DWS Group GmbH & Co. KGaA (DWS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome, and thank you for joining the DWS Q4 2019 Investor and Analyst Conference Call. [Operator Instructions] I would now like to turn the conference over to Oliver Flade. Please go ahead.

Yes. Thank you very much, Emma, and good morning, everybody, from Frankfurt. This is Oliver from Investor Relations, and I would like to welcome everybody to our fourth quarter 2019 earnings call. Please be reminded again that the upcoming Deutsche Bank analyst call will outline the asset management segment results, which has a different perimeter basis to the DWS results that we are presenting today. I'm joined by Asoka Woehrmann, our CEO; and Claire Peel, our CFO. And as always, Asoka will start with some opening remarks and then Claire will take you through the presentation. For the Q&A afterwards, I would ask everybody to limit yourself to the 2 most important questions. And I would also like to remind you that the presentation may contain forward-looking statements, which may not develop as we currently expect. 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 now let me hand over to Asoka.

Thank you, Oliver. Good morning, and welcome, everybody, to the quarter 4 and full year results for DWS. Today, we can report our strongest quarterly financials, completing a year of really strong performance for our firm. During 2019, we completed a substantial turnaround. Reported net inflows in every quarter totaling an impressive EUR 26 billion for the full year and almost EUR 30 billion excluding cash. This represents a swing of nearly EUR 50 billion of flows between 2018 and 2019. This is also the highest annual net inflow number since 2014. We were able to gather net inflows in all 3 regions and all our focused strategies, reflecting a strength and the depth of our global diversified platform. Our strategic partnerships contributed nicely to these flows, accounting for a quarter of annual net new assets. Strong investment outperformance was also a big game-changer for our improved flow performance in 2019. After intensifying our focus on product performance, we saw 73% of our Active retail investment funds outperform their respective benchmark on a 3-year basis and 89% on a 5-year basis. This led also to a positive external recognition reflected in 193 funds now rated 4 and 5 stars by Morningstar. For us, this is a significant achievement. A strong investment performance is super important and the #1 driver for success in the challenging market environment for the asset management industry. And we are gaining more and more traction with our product innovations and ESG-related products as we are increasingly being recognized for our capabilities, product quality and performance as a stand-alone fiduciary asset manager. This traction was also reflected in our institutional business where we saw very good inflows, in particular with insurance clients. Moving to costs. Throughout 2019, we accelerated our cost measures so we can operate more efficiently going forward. We achieved the high end of our medium-term cost savings 1 year early by considerably lowering our third-party vendor costs across the entire firm and by optimizing our real estate footprint. These cost actions were complemented by healthy revenue top line, which was driven by market and product performance and by net new assets, resulting in a lower cost-income ratio of 67.6%, thus, significantly beating our target of full year 2019. This has put us well on track to achieve an adjusted cost-income ratio below 65% in 2021. These strong results make it possible for the DWS Executive Board to propose a dividend of EUR 1.67 per share to the Annual General Meeting, an increase of more than 20% from 2018 and in line with our payout ratio guidance of 65% to 75%. With that, I will pass now over to our CFO, Claire Peel, to talk about the financial results in detail. Claire, please?

