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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning to everybody from Frankfurt. This is Oliver Flade from Investor Relations, and I would like to welcome everybody to our Earnings Call for the First Quarter of 2024.Before we start, I would like to remind you that the upcoming Deutsche Bank Analyst Call will outline the asset management segment results, which have a different parameter basis to the DWS results we're presenting now. I'm joined by Stefan Hoops, our CEO; and Markus Kobler, our CFO; and Stefan will start with some opening remarks and Markus will take you through the presentation. For the Q&A afterwards, please could you limit yourself to the 2 most important questions so that we can give as many people a chance to participate as possible.And I would also like to remind you that the presentation may contain forward-looking statements, which may not develop as we currently expect. And I therefore ask you to take note of the disclaimer and the precautionary warning on the forward-looking statements at the end of our materials. And for this quarter, we would also like to make you aware of the following.In the interest of increased transparency and due to the different nature and dynamics of the businesses, DWS has decided to separately show assets under management and flows from Cash products and Advisory Services on the one hand and other assets and flows from the Active, Passive and Alternatives areas that are comparatively more long-term-oriented than the former. Going forward, DWS will therefore disclose within total assets under management the separate categories long-term assets under management, cash assets under management and Advisory Services assets under management. In terms of net flows, the corresponding categories within total net flows will be long-term net flows, cash net flows and Advisory Services flows.And with that, I will now pass on to Stefan.
Thank you, Oliver. Good morning, ladies and gentlemen, and welcome to our Q1 2024 earnings call. In the last few quarters, the opening statements of any asset managers' earnings calls could have been written by ChatGPT, using terms such as uncertainty, volatility, geopolitics and Central Bank action. Now we need to recognize that the last 2 quarters, including Q1 of this year, were quite different. We have seen a much welcome tailwind from market appreciation. However, given that investors remain in risk-off mode, there has been a greater appetite for Passive than for Active strategies.Given this new environment, our key focus at DWS has been two-fold. One, don't allow higher management fee revenues to get in the way of our continued cost discipline. And two, attract net inflows that will help offset margin pressure attached to the current Active to Passive flow mix. For the latter, we see continued progress, as reflected in our Q1 financial results. We reported another quarter of substantial net inflows in Q1 driven by Passive, including Xtrackers. Notably, we remain the #2 ETP provider in EMEA by net inflows, with growth outpacing the market and hence gaining further market share.In addition, we reported net inflows into Active Fixed Income and SQI, which helped to offset net outflows from Active Equity, Multi-Asset and Alternatives. To be clear, we are mindful that this flow mix is a challenge, but we draw comfort from our diversified product offering, which allows us to counterbalance the Active to Passive industry trend, and we also believe that we are well positioned for a turnaround in Alternatives. Furthermore, this positive flow momentum supported our quarterly increase in total global AUM, which is now at a record EUR 941 billion.Markus will provide further details on our financials later on, but for now, allow me to briefly highlight 2 points; our ongoing transformation program and the resolution of the ESC matter. Let's start with our transformation program. As indicated in our Q3 results call last year, we have been assessing the progress of our multi-year transformation program with the aim of improving our operational set-up and standalone capabilities.The assessment has now concluded and we've agreed on the following solution. We have decided to focus our efforts on areas that are differentiating factors for us as an asset manager. That includes a policy framework suitable for an asset manager and our own corporate functions for almost all areas where we've made significant progress. When it comes to IT infrastructure, we agreed on adopting a hybrid model. On the one side, we continue with our cloud migration into our separate DWS cloud environment. Again, a differentiating factor for us as an asset manager as this enables us to faster deploy our own asset management specific applications.At the same time, on the other hand, we will take advantage of economies of scale by partnering with Deutsche Bank and continue leveraging the bank's capabilities in areas that are well functioning, while not being differentiating, such as data center operations, networks or hardware. This hybrid model is in the best interest of DWS and offers the best level of security and stability in the IT landscape as we seek to avoid solutions that are needlessly complex in areas where things currently work well.At this stage, we have to acknowledge that the initially targeted cost saves are not achievable due to a variety of reasons ranging from inflation to an enhanced cybersecurity threat landscape. And while we do not expect the outlined hybrid option to generate cost savings compared to our current run rate, this option is in fact cheaper than a full separation due to Deutsche Bank's scale and reduced transformation costs.Another area that I would like to update you on is the ongoing ESG matter. As you know, the U.S. authorities closed their ESG-related investigations last year. With that, the investigation by the Frankfurt Public Prosecutor's Office is the only remaining ESG investigation. However, as stated previously, the timeline for completion is not in our hands. As we've said before, we provided documents and information to the Frankfurt Public Prosecutor's Office at their request.Recently, we increased our inventory of other provisions, effective year-end 2023, which also includes provisions required for matters such as the Public Prosecutor's investigation into the ESG allegations. While the outcome of this is yet to be concluded, this means that we are making progress with regards to the Frankfurt Public Prosecutor. We will continue to cooperate fully to come to a resolution of this investigation as quickly as possible, but we are dependent on the timing of the Prosecutor's Office.Now coming back to the purpose of today's call, our financial performance and the way forward. Overall, we had a solid first quarter of positive net inflows as well as continued cost discipline and focused implementation of our strategic plan. And as we approach the halfway point towards our financial ambitions, as announced at our Capital Markets Day, we will provide more clarity and transparency on how we assess our progress and outline a bridge towards our 2025 targets.But for now, I would like to hand over to my partner, Markus, to explain our Q1 results.
