Invesco Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 25, 2022

There are 14 speakers on the call.

Operator

Good morning and thank you all for joining us. As a reminder, this conference call and the related presentation may include forward looking statements, which reflect management's expectations about future events and overall operating plans and performance. These forward looking statements are made as of today and are not guarantees. They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from our expectations. For a discussion of these risks and uncertainties, some of the risks described in our most recent Form 10 ks and subsequent filings with the SEC.

Operator

Invesco makes no obligation to any forward looking statement. We may also discuss non GAAP financial measures during today's call. Reconciliations sections of these non GAAP financial measures may be found at the end of our earnings presentation.

Speaker 1

Welcome to Invesco's 4th Quarter Earnings Results conference call. All participants will be in a listen only mode until the question and answer session. This call will last 1 hour. Call is being recorded. If you have any objections, you may disconnect at this time.

Speaker 1

Now, I would like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco and Alison Dukes, Chief Financial Officer. Mr. Flanagan, you may begin.

Speaker 2

Thank you, operator, and thank you everybody for joining us and Happy New Year. We did end up 2021 with a strong quarter momentum going into 2022. So we'll spend a few minutes looking back at the Q4 and also take a a quick look at 2021 because it really sets the context as we go into the New Year. Our focus has been and we'll continue to be on clients and employees as we execute in this COVID operating environment and we've embedded new ways of working together to deliver outcomes for our clients and we've maintained our focus in 6 key capability areas: ETFs, Factors Index, Private Markets, Active Fixed Income, Active Global Equity, Greater China and Solutions. This approach has helped us generate consistent strong and broad organic growth and we ended the year crossing over $1,600,000,000,000 in assets under management.

Speaker 2

And as you can see on Slide 3, our net term net long term inflows of $12,500,000,000 represents organic annualized long term growth of 4% despite market volatility in the 4th quarter. This is the 6th consecutive quarter of strong growth and is a direct result of the investments we've made over time to enhance and evolve our business to meet the needs of our clients and it also speaks to the broad diversification of our business. Growth was driven by continued strength in our key capability areas as we strategically invest in areas where we see client demand and have competitive strengths. For the year, Invesco delivered the strongest organic growth in our history. We generated over $81,000,000,000 of net long term inflows, representing 7% organic growth rate, which is one of the best in the industry.

Speaker 2

Looking at our specific capabilities, our global ETF platform closed up the year very strong. ETFs generated net inflows of nearly $22,000,000,000 in the 4th quarter, including our flagship QQQ product. The QQQ product had an exceptional quarter generating $13,000,000,000 net inflows. For the year, ETFs globally generated a record $62,000,000,000 of net inflows and we increased our market share both assets under management and revenue. The Qs had an outstanding year with over $21,000,000,000 net inflows growing to $215,000,000,000 at year end.

Speaker 2

QQQ Product has become the 5th largest ETF globally. Its popularity has spurred growth in the rest of our global ETF platform and laid the groundwork for the launch of the adjacent fee generating products such as the Q Innovation Suite. We launched the suite in October of 2020 and it has been highly successful growing to $5,000,000,000 in assets under management by the end of 2021. We continue to see clients increasing their allocation to alternative strategies as they search for diversification and higher return and Invesco has built a broad to meet client demands. We are confident in our ability to accelerate the growth as we look to the future.

Speaker 2

In the Private Real Estate business, long term net inflows were $2,400,000,000 in 2021, comprised of the new acquisition activity of 12 $4,000,000,000 and investment realizations of $9,000,000,000 Our direct real estate assets under management grew by 12%. Our private credit business robust bank loan product demand resulted in net long term inflows of $7,500,000,000 for the year, some closing remarks, including the launch of several new CLOs. Our active fixed income business remained strong, generating net inflows of 9 point $2,000,000,000 in the 4th quarter, including $7,100,000,000 from Greater China and $35,000,000,000 for the year, representing organic growth of 13% over the prior year. Within Active Global Equities, although our $45,000,000,000 developing markets fund So on net outflows in the quarter, the fund generated net long term inflows in 2021 of $1,200,000,000 an improvement of $4,300,000,000 over 2020. On the institutional side, we finished a strong year with solutions enabled opportunities accounting for 35 percent of our institutional pipeline.

Speaker 2

The business in Greater China closed out an exceptional year of growth 4th quarter net long term inflows of $9,500,000,000 For the year, net long term inflows were $28,700,000,000 representing organic growth of 32%. Business in China continues to be a source of strength and differentiation, and we expect strong growth in the years ahead. On Slide 4, we highlight a very strong set of results for 2021. In addition to reporting net long term inflows in 2021, we generated record gross inflows of $427,000,000,000 a 37% increase compared to 2020. Net revenues grew 17% over the prior year, helping drive adjusted operating income to nearly $2,200,000,000 a 31% increase over 2020.

Speaker 2

Revenue growth coupled with strong expense discipline led to 450 basis point increase in our net operating margin to 41.5%. In the second half of the year, we reported 2nd highest net operating margin since the company became U. S. Listed in 2007. These factors drove a 60% increase our full year EPS to $3.09 The strength in our business has generated strong cash flows, improving our cash position to a point where We are resuming our share buybacks.

Speaker 2

We intend to purchase up to $200,000,000 in common shares during the Q1. We We remain focused on continuing to build a stronger balance sheet and improving our financial flexibility for the future. I'm pleased with the progress we've made over the last year and even more confident that Invesco is on the right path to sustainable organic growth. And as we look to the future, we're determined to continue delivering consistent organic growth together with our disciplined approach to expense management should enable us to generate positive operating leverage while at the same time continuing to invest in growth the growth of our business and the efficiency of our business. I do want to take a moment to thank our employees for their continued resilience, hard work and dedication through this COVID operating environment.