Thank you, and welcome, everyone. Today, I will present the results and activities for the fourth quarter and full year 2019, starting with the key financial highlights. Adjusted profit before tax increased to EUR 266 million, up 56% quarter-on-quarter and 24% in the full year driven by increased performance fees. Adjusted cost-income ratio improved to 61.3% in Q4, mainly driven by higher revenues. The full year ratio was 67.6%, outperforming our guidance of approximately 70% by year-end 2019. Net inflows were EUR 13.2 billion for Q4, our highest quarterly inflow for the year, and supporting a 4% net flow ratio in the full year. This is in line with our target of 3% to 5% of net flows on average. Last year, we benefited greatly from our global and diversified investment platform particularly targeted growth areas, and with significant contributions from our strategic partnerships. Let's move to our financial performance snapshots in Q4. Starting at the top left, AUM increased 2% from Q3 to EUR 767 billion in Q4, supported by stronger net inflows. Moving to the top right. Adjusted revenues were EUR 687 million, up 23% quarter-on-quarter driven by the recognition of a significant Active Multi Asset performance fee in Q4. On the bottom left, adjusted costs increased by 8% to EUR 421 million, reflecting the seasonal uptick in compensation and benefits costs, and the adjusted cost-income ratio fell to 61.3% in Q4, a significant improvement from 69.6% in Q3. This resulted in an adjusted profit before tax of EUR 266 million in Q4. Moving to our full year performance. This year, markets have been constructive, enabling us to execute our strategic priorities effectively and deliver positive financial performance in 2019. AUM increased 16% year-on-year driven by favorable market and FX movements as well as improved inflows across most asset classes. Adjusted revenues were up 6% at EUR 2.4 billion driven by higher performance fees over the year. Adjusted costs were down slightly at EUR 1.6 billion with accelerated efficiencies partly offset by a number of nonrecurring cost items, such as the carried interest relating to one of our alternative investment performance fees in Q2. As a result, the adjusted cost-income ratio improved to 67.6%, below our guidance of approximately 70% for the full year 2019. Adjusted profit before tax increased to EUR 774 million in 2019 driven by stronger revenues. Let's recap on the market environment. At the start of 2019, we were cautious but constructive on equity markets following a challenging and turbulent 2018. Last year, market conditions were less volatile, helping to drive improved investor risk appetite particularly in the retail space. In contrast to last year, the fourth quarter was the most positive of 2019. All major equity indices traded at higher levels in Q4, resulting in improved investor risk appetite, particularly in the European retail market. Bond yields also bottomed out after deteriorating in the third quarter, while fixed income interest rates started to trend upwards, which had a positive impact on the fair value of guarantees. In the fourth quarter, we also saw U.S. dollar depreciate against the euro but remained positive for the full year. Overall, market conditions were more favorable compared to 2018, helping to contribute significant AUM growth at DWS in 2019. Moving more closely on to AUM development. Assets under management grew to EUR 767 billion in Q4, an increase of EUR 15 billion in the fourth quarter and an increase of EUR 105 billion in the full year. Market performance was the primary driver of the annual increase, further supported by positive FX, while net inflows were a key contributor of quarterly asset growth and in the full year, making a significant turnaround from 2018 redemptions. Let's look more closely at the composition of net flows. The fourth quarter marked our strongest quarterly flow performance of 2019 with EUR 13.2 billion of net inflows and EUR 14.8 billion excluding cash. Passive was a key flow driver with inflows accelerating to EUR 6.2 billion in Q4 and EUR 19.1 billion in the full year, more than double 2018 inflows. ETFs and ETPs accounted for the majority of quarterly inflows driven by positive momentum in the European and U.S. markets, while mandates significantly contributed to the full year inflows, reflecting successful continued efforts in expanding our institutional client base. Alternatives have been and will continue to be a key growth area for DWS. Inflows in Alternatives more than doubled to EUR 3.7 billion in Q4 versus Q3 and reached EUR 10.2 billion in the full year, up significantly from 2018 inflows. Quarterly and annual alternative inflows were driven by illiquid alternative products, mainly from real estate and infrastructure funds, which continue to attract investor interest in the low-yield environment. We have seen this through continued demand for our new Pan-European Infrastructure Investment Fund, which had its first close in the fourth quarter; and our flagship real estate fund family, Grundbesitz, which sustained positive flow momentum with EUR 3 billion of net inflows in 2019. In light of stronger equity markets, the fourth quarter was also positive for a number of our Active asset classes. Active Multi Asset completed a year of solid flow performance contributing EUR 3.3 billion of inflows in Q4 and EUR 7.2 billion of inflows in the full year, reversing the 2018 outflows. Flagship retail fund Concept Kaldemorgen was the key driver of Q4 and full year inflows, reflecting strong investment performance and increased investor appetite in the low-interest rate environment. Dynamic opportunities and champions funds also reported strong inflows, and we saw a number of sizable institutional mandate wins throughout 2019. Active SQI also shifted into positive territory with EUR 2.5 billion of inflows in Q4 and EUR 1.5 billion in the full year driven by increased institutional demand. And for the first time this year, Active Equity recorded positive flows in Q4 as equity markets strengthened over the quarter driving increased retail risk appetite. This includes inflows into flagship top dividend and inflows reported across Germany, France and Spain, and also in equity's positive flows into a couple of our ESG equity funds and into U.S. retail Active Equity. In the full year, equity redemptions were driven by institutional outflows offsetting European retail inflows, although these have stemmed significantly compared to 2018. Overall, Q4 inflows concluded a very strong 2019 flow performance at DWS. In the full year, we reported EUR 26.1 billion of net inflows and close to EUR 30 billion excluding cash, reflecting the strength and depth of our diversified business model in the current market environment. We recorded positive flows across all of our core regions and across retail and institutional channels, further supported by our strategic partnerships who accounted for 1/4 of the annual inflows. By product, we saw consistently strong inflows into our targeted asset classes of Passive, Alternatives and Active Multi Asset as well as improvements across all other asset classes, including fixed income, which has seen outflows slow significantly compared to 2018. The turnaround in 2019 flows was partly driven by the recovery in our Active retail investment performance, resulting in stronger inflows into a number of our flagship funds as well as positive flows in our insurance and U.S. businesses, which were negatively impacted by U.S. tax reform in 2018. This is a great success for DWS and is