MSCI Inc (MSCI) — Q4 2021 Earnings Call Transcript

Thank you, Elizabeth. Good day, and welcome to the MSCI Fourth Quarter 2021 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the fourth quarter 2021. This press release, along with an earnings presentation we will reference on this call as well as a brief quarterly update, are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we'll also refer to non-GAAP measures, including, but not limited to, organic operating revenue growth rates, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide insight into our core operating performance. You'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation. We will also discuss run rate which estimates at a particular point in time the annualized value of the recurring revenues under our client agreements for the next 12 months, subject to a variety of adjustments and exclusions that we detail in our SEC filings. As a result of those adjustments and exclusions, the actual amount of recurring revenues we will realize over the following 12 months will differ from run rate. We, therefore, caution you not to place undue reliance on run rate to estimate or forecast recurring revenues. Additionally, we will discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures. On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. Finally, I would like to point out that members of the media may be on the call this morning in a listen-only mode. And with that, let me now turn the call over to Henry Fernandez. Henry?

Thanks, Jisoo. Hello, everyone, and thank you for joining us today. MSCI delivered exceptional results in 2021, especially in the fourth quarter, demonstrating the strength of our ambitious strategy, key long-term investments and consistent execution. The results also reflect unprecedented demand for our solutions and enormous growth opportunities for the years ahead. To list just a few highlights, in the fourth quarter, MSCI achieved organic revenue growth of nearly 20% and adjusted earnings per share growth of over 28%. For the full year, we achieved organic subscription run rate growth of over 13%, record recurring subscription sales of more than $255 million and close to 95% retention. In addition, we generated free cash flow of more than $883 million, which represented a 16% growth rate. Our strong financial results reaffirm our strategic progress. MSCI continues to expand its role as a change agent for the global investment industry while providing the common language and the tools investors use for indexation, risk management, factors, ESG, climate and other key investment categories. Across all of our business lines, MSCI is making a big impact and gaining further recognition. We saw numerous examples of this during the fourth quarter. In October, Hong Kong exchanges launched a futures contract on an MSCI China A share index, the first offshore sector balance China A share future supported and approved by Chinese regulators. It proved to be the most successful launch ever of a futures contract based on an MSCI Index. In November, we affirmed our status as a leading provider of climate solutions for investors. During the COP26 Finance Day, the UN Capital Development Fund launched a new ETF linked to the MSCI ACWI Climate Pathway Select Index. Before and after COP26, we rolled out several new climate tools, including an analytical tool that provides carbon emissions data for more than 15,000 private companies and nearly 4,000 active private equity and debt funds. This is in addition to the carbon emission data we provide on nearly 10,000 public companies. As the global race to net-zero accelerates, we'll see enormous opportunities to provide data, tools and solutions to support investors' and companies' decarbonization initiatives and the resulting asset repricing and capital reallocation. Our ongoing and incremental investments will help us maximize these opportunities