Speaker 2

Their efforts are delivering the strong results you're seeing from Invesco. The breadth of our capabilities and our competitive strengths position us well as we look forward. We will continue to focus our efforts on delivering positive outcomes for clients, while driving future growth and delivering value over the long run for our stakeholders. With that, I'll turn it over to Allison. Allison?

Speaker 3

Thanks, Marty, and good morning, everyone. I'll start with Slide 5. Our investment performance was strong in the Q4 with 64% 75% of actively managed funds in the top half of peers or beating Benchmark on a 5 year and a 10 year basis. These results reflect continued strength in fixed income and foreign equities, most notably emerging markets and Asian equities, all areas where we continue to see demand from clients globally. Turning to Slide 6.

Speaker 3

We ended the year with over $1,600,000,000,000 in AUM, a 19% increase over year end 2020. As Marty noted earlier, our diversified platform generated net long term inflows in the Q4 of $12,500,000,000 representing a 4 0.1% annualized organic growth rate. Active AUM net long term inflows were $1,800,000,000 and pass AUM net long term inflows were $10,700,000,000 Net market gains led to an increase in AUM of $18,400,000,000 in the quarter. The retail channel generated net long term inflows of $3,000,000,000 in the quarter, driven by inflows into global ETF products and Greater China. The institutional channel demonstrated the breadth of our platform and generated net long term inflows of $9,500,000,000 in the quarter with diverse mandates, both regionally and by capability funding in the period.

Speaker 3

Inflows in the Asia Pacific region were particularly strong. Regarding retail net inflows, our ETF capabilities generated net inflows of $21,700,000,000 Excluding the QQQ, our net long term inflows were $8,800,000,000 As Marty noted, in 2021, our global ETF the platform captured 5.6 percent of net new flows in 2021, increasing our market share of ETF AUM to 4.9% at the end of 2021. Our share capture of incremental ETF revenues was also above market share at 5.2% excluding the QQQ. Looking at flows by geography on Slide 7, you'll note that the Americas had net long term outflows of $4,300,000,000 in the quarter. While we saw strength in ETFs and our institutional business, we did see pressure from select active equity strategies, including developing markets and diversified dividends.

Speaker 3

A strong quarter with net long term inflows of $12,900,000,000 Net inflows were diversified across the region, including a record 9 point $7,000,000,000 of net long term inflows from our joint venture in China, Invesco Great Wall and $3,200,000,000 from other countries, including Australia, $1,800,000,000 and India at $800,000,000 EMEA, excluding the U. K, also delivered a strong quarter of net long term inflows totaling 4 point $7,000,000,000 representing organic growth of 12%. This was driven by strength in ETFs, sales of senior loan products and institutional mandates and investment grade fixed income. From an asset class perspective, we continue to see broad strength in fixed income in the 4th quarter with net long term inflows of $9,100,000,000 4. Drivers of fixed income flows include institutional net flows into various fixed income strategies through our China JV and EMEA, global investment grade, stable value and municipal strategies.

Speaker 3

Our alternatives asset class holds many different capabilities and this is reflected in the the flows we saw in the Q4. Net long term flows in alternatives were $3,100,000,000 driven primarily by our private markets business, which included direct real estate property acquisitions, a newly launched CLO and senior loan capabilities. When excluding global GTR net outflows of $700,000,000 alternative net long term inflows were $3,800,000,000 the strength of our alternatives platform can be seen through the flow that has generated over the past 4 quarters with net long term flows totaling over $17,000,000,000 Moving to Slide 8, our institutional pipeline was $26,000,000,000 at year end. The decline in the pipeline from the prior quarter was due close

Speaker 4

for the quarter. While the

Speaker 3

size of the pipeline will fluctuate quarter to quarter, it remains consistently strong, typically running in the $25,000,000,000 to $35,000,000,000 range. 4th consecutive quarter levels in terms of fee composition. Overall, the pipeline is diversified across asset classes several different geographies. Our solutions capability enabled 35% of the global institutional certain

Speaker 5

key items.

Speaker 3

Turning to Slide 9, you'll note that net revenues increased 40,000,000 some additional details as a result of higher than expected performance fees as well as higher average AUM in the 4th quarter. Certain key metrics. The net revenue yield ex performance fees was 33.4basispoints, a decrease of 7Q and money market average balances. The incremental impact from higher discretionary money market fee waivers was minimal relative to the 3rd quarter and the full impact on the net revenue yield for the 4th most of the dynamics impacting net revenue yield will continue. In addition, the Q1 contains 2 fewer days than the Q4, which always impacts net revenue yield.

Speaker 3

Regarding discretionary money market fee waivers, given the current prospects for higher rates in the near term, we anticipate that 75% to 90% of these waivers would cease within the 1st 60 to 90 days after the first 25 basis point increase in the Fed funds rate. That would result in a recovery of about 4.4 to 5 tenths of the negative impact waivers have had on our annualized net revenue yield. Some additional details on our expectations and were driven by certain portfolios that have annual absolute return performance hurdles, including approximately $20,000,000 from our JV in China. Given the strong influence of the market on these portfolios, these performance fees are clearly difficult to forecast. Total adjusted operating expenses increased 3.1% in the 4th quarter.

Speaker 3

The increase was mainly driven by the typical seasonal increase we see in marketing and higher G and A expense, which were partially offset by a decrease in compensation expense. Also impacting marketing and G and A expense was an increase in client events and travel in the 4th quarter before we saw the impact of the new Omicron variant. With the impact of the new variant, we have seen a slowdown of travel and in person client activity in January, and we would not expect Q1 activity to be as high as Q4.