reflected in the 4% net flow ratio for the full year, in line with our medium-term guidance of 3% to 5% on average. Moving on to product launches. ESG continued to be a prominent theme in our Q4 product launches, in line with every other quarter of 2019. This included ESG versions of existing equity and fixed income funds, reflecting the growing demand for sustainable investments particularly from institutional investors. We also successfully completed the first close of the new Pan-European Infrastructure Investment Fund, reaffirming continued strong interest in the asset class. Looking forward to Q1, we have a solid pipeline of products, reflecting the outcome of excellent collaboration and innovation at DWS. We have worked closely with our strategic partner, Nippon Life Group, to develop a new equity ETF designed to target institutional investors in Japan. And we have harnessed our internal capabilities to bring the best of ESG and illiquid alternatives to create the new DWS Invest ESG next-generation infrastructure fund, which is expected to offer an attractive combination of growth and quality real asset exposure in the current low-yield environment. Moving on to revenues. Total adjusted revenues increased to EUR 687 million in Q4, up 23% quarter-on-quarter. Quarterly management fees and other recurring revenues increased by 2% quarter-on-quarter, benefiting from positive market conditions and net inflows, while performance and transaction fees increased by EUR 87 million due to the recognition of a significant Multi Asset performance fee in the quarter. Other revenues were also up in the fourth quarter, reflecting a EUR 14 million contribution from our Chinese investment Harvest and a positive change in fair value of guarantees with the improved interest rate environment in Q4. In the full year, total adjusted revenues increased by 6% to EUR 2.4 billion. This was contributed by higher management fees and other recurring revenues, which grew by 10 -- 2% over the year, while performance and transaction fees represented 8.6% of this total primarily due to the significant fees recognized in the second and fourth quarters. The recognition of the Alternative Investment performance fee in Q2 is non-repeating as the fund has reached a final close. And the Active Multi Asset performance fee in Q4 was significant amid stronger equity markets. While there is always potential for our funds to recognize performance fees in certain periods of the year, this can be impacted by the market and is also subject to set investment and performance hurdles which may not always be achieved. As a result, we expect performance and transaction fees to contribute 3% to 5% of total adjusted revenues in the medium term. Moving to management fees and margin. At 29.6 basis points, our overall management fee margin declined by 1 basis point compared to full year 2018. This is primarily due to the impact of noncontrollable effects on the existing AUM. Broader industry pressures, such as margin compression and greater fee transparency have had a significant impact. This can be seen in our Passive management fee margin, which has declined year-on-year as expected despite reporting higher management fee revenues from stronger inflows. This is a contrast to Active Equity, which was able to maintain stable management fees and margin in 2019 supported by positive market movements particularly in the fourth quarter. This year, we have also benefited from a number of specific fee events. For example, the liquidation of our FlexPension fund had a negative impact on the Active SQI management fee margin and revenues. However, the breadth and product mix helps us to counterbalance some of these effects. In particular, our Alternatives business is a key driver of our total revenues and overall management fee margin, and this was evident in 2019 as Alternatives reported higher management fee revenues year-on-year driven by stronger inflows across all of our alternative products. In general, we expect margin compression to remain a key feature in our industry but our well-diversified portfolio provides some mitigation against this. Going forward, we will report our management fee margins on an annual basis by asset class. Moving on to costs. Total adjusted costs were up 8% in Q4, reflecting the uptick in compensation and benefit costs, including the effects of our performance-related compensation framework. Adjusted general and admin expenses were higher as a result of increased non-compensation costs in the fourth quarter, such as intensified marketing efforts and volume-related expenses. However, general and admin expenses declined by 10% in 2019, supporting the overall reduction in total adjusted costs in the full year. This reflects accelerated efficiency initiatives in 2019, including sales from strategic vendor management and also, lower charges from DB Group, in line with our expectations and with potential for further saves as we move into 2020. Our adjusted cost-income ratio fell to 61.3% in the fourth quarter and 67.6% in the full year driven by stronger revenue development in 2019. This ratio is better than our guidance of approximately 70% in 2019 and puts us firmly on track to achieve our target of below 65% by 2021. This will be supported by an additional EUR 150 million of gross cost savings identified for the next 2 years with efficiencies being weighted towards 2020. Taking a look at our capital position in 2019. In the full year 2019, we saw our CET1 capital increased to EUR 2.8 billion, up from EUR 2.7 billion at the end of 2018. This increase was mainly from the recognition of half 1 2019 profits and from smaller other impacts, including FX. Half 2 2019 profits are not yet reflected in CET1 capital as this requires prior regulatory approval, which we will seek in due course. Our Pillar 1 requirements are stable year-on-year with EUR 9.2 billion of risk-weighted assets at the end of 2019, and our CET1 ratio stood at 31% at year-end, remaining comfortably above requirements. So to conclude, 2019 was a milestone year for DWS. We stabilized our business, returned to positive flows and sustained a lower cost base, enabling us to deliver all of our financial targets successfully. As prioritized, the adjusted cost-income ratio fell to 67.6% in 2019, supported by accelerated efficiencies and higher revenues. Annual net inflows increased to EUR 26 billion at the end of 2019, generating 4% net flows in line with our medium-term targets and reversing 2018 outflows. Overall, we have increased shareholder value in 2019 with the DWS Executive Board proposing a dividend of EUR 1.67 per share, subject to approval at the 2020 Annual General Meeting. This represents an increase of more than 20% from the dividend we paid out in 2018 and is fully in line with our payout ratio of 65% to 75%. Looking forward to this year, we will continue to build on the hard work from 2019. As outlined at the investor update in December, we will continue our journey to become more efficient. We've identified a further EUR 150 million of cost efficiencies to help us achieve our targeted cost-income ratio of below 65% in 2021. And while revenues were higher in 2019, we still expect performance and transaction fees to account for 3% to 5% of total adjusted revenues in 2020. We therefore expect revenues to remain in line with 2019. We remain committed to sustaining the strong flow momentum from 2019 to achieve our net flow target and to create stronger shareholder value in 2020 and beyond. Thank you. And I will now hand back to Asoka for strategic outlook.

