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

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thanks for joining the DWS Q2 2020 Investor and Analyst Conference Call. [Operator Instructions] And I would now like to turn the conference over to Oliver Flade. Please go ahead, sir.

Yes. Thank you, Emma, and good morning, everybody, from Frankfurt. This is Oliver from Investor Relations, and I would like to welcome everybody to our earnings call for the second quarter of 2020. I hope everybody is keeping healthy and safe wherever you're based. And before we start, I would like to remind you as always that the upcoming Deutsche Bank analyst call will outline the asset management segment results, which have a different parameter basis to the DWS results that we are presenting now. I'm joined as always by Asoka Woehrmann, our CEO; and Claire Peel, our CFO. And Asoka will start with some opening remarks, and Claire will take you through the presentation. [Operator Instructions] 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 with that, I will now pass on to Asoka.

Thank you, Oliver. Good morning, and welcome, everybody, to the second quarter results of 2020 for DWS. I hope you all keeping healthy, safe as we continue to fight the pandemic. Today, we will explain how we were able to solidify delivery against our strategic plans as a firm despite the challenges we all face. As lockdown measures begun to ease across most of the industrial world, we saw equity markets recover more strongly than expected. However, uncertainties remain. We saw various situations where business models and corporate activities in different industries came under increased scrutiny, oftentimes rightfully so. But while COVID-19 continues to impact our day-to-day operating environment, it is not stopping us from executing our strategic priorities as committed. Against this backdrop, we delivered an adjusted cost/income ratio of 65.7% in the second quarter, close to our medium-term target, ahead of schedule for the second quarter in a row. This was made possible by our relentless and continuous focus on cost measures, and we will continue on that track, regardless of the pandemic-driven environment. On the flow side, having a diversified business across all liquid and illiquid asset classes, benefited us as we were able to meet changing client demands throughout first half of 2020. We attracted EUR 8.7 billion of net inflows in the second quarter. This was driven especially strong momentum in Passive and with sustained inflows in Active Equity. In the first half of the year, we reported a total of EUR 6.2 billion in net inflows, half, which was driven by ESG fund flows. This is not indicates -- this is not only indicates that increased client demand we are seeing for sustainability team products and solutions, but also reflects the strong outperformance of our ESG dedicated funds and their ability to remain resilient compared to traditional funds in times of crisis. To ensure we keep our intensified focus on sustainability in the long run, and we have appointed Desiree Fixler as our Group Sustainability Officer. In this newly created role, Desiree will be responsible for coordinating a sustainability strategy that is consistent across regions and that aligns perfectly with our duties as a fiduciary and as a corporate citizen. And I am very pleased to say that we are already making meaningful progress on this front. During the second quarter, we enhanced the integration of ESG criteria in our investment platform through a sophisticated and pioneering process called Smart Integration. This process enhance our own stewardship practices while also setting the bar higher for sustainability standards across the asset management industry. Through Smart Integration, we use robust research from our ESG engine to identify companies in our portfolios that either violate international norms or have high climate transition risk. More importantly, it allows us to take the necessary actions to mitigate these ESG risk from our client portfolios, either through active management or by excluding them from our investment universe as a last resort. To us, this is super important as we aim to shield our clients and help them to invest more responsibly. We are also continue to execute our strategic plan. For the first time in our firm's rich history, we introduced fully globally integrated structures removing silos, creating greater accountability and enhanced client centricity. Our new structure allows us to prioritize our most important responsibilities as a fiduciary asset manager. Our unified investment platform and in so-called in the future division will bring together our market expertise to help us achieve strong investment performance across all asset classes. Our Coverage division will operate more efficiently and effectively to provide coverage locally where our clients need us. Through our new and dedicated product division, we will strengthen time to market, innovation and life cycle management of our product suite. And further advancing this establishment of the state-of-the-art asset management framework, our infrastructure functions have been newly aligned into a globally integrated structure. With these changes, we ensure that DWS remains client-centric, flexible, efficient and effective in the future. Ladies and gentlemen, the second quarter has been extremely progressive for DWS. We have continued to withstand -- to overcome the biggest challenges of the pandemic so far. So demonstrated by our strong and resilient financial performance in quarter 2, and the entire first half of the year. And we are not slowing down, dropping any of our strategic priorities we set before the pandemic. On the contrary, we are intensifying our focus on executing everything we have committed to consistently, since late 2018, and we are delivering results. With that, I'm happy to hand over to Claire to look into the financial results.