Thank you, Stefan, and also good morning, and gruezi mitenand from my end.Our first quarter 2024 results indicate that we are on track to achieve our 2025 strategic targets with a quarterly increased adjusted profit before tax totaling EUR 231 million. The adjusted cost-income ratio further improved to 64.7% being down quarter-on-quarter and year-on-year. Long-term net flows were at EUR 7.9 billion, strongly supported by Passive, including Xtrackers. Total assets under management increased to a record level of EUR 941 billion and our alpha creation for our clients was underlined by further improved 3 and 5-year outperformance ratios of 71% and 80%.Moving on to the financial performance snapshot in the first quarter. Starting at the top left, total assets under management increased by 5% quarter-on-quarter to EUR 941 billion, a record level for DWS, mainly driven by inflows and positive market impact. On the top right, adjusted revenues totaled EUR 653 million being essentially flat versus the fourth quarter. Increased management fees were leveled out by lower performance and transaction fees, which follow a seasonal pattern. On the bottom left, adjusted costs decreased quarter-on-quarter and totaled EUR 423 million. This resulted in an adjusted cost-income ratio of 64.7%. Thanks to the positive operating leverage, the adjusted profit before tax increased on a quarter-on-quarter and year-on-year basis and stood at EUR 231 million.Let's recap the market environment. The year continued with tailwinds from the market environment with stock indices being at new highs. European stock specifically having more than 8 consecutive weeks of gains, the longest winning streak since 2018. The rate environment experienced some volatility since the beginning of the year as better than expected U.S. economic data coupled with persistent high inflation-led markets to scale down expectations for rate cuts. The rise in the higher for longer rate sentiment had some positive impact on yields, which started to pick-up at the end of the quarter. All in all, market appreciation had a favorable impact on our quarterly AUM development, which I will now outline.We reported EUR 941 billion of total assets under management at the end of the first quarter, up 5% quarter-on-quarter and being at a record level. The increase was supported by all 3 components; EUR 30 billion of positive market impact, EUR 8 billion of net inflows and EUR 7 billion of ForEx movement. Total net inflows of EUR 8 billion were predominantly driven by our Passive products, which grew by 12% quarter-on-quarter to EUR 275 billion. Our Passive business has grown by almost EUR 80 billion, around 40% since the Capital Markets Day, where we announced refocused on Passive as one of our strategic priorities. Our Active asset classes benefited from the continued market tailwinds and net inflows, which led to assets under management of EUR 443 billion. The market sentiment for Alternatives continued to be challenging with assets under management remaining flat at EUR 109 billion.Moving to our flow development. In the first quarter, we generated total net inflows of EUR 7.8 billion and EUR 7.9 billion of long-term net inflows. We are reporting net inflows in Active and continue to see strong momentum in Passive with both asset classes over-compensating the net outflows in Alternatives. Our Passive business remains to be the key flow contributor with EUR 9.3 billion of net inflows in the first quarter, driven by Xtrackers and our institutional mandate business.We continue to attract flows with our thematic ETFs, such as Xtrackers, artificial intelligence and big data with around EUR 800 million of inflows and Xtrackers, MSCI World, Healthcare with around EUR 400 million of inflows. The continued strong performance led to an increase in our overall EMEA ETF market share of 10.5%. The year-to-date growth again continued to outpace our market share, which is helping us to narrow the gap and getting closer to the #2 position for ETPs in Europe.For the Active business, we have returned to net flows of EUR 0.9 billion in the first quarter, being driven by Active Fixed Income with EUR 1.7 billion and Active SQI with EUR 1.5 billion. This development was partly offset by the continued low customer risk appetite and the ongoing trend to move from Active to Passive, hereby specifically in equity, resulting in net outflows of around EUR 1.8 billion in Active Equities. Despite the trend in Active Equities, we also see positive examples where we generate inflows, thanks to our investment performance, innovation or distribution alpha like our DWS ESG Akkumula fund with around EUR 300 million of inflows, which benefited from a strong investment performance and retail clients moving back to global equity blend strategies. The rate environment and challenging market conditions in real estate and liquid real assets led to EUR 2.2 billion of net outflows in Alternatives.Overall, Q1 marked a solid start in terms of flow performance, further supported by new product launches, which continued to be important flow drivers for DWS, as I will now explain. To sustain our market flows and grow revenues, we have given product innovation a high importance level within our organization. For the first quarter, we would like to highlight the following product launches.In Alternatives, we have launched Xtrackers RREEF Global Natural Resources ETF, our first Active ETF in the U.S., and launched the 4th Series in our private European infrastructure strategy. We have enlarged our ESG offering by launching DWS Invest Net Zero Transition and DWS Invest ESG Euro Corporate Bonds Long on the Active side and expanded our Passive ETF offering to provide investors access to the next generation thematic trends by launching MSCI Global SDGs, Social Fairness Contributors UCITS ETF and Xtrackers MSCI World ex-USA UCITS ETF.Furthermore, our partnership with our strategic ally, Galaxy Digital, has delivered another important milestone in our digital asset strategy. We have launched our first 2 Xtrackers Cryptocurrency ETCs giving investors easy access to Bitcoin and Ethereum. Looking ahead, for the second quarter of 2024, we continued to meet our client needs by expanding our ESG offering in the liquid real asset space with the Xtrackers Developed Green Real Estate Fund launch. In addition, we will be completing our Active product offering with a Japanese value equity fund, the DWS Concept Nissay Japan Value Equity.Since the Capital Markets Day in 2022, we have managed to grow the number of our flagship funds by just above 20%, which was roughly driven by about 1/3 of flows and 2/3 as a result of positive market performance over that period and especially during the last quarter. Our efforts to match our clients' needs with the right product offering are underlined by a solid EUR 61.6 billion inflows through new funds since the IPO. The demand for sustainable products continues and is reflected in around 41% of our new fund flows generated by ESG products. The ESG inflows amounted to EUR 1.7 billion in this quarter, of which EUR 2.2 billion were Article 8 and 9 products.Moving on to revenues. Total adjusted revenues amounted to EUR 653 million in Q1, essentially flat versus the fourth quarter, but up 7% year-on-year. Our management fees stood at EUR 592 million, up quarter-on-quarter and year-on-year, benefiting from a 5% increase in our average total assets under management, which amounted EUR 917 billion. In the first quarter, we