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 Q3 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, operator, thank you very much, 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 third quarter of 2020. I hope you're keeping healthy and safe wherever you're based. And before we start, I would like to remind you that the upcoming Deutsche Bank analyst call will outline the asset management segment results, which have a different parameter basis to the DWS results that we are presenting today. 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 then take you through the presentation. [Operator Instructions] And I would 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 Third Quarter 2020 Results for DWS. I hope you are all continuing to keep healthy and safe. Today, we are able to celebrate yet another excellent quarter of financial performance of DWS, proving the strength and the resilience of our firm despite the unprecedented times we are all experiencing. Our adjusted cost-income ratio improved to 64.3% for the first 9 months of 2020, following a third quarter during which we were able to continue our laser-focused approach on cost-saving and client-centric fiduciary work. As a result of our efforts, we now expect to deliver our targeted adjusted cost-income ratio of below 65% for the full year 2020 1 year earlier than planned. In addition, our flow momentum continued to strengthen in the third quarter. We reported EUR 10.5 billion of net inflows in quarter 3 as well as EUR 16.7 billion in the 9 months of 2020, supported by our diversified product offering, new launches and strategic partnerships. In particular, ESG continues to contribute significantly to our inflows, accounting for more than 1/3 of our total global net inflows so far this year. This reflects the unbroken importance of ESG for our broad client base despite the ongoing pandemic. Supporting our business with clients further, we were able to expand our strategic partnerships, extend them and start new ones. These strategic partnerships have always been an important cornerstone of DWA's long-term success. With the investment group, Zurich, we signed a long-term extension of our successful partnership in the unit-linked space until 2032. In that same line with our business, we were just able to announce a new partnership with Eurovita in Italy. And finally, we agreed on a new partnership with Northwestern Mutual Capital in U.S., focusing on private markets. During the third quarter, we also implemented the organizational changes we announced in June. Apart from unifying our entire investment platform across liquid and illiquid under one roof and creating one global client coverage organization, we successfully established a now dedicated Product Division. Operational today, the Product Division completes our value chain as a fiduciary asset manager focusing on our duty for our clients in delivering the right products and innovative solutions effectively and efficiently. Additionally, the entire senior leadership of the firm has, in light of the organizational changes, also been redefined during the third quarter. The top tiers of our firm now follow a governance structure that is globally integrated, collaborative and allows for holistic and strategic management of DWS. Looking back on this year so far, we are extremely pleased with the financial and strategic progress we have made despite a particularly challenging 2020. As we expect to reach our medium-term targets we set at the IPO a year early, including proposing a dividend for 2019 of EUR 1.67 per share to our upcoming AGM in November. We have demonstrated our ability to deliver on our promises and to deliver results. Now let me pass over to our CFO, Claire Peel, to talk about our financial results in quarter 3 in detail. Claire, please.