Thank you, and welcome, everyone. I hope you're all keeping healthy and safe. Today, I'll present the results and activities for the second quarter of 2020, starting with the key financial highlights. Adjusted profit before tax increased to EUR 189 million in Q2, up 5% quarter-on-quarter, driven by an increase in quarterly revenues. Adjusted cost/income ratio improved to 65.7% in Q2 and 65.8% in the first half of the year, reflecting the continued success of our efficiency initiatives and keeping us on track to achieve our target of below 65% in 2021. Net inflows of EUR 8.7 billion in Q2, driven by strong flow momentum in Passive and cash, further supported by Active Equity, and this helped us to achieve EUR 6.2 billion of net inflows in the first half of 2020. Moving on to our financial performance snapshot and starting at the top left. AUM increased to EUR 745 billion in Q2, up 6% quarter-on-quarter, driven by the improvement in market performance and net inflows. On the top right, adjusted revenues were EUR 551 million, up 5% from Q1, mainly reflecting the favorable change in fair value of guarantees during the second quarter. On the bottom left, adjusted costs were up 5% quarter-on-quarter due to higher compensation costs linked to the DWS share price, but down 14% year-on-year, reflecting the desired impact of ongoing efficiency measures. This supported an adjusted cost/income ratio of 65.7%, and adjusted profit before tax increased to EUR 189 million. Let's recap on the market environment. Following one of the sharpest market declines on record in Q1, we saw a stronger-than-expected recovery in Q2. Markets rallied in the second quarter as lockdowns began to ease, most notably in Europe. And with central banks around the world confirming their easing bias, this provided reassurance that they would be ready and more when needed. To get together, this helped stabilize equity markets and reduced levels of volatility over the second quarter, while interest rates continued to operate at new lows. However, as the pandemic continues to accelerate at different paces across the world, particularly in the U.S., there was still some volatility in FX movements with the U.S. dollar depreciating against the euro by quarter end. Overall, market conditions were more constructive in the second quarter, which had a positive impact on our AUM development, which I will now outline. Assets under management increased to EUR 745 billion in Q2, up 6% quarter-on-quarter. Positive market performance helped recover 2/3 of the assets lost during the severe market downturn in Q1, and this more than offset the negative impact of FX movements during Q2. Net inflows also positively contributed to our AUM growth over the second quarter, which I will now explain in more detail. We reported EUR 8.7 billion of net inflows in Q2 2020, marking a reversal from Q1 net outflows. Our positive flow performance is a testament to our diversified business model, which has enabled us to continue meeting clients' needs, regardless of the market conditions in which we are operating. After a challenging first quarter, Passive gathered significant momentum in Q2, reporting EUR 6.5 billion of net inflows. European listed ETFs and ETPs accounted for the majority of this quarterly performance, helping us to rank #2 by Q2 flows in Europe and #1 by equity ETF inflows over the same period. We also recorded more than EUR 0.5 billion of ETF inflows in the U.S., the majority of which went into our high-yield bond offering. Cash sustained strong flow momentum from Q1, attracting EUR 6.3 billion of net inflows in the second quarter. Approximately half of the quarterly cash inflows went into our sterling fund as corporates and local authorities stockpiled their cash to avoid a liquidity crisis in light of the lockdown. Active Equity also reported inflows for the second quarter in a row with EUR 1 billion in Q2. This was driven by improved retail flows, including contributions from our flagships, together with ESG equity funds, which remain positive in flow territory over the quarter. Alternatives also sustained positive flows, albeit at a lower level compared to Q1. This is mainly driven by real estate as our flagship grundbesitz continued to attract investor interest in the low yield environment. Collectively, these inflows more than compensated for outflows in the remaining asset classes. In active multi-asset, retail inflows into our flagships Concept Kaldemorgen and dynamic opportunity funds, were most -- more than offset by a redemption from one of our institutional clients. Active fixed income reported the largest outflows of all of our asset classes in Q2, mainly reflecting the strategic decisions made by 3 institutional clients to bring assets in-house. However, there was also some positive developments in the fixed income asset class. In contrast to Q1, we reported net inflows in a number of our flagship retail funds, and we attracted positive fixed income flows from institutional clients in Asia. Altogether, our strong Q2 flow performance helped us to achieve EUR 6.2 billion of net inflows in the first half of 2020, almost in line with the level of inflows recorded in the same period last year. This includes contributions across all 3 pillars of Active, Passive and Alternatives and with inflows across retail and institutional clients. And with ESG funds accounting for more than half of our half 1 inflows, this once again reinforces the importance we place on ESG and sustainability as a growth strategy for DWS. Product launches. During the second quarter, we continued to launch new products, demonstrating our commitment to continue meeting clients' needs in these demanding market conditions. This included launches across most of our asset classes and with ESG continuing to a prominent feature of our portfolio. Our Q2 launches also include great examples of our product innovation such as DWS Invest, Qi, Global Climate Action Fund and the DWS Invest ESG Next Generation Infrastructure Fund. Both of these funds are considered to be the first of their kind to directly deal with the challenges posed by climate change. As we enter Q3, we plan to launch sustainability-themed products within our Fixed Income and Passive offerings. And with our newly created product division, we will align all of our capabilities to ensure that product innovation and the full product life cycle will remain a key focus for our business going forward. Moving on to revenues. Total adjusted revenues grew to EUR 551 million in Q2, up 5% quarter-on-quarter. As anticipated, management fees and other recurring revenues were lower as we started the second quarter on a lower asset base as a result of the market downturn in Q1. This is also reflected in our management fee margin, which fell to 28 basis points in Q2. Performance and transaction fees remained stable quarter-on-quarter despite the market turmoil. And other revenues reported a positive turnaround from Q1 due to a favorable change in the fair value of guarantees over the second quarter, in addition to a EUR 16 million contribution from our Chinese investment harvest. Despite positive quarterly developments, total adjusted revenues decreased to GBP 1.1 billion in the first half of 2020, down 7% compared to the first half of 2019. And as already guided last quarter, we do expect 2020 adjusted revenues to remain below those reported in 2019. Moving on to costs. In Q2, total adjusted costs increased by 5% from Q1 to EUR 362 million. The quarterly increase can be attributed to higher adjusted compensation and benefits costs, mainly driven by the increase in equity-linked deferred compensation expenses relating to DWS share price in the second quarter. This more than offset the 4% decline in adjusted general administration expenses quarter-on-quarter, which reflects ongoing efficiency initiatives and additional cost saves from the pandemic, such as reduced travel expenses. Together with higher quarterly revenues, this helped us to achieve an adjusted cost/income ratio of 65.7% in Q2. In the half year 2020, we saw total adjusted costs fall by 12% year-on-year. With significant decreases in both general and admin and compensation and benefit expenses. As committed, we have continued our focus on efficiency, keeping us on track to deliver our gross cost savings objective of EUR 150 million, and to reach our targeted adjusted cost/income ratio of below 65% in 2021. To conclude, DWS continued to show financial resilience in the second quarter of 2020 despite facing ongoing challenges in light of COVID-19. We have remained fully focused on delivering and executing on our strategic priorities. Efforts to build that and enhance our global and diversified business model are proving to be successful. We reported significant inflows in Q2 and in the first half of the year, including positive flows across the 3 pillars of Active, Passive and Alternatives and also across retail and institutional client channels. Cost efficiency remains a key focus to ensure that we maximize shareholder value. And in the first half of 2020, we have seen our cost base fall 12% year-on-year as we have continued to deliver our efficiency initiatives as committed. And with the half 1 adjusted cost/income ratio of 65.8%, we are close to our medium-term target. Considering the unprecedented circumstances we have been operating in, the strength of our Q2 and half 1 results gives us confidence that DWS has the financial resilience to remain successful in the future. Thank you, and I will now hand to Asoka for the strategic outlook.

