appropriately. And also our national accounts team did an extraordinary job making sure that CSR was recommended on the right models and platforms, just as the CSI the soft-closed fund was. So I would say that the transition was seamless, the take-up is accelerating and we couldn't be more pleased with how this process has been transitioning.
Got you. And then just a question on the infrastructure segment. We had like six -- six of the last eight quarters have been out-flowing and you have the push and pull of the low rate environment versus growing secular allocations. What's the outlook for infrastructure and what could get it cooking better?
Well, it's a tough question to answer, because there isn't just one infrastructure strategy for example. So, as you're probably aware midstream energy has had a real tough go of it for a while now. And so certain segments of that marketplace have lagged.
Look I think for infrastructure to pick up both absolute and relative performance needs to improve. I think, as Joe mentioned, the stars are in alignment for real asset allocations including infrastructure to go up meaningfully over the coming year and years, because they are great diversifiers. They are unique sources of income. And so we do anticipate allocations to going up. And we have to compete.
We have two or three excellent competitors just as we do in real estate. And we have to maintain or improve performance. And again, I think the market demand is not as robust for anybody as REITs and preferreds, but there is demand and we do anticipate that it's going to accelerate.
Great. Thank you.
Thank you. [Operator Instructions] Our next question is from the line of Robert Lee with KBW. Please proceed with your question.
Great. Thanks. Thanks for taking my question. Just maybe I'd like to dig in a little bit more in Japan sub-advisory. I mean, certainly you've seen a dramatic improvement in momentum there. But could you maybe flush out a little bit of what do you feel like has changed about the marketplace that maybe this cycle could hopefully make it more sustainable and maybe drill into some of the more specifics of the products that are being marketed there?
Sure. Well, again, as I think everyone knows the Japanese retail market is notoriously unpredictable. So, talking about sustained trends is a tough -- is a tall order. But following industry-wide dividend cuts a year or two years ago that effect has begun to wane for a number of U.S. REIT funds in particular, in the marketplace.
We have fared better than most, because our performance is just a whole standard deviation above our competitors. The demand for income continues. Some of the previously hot new fund launches in that marketplace which were focused on technology, AI, robotics things like that, kind of fizzled.
And without a lot of pizzazz in the market I think investors just come back to REITS which have great absolute returns, great income and our product is -- stands out in the marketplace.
Going forward, -- I might add one other thing. Our best-selling fund is distributed primarily not by wirehouses but by regional banks. And so those flows have been and continue to be more sustainable, than those managers whose funds are distributed by securities firms.
Going forward, there is interest some new partners, on new products. Joe had spoken about earlier more broadly next-generation real estate which is portfolios focused on e-commerce and related sort of new -- next-generation real estate.
There's strong interest in that and other concepts. And we are hopeful that we'll be able to talk specifically in the very near future about new product offerings such as that, with new and substantial distribution partners that are incremental to our existing relationship lineup.
Great and just really quick -- and I apologize if I missed it. Did you quantify what the current, unfunded backlog is?
It's about $700 million.
Great, thanks for taking my questions.
Sure.
Thank you. There are no further questions at this time. I will now turn the call back over to Mr. Bob Steers to continue with the presentation or closing remarks.
Great. Well, thank you all for joining us this morning, and for your questions and we look forward to reconnecting next quarter. Thank you.
That does conclude the conference call for today. We thank you all for your participation. And we ask that you disconnect your lines. Thank you. And have a great day.