Thank you, and welcome, everyone. I hope you're all keeping healthy and safe. Today, I will present the results and activities for the third quarter of 2020, starting with the key financial highlights. Adjusted profit before tax increased EUR 215 million in Q3, up 14% quarter-on-quarter, supported by both lower costs and higher revenues. Adjusted cost-income ratio improved to 61.4% in the third quarter, bringing us closer to our targeted ratio of below 65% earlier than planned. Net inflows were EUR 10.5 billion in the third quarter, primarily driven by strong flow momentum in Passive, together with inflows into cash, Active Fixed Income and Alternatives. Moving on to our financial performance snapshot. Starting at the top left, AUM increased to EUR 759 billion in Q3, up 2% quarter-on-quarter, supported by market performance and stronger net inflows. On the top right, adjusted revenues were EUR 550 million (sic) [ EUR 558 million ], up 1% from Q2, driven by higher management fees and other recurring revenues. On the bottom left, adjusted costs were down 5% quarter-on-quarter at EUR 342 million as a result of lower compensation and benefits costs. Adjusted cost-income ratio was 61.4% in Q3, down 4.4% from 65.7% in Q2. Adjusted profit before tax increased to EUR 215 million, up 14% quarter-on-quarter and up 27% year-on-year, reflecting significant cost efficiency. Let me recap on the market environment. At the start of Q3, markets sustained under the positive momentum of Q2 but slowed down in September as COVID-19 cases started to rise again. Despite this, most asset classes performed well during Q3. Central banks maintained their monetary policies, serving as a backstop for markets around the world. And despite the mixed news regarding the pandemic, stimulus packages, the U.S. elections and Brexit, markets remained relatively stable, with the U.S. outperforming European equity markets in Q3. As with previous quarters this year, interest rates remain low, while monetary and fiscal support for corporates decreased credit spreads further. And during Q3, the U.S. dollar continued to depreciate against the euro. Overall, market conditions continue to be constructive in the third quarter, supporting positive AUM growth overall at DWS. Assets under management increased to EUR 759 billion in Q3, up 2% quarter-on-quarter and almost back to the levels reached at the end of 2019. Quarterly asset growth is attributed to the positive market performance and net inflows, which more than compensated for the negative impact of FX movements during Q3. Moving on to the flow performance. In Q3 2020, we reported EUR 10.5 billion of net inflows, continuing the positive momentum from Q2 net inflows of EUR 8.7 billion. ESG dedicated funds remain a key flow driver, attracting more than EUR 2 billion of net inflows in the quarter and accounting for 1/3 of our total EUR 16.7 billion of net inflows in the 9 months of 2020. Once again, Passive demand remained strong with EUR 6.3 billion of net inflows in the third quarter, further strengthening our position in the market. European-listed ETPs continue to account the majority of quarterly Passive inflows, helping us to rank #2 by the 9-month 2020 net inflows in the region with 14% market share. This was further supported by stronger ETP inflows in the Americas, which tripled compared to Q2 levels amid ongoing demand for our U.S. dollar high-yield corporate bond offering. Meanwhile, the newly launched Xtrackers MSCI Kokusai Equity ETF attracted more than EUR 0.5 billion of net inflows from Asian clients in Q3, including a significant contribution from our strategic partner, Nippon Life. Active fixed income moved into positive flow territory with EUR 2.5 billion of net inflows in Q3, mainly driven by institutional clients. This includes a significant mandate from our strategic partner, Zurich, underscoring the strong distribution relationship we extended together during Q3. Cash attracted EUR 4.3 billion of net inflows, making its third consecutive quarter of positive flow performance this year. Quarterly cash inflows were primarily driven by the Americas, where we saw significant demand for the DWS government money market series fund, particularly among banks and corporates. Alternatives contributed EUR 0.8 billion of inflows in Q3, mainly into liquid real assets and real estate, together with inflows into infrastructure and private equity. Collectively, all of these asset classes more than compensated for the outflows reported in Active Equity, Multi Asset and SQI. Most notably, Active Equity redemptions, market reversal from Q2 inflows as several sectors, including dividend and German equities, fell out of favor. However, demand for our active ESG equity offerings remained strong as reflected by our third consecutive quarter of net inflows in Q3. In general, ESG remains an important flow driver for DWS, especially as we continue to make sustainability a key feature of our investment portfolio, which I'll now discuss in more detail. At DWS, we recognize the importance of product innovation to fulfill our fiduciary responsibility to our clients and contribute to net flow momentum. We work closely with both clients and strategic partners to ensure that we are launching the right products to meet their changing investment needs. This is reflected in our new product launch trend, as detailed on the left-hand side of this slide. Since Q2 2018, our new product launches have attracted EUR 17.3 billion of cumulative net inflows, with new ESG products accounting for approximately 1/3 of these inflows over the period. Among these is the Xtrackers MSCI USA ESG Leaders EX ETF, which has grown significantly since its launch in 2019. This product is a great example of both innovation and collaboration as it was launched together with one of our European institutional clients and was named the largest ESG EX ETF product launch in the Americas. With investors increasingly looking to switch into ESG equivalents, we have the right products to absorb this demand at DWS, particularly for ESG ETFs. In addition, our new Alternative offerings continue to gain traction, accounting for more than 1/4 of our cumulative net inflows from our product launches since Q2 2018. Notably, we continue to see greater investor appetite for pan-European infrastructure fund series from investors around the world. Given the level of interest we continue to see in the strategy, we remain on track to comfortably exceed the most recent infrastructure funds target of EUR 2.5 billion. Overall, new product launches have contributed nicely to our 2020 inflows, accounting for almost half of our EUR 16.7 billion of net inflows year-to-date. And as we progress into the fourth quarter, we have a variety of new fund launches in the pipeline. They span both ESG and non-ESG funds as we continue to build out a diversified investment portfolio to fulfill the very needs of our global client base. Looking beyond 2020, product innovation remains high on our strategic agenda. Our Product Division will work closely with the new Group Sustainability Office to ensure strong alignment with our investment and client strategy while also enabling a more agile setup to respond to client needs, particularly for sustainability-focused investment products. This is particularly important for us to capture new growth opportunities and continue our positive flow trajectory in the long term. Moving on to revenues. Total adjusted revenues grew to EUR 558 million in Q3, up 1% quarter-on-quarter. Management fees and other recurring revenues were up 3% from Q2, driven by higher average AUM during the third quarter. Despite this, the management fee margin declined slightly to 27.8 basis points in Q3. Performance in transaction fees remained stable quarter-on-quarter despite ongoing market uncertainty, while other revenues benefited from a EUR 15 million contribution from our Chinese investment, Harvest, resulting in a EUR 46 million contribution year-to-date. Moving on to costs. Total adjusted costs fell to EUR 342 million in Q3, down 5% quarter-on-quarter and down 12% year-on-year. Adjusted compensation and benefits costs were down 13% from Q2, reflecting a decrease in value of formerly granted deferred compensation and a decline in fixed compensation costs in the third quarter. Adjusted general and admin expenses slightly increased from Q2, following an uptick in technology and volume-related costs during the quarter. Efficiency measures continue to contribute to our declining cost base and support our lower adjusted cost-income ratio of 61.4% in Q3 and 64.3% in the 9 months of 2020. Year-to-date adjusted cost-income ratio result is 5.9 basis points lower than the same period last year. To conclude, DWS reported another strong quarter of financial performance in Q3 2020. Adjusted profit before tax was up 14% in Q3 and up 15% in the year-to-date. We have maintained a disciplined focus on efficiency, enabling us to remain firmly on track to achieve our targeted EUR 150 million of gross cost savings by 2021. And with the year-to-date adjusted cost-income ratio of 64.3%, we are closer to reaching our target of below 65% earlier than planned. As we move forward with our low and sustainable cost base, we have a strong foundation in place to fully focus on growth and transformation initiatives. Our diversified business model, coupled with intense client engagement, is serving our clients' needs well as demonstrated by our EUR 16.7 billion of net inflows in the 9 months 2020. We continue to deliver sustainability offerings to meet client needs, with 1/3 of our year-to-date net flows coming from ESG dedicated funds. Looking forward, we will continue to strengthen our strategic partnerships and product innovation to support the net flow and revenue growth in the future. Thank you, and I will now hand over to Asoka for the strategic outlook.

