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MSCI (NYSE: MSCI)
Q3 2024 Earnings Call
Oct 29, 2024, 11:00 a.m. ET

Overview of MSCI’s Q3 2024 Earnings Call

• Prepared Remarks
• Questions and Answers
• Call Participants

Key Highlights from Prepared Remarks

Operator

Good day, ladies and gentlemen. Welcome to MSCI’s third-quarter 2024 earnings conference call. Please note that this call is being recorded. I now turn the call over to Jeremy Ulan, head of investor relations and treasurer. You may begin.

Jeremy Ulan — Head of Investor Relations and Treasurer

Thank you. Good day, and welcome to MSCI’s third-quarter 2024 earnings call. Earlier today, we released our results for the third quarter of 2024. This press release, along with an earnings presentation and a brief quarterly update, is available on our website, msci.com, under the Investor Relations tab.

Please be reminded that today’s call includes forward-looking statements. These statements are based on current expectations, economic conditions, and various risks that could alter actual results. For more information, please refer to the risk factors discussed in our recent Form 10-K and other SEC filings.

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We will be discussing GAAP and non-GAAP measures today. A reconciliation of these measures can be found in the appendix of the earnings presentation. We will also discuss key operating metrics, including run rate and retention rate.

Joining us on the call today are Henry Fernandez, CEO; Baer Pettit, President and COO; and Andy Wiechmann, CFO. As a reminder for our analysts, please ask one question at a time during the Q&A segment. You are welcome to rejoin the queue for additional questions. Now, I will turn the call over to Henry Fernandez.

Henry A. Fernandez — Chair and Chief Executive Officer

Thank you, Jeremy. Good day, everyone, and thank you for joining us. MSCI’s third-quarter results highlight our business strength and the vital role of our solutions in global investing. Financially, we achieved a total revenue growth of 16%, adjusted earnings-per-share growth of 12%, and free cash flow growth of 46%.

We repurchased $199 million worth of MSCI shares, reaching $440 million in total repurchases for the year. Our asset-based fee revenue grew nearly 20%, with a subscription run rate increase of 15% and a retention rate of 94%. Notably, the ETF cash flows for the third quarter amounted to $18.6 billion, underlining the strength in our asset management sector.

In terms of subscription sales, we saw organic growth of 11% for asset owners and 15% for hedge funds. However, sales in our ESG and climate segment were down compared to last year. Although the current drop appears to be cyclical, the need for integrating ESG into investment strategies remains crucial.

MSCI’s diverse product lines work together effectively. We see great potential in wealth management, with major index wins from prominent banks, and direct indexing run rate growth at 22%. Additionally, our technology platform for wealth managers continues to foster robust client engagement.

In private capital solutions, our MSCI Private Capital Fund Indices, launched in July, cover over 13,000 funds totaling more than $11 trillion in AUM. This positions us to be a leader in private assets moving forward.

Furthermore, our partnership with Moody’s enhances our ESG offerings, particularly for private companies. I would like to welcome Luke Flemmer to MSCI as our new head of private assets, aimed at expanding our capabilities in this area.

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MSCI Reports Strong Q3 Growth Driven by Climate Solutions and Analytics

MSCI is witnessing a surge in demand for climate-related solutions as investors increasingly prioritize climate risks. This demand is expected to accelerate, necessitating high-quality data models and research for both institutional investors and capital market participants. Currently, MSCI provides carbon emission data for over 60,000 private companies and more than 7,500 private equity and debt funds. This strong foundation positions MSCI to be a leading provider in the significant reallocation of capital and asset repricing.

Recently, MSCI welcomed Richard Mattison as the new head of ESG and Climate. Previously with S&P Global and founder of Trucost, Mattison brings valuable expertise to MSCI. This leadership change highlights MSCI’s commitment to addressing the urgent need for decision-making tools in the emerging voluntary carbon markets, which are considered vital for reaching net-zero targets. The introduction of MSCI Carbon Project Ratings last month, focusing on over 4,000 carbon credit projects globally, underscores this initiative.

MSCI’s competitive advantage lies in its vast, integrated global operations, enabling the firm to capture significant trends that are reshaping the investment landscape. The company is better-equipped than ever to support both traditional and emerging client segments.

Now, I’ll hand the call over to Baer Pettit, MSCI’s President and Chief Operating Officer. Baer?

