S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for joining us here today. My name is Andrew Nicholas. And I'm the research analyst covering the information services sector here at William Blair. Before getting started, I'm required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. With that out of the way, I'm very pleased to welcome the CEO of S&P Dow Jones Indices, Dan Draper, here to the 43rd Annual William Blair Growth Stock Conference. Thanks very much for joining us here today. We're going to take this time, this 30 minutes, to do a bit of a fireside chat. But before we get started, I am going to ask kind of two questions to Dan: first, to give a quick intro to himself and his background, he's been in the index business for a very long time, very knowledgeable in the space; and then a brief overview of S&P Dow Jones.

Yes. Great. Well, look, first, Andrew, thank you very much, and William Blair, all the participants. It's actually a real pleasure to be here today, beautiful weather, obviously, in Chicago, so helping. So Dan Draper, CEO of S&P Dow Jones Indices. We're a division of S&P Global. Personally, I've been in financial services for over 30 years across investment banking, wealth management, sales and trading and over the last 15 years prior to this role, asset management, so running most recently Invesco's passive asset management business, particularly the ETF business. So I had that background as a customer, not only of S&P Global but even legacy IHS Markit of that side, so bringing that perspective. And I'll have my third year anniversary at S&P next week.

Great. And yes, so if you could give just a little bit of a high-level overview of the key brands under S&P Dow Jones, key products, business lines, that sort of thing just to give a little bit of context before we get into a little bit more of the nitty-gritty.

Yes. So S&P Dow Jones Indices is the world's leading index provider. If you look, we have about $18 trillion either benchmarked or investable products around our intellectual property. And we're very much an intellectual property-driven business. You'll know the brand has been around in some form for 127 years in terms of the Dow Jones Industrial Average. And look, you can't talk about equity markets today without obviously talking about the S&P 500, which is 67 years old. And then if you think about fixed income, this is where the merger had really brought in enhanced fixed income, specifically credit capabilities with the iBoxx and the iTraxx ranges. So our really focus going forward is bringing together the leading equity, fixed income, also commodities. We have the S&P GSCI, the leading broad-based commodities benchmark. And as new asset classes emerge, bringing the one-stop shop opportunity for benchmarking and indices across financial services.

That's -- we're going to hit on a bunch of those topics as we go through. But maybe I'll start with the growth rate. At your Investor Day back in December, you outlined basically a growth target in 2025 and 2026 of 10% growth, which is quite a bit higher than what's expected this year but more in line with your historical average, albeit off a bigger base. So I want to start there for context, but kind of talk through what are the components of that organic growth target? What are the things that get you there over the medium to long term? How much comes from new product growth versus market appreciation versus other factors?

Yes. So the way we look at the revenue growth, three components. And then I'll talk about their cyclical elements and then secular. So first, the first component, which is the majority of our revenues are asset-linked. So for those of you in asset management, it's very similar, roughly basis points on assets under management. So as we would work with you licensing our intellectual property, roughly having some percentage of kind of management fees as a broad concept of that. The second is also we license our intellectual property for derivative usage, so with the big exchanges here, for example, here in Chicago. And that's more based on trading volume. And then the third component is data being able to support the intellectual property used in benchmarks, indices and asset management, for example, or in derivatives and being able to sell data to support that. Now within that revenue context, the different elements, clearly secular. One of the biggest trends I would argue in the investment world over the last 3 decades has been the movement of active management into passive. Now that trend again has been going on for 30 years. We still believe it's very much in the still early stages of that type of adoption. And in fact, after every market pullback over the past 2 decades to 3 decades, you've seen more adoption of passive, for example, after the dot-com bubble bursting, after global financial crisis as investors become more aware of the lower cost, transparent benefits. So that's the underlying major secular trend. And that directly relates to those asset-linked revenues that I generated. So for us to be able to work with asset managers, wealth managers, asset owners around the world to grow the passive usage, we are a leader. Our flagship research, our SPIVA, or S&P Indexing versus Active, has really been a major thought leadership piece to bring performance attribution and to bring these benefits of passive investing. And to end investors, we've demonstrated we estimate our 3 biggest indices in equities, the S&P 500, the 400 MidCap and the 600 SmallCap, we've estimated versus active management fees. Over the past 26 years, we've saved investors or helped save investors over $400 billion in management fees and savings. That's directly into their pockets. So that's the major secular trend. Again, even with last year's market correction, we see that trend continuing. Now obviously, cyclically, you see with equity markets, particularly the S&P 500 down nearly 20% last year and even credit markets with our iBoxx down in the teens last year, AUM was challenged. So we're coming into a year with that kind of market correction. But again, the flows, the secular trends that we see moving forward over the medium to long term, that's what we're focused on growing and executing on.