Thank you, Claire. Again, allow me to say, we are extremely pleased with our achievements so far this year and during the third quarter. Our efforts have put us in a position that we are confident we will achieve our medium-term targets already in 2020 despite volatile markets and pandemic-induced environment we all have to operate in. As we now look ahead, we will, of course, manage this extraordinary situation for our clients and our staff, keeping flexibility with regards to remote working arrangements, while at the same time never compromising our duty to our clients. More strategically for DWS, we will now, after the original period following the IPO, initiate the next phase of our corporate journey. Roughly 11 months ago at our investor update, we presented our assessment of the trends and developments we see pushing the asset management industry out of its comfort zone. None of these trends have changed. Instead, COVID has amplified some of them. Secular stagnation is manifesting itself in an environment where there is an even greater need for fiscal and monetary stimulus. Zero interest rates or record-low interest rates are here to stay. ESG is becoming licensed to operate for the industry at a more dynamic pace than ever before. The global wealth shift is continuing. The tech revolution is picking up even more steam. The sophistication of our clients and their solution needs continues. And margin compression remains a reality our entire industry has to face. We are ready to meet these challenges. And we are ready to further transform our business in this next phase of our corporate journey to stay successful and take advantage of the many growth opportunities we see. As we become more and more stand-alone as a company, we will establish a framework and a core platform that is asset management focused. We will build on our expertise and experience as an investment powerhouse, enriching our product offering and investment processes with artificial intelligence. Artificial intelligence will be a game changer. We will meet the ever-increasing demand for ESG by continuously developing a market-leading ESG product suite, as Claire described, further rolling out and utilizing our proprietary ESG engine and smart integration approach. And with our new Group Sustainability Office, we now have the expertise and dedicated resources to drive and advance our ESG efforts to the next level. We will invest in areas and segments of our business where we see potential for growth and the potential for DWS to take a leading position in our industry. And finally, we will assess new opportunities in the APAC region, especially in China, where we see a lot of room for growth. While we embark on this next phase of our journey, we will remain committed to sustaining a competitive annual cost-income ratio at least at levels we have already achieved this year. Ladies and gentlemen, we at DWS have proven we are capable of delivering results both on our cost base and on our flow turnaround. We have proven our ability to successfully operate in the most extraordinary times and adjust our business as needed. Our firm is in a great position to build on what we already have achieved, especially over the last 2 years. We are excited about the future, and we look forward to discuss with you further how we will transform our business and grow DWS into a leading position in the asset management industry over the next couple of months. Thank you for listening, and please stay healthy and safe. Please, I will pass over to Oliver for Q&A.

