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Edited Transcript of DWSG.DE earnings conference call or presentation 24-Jul-19 8:00am GMT

Q2 2019 DWS Group GmbH & Co KgaA Earnings Call (German)

Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of DWS Group GmbH & Co KgaA earnings conference call or presentation Wednesday, July 24, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Asoka Woehrmann

DWS Group GmbH & Co. KGaA - CEO & Member of Executive Board

* Claire Peel

DWS Group GmbH & Co. KGaA - CFO & Member of Executive Board

* Oliver Flade

DWS Group GmbH & Co. KGaA - Head of IR

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Conference Call Participants

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* Arnaud Maurice Andre Giblat

Exane BNP Paribas, Research Division - MD & Research Analyst

* Gurjit Singh Kambo

JP Morgan Chase & Co, Research Division - Head of Diversified Financials Research

* Hubert Lam

BofA Merrill Lynch, Research Division - VP

* Jacques-Henri Michel Gaulard

Kepler Cheuvreux, Research Division - Head of Banks Sector Research

* Michael Joseph Werner

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst

* Samarth Agrawal

Citigroup Inc, Research Division - Assistant VP & Senior Associate

* Stuart Oliver Graham

Autonomous Research LLP - Head of Banks Strategy

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Presentation

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Oliver Flade, DWS Group GmbH & Co. KGaA - Head of IR [1]

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Yes, operator, thank you very much, and good morning, everybody, from Frankfurt. This is Oliver Flade from Investor Relations, and I would like to welcome everybody to our Second Quarter 2019 Earnings Call. Please be reminded again 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, as usual, with some opening remarks and then Claire will take you through the presentation. (Operator Instructions)

I would also like to remind you that the presentation may contain forward-looking statements, which may not develop as we currently expect. I therefore ask you to take note of the disclaimer and the precautionary warning on the forward-looking statements at the end of our materials.

And now, let me hand over to Asoka.

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Asoka Woehrmann, DWS Group GmbH & Co. KGaA - CEO & Member of Executive Board [2]

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Thank you, Oliver, and good morning, everybody, and welcome to the quarter 2 results call for DWS. We can report today a strong overall first half of 2019 and the second quarter. In a challenging market environment, we saw continued positive flow momentum, resulting in EUR 6.7 billion of half year net flows and EUR 8 billion ex cash.

Targeted growth areas of Passive and Alternatives have been funded to our net new asset gains, and we are encouraged by the demand we see for our product innovations in the ESG space and in automatic solutions. Our funds also performed well, adding to our inflows, especially into the flagship products. This include Concept Kaldemorgen top dividend, our real estate family, grundbesitz and also DWS Invest Asian bonds and DWS Dynamic opportunities.

The last 2 funds each exceeded EUR 1 billion mark in assets under management during the first half of the year. Our positive fund performance also paid off with all asset classes reporting a significant improvement in overall outperformance ratios since quarter 1.

Efficiency measures remained a top priority for us in the second quarter and we made sustainable adjustments to key levers, which can harvest of benefits of -- I'm pleased to say that we are firmly on track to deliver the top end of our medium-term cost savings guidance of EUR 150 million by the end of this year.

Our revenues were up in the second quarter and stable in the first half despite the challenging environment, reflecting the benefits of our broad, diversified business model.

In summary, we recorded a improved cost income ratio of 69.5% in the second quarter, and we are firmly on track to achieve our target of around 70% cost/income ratio in 2019.

Looking into our future, it is also imperative that we invest in areas we have identified as mega trends of the asset management industry. With client interest exponentially growing, we are making even greater efforts to making sustainability the core of we do -- what we do.

As a firm, we have a long-standing heritage in ESG and ESG has contributed distinctly to our inflows in the first half of the year from both retail and institutional clients. And we always want to build upon our capabilities in this super important field of sustainable investing. The minority stake acquisition in Arabesque S-Ray does just that. It adds to our long-standing existing solution capabilities that we offer through our proprietary ESG engine.