and drive climate progress across the whole of the capital markets industry. Climate is just one example of the historic changes reshaping the global economy. At this time, MSCI's products and services have never been more important to investors and business leaders around the world. Across most client segments and regions, we currently see a strong operating environment. Among our clients, we've seen more confidence than at any point since the 2008 financial crisis. Our intense client centricity has enabled us to add wallet share organically and emerged as a go-to partner for clients seeking to differentiate themselves. That includes asset managers and asset owners, MSCI's largest installed base of clients. Last year, our subscription run rate among those two client segments increased by 11%, excluding acquisitions. We're also rapidly expanding client segments and end markets such as wealth managers, case funds, broker-dealers, insurance companies and corporates. We generated close to $78 million of incremental subscription run rate from those groups in 2021 for a growth rate of nearly 20%. Within our products and services, we continue to address the enormous market for indices across asset classes, exposures, and investment thesis. In indices, MSCI remains a go-to provider for tools to support asset allocation, portfolio construction, performance benchmarking, indexation and customized outcomes. As we modernize the client experience and capitalize on growth opportunities, MSCI continues investing in and executing on our data transformation strategy. This strategy was a direct result of the feedback we received from many of you more than a year ago and before the last Investor Day. To put this data transformation in context, MSCI has traditionally used third-party data to create indices, risk models and other products. We will continue to do that in the future while creating new pathways for clients to access and interact with our products, but we will also source and collect much more data from alternate and direct sources on areas ranging from private equity and fixed income to real estate and climate in order to generate more meaningful and richer insights for our clients. In effect, MSCI has always been a data processing factory. Now we are rapidly becoming a data-building machine. The value of this transformation cannot be overstated. In a world that increasingly runs on data, MSCI's new capabilities will dramatically enhance our competitive advantages and boost our long-term growth potential. Our new data strategy is closely connected to our technology transformation. We recently launched MSCI Developer Community, a cohesive platform for clients to access our APIs and our code. This platform will help developers and quants customize and improve their offering and scale various use cases such as integrating front- and back-office applications. We're also pleased with our accelerated migration to the cloud. Last year, we successfully exited one of our on-premise data centers, and we are on track for another exit this year. Looking at the larger picture, MSCI's all-weather franchise and mission-critical solutions position us favorably in every type of operating environment. That includes periods of sector, factor, geographic, and ESG rotation due to our diversified product line; periods of elevated inflation due to our pricing power; and periods of market volatility due to our franchise in risk management and index derivatives around the world and, of course, our approach to repurchase of shares. Today, with strong momentum in a constructive environment, MSCI continues making investments that we are confident will deliver tangible near-term benefits. These investments are fueling robust business growth and helping us modernize the client experience. We believe that they will also help us build on the historic achievements of 2021 and reach even greater heights in 2022.