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

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

Congratulations on achieving your target a year earlier than expected. Now that you achieved this target, I guess, the question is, what's next? Will you set new flow and cost-income targets for next year? And also related to that, will -- can the cost-income actually do much better from here, say, towards 60%? Or is that not a target for you? Second, in terms of investments, where specifically do you need -- want to grow? And where do you want to invest? Will this require higher investment costs? And will this mean that the cost base next year will be higher than it is for this year?

Yes. Claire will take the first question. I will come to the growth area, and I think we will mix up. Take it, please.

Yes. Hubert, thank you for the questions. So the targets that we set for medium-term horizon, of course, the average net flow rate of between 3% to 5% and the cost-income ratio of below 65%, we see ourselves being firmly on track to deliver against those this year. And that will be with the cost base this year that's obviously lower than the cost base that we had next year. We will be looking to have a sustainable cost base at these levels of cost-income ratio that we are achieving this year. And so in its nature, that's a function of the revenues as well. So your specific guidance on direction of cost will be anchored on a continued cost-income ratio sustainability measure. In terms of growth areas?

Yes. Thank you, Claire. And I think, Hubert, thank you for the nice words. Really appreciate it. I do think, as we now really reach earlier than -- we are expecting to reach the targets earlier than we have talked to you over the 3 years, I do think we are now -- and we felt also in an environment of COVID, after the shock and after navigating the crisis, we felt COVID is an accelerator for our industry and I think even more than we expected. And I think we want to take the chance to transform our business, but also invest into growth areas, really, where we are good on -- and I do think like in segments as well as areas we felt we have to -- we can lead, we can be in the leading pack of asset managers. And I do think all these investments will be in, as Claire said, will be always designed in the way that we can keep our cost-income ratios, what we have achieved so far, as long as the markets are behaving nicely to us. So I want to say that I don't want to give you a guidance that we are investing and not taking care of the cost-income ratio and that we are free to invest as we like. No, we are taking this 65% somewhere as a ground, what we have reached and we want to defend and we want to improve. And the long term, I have to say that, Hubert, it is always growth and transformation is designed to bring the cost-income ratio strategically down important, but that's a time to invest and catch the opportunity to lead in this industry.

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

I've got 2 questions, please. Firstly, in your closing remarks, you talked about new opportunities in APAC, especially in China. Does this mean launching new joint ventures? Could you perhaps flesh out more your plan in China? And how far along you are in establishing new joint ventures, if that's the case? And my second question is on Alternatives. Clearly, there are a number of trends that you've done well on and going into Alternatives is one of them. I'm just wondering what the pipeline is looking like. I think Claire alluded to some update on the pipeline in her opening remarks. I'm just wondering if you could expand on that. And how this new partnership with Northwestern Mutual Capital will look like in terms of flows perhaps in the coming years?

Arnaud, thank you. And I'm happy to give you a little bit the outlook, what we are looking in Asia. Again, the COVID has created a really strange situation at the beginning of the year. As you know, we want to really build up our strategic partnerships as well as look JV partnerships in Asia. COVID has really created more difficulties for us in this -- on this topic. But I think we are now, as a firm, preparing, really build up our footprint in Asia more decisively because we felt after the COVID this area will see the highest growth rates. And for this reason, we are going 2 ways. First of all, our strategic partner and especially our JV partner, Harvest, is doing greatly in this environment and we want to build up a stronger partnership beyond only a JV partnership. That's the one thing that I can give you as a little bit as a trend. And the second part is we are looking for all real strategic partnerships in Asia. We are missing it beyond Nippon Life at the moment. Nippon Life was a very great partnership for us in the last 3 years. That has been not only on the -- as a client, but it is as a really partner and also developing products together, as we have shown in the Kokusai ETF, as Claire outlined and we want to build these partnerships. And we have a lot of ask from Asian partners to build these bridges. And I do think that is now our real focus there to build. This is a little bit the view of Asia and also the strategic build. And Claire, please, if you go into the second area, what Arnaud has asked.