And obviously, the importance of technology for progress in an increasingly digital asset management industry cannot be overstated. For this reason, we are working hard to modernize our core platform by incorporating technology-based analysis and investment tools as well as increase our use of artificial intelligence. To this end, we are also conducting exclusive talks with Arabesque about potentially investing into their AI engine.

To summarize, we have meaningful progress as a company in the first 6 months of 2019. We have seen continued flow momentum solidified in the second quarter for a total of EUR 6.7 billion and EUR 8 billion, excluding cash. We are firmly on track to achieve our 2019 cost/income ratio targeted of around 70% and firmly on track to deliver the top end of EUR 150 million in cost saving guidance by the end of this year. We are making sustainability core, what we do, adding to our capabilities with the closing of acquisition of stake in Arabesque S-Ray.

With that, I would like to pass over to our CFO, Claire Peel, who will run through our financials for the second quarter in detail. Claire, please?

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Claire Peel, DWS Group GmbH & Co. KGaA - CFO & Member of Executive Board [3]

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Thank you, and welcome, everyone. I'll present the recent activities and results of the second quarter of 2019, starting with the key financial highlights.

Adjusted profit before tax was EUR 185 million, up 21% quarter-on-quarter, primarily driven by higher performance and management fees. Adjusted cost/income ratio improved to 69.5% as a result of higher revenues. Quarterly net inflows were EUR 4.2 billion driven by cash and continued strong inflows into our targeted growth areas of Passive and Alternatives. Excluding cash, net inflows of EUR 0.6 billion in Q2.

Let's move to our financial performance snapshot. Starting at the top left, AUM increased to EUR 719 billion, up 2% from Q1 driven by positive market performance and net inflows.

Moving to the top right. Revenues of EUR 608 million represent a quarterly increase of 14%, reflecting higher management and performance fees, and this supported a resilient management fee margin of 30.3 basis points.

On the bottom left. Adjusted costs were up 11% in the quarter to EUR 423 million, primarily due to carried interest expenses relating to an alternative investment performance fee. Despite this, the adjusted cost/income ratio fell to 69.5%.

Adjusted profit before tax increased to EUR 185 million, up 21% quarter-on-quarter due to the increase in performance and management fees.

Let's refresh on the market environment in Q2. Following a better-than-expected market recovery in Q1, markets were slightly more unsettled in the second quarter due to the reemergence of the trade conflicts and continued geopolitical tensions. This had an impact on investor sentiment, which remains fragile, particularly in the European retail market.

In addition, there has been a marked divide between equity and bond markets in Q2. Many major equity markets began and ended the quarter trading at at or near record levels, there with some volatility in between during the quarter, while bond yields have mostly headed downwards. And these trends also played out in DWS at Q2, with lower fixed income rates negatively impacting fair value of guarantees, but increased our fixed income revenue and asset base, while positive equity market performance contributed to higher AUM as well.

Let's look at AUM development more closely. Assets under management increased to EUR 719 billion in Q2, with favorable market performance and net new inflows more than compensating for negative FX impacts. Stronger equity indices contributed towards EUR 15 billion of AUM growth, accounting for the majority of the quarterly AUM increase and further supported by continued net inflows, which I will now explain in more detail.

Net inflows were EUR 4.2 billion in Q2 driven by cash and continued strong inflows in Passive and Alternatives. Excluding cash, net inflows were EUR 0.6 billion. Our flagship -- our active flagships contributed to the quarterly net inflows, continuing the trend that we saw in Q1.

Top dividend sustained inflows compared to retail equity outflows in Europe. And Concept Kaldemorgen and DWS Dynamic Opportunities fund continued to win inflows in a more difficult market environment. Our real estate offerings, grundbesitz, continued to benefit from strong retail demand, while RREEF America II also saw inflows.