Thank you, Henry, and greetings, everyone. As Henry alluded to, our Triple-Crown framework, emphasizing the highest returns, fastest payback and most highly valued business opportunities, is driving accelerated growth across the board as you can see from the record numbers. On today's call, I will provide more detail on some of our investment areas and growth opportunities. Most of our investments will be in areas where we have demonstrated leadership and see incredible demand. Let me start with index where we are uniquely positioned to serve the global investment community. We are transforming the ability of our index clients to access, monetize and leverage our indexes and calculation capacity. MSCI currently calculates more than 260,000 indexes per day. With our investments, we expect that number could reach several million indexes calculated over the next few years. Our forthcoming client application called Index Builder will provide investors with the opportunity to create, customize, and test indexes around MSCI's world-class frameworks and content. This will put an index calculation solution at our clients' fingertips for the first time, accelerating our ability to meet their demand. Customized index subscription modules overall continued to show excellent momentum, growing by 18% to $93 million of subscription run rate. Additionally, customized indexes are a key driver of new growth opportunities within index-based products. We're also investing to stay ahead of clients' needs for direct indexing as demand continues to grow in the wealth industry for personalized tax-aware portfolios at scale. Our strong brand across indexes, ESG and climate, factors, and analytics, coupled with our portfolio construction and tax optimization tools, are helping us land several big wins, including with clients who are licensing our indexes and expanding their use of our ESG content and risk models. In fact, the AUM of direct indexing licensed to MSCI indexes is now roughly $60 billion, while our run rate for direct indexing offerings across the firm is roughly $10 million. In the climate space, clients continue to adopt MSCI's Paris-aligned indexes, climate data insights, physical and transition risk models, implied temperature rise measures, our net-zero tracker, and our TCFD-aligned and other reporting tools. Our climate-related run rate across the firm now totals $45 million, well more than double from last year. Following the successful product launch of Climate Lab in October, we signed several new clients during the quarter, including asset owners in EMEA. These wins also benefit the Analytics segment and leverage their reporting infrastructure. One of our largest current priorities is to build and enhance our core products, including Climate Lab and our climate models, data, and research. As you can see from the numbers, ESG at MSCI continues to perform strongly and is a central focus for us in 2022. Our ESG franchise serves different types of investors including ESG integration investors, impact investors and values-based investors. Some focus only on the financial impact of ESG issues, while others concentrate more on ethical and sustainability concerns. We offer data and solutions to support each of these use cases. New clients in the ESG and Climate segment comprised more than 50% of new recurring subscription sales during the quarter. We're proud of the role we have played in the investment ecosystem as the largest ESG ratings provider covering over 14,000 issuers. We will continue to expand and deepen our large securities coverage universe and high data quality. We believe our focus on rules-based and transparent methodologies, financial materiality of ESG risks and assessing resiliency to those risks has enabled MSCI to transform the investment process for our clients. I'd now like to highlight some successes in Analytics this quarter. Our subscription sales grew 72% quarter-over-quarter. Year-over-year, they grew 36%, and our retention rate improved to 93.4%. This resulted in record-high net new recurring subscription sales of $18.2 million for the quarter. The wins were broad-based, including with asset owners and asset managers for use cases where we have leadership, such as enterprise risk and performance and equity models. We're also leveraging our traditional offerings for target client segments such as our enterprise risk platform for insurance firms and our fixed-income factor models for broker-dealers. Our business wins also consisted of new offerings to solve new use cases, including, as I mentioned previously, in climate reporting within the Analytics platform and Climate Lab. Across Analytics, we continue to benefit from the enhancements we have made to portfolio construction and the reporting tools that we have developed, including factor and risk models, optimization engine and performance attribution tools while providing our index, ESG, and climate franchises with critical and differentiated IP. We're also adding to our coverage footprint and leveraging our existing offerings to serve newer and potentially significant client use case. Our recent success scaling the hedge fund client segment is a great outcome of this approach, where our subscription run rate totals $143 million, growing over 18%. Before concluding, I'd like to say a quick word about our data capabilities. We continue to rapidly incorporate new proprietary third-party data sets to expand and enrich our existing content, improve interoperability with external sources and establish deep network effects and client stickiness. This is evident in fixed income indexes and modules where we have added data on roughly $53 trillion worth of additional fixed income assets. Meanwhile, through our climate investments, we are rapidly adding data on physical assets, target emissions, and other key metrics. We're also investing in the data consumption experience for our clients. To that end, we recently launched MSCI Data Explorer, our new cloud-native data search and exploration application, which enables clients to access and download data sets across all product lines in index, ESG and climate, analytics, and real estate. Looking ahead, we remain confident that our long-term investments will drive future growth opportunities. With that in mind, we will continue investing and continue meeting client demands for our offerings using MSCI's rigorous Triple-Crown framework as our north star.