Thank you, Claire. We are indeed very pleased and satisfied with the performance of the firm in 2019 as reflected in our full year numbers. By achieving all our targets and returning DWS back to a positive path, we were able to lay the groundwork for our success in the future. And that is exactly the path we would stay on, further building on our operational and investment excellence to remain successful in an environment that is pushing asset managers out of the comfort zone. Looking at the market environment in 2020, and while it is still too early to make full year predictions, we expect moderate but constructive growth. And we expect upside potential in equity markets in particular, as we believe we have seen the low point of interest rates, although we expect them to remain at very low levels. To ensure DWS sustains its positive momentum in this environment, we have identified strategic initiatives focused on efficiency, growth, protection, capability and culture, as outlined during our investor update in last December. As we stressed time and time again, efficiency will remain critical in the challenging revenue environment, which is why we will continue our laser-focused cost control also in 2020. This will include ensuring that we have efficient, globally integrated structures, further removing silos across our organization. And while we have to be more efficient, it is equally important for us to grow and protect our business. For us, organic growth is very much a key priority, and we will aim to achieve this by continuing to concentrate on our targeted product areas and regions. High-performing Active products, especially in Multi Asset, will be an important driver for us. Meanwhile, Passive will remain an area of significant market growth. And in the low-interest rate and low-yield environment, Alternative assets will remain in high demand with our clients globally. At the same time, the ongoing wealth shift towards Asia provides new growth opportunities for asset managers. And as global demand for sustainable investments continues to grow, we will advance our strategy to become a leading ESG-integrated asset manager, both as a corporate citizen and as a fiduciary investment manager. In addition, we will enrich our capabilities to further expand our investment excellence and client offerings. We will further improve our product management across the entire life cycle from innovation and time to market to fund closings along our clients' needs. We are also increasing our use of technology as artificial intelligence, supported by important partnerships such as our minority acquisition in Arabesque AI, in order to sustain and increase our investment excellence and client experience for the digital age. And in an industry facing greater pressures of consolidation, we will also continue to evaluate potential M&A opportunities, considering only deals that create shareholder value, not disrupt our fiduciary duty for our clients and fit well into our culture. Which brings me to my last point, that culture is super important for DWS to deliver on these strategic priorities. Through our new functional role framework, we are transforming DWS into a leaner, more agile organization, reinforcing a culture of performance, innovation and entrepreneurship. We will also roll out ESG initiatives across our entire value chain, embedding it into our culture and making it core to everything we do. All these initiatives share the same goal: To deliver long-term shareholder value as we fulfill the purpose of DWS, ensuring the best possible foundation for our clients' future. DWS has a clear path to achieve this. Of course, there will be some headwinds along the way, but for 2020, the outlook is positive. After a strong 2019, we have a solid base of financials, as Claire has shown, on which we can build a global, high-performing investment platform, high-quality products, skilled and dedicated people and the right fiduciary culture to take our business to the next level. Thank you for your attention. Now let me hand over to Oliver for Q&A.