Beyond the flagships, our targeted growth areas of Passive and Alternatives saw positive inflows in the second quarter, more than offsetting outflows from active fixed income, equity and multi assets. Cash was a key driver of Q2 inflows, reversing outflows in Q1 and marking the first time the asset class has been positive since Q3 '18.

Passive momentum remained strong, with EUR 3.5 billion of inflows driven by both ETPs and mandates. Our European ETPs ranked #4 in Q2 by net inflows in Europe with a 17% market share. And we saw continued inflows to our mandates, including our first synthetic Passive mandate win. Alternative inflows totaled EUR 2.2 billion in Q2 reflecting sustained flows to real estate and infrastructure debt funds.

Liquid real assets also remained in positive territory. Together, these more than compensated for redemptions in Active Equity, Fixed Income and SQI. In particular, our Fixed Income business was impacted by the declining interest rate environment, including a single EUR 2.4 billion institutional mandate loss in Asia.

However, there were positive developments in the Fixed Income asset class. Insurance continued to report inflows, reflecting a new client relationship and inflows from Nippon Life, while our Asian bond fund exceeded the EUR 1 billion very well, including our recently launched U.S. ESG leaders ETF.

Altogether, we have seen more than EUR 1 billion of ESG inflows year-to-date. This contributes to overall net inflows of EUR 6.7 billion in half 1 '19 and EUR 8 billion of inflows, excluding cash.

Let's move on to fund launches. At DWS, product innovation is core to meeting our clients' needs, and we have seen rising demand for ESG investment products, a trend we expect to continue and one we are fully embracing. This quarter, we teamed up with S&P to launch an ETF that provides a sustainable alternative to its U.S. equity benchmark, the S&P 500. We have also launched ESG versions of existing active fixed income and multi-asset funds as well as a new equity fund investing in emerging market companies with strong ESG ratings.

Looking forward to Q3, we have a pipeline of product launches across several asset classes, subject to demand assessments and approvals.

Moving on to revenues. Adjusted revenues of EUR 608 million are up 14% quarter-on-quarter reflecting a combination of higher management performance fees. Management fees and other recurring revenues increased by EUR 31 million in Q2 driven by positive market conditions and net inflows.

Performance and transaction fees were up EUR 55 million compared to Q1 due to the recognition of a nonrecurring alternative performance fee in the second quarter.

Together, these more than compensated for the reduction in other revenues, which saw a negative change in the fair value of guarantees due to declining interest rates.

Overall, revenues helped drive a significant improvement in our adjusted cost/income ratio, which fell to 69.5% this quarter. In the first half of 2019, total adjusted revenues are up slightly compared to the first half of 2018. We expect revenues to remain in line with 2018 total adjusted revenues.

Moving to management fees and margins. Overall, our management fee margin increased to 30.3 basis points in Q2. The quarterly increase can be attributed to a strong market recovery in Q1 and sustained improvements in Q2. This is reflected in higher recurring revenues across almost all asset classes, including Passive and Alternatives, which benefited from continued strong inflows in 2019.

The management fee margin was 30.2 basis points for the first half of the year, demonstrating resilience in the current market environment.

Moving on to costs. Total adjusted costs increased by 11% to EUR 423 million in Q2. This is primarily due to carried interest compensation expense relating to a nonrecurring alternative investment performance fee. Excluding this carried interest item, total adjusted compensation and benefit costs were below those of Q1.

As anticipated, total adjusted general and admin expenses were up over this quarter as some favorable nonrecurring items in Q1 normalized in Q2. Despite this, we saw half year 2019 adjusted costs fall by 5% compared to the first half of 2018, and we remain on track to deliver our gross cost savings objective of EUR 150 million by year-end, and reach our targeted adjusted cost/income ratio of approximately 70% in 2019.

However, due to the related carried interest expenses, we now expect full year 2019 adjusted costs to be in line with those of 2018.

I will now move on to our capital position. In the first half of 2019, our CET1 capital was EUR 2.7 billion. This includes the recognition of profits for the second half of 2018 and also provisions for guaranteed funds and pension plans as well as FX movements.