Thanks, Baer, and hi, everyone. The record results for the quarter and for the year reflect the enormous opportunity set available to MSCI and our long-term actions to identify, invest in and capture those opportunities. Each of our product segments, index, analytics, ESG and climate and all other private assets, recorded their highest quarter ever for recurring subscription sales and net new recurring sales. We drove very strong double-digit sales and subscription run rate growth in each of the Americas, EMEA and APAC regions, reflecting our ability to unlock the significant addressable markets in front of us. Our One MSCI ESG and climate franchise delivered 58% run rate growth year-over-year, adding $129 million of additional run rate during 2021. And looking forward, our longer-term sales pipeline across products and regions looks quite healthy. Across the firm, our 13% organic subscription run rate growth was fueled by strength across nearly all dimensions, geographies, client segments and product segments. Index subscription run rate grew more than 12% year-over-year, our 32nd consecutive quarter or eighth consecutive year of achieving double-digit growth. Market-cap-weighted subscription modules, which represent approximately 75% of index subscription run rate, grew 9% while we recorded strong double-digit growth in our investment thesis index modules, particularly in areas like factors, ESG and climate, which collectively drove 28% year-over-year subscription run rate growth while customized index subscription modules grew 18%. Analytics recorded 5% organic revenue growth and 7% organic run rate growth with double-digit organic growth in both equity portfolio management tools and fixed income portfolio management tools, reflecting the strategic business wins Baer described earlier. Importantly, our strong profitability growth across Analytics is fueling company-wide operating leverage and enabling us to make investments in key growth areas across the firm. In ESG and climate, we drove outstanding organic growth of 53% in revenue and 47% in organic subscription run rate with strong demand from new and existing clients alike. To put this in context, since MSCI's acquisition of RiskMetrics in 2010, it took almost 10 years for the products in our ESG and climate segment to cross $100 million of run rate, which happened at the end of 2019. In the two years since, we've doubled that, and in 2021, with nearly $200 million in run rate. Within all other private assets, we are building momentum with organic revenue growth of 13% while benefiting from growing traction with our climate offering. Additionally, we're seeing strong early traction from RCA, which added $76 million of run rate as of 12/31. As we had indicated previously, we expect the annualized adjusted EBITDA margin for the All Other segment to be close to the mid-teens for full year 2022, impacted by some employee retention and integration expenses as well as the reallocation of certain internal costs to the segment. Turning to asset-based fees. Despite year-end volatility, we observed healthy cash inflows across geographic exposures and product areas and equity ETFs linked to MSCI indexes. This included healthy inflows into products with emerging markets, developed markets ex U.S. and U.S. exposures. AUM and equity ETFs linked to MSCI ESG and climate indexes as of year-end was $227 billion, growing a tremendous 114% from a year ago, with cash inflows of nearly $34 billion during the quarter, resulting in more than 75% market share in global ESG and climate equity ETF flows. The period-end basis point fees were 2.54 bps. The quarter-over-quarter decline was almost entirely driven by mix shift, with higher growth in lower-fee products. Solid operating performance and notably strong revenue growth drove nearly all of the adjusted EPS outperformance in the quarter, with some puts and takes from higher tax rate and interest expense. Even in the context of business investments we've made, we drove modest margin expansion during the quarter, which continues to be a key objective. Excluding results from the RCA business, MSCI's adjusted EBITDA margin across the firm would be roughly 59.3% for the quarter, which would imply roughly 150 basis points of margin expansion. We also continued our track record of delivering strong free cash flows of over $880 million for the full year or growth of over 16%. This was also higher than our prior expectations as we did not make accelerated incremental cash tax payments in the fourth quarter that we had previously assumed as a result of our latest views of the tax environment. Turning to capital allocation and our balance sheet. Including December and January month-to-date through Tuesday, we have repurchased approximately 925,000 shares or close to $480 million. Also, MSCI's Board of Directors has authorized the company to opportunistically explore financing options, although any potential financing is subject to market and other conditions and there can be no assurance as to the timing or certainty of the transaction. As a top priority, we remain focused on reinvesting in our business across the Triple-Crown areas that we've highlighted today, including custom, ESG, climate and other investment thesis indexes; fixed income and private asset content and solutions; data and technology capabilities; as well as client coverage, product and research enhancements. Additionally, we will continue to pursue opportunistic M&A in highly strategic growth areas for us. Turning now to our full year 2022 guidance, which we published this morning. Our expense guidance range primarily reflects the investments we are making to fuel continued growth as well as enhance the client experience. Our projected level of spend assumes relatively flat market levels for the year. And as always, our expenses may flex up and down depending on market conditions. As a reminder, we expect normal seasonality in our expenses during the year with certain compensation and benefits expenses typically being higher in the first quarter. Our free cash flow range continues to reflect our confidence in strong collections and operating performance. Our tax rate guidance range assumes no significant changes in global tax regimes. Excluding the impact of combining with the lower-margin RCA business, we would expect margin expansion in 2022 across the balance of the company. In summary, as both Henry and Baer have noted, we are seeing unprecedented levels of demand for our offerings, and we are focused on capitalizing on those opportunities. We have an all-weather franchise that positions us well for all operating environments, and we're excited for the continued growth opportunities ahead of us in 2022 and beyond.