Yes, happy to. Arnaud, thank you for the questions. Just on Alternatives, particularly -- specifically, as we stand at the moment at Q3, we have EUR 92 billion of assets under management. That comprises of 12% of our total asset base. We have seen flows contributing positively in the illiquid space throughout 2020. And we have a positive outlook in our pipeline, as you point to. One specific area I've guided on is our infrastructure series, the pan-European infrastructure series, 1/3 of those that was launched at the end of last year and continues to bring in further closes and we will see that in our forward pipeline. We also have a very healthy portfolio of dry powder, which we will continue to invest in the alternatives and a liquid space. And we have a pipeline of other products and fund launches, including in the private equity areas and in sustainable products that we will continue to launch in Alternatives in the future. I would also just point out the guidance that we gave on new product launches that we've made over the last number of quarters back to Q2 2018. And 29% of flows are coming from Alternatives fund launches and that pipeline we expect to continue forward.

And the Northwestern Mutual Capital?

Can you repeat -- the what?

Sorry. The -- if you could describe a bit the nature on the Northwestern Mutual Capital private markets business and how this can perhaps contribute to flows in the future.

Again, we are now officially set up this partnership. And I do think they are very much keen also build our products into their offerings. And I do think this is the partnership we are expecting to grow. And I think we are happy to come back quarter-on-quarter on this -- in a set, what we are discussing as a strategic partnerships and flows. And I think I am very confident this is a great partnership for us, especially in Alternatives area and that they are really a specialist in this area. And I think not only that we can bridge the product expertise, we can really have a better client base in the U.S. to bring these offerings forward. And I do think that will help, especially what Claire also outlined today, the 29% of the product innovations, what we have distributed in the flow, what we have. I do think this is what we want to build out. It is important in a zero interest rate environment. Also, the record-low interest rate in the U.S., the demand for these products will be much higher. And so therefore, we are looking for more partnerships into -- also in this field.

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

Can I have one question on Slide 11? And then there's actually a couple of follow-ups on the previous questions, if that's okay. With Slide 11, 5 core growth opportunities you set out on the right-hand side with a view to your plans to invest. Could you remind us perhaps of your regulatory capital position and how much subs you currently have? And I guess with respect to that first growth opportunity to establish an asset management-focused core platform, is there anything you can say here about the news reports last month on a possible sale of IKS? That would be great. In terms of follow-up questions, just on the cost-income ratio, can I just confirm, the long-term target to keep it at or below the achieved levels, should we consider that with respect to the 64% you've done year-to-date or the 61% that you've done in Q3? And then on the pan-European infrastructure fund series, the EUR 2.5 billion that you mentioned, Claire, as a target that you will now exceed. Can I just confirm whether that was a target just for the next close or whether that was a total target from the beginning?

Haley, thank you for the questions. I'll take a few of those and then hand over to Asoka. Firstly, on the capital question, at the midyear, we had common equity Tier 1 on capital of EUR 2.9 billion, with a CET1 ratio of 30%. We're broadly in line with that and the CET1 ratio is now at 29%. It's really in the roundings. So well capitalized on that Pillar 1 level. I'm afraid we don't disclose the excess capital number. But in terms of the Pillar 1 capitalization, that is very healthy. On the question around the cost-income ratio, our medium-term target that we set for ourselves was below 65% over the horizon up to 2021. And obviously, we're very focused on concluding this year, concluding 2020 and seeing where we come out after the full year. We stand at 64.3% for the 9 months, but we remain very diligent. We have 2 months to go this year. We're not going to lose sight of that. And where we close this year is where we look to have a sustainable level as we move forward into the future and look at growth and transformation. On the question on the pan-European infrastructure series, the 1/3 of those offerings had a target level of EUR 2.5 billion in total. The fund is looking to exceed that. That's not a forward projection because we have already committed some of that capital to date, but there's more to come in subsequent closes.

Thank you, Claire. And I think -- Haley, I think you put in 2 questions, 5 topics, but I'm happy to address because I can remember very well our conversation last time. And I do think -- IKS, again, I want to put a clear view on. I think that client platforms in asset management industry is a really most dynamic area that is getting more consolidation, what we can see and what we have seen already and we will see more. And for -- and I do think this is also on tech play. And I do think, in the retail area, especially a lot of platforms, they need a really state-of-the-art investments and really a broader scale. And that is exactly happening, especially in Europe and the IKS is something what we are looking for to partnering up. And we are in this process and that is what might be you read. And I do think to look the better future to address this topic in the industry. To IKS, this is to say, and I do think what you have -- your first part of the question, the AM-focused core platform is to address, I think, the needs for the flexibility on our technological side to compete with the market, especially in the asset management industry. So we need a less-heavy IT platform and we need really an asset management-focused platform. We are in really in the process, as we outlined 11 months ago, to create a real stand-alone asset management-focused platform and framework. This is super relevant to ensure growth and this transformation is needed. Haley, is all your 5 complexes answered?

Apologies for stretching...