Thank you very much, Asoka. Emma, we are ready for Q&A now. [Operator Instructions]

[Operator Instructions] The first question comes from the line of Hubert Lam with Bank of America.

Just a couple of questions. Firstly, on the Passive fee margin. If you can please explain the reasons for its decline over the last -- over this quarter as well as the last quarter. I guess last quarter, in Q3, it fell by 3 basis points, this quarter close to 2. What's going on there? And is it due to -- mainly due to mix, competition, discounts you're giving to clients? And how should we think about the run rate going forward by quarter? Second question is to do with capital. If you can just give us the update in terms of your excess capital position. And is -- and related to that, your dividend payout was at the low end of your 65% to 75% range, is the reason why you -- is the reason why it's built at the low end of that range due to you possibly increasing your -- wanting to increase your capital position or your excess capital position? Or is there any other reason for that?

Thank you for your questions. Let me address the first one on the Passive fee margin. So we look at that more on an annualized basis, where we have seen a 2 basis point drop year-on-year, which is in line with our expectations and guidance. And that 1 to 2 basis points of margin compression in Passive is something that we do anticipate in the outlook. It's a combination of the mix of inflows, outflows that we see, the mix between retail and institutional, and the mix of the value on the fees that we get from inflows versus outflows is all contributing to the overall Passive management fee margin. What I would point out in Passive is that we're very focused on growing revenues. So revenues are up 7% year-on-year. Net new assets are 17% growth ratio. And AUM, of course, in Passive, is up 40% year-on-year. So despite the management fee dilution that we naturally see, we are very much focused on revenue growth in Passive. On excess capital question. At the point of IPO, we pointed to excess capital in the region of EUR 0.2 billion. Since then, we have made some investments and provided seed money and co-investments alongside our clients in the Alternative fee class in particular. And we also see some volatility in capital demand as a result of interest rate changes and market volatility. However, we have been able to build on our excess capital position, which is higher at this point in time. But we don't intend to disclose the exact position regularly in the future given the frequent changes that we do see in capital demand as a result of the market environment.