reported a flat total management fee margin of 26 basis points versus the fourth quarter, leading to a quarterly margin, which is slightly below our full year '24 guidance of 1 basis point margin compression per year.The margin development can generally be impacted by 3 major factors. Firstly, fee cuts. This quarter, we had no material fee cuts for Active and Passive products. Secondly, market development. We experienced an uplift in the margin, thanks to the higher average total assets under management levels driven by market tailwinds, especially seen for Active Equity products. And lastly, the flow mix. In this quarter, our product flow mix had a detrimental impact that offsets the market appreciation-driven development.Here, the flow impact was two-fold. Firstly, the impact from very strong Passive net inflows; and secondly, we continue to experience outflows in some high-margin products. Let me reiterate. We are comfortable with changes in the overall DWS margin, if it is driven by faster-growing, lower-margin asset classes under the premises that those flows are accretive to overall revenues, i.e., additional revenues are above incremental costs. And lastly, on margin, our total fee margin guidance of 1 basis point dilution remains unchanged in 2024.Performance and transaction fees stood at EUR 17 million. The first quarter is typically a quarter with seasonally lower performance fees as they are normally recognized in the fourth quarter, which explains the quarter-on-quarter development. Other revenues were flat quarter-on-quarter, including a EUR 14 million contribution from our Chinese investment Harvest.Moving on to costs now. Total adjusted costs stood at EUR 423 million, down 2% quarter-on-quarter, resulting from lower adjusted general and administrative expenses. The cost components were driven by the following impacts. Adjusted compensation and benefits amounted to EUR 222 million. The quarterly increase was driven by the normalization in variable compensation levels as there are usually some adjustments in Q4 and impacted by the positive share price development. Despite further investments in our targeted growth areas and inflationary pressure, we managed to keep our fixed compensation stable. Adjusted general and administrative expenses strongly declined quarterly and amounted EUR 200 million, thanks to the usual seasonal effects in Q4 and stayed unchanged from Q1 2023.Our adjusted cost-income ratio decreased on a quarter-on-quarter and year-on-year basis to 64.7%. That is in line with our full year 2024 guidance range of 63% to 65%. This reflects our focus on sustaining cost discipline, especially in a continued high inflationary environment. The total adjusted cost base excludes EUR 17 million of investments into our infrastructure platform transformation in Q1 2024. Thank you.I will now hand over back to you, Stefan, for closing comments.
Thank you, Markus. While we have been called a show-me story, and understandably so, we are highly appreciative of the trust and faith our shareholders have shown us in recent months. Continuing in the spirit, we will provide transparency on what has been working and what has not been working so well. And we remain laser-focused on delivering our 4 strategic categories of Reduce, Value, Growth and Bid, which will help pave the way forward towards our 2025 financial targets.As a reminder, our financial targets are straightforward and ordered in terms of hierarchy of what we consider key to creating stable shareholder value. Firstly, our commitment to deliver an earnings per share of EUR 4.50 is the most important target for us as it is simple, honest and clearly our top priority as it is what we do for our shareholders. Generally speaking, we aim to grow all businesses that are EPS accretive, even if the management fee margin is below DWS' average. Therefore, we are happy with our strong growth in Xtrackers even as the flow mix dilutes our average margin.Adjusted cost-income ratio is second in the rank of targets as it enables us to measure profitable growth. We believe that the cost-income ratio is for asset managers, what leverage ratios are for banks, a measurement for how well companies are prepared for a weaker market environment. A high EPS, but with a high cost-income ratio is dangerous as market volatility can quickly impact the bottom line. Hence, we're targeting a sustainable adjusted cost-income ratio of below 59% and are confident of achieving this goal. Finally, our AUM CAGR targets for Xtrackers and Alternatives were designed to demonstrate how we are investing into growth businesses as part of our overall strategy, as outlined at our Capital Markets Day.Now as we close the halfway point of our 2025 financial targets, allow me to attempt a self-assessment of our strategic plan so far, starting with the Reduce category. As you know, we started taking out costs early to create self-funded investing capacity with the bulk of our Reduce strategy already concluded last year. We will obviously always be cost conscious and have ongoing initiatives to focus on our core competencies in businesses and churn, we only compete where we are able to add value to our clients.Looking at the Value part of our strategy, our Active Fixed Income, Equity, Multi-Asset and SQI, there's always some work to be done in what we consider to be the pumping heart of our franchise. We remain encouraged by the developments we have seen in recent quarters. Notably, the positive turnaround in our fixed income investment outperformance is a testament to the ongoing efforts we have made to adopt a positive performance culture within our investment teams. In addition, several of our flagship funds in Active Equity and Multi-Asset are holding up well in what is currently a difficult environment for these asset classes.Looking at our Growth strategy, we see progress, but also room for improvement. On the one hand, our Xtrackers business is going from strength-to-strength as the team has executed exceptionally well. As a result, Xtrackers AUM growth is significantly ahead of its CAGR target as investor appetite for ETFs has been far more favorable than what we originally anticipated in 2022. On the other hand, we have a steep hill to climb to achieve our AUM growth target in Alternatives as investor sentiment has been more muted for the asset class than expected. Nevertheless, we see investments in Alternatives as a longer term growth case, which requires stamina and focus and believe that a turnaround for Alternatives flows is on the horizon.In the Bid component of our strategy, we are laying the foundation for future revenue streams. In this respect, our partnership with the Galaxy Digital is paying off. You may have seen that we just launched our first 2 cryptocurrency ETCs. And we've also announced the incorporation of AllUnity, our joint venture with our partners, Galaxy and Flow Traders as part of broader efforts to create a euro stable coin.In the spirit of transparency, allow me to furthermore outline how we expect the path towards our 2025 financial targets play out. While doing so, please take a look at Page 11 of our Q1 results presentation, which shows the bridge I want to walk you through. Take our 2023 as a base when we reported a profit before tax of EUR 777 million in the full year and an earnings per share of just under EUR 3. This results in an approximate difference of EUR 1.75 compared to our targeted EPS of EUR 4.50. Given that we have roughly -- that we have 200 