No, no. No problem. No problem. Thank you.

Your next question comes from the line of Nicholas Herman with Citigroup.

Two questions from me, please. Just -- I'm just curious if I could dig into the Americas piece. Strong flows there, but mostly cash, as you noted. If we exclude cash, just could you provide some detail on what the underlying trends inflows in the Americas are, please? And more broadly, I think you had a leadership reorganization in the Americas early this year. Are you seeing any change in underlying trends in the region? Or is it still too early to say? Second question, it sounds like delivering the cost-income early has given you additional capacity to invest, which you perhaps hadn't expected. Is that fair to say? And you mentioned ESG. I mean, are there any other particular products you'll be directing this additional investment into? Or is it kind of just going to be a benefit for all products?

Nicholas, thank you very much. And I will start and Claire will come back to the flow numbers. Again, we have to say we changed the leadership in the U.S. But as you know, the COVID is creating some difficulties at the moment, but I think we've done a great, in my opinion, sentiment change in the U.S. under the new leadership of Mark Cullen and all the global heads. As I said, Global Head of Distribution is now running the U.S. platform with the Regional Sales Head. And I think also, as you know, the global investment, the global CIO, is managing with the regional team the products in the U.S. So this is a little bit of frame that has changed, as I said. And again, we are really a true global company now. And I do think we are happy to see, even in the COVID and all the difficulties what we have experienced and the changes, that clients are still confident to give even in cash. And I think U.S. is in a more serious situation, as you know, in the COVID. And I think people are looking with the companies that has some good positions, brands or they have confidence into the organization. I do think, even cash, we are confident that is a good sign for our organization, that we get these flows, because we missed in the past quite these flows. And I do think, under the leadership of Dirk Goergen and also the regional management, regional sales forces, I'm quite confident we can turn around and create a great turnaround story in the U.S. That's the first signs. I think Claire will go into the numbers. And -- yes.

Yes. Just specifically on the U.S. flows, I can confirm in the quarter that we're positive inflows in the U.S. with cash, but also excluding cash. And we're seeing the flows being contributed across areas, including Fixed Income. We have suffered from outflows in the past in Fixed Income, but we're seeing those as positive in the quarter. In Passive, again, where we tripled our flows in the U.S. compared to prior quarter. And also in Alternatives where, amongst others, liquid real assets is particularly in favor currently, and we also have strong real estate offerings in the U.S. as well. So all of those areas are contributing to positive flows in the U.S. in the third quarter.

The next question comes from the line of Mike Werner with UBS.

Congrats on the results. Two questions from me. I just want to confirm that the -- with the Annual General Meeting scheduled for next month, that you are still expected to pay out the 2019 dividend. And I was just wondering, assuming a positive shareholder vote, when the timing of that payment would be. And then second, on Slide 7, you noted how new product development has been key to inflows over the past couple of quarters/years. One of the things we are hearing from some of your competitors is that the lockdown environment has impeded the ability to develop new products. I was just wondering if that's something that you're seeing as well. Or what makes -- if not, what makes DWS different?

I think, Mike, I take first question. Claire, if you don't mind. I think Annual General Meeting 2020, as you know, we postponed from June to November. And I think, unfortunately, we had the thought at the time as we decide to shift that we can held it physically because we thought, as a second AGM, we should go more on the interactive, let me say, approach to our investors because we want to lift this culture, investor culture. But unfortunately, we will held that in a virtual format on the 18th. The decision, as we mentioned now many times, really made in light of the pandemic and also to protect our -- health of our shareholders, employees and service providers. And I do think now the EUR 1.67, we are -- we proposed -- we will propose and I think we will see what the shareholders will decide. They have to definitely decide. And I think that will -- I'm confident about this vote and to go with our proposal. Regarding the flows, I think I will give -- hand over to Claire.

Yes. Just to respond on the question about product launches and product innovations. I think quite right that it is a really important feature of contributing to net flow growth over time, which is why we put a spotlight on that. And also, we give good insights into what's in our pipeline. To the question of has the environment slowed down our ability to launch products, a couple of things I'd point to there. One is that the pipeline is a long-term pipeline that we put a lot of effort and focus into establishing. So I think the fact that these are being developed over time means that we have sufficient time to bring them to market. We have announced earlier in the year that we have a new Product Division newly established for exactly that reason to enable us to be more proficient and agile in our delivery of bringing new products to market, bringing the entire value chain together and ensuring that we can match that speed. So I think we recognize the environment that we operate in. We recognize the need for product to be an absolute central focus. Hence, the reorganization earlier in the year. But again, this is a pipeline in the process. It's not something that we do instantaneously.