Speaker 5

Full year

Speaker 3

2020. G and A expense in the 4th quarter also included a non recurring $10,000,000 charitable contribution to the Invesco Foundation. The Invesco Foundation exists to support our communities and further progress as in pillars of education and financial literacy. Several additional details.

Speaker 5

We're pleased

Speaker 3

to have the ability to make this contribution at the conclusion of a very strong year. As we look ahead to the Q1 of 2022, consistent with prior years, We expect an increase in compensation expenses related to the seasonal increase in payroll taxes and the reset of other benefits such as our 401 plan match. Typically, this is about $25,000,000 to $30,000,000 higher in the Q1 relative to the Q4. 4. As noted, one area that's still more difficult to forecast at this point is when COVID impacted travel and entertainment expense levels will begin to normalize.

Speaker 3

Moving to Slide 10, we update you on the progress we have made with our strategic evaluation. In the Q4, we realized $5,000,000 in savings some significant progress in our facilities portfolio. The $5,000,000 in cost savings or $19,000,000 annualized, 4,000,000,000 in the Q3 in 2021 brings us to $167,000,000 in total or 84 percent of our $200,000,000 net savings expectation. As it relates to timing, the remainder of our net savings some additional financials and financials. We expect the total program savings of $200,000,000 through 2022 would be roughly 65% from full year 2019 and 30 5

Speaker 5

year 2019.

Speaker 3

In the Q4, we incurred 32,000,000 several key initiatives. In total, we've recognized nearly $220,000,000 of our estimated $250,000,000 to $275,000,000 in restructuring costs associated with the some additional details on the balance sheet. We expect the remaining restructuring costs for the

Speaker 5

remainder of

Speaker 3

the year of $30,000,000 to $55,000,000 in supplemental and regulatory requirements. We expect that our strategic evaluation are not reflected

Speaker 5

some of the key factors that we have

Speaker 3

in our non GAAP results. Going to Slide 11, adjusted operating income some improved $16,000,000 to $578,000,000 for the quarter, driven by the factors we have reviewed. Adjusted operating margin was relatively stable at 42%. Excluding the non recurring contribution to the foundation, we generated positive operating leverage in the 4th quarter. For the year, the degree of positive operating leverage was 1.8x, underscoring our focus on driving scale and profitability across the company's diversified platform.

Speaker 3

Non operating income was $51,000,000 driven primarily by recognition of gains from funds that are in liquidation. 4th quarter. The decrease in the effective tax rate was primarily due to a decrease in the valuation allowance recorded against net operating losses and a decrease in the expense for uncertain tax positions in the Q4. We estimate our non GAAP effective tax supplemental estimates due to the impact of non recurring items on pretax income and discrete tax items. Slide 12 illustrates our ability to drive adjusted operating margin improvement against the backdrop of the client demand driven change in our age group, excluding performance fees.

Speaker 3

Full year 2020. We also illustrate the impact the exceptional growth of our QQQ product, which does not earn a management fee, have had on our net revenue yield.

Speaker 5

Some of the key drivers that we have in place.

Speaker 3

Our operating margin 2 years ago in the Q4 of 2019 was 39.9 4%. At that time, we reported a net revenue yield of 40.5 basis points. In the Q4 of 2021, our net revenue yield declined a little over 7 60 basis points to 33.4%, yet our operating margin improved to 42%. As Marty noted earlier, the operating margins we have generated in the 3rd and 4th quarters of 2021 are the highest since Invesco became a U. S.

Speaker 3

Listed company in 2007. This is against the backdrop of a mix driven declining net revenue yield. We have been building out our product suite to meet client demand and client demand has been skewed towards lower fee products, including the highly successful Q222 product. Growth of the Q2Q product over this period is remarkable, growing from 7% of our AUM mix in the Q4 of 2019 to 13% in the Q4 of 2021. Even though we do not earn a management fee, as sponsor of the QCC, we manage the over $100,000,000 annual marketing budget generated by this product.

Speaker 3

Growth in the QQQ accounts for 2 basis points of the net revenue yield decline over this period shown on this chart. 4. And as I noted earlier, discretionary money market fee waivers account for 0.6th of a basis point decline in the net revenue yield. The combination of the extraordinary growth in the QQQ combined with the temporary drag for money market fee waivers account for over 1 third of the decline in net revenue yield over this time period. Realizing our business mix is shifting, we continue focus on aligning our expense base with these changes.

Speaker 3

This has enabled the firm to generate positive operating leverage and operating margin improvement despite the decline in the net revenue yield. Now turning to Slide 13, a few comments here. Our balance sheet cash position was $1,900,000,000 on December 31st approximately $725,000,000 of this cash is held for regulatory requirements. The cash position has improved meaningfully over the past year, increasing by nearly $500,000,000 We were able to drive improvement in our cash position, while also funding the resolution of the remaining contingent liabilities in 2021. These included $294,000,000 in forward repurchase liabilities that we funded earlier in the year and the $254,000,000 in fund shareholder reimbursements to complete the remediation of the MLP matter in the 4th quarter.

Speaker 3

We also received an insurance recovery of $100,000,000 related to that matter in the Q4. Our debt profile has improved considerably as well. Full year 2020. As a result, we substantially improved our leverage position with the leverage ratio as defined under our credit facility agreement at 0.79x@yearendascomparedto1.37x a year ago. If you choose to include the preferred stock, leverage has declined from almost 4x to 2.47x.