Thank you, Claire. And I would -- and I think you asked 2 questions, but it was a third one, I think, the payout ratio question, dividend payout ratio question. Let me explain you that. I think we had an extraordinary strong year for performance fees, which we do not expect to repeat to the same degree. We had a substantial year-on-year increase also in adjusted PBT. And we have set ourselves a range in order to have some flexibility in years when started net profits are positively and/or negatively impacted by extraordinary effects apart from the payout ratio range. Our aim is to pay a steadily growing dividend per share over the time. And that is the absolute case this time. We have a 20% up compared to 18% what we outlined today, Claire and myself. So we will decide next year again about the payout ratio depending on net profit, capital availability and expected investments. The final dividend amount is subject always, as Claire also said, Annual General Meeting's approval in June 18, 2020. But important thing is, for us, we gave a forward guidance between 65% and 75%, and we are absolutely in this range, and we have a substantial hike compared to '18. And I do think you guys can expect we want to have a robust payout, but also the total magnitude of dividend should be -- go along hand-in-hand with other net income and adjusted PBT.

The next question comes from the line of Arnaud Giblat with Exane.

I've got 2 questions, please. First on costs and -- well, let me start there. So on costs, your marginal increase in cost versus your marginal increase in performance shows a 21% cost-to-income on that increase. Of course, there are other moving parts. What I'm trying to understand is what is the cost associated to the increase in performance fees? And the reason why I'm trying to understand that is looking into the future, given that we should expect a normalization in performance fees, what is the cost reduction associated with that? And how do we strip that -- put that into context with your general guidance of EUR 150 million cost-cutting and reinvestments into the business and inflation? So that's my first question. My second question is on Harvest, EUR 14 million of earnings from Harvest, thanks for disclosing that. Is that a run rate level of earnings that we should expect? Or what's the outlook there on net contribution going forward?

Thank you for your questions. Let me address the question, first of all, on costs and specifically the performance fee question, I think. So we had an extraordinary performance fee in the second quarter of 2019, which had an expense attached to it. We disclosed that expense as EUR 26 million, which is nonrepeating. So that's something that you can adjust when you look forward in the outlook. We don't anticipate seeing carried interest attached to anticipated performance fees in the near-term horizon of that magnitude. So that would be an exceptional event to adjust for. Otherwise, we expect in absolute terms, therefore, that our costs will be declining year-on-year in 2020 compared to 2019 as we look to continue driving forward on efficiencies. On the question of Harvest, we had EUR 14 million of net income effectively recognized in revenues in the fourth quarter. And the full year representation of revenues was EUR 44 million, so there was some hike that we saw in the fourth quarter. We do anticipate that, that will sustain or grow. So I would more look at the full year EUR 44 million and consider a growth on the full year value.

The next question comes from the line of Haley Tam with Crédit Suisse.

So a few questions from me, please. I mean first of all, could I ask you, you mentioned about the Asian opportunity, Asoka. I noticed the flows there continued to be strong in Q4. And I just wondered if that reflects the benefit of your partnership with Nippon Life already or if that's still to come. And I guess connected to that, any comments you can make on your plans for Harvest given the changing regime in China and the fact that foreign investors can now take majority control of joint ventures? And then at the risk of incurring Oliver's wrath, there are a couple of quick follow-ups. On the Passive fee margin, the 1 to 2 basis point decline on an annual basis. Obviously, you were at 19 bps in Q4 versus 21 for the full year. Was there anything unusual about Q4 that we should be aware of when thinking about your full year guidance for margins going forward?

Shall I take the first question? Thank you for all -- again, also for your questions. I think regarding Asia, let me outline that, first of all, DWS, the great inflow story in 2019 was also due to our strategic partnership -- participation in these high numbers of NNAs and Nippon Life has contributed considerably also to these numbers. And I do think it's a very strategic and important partnership, not only in NNA but also in -- to develop -- developing products together, addressing some strategic pieces in Asia, all that is very close collaboration with our Nippon Life strategic relationship partners. And I do think important is also Harvest. Harvest is our really strongest partner in Mainland China, 30% stake ownership of DWS, that has worked out, and Claire's more or less outlined the dividend. But we are, and as I addressed, the future compounded growth rates in asset management industry is in Asia. More and more, we will have a strategic discussion how we're going to work and collaborate with these partners in Asia. And there is, I think -- I know there is expectation, and I do think also in this regard, we will come back in 2020 with our clear strategy piece for Asia. And I think this both partners are core of the center of this -- also of this strategy.

