“We have continued to make good progress in developing our business through our growth initiatives, cost reductions and strategic partnerships. We are especially pleased to have entered a strategic alliance with Tikehau and to have established the cooperation with Generali, one of the world’s largest insurers. Through effective cost management and stable revenues we have been able to show a good increase in profitability”, said Nicolas Moreau, CEO.
“As we had envisioned, as a standalone company we have been able to reduce costs significantly in the third quarter. We are satisfied with our progress and our cost saving target for 2018 is well within reach. Good market and fund performance outweighed net outflows, leading to stable adjusted revenues. We also continued to see the management fee margin above our medium-term guidance, at 30.5 basis points in Q3 2018”, said Claire Peel, CFO.
During the third quarter, we continued to develop our business following our public listing earlier this year through both cost and growth initiatives, while the effects of the US tax reform and investor appetite continued to make for a challenging flow environment. We made strong progress with our cost efficiency program, launched following our separation from Deutsche Bank Group, resulting in substantially lower costs and Cost-Income Ratio compared to the second quarter.
We also used the summer to advance growth projects, including agreeing on a strategic alliance with Tikehau Capital, furthering a cooperation agreement with Generali. Furthermore we launched several new funds in the third quarter. For example, we launched the first money market fund in the USA incorporating ESG criteria, reinforcing our expertise in this area.
Total adjusted revenues in Q3 2018 stood almost unchanged at EUR 574 million, (Q2: EUR 576 million). Adjusted profit before tax increased by 18 percent quarter-on-quarter to EUR 177 million, (Q2: EUR 149 million). After deduction of taxes, DWS posted an improved net income of EUR 121 million, up 32 percent compared to the second quarter (Q2: EUR 92 million).
The management fee margin decreased slightly to 30.5 basis points in the third quarter (Q2: 30.7 basis points) and remained in line with our medium-term target of at least 30 basis points.
Assets under Management (AuM) rose by a total of EUR 5 billion compared to the last quarter, to EUR 692 billion in Q3 2018. This growth was a result of good market performance and positive currency developments.
Net flows of minus EUR 2.7 billion during the quarter (Q2: minus EUR 4.9 billion) were due predominantly to redemptions of EUR 3.2 billion of low margin mandates connected to the US tax reform.
Active Asset Management saw net outflows driven by redemptions in the Active Equity segment by a few institutional investors and lower overall demand by retail investors in the volatile market environment, while DWS Top Dividende fund outflows decreased significantly quarter-on-quarter. Active Fixed Income net outflows slowed versus the prior quarter supported by significant positive flows in Institutional Fixed Income.
Passive Asset Management flows were close to flat in the third quarter. While inflows into European-listed ETFs remained strong, passive flows were impacted by an institutional client redemption related to the US tax reform. In the first nine months of 2018, DWS ranked second in ETP (exchange-traded funds and commodities) net inflows in the European market with a 14.5 percent flow market share according to ETFGI.
The net inflows into Alternatives increased compared to the second quarter. The main driver was a higher demand for Real Estate products, which continued their positive flow performance seen in prior quarters. For the first time the three open-end real estate funds of the DWS “grundbesitz” family reached combined fund assets of more than EUR 10 billion at the end of August 2018.
Adjusted costs decreased quarter-on-quarter by 7 percent to EUR 398 million (Q2: EUR 427 million), demonstrating that our cost efficiency program is well on track. Here, our new standalone basis helped us to significantly reduce the charges related to services received from Deutsche Bank. We are on course to meet our gross savings guidance for 2018 of 20 to 30 percent of the medium-term target – EUR 125 to 150 million compared to full year 2017.
The adjusted Cost-Income Ratio (CIR) improved by 4.8 percentage points to 69.2 percent (Q2: 74.1 percent), following the positive cost development.
Growth Initiatives and Strategic Progress
During the quarter, the Executive Board of DWS shared its five-year transformational program with DWS staff. It reinforces their full commitment to reaching our medium-term financial targets but also extends its strategic horizon further. The program specifies three distinct phases of our corporate development. After having completed phase 1 with the public listing of DWS earlier this year, we are currently in phase 2, where we advance our business through growth initiatives as well as through our cost efficiency initiatives from which we expect to see further positive effects in the quarters to come. From 2020 onwards, in phase 3, we envision DWS to be in a strong position to globally diversify its profit contribution, realize scale benefits and become a market consolidator.
During the third quarter, we were able to advance several growth initiatives as part of our phase 2 efforts which led to signings recently:
We agreed a strategic alliance with Tikehau Capital, deepening our relationship following their participation in DWS’s initial public offering. In the agreement, DWS and Tikehau list several initiatives they intend to explore, including the potential launch of a joint product, which would pursue a special situations strategy, leveraging the two companies’ alternative asset management expertise and platforms. It is currently expected to be launched in 2019. Other initiatives include a collaboration on identifying funds for potential distribution through the companies’ respective channels.
In addition, we agreed with Generali to expand our existing cooperation, making us one of the insurance company’s preferred asset managers. We will further strengthen our collaboration in key markets and extend the scope of the portfolios managed by us for Generali to include unit-linked insurance products. We will work to strengthen our cooperation efforts in providing unit-linked solutions in France, Switzerland, Italy and Germany as well as potentially in other countries.
For the remainder of the year we are focusing our growth initiatives on products and services where we can differentiate ourselves as well as executing on cost efficiency initiatives from which we expect to see further results in the quarters to come. DWS Group is still on track to achieve 20 to 30 percent of its gross savings target by the end of 2018. And as our cost efficiency initiatives continue to pay off, we remain on track to deliver on our CIR target of less than 65 percent in the medium term.
As previously stated, we expect revenues to be lower for 2018 than for 2017, largely attributable to lower performance and transaction fees reflecting the periodic nature of fund performance fees recognition and significantly lower other revenues driven by non-recurrence of the insurance recovery. Management fees are expected to be slightly lower compared to 2017 due to net outflows, market performance and margin compression.
We remain committed to our 3 to 5 percent net flow target in the medium-term. Our strategic growth initiatives, new product launches and our existing fund pipeline support the 3 to 5 percent net flow target for 2019 and beyond.
We remain highly committed to our dividend pay-out target of 65 to 75 percent.
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