Intra-year 2019 profits are not reflected in CET1 capital as this requires prior regulatory approval, which we will seek to obtain in due course for the first half 2019 profits. The impact of half 1 '19 profits on CET1 is also recognized net of dividend accruals and in line with our previously communicated payout ratio targets.

Our Pillar 1 requirements were stable in the first half of the year with EUR 9.2 billion of RWA at the end of the quarter compared to EUR 9.2 billion at the end of 2018.

Our CET1 ratio stood at 30% at the end of Q2, comfortably above requirements.

I will now Pass Asoka to conclude.

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Asoka Woehrmann, DWS Group GmbH & Co. KGaA - CEO & Member of Executive Board [4]

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Thank you, Claire. So in summary, DWS continued its positive momentum in quarter 2, concluding a first -- good first half of 2019. Positive net inflows throughout the first half mark a reversal from 2018 outflows and underpin the intrinsic strength of our business model.

At the same time, we were able to defend the high margin on our asset base despite a challenging environment. As emphasized last quarter, the cost/income ratio is our #1 target to maximize shareholder value. And I am pleased with the progress made so far, putting us on the right path to achieve our targeted cost/income ratio of around 70% for the full year of 2019.

Looking ahead, the strong fund performance we have seen, especially in many of our flagship funds across our diversified business of Active, Passive and Alternatives, supports our ambitions to growing organically. We will also continue to concentrate on and further strengthen our capabilities in the 2 mega trends that will shape the asset management industry in the future, ESG and digitalization. And finally, we will work to increase our agility in responding to our clients' needs by accelerating our product development and fund innovation process.

Thank you very much for your attention, and I will now hand over to Oliver for the Q&A.

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Oliver Flade, DWS Group GmbH & Co. KGaA - Head of IR [5]

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Yes. Thank you very much, Asoka. Operator, we are ready for Q&A now. (Operator Instructions)

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Questions and Answers

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Operator [1]

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Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) The first question is from the line of Jacques-Henri Gaulard with Kepler Cheuvreux.

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Jacques-Henri Michel Gaulard, Kepler Cheuvreux, Research Division - Head of Banks Sector Research [2]

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Just a quick question on the performance fee that ended up being very high this quarter. I know it's very difficult for you to give a guidance, but I remember that at the time of the IPO, I think the idea medium term was to have the performance fees representing roughly 3% to 5% of total revenues. Is it fair to actually have that in 2019? In the results, you're at about 7% right now.

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Claire Peel, DWS Group GmbH & Co. KGaA - CFO & Member of Executive Board [3]

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I can address that question. Yes, we advised that we would anticipate our performance fees and transaction fees to be around 3% to 5% of our total revenues, and we still anticipate that that's good guidance for the full year of 2019. So we still operate within that guidance.

We've obviously seen a strong performance fee in this quarter, and that's obviously subject to the hurdles that we have achieved in our infrastructure funds in Alternatives.

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Operator [4]

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The next question is from the line of Hubert Lam with Bank of America Merrill Lynch.

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Hubert Lam, BofA Merrill Lynch, Research Division - VP [5]

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I got 2 questions. Firstly, on fixed income, you had EUR 3.7 billion of outflows in the quarter. You're saying that this is due to the lower rate environment. Given that rates are expected to go down even further, do you expect to have as big of outflows going forward just because of the lower rate environment and what it means for your clients? That's the first question.

Second question is your parent, Deutsche Bank, is going through some big strategic changes. Do you think this affects you in any way? Does DWS become more of a focus now? And maybe you can benefit from this? Or do you think nothing really changes from what's happening at Deutsche?