Thank you, Claire. With the first half of the year behind us, the historic disruption of markets and economies worldwide is clear. The unprecedented crisis was met with unprecedented action with protection -- the health protection actions led to lockdowns counterbalanced by swift monetary and fiscal policy decisions, which help stabilize economies across the globe. But also leading to the biggest mismatch of the real economy and markets, especially equity markets in the modern history. As we look ahead, the reality is that the road to recovery will be much longer than widely expected. It will take more stimuli and a lot of collective discipline. The pandemic itself also poses one of the greatest risks as we look ahead into the second half of the year. The mass realization of the second wave might lead to a further economic downturn. Additionally, there are heightened geopolitical risks, including the U.S. elections in November, along with ongoing international disputes centered around trade as the U.S. continues to score off of China and European Union. Despite the challenging and somewhat volatile market, I can reaffirm what I said last quarter, DWS is well positioned to overcome the industry headwinds and deliver on its promises. I'm pleased to note that the Executive Board of DWS has reiterated its proposed dividend of EUR 1.67 per share of financial year 2019 for approval at our AGM, which will now take place virtually on 18th of November this year. We are also, as I mentioned, committed to achieve our adjusted sustained cost/income ratio target of below 65% as well as turning -- returning to our flow targets to the levels we had locked before pandemic. As outlined at the start of the call, we have significantly restructured our organization to ensure that DWS is operationally ready to deliver on these goals and for the future in general. Let me be clear, our organizational changes were not made in response to COVID-19. The form part of our strategic priorities we have outlined consistently since late 2018, and which we reiterated again at our investor update in December 2019. And let me say, we are confident that this improved structure gives us a solid basis to focus on our most important responsibilities: strong investment performance, best-in-class client services and product innovation. This will be especially important as we enter the next normal. As we have said before, the mega trends we had identified last year are likely to accelerate in light of the pandemic. In particular, we expect the battle between Alternatives and Passive to become more pronounced, driven by market liquidity and low interest rates. We are already seeing this at DWS. Despite a muted second quarter, our Alternatives business continues to thrive. As investors look into increasingly invest in such products due to their long-term nature and ability to generate returns in the low yield environment. And as we saw very clearly in the second quarter, demand for Passive remains very strong. We expect this trend to continue amidst growing client interest in ESG and sustainability-focused Passive products, especially in EMEA and in the U.S. Also on our agenda, continue to develop existing relationships and exploring opportunities to build new ones. This is exemplified by the strategic partnership we recently formed with the private markets division of Northwestern Mutual Capital, where we will combine the strength of DWS Global, investment expertise, broad platform and client base with Northwestern's proven investment track record to identify and develop private market opportunities. And of course, we want to shape how the post-pandemic work environment will look like in the asset management industry. So we are exploring how our business becomes more digitalized, our offering and our workplaces more flexible and our client coverage more interactive to various virtual formats, which are adding to in-person engagement. And we want to lead the movement into the next normal, not merely follow the herd. Thank you for listening. Please stay healthy and safe. And with that, I will pass over to Oliver.