million shares outstanding, this means we need to grow our net income by roughly EUR 350 million and the profit before tax by between EUR 450 million and EUR 500 million compared to 2023.And while there are many small initiatives we have in place to help us achieve this, they all ultimately lead up to 3 big buckets of profit before tax contributions. First, a reduction in one-off items. Second, a higher level of performance fees. And third, an increase in management fees. Let's look at each of these more closely. Thinking in rough numbers and with the obvious caveat that we assume stable markets and that numbers can and will deviate to each site, the following scenario can help understand how we can hit our 2025 targets.In the first bucket, we expect to reduce our one-off cost items by approximately EUR 125 million versus 2023 as we should not be impacted by the elevated levels of one-off items we faced in 2023, which included transformation costs, legal provisions and organizational delayering. In the second bucket, we generally anticipate a higher level of performance fees as we expect an extra EUR 100 million from our Alternatives Infrastructure product, PEIF II. With the majority of assets have already been sold, but performance fees are only expected to kick in during 2025. And in the third bucket, taking into account the reduction in one-off items combined with higher performance fees, we need roughly EUR 250 million from management fees to keep us on track to achieve our EPS target.Let's only look at our long-term assets. If we use 2023 as a jump-off point and base our management fee calculations on current average margin of about 29 basis points for long-term assets minus [ custody ] costs, so say roughly 25 basis points net, this would require the equivalent of an additional EUR 100 billion of long-term assets above our 2023 average. In other words, EUR 100 billion of extra long-term AUM times 25 basis points gets you an extra EUR 250 million of management fees after custody costs. As we had EUR 751 billion of average long-term AUM last year and with current long-term AUM of EUR 827 billion, we believe we are on course to achieve this.Clearly, there are many more details to consider, such as market conditions and running a company is more complex than a few big picture numbers. Yet, this combination of cost discipline to ensure a flat adjusted cost base, fewer one-off costs, expectation of higher performance fees and AUM growth gives us comfort to reconfirm our 2025 financial targets of EUR 4.50 of EPS and an adjusted cost-income ratio of below 59%. Overall, we consider our financial targets to be a mere milestone on our path to finally punch our weight in the longer term. Obviously, we remain disciplined on cost control and we'll do our utmost to avoid any negative surprises. We appreciate our constructive exchanges over the last few quarters and look forward to continuing this dialogue in the spirit of transparency and clarity as we focus on further implementing our game plan.Thank you. And over to Oliver for Q&A.
Yes. Thank you very much, Stefan. And operator, we're ready for Q&A now. And if I may just remind everybody to limit yourself to the 2 most important questions that will be very kind. Thank you very much.
[Operator Instructions] Our first question comes from the line of Jacques-Henri Gaulard, Kepler Cheuvreux.
Yes. So I'm going to have also a rather transparent question. When you mentioned the fact that you had given up the idea of becoming completely independent from Deutsche Bank, that's actually a big announcement, because if I remember well, it was a pillar of the IPO targets. And in a way, it was to build an independent asset manager, et cetera. So at this point, and I'm not asking that question to the shareholder of DWS, but to you, doesn't it make sense to actually ask your shareholders at that point, it doesn't really make a lot of sense to remain listed and why don't you take us private? Because in a way, isn't that going to make it easier for you to actually get big assets, be able to actually grow by acquisition, grow the assets simply as rather than just being the independent company, you are -- that you aspire to be and that you're not now? So the question to you, Stefan, was do you still want to remain listed? Does that make sense? Is it even something you feel is sustainable in the future?
Well, thank you, Jacques-Henri. And I think that's exactly the sort of strategic exchange that we value. So I think we need to be clear that out of 4 components that we assessed when it comes to the transformation project, 3 out of 4, we are independent, right? So let me just -- happy to have a constructive discussion on it. But firstly, when you look at policies, previously, we had policies essentially designed for a global universal bank, which obviously includes a trading-oriented investment bank. And we reviewed all of the policies. And for those we feel it's relevant and differentiating, we aligned our policies with those of our competitors. So in a variety of areas, we now have policies in line with the Amundis, BlackRocks, Schroders and so on and not a global universal bank.Second, we have our independent corporate functions. So we have our own graduate program, our own accounts department, our own finance and so on. So previously, all of that was essentially DB Central and we got allocated costs. And the vast majority of that with a couple of exceptions, whatever, like tax, we are completely independent from a corporate function perspective.Third, when you look at software, we have our own DWS cloud environment. We have our own applications. There are plenty of areas in which we have apps different to Deutsche Bank. So also when it comes to software, we are completely independent and we have what we feel is differentiating.Now the fourth component is hard when I'm simplifying a little bit, but that's network. So who operates the WiFi in this building, it's data centers for backup, right, it's the printers, the screens. All of that has been delivered by Deutsche Bank up until now. And so the question was simply, is it sensible for us to buy all of that and create substantial transformation cost or is it simply in the best interest of our shareholders of DWS specifically to simply continue getting that from a master vendor. Now don't tell Deutsche Bank that I called them a master vendor in this regard. But to some extent, they are that for those hardware components. So all of that basically implies that we're not changing what's currently working and we certainly don't invest to move away.I think the one additional comment I would make given that I spent 4 years in being the plumber of Deutsche Bank and running custody and essentially taken ops for transaction banking, I have pretty -- a lot of paranoia of breaking things that work because sometimes when you try to optimize a little bit, you start spending a lot of time on things which are not differentiating. So never break a working system which has scale. And that's why there's a fourth out of 4 components, we decided to continue getting what we got from Deutsche.But I think, again, I'll let you decide Jacques-Henri, but when it comes to all the things that I think people would like to see from us, meaning strategy on flows, client strategy, M&A strategy, driving investment outperformance and all of that, we are independent and essentially defined on our own destiny.
Our next question comes from the line of Nicholas Herman with Citi.