C. D. Baer Pettit — President and Chief Operating Officer

Thank you, Henry, and hello to everyone. Today, I’ll discuss our progress and opportunities from the third quarter with a focus on individual client segments within the investment ecosystem. Asset owners have noticeably contributed to MSCI’s success this quarter, helping us achieve an 11% organic subscription run rate growth overall. Their increasing use of our analytics is particularly noteworthy.

For instance, a large public pension fund in Asia has chosen MSCI as their main risk analytics provider, utilizing our advanced applications and data services. In another strong showcase, a U.S. public pension fund also selected MSCI as their analytics platform for the complete investment process. In both instances, MSCI outperformed major competitors.

These achievements helped us achieve a record third quarter for recurring sales in analytics, fueled by exceptional performance in Europe and the Americas. Although challenges remain, such as budget constraints for asset managers due to fee compression, we maintained a high client retention rate of nearly 96% in this segment. In the last year alone, asset managers added over $60 million to our subscription run rate, illustrating their continued value to MSCI.

This quarter, strong inflows into MSCI index-linked ETFs totaled nearly $68 billion, boosting our ABF revenues by almost 20%. As previously noted, our index work is increasingly connected to our climate initiatives, aiding asset managers in navigating the low-carbon transition.

Further, we successfully launched a $1.6 billion ETF linked to an MSCI climate Custom Index, in partnership with one of our asset manager clients. Beyond asset managers, we also saw solid growth from hedge funds, wealth managers, and banks, all together contributing an additional $60 million to our subscription run rate over the past year.

In the wealth management segment, our solutions have attracted about $11 million, now bringing our organic subscription run rate to $112 million and an impressive retention rate of over 97%. Wealth-focused tools are increasingly sought after as clients strive for cohesive investment strategies that encompass various factors.

We intend to build on this momentum, capitalizing on the wealth manager platform across diverse business areas. Accelerating growth within this segment remains a priority for MSCI, as we aim to expand our presence in established and emerging client spaces. Such strategies are key to ensuring our strong ongoing growth and profitability.

Next, I’ll pass the call to Andrew Wiechmann, MSCI’s Chief Financial Officer. Andy?

Andrew C. Wiechmann — Chief Financial Officer

Thanks, Baer. Hello, everyone. During the third quarter, MSCI achieved 11% organic revenue growth, 17% adjusted EBITDA growth, and 46% growth in free cash flow. Our index segment saw subscription run rates grow by 7% for asset managers and 11% for asset owners as these clients comprise nearly 70% of our index run rate.

For hedge funds and wealth managers, the subscription run rate escalated by 23% and 13%, respectively, during the quarter. The popularity of MSCI indexes continues, with equity ETFs linked to our indices attracting $18.6 billion in cash inflows this quarter alone, particularly in developed non-U.S. markets.

Consequently, we reached a record $1.76 trillion in ending AUM for equity ETFs linked to MSCI indexes. Additionally, non-ETF passive products linked to MSCI indexes climbed to a record $3.65 trillion, leading to an overall AUM balance of $5.4 trillion across both categories. This milestone reflects a nearly 20% year-over-year growth in ETF revenue, echoing the ongoing trend towards indexed investing.

In analytics, we experienced an 8% growth in subscription run rate, driven by several key areas including factor models and fixed income analytics. Overall, our organic revenue growth remains strong, buoyed by a number of successful implementations and robust non-recurring revenue. Looking forward, we anticipate that recurring revenue growth will align more closely with run rate growth in the coming quarters, particularly as we approach comparative periods of large implementation-related revenues. In the ESG and climate reportable segment, we noted an 11% organic run rate growth, excluding currency fluctuations and specific Trove impacts.

Regionally, we reported a notable 22% subscription run rate growth in Europe, 18% in Asia, and 7% in the Americas. Engagement from clients remains robust, and they are increasingly interested in expanding their partnerships with us across various initiatives.

MSCI Reports Steady Growth and Strategic Changes Amidst Market Shift

Private Capital Solutions Drive Revenue Growth

MSCI is maintaining its leadership position in the investment sector by delivering essential ESG and climate solutions. These offerings are critical components of the investment process and open significant avenues for growth, especially in ESG integration and regulatory compliance.