And it sounds like obviously you have this kind of base of exceptionally well respected and known brands and products, another part of driving organic growth or flows as we speak to. And this part of the business is new product development. And I think one of the new product areas that you seem to be most excited about as an organization is multi-asset, some of which is enabled by that iBoxx brand that you bought with IHS. So can we talk a little bit about multi-asset indices and ETFs, the products that you've already launched in that area post-IHS merger and maybe just overall, the way that you go to market in that -- with that particular set of products?

Yes. So when we think about new product development, almost inevitably, we're starting with a client who's coming with an opportunity, a challenge, but they need a solution. And that brings us back to our base of starting with our core benchmark and indices, something like the S&P 500. And it's not only a new theme or index. In many cases, it's a new product. So if you think about the S&P 500 itself, and this is what we really emphasized at Investor Day, it's an ecosystem. Thinking about what started as an active management benchmark for the most part 67 years ago and to today, 30 years ago, that became the basis of investable passive products as passive started to take off. 20 years ago, it became the intellectual property basis of derivative contracts that we see. So this is where taking not only the intellectual property itself, but how it is used in different use cases is really, really crucial. So then if we kind of pivot to new opportunities off of that, being able to now in a world where there are different investor challenges, we saw the low interest rate environment, income was a major need around the world. So how off that core ecosystem can we, with our leading aristocrats dividend franchise, really offer higher income equity-type strategies, which is adopted? And now supplementing, as now interest rates have more moderated and gone up, can we now bring in traditional credit and fixed income, combining those in a way that ensures that the solutions many clients need for us to have higher income but then using the correlation and diversification benefit of combining equities and fixed income together in a transparent, systematic way. And particularly, those clients, I'll pick an example, I think we mentioned during Investor Day, is insurance. If you think about that client channel for us or that industry, which is historically for, say, annuities used active products, many of your products, the ability now to see that active to passive shift go into -- increasingly into insurance but to be able to offer the needs of the annuity buyers of what they're trying to accomplish for retirement and other outcome needs to get, say, income but to then use the multi-asset diversification benefit in a single index and a solution. So that's an opportunity. We've had a number of launches. Our S&P MARC 5% is an index that's helped build our brand through certain client channels there. And in fact, even in Japan, globally, there was a first multi-asset ETF issued in Japan at the end of last year by one of our large clients. So again, we see it as an opportunity to really showcase the one-stop full asset capability of our franchise. And particularly, certain segments, like I said, insurance and others that are earlier stages of the active to passive movement, we can really get in and start with value-added products like multi-asset.

Just so I understand, the insurance market is -- like what is -- okay, so I understand the S&P brand and all the assets you have and making it a one-stop shop. Is it the same things driving adoption eventually or maybe in the early stage of adoption in that market that have driven the shift from active to passive in other parts of the market to this point? Are there other, I don't know, dynamics or things about the multi-asset class product that fits well there? Is it liquidity? I'm just trying to better understand maybe why they're lagging and why they won't continuously lag or why -- where is the ramp? And why is it coming?

It's a great question. I mean, I would get -- the answer is look at the outcome. And generally, what an insurance company, asset manager and intermediaries, what they're trying to solve for their end customers. And I think if you look -- and like I said, this case of things like you need income, but you want to basically control or manage the volatility or the risk you're taking to generate a certain level of income, that is an outcome. But then if you think about from a distribution perspective in that we need to scale, we want to have our sales teams at the insurance companies to be able to sell. You need to be able to have a liquid, scalable product that doesn't have capacity constraints necessarily. So how do we build an index methodology to support that on a multi-asset basis? But also to be able to sell to end consumers, how can you describe, if you will, in a way that's simple enough and understandable on that underlying methodology through the annuity wrapper, something that people can understand is going to meet their needs? So there's a lot of work to refine it to that stage to develop the index to help our customers in that space but then to have the thought leadership and the education that it then can be applied to broader holistic financial planning and kind of wealth management. So again, we're not in that space. We only produce the index and benchmarks. But that's where the partnership with our key customers to understand the benefits of multiple asset, to understand the outcome, produce it, but then to really help the education and grow the awareness and to really facilitate that active to passive shift in that client channel.