Yes. Just returning to numbers, please. Just can I push you a little bit please on the outlook for Alternatives? So firstly, I have 2 buckets actually, just firstly on costs. Could you just please just help us understand how much higher share price drove the increased compensation costs this quarter? That would be helpful. And then on the Alternatives side, I think you've said that you've launched PEIF IV now. Can I confirm that that means the formal fundraising launch rather than fund activation? And can you confirm when you expect to have a first close of that fund and when does that fund start generating fees? And then as part of that, you mentioned a couple of times that you're well positioned for a turnaround in Alternatives. Are you talking about effectively the infrastructure fundraising or is it broader than that? So more detail would be appreciated given obviously pretty bleak trends in LRA and real estates?
Happy to start with the first question on compensation and benefits costs, and referring back to Page 10 of the analyst presentation. The increase we see in terms of comp and ben costs over the quarter of close to EUR 30 million is driven by variable compensation. I mean, it's very important to state that our fixed remuneration cost remained flat.On the variable compensation side, there are 2 factors playing into that. And the first one, and that is I mean, impacting us, but obviously, it's positive news what we call retention. An increasing share price reflects positively or increases the VC cost as our employees participate in that as well. And the second one is a seasonal effect one usually has in variable compensation because variable compensation is set in the fourth quarter, but we accrue, as everyone else, these expenses over the year. And so usually, one has then and which we had now a downward adjustment in the fourth quarter, but now in the first quarter again, we are accruing. So that's the difference. These are the 2 factors explaining the EUR 30 million. So nothing we worry about from a cost management point of view.
Could you just provide a bit of a broad mix split between the 2, please?
I would say, about 2/3 is -- I mean, quarter-on-quarter is about 230 is the adjustment, cash bonus adjustment and about 1/3 is retention, increasing share price.
So Nick, on your second question, a quick addition to the first one. I mean, we probably wouldn't typically disclose the retention, essentially the impact of the share price. But we're sort of proud of the share price appreciation over the last 12 months. So on the Page 10, if you compare Q1 '23 to Q1 '24, more than EUR 50 million of that increase in just comp and ben is just the share price. It's not carry, not any seasonality in variable compensation, just the retention costs, which hopefully you would agree, it is what it is. It's probably a positive thing. But I think most importantly, as Markus outlined, fixed pay, we remain stable.Now on Alternatives, and I will give a slightly broader answer because I suspect plenty of people do have questions on it and then people can ask follow-up questions if I should go into more detail. I think one of the things that we simply -- it is what it is, that 3/4 of our Alternatives AUM is exposed to real estate, either because it's real estate equity in the U.S. and Europe or within LRA, it's a weak, right? So 3/4 is exposed to real estate and that has been quite rough. Again,I don't want to sound defensive because I'm reasonably bullish on the business overall and we recorded growth. But that was just a difficult market sentiment. I think 3 months ago, we were probably slightly more optimistic on rates in the U.S. coming down. Obviously, the last quarter has like reversed to some extent. But we feel that the client interest is now stabilizing, right? So when we talk about turnaround on the horizon that's based on feedback we get from clients.The question you asked on new funds, I mean, you specifically asked about PEIF IV, but let me just quickly walk you through kind of different components and what we're currently actively raising because the number of fund launches is roughly twice of what we had last year. And then again, people can ask follow-up questions if it's of interest. So I'm basically doing it in the order of how difficult the market sentiment is. So in LRA, we have the fund that we have, to like what Markus mentioned earlier. We launched an Active ETF with our global natural resources folks managing it. So we combined our LRA capabilities and essentially the wrapping capabilities of Passive and have launched an Active ETF for Global Natural Resources.I think probably second most difficult is European real estate. There, we have a variety of discussions on specific solutions, right? I mean, there's a lot of turmoil in the German real estate market. We have been completely unexposed to any of those like big brand names that went into difficult territory. So we I think are in a good position to advise clients that have some challenges, but there's no big fund launches.In U.S. real estate, we have a couple of fund launches. So we had our first close of our Core Plus Residential Fund in Q1. We're actively marketing our logistics fund. So I think there we see, and I think the first close in Core Plus Residential shows that the people are starting to, I don't want to call it the bottom, but to differentiate between office and large city, and let's say, residential or logistics.For infrastructure, the PEIF IV is currently in active marketing. We expect the first close -- I mean, this year, I would like to say Q3, I mean that's what we're aiming. Could it slip into Q4 potentially, but very high confidence that it's in the second half of this year, actively marketing, I'm involved in that. So I think that we will accrue or start accruing management fees in 2024. We have a variety of other smaller things in the infrastructure space. So our retail-oriented infrastructure fund that essentially allows small retail investors to invest, that's going fine, but we've added to that in Q1. We have a sustainable growth. I mean, we have variety of other smaller things, but the PEIF IV active marketing, we expect to start accruing.Lastly, in private credit, and I would assume that a couple of people have questions on private credit, a couple of things we're marketing. So I think we're getting closer on the first CLO that should come this year. We are marketing the second series of our European Direct Lending Fund and expect the first close of that this year. And a couple of others like more solutions-oriented bespoke mandates that we have visibility on. So it's like when I said that turnaround on the horizon is a combination of client sentiment, which seems to have stabilized and it's probably more differentiated, meaning office is different than resi or infrastructure and so on, and essentially doubling of fund launches and good feedback from the marketing phase.
The next question comes from the line of Angeliki Bairaktari, JPMorgan.
If I may just first touch on the costs and sort of the methods that you delivered in the beginning of the call with regards to the savings. So I think you said that the initially targeted cost savings, which from memory, there were EUR 100 million presented at the Capital Markets Day, they are not achievable due to inflationary pressures. But at the same time, I heard you reiterate your target for cost-income ratio of below 59%. And I think I also heard you say that you have assumed in sort of those 2025 targets to get to an EPS of 4.5%, you have assumed flat adjusted costs. So I just wanted, first of all, to cross-check that what I heard is right that the assumption is for flat adjusted costs versus 2023 and 2025.And then second question with regards to sort of the sustainability of the cost trajectory and the cost-income ratio. I do hear you with regards to PEIF II performance fees that those should be higher and that's going to help 2025 numbers. But -- and what is the total carry potential from this fund? And for how many years shall we expect this elevated level of performance fees? In other words, is there a risk that after 2025 we then slip back again towards 65% cost-income ratio?