Coming back to the question on Passive fee margin. We were indeed at 19 basis points in the fourth quarter. I think we've often said that we do see volatility across the quarters for various timing events that take place. So we would expect that to sustain at that kind of level in Q1. So it is a good guide going forward, and hence, the 1 to 2 basis points guidance for the forward, always stands at the mix that we see between both retail and institutional inflows that we will anticipate throughout 2020 in the Passive portfolio.

The next question comes from the line of Bruce Hamilton with Morgan Stanley.

So I guess 2 questions for me to follow up. One, on the cost side. Just to make sure I heard correctly, you're saying of the sort of gross EUR 150 million savings over the next 2 years, we should expect those to be weighted in 2020. Just to confirm. And then on this Arabesque AI investment. Where do you expect this has most impact? Is it in the investment process, say, in sort of portfolio construction? Or is it more around your interaction with clients? Just to understand where this may have most impact longer term.

Just to address the question on costs and the forward EUR 150 million of future savings that we anticipate. We do indeed guide to having that weighted more heavily towards 2020, and that's because there's a number of foundational choices, decisions, actions that we have taken in 2019 that always already lead us forward to achieve some of those savings in year 2020. So that would include, for example, changes that we've made into our real estate already at the end of 2019, changes we've made to vendor negotiations in the latter part of 2019 and renegotiated consumption charges from across the platform. So we have comfort in being able to weight the savings more heavily in year 2020.

Bruce, I think your question regarding AI, participation of Arabesque AI sub -- division. Let me outline 2 things there. I do think AI will come in next year very strongly on the investment platforms, but also in the client interactions. And I do think the world will also move in asset management industry more strongly into a data mining approaches. I do think AI will become a center technology, in my opinion, asset management industry. But what is our first step with Arabesque AI? We will build up a strategic approach with them to enrich our investment platform. The second step is client front end. And I do think also, as you know, we have been participated also in Arabesque S-Ray because I think combining data with AI will be a key success factor in the asset management industry. So therefore, we are going to start first on the investment side and then we are going to build up also into the client interactions.

[Operator Instructions] The next question comes from the line of Mike Werner with UBS.

Just one question from me particularly with the institutional mandates in the fourth quarter. I was just wondering in terms of the pipeline, were you seeing kind of interest replenish across the board as ultimately these inflows came in and kind of accelerated into the end of the year? I was just trying to get your gauge on what the pipeline looked at year-end.

Thank you for the question. And again, we -- compare to 2018, we had a completely turnaround in institutional flows and especially also insurance flows. We are well positioned to get with our already [ new ] pipeline. We are well prepared for 2020 also, but also the product-wise. We have the PEIF III fund is -- will go into a direction to really cater the demand of our institutional clients, but also the whole Active offering. And also more and more, the Passive fund offering is going to cater exactly the institutional demand. And I think we are expecting this year very strong flows in this area because the reinvestment needs of different type of institutional clients will trigger very much demand for this kind of products. And I do think, from this perspective, we are very positive. And again, the fourth quarter was a great quarter of inflows, but I think we are expecting further great momentum in this area. And a healthy -- we have seen already a healthy start into the first quarter. So that is the only thing I can only frame so far.

The next question comes from the line of Roberta De-Luca with Goldman Sachs.

I have 2 questions. One, if you can give us a bit more color on your Passive products demand in terms of kind of both products and tunnels, what you're seeing in the market. And then the second question is, if you have already set a target for your ESG integration plan, especially in light of the recent regulatory changes.