Andy, you're guiding to about a 15% increase in EBITDA expenses year-over-year. Is your expectation that revenue will grow at least in line with the expense increase? Or is this sort of more of an investment year? And also just embedded in the guide, are you assuming that markets stay at this level? Or if they are choppy, I know you mentioned that you could sort of dial it back, but maybe for future growth, it's sort of the right decision to make the investments. So just wanted to hear about some more color on the expense guide.

Thank you, Toni. Regarding growth, we don’t provide top-line guidance, so I can’t comment on that specifically. However, I want to emphasize that over the long term, our business model includes a very slight and positive operating leverage. Currently, our main focus is on investing in the attractive opportunities we see ahead. We have pursued these investments over the past year, and our expense guidance reflects our intention to keep doing so. It’s important to note that the main reason for the increase in expenses is due to these investment dollars. We're investing in the compelling long-term opportunities we've discussed. Additionally, we are experiencing some carryover effects from our hiring and investments in 2021, and we will continue to invest in 2022. It's also worth mentioning that we will feel the full-year impact of RCA expenses, which will influence our expense guidance. The smallest factor affecting our expenses will be same-store wage increases, which we expect to be slightly higher than usual. This is a minor consideration, and we have various strategies in place to manage wage impacts in both our expenses and our pricing, which puts us in a good position during inflationary periods.

Terrific. Helpful. And then Baer, you spoke about investing in data. And could you just talk about how differentiated your ESG data is versus competitors and how hard you think it will be for others to replicate once you make these sorts of investments? And I think this is a particularly interesting topic because I think the perception is that you have this leading brand. It sort of helps with client relationships and benchmarking. But I think the common perception around data is that data could become more commoditized or things like that. So just talk about how important it is to have this differentiated ESG data and how you get to that.

So thanks, Toni. So it's absolutely critical. So I think that at this stage, roughly 45% of our ESG data comes from alternative sources. So we're highly dependent both on, I would say, the expertise and depth and breadth of our research and our data environment, the combination of both of those. So I think we're very far from a stage where data in either ESG or climate is anything like a commodity. We're doing a lot of interesting and new research in this area. We're stepping up our investment dramatically, and that includes in both our infrastructure for managing all of that data. It includes the software, which enables us to go directly to issuers and makes it very easy for them to send us that data. And it also includes precisely those alternative data techniques such as natural language processing that allow us to go broader and deeper to look for topics such as controversies in the ESG area and new sources of information in climate. So this is really central to what we do at MSCI generally and in ESG and climate, and we're very confident that it will be central to our competitive advantage for quite a number of years to come.

Yes, I have another question regarding ESG. Recently, there seems to be a surge in discussions in the media about ESG, particularly concerning firms like yours and how some ESG scores may not accurately represent what investors seek when they consider ESG products. I believe this isn't a new issue; perhaps it's just noise or a reflection of your success. I'm interested to know how you perceive these discussions. More importantly, are you experiencing any changes from your clients? Are they scrutinizing more, asking additional questions, or is it having no impact at all? Also, are you noticing an increase in potential regulatory scrutiny? I realize this is a lot to unpack, but I'd appreciate any insights you can share.