The company observes that it may take time to return its product line to higher growth rates. Currently, Private Capital Solutions has experienced a notable run rate growth of 17% compared to the same timeframe last year, generating over $6 million in new recurring subscription sales. Since late 2023, more than 25% of this growth has stemmed from new client relationships. Furthermore, Private Capital Solutions boasts a retention rate nearing 94%, with revenue reaching nearly $27 million for the quarter.

Real Assets and Commercial Real Estate Challenges

In the realm of real assets, run rate growth hovered around 5% during the third quarter, with an improved retention rate slightly above 92%, showing positive sequential and year-over-year performance. The quarter saw several substantial deals closed within the Americas, particularly one related to transaction data, facilitated by our integration with platforms like Snowflake. Signs of increasing market activity are encouraging.

Despite ongoing pressures in the commercial real estate sector, MSCI’s financial model proves resilient, generating strong free cash flows. During the third quarter, MSCI repurchased over $199 million of its shares at an average price of approximately $522, bringing the year-to-date total to $440 million across 879,000 shares with an average price of around $501.

Capital Management and Future Financial Guidance

As of the quarter’s end, MSCI’s cash balance exceeded $500 million, reflecting a focused strategy on opportunistic share repurchases. Notably, we reduced $125 million from our revolver following the quarter’s conclusion. Looking ahead, there may be instances of revolver usage for capital needs to optimize interest expenses. For 2024, if markets stabilize or improve, MSCI anticipates operating at the higher end of its expense guidance for the year.

The company has adjusted its capital expenditure guidance upward by $10 million, correlating with plans to acquire more hardware for its data center in the fourth quarter. Investments aimed to enhance the data center environment are set to better support the growth of new hybrid cloud solutions. Additionally, there has been an increase in free cash flow guidance by $80 million, resulting from improved cash collections and tax timing advantages. Notably, the cash tax deferral of $30 million will be due in early 2025.

Management Changes and Strategic Focus

Henry A. Fernandez, Chair and CEO, commented on recent management shifts within ESG and private credit sectors, emphasizing that this move continues to strengthen their leadership team in areas with immense future potential. The global investment arena is increasingly leaning towards private assets, with private credit evolving as a transformative force in finance.

Despite challenges in parts of private real estate, the demand for physical assets remains steadfast. The company recently welcomed Luke from Goldman Sachs Asset Management to lead these initiatives, aiming to create new products that cater to General Partners (GPs) as well.

On the ESG front, despite some instability, MSCI remains devoted to advancing Climate solutions, particularly in light of recent global challenges such as severe weather events. Richard, the new hire with a solid background in climate, will focus on enhancing capabilities and developing new client segments in this strategic area.

Looking Ahead: Sales Pipeline and Market Conditions

Overall, there are signs of gradual improvement in the sales pipeline; however, elevated cancellation rates and delayed sales cycles are expected to persist in the short term. MSCI remains optimistic about future opportunities and client engagement. Now, we invite your questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from Manav Patnaik at Barclays. Please go ahead.

Manav Patnaik — Analyst

Thank you. Good morning, Henry. I wanted to inquire about the recent management changes in ESG and private credit. Could these adjustments signal a change in strategy?

Henry A. Fernandez — Chair and Chief Executive Officer

Thank you for your question, Manav. These changes are part of our ongoing effort to deepen our management team, particularly in sectors with significant growth potential. Private credit is revolutionary and will reshape finance globally, while private equities and infrastructure continue to become major asset classes. We have drawn Luke from Goldman Sachs Asset Management to lead this effort, and we are also solidifying our ESG and Climate strategies.

Operator

Your next question comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Toni Kaplan — Analyst

Thanks a lot. As we approach year-end, could you share insights into the budget environment among your clients and your pricing outlook for 2025?

Andrew C. Wiechmann — Chief Financial Officer

Sure, Toni. We are observing initial signs of improvement in client dialogues, which we hope will translate into a stronger sales pipeline over time. However, elevated cancellation activities and prolonged sales cycles are anticipated to continue in the near future, especially given that asset managers are our largest client segment.

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MSCI Discusses Client Relationships and Pricing Strategies Amidst Market Challenges

In recent discussions, MSCI executives emphasized their commitment to maintaining strong relationships with clients, hoping to translate this focus into improved budgets. The company is currently moderating price increases, and noted that the impact of pricing on recurring sales has decreased slightly compared to a year ago. MSCI aims to build long-term partnerships with clients while remaining aware of the competitive pricing strategies of its rivals.