Yes. Thank you very much, Asoka. And operator, we're ready for Q&A now. [Operator Instructions] Thank you.

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

I've got a couple of questions. Firstly, on costs. You've made really good progress on G&A costs coming down every quarter. Should we expect the same type of progress over the next several quarters where it continues to come down? Also related to this, how much of the decline in G&A in the quarter was due to COVID-related savings that may come back eventually? Second question is on fee margin. Your fee margin fell about 1.5 basis points quarter-on-quarter. How much of that would you say is due to fee margin pressure and how of that is due to mix? And also maybe you can give us some color by asset class as to where -- where the most of the fee margin pressure is being felt?

Hubert, thank you for the questions. I'll take both of those on cost and margin. On the cost run rate, indeed, we expect this to be a sustainable level of costs that we are operating in. Certainly, on the adjusted general and admin expenses, which is taking into account the initiatives that are reflected there, we would expect to operate at that level that we see at the moment in Q2. On the compensation and benefits line, that is similar and consistent in terms of what we expect going forward with the exception of any volatility that we may see in the share price, but with the share price being equal as it stands at the moment, we would expect to see a stable level with, of course, the normal movement that we may see in comp and benefit at the end of the year. But otherwise, we're very much focusing on the cost/income ratio target of below 65%, and that will be our guide. On your question around incremental cost savings around COVID for T&E and marketing expenses, those have declined in this half year compared to last half year by EUR 11 million, and I would attribute that decline to the COVID environment that we're operating in. On the fee margin question. So Q2, we see 28.1 basis points. So quite a step down, of course, from the first quarter. And I would break that into 3 parts. Around 0.5 basis points of the movement is coming from the market downturn and the spillover effect that we see in Q2 versus Q1. We provide on the revenue slide, the average AUM levels compared to the spot and of course, the average in Q2 is much lower than it was in Q1, which hasn't seen the full effect of the market decline. The flow mix effect is also around 0.5 basis points and then the balance is normalization effects that we see between quarter 1 and quarter 2. We would expect to be operating at this kind of margin level in our outlook.

Sorry. On cost, I just want to clarify, you're saying that the EUR 170 million G&A cost, is that the -- you're saying it's going to be stable going forward on that number? Or do you mean that can come down further?

I would say that, that would be more stable. And, obviously, it can fluctuate. I can't give a precise prediction, but I would expect it to fluctuate around that level.

Next question comes from the line of Haley Tam with Credit Suisse.

Two questions from me, please. First of all, just a follow-up on the management fee margin question that Hubert gave. The 28.1 basis points in Q2, I think you said that should be now a level that you would expect to operate at in terms of your outlook. Could you help us understand why that actually shouldn't go up given the market recovery in Q2, and perhaps a positive flow mix with most of the outflows in Q1 apparently from institutional mandates? And then a second question, in terms of this barbell of flows that you've spoken about, can you help us understand how to think about the alternative side of that for you from here, I guess, in particular, liquid alternatives, how much AUM there is there? What's been driving the net outflows and perhaps some idea of the scale and timing of both the opportunities you outlined with Northwestern and the other joint fund ventures?

Haley, I'll comment first on the basis points around the fee margin and then hand over to Asoka for some comments on Alts. So the 28.1 has effectively factored in what we've seen in the market downturn and the average AUM level that we see for Q2 is EUR 728 billion compared to the spot of EUR 745 billion. So I think it's reasonable to say that we've obviously seen that baked into the 28 basis points. But we've also had a shift in the flow mix in the asset classes that we've seen driving our flows. And I think from what we see at the moment, at least, in this kind of environment, we see that as driving the margin at this kind of level. So I think that's the basis of the 28 basis points outlook that I was pointing to. And on the Alternatives side, I'll hand over.