Angeliki, I will start because Markus obviously is well aware of what we said at the Capital Markets Day, but he wasn't there yet. So let me start. At the Capital Markets Day, we always spoke about a variety of cost components. We spoke about -- we take out costs to reinvest and then we gave a number. We said that we will reduce the running costs, meaning essentially the allocations from DB because we'll do things ourselves. We spoke about transformation cost of EUR 100 million that will appear for a couple of years. And I think what we sense at some point is that it's probably easiest to refer to what you see, which is the 2023. So our -- when I made the comment of, we do not expect cost saves versus what you've seen in 2023, it's just in order to simplify because things have obviously evolved since then.So therefore, when it comes to the transformation project, if you look at what we paid in 2023, that is what we expect as running costs in '25 and beyond. Now what you saw in '23 was also high transformation cost, so about EUR 100 million, and that we expect to disappear in 2025 or materially disappear. I think if you dig into our numbers in Q1, you will see that the one-off items in Q1 were, I don't want to say only, but were about EUR 20 million. So if you compare that to the EUR 170 million, which we had in '23, you already see a reduction because of no further litigation, no restructuring, so much less restructurings, but also lower transformation cost.But I think to confirm, at the Capital Markets Day, we are quite hopeful that if we discontinue getting certain services from DB and simply do it ourselves that we could operate it cheaper than DB and that fortunately doesn't hold true. There's inflation. It was very difficult, as you would imagine, to renegotiate license fees in 2022, 2023. It was more complex. I mean a variety of reasons, I'm simply saying that we don't expect cost to go up, but we also don't expect them to go down from what you see in the 2023 run rate. But on the adjusted cost, I think the way I would phrase it is anything which is not volume based, we aim to remain flat. So Markus and I, the whole company is very disciplined on fixed pay, very disciplined on G&A, as you have seen. If AUM grows, I think there's a good chance that total cost will go up simply because of custody fees. But again, what we can control, we aim to keep flat in '25 versus '23.Now PEIF II, and I probably wouldn't want to disclose specifics, essentially fund documentation. But the easiest way to think about it is we have an approach to booking the performance fees, which as all of the investors get repaid in full and get to a pref rate, that's essentially the cash flow definition, after the pref rate, we get our carriers, we essentially get a catch-up on performance fees and then it's split in a certain way. Now the way that we've been accounting for it is to simply show zero during the phase of investors getting their money back and getting the pref rate and only then we would do the, let's call it, true-up.Now at this stage, we essentially add the money. So at this stage, we have sold enough assets that I think the investors are satisfied with repayment and their pref rate and the next sales will essentially generate the performance fees for us. Now that should be a couple of hundred over a couple of years. So meaning, this is not going to lead to essentially an extra revenue stream for eternity. However, expect this for '25, '26, maybe a bit in '27. And at that point in time, we're obviously working on a variety of other vehicles creating performance fees. I mean, PEIF III will come at some point and other things in private debt and real estate. So that's why we're reconfirming our performance fee target of 3% to 6% of revenues expected to be elevated because of those extra kickers in '25 and '26, but obviously, working hard to also increase it afterwards.I hope that sort of answers your question, Angeliki, otherwise, I can go on more detail?
Yes. Just maybe one follow-up on this one, and that's very helpful. In terms of the sort of long-term sustainable cost-income ratio that you think DWS should operate that, is that 59%? Because I would argue that 2023, if we look at markets, obviously, we had quite a lot of market appreciation. And Q1 '24, similarly, the market indices were quite constructive. So -- and you've operated at 64% under this environment. So -- and I would imagine we'll continue to see Passive gain market share over the next few years in the industry as a whole and for DWS as well. So I'm just wondering, is 59% what we should have in mind as a sustainable cost-income ratio for you or is 64%, 65% more sort of the run rate?
So you're right. I just remembered that you asked specifically about that and I didn't answer that. So firstly, I think what you will have seen in Q1 is that there is substantial compression between adjusted and reported, right? So by us bringing down the adjustment items, we essentially get -- we don't have this -- so like last year, we had like in Q4, 9 percentage points difference between adjusted and reported. And obviously, we feel for our shareholders who want to make sure that what's reported, what's actually payable is what we're targeting.I actually like being called a show-me story, we've aimed to under-promise and over-deliver. So I don't think we would want to change any guidance for the 59%. But I'm obviously speaking to an elite group of mathematicians, with all of you. So if we are able to keep costs flattish and keep discipline on costs and continue growing the business, then there's no reason why we should get back into the 60s after 2025.
The next question comes from the line of Bruce Hamilton with Morgan Stanley.
Maybe 2 from me or 3 on the Alternatives business. How do you think about the asset mix sort of evolving over the next 3 to 5 years? So you're currently 3/4 real estate. And so how ambitious should we be in terms of the growth potential in private credit and in terms of broadening out?Secondly, on the sort of Asian opportunity. I think in the past, you've mentioned that Japan -- I mean, obviously, there's a lot of folks on Japan for many of your peers at the moment. You said, you have a good, but perhaps under-managed or under-valued franchise there. So how are you thinking about that? And what's your degree of excitement or is it more elsewhere, India, continued growth in China that would be your focus?And then, sorry very last one, on the equity performance. I guess, the 3 years now drifted a bit below 50%. How much of a risk is that do you think to ongoing flows or in terms of your client engagement from what you're picking up with institutional and other clients?