Makes sense. Thank you. I think one of the things that I've learned from covering MSCI in the past and obviously the index business here is there is a pretty significant first-mover advantage in a lot of these cases. In multi-asset, there are other competitors that I would imagine are going after the same thing. And we know the names of some of them that are well-known. Can you talk a little bit about the competitive set and maybe your right to win in this market?

Yes, absolutely. Look, if you look at the index industry, the barrier to entry is exceptionally low. There are so many smart people, quantitative backgrounds who can come up with a spreadsheet and come up with an opportunity. But what differentiates and creates a marketplace? It's pretty simple, it's trust. And so not only having its table stakes to have the quantitative, to have the talent to be able to do it, but having the brand, the reputation. And for us, the crucial elements are trust as well as the independence and transparency. So this is where being able to come in and have whether it's, like I said, an attribution benchmark or a product that's based on one of our investable indices, it's being able to bring, I think, all of those elements to bring buyers and sellers to trust to be able to kind of transact through that. And that's where again the long history that S&P, the brands that we've been able to bring but also the track record of buyers and sellers. And then once -- and fiduciary processes like many of you have with your fund boards, with your end investors to be able to point to that level of independence that my performance, my outperformance is based on something that is independent, verifiable through our methodologies, which are public on the websites. That's real value that brings people to the marketplace.

Makes sense. Switching gears a little bit, I want to talk about another area of new product, maybe not a new product area but certainly a bigger growth opportunity with index, which is ESG and sustainability. It's a major initiative within the broader S&P Global enterprise. But I want to speak to obviously its role in the index business. Can you speak to how you're capitalizing on the secular growth opportunity within ESG, how you're leveraging not only the assets that you have already within the index business but maybe across other segments of S&P to bring value to customers?

Yes. Look, sustainability is absolutely an S&P Global priority. And at S&P Dow Jones Indices, we're leveraging all the capabilities throughout the firm. And that's what's so exciting, I think, post merger for us. If you look specifically at S&P Dow Jones Indices, we have arguably the longest legacy in sustainable indexing. You look at the Dow Jones Global Sustainability Index, it was launched in 1999. So we have that track record there. As we've been able to now look at the evolution, there are going to be different phases of sustainability, of ESG broadly that come out over time. And I think we're really entering a phase now particularly looking at markets like Europe, where now regulation, the taxonomy is becoming more defined and the needs and getting the feedback, the prototyping. Now we're entering, I think, a new stage where we're exceptionally well positioned at S&P Global. And at S&P Dow Jones Indices, we're leveraging with our Sustainable1 colleagues incredible datasets like on climate. We're getting a lot of feedback with the Trucost dataset that comes through there. And if I look particularly at our expansion plans and our conversations when I'm in Europe with our biggest clients, almost -- if not the first topic, one of the first two topics of every conversation is ESG. And if you look at ETFs, for example, in Europe last year, out of all of the net new assets in European ETFs, 65% were ESG-related. So you have to have that capability. And it gives S&P an opportunity for us in certain segments of indices or even asset classes where we're maybe not the leader, a disrupting opportunity. We can take the datasets, the capabilities of Sustainable1. We can take these outcome solution opportunities that our clients are giving us to really move forward, same thing with Asia, even early. So I think this is kind of the global nature of kind of our franchise, gives us a real big opportunity to get even closer to our clients there.

Perfect. Maybe I'll wrap it up in terms of the growth opportunity discussion with the two other areas that you called out at Investor Day: Factors and Thematics. Can you spend some time talking about what you have in terms of offerings in those areas? And again, similar question to the other two topics of why there is an opportunity there to drive growth to that 10% level.