Yes. I think your comment on Alts is quite right. I think the second quarter, we have seen some very muted flow. There -- I think it's understandably, people took some force into the flow story. But I think there is a 2 angles to see. I think more and more people are also not realized that the pandemic will lead us to a lower core rates in the world, and that is going to happen. And will stay there. So therefore, I think the demand for these kind of assets will increase further, not only this year but also beyond that. We have seen already strong inflows in Germany, for example, in grundbesitz family, the open real estate funds, all the 3 categories, Germany, Europe and global. And I do think, for us, it's important that you see this as we have the first -- first quarter was strong inflows. Second quarter, we have still continued in inflows, but not in the same momentum and it dried up and I do think also the infrastructure inflows in infrastructure equity funds, they will go in, in my opinion, in the third and the fourth quarter, we will see more momentum, especially in the fourth quarter, and we are expecting also liquid real assets area to get -- with the positive momentum of the market is coming up. And the PEIF III, I am not allowed to talk precisely into that, but I do think third and the fourth quarter, we can see next closing. And I do think with that, we will back on track again on the flows and Alts, and that is exactly the barbell, what we are looking for. And now at the moment is the second quarter liquidity flows coming in. And some equity funds, people are seeing a chance in very low index levels, get into these strategies. But now the second half of the year, we are seeing more momentum in Alts.

Next question comes from the line of Mike Werner with UBS.

Two questions for me, please. First, have you seen, I guess, any fallout in terms of flow momentum on the equity side from the Wirecard exposure that you had across some of the funds? And I was just wondering and thinking about how we should think about that as we go through Q3? And then second, you noted in the press release this morning that the management team has identified or is committed to identify and reanalyze further cost savings, if the revenue situation should allow that to be or should make that necessary. And I was just wondering about these incremental cost savings. I mean, are these cost savings that will only be implemented upon should the revenue environment weaken? I mean, are these core to the business? Or if the revenue environment, if the markets continued to perform, are these potential cost savings that could come at a later point, in addition to the EUR 150 million that you've already targeted?

I'll take the first question. And I think the second part, Claire will go in and especially the cost program, what we have initiated already, beginning of the year and end of last year. Let me say the Wirecard -- on the Wirecard topic, it is a big -- let me say that event in Germany and also in Europe, but we do not see any direct short-term impact on our flows. Also, we cannot predict the medium and the long term. But I do think I have -- ironically, we have seen in German equity funds in the second quarter inflows. But it is -- might be a mix between a great performance of the DAX, German Stock Index, and people might be seeing a chance after clearing dispositions from our side. But again, we are not seeing any negative impact on the Wirecard but we are coping with all the reputational risk, what the organization looking for. And therefore, the moment, also the relative underperformance through the Wirecard of our German equity funds are very, very muted. And I think, therefore, I'm not seeing any big topic out of that. And happy to hand over now on your revenue and cost topic to Claire.

Mike, just to pick up on the question around the cost savings. So to recap, we committed to a gross cost savings plan of EUR 150 million for this year and next. That's weighted towards year 2020 and we're very much on track to deliver against that. And I think that's quite evident, particularly looking at the half year G&A number, when you look at half year 1 this year versus last year on the G&E -- sorry, G&A. That's down EUR 45 million over those periods. So we're very much on track with those initiatives, and we can see the benefits of those coming through. On your question of the additional cost savings, we've already realized some of those COVID-related savings, as mentioned on the marketing and T&E line. That's EUR 11 million down in the first half, and we would anticipate that, that's saving to continue, given what we're seeing in Q3 and possibly Q4 for this year. So I think we will certainly see those additional COVID-related savings. But in terms of the go forward, we're very much focusing on the cost/income ratio targets. And obviously, if we need to continue incremental cost savings, we will do so, but it's all anchored on a cost/income rate ratio target.

Next question comes from the line of Jacques-Henri Gaulard with Kepler Cheuvreux.

Two quick questions. You mentioned in your press release that you're combining your Passive and SQI units, and I was wondering what would that mean in terms of disclosure, if you would still keep SQI and Passive separate? And whether that was actually sort of cost reduction as well? And if you can maybe quantify that, if it is at all relevant? And maybe a view about the excess capital of the firm and whether you are seeing the current situation as lending itself to consolidation or not?

Let me take the SQI and excess capital. Claire will briefly go into that. Again, SQI is for us, and I think I explained that might be one of the former analyst meetings, it is a more -- create a scale and combining Passive and the quant -- quant area together. That is creating very much -- and we want to create a platform. And based on this platform, we want to set our aspiration, especially for this area, ETFs and in the quant area much stronger in the future because as I outlined before, I think the Passive and quant-related strategies will be requested from our clients much more in the future. So this is -- and that is -- there is an efficiency aspect -- there is an efficiency aspect. And I think we are never disclosure this thing in a separate way, but I want to say this, it's playing out into the all efficiency measures what we have outlined and the program, what Claire always outlined. But at the same time, I can see much more revenue potential and AUM potential for DWS. This is why we are doing, and we have the aspiration and also our new organizational setup, we already executed the 6 plus 1 strategy what we are called in our transformation of our platform into this area. So we have already announced SQI and Passive coming together in systematic investment platform. And we will see in 12 months where we are, and I think this is our aspiration and thinking. Claire, briefly, if you can outline excess capital, would be great. Thanks.