Speaker 3

With respect to our capital strategy, we are committed sustainable dividends and to returning capital to shareholders through a combination of modestly increasing dividends and share repurchases. As we stated, we intend to build towards a 30% to 50% total payout ratio of the next over the next several years by steadily increasing our dividend and resuming a share buyback program. As Marty noted earlier, Given our strong and growing cash position combined with continued opportunity in our valuation, we expect to repurchase $200,000,000 in common shares during the Q1. Forward looking statements. Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility, and our 2021 results demonstrate that progress.

Speaker 3

In summary, 2021 was a very strong year for Invesco. We remain focused on executing the strategy that aligns with our key areas of focus, and we continue to invest ahead of client demand in these areas. At the same time, we're focused on This has also facilitated stronger cash flows, further strengthening our balance sheet and driving the improvement in our leverage profile. Forward looking statements. As we look towards the future, Invesco is in a very strong position to deliver value over the long run to all of our stakeholders.

Speaker 1

Our first question comes from Brennan Hawken with UBS. Your line is open.

Speaker 4

Good morning. Thanks for taking my questions. Just was curious, Allison, thanks for all that color on the expenses And whatnot. But if we think about the 2022 is not really off to such a great start here in the equity markets. So If we think about where we stand here year to date, do you have any sense about what kind of impact that some of the things that you have on net revenue yield and how what kind of position are you in To maintain the operating margin level even if we see adverse equity market conditions?

Speaker 4

Thanks.

Speaker 3

Yes. Good question. I mean, let me start with net revenue yield. The biggest source of pressure is really the mix shift. The market 4% doesn't help either, but even in rising markets, as we continue to see really strong demand for our passive capabilities, and I think that's evidenced some of the organic growth rates we just walked through.

Speaker 3

We continue to see real pressure on the overall net revenue yield. And if I look at net revenue yield of our active AUM, it's actually held up pretty nicely over the last year or 2 years. It's really that strong demand for our path some of the AUM that's creating this pressure. And so we do expect there to continue to be downward pressure on net revenue yield call as we continue to see that demand and the shift of our business mix and hopefully some of the detail and the color we provided on the pressure that we also see just from money market fee waivers in the queues, one of which is temporary and maybe an opportunity if we do see rates increased over the course of this year. As it relates to then what does that mean for our operating margin?

Speaker 3

Look, yes, the volatility we're experiencing so far in January, it does put pressure on it, and it will require us to be incredibly disciplined from an expense management standpoint. I think we've made terrific progress. When I look at 4.50 basis points of operating margin improvement year over year, we've got ourselves to a new place, a new position that we can operate within. It might not be as high as what we experienced in the last quarter or 2, but I don't think we get anywhere near back to where we were a couple of years And we're being very disciplined and very thoughtful about that exact issue as we look at the our budget for the year and how we think about a pretty significant expense base.

Speaker 4

Yes. The progress on the Profitability has been really, really great. So agree on that. Then shifting gears a bit to follow-up. There's a $200,000,000 buyback that you announced for the Q1, but as you flagged, there was a $100,000,000 insurance settlement.

Speaker 4

So, when we if If we're thinking about calibrating to the run rate, if we shift to your comments around the payout, it would suggest that the 1Q probably has a little bit of excess from that insurance recovery. And so backing that out is probably the right way to think about It seems like the right way to think about a run rate. Is that fair? And is that the potential for more insurance recoveries behind this one? Or is that This $100,000,000 probably the end that we should expect.

Speaker 4

Thanks.

Speaker 3

I think yes, so a couple of things to point out. That $100,000,000 recovery is actually in our non GAAP results and our transaction integration expense. To note the resolution of that MLP matter and that it was fully resolved in the Q4 with the $254,000,000 getting that liability behind us is really terrific progress after a couple of years. Don't want that to go unnoticed because we've really cleared out all these contingent liabilities. But the $100,000,000 recovery against that is somewhat irrelevant to our payout ratio targets of 30% to 50%.

Speaker 4

No, I just mentioned the $200,000,000 balance. I guess it was Clearly some extra capital that you now received. Did that support the $200,000,000 pace in the Q1? That's all I meant by that, not the payout ratio.

Speaker 3

Fair enough. Look, it adds the $1,900,000,000 cash balance. And so I would think about it from a cash perspective and the fact that our cash did grow about $500,000,000 over the year after resolution of all of those contingent liabilities, dollars 100,000,000 insurance recovery was a positive there. It does somewhat factor into the timing of moving forward with this in the Q1. Also, our valuation and these rather proactive prices factor into the timing as well.

Speaker 3

If not now, when is in our thinking as well.

Speaker 4

Yes, that's fair enough. Thanks very much.

Speaker 1

Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Speaker 6

Great. Thanks. Good morning, folks. Again, thanks for all the color, Alex, on the expenses. I just wanted to come back to the operating margin and in the context of the Great Wall JV.

Speaker 6

Obviously, seeing really good success there continuing on the organic growth side. Do you view that as a more scalable part of the model? And if you continue to have this type of success there, that that could be a positive contributor to the operating margin dynamic.

Speaker 2

Yes, absolutely. I mean, as we said before, if you take a macro picture, the opportunity in China for Asset managers is phenomenal. It's and you pick your estimate out there, but there's very assessments of if you look at the next 3 to 5 years, 50% of the organic growth in flows could be coming from China. So being very, very strong in China is an enormous opportunity and it's

Speaker 5

some

Speaker 2

of the strength as we look forward.

Speaker 6

That's the color. And then just maybe just on organic growth, if you can some color on traction in sustainable product, ESG products on both the full active and ETF side and where you stand in terms of integrating ESG across the investment process, if that's completely flows in Europe, both I guess on the institutional side and also your traction in gaining ETF share in Europe on that sustainable side as well?