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Claire Peel, DWS Group GmbH & Co. KGaA - CFO & Member of Executive Board [6]

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Thank you for question. On the fixed income question, with the declining interest rate environment, we see mix effects. We saw in the second quarter our AUM increased in fixed income and our revenues, effectively off that basis, improve. However, we did see some redemptions in fixed income in the second quarter. Those were isolated to a single outflow mandate loss in Asia, which was driven by corporate events as opposed to interest rate environment. But the lower interest rate environment does, of course, change behaviors between the short-end and longer-end dated funds that we have. So we continue to ensure that we will offer innovative products that offer credit solutions in the interest rate environment.

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Asoka Woehrmann, DWS Group GmbH & Co. KGaA - CEO & Member of Executive Board [7]

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Thank you, Claire, and I will take the second question regarding Deutsche Bank. I think Deutsche Bank has announced that it will make substantial changes to create a new and a better bank that will position to prosper in the years ahead. So we fully support this bold overhaul as it will not only benefit our majority shareholder, but it is -- but as it will also have a positive effect on the banks and our client relationships. This -- the changes of the bank do not impact us or our business. We will stay on course in servicing our clients as a fiduciary asset manager. DWS is a distinct and published listed company, with Deutsche Bank being an important client service provider and also remaining our biggest shareholder. At the Deutsche Bank, as you -- might be well-known, this year, Christian Sewing reinforced his commitment to our business, reiterating the goal to form a top 10 global asset manager along with the fact that DWS are not for sale and known of this changing.

What that means for us, impact to DWS, I do think we have been very transparent in explaining to the market our own dedicated strategic aspirations as asset manager as well as the need for weatherproof our business through cost discipline, efficiency improvements. And we are making good progress as we -- as you have seen and we are continuing our focus on emerging growth opportunities and mega trends, and this include growing the Asian market to meet the global wealth shift, accelerating our digitalization efforts and ensuring the sustainability, as I mentioned in the summary that's at the heart what we do.

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Operator [8]

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

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Arnaud Maurice Andre Giblat, Exane BNP Paribas, Research Division - MD & Research Analyst [9]

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I have 2 questions, please. Firstly, there's been a bit of press coverage on the intention to liquidate a EUR 2.6 billion fund range, the FlexPension, due to negative rates. So I was wondering if you could give us a bit of an indication of what the financial impact of the -- that would have on the P&L, but also, if there would be any balance sheet benefits from this, given that you hold quite a lot of capital against these funds?

And second question is on the Infrastructure fund. So you've launched your PEIF Fund III and seem to be targeting EUR 3 billion. I was wondering if there was a bit of upside to that target, given the appetite we're seeing in the market for your Infrastructure right now? And what sort of timing should we be looking for in terms of closings? Perhaps if you could give us a bit of commentary also on your track record on Fund I and Fund II, that would be quite helpful.

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Claire Peel, DWS Group GmbH & Co. KGaA - CFO & Member of Executive Board [10]

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Thank you for the questions. Firstly, on the liquidation of DWS FlexPension funds, that's correct; they will be liquidating in the fourth quarter of 2019 and account for EUR 2.5 billion of AUM. That is a guaranteed fund products, And given that the hurdle is achieved for the guarantee, the point for liquidation makes sense for our clients for reinvestment into Alternatives and also, as you've commented on, does provide also benefit to RWA and to capital requirements as well as giving the opportunity for a transition into funds that can provide a better return in a low interest rate environment.

On the question around PEIF III, we do, indeed, have an Infrastructure fund launch planned for the second half of 2019, with a target level in the range indicated. And we expect the first closing, as indicated in the earnings presentation, to be in the second half of the year. There is, of course, high demand in our Alternatives asset class as we've seen in our first half results. We have around EUR 5 billion of inflows across the Alternative asset classes and continued demand for the pipeline going forward. So we will monitor that fund launch in due course.

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Arnaud Maurice Andre Giblat, Exane BNP Paribas, Research Division - MD & Research Analyst [11]

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Just a quick follow-up. You said, clients are likely to invest. Is that a belief or is that a factor? Or do your clients get reinvested automatically into other funds -- for the FlexPension, sorry?