Operator

Your next question comes from the line of Alex Kramm with UBS. Please go ahead.

Alex Kramm — Analyst

Good morning, everyone. I wanted to stay on the topic of retention. Andy, in previous discussions, you mentioned that improvements were expected in Q4, particularly regarding client retention. However, it sounds like conditions are still challenging. Can you provide more specifics on anticipated cancellation rates for Q4 compared to last year, which is crucial? Additionally, could you comment on sales performance in various segments?

Andrew C. Wiechmann — Chief Financial Officer

Sure, Alex. While I prefer not to be overly specific, I acknowledge that results can fluctuate from quarter to quarter. Regarding cancellations, we expect them to be elevated in Q4 compared to the same period last year, as this time typically sees higher cancellation rates. Seasonal pressures and client events from the past year continue to influence these rates. However, I believe retention will align more with Q4 of last year, showing some stabilization after the declines seen in Q3.

As for sales, tighter budgets are still a trend we are observing across client segments. Yet, we notice early signs of constructive dialogues, particularly related to clients experiencing improved revenue due to rising Assets Under Management (AUM). It’s essential to give these conversations time to influence budget adjustments. Thus, we remain cautiously optimistic about early momentum.

Operator

Your next question comes from the line of Alexander Hess with J.P. Morgan. Please go ahead.

Alex Hess — JPMorgan Chase and Company — Analyst

Hi, gentlemen. We’ve seen ongoing discussions about the sales cycle within the asset management channel. How does MSCI evaluate whether issues stem from product gaps or execution problems? Also, what external metrics should analysts watch to gauge shifts in client budgets?

C. D. Baer Pettit — President and Chief Operating Officer

Thank you for your question, Alex. Assessing the competitive landscape is critical for us. While I can’t delve deeply into specifics, we sometimes find ourselves in stronger positions compared to competitors who may be struggling. Recent earnings announcements from rivals have highlighted this disparity, indicating areas where we can improve.

Additionally, we monitor cancellations arising from client events, which can help differentiate whether we’re facing internal challenges or broader economic shifts. Our history of transparency during these calls allows us to provide detailed information about our product pipeline, competition, and overall market trends, helping to clarify the competitive environment we navigate.

Operator

Your next question comes from the line of Ashish Sabadra with RBC Capital Market. Please go ahead.

Ashish Sabadra — Analyst

Thank you for taking my question. I’d like to explore the ASG and Climate areas further. You’ve mentioned subdued demand but noted strong secular trends. When might we expect a moderation of these cyclical headwinds? Also, given recent leadership changes, will this enhance sales momentum and the bundling of climate and ESG services?

Henry A. Fernandez — Chair and Chief Executive Officer

It’s crucial to separate secular trends from cyclical conditions. Societies globally remain intent on addressing social, environmental, and governance issues. The interconnected nature of our world makes it hard to ignore these matters. Although current economic concerns, such as inflation and geopolitical tensions, seem to overshadow them, we firmly believe that interest in climate-related issues will return.

Currently, we are experiencing a cyclical downturn, influenced by regulatory changes in Europe and political dynamics in the U.S. However, MSCI is focused on long-term investments, and we anticipate a gradual recovery in the demand for climate solutions.

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The Resilience of MSCI: Long-Term Growth in a Shifting Financial Landscape

Despite recent turbulence in financial markets, MSCI remains committed to its long-term strategy focused on ESG and climate growth, emphasizing sustainable growth over quarterly results.

Operator

Your next question comes from the line of Scott Wurtzel with Wolfe Research. Please go ahead.

Scott Wurtzel — Wolfe Research — Analyst

Good morning. Thank you for taking my question. Regarding your fixed income and multi-asset business, can you share where you are in the journey of analytics development? I’ve noticed it has been one of the stronger organic growth areas. How much potential remains for growth in this sector?

C. D. Baer Pettit — President and Chief Operating Officer

Thank you for your question. As mentioned in our earlier remarks, fixed income analytics is a crucial component of our overall strength. Compared to three to five years ago, our success now stems from enhanced capabilities in this sector.

This area is vital for multi-asset class sales, and we are focused on delivering standalone fixed income capabilities directly to front office teams. We anticipate growth by improving critical services like fixed income performance attribution, essential for both sales and client retention. While growth in this domain may not be rapid or flashy, we are building a reputation for delivering quality analytics, particularly in fixed income. Therefore, we believe the upward trend will continue.