Speaker 2

Yes, let me make a couple of comments and Alice can chime in too. So right now, if you look at our assets under management, it's now 96% of our assets under management are ESG that's up this quarter, almost $45,000,000 And where you're going there, it was converted 69 funds of $45,000,000,000 to Article 8 in the Q4. And let's stay on Europe for a second. Yes. ESG is just fundamental to any money manager's success there.

Speaker 2

And whether it's retail or institutional, You really have to have ESG integration at a minimum. That's really our effort with Article 8, and they're going to continue to see that. So It's not just a business opportunity, it's business imperative in the U. K. And I'm in continent right now and it's continuing through the rest of the world.

Speaker 2

Our commitment is to have ESG integration across all of our investment teams. Right now, we are at 75%. So we've made very good progress. And again, from my perspective, you're going to be out 3 years out, you're really not going to probably be talking about ESG as sort of a separate category. The integration piece that we've seen that Billy could be and the like, but it's just a reality of money management right now.

Speaker 3

Let me just clean up one thing. It's not 96% of our AUM, it's $96,000,000,000 of our AUM, would be ESG qualified as Marty said, 75% of our funds are now what we would consider kind of as minimal, but systematic ESG integration.

Speaker 6

And just the flows in the Q4 on sustainable products?

Speaker 3

It flows, there were we had modest in the Q4, continue to see a little bit of pressure there. A lot of our ESG capabilities are somewhat, I think, thematic in nature as we continue to build them out and so they could come in and out of favor. Definitely continuing to see demand overall in terms of institutional mandate for these ESG capabilities, but flows, I would say, were relatively soft on the flattish in the quarter. 4. One thing I would note in particular is we see some outflows that are related to our GTR capabilities we've talked about GTR quite a bit.

Speaker 3

GTR was about $800,000,000 of outflows. That also contributes to what we would consider ESG the outflows as well. So there are places where we see positive flows. There are other places of pressure for very specific reasons, but overall continue to see this as just an important component of our portfolio. And I think as Marty said, in a few years, we don't think we'll really be talking about ESG as its own separate kind of category, but rather a standard that we hold ourselves to across the board.

Speaker 6

Yes. That's great color. I appreciate it. Thank you.

Speaker 1

Our next question comes from Glenn Schorr with Evercore. Your line is open.

Speaker 7

Hello there. I want to first follow-up On Greater China, if I could. You talked about the 6 new funds capturing 2,500,000,000 long term growth, 7.2 from existing products. On a base of $106,000,000,000 ending the quarter, that's a really high growth rate. Some of that is ramping.

Speaker 7

So I know you talked about the big opportunity, but maybe we can talk about the next, I don't know, 2 years, 20 2, 20 23 On other new products in the pipeline and how box in This growth rate is probably not sustainable, but could be in the early years as new funds are ramping. So just talk about

Speaker 2

Yes, a couple of comments and Alison will chime in also. So look at the year over year It was 32%. I mean, it's quite phenomenal. And if you look back, we've really maintained that over the last 3 years. And as you say, it's decades later overnight success.

Speaker 2

So a number of things have come together and we anticipate strong growth in the next year or 2 years, recognizing every market will have its volatile moments. What we are seeing last year is very, very strong launches at the beginning of the year, new product.

Speaker 8

You were talking about some of

Speaker 2

the more recent ones. We are starting to see greater flows into existing products too. So it will be Yes, I think that would be a sign of a market developing where you get ongoing flows into existing products as opposed to sort of a constant launch, but it will be both as we look forward. So we're anticipating continued strong growth in China, both at a retail level and institutional level as we look forward.

Speaker 3

One thing I'd add to that is, I do think in the very near term, China is experiencing some pretty new dynamics with COVID that they have not experienced in the last couple of years. While they've been in a bit of a locked much softening a bit domestically there, and we're seeing that a little bit as we go into the Chinese New Year here soon. So I'd say it's uncertain, what impact some of the measures will have on just sentiment overall within the region. As a counterpoint to that, however, where we see real strength and continued demand in our capabilities within our JV is specifically for our fixed income and our balance products. And so as we continue to see perhaps a flight to safety and some conservatism, if we We see some softening of sentiment.

Speaker 3

We're very well positioned with our capabilities through our JV and we're seeing that so far this year.

Speaker 7

I appreciate that. That's a perfect lead to the follow-up. I was curious, Brendan alluded to the market drop So, following the volatility, it's early, it's a couple of weeks, but just curious if you could give us insight into both institutional retail client behavior as the markets get a little wacky here.

Speaker 3

Yes, I think We try to stay away from real slow updates inter quarter, but I will or in for months. I will say this, I I think you could see with some of the publicly available data that with what we can control in terms of sales and redemption rates and the like, we feel very good about where we are breadth of capabilities as people look to rebalance and shift some of their allocations. We're able to capture a lot of the flows even in a risk off environment. At the same time, there's a lot of pressure in the market and a significant amount of volatility as we all experienced yesterday in particular and I think the couple of days with the Fed meeting and the minutes coming out of that are going to be quite informative as well. And so with what we can control, we feel very good about it.

Speaker 3

And I'd say the conversations with clients continue to be very constructive and very positive and we're where we need to be. But this is an interesting market.

Speaker 7

Appreciate that. Thanks a

Speaker 1

lot. Our next question comes from Craig Siegenthaler with Bank of America Securities. Your line is open.

Speaker 9

Good morning, Marty, Allison. Hope you're both doing well and congrats on the 7% organic growth this past year.