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Claire Peel, DWS Group GmbH & Co. KGaA - CFO & Member of Executive Board [12]

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Yes. I can't comment on how reinvestment takes place, of course, but we will be liquidating the DWS FlexPension fund as we have announced and provide the opportunity for clients to reinvest in funds that can provide a better return in such a low interest rate environment.

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Operator [13]

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The next question is from the line of Gurjit Kambo with JPMorgan. I'm sorry, the next question is from the line of Stuart Graham who's an independent.

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Stuart Oliver Graham, Autonomous Research LLP - Head of Banks Strategy [14]

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Can you hear me okay?

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Asoka Woehrmann, DWS Group GmbH & Co. KGaA - CEO & Member of Executive Board [15]

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Yes, we can hear you.

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Stuart Oliver Graham, Autonomous Research LLP - Head of Banks Strategy [16]

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So I had 3 questions, please. The first one's a number question. May had missed it. What was the one-off performance fee in Q2, both in revenues and costs?

And then the second question was maybe it was just me, but I thought the net new money, ex money market funds is a bit disappointing in Q2. Were you happy with that EUR 0.6 billion?

And then the third question is this goal of being a top 10 asset manager. I mean it looks to me like that means that you have to do a transformational deal, but I think the kind of criteria you've laid out, it has to be complementary in terms of bringing capabilities and geographies you don't have and it mustn't lead to significant disruption. That's quite difficult to execute on a transformational deal. So is it a real, we need to be top 10 by 2022? Or is it a kind of vague ambition, nice to have, but not something which is really driving your strategy?

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Claire Peel, DWS Group GmbH & Co. KGaA - CFO & Member of Executive Board [17]

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Thank you for the questions. On the first one, the one-off performance fee that we saw in the second quarter that related to an alternative infrastructure fund, the performance fee we recognized in revenues was EUR 47 million. And on the cost side, we had an accompanying carried interest cost of EUR 26 million. And hence, when you adjust for the EUR 26 million in our adjusted cost base, then we see comp and ben costs declining and we would see the adjusted costs, excluding that carried interest, coming in at EUR 397 million.

On the second question regarding flows, excluding cash of EUR 0.6 billion for the second quarter and EUR 8 billion for the first half. We're happy with the mix that we see in the -- both the first half and the second quarter on our ex cash flows. In particular, the trends that we see around Passive and Alternatives continue to be strong and supported by pipeline and product launches and distribution partners going forward.

So in Alternatives, we see EUR 2.2 billion of net flows in the second quarter and almost EUR 5 billion for the first half. In Passive, we see EUR 3.5 billion of net inflows in the second quarter and almost EUR 10 billion in the first half. And across the population of our active asset classes, we see the flagship funds continuing to bring in inflows, and we also see a strong improvement in our investment performance in the second quarter, which is supporting those flagship fund inflows.

We did see, as mentioned in fixed income, 1 or 2 specific corporate event matters, which were a swing factor in the fixed income net flow number. But aside from that, we're happy with the dynamics that we continue to see in the second quarter, which is strong flagship performance, positive returns from distribution partners and positive returns in ESG.

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Asoka Woehrmann, DWS Group GmbH & Co. KGaA - CEO & Member of Executive Board [18]

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Stuart, I'd like to answer your third question regarding the top 10, the aspiration to become into the top 10 in the world of asset management industry. I do think, you're right, beside our unorganic -- our organic desire to grow next years and improving our efficiency, I do think to become top 10, there is a transformational deal needed. And again, many are speculating, we can't comment on any speculation on that. But it's also very clear, we are doing all our best to grow organically, do also really the things what we need to do to improving our organization, but also to build up our capabilities in area.