Operator

Your next question comes from Kelsey Zhu with Autonomous Research. Please go ahead.

Kelsey Zhu — Autonomous Research — Analyst

Good morning and thank you for the opportunity to ask my question. With new leadership in place, can you discuss your medium-term strategy for expanding private assets? During the Burgiss acquisition announcement, you mentioned plans to enhance benchmarking data. What are your latest insights on this strategy and your investment plans for this sector?

C. D. Baer Pettit — President and Chief Operating Officer

Excellent question, and thank you. I’m particularly excited about our intent to gather deeper and broader data in private markets, which will significantly enhance our analytical capabilities. We are leveraging AI to expand the breadth and depth of our data collection, and we anticipate notable advancements in the coming year.

Currently, we are serving our limited partner (LP) client base with substantial demand and growing in the high teens. As we introduce new data, we can enhance analytics in specific sub-asset classes such as private credit and private equity.

Moreover, we aim to foster connections between LPs and general partners (GPs). Our efforts in benchmarking and indexing in private markets are still in the early stages but are recognized for their potential improvements. As we refine our approach, I foresee an expanded role in this space across various asset classes in the coming year.

Operator

Your next question comes from George Tong with Goldman Sachs. Please go ahead.

George Tong — Analyst

Hi, thanks for taking my question. I’d like to revisit the trends in net new recurring subscriptions. I noticed that these sales shifted from positive growth in Q2 to a decline in Q3. You mentioned tighter client budgets and increased churn. Can you elaborate on the factors that contributed to this change in trend and what external conditions might need to improve for recovery?

Andrew C. Wiechmann — Chief Financial Officer

Sure, George. Although overall sales remain strong, especially in our Index and Analytics segments, we did see an increase in cancellations this quarter compared to last year. It’s not uncommon for cancellations to be unpredictable from quarter to quarter. We expect some lingering volatility in the near term, but we’re also seeing early signs of recovery in certain areas.

The uptick in cancellations reflects a continued adjustment to various client challenges over the past year. We are optimistic that improved client interactions will strengthen our sales pipeline, allowing us to navigate through these cancellations, ultimately leading to more positive recurring net new subscription growth in the future.

Company’s Competitive Edge: Insights on Recent Growth and Future Opportunities

Operator

Your next question comes from the line of Faiza Alwy with Deutsche Bank. Please go ahead.

Faiza Alwy — Analyst

Hi, thank you for taking my question. I would like to discuss competitive displacement.

In your comments, you specifically mentioned the analytics business and highlighted several instances where you displaced a competitor. Can you provide more details about the sustainability of this trend? Is there a particular product that is driving these displacements? Any insights would be appreciated.

C. D. Baer Pettit — President and Chief Operating Officer

Sure. In the area of ESG and Climate, we see significant data indicating that we are successfully displacing competitors, despite facing some challenges. For instance, we recorded a remarkable 22% run rate growth in EMEA.

Our standing in the Index sector is quite strong. Concerning Analytics, while we don’t disclose competitor names, the competitive environment often involves formal interactions such as Requests for Proposals (RFPs) where the competition is clear. In private markets, however, the competitive landscape can be a little more fluid.

Overall, we feel optimistic about our performance within this competitive framework. While new functionalities are always emerging from both us and our competitors, we believe our current capabilities set us apart.

Operator

Your next question comes from the line of David Motemaden with Evercore. Please go ahead.

David Motemaden — Evercore ISI — Analyst

Thank you. Good morning. Andy and Baer, you both mentioned noticing early signs of positive discussions with clients.

Given the recent growth in Assets Under Management (AUM), which has been beneficial for your clients’ revenue, along with some stabilization in flows, I’m curious what else you see as necessary before new sales reach an inflection point. Do you believe the historical link between AUM and client activity will continue to hold?

Andrew C. Wiechmann — Chief Financial Officer

It’s important to recognize that we are experiencing various dynamics across our business. We’re a diversified entity, making growth complex. Our largest client group consists of active asset managers who have weathered a couple of challenging years characterized by significant outflows. These outflows have stabilized, and we’ve witnessed year-over-year increases in AUM. Our clients are eager to grow and want to achieve that with our help. This presents an encouraging outlook.