Speaker 3

Thanks, Greg.

Speaker 9

So I'm sorry about this, but I have another one on China. And I just wanted to update on your effort to increase your equity stake in the joint venture because I don't think you've done that yet, but you're working on that. And then also you previously disclosed as the percentage of flows that come from digital platforms like Ant Financial, I think it was trending around 50% before 4Q. So I don't know if you have an update on that number either.

Speaker 2

Yes. And hope you're doing well too and hope you had a good New Year's. So just on the we continue to be in dialogue with our joint venture partner to increase our stake over 50%. Still a positive conversation. We've not accomplished that.

Speaker 2

That I'll come back to the most important element is that which differentiates us even though we have 49% of the ownership. We have management control and we have had since the beginning and that is really what has allowed us to be so effective successful in China. So that's the main point to look at. But we do feel in time that we will people to end up with a majority stake in our joint venture. It is not in peak progress at all.

Speaker 2

Secondly, with regard to digital platforms, they continue to be Yes, so really very, very important part of the market dynamic there. And The number really hasn't changed. It's still about 50%. But again, it's a very strong part of the future success that we'll see in China.

Speaker 9

And then just for my follow-up on the Private REIT business, you have the U. S. Business and then you have the global distribution partnership with UBS. It looked like the U. S.

Speaker 9

Vehicle only raised about $16,000,000 through month end November. And I don't have the December number yet, but I was wondering if you could update us on the progress of those two products and any kind of flow or AUM detail.

Speaker 2

Yes, I'll make a couple of comments. Just the we're still in the process of onboarding various institutions and I don't want to get too specific, but it is now being onboarded in the United States and it will probably take into the Q2 of this year before we would get to a level where we feel that it's sufficiently onboarded at the various places that you would hope it would be. But again, it's an area of Great opportunity for us. The reception has been very, very strong. It's just literally the due diligence process of working through those types of things.

Speaker 9

Thank you, Marty.

Speaker 2

Yes. Thank you.

Speaker 1

Thanks, Craig. Our next Question comes from Robert Lee with KBW. Your line is open. Hi, Robert, please hit your mute button.

Speaker 10

Sorry about that. Thank you. Thanks for taking my questions and happy belated New Year to everyone. Hope you're both doing well. Maybe my first question, I'd like to just go back to maybe dig into flows a little bit.

Speaker 10

So I mean, obviously, even strong organic flow growth for the year. I mean, that's great. But can you maybe dig in a little bit since there's such a focus on fee realization rates and whatnot, help us better Maybe get a sense of the economic impact of the inflows. I mean, I don't know if you have, for example, the net revenue net organic revenue or EBITDA growth, maybe that'd be a better metric. Anything that could help us get a better sense of the economic impact you're seeing from inflows?

Speaker 10

This would be my first question.

Speaker 3

We don't disclose it in that way and the way that I think where you're going. I mean, I'd point to a couple of things, which is with the strong organic growth rate and we're generating positive organic revenue throughout the year on the flows. There are points of strength and points of challenges against that. And as I noted, the active the net revenue yield inside of our active capabilities is actually held up pretty strong. It's barely moved in the last couple of years, and it's really just the challenges we have there with just the demand is not as strong as it is for our passive capabilities.

Speaker 3

And so what I would point you to is, and we've talked about this a few times as well in our passive capabilities and our ETFs in particular, I'll point that out. Our operating margin that we generate from that is consistent with or a little better than the firm average operating margin. It takes a higher volume. It's more of a scale play for us. And so as we continue to really see the positive demand for those capabilities we're able to not only generate positive organic revenue growth, but also really contribute both to operating absolute operating margin and absolute operating profit and sustain our operating margins at the same time.

Speaker 10

Great. Thank you. And maybe as a follow-up going back expenses. I mean, can you just remind us, as you look given the difficult start to the year With the market so far, can you just remind us kind of how much flex or variability you feel like you may have in the expense basis that may be linked to whether it's pre tax operating income or asset levels or flows. Just trying to get sense of what's kind of the natural built in flex you could have to respond to the more difficult revenue

Speaker 7

to start the year? Sure.

Speaker 3

A couple of things. One, so we would expect that to flex up with stronger revenue and flex down if we don't see it. And That's 0.1. And the 2 thirds of our expense base that is more fixed in nature, that's really some of where we continue to look at our expense discipline and where we can look at opportunities to unlock cost. In some cases, allowing that to fall to some of the key factors that we've talked about, we're at $167,000,000 there.

Speaker 3

We still got a little ways to go. Our real estate property segment, and we continue to look.

Speaker 5

Some additional

Speaker 3

details and that's an element of a fixed expense that's in the environment that not only

Speaker 5

some of the factors that we're seeing

Speaker 3

in the future. And we're seeing that we're seeing a lot of the

Speaker 5

changes that we're seeing

Speaker 3

in the future. And we're seeing a lot of the changes that we're seeing in the future. And we're

Speaker 5

seeing a lot of the changes that we're seeing in the future.

Speaker 3

And we're seeing a lot of the changes that we're seeing in

Speaker 5

the future. And we're seeing a lot of

Speaker 3

some of the fixed costs there.

Speaker 10

Great. Thanks for taking my questions.

Speaker 1

Our next question comes from Dan Bannen with Jefferies. Your line is open.

Speaker 8

Thanks. Good morning. Just to follow-up one more for you on expenses. We think about the sequential change from 4Q to 1Q and you highlighted the normal seasonal stuff, but curious about this past Q4 where you had elevated performance fees, what we should normalize for compensation within that and any other maybe one time or items to think about the Kind of 1Q to I'm sorry, 4Q to 1Q ex kind of the market impact.