But again, as I said last time and also I think our bilateral meetings, any deal must fit either to that we have a access to new client bases or must extend our capability set, if not, it makes no sense for us. So I do think we have a patient enough for wait for this kind of criteria fulfilling and then I do think that things can happen. And end of the day, we know what we have to do as a listed -- market listed company, shareholder value. And to be big is not our main target. Increasing the shareholder value is the most relevant target what we have in our mind as a management.

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Stuart Oliver Graham, Autonomous Research LLP - Head of Banks Strategy [19]

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So just to be clear, if you had a transaction which got you into the top 10 but didn't make shareholder value, you would not do it? It's got to be shareholder value first and then it gets into the top 10, yes?

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Asoka Woehrmann, DWS Group GmbH & Co. KGaA - CEO & Member of Executive Board [20]

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But I do think, look, as I said, these 2 targets as extending the client bases or regional -- better regional access or access to the markets and clients and as well as capabilities are super relevant for us. You can see and, Stuart, you know the market better than me, how many mergers happened in this industry. And after 3 years, you are sitting, asking your reason why. And that is -- this is exactly what we are going to avoid.

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Operator [21]

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The next question is from the line of Gurjit Kambo with JPMorgan.

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Gurjit Singh Kambo, JP Morgan Chase & Co, Research Division - Head of Diversified Financials Research [22]

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I'll try for the second time, this time. So 2 questions. Firstly, in terms of the -- your outlook for net flows to be outperforming the industry 2% to 3%. What gives you sort of confidence around that? Is there a pipeline that you're seeing? Is there sort of certain fund launches, which help you get above the 2% you're running at, at the first half level? So that's the first question.

And then the second question is just around the revenue margin. So if we look at the revenue margins across all of your asset classes, they're either stable or they're improving versus the Q1 level. Just what is the sort of outlook for the margins going into the second half and into 2020?

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Claire Peel, DWS Group GmbH & Co. KGaA - CFO & Member of Executive Board [23]

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Thank you for the questions. I'll start with your question around revenue margin, which we've seen to be quite resilient during 2019. We have 30.3 basis points this quarter compared to 30 basis points in Q1 and, as you commented, is stable across all of our asset classes.

That said, we do acknowledge that there is margin compression in the industry and, of course, we see that taking place as well. I would say, most profound, probably, we would anticipate in the outlook looking forward that our Passive portfolio would see between 1 to 1.5 basis points of margin dilution as we look forward, but so far, has been very resilient in the first half of this year. It's [gone up] 23 basis points in the Passive asset class alone. So I think that resiliency is made up given the diversification we have across our asset classes. And the growth that we're seeing in Alternatives is, of course, supporting the overall margin. But as we've always said, market volatility can be a contributing factor in the outlook.

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Asoka Woehrmann, DWS Group GmbH & Co. KGaA - CEO & Member of Executive Board [24]

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The first question, I do think we have -- really have an aspiration to outperform the market; that has nothing changed. As I said -- and I do think we have discussed also last time and outlined, we want to our midterm aspiration is 3% to 5% net inflow growth and in average. And I do think this year, we judged -- in the first quarter had a judgment around that the market will grow 2% to 3%. I do think from the most recent data and I think there have not been so much published in companies so far, but I think what I have seen so far, we can expect the industry average to come down from the original projection. But I do think nothing has changed. Our aspiration but also that underpinning also our pipelines in flow that we want to keep the ambition to outperform the market average industry flows in 2019 is for us given and we are confident to meet this.

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Operator [25]

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(Operator Instructions) The next question is from the line of Samarth Agrawal with Citi.

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Samarth Agrawal, Citigroup Inc, Research Division - Assistant VP & Senior Associate [26]

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I have just one question on the positive retail flows. What were the key underlying drivers for the positive retail flows in this quarter? Do you think that the sentiment is improving? And how much of these retail flows came from ET and F funds?