While clients are not yet fully in an expansionary phase, they are entering a more positive mindset. This should hopefully lead to more constructive budget planning for 2025. I also want to highlight strong momentum in other client segments, particularly in wealth management and insurance companies, where we see ample opportunity for growth.

Operator

Your next question comes from the line of Kwun Sum Lau with Oppenheimer. Please go ahead.

Owen Lau — Oppenheimer and Company — Analyst

Thank you for answering my question. I would like to understand more about the analytics segment. Many industry peers mention tight budgets and vendor consolidation, which you have indicated as well. However, both recurring and non-recurring revenues appeared strong in the third quarter. Was this increase driven by implementation revenue or large episodic deals? Additionally, could you discuss the outlook for analytics?

Lastly, regarding the run rate, when I calculate by adding the beginning analytics subscription run rate to the net new sales, I arrive at $685 million, while your reported figure was $691 million. Could you clarify this discrepancy?

Andrew C. Wiechmann — Chief Financial Officer

Certainly. Regarding your last question, a few factors could explain the difference between the beginning run rate plus net new sales and the ending run rate. Notably, foreign exchange movements can impact the overall run rate base, causing discrepancies like this.

Focusing on analytics, we have observed strong momentum across our business lately. A significant driver of this success is the increased demand for our equity risk models, particularly as clients seek clarity on portfolio risks. Our models have gained traction with hedge funds and active managers alike. Moreover, enhancements in our fixed-income offerings, including liquidity analytics, have been successful, especially in volatile market conditions.

We are also providing tools that enhance operational efficiency for our clients. This includes our insights and risk offerings, which allow clients to generate valuable insights while streamlining their workflows. These developments contribute positively in today’s market environment.

In terms of revenue, there was a substantial implementation that went live in Q3 earlier than anticipated, resulting in an unexpected revenue catch-up. We have witnessed several large implementations coming online recently, which have contributed to higher revenue growth compared to our run rate growth.

MSCI Discusses Growth Challenges Amidst Market Recovery

Operator

Your next question comes from Craig Huber with Huber Research Partners. Please go ahead.

Craig Huber — Analyst

Thank you. Can you elaborate on the current market environment? The stock market has performed well over the past two years, and with the Federal Reserve lowering interest rates, inflation seems more manageable. Past recession fears appear to have subsided, leading many industry managers to feel more optimistic about the U.S. economy and assets under management (AUM). Why does there seem to be a persistent belief among your clients about a tough operating environment? Are we too early in the budget discussions for 2025 to make accurate predictions? It seems likely that discussions in the coming months would be more positive than a year ago. What’s your perspective on these concerns? Thank you.

Henry A. Fernandez — Chair and Chief Executive Officer

Your question is quite insightful and is central to our discussion today. When viewing MSCI as a whole, we see promising areas of performance. For instance, the asset-based fee business from passive investments is reaching record levels in both ETFs and non-ETF linked products. We’ve experienced significant sales to asset owners, hedge funds, and wealth managers, along with initial moves into the insurance segment.

However, there seems to be an overemphasis on weaker performance sectors. Approximately 50% of our subscription run rate is tied to active asset managers. This segment has yet to fully recover despite increased global equity markets. Meanwhile, fund flows have shown marked improvement over the last few quarters. We anticipate a substantial recovery for active asset management moving into 2025, especially as budgets are expected to improve, allowing for growth in both revenue and profitability. However, the recovery has not yet occurred, and we acknowledge that it may take time before we see it, including possibly extending into the fourth quarter.

Another area of softness is in ESG and climate sales, which are currently experiencing a cyclical downturn. We believe we are reaching the bottom for ESG and starting to see a recovery in climate-related sales. Yet, predicting growth on a quarter-to-quarter basis remains challenging. Notably, we’ve made significant consolidations in ESG, pulling clients away from competitors. Sales within non-asset management sectors, such as corporate clients, have also seen a boost.

Although climate initiatives have slowed, we believe this is a temporary setback. Factors like physical and transition risks, coupled with upcoming climate talks by the UN next year in Brazil, could reignite interest and efforts in this area. Thus, while we’re closely watching developments in ESG, it’s important to remember the strength shown in many other sectors of our business, including record sales in asset-based fees and analytics.

Operator

Your next question comes from Jason Haas with Wells Fargo. Please go ahead.