Speaker 5

Yes. Some of the other items that we have

Speaker 3

in the past. Compensation expense, let me just speak to it sort of broadly. It tends to run somewhere between 38 42% of our revenues. If you just look at that on an annualized basis, that's been the range in which we've operated for quite some time. In 2021, it was at 38%, So it's on the low end of that range, which is what you would expect in a really strong year.

Speaker 3

And so I think that is still a very reasonable range to be thinking about as you think about just our overall compensation expense regardless of revenue, whether it's coming some performance fees or management fees that range is the right range to think about. Looking towards expenses in the Q1 overall. I would say a couple of things. Look, marketing tends to be seasonally high in the Q4. You certainly saw that in the Q4 of this year.

Speaker 3

We've got the $25,000,000 to $30,000,000 increase that is the seasonality and compensation expense. And the other point that we're trying to get our own arms around is we did start to see something that looked like a return to normal in the Q4. And the omicron variant really didn't impact in person activity and travel until we were almost on the holidays. And so we were pretty active, right, until that and then things changed just as the holidays would have brought a natural sort of closure to things for a few weeks, and we obviously haven't seen any travel or engagement really pick back up just yet. I do think we'll start to see some return of that later in February.

Speaker 3

We're certainly hopeful. And I think that's an area that we hope continues to grow throughout the year. We've said that now for a while and we just haven't seen it. But Q4 was the first time we started to feel like it was close to normal. So hard to guide as to whether or not Yes.

Speaker 3

We as to when we see the pickup, but I do expect it comes down a bit in the Q1 relative to Q4.

Speaker 5

Some of the key things that we're looking at. That's helpful.

Speaker 8

And then just looking at Slide 12, Appreciating obviously what you've been highlighting around the margin expansion versus the fee mix shift that's happening. But if we flat markets assume for the next couple of years and the trends hold. Is margin expansion for you still part of the story or?

Speaker 3

4Q, so AUM level for the markets hold, is operating margin expansion a possibility? Was that your question?

Speaker 8

With the same underlying mix shift of flows, yes. So take markets out.

Speaker 3

Yes, I'd say it is the I would be thinking about flat to modest expansion in a market some of the initiatives that we're looking at in an environment where markets hold and we continue to see this mix shift. The question is really just the pace of the mix shift. If it's quite fast, I think we're looking at flat. If it continues at the pace we've seen, we could get some modest expansion out of that. We've said before, we don't intend to run our business with an ever increasing operating margin, and I'll reiterate that.

Speaker 3

And we do feel like we're in a pretty nice operating range. We would be happy to see it improve some, But we're not going to start the business in order to allow it to grow. We've got some key investments we want to continue to make ahead of where we see demand. And so I think that in a flat market with real mix shift could get us to a flat operating margin.

Speaker 2

Yes. And I do just want to reiterate, it's really important for us to continue to

Speaker 5

some of the investments that we're going

Speaker 2

to continue to do it along the way that we've been having. Continue to look at areas of opportunity and look at our expense base, reallocate and invest in. It's going to be in those areas of client demand where there's growth. It's going to continue to be ETFs, etcetera, and also the investment in technology that we need to do. So it's a really, really competitive marketplace.

Speaker 2

And

Speaker 5

One of

Speaker 2

the things that's really important is as we drive results for shareholders, we're also investing in the business for shareholders and for clients to focus on that path as we go forward.

Speaker 3

Operator, do we have any other questions?

Speaker 1

Yes. Our next question comes from Ken Worthington with JPMorgan. Your line is open.

Speaker 11

Hi, good morning. Marty, I wanted to step back and think bigger picture. It's a New Year, so some of the key factors that we have in place. Invesco had a great year in 2021 for a period of time. The stock price Is that about the same level as it was a decade ago.

Speaker 11

And it seems like Invesco has executed well on a value creation roadmap that resulted in size and scale and better positioning, but one that hasn't been reflected some of the factors that are being measured by the stock price. So you have an activist investor that continues to build a position in the company. I guess, are you thinking about things differently in terms of how you're approaching shareholder value creation when you're making investment and capital allocation decisions. And as you think about driving improved results for shareholders, what is sort of top of mind for you as you think about 2022 and beyond? Yes.

Speaker 2

Look, it's a great question and that doesn't go beyond this either. And I think what's really important is get The results that you've talked about in share price, from our perspective, you really have to deliver results for clients and you have to do it in a very thoughtful and meaningful way and ensuring that We're hitting what all the constituents need. And I think, again, you just look at where the Business has evolved. We think we've evolved it very strongly to meet those needs and it's been reflected in the operating results. And So our perspective is continue to be very focused on that and also not just clients, but with shareholders in mind and in time the share price should reflect that.

Speaker 2

Just today as we talked about looking to buy back our stock, we think it's very, very attractive for all the reasons that you laid out.

Speaker 3

I mean, I would only add to the valuation is frustrating to us. And so what we focus on is what we can control and where we can influence. I think as Marty said, really making sure we're delivering for clients and building out our capabilities so that we are 3 and we're certainly winning visavis the competition there. We've also made meaningful progress with 4.50 basis point improvement in our operating leverage. It was important.

Speaker 3

We had some work to do there, and we needed to get ourselves back into the right operating range. And there was a lot hard work that went into that and we feel very good about the work that we've done there and that falls to the bottom line. And then the balance sheet needed some work and we've made tremendous progress in strengthening the balance sheet and continue to work on that and put ourselves in a position to do further work on the balance sheet as the year unfolds. And so as we look at what should influence that return to shareholders, we think we're making real progress against each one of those. And it's not a quarter to quarter game, and it is a long term game, and we're going certainly have the support of our Board as well.