Yes. Well, thanks, Alex, for that question. Now first of all, there's been no impact on our clients and client requests. If anything, because of the controversy that has been created in the media, clients have become more intrigued because one of the tenets of these reporters was that MSCI is the leading provider of all of this. So people want to come to us because of that. Secondly, and as Baer indicated in the prepared remarks, we at MSCI serve a large number of different types of investors. In ESG and in climate, we serve investors that are looking to integrate ESG and climate considerations into their investment process and therefore, they only focus on financial risk associated with ESG controversies and ESG issues or climate issues in security selection or pricing in their portfolios. Right? The second type of investors are impact investors. And those are very different than the ones that are looking for financial metrics only. These are investors that are looking to, as the name says, make an impact in what they do, and some of them may be willing to give up returns. And the mandate that they've been receiving as a fiduciary indicates that they could do that. The third type of investors is values-based investors, religious organizations and the like in which they want to only invest in what they believe in and are willing to give up substantial returns sometimes for that or increase risk in their portfolios for that. So we serve every one of those types of investors. So I think a lot of what has been twisted and done in these kinds of controversies in the media is a particular tool. These ESG ratings are largely used by people who are looking for financial risk on that. So I think that everyone we have talked to as a consequence of these articles has completely recognized the differences between one thing and another. And many of them have indicated that it is very incredible to have people that think that they can take fiduciary money and go out and fight social causes with the fiduciary money when that is not part of their mandate. So a lot of what these articles have been allocating is for people like you and others on this call to go out and invest and get lower returns on the basis of helping different parts of the world. And that is not what it is in your mandates and how people run money. So there are others that do that, and we serve all kinds of investors. We don't tell them what to do. We provide the tools for them to achieve their investment objectives, not ours.

Moving on and maybe staying in the segment but maybe on climate, $45 million, I think, the run rate you gave, pretty impressive. Can you maybe help us break this down a little bit into what the biggest chunks of those run rates are? You just mentioned that around COP26, you've been introducing a lot of new products. So just wondering where most of that is coming from and then maybe in the next couple of years, as you invest into all these new products, where you actually think in the future most of the growth is going to be coming from.

Alex, Baer again. So look, the biggest driver is clients needing to report within certain organized frameworks, such as TCFD, or to their investors and to look at the climate exposures across their portfolios or, for example, within a given index or an index exposure. So we're really working around the clock as it were to meet a lot of those demands. Now there are subcomponents of that. There are elements of physical risk in climate risk. So there are building blocks of those types of climate exposures or climate reporting needs. But overwhelmingly today, if you want to put it in very plain English, people want to know what is going on in their portfolio and their security exposures as it relates to the climate transition and to keep them on either the portfolio itself or in the interest of their investors to record where they are in the path to net zero, where many of them have set goals and targets. Right? So really, and if you think about that, it's an enormous effort for transparency and understanding in a category where the underlying data and assets is extremely broad. So that's where really our work is going on.

I just wanted to follow up. Henry, you mentioned that you shut down one on-premise center and are planning to do another one this year. I was hoping you could provide more details on how many there are, perhaps some additional statistics, and how much is on the cloud or any other milestones we should track regarding this tech transformation.

Yes, Manav. I'm not going to discuss every data center during this call, but I want to highlight that we are very excited to have transitioned all of our ESG and climate products to the cloud. This was our first move in this direction, and while it is relatively new for us, it significantly enhances our ability to innovate. This is important as it helps us meet the high demand while ensuring our investments are not just in the foundational data and research but also in the supporting infrastructure. Overall, we're pleased with our progress in the cloud, and I believe 2022 will be a crucial year for us. Furthermore, we are managing this transition on a cash spending neutral basis compared to our previous expenditures. It's an encouraging narrative for innovation and the future of the company, and we will keep you updated on our advancements.

Got it. That makes sense. And then just the Board authorization to explore financing, Andy, should we read that as basically looking to raise some more debt to buy back more shares? Or is it more just refinancing ahead of rate rises, et cetera? Just curious how you guys are thinking about that.

Yes. I'd say it's consistent with the approach we've taken in the past where as we delever, we look for opportunities to take the leverage back up. In this case, it would be new capital, so new money, additional cash coming in. And that would be used for general corporate purposes, including potentially repurchases, potentially some targeted M&A. But it's really just taking advantage of an attractive financing market if we see it. And if we do, we're confident that we can get a good return on that capital, whether it goes towards continued repurchases at potentially attractive levels or M&A or organic corporate purposes.