Yes. I think if you look at the growth opportunities within kind of the investment world, which all of you know well is again you look at the margin profile, potential growth for net new assets, again you can see the Factors, Thematics. And these come again from our solid core. When you have a core S&P 500, the ecosystem we built, which would have started with the Fama-French-style investing, we call it today, back in the early '90s of growth and value. Style has evolved into sectors we've built, and now either through the performance attribution, things like low volatility momentum. So that constitutes our factor, how can we find investable ways to help investors meet outcomes and build better diversified ways of meeting those outcomes. So as we look through it and then we can use this ecosystem to provide liquidity, to provide products like ETFs, structured products, other ways to express these views to build ultimately better portfolios. And within that as well, we can look at new marketplaces. And this, for example, S&P Global owns Kensho, which is a leader in AI and machine learning. In 2018, S&P Dow Jones Indices prototyped new sector indices, we call them New Economy, on AI and machine learning. So these S&P Dow Jones Kensho Indices have been in market with ETFs since 2018. They now have about $3 billion of AUM. So being able to not only get using things like AI, Factors, Thematics in traditional ways but even thinking about new markets and how that may be applied on a new sector basis. So it gives us a chance to do it. But it's a rich opportunity to build on our core -- if you will, our core beta indices but provide additional ways of thinking of new markets but ultimately better diversification. Where can these fit in as additional tools to build better portfolio outcomes?

Maybe I'll take the Kensho reference to switch gears a little bit and ask kind of the topic du jour about artificial intelligence. Obviously, it's leveraged very broadly across the S&P firm. Can you talk a little bit about -- you say the sectors and some of the new products that it has already created. Is it something that can create additional products in the future? Is it something that can create additional efficiencies? Obviously, it's a pretty efficient organization already or segment at least already. But if you could speak a little bit more to kind of that very hot topic.

The answer to your broad -- two broad questions are yes and yes. So our ability to really take -- if you think about -- now I think this is again the benefits of the merger we brought together, the incredible underlying data capabilities in these datasets to bring together, to help solve problems, to build new intellectual property, that is a huge opportunity. So building new products, yes, but also you mentioned the efficiency. Being able to free up capacity to self-invest and kind of building through more agile processes and AI gives us better intelligence on our customers. How can we help anticipate changes in demand earlier? How can we where -- many of our clients, including many of you in the room, are trying to be more efficient yourselves. If we can move further into the research and development processes, we can show up better educated with better data what's happening within consumers, that's going to help us deliver better to you. Same thing specific to indices, how can we think about our process of rebalancing indices? You're processing, cleaning the data, using it to ultimately create better intellectual property. So you hit the two points, growth in new products but also a huge amount of efficiency gains. And we can also get -- we have incredible talent at S&P Global to really utilize that to higher-value opportunities for our customers. So I think there are many ways that we're kind of prototyping different ideas. But it's prioritizing. We've been using AI, as you can tell, for a number of years. But I really think this is a huge pivot opportunity for us to lean in more both product and efficiency.

Makes sense. We've talked at various points in this conversation about the combination of assets, leveraging IHS, leveraging different parts of the segment. But I want to focus on maybe the integration of IHS Markit's capabilities into your business. Are you effectively done with that transition? Where are you on the integration arc? I know you've already put together some new products out there, but just trying to get a sense. Is this one segment at this point? Or are there still some kind of remaining initiatives in place to make it one business?

At S&P Dow Jones Indices, we're one team. And we're super focused on our customer opportunities right now. So a huge opportunity for us was obviously to look at synergies, to find ways which we've done, but being able to deliver those and being able to look forward. It's about growth and the ability, as you mentioned earlier, how can we find new product areas as new markets are evolving? As the macro environment, higher nominal interest rates, dispersion of returns are obviously increasing, how can we really kind of use again the multi-asset capabilities and also the incredible talent to be able to bring in fixed income expertise, which has really supplemented our strong equity, to be able to think that, also to take a more global view? If you look at the footprint that IHS Markit has built global, but particularly in Europe and Asia, again those are markets that are exciting expansion opportunities. But we're absolutely one team, getting the talent, the leadership in place within S&P Dow Jones Indices and to really get us forward-looking. And it's not something that just we wanted to do, our customers are demanding it. They wanted a seamless integration from an indices perspective, wanted to make sure there wasn't disruption to their customers. And we've really worked hard to deliver that.