Speaker 7

Great. Well, I know it's

Speaker 11

a tough question, but it's great to hear your comments. Thank you again.

Speaker 2

I'm glad you asked.

Speaker 1

Yes.

Speaker 2

Thank you.

Speaker 1

Our next question comes from Patrick Davitt with Autonomous Research. Your line is open.

Speaker 12

Hey, good morning, everyone. I have a quick follow-up on Brennan's repurchase question. Following it looks like the $200,000,000 in 1Q would already get you to the 35% to 50% payout. So should we assume that's more of a one off or When we're modeling this or assume a resumption of more regular repurchases in every quarter beyond that?

Speaker 3

Hard to say just yet. You're right. That does get us into that range. And we did feel like the timing was right to actually move rather aggressively on it all the reasons that we talked about earlier and feel good about that. Whether or not we will continue to do more as the year unfolds, I think we'll just have to address that as the year both and results will dictate that.

Speaker 12

All right. Fair enough. And then MassMutual recently announced a new reinsurance platform with Centerbridge and Barings acting as the asset managers. Just curious how you think that news fits with your relationship with them and does it change your thinking on the opportunity for managing more

Speaker 4

of their assets at all.

Speaker 2

Yes. No, it does not. As we said, it's a very strong relationship. Obviously, 2 Board members on our Board. They own 60% of the company.

Speaker 2

They've been very helpful in supporting

Speaker 5

some of the

Speaker 2

other initiatives that we continue to do that. We continue to make a relationship.

Speaker 12

Thank you.

Speaker 1

Our next question comes from Bill Katz with Citigroup. Your line is open.

Speaker 10

Okay. Thank you very much

Speaker 13

for taking the questions this morning. So, Marty, I think you mentioned that you hope to deliver some operating leverage going forward, you just spend in your opening remarks and then Alison you sort of qualified that you're not here with infinite margin improvements. Some additional details. So as we look into maybe 2023, can you unpack maybe your gross spending rate and then the net spending rate, just trying to see as you get to the expense growth into 2023. I certainly appreciate what's in January 2022, of course.

Speaker 3

Yes. I can go ahead and tell you we're not going to give

Speaker 5

some

Speaker 3

guidance in the 23. I think we've tried to give some color to what we expect in the Q1 and the operating margin within which we intend to operate.

Speaker 2

Yes. And Bill, I think you're asking a question was connected to some of the other questions that were asked. You're trying to do many things here, right? You're trying to invest for the future and be competitive to drive results for clients and ultimately shareholders. And We think we've done that, right?

Speaker 2

If you look at the business today, look at where it was 5 years ago, it's a very attractive business, investing in China, ETFs, private markets, etcetera. That just was not where Invesco was 5 years ago, 10 years ago. And at the same time, we talked about the margin expansion year over year. With that expansion, we've also been able to invest in the business to improve our competitive positioning. So you're really trying to do any number of things all at once and we're showing that we can do that.

Speaker 7

Okay. Thank you.

Speaker 13

And then just one last one for me and thanks for taking both of them. So a couple of your competitors have been spending pretty aggressively to build out their platforms, particularly Alts bucket. And I think you guys are probably a little bit further along strategically. But does M and A incrementally fit into discussion from here?

Speaker 2

Yes. You're going to get tired with the answer because it's going to be the same one. But look, we look at business very strategically and we look at where client demand is coming from and can we meet our clients' needs. And we're always going to look internally first to develop what we can. And when we come up short there, that's when we'll start to look to the market.

Speaker 2

And it has to be a capability that There is client demand for it. It's additives to our capability set and something that we think also can fit very nicely within the business from a cultural point of view. So again, our first focus is internally. Yes, we will continue to pay attention to the market when it makes sense.

Speaker 6

Thank you.

Speaker 2

Thanks, Bill.

Speaker 1

Our last question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Speaker 7

Hey, Marty, Allison, thanks for Excuse me again here. Just want to circle back on expenses. You mentioned 1 third of the expense base is variable, about 2 thirds Fixed or so. I guess, where would you like to see that mix over time? And how do you see that evolving?

Speaker 7

And when you think about the margin more medium to longer term. Where do you see that operating margin? Is mid-40s achievable? Does that make sense for the business? How do you think about that?

Speaker 3

In terms of the variable fixed mix, I think it's actually probably accurate where it is. And I don't necessarily see it evolving to be terribly more variable over time. So I think one of the things we focus on quite a bit is just driving scale over that fixed expense cost is actually where we deliver that operating margin growth. In terms of where we could be. Look, we 450 basis points of improvement 1 year was pretty extraordinary.

Speaker 3

I don't expect to replicate that strategic review that we have been in is not easy, but looking at those opportunities that gave us we gave us the chance to look at a lot of good opportunities that made sense for us. In terms of where could you be, could you be mid-40s over time? That's a longer term comment. I couldn't tell you by when or how. And certainly, we need some very supportive dynamics behind that as well.

Speaker 3

So I'll never say never, but I can tell you it certainly won't be in 2022 or probably not in 20 3 because we really are focused on investing in the business and getting to a margin of that level in the next couple of years would require us to do things as I think Marty noted a few times that just really aren't tenable because it would not position us well in terms of investments that we need to build the platform the future. And so I think in the short term, the low 40s is a really good operating range for us to be in.

Speaker 7

Great. I'll leave it there. Thanks so much for taking the questions.

Speaker 3

Sure. Thank you. Operator, I think that brings us to the end.

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Earnings Conference Call
Invesco Q4 2021
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