So just focusing on Analytics, you called out a pretty good subscription sales in that business. How should we think about the growth trajectory there and getting to your longer-term growth targets in Analytics? Any color would be helpful.

Yes, we're pleased with our performance this quarter. We have strong plans in some of the growth areas we’ve discussed before, like fixed income. We're also working hard to ensure that the opportunities in ESG and climate positively impact our Analytics business. Overall, we're focused on our clients, and that effort paid off in Q4. We aim to keep delivering positive results as we enter the next quarter. While we do experience some fluctuations, I believe that with ongoing improvements in our content and platforms, we can continue to increase our run rate and, consequently, our revenue over time.

That's very helpful color. And maybe just a quick follow-up question on the future contracts on the MSCI China Asia Index. I just wanted to get a more broader perspective. How big is the derivative revenues based on currently MSCI indices? And how do you think about that over the mid to long term? How big is that opportunity and where we are in that process?

The opportunity is extremely large with the creation of a new market. There are two types of opportunities: one involves creating single-country, single-currency index futures and options along with structural products in select areas. This is what we have traditionally focused on. However, in the past five to seven years, we have expanded with our partners in derivative exchanges into the market for multicountry, multicurrency index futures and options, which are being utilized for structural products, over-the-counter products, and investment vehicles. This includes emerging market index futures and options, EAFE index futures and options, and those in Europe. We are very pleased with the potential, which is significantly greater than what we currently have. It will take time to grow, educate the market, and promote these products through the exchanges. We are committed to this effort. The China Asia futures product provides access, allowing trades of local index futures directly or other futures traded in Singapore, or through Hong Kong. The appeal of these futures lies in their construction, representing a balanced sector consisting of 50 stocks, reflecting a broader market in China rather than just the top 50 companies. This approach has proven to be highly successful. As a result, our clients have launched EPS both in China and Hong Kong, and we've shifted several clients in the U.S. and Europe to this index from others. Overall, the total open interest in the futures contracts, combined with the assets raised in EPS, has already surpassed $10 billion in a short timeframe, indicating strong potential for the continued use of these products.

And Ashish, I heard you mention that the run rate for listed futures and options as of December 31 was $54 million. The opportunities in over-the-counter derivatives, which are related but differ from the listed products, are reflected in our nonrecurring index revenue, with a portion also included in the recurring subscription revenue. The geographic aspect is just slightly different for the over-the-counter products.

The retention rate was quite strong at 94.4%, and traditionally, the fourth quarter tends to be weaker for retention. Can you discuss what contributed to this strong performance? Was it a result of a change in client mix, or did healthy capital markets play a role? Any additional insights would be appreciated.

Yes. So look, I think it's a mixture of things as in all these circumstances. We've clearly been continuing to invest in the quality of our products continuously. We've also been extremely focused from a client coverage point of view on client retention and put an enormous amount of effort into making sure that we contact clients, that we monitor their use of our products, that we're regularly ensuring that they're getting value out of them. And so I think it's probably those two things. Maybe it's been a reasonably good environment, too, at the end of the year overall. But I think it's, for sure, I hope and believe both the quality of the products and the extreme client service focus on client retention.

Yes. I don't know if we're sharing exact numbers yet going forward, but at a higher level, we're really pleased with the integration process with RCA. We conducted some internal surveys, and the RCA team is very enthusiastic about being part of MSCI. We are currently integrating both the front and back office and developing a clear, combined real estate go-to-market strategy. So far, everything is going well. I believe what we have prepared for all real estate clients, whether they were MSCI or RCA, clearly demonstrates our commitment to this asset class. Very soon, I think we will see a lot of cross-fertilization of content and data, which will enhance our client offerings.