Mike, I think your point, and I can imagine where you're coming from because, as Claire said, at the very beginning in her presentation, at the beginning of the year, we had a fantastic run, the first 2 months. And the shock of the COVID in March wipeout. I do think the lockdown -- and I just talked to some press people earlier, I do think -- I think even in a lockdown what we are experiencing in Europe now, I do think -- I don't think that we will see a wipeout of the flows like what we have seen in March. So as Claire said, our pipeline is quite healthy and very, very much been challenged also by our teams. But I do think also our clients are willing to invest in this environment. They have to invest. They have to take care of the returns on their portfolios. So therefore, Mike, we are quite confident even in a light of full shutdown in Europe will not impact as we have seen in March.

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

Just a quick one, just going back to the sort of consolidation topic. Obviously, you've delivered very well to your plans. You've got decent scale in the business now, decent efficiency and some momentum in net new money. But then it also sounds as though you've got probably conservatively excess capital of EUR 1.5 billion. I think, in the past, getting the IT infrastructure properly in place was one hindrance to being more aggressive on deals. So how should we think about the possibility of deals going forward? Would you be focused on more pushing with partnerships in Asia, as you said earlier? Or could you conceive bolt-ons in certain growth product areas? And when you think about the sort of optimal scale for the business, would you participate in bigger deals? And how much of a hindrance is the sort of Deutsche relationship in that? Or now that you have your own sort of IT, is that a more plausible scenario? Just interested on thoughts there.

Yes. Bruce, thank you. Again, I do think you are referring to 2 topics that is very core to us for the future journey -- corporate journey. As we said always, the infrastructure platform must create efficiency that we can keep our cost-income ratios on levels we are targeting and trending down mid- and long term. And I do think this is why we are looking for a stand-alone IT platform that is fitting for asset managers. And I do think this is in cost plans embedded. I do think there is not too much magic behind. And I think also in Jan, we will come back in detail on these topics. Regarding -- and I think consolidation in the industry, and I have seen in the U.S., Eaton Vance, all that saying, for us, it's important after we delivered the IPO matrix, we must work on the transformation of our business. That means creating efficiency using new technologies and really disrupt ourselves, not get disrupted, allow it to disrupt us, but disrupt ourselves with -- like technologies, like artificial intelligence, but also transform means also, Bruce, for us to really asset management-friendly organization. As you know, we are redeeming the titles and we are going to a functional framework. We are going to pay for performance. This is more really a broader transformation of DWS. And the second area is growth. Growth is needed. Because of the margin erosion, we have to grow in areas of -- Passive areas because we have a leading position in Europe. And I think, as Claire outlined, our flow rate in Europe year-to-date, we are #2 in this area. So we want to build on these things. We want to invest in these areas that is also underpinning other strategic growth part, but also investing as we're talking -- as a barbell, to invest in the high margin areas, like in illiquid premium -- let me, hunting areas where we have the DNA, we have the expertise, we have now the chance to bring as we brought the investment platforms together illiquid and liquid. And we have the right medicine to fight against a zero interest rate. This is super important. That is the client needs, what we have addressing and that will stay a decade long. And that is where we want to position. This is -- and at the same time, looking to strategic partnerships in getting distributions channels right and addressing the right growth regions because I think we don't want to miss the trend in these areas. Thank you, Bruce, for the question. Hopefully, we answered in the length your question.

Next question comes from the line of Angeliki Bairaktari with Autonomous Research.

First of all, just a clarification on the definition of excess capital. At the time of the IPO, you had defined your excess capital as a difference between your CET1 and your Pillar 2 requirement, which was EUR 2.4 billion. This EUR 2.4 billion translates into a CET1 ratio of 25%, which is much higher than the regulatory minimum requirement of 10.5% that you have. So I was wondering, if you were to engage in M&A, could you use all capital in excess of 10.5% of RWA? Or would you stick to the much higher Pillar 2 threshold that you had set at the IPO? That's my first question. And then my second question, you mentioned that compensation and benefits declined thanks to lower fixed compensation on top of the lower value of deferred comp. So could you please provide a bit more detail on what drove the decline in fixed compensation and whether this is sustainable going forward?