Yes. Thank you, Asoka. I think on the point of capital, I would just reiterate that we are very well capitalized. We have a CET1 ratio of 30% for the second quarter, which is well above the regulatory minimum on a Pillar 1 standpoint. On excess capital, we don't disclose that. We did announce at a point in time that we had excess capital at the point of the IPO, but it's not something that we measure or disclose on a go-forward basis. But I think more importantly, when it comes to M&A activity, we certainly will continue to scan the environment and to monitor opportunities and consider those that make economical sense at DWS. So we will be active in monitoring the opportunities that are in front of us.

Next question comes from the line of Stuart Graham with Autonomous Research.

I had 2, please. On the additional cost savings that you talk about, I'm a bit confused. If you know you can deliver them already, I don't understand why you're not formally targeting them already rather than only invoking them if revenues falter. That's my first question. And then the second question is on ESG, your own governance setup, the KGAA structure is obviously relatively suboptimal from a governance perspective. I know that was chosen by your parent, not by you. Are there any discussions of changing this structure to give your outside shareholders normal shareholder rights?

Let me say Stuart, thank you. I think -- let me answer the last one first. The KGAA structure is given as I became CEO of DWS that was well known, and also as we went into the IPO. So therefore, I think we can't change the structure. I know all the, let me say, ESG perspective on the KGAA and shareholder perspective on that. But again, that is something -- it is out of our scope of the management of DWS Executive Board and -- but all other people can engage on that. And I think this is exactly, given that we are still completely confident that the ESG is the right -- the right, let me say that DNA change, what we need for DWS itself and might be in fourth following step, we might be also going to address that. But we have to, first of all, we are going to change. And as you have seen, Stuart, changing through our smart integration of investment processes. We are delivering on all innovative ESG products in Passive or in Active area, all the solution and in all this kind of product suite for our clients, and we are taking as a corporate all our duties in this area, and we are taking very seriously, as I said in last AGM, and we have continued to do and put all the right governance, given the structure, what you are alluded to. The second -- the first one, smart question. And I think, again, we are -- you can see, we are delivering quarter-on-quarter our targets. We are, I think, again, COVID was not completely unexpected from us, still that -- even that we are trying to deliver and that is why I think the first day on what we are doing since late 2018, we're managing other costs, you're really diligently -- this is the disciplinary action what we have introduced to delivering our targets but I think, Claire, you want to also look or give some comments on that. With that, I will hand over to Claire.

Thank you. Yes. I would just briefly add on the cost side that I think the EUR 150 million cost-saving program that we have initiated, we've done that regardless of revenue environment and that we will put those savings in place to drive efficiencies across our platform. The incremental savings are really in support of the volatility that we have seen and could see in the revenue environment in the future.

So also, I think, look, the market scenario is some way still -- as I presented at the very end, quite, let me say that volatile is -- we can see a second pandemic wave, we can see or uprise markets and our activities are going back to very normal. All that has some impact as also Claire outlined. So therefore, I think to deliver quarter-by-quarter and into 2021, our target, especially medium term and medium term is not medium term for us is, it's always shifting the 3-year periods front of us. No, we have committed and we are delivering. And it's things coming earlier. We are all happy, but we are working into that. And I think there is also market perspective and client perspective, and we have to be -- they're also cautious and not interpolating the things what we have reached. We are all proud on that, interpolating into the next quarters because the uncertainty, at the moment, we should not underestimate.

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

Firstly, could I ask on Harvest? So that's had some nice progress. So firstly contribution to profits of 55% year-on-year in H1. Could you maybe go through some of the drivers that's driving that growth in terms of AUM progression flows, revenue margins, operating margin? That could be quite helpful. And specifically, are there any plans to further develop that joint venture? And secondly, I'd like to ask on your fund platform IKS, what sort of contribution it makes to the group? The reason why I'm asking is, obviously, there's been some stories going around where the platform may be up for sale. So any comments on that would be appreciated. Clearly, Deutsche Börse has done well, out of accelerating growth of the platforms that they've acquired. So perhaps you could partake in it by retaining a minority, but I'd really appreciate some thoughts on that.

Thank you for the questions. I'll start with the question on Harvest. So yes, indeed, in the second quarter, we've recognized EUR 16 million of revenues from Harvest, and that's compared to EUR 15 million in Q1, so EUR 31 million for the first half of the year. And that compared to a full year recognition last year of EUR 45 million. So certainly operating at a higher run rate from a very kind of solid return that we see from Harvest. And that's been supported on the Harvest side by some good inflows in the first quarter and obviously a market recovery in the second quarter and then some underlying product and performance factors that Harvest has seen within its own -- its own area. So that has had a knock-on effect to us and give us the opportunity to beat the run rate that we had on a full year basis in 2019. In terms of incremental opportunities with Harvest, we are indeed looking to further build on the relationship that we have there and to collaborate on further projects, and we'll have more details to give on that. If I move on to IKS, as we've said with -- or as I said earlier, at least, we will continue to scan the environment for any opportunities that we have around strategic partnerships at exception, but I will pass to Asoka to add some more comments.