Question on pricing. As you know, historically, your recurring subscriptions in indexes, two-thirds of the growth there, historically, will be from volume, one-third from pricing. I'm just curious, in this higher inflation environment, are you still thinking pricing would be about one-third of the growth for this year or maybe roughly 4%? Or is there a little bit more of upside there?

Yes. We have significant pricing power at MSCI, and our clients recognize this as well. However, we also have a responsibility to align our interests with those of our clients in terms of value delivery and price increases, considering their cost structures and business operations. We have been careful in managing this balance. We are making substantial investments in the data and refining our products and tools, which enhances the client experience and improves client service resources. This all contributes to providing greater value to our clients. Additionally, in areas where we are experiencing higher inflation, particularly wage increases, we anticipate implementing larger price increases this year compared to previous years. We will do this thoughtfully, maintaining our commitment to fair pricing and ensuring we deliver a return on our investments in our products.

I have another question regarding the margin expectations for the index business this year. Assuming that the markets remain relatively flat, as you mentioned, do you anticipate your margins will stay stable or perhaps see a slight increase throughout the year? How should we approach the forecast for margins in this segment, considering all the investments you are making?

Yes, you pointed out correctly that our baseline assumption is that markets will remain relatively flat for the year. Our primary goal is to invest in the long-term, attractive opportunities we see in the index. We're not focused on achieving a specific index margin. Instead, our top priority is to lead in these major markets. Regarding your question about managing market fluctuations, it's a continuous adjustment process. This is not just based on asset under management levels but also on current outlooks and the successes we are observing in our investments. We have some flexible expenses in compensation and discretionary areas that we can adjust easily. However, we want to avoid impacting our key investment areas. So, if the market declines, we might reduce expenses. Conversely, if the market rises, we will likely increase our investments in these appealing opportunities. It's challenging to be very specific about this, but I can say it's an ongoing process that we are constantly evaluating and discussing.

Let me add that when we mention markets, our asset-based business is thoroughly diversified across different geographies, including Japan, Asia, Europe, the U.S., Canada, and emerging markets. This diversification includes market cap indices, thematic indices, ESG indices, climate indices, and more. Our asset-based fees come from institutional passive and listed ETF products. Overall, we believe that when we consider everything together, it will likely remain stable. This does not rule out significant sector rotation, where increased sourcing might be offset by reductions elsewhere, leading to money flowing into the U.S. from emerging markets or more investment in ESG and climate initiatives at the expense of other areas. It's critical to understand that this is not just one market. We observe the overall fluctuations as we analyze everything. We are confident that this is a conservative estimate in a year that began with considerable volatility. We hope that, similar to what we observed today in the U.S., fundamental earnings and economic growth will continue to improve and eventually create a favorable environment for appreciating equity assets.

Sales have been phenomenal this year, both recurring as well as nonrecurring. And I appreciate the investments you guys have made in new products and whatnot. But have you guys also made any changes in the sales force to help contribute to that and make this more sustainable in the long run?

I think in a narrow sense, we haven't made any changes, but we have fantastic leadership in our client coverage organization. I'd like to highlight Alvise Munari and his team, who have done an outstanding job globally. It's exciting to be around the organization because we have really smart, positive, energetic leaders. This is evident not only in sales but also in client service and everything we do with our consultants to assist our clients. We have made some adjustments in how we approach certain client segments, with a strong focus on senior client relationships, as we have for several years. All these factors contribute cumulative benefits over time. Overall, I believe we have a great team and excellent leadership, and our people are genuinely committed, which is reflected in our results.

We have established numerous partnerships with experts in various fields, which allows us to enhance our understanding of areas like biopharma, clean energy, and disruptive technologies. One notable partnership is with Menai, focusing on blockchain and cryptocurrencies. At this point, we're not ready to discuss the launch of any specific products, as we are assessing every aspect of the market to determine the value we can add and what opportunities we can offer our clients in the investment sector. This approach continues our longstanding philosophy of collaborating with subject matter experts across different domains.