Thank you for the questions. I will take both of those. So firstly, on the excess capital, the excess capital is calculated based on the Pillar 2 excess as opposed to the Pillar 1 excess. Pillar 1 is determined by the a 10.5% CET1 ratio hurdle, which we are exceeding currently at 29%. But the excess is measured by Pillar 2, which is established based on incremental risks that we see that we accommodate capital for in our business model. Now the regulation on that is evolving and changing as we go into 2021 as we move into the investment firm regulation directive. So I think the Pillar 2 definition continues to evolve, and we're monitoring that very closely as we go into next year. On the question of compensation and benefits costs, we've certainly seen a decline in the quarter and a decline in the year. And we're seeing that decline in compensation and benefits costs across all aspects, both variable and fixed. The absolute head count levels that we see for this -- the point this year compared to same point last year is down, and that contributes to the decline in the fixed salaries and the fixed cost base that we see on fixed compensation. And also, we have a revaluation on formerly granted deferred compensation, which also has an effect on the compensation costs.

If I may just follow up on my first question. So in the case of M&A, it would be wrong to sort of look at your excess capital as anything that is in excess of 10.5% of RWA? You wouldn't be willing to go with -- to operate within your Pillar 2 in the case of a combination with another player.

Yes. So in terms of the excess capital, we would anchor that on the Pillar 2 where we establish what we consider to be capital requirements that we carry for the risks within the organization. So the excess capital we would consider on that Pillar 2 level.

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

Two questions. It seems that the one certainty we have on the next presidential election in the U.S. is going to be the fact that the U.S. dollar is going to remain quite low and probably depreciated around the euro. So can you tell us a little bit the way you think about this and whether you're going to hedge your exposure or if you plan that in your budgets? So any sort of detail you could give us would be great. And then, Asoka, you've talked enthusiastically about the outlook for quite a while, which is good in a market which is as bad as it is currently. So maybe following up on the last line of your press release about the 2030 outlook, how do you see DWS in 10 years' time? Probably not so much in terms of new products, the way you've developed it, but more geographically versus what it is now would be helpful.

Thank you for the questions. Just on the dollar movement, as you comment on, indeed, from that movement in the third quarter, we've seen a negative shift in our AUM, saw a EUR 13 billion of decline within the quarter from the dollar movement against the euro. We do look at the sensitivity around that, which we've shared in the past, which is for about a dollar movement in -- sorry, a 1% movement in the dollar, we would see about a EUR 3 billion movement in AUM and about an EUR 8 million annualized impact to management fees. So we certainly monitor that very closely and take that into account in our outlook, but not something that we would specifically hedge against.

Jacques, thank you for the last part. I would like to answer your last part of your question. Again, love that you put this question on the table. I do think the only guy who has a problem is Oliver because he knew now I'm going to talk 15 minutes about this topic.

That will teach him.

But I do think it is really -- we are going to outline and now we are in the design process, and we are in the finalization in a program, what we called DWS TGL program, Transform, Grow and Lead. And this is a program for the next 3 to 5 years, but I do think 2030 is so relevant for us. We felt there is a 3 big -- besides all the trends, there is really a change for the asset management industry in place as we talk about a decade of zero interest rates, decade of sustainability and decade of algorithms, how that's going to disrupt our societies, our industry and especially the asset management industry and specifically. And I do think we are addressing that. We have also -- and I'd love to outline in a longer meeting, Vision DWS 2030. We have presented to the Supervisory Board of DWS, in the offsite, this Vision 2030. That is not super certain, but how I am seeing is DWS will get 50% and more revenues outside Europe. I do think this is a global organization we want to build. We want to lead in areas like in Passive in Europe, very much a clear other destination there. Might be very difficult to catch up with the top 2 players in the U.S., but we want to be the player in Europe in this area. 2030, I do think 10 years is a very long time period with a lot of changes, what we can see. And in the third area is, for me, is absolutely important. And this is what we are saying, that will we want to change our DNA is the ESG. We want to become the leading ESG asset manager in the next 10 years in Europe. It is needed. But I do -- because I think we have to address -- I'm very confident 2030, end of 2030, the humans have to answer the question how we want to live next 50 years beyond 2030. So I do think the ESG will become a dominant team. And that is beyond license to operate for me in this decade. We have to -- and we have to be involved asset manager, but the second topic is, for me, the question what the place of humans in a very technological world, very much algorithm-driven world and also that we want to answer we have a very clear view. 2030, there will be AI with humans will create the best superior performance for other clients. So that is a little bit the lighthouses I would like to outline in the short term because I think Oliver is looking still -- looks happy, but I do think I have to finish here. But Jacques, I am happy to have really an outlining session to Vision 2030 and also the way forward in the next 3 to 5 years.

And there are no further questions on the line. I would like to hand back to Oliver Flade for closing remarks.

Yes. Thank you very much, 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 fantastic day. Bye-bye.

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