Let me take the ETF topic. I think -- I do think we are expecting ETF market, especially in the Passive market in Europe, to get more momentum than in the last years. I think as you know, in the U.S., we are now beyond the 50% mark in the total asset market. And I do think, for us, now is -- core is European also ETF market. The reason is -- for 2 reasons. First of all, European, especially fixed income market, is massively under pressure because of the negative interest rates. I think we will see more and more ETFs will be -- gets up -- will substitute the Active product offering in this area. And people are looking because of total return perspective in Europe is quite low for many asset classes to tap into this market. So therefore, the momentum is strong. And I think, especially the reinvestment topic, as I raised before, will be an important driver for the European ETP market. And I do think there is -- a clear second area is going to build up around the world in the U.S., but also, in my opinion, in Europe. As you know, we have launched last year the biggest ESG ETF global equity type in the U.S. ever -- biggest launched product in the U.S. for one of Scandi institutional client. And I do think again, we are expecting Europe will see much more offerings on the ESG ETF market, and we are very well positioned to that because our proprietary approach on ESG, and in my opinion, also leading a cutting-edge in our investment process and also in our concept, will create very, very much demand. And so therefore, we felt we are very well positioned. We will come in soon to explain you the total rollout of the ESG, as I outlined in my part. As you know, DWS is going to -- our aim is to become a leading integrated ESG asset manager. So that means also the European regulation change in 2021, even we are going to miss the taxonomy, but I do think the regulation will change first quarter 2021, and that will trigger huge change into the ETF and ETP market in Europe towards ESG. We are well prepared to go into this market. Is that answered or is there any...

Yes, definitely.

Thank you.

The next question is from the line of Christoph Blieffert with Commerzbank.

Christoph Blieffert, Commerzbank. One question on Concept Kaldemorgen, please, which is an important cash cow for you. Given that Mr. Kaldemorgen is already close to retirement age, could you please give us an update when this contract will expire or whether it has been renewed recently? Any indications for how long he is going to stay with DWS would be helpful.

Yes. Thank you for the question. Again, Klaus is, since decades, with DWS. And I do think, yes, we can also say Klaus will stay also the course of 2021, very, very active. And by the way, we have more cash cows than one product. As you know, there's several products. I'm not going to mention every product. But it is -- Klaus has a fantastic performance last year, the Multi Asset whole product range. And the team behind Kaldemorgen created a fantastic performance and also in different kind of products. But definitely, your question regarding contract, DWS will always interested to keep the best people around us, independent of their age and all they are -- let me say that besides the age, and Klaus Kaldemorgen will be very close to stay with us for long, and all will -- all of you will be surprised. But again, I want to say age should -- age is not a criteria. Think about Klaus is minimum better than -- equal or better than Warren Buffett. And he is the Warren Buffett of European asset management industry. And I think Klaus, as you know, I am -- I worked very long with him and I think he will stay with us and we will stay. Also his contractual prolongation is, in due course, we will also communicate it to the market. And I want to say important thing is Klaus built up over the years very strong team behind him. This is not only one-man show. Even Klaus is our shining star and a legend in our fund management industry. And -- but everyone as a senior knew, the firm need a team approach, and he'd done at best.

The next question is a follow-up from Haley Tam with Crédit Suisse.

Sorry, I am being greedy. Two quick follow-ups, please. Just on the strong Alternatives flows in Q4. Could you clarify first if there was any impact there from any return of capital to investors in the original Pan-European Infrastructure Fund? And then the second question, just in terms of the potential impact on future staff costs. Has there been any impact already in 2019 from the removal of job titles and a move towards a different culture? Or is that still to come?

Just to clarify, firstly, on the Q4 flows that we saw for Alternatives, there was no exceptional items that you're referring to related to other versions of PEIF I and so on. So no events to point to in the fourth quarter there. And on the staff costs, also no extraordinary events that have taken place with regards to the functional role title change at all. I think Q4 was just a function of the general performance compensation framework that we have in place that has a seasonal correction in the fourth quarter.

At this time, there are no further questions. I hand back to Oliver Flade for closing comments.

Yes. Thank you very much, Emma, and thank you, everyone, for dialing in today. For any follow-up questions, please feel free to contact the IR team. Otherwise, we wish you a great day. Bye-bye.

Thank you.

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.