Makes sense. We've got about 5 or 6 minutes left. I want to maybe pull away from S&P and speak more holistically about the industry. We've highlighted or you've highlighted some of the bigger-picture secular trends at play. So I'm going to start with the first one, which is that shift from active to passive. In terms of its share of the overall market, how do you think about the runway? I don't know if there's any numbers you could put around that. And also does a choppier market environment, like what we have seen over the past 12 months, in your view, kind of impact that trajectory at all, whether it be temporary or over the long term?

Yes. So if you -- the estimates -- because you have things like exchange-traded funds and, to some degree, mutual funds, you can measure. But if I had -- there are other parts of separately managed accounts and others. But if I -- in aggregate from what we can measure, passive is roughly about 30% of AUM, broadly speaking today. And I think the opportunity to grow, how big could that get, we get a lot of those questions. But I think it's important to remember that passive investing is a passive price-taker here in the marketplace. Active management overwhelmingly sets the price discovery process. So if we think about the average daily trading volume of passive, particularly ETF-related items, it's probably less than 10% because of the lower turnover. When you have a passive index, it just turns over much lower than an active strategy. So that gives you some perspective of -- and so the ability for passive to grow without impacting market prices, for example, we estimate passive would probably have to go over 80% before the daily trading volume of passive would constitute half of the average daily trading volume, just to give you a perspective. So these are still, we believe, early innings for kind of that growth of passive on that side.

Makes sense. Maybe related, I think investors in this space and other of your competitors are constantly interested in fee pressure and what -- and you said price-taker. But I'm speaking more specifically to the fees on the ETFs themselves. Can you talk about the trajectory there? Obviously, there -- and I don't mean to be answering the question for you. But obviously, there are larger customers or bigger products that are going to have a little bit more leverage to get basis points down. Can you talk a little bit about overall trajectory of S&P Dow Jones' cut of the traditional passive ETF or ETMF?

Yes, look, first, I would say pricing is a strategic asset for our business. So we think about it as we -- from intellectual property, we have all the way through kind of our data as we go through that. So it's something we spend a lot of time with. Generally, we are aligned with our customers. So effectively, if we are adding value to asset managers, insurers, wealth managers, I mean, that's the ultimate goal that we deliver. And I think, again, that's where, in philosophical terms, our pricing is aligned with our clients' success. So we continue to do and deliver as we've done. We're able to kind of push forward on that. And I think that's where the trade-off we have is where can we find new segments and be first to market, where you can price at a premium level? And that's interesting, that's innovation. We want to be able to do things like a Kensho, for example, I mentioned, or certain areas of sustainability, right, where we have proprietary data. On the other hand, there, in this long secular trend, volume opportunities. So in many ways, we think strategically about that, but then also working with our clients, in particular, where they win, we want to be able to win as well.

Perfect. And then maybe one last one. I get asked about the threat from self-indexing every so often, maybe less so now than years ago. But just kind of curious about how you think about self-indexing from some of your clients. I know you've talked about a lot of the reasons for the S&P moat. But is that something that you guys think a lot about? Is it something that has impacted your business in any way to this point? Or would you expect it to have a meaningful impact going forward?

Look, self-indexing has -- and I say this having been a former asset manager and now on this side. Look, self-indexing has been around for more than a decade in some form. It's an opportunity. I would say putting my previous hat as an asset manager, it does bring considerable ring-fencing and potential management of conflicts of interest. So it doesn't come as an easy way for fiduciaries necessarily to do. That's my experience. That said, it can be appropriate for various reasons. What I would say is for some of the companies that do, do self-indexing, they will outsource calculation services or other services to us. So we are still kind of involved in that area. But I would say over the last decade, you can see self-indexing hasn't really had a major impact. But in many cases, it's firm-specific on kind of use cases. Overwhelmingly, you can see the independent third-party benchmarks, which we are a leader in, that's really where customer demand ultimately sits and, I think, will continue to be for the foreseeable future.

All right. Great. We have about a minute left. So I'll wrap it up there, unless there's anything, Dan, that we haven't covered that you'd like to message to the group before we wrap up.

No, look, it's a pleasure to join everybody today. And super job, Andrew. Thank you for inviting me. Great to be here.

Thank you. Thanks, everybody.