No, happy -- I think, Claire, thank you very much. I think -- let me say on Harvest, but also a comment on what we have done also previously comment -- commented already. We are looking for strategic relationships. You're seeing like Northwestern Mutual is something that we enriching our organization with all the capabilities, our capabilities and combined with external strategic partnerships are the best we've done. And we are also looking at -- as I said before, our Asian aspiration is still, I have a really big aspiration in Asia, and we are working also beyond Harvest on strategic relationships. And I do think also that is ongoing, and this is something we want to reiterate again. The second thing is regarding the IKS. It is more than the IKS topic for us. The market is, in some way, in the sales platform building in asset management industry. That's a peripheral area but the highest dynamic and M&A activities and partnerships is going in this field in the platform building and the sales platform building environment. And I do think in this subsector, we want to be active, we have with our IKS in a fantastic position, as Claire said, and I do think we are really evaluating and thinking what are our strategic options to build our fund platform into the next era. Next big catch, the next momentum in the market in this environment, and that is exactly what we are doing. There is some rumors, but I want to say that DWS' Executive Board was very much engaged also in the last 12 months to think about this topic because this is a fast-growing area.

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

Maybe firstly, just to go back to the cost question, just to clarify. So on the COVID impact. I think Claire, you said EUR 11 million with the saving in Q2, and you expected similar sort of Q3 and Q4, just to check. And then, secondly, given the experience of most of your peers have found that they can operate pretty effectively and actually improved efficiency in decision making, et cetera, et cetera, less trouble going forward. I mean, some of these savings should be sustainable into the future? Or is that not how you view it? And then, secondly, just a little more color on the strategic partnership with Northwest Mutual. What are they sort of -- what product strength do they bring? Or what -- could you give just a little more color on what they bring in terms of enhancing your existing capabilities?

Thanks for the questions. You are correct in the way you defined the COVID-related marketing and T&E savings that we've seen in the first half. So that was EUR 11 million, which I commented on. And we would expect the same kind of level in the second half of the year based on activity that we're seeing at the moment. Do we expect that to be sustainable in the future? I think the way we work is clearly going to change in the future. And I think that's under evaluation with us and everywhere. But equally, we would expect to see some of that expense saving this year come back as we normalize to a certain degree in the way that we operate some of our travel and marketing events and so on. So some of it will come back, but I'm sure not to the scale that we've spent perhaps in the past, something that we are very much assessing. And I will hand over to Asoka on the second question.

Yes. Thank you. And I think Northwestern Mutual is a new topic for us. We work for some time to build our excellent position in the U.S., what we have in -- in different various areas in Alts. But I do think we are now looking for the partnership that we are building, especially our private equity -- new form private equity division are looking to partnering up with the excellent investment capabilities of Northwestern. And I do think what we are aiming with these actions is the broadening the product range, strengthening the distribution reach with -- also with the new product range and also go faster complementing our capabilities in our organization because there is some complementary products, what we have not and to build up at the moment in this cycle is quite -- take time. And this is the capabilities what we are looking for. So this is 3 things, broadening our product range, strengthening our distribution reach and complementing our capabilities. This is the main approach behind this, let me say, strategic partnership.

Next question comes from the line of Nicholas Herman with Citigroup.

I appreciate the broad color you provided on group margin trends. Can I just push you for some more detail on margin trends by product, please? And as part of that, on the Passive side, is that coming off to a greater extent than the rest of another product? I saw in particular for example that BlackRock cut several of their Passive fees in Q2. So some commentary around the Passive competitive environment would be helpful, please. And second question, just on growth or inorganic growth. I guess, with the strong market rebound, does that basically -- has that basically limited now M&A optionality? And therefore, your -- it makes it much more likely that any inorganic growth, so to speak, it's going to be done through strategic partnerships? And I guess within that, your -- I think you said before your preferred regions there is Asia, in Alternatives?

Thank you for the question. I will take the first question on the margin. And specifically, you're asking about asset classes there and I think I heard where is the decline most pronounced? I think we've always guided to the fact that we would expect to see margin compression in the Passive asset classes of up to 2 basis points per annum. And that's certainly what we saw last year, and that's what we would expect to see this year and is indeed a contributing factor in what we see in the second quarter. We're not disclosing the quarter-on-quarter fee margins per asset class just because of some of the volatility that we see there. But certainly, Passive is a driver. And also influencing is the active equity asset class, where the movement in the markets and the mix of the assets is also contributing to the average fee margin. So those would be the 2 main areas of margin effects that I would point to. And I will hand over to Asoka.