And because we like all of those questions, we'll answer all 3, even though everybody is only getting 2, but look, we'll make an exception for you. I think I will start and Markus will jump in if I'm forgetting any points. So on Alt, I think it's difficult. I mean, it depends on what horizon you look at. I mean, we have the ambition of being the largest provider of Alternative credit in Europe over the next couple of years, right? We're young, we're ambitious. Well, that this is going to be until '25, definitely not '27, probably not 2030 hopefully. And when you look at how much the largest have right now in Europe, that should be meaningful, right? I think I would expect it to be larger than infrastructure over time. And infrastructure is 15%, but again, now we're talking about like late 2020. So -- but that's essentially the ambition that we have and the ambition that essentially got pretty senior well-known people in the market to join DWS.I would imagine real estate to continue doing -- to feature pretty prominently in our Alternative mix. I mean, we like really to say, we're actually quite good. If you recall, in Q2 last year, we won a substantial mandate in the U.S. because people like the traditional RREEF set-up and like what they do. It's just an incredibly out-of-favor component of Alternatives, but we actually like real estate. So I wouldn't -- I think it will go down this year because private credit goes up and infrastructure probably grows faster than real estate. But I would imagine it always being in, I don't know, maybe 60% of contribution even in 5 years. And I think the rest is probably too hypothetical. Obviously, private credit has a large group of fans and it's very difficult to find an asset manager not excited about private credit, which is why we'll stay disciplined in Europe. But that's probably how I would look at it.In Asia, and you asked specifically about Japan, I mean, we currently rank, I think it's 32nd out of the foreign asset manager in Japan, and that's probably not where we should be. I mean, they are -- I think I know most of my peers, but there are a couple of names ahead of us that I had difficulty remembering or knowing what they do. So that simply shouldn't be the ranking of DWS in the market in which Deutsche Bank is a top 3 international franchise or foreign player. So I think Japan and Germany have pretty good relations at a country level. I think the Deutsche Bank brand is light, [ flicking ] the circle of trust. The DWS name in Japan hasn't changed over the last 6 or 7 years. So I think they are still called Deutsche Asset Management, but seem to profit or benefit from that name recognition. And so we simply shouldn't be a 32nd.We changed the country, have a pretty young, ambitious, but still a very versatile person at feet and are pretty ambitious when it comes to organically growing in Japan, especially given that Nippon, our 5% shareholder, obviously can open doors. So when I say exciting, I'm definitely not excited about our ranking. It's probably too easy to say, well, there's so many -- there's so much upside because there's a reason why we rank where we rank. But I think that there should be a substantial organic upside in Japan.I think on Equity, the -- and hopefully, I don't come across as defensive, but the story is not dissimilar to Alternatives that were simply exposed or we're not exposed. But what we can do well as DWS is essentially the sort of out-of-favor component of Equities. So we are very strong in income, very strong value, very strong German and the Magnificent 7 didn't help. So when you think about why people give us money, EUR 1 in EUR 3 that are invested in Active German Equity come to DWS. EUR 1 in EUR 4 that are invested in income strategies come to DWS. But while I'm a proud German, I think our country is probably not hyped right now, so there's not a ton of demand for Germany. And look at what happened over the last couple of quarters. So income value hasn't really been name of the game.So therefore, I think when you look at our strategies, I think we've suffered a bit from being really good in areas that we're a bit out-of-favor. We're not changing our style. But I think when I said that those funds have held up well, they've held up well from an investment performance. Sometimes their peer group is quite mixed. So meaning the peer group includes competitors with a different strategy and just all banded together. So that's why performance is somewhat misleading in Equities and a fund like top dividend is like tracked differently. But therefore, I don't expect -- I think people give us money because they know what we do for them. And I'm optimistic that value will return and that income will feature prominently going forward. So it's why there's no change in how we look at our Equities franchise.
The next question comes from the line of Hubert Lam, Bank of America.
I've got 2 questions. Firstly, on your Passives or Xtrackers business. I know Markus mentioned there was no pricing cuts in Passives, but what are your feelings around pricing over the near and medium term? Should we expect more price cuts to come in terms of how many basis points you expect possibly per year to come through there? And also, obviously, we know about the structural shift towards Passives, but just wondering what you view as to your strengths of your strong growth there? Is it your distribution, the product line-up, et cetera? Just wondering to one of your thoughts around the Passives business.And secondly, on your Alternatives business. I know your target -- you have in your targets, you expect it to grow from at over 10% AUM CAGR, and now that seems -- does not seem that achievable unless you tell me otherwise or what do you think is more of an achievable growth rate for 2025 compared to your 10% that you had originally targeted?