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Asoka Woehrmann, DWS Group GmbH & Co. KGaA - CEO & Member of Executive Board [27]

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Look, in my opinion -- and a great question. And I do think the fourth quarter 2018 was, with the harsh market collections, really a little bit weaker the momentum of 2018 in the asset management industry, but I have to say, also for the first half of the year, the sentiment is still challenging and I think slightly negative in the market. And that's why we are pleased to really see EUR 6.7 million inflows in the first half of the year. And I do think what is very much underpinning that we can outperform, but also against a slightly negative sentiment in the market is that we're really driving our 2 driving forces. Passive as well as Alternative area is really delivering -- more or less delivering the growth, what we are expecting, and I do think also the flagship has really contributed to that.

And your ESG question is absolutely relevant. One we know, industry has nearly 15% of over inflows from ESG, we cannot only stay around 15%, we are above that. So we have 0.9 nearly for the first half of the year and from EUR 6.7 billion, yes, ESG. And so therefore, I do think we are very happy that we are really seeing in this area especially flows into that.

Important part is not only into institutional, especially also at retail area it's taking. The German Postbank has really took the ESG fund, that Global Equity Fund now over EUR 200 million a day risk assets in this area, I'm very pleased to say. So this is really across the clients and across the channels we are seeing the flows there.

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Operator [28]

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

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Michael Joseph Werner, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst [29]

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Just one question here. I think Claire mentioned that the improving performance of the AUMs in Q2 relative to what you had at the end of Q1. In the past, particularly on the IPO, you provided some very helpful information as to what percent of funds or AUMs in the Active and Alternative spaces were outperforming their peers and/or benchmarks. Do you have that type of information? Is that something that you guys can provide?

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Claire Peel, DWS Group GmbH & Co. KGaA - CFO & Member of Executive Board [30]

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Yes. So on your question around the increase in AUM in the first half of the year or the second quarter, we've seen EUR 15 billion of increase in AUM market performance and EUR 35 billion in market performance in Q1.

In Q2, the EUR 15 billion of market performance is split between equity performance and fixed income performance. And if I understand your question correctly, you're referring to the sensitivity that we see to our AUM from equity and fixed income moves that we disclosed at the point of IPO, which generally holds true for what we see in the market movements in our AUM this quarter.

So for an increase in equity markets of 1%, we would see AUM impact of EUR 2 billion annualized and for a fixed income decline of 10 basis points, we would see an AUM increase of EUR 2 billion annualized.

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Michael Joseph Werner, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst [31]

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And actually I was more referring to the relative performance of your AUMs. If you recall, during the IPO, you provided some information as to what percent of your AUMs were outperforming benchmarks, both in Active and Alternative? Is that something that you're willing to provide today?

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Asoka Woehrmann, DWS Group GmbH & Co. KGaA - CEO & Member of Executive Board [32]

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I think -- okay. No, I think the question is clear. The detail in the investment performances and hopefully, that now really clear to me what you -- how I'm going to answer. I do think in 3 years' time horizon, we have 79% of our -- all asset classes, the funds in all asset classes are outperforming their respective benchmark. And this is a very strong number. And this is where we have the very big improvement. And I do think also the flagship funds, especially a flagship fund in multi-asset area has really strongly outperformed the benchmarks. And I do think also very good and a sign for us. And also our 2018, we had quite a difficult time in active management in equity space. And I do think that has turned very much now, swing very much from a fourth quarter to now mid of this year, very much in performance. So this is the big improvement what we can see. And I do think, with that, especially in flagship funds, the turnaround in performance, what has started already in the fourth quarter 2018, has really came with also with inflows and has been very much a very nice trend what we have seen. Did that answer to your question or is that something you let open?

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Michael Joseph Werner, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst [33]

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No, that's very helpful.

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Oliver Flade, DWS Group GmbH & Co. KGaA - Head of IR [34]

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And Mike, you will find all the details in the analyst presentation appendix on Slide 18.

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Operator [35]

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At this time, there are no further questions. I hand back to Oliver Flade for closing comments. Please go ahead.

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Oliver Flade, DWS Group GmbH & Co. KGaA - Head of IR [36]

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