Thank you, Claire. And I think your question between strategic partnerships and M&A activities, I do think also, we can show you that we're managing our DWS with a clear priority, and this is generating organic growth and improving our efficiency. And that will strengthen our market position, and we want to become a leading asset manager in this industry. And this is exactly why we are strengthening the ESG efforts. That is why we are enriching our product suite with the 3 product layer asset manager, and we want to strengthen our organic, let me say, our regional footprint, and that is why we are looking for strategic relationships. We know, and I do think in the COVID crisis, and I think you all can experience yourself. Executing M&A activities during this -- let me say that unknown period of [indiscernible] is a big challenge for many organizations here that have M&A activities. I am happy to say also and also with my Executive Board that we are not engaged with M&A executions, but the possibility and of this COVID cycle, I am sure there's a lot of possibility we are looking for. We are screening these things, but we are also strengthening our competitive position and building our leading position in this industry. This will help us to make a much better in the later stage M&A activities than today. I am -- I want to confirm to you, we are working on our own position, want to grow organically and become more efficient and leading organization.

That's very clear. And just to clarify, you still expect, despite the very strong market rebound, therefore, you still expect to see a lot of possibilities in the market as a result of this COVID cycle?

Yes. Let me say that many, many players. They have not worked for some time on cost. If you work on cost and Claire and myself and we know as Executive Board, how long that takes these things kicking in. And I do think now is all about run your costs in a diligent way and build up an efficient organization, and it is to build efficient organization in COVID is difficult for many, many leaders and management people. And I do think, from this perspective, the revenue side is also now recovering markets is a good sign, but we lost more or less 4 months this year, good markets, we have to say. This is a part what you are missing on your revenue side. If you not counterbalance with cost, you can never deliver what we have promised at the very beginning of the year. So from this perspective, I am sure that many companies have to look for partnerships, M&A activities. And also, I think this industry is fast moving. And as I said, it quite depends on the duration of the COVID. And I think end of -- longer the duration of the COVID impacts will impact the industry, the life of people. And I do think also the economies, there is more pressure to the market to consolidate, and we are ready also for looking into these trends, as I said, always before.

Next question comes from the line of Thomas Hallett with KBW.

So I guess most of my questions have been answered, but maybe just a quick one on the dividend then, a follow-up on the excess capital. I guess, firstly, on the dividend, you reiterated the proposal for the 2019 dividend at the November AGM. The recent ECB commentary called banks that will have to wait until 2021. I guess given your previous commentary on staying within the regulatory spirit, I'd just like to get your thoughts on your ability to diverge from that ECB view and whether any discussions took place with the regulators? And then maybe just a follow-up to the question on excess capital. I appreciate the challenges on not providing too much detail on this, but given the general reduction in capital requirements across Europe, can you least tell us whether DWS has been a beneficiary of this? Or at least do you broadly expect the capital requirement to fall over time? And if so, is there any potential time line on this?

Again, let me thank you for the question. And I think there are questions, and Claire will go the first part, I will come -- I will answer your question regarding dividend and regulators. I think we are in a financial holding company, and we have regulated as a financial holding company and the ECB for example, what they're discussing are -- does not apply to us. And I do think we have very carefully look into that from various perspectives. But also all the sub entities, everything we look very in detail. I think Claire's department done a fantastic job on that. And I do think that is why we are reiterating our proposal of EUR 1.67 into the next -- to our AGM this year, 18th of November. That is why we came to this statement. Also looking into the regulators' views and how can -- how that will impact us. So up to now, we can't see any, let me say that this can be -- let me say that is, again, regulators view of the financial holding companies. The second thing is, I do think also our commitment, EUR 1.67, we have proposed beginning of the year to our investors, we always kept on that. Also, in the last analyst meeting, we said, we want to -- we want to have the chance to have a physical AGM versus virtual. I think now we know that taking pandemic longer than we expected. We are going to the more or less a clear view, virtual, but we want to do it, and we want to keep our promise on the dividend, what we outlined, our proposal, what we outlined. And I think with that, and that has very much -- very much based on our commitment to you guys, for investors. Claire, if I can hand over to the excess capital, what you already briefly answered. Thank you.

Yes. Thank you for the question. Nothing to add specifically on the quantification of excess capital, but I think on your comment around the revised European prudential framework for investment firms and the review that's underway at the moment. We do expect for the publication of new regulations that these will come in to be applicable around the middle of next year. And our understanding is that the aim of the new regime, for investment firms, is to introduce rules that are adapted to the risk profile and the business model of investment firms. And of course, we generally welcome that, and we'll be monitoring that progression very closely over the coming months.

There are no further questions at this time. I hand back to Oliver Flade for closing comments.

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

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