Jason Haas — Wells Fargo Securities — Analyst

Good afternoon, and thank you for taking my question. I’m interested in understanding why the expense guidance range for the year hasn’t been adjusted, despite higher AUM levels potentially pushing it toward the upper end of the range. Are there savings elsewhere, or is the current environment leading you to maintain a cautious approach to additional investments?

Andrew C. Wiechmann — Chief Financial Officer

Thank you for your question. We always seek opportunities to increase our investments in key growth areas of the business. As you noted, current AUM levels are higher than what we initially estimated when setting our guidance earlier in the year.

If AUM remains at these levels, we expect to approach the higher end of our expense guidance range, which reflects our intention to invest further. We’re focusing on compelling growth opportunities such as rules-based index portfolios and developing our analytics and AI capabilities that enhance both efficiency and growth.

While we’re committed to maintaining solid profitability growth, we also have to balance our investments for the long term. It’s a nuanced process, and quarter-to-quarter expenses can vary for multiple reasons. Thus, our guidance remains flexible as we continue assessing investment opportunities.

Operator

Your next question comes from Russell Quelch with Redburn Atlantic. Please go ahead.

Russell Quelch — Redburn Atlantic — Analyst

Good morning, and thank you for taking my question. Your report indicates another strong quarter with mid-teens revenue growth in custom and specialized index solutions. This segment now represents nearly 10% of total index segment revenue. What are your thoughts on this growth?

MSCI Sees Bright Future Amid Evolving Market Landscape

Exploring MSCI’s Unique Edge in Index Services

C. D. Baer Pettit — President and Chief Operating Officer

Thank you for your question, Russell. We are indeed very optimistic about our future. Our advantage is not just about our capabilities, but how they cater to various client segments with unique needs. The integration of the Foxberry acquisition will enhance our custom index offerings, expected to launch in the next few quarters. This development will offer us increased speed and flexibility, enhancing our ability to manage diverse calculations and asset classes. Our competitive edge lies in our robust models, research capabilities, and a strong understanding of market dynamics, including climate considerations in our indexes. The demand for these capabilities spans all client groups, from asset owners to wealth management firms, creating significant growth potential.

Every client segment we serve is expressing a growing need for our enhanced capabilities. For instance, asset owners require customization at both the mandate and plan levels, while the asset management sector is keen on exploring bespoke products and benchmarks. The sell-side, particularly in structured products, represents untapped potential for us. In wealth management, our ability to customize indexes and link them to ETFs allows wealth management firms to efficiently manage risk while tailoring portfolios. These advancements are crucial components of our growth strategy, marking a significant turning point with new capabilities set to come online in the near future.

Assessing the RCA Business Performance

Greg Simpson — BNP Paribas Exane — Analyst

Hi. I’d like to get an update on the RCA business’s performance in light of the 2% organic growth in private assets. When MSCI acquired RCA, there was talk of double-digit growth potential. What are the key factors to reignite that growth? Is it more of a cyclical issue with real estate transactions, or are there competitive pressures at play?

C. D. Baer Pettit — President and Chief Operating Officer

Thanks, Greg. The main issue we’ve encountered has been a decline in transaction volume, which significantly impacts revenue. Recent data indicates a resurgence in transaction activity within the market, showing tighter spreads between buyers and sellers. We anticipate a further increase in transactions over the upcoming year. Although we maintain a cautious tone regarding our projections, we have sound reasons to believe in a turnaround for RCA’s performance soon.

Insights into Custom Index Opportunities

Alex Kramm — Analyst

Hi again. On the custom index opportunity, I noticed the run rate for customer and specialized services actually dipped slightly. Can you explain why it didn’t see quarter-over-quarter growth?

Andrew C. Wiechmann — Chief Financial Officer

There’s nothing particularly alarming to note at this time. Broader market pressures are affecting all areas of our business, including custom and special packages. Despite this, we see immense potential and strong engagement with various client types. Importantly, customized climate indexes are becoming a vital growth driver across different service areas, including institutional mandates and the wealth management sector.

Final Remarks on MSCI’s Growth Strategy

Henry A. Fernandez — Chair and Chief Executive Officer

Thank you all for joining today. Our ongoing focus is on developing innovative products that deepen our client relationships. We aim to deliver on a strategic approach that continues to create shareholder value. As always, we prefer to emphasize results rather than potential, as evidenced by today’s discussion. We’re looking forward to sharing further developments in the coming quarters.

Operator

[Operator signoff]

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.