While we were on mute, Markus jokes and said that apparently he's much more clear in what he says than I am because I'm getting out of the follow-up questions. So maybe Markus should do my part next time. So Passives and Alts. So on Passive, firstly, when you look at the average margin of Passive, it actually increased a little bit in Q1, meaning we had gross inflows in higher margin strategy that we had across outflows. To give you an example, Markus referred to our AI and Big Data ETF, which we raised about EUR 800 million in Q1, that has 35 basis points. I mean, our Eth and Bitcoin ETPs have also 35 basis points.So when you look at our Passive, we will aim to continue being creative and not just do index replication. And I think for creative strategies where you simply allow people to get exposure to, I don't even want to call it niches, I mean, I think AI and big data is in a niche, but in something somewhat innovative and flavor of the year, people are paying for it. And so therefore, I think in Passive, I'm actually reasonably optimistic that we don't have to make price cuts for existing strategies. I'm also reasonably optimistic that we will be able to continue designing strategies that allow us to essentially ask for fees in line with the numbers I just quoted.So I think that -- you asked about the strength in the business. I think we're pretty strong when it comes to digital distribution. Roughly 1/4 of our inflows in Q1 stem from digital distribution channels, which is up quite a bit. So we are close to the new brokers, we're close to platforms and so on. I think in the past, we once spoke about what we are doing in Asset Management-as-a-Service. Maybe in the next couple of quarters, we'll give an update. Obviously, I've been more focused on stable coin and the crypto ETPs, but that's the third thing that that team is working on. So that's something which has been additive to have those channels.So I think the strength of our Xtrackers Passive franchise is really a combination of very, very good people. So when we said that they've executed exceptionally well, it's a combination of creating creative new strategies, being good in selling it, but also being pretty strategic in new distribution channels, like the ones I just mentioned. Secondly, I think our tech is really good. I mean, I think on Active ETFs, it's sometimes underestimated. I mean, sometimes when I hear people talk about Active ETFs, it appears as if you can take a mediocre asset manager such as Rapid and you have Warren Buffett, that's obviously not the case. You need to have good competent active asset managers like us and LRA and then the competency to actually wrap that which we have. So I think the tech is very good. And I think thirdly, we have sort of German engineering and the processes. So we win Passive mandates because people just trust us to be able to deliver what we do, what we've promised, we have a low tracking error. So I think the processes are quite good. And that's why, I mean, they have been growing quite nicely with about 17% market share of inflows in Q1 and have now grown market share to 10.5%. So I think we like what we see.Now in alternatives, that is the more challenging part. I mean, when we said that we expect a 10% CAGR over 3 years, obviously, we didn't expect to shrink in the first year. I mean, like we didn't design a path which is like down in the first year and then up 15% for 2 years in a row. So we are behind. And I think when -- if you remember at the Capital Markets Day, Hubert, we said that we expect about 3/4 of the 10% to come from flows in 1 quarter for market, there's definitely been no help from the market, but also no real inflows. I mean, we had positive inflows last year because of the one big -- in Q2, the one big portfolio we took over. But obviously, also the inflows were much lower than we had expected.I am still optimistic that second half of '24 is going to look better, that '25 is going to look better. I think it's a stretch to assume that we'll get to the 10% CAGR. But then again, we assume a 12% CAGR for Xtrackers and that substantially helped. So that's why I think in the script when I tried to say that the 2 important metrics are EPS and cost-income ratio and the other 2 more designed to explain how we invest those self-funded capacities, I think that's what I would probably -- that's how I would look at it. And there are always things that turn out better than expected, which is sentiment for ETF and somewhat tougher, which is the muted interest in Alternatives. But we definitely continue to push on both sides.
[Operator Instructions] Our next question comes from the line of Arnaud Giblat, BNP Paribas Exane.
I've got a couple of questions then. First, if I can check on what's been said in terms of the cost guidance that you're giving, is if you look at absolute adjusted costs from 2023, that's going to broadly stay flat in 2025. Is that right? And just an adjusting question to that is with a pick-up in performance fees, what is the variable component that is attached to that? That would be helpful to know.And secondly, a quick housekeeping question. Could you tell us when we should expect the payments of the special div? And probably a second question now is in terms of Alternatives, great to see you make progress in credit. I'm just wondering, if I'm looking at a traditional asset management and I think with a good distribution franchise where it's an obvious place to be hitting on the -- to leverage that distribution in private assets. And I suspect secondary is a good place to be looking at a number of traditional managers have built out the franchise organically and inorganically. I'm just wondering if that is at all on the radar?
Let me take I think the first couple of questions. Let me start and then you step in, again, in terms of expenses. As Stefan explained, it is about stable, except the volume-based contributions, and we have that both with regards to comp and ben as well as G&A. On the comp and ben, I said before, an increasing share price is also pushing the variable compensation cost up. Then you have an increase also of assets under management that again is a trigger for banking and banking services expenses. And that is again an important component of the G&A costs. So but -- I mean, excluding from that, we focus on all cost items, obviously. We continue to analyze all areas very, very disciplined. And what is also important is that by doing that, that allows us afterwards to self-fund investments, be it especially in the growth and build area.With regards to the carry component of performance fees, that's not an information which we would disclose, Arnaud. And then the other one on the dividend, and again, the dividend procedure is as follows. We have the AGM on the 6th of June, 2024. And then there will be, I mean, a very -- I mean, structured process afterwards with the pay date expected on the following Tuesday, on the 11th of June. So that's the process. But obviously, depending on the approval by the AGM on Thursday.And probably, Stefan, if you take up on the last one.
Yes. So a quick addition to the performance fee question. So for transaction fees, we obviously have no carry, like nothing. And in performance fees, as Markus said, we wouldn't disclose specifics. But there are some that we like a lot, like the Kaldemorgen performance fees because there's no real split. And I think all of you know the Kaldemorgen structure fairly well. So they have been doing fine this year as you would expect with depreciation of market. So we are pretty optimistic about the Kaldemorgen component for this year and maybe future years. But then anything Alternatives-related will have a typical split between house and the team. But we typically think of it in terms of net contributions, so the way it's being calculated internally.For private credit, so your last question. I mean, the reason why we feel we need to be very disciplined in saying that we want to focus on Europe is because to the point you made, we feel we have some positive differentiation, both in origination, which I think is more key and distribution. So I think in the origination side, and we could speak about it for hours, but I think most of the private credit competitors are mostly hunting or fishing in the LDO pond so they can look at private equity-owned companies. And then if they need private credit, then this is like open to all. And that's why they can originate. And when I say originate, in many cases, it's through banks.I think our approach in originating risk is I think is differentiating because it will benefit from DB originations through the corporate bank, could potentially benefit from DB origination through the investment bank, but could also benefit from origination, frankly, through BNP, Commerzbank or others because those are I think people we understand and understand what they will be able to take on balance sheet and whatnot. So we feel, Arnaud, that we are more differentiated on the origination side than distribution.But then again, on distribution, everybody hears about it and we are strong in the retail space. So we feel that with the retail being interested in Alternatives, we have the mechanism, meaning the wrappers, potentially also blockchain-based and there's a lot of hype around distributing Alternatives through retail, through blockchain and so on, being represented there. So we feel that we have the mechanisms to essentially represent access to those funds, but then also the distribution channels through our normal wholesale distribution. So we feel we are competitive, but again, very disciplined with the focus on Europe.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Oliver Flade for any closing remarks.
Yes. Thank you very much everybody for listening in, and please reach out to the IR team in case there are any open questions. Otherwise, I wish you a fantastic day. Thank you very much, and bye, bye.
Bye, everybody.
Thank you very much.