Invesco Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2021

There are 11 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 of risks, uncertainties and assumptions and there can be no assurance that actual results will not differ materially from our expectations. For discussion of these risks and uncertainties, please see the risks described in our most recent Form 10 ks and subsequent filings with the SEC.

Operator

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

Speaker 1

Welcome to Invesco's 3rd Quarter Results Conference Call.

Speaker 2

We will be conducting a question and answer session. This call will last 1 hour. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco and Alison Duke's Chief Financial Officer.

Speaker 2

Mr. Flanagan, you may begin.

Speaker 3

Thank you, operator. I appreciate it very much and thanks everybody for joining us. And I'll make a few comments and turn it over to Alison. So she's going to We'll continue to see the quarter in more depth and then we'll open up Q and A as we always do and hoping everybody is staying safe and healthy as we continue to we will return to normalcy and I know we are all looking for that pace to continue in the months ahead. We continue to have a high level of engagement with our clients, which is even more important as we navigate the market uncertainty brought about by the end of economic and market upside surprises we experienced from the depths of COVID, helping our clients by providing insights and solutions, utilizing our broad range of capabilities.

Speaker 3

This approach has helped us we delivered strong consistent growth over the past 5 quarters. And as you can see on Slide 3, if you're following along on the deck, Net long term flows were $13,300,000,000 during the quarter. This represents over 4% annualized long term organic growth for the quarter. Growth was driven by continued strength in a number of our key capabilities, including ETFs, fixed income, China solutions, Alternative and Global Equities. Strategically, we continue to invest in areas where we see client demand and we're at competitive strength.

Speaker 3

And since the Q3 of last year, we've generated $86,000,000,000 of long term inflows and average quarterly organic growth rate of 6%, we have 5 consecutive quarters of strong growth as a direct result of the investments we've made over time to enhance and evolve our business to meet client needs. ETFs excluding the Qs generated long term inflows of $3,700,000,000 in the quarter with strong market share gains in our EMEA ETF range. In private markets, we generated net long term inflows in our direct real estate business, dollars 1,200,000,000 and robust bank loan product demand resulted in net long term inflows of $2,000,000,000 during the quarter. This included the launch of a new CLO. We generated net long term inflows of $11,000,000,000 within active fixed income across the platform And within Active Global Equities, the Developing Markets Fund, a key capability that came over when we combined with Oppenheimer, we continue to see net long term inflows of $700,000,000 during the quarter.

Speaker 3

That said, we remain focused and continue to work on areas where there's opportunity for improvement. In addition, our solutions enabled institutional pipeline accounts for 38% of the pipeline at quarter end. 3rd quarter flows included net long term inflows of $6,800,000,000 in Greater China. Our China business we continue to be a source of strength and differentiation for Invesco. We continue to expect the Chinese Investment Management Industry to be the fastest growing market in the world for the foreseeable future, we are an early entrant 20 years ago, and we are benefiting from that commitment and investment, and we expect to see continued growth in the years ahead.

Speaker 3

Before I turn the call over to Alison, who will provide more information on the China business and the results. I'd like to note that the growth we are experiencing is driving positive operating leverage, reducing adjusted operating margin of 42% for the quarter. The strong cash flow being generated from our business improved our cash position and helping build a stronger balance sheet and improving our financial flexibility for the future. Invesco's depth and breadth of capabilities and competitive strengths position us well as we go forward. We continue to focus our efforts we are pleased to deliver positive outcomes for our clients while driving future growth.

Speaker 3

And with that, let me turn it over to Allison.

Speaker 1

Thank you, Marty. Good morning, everyone. Moving to Slide 4, our investment performance was strong in the 3rd quarter with 72% and 74% of actively managed funds in the top half of peers we're meeting Benchmark on a 5 year and a 10 year basis. This reflected continued strength in fixed income, global equities, including emerging market equities and Asian equities, all areas where we continue to see demand from clients globally. Moving to Slide 5, we ended the quarter with 1 point $529,000,000,000,000 in AUM, a net increase of $3,600,000,000 As Marty noted earlier, 5 platform generated net long term inflows in the Q3 of $13,300,000,000 representing a 4.4% annualized organic growth rate.

Speaker 1

Passive AUM net long term inflows were $6,800,000,000 and passive AUM net long term inflows were $6,500,000,000 Market declines and FX rate changes led to a decrease in AUM of $18,600,000,000 in the quarter. The retail channel generated net long term inflows of $1,800,000,000 driven by positive ETF flows and inflows in Greater China. The institutional channel demonstrated the breadth of our platform and generated net long term inflows of $11,500,000,000 in the quarter we have a diverse mandate both regionally and by capability funding in the period. Regarding retail net inflows, our ETF excluding the QQQ generated net long term inflows of $3,700,000,000 year to date, we have captured global ETF market share. Our global ETF platform, again excluding the QQQ, captured a 3.8% market share flows, which exceeded our 2.7% market share of AUM.

Speaker 1

We have also captured a higher share of the global ETF revenue pool over this period. Our market share of the revenue pool was 5.6%. Net ETF inflows in the United States does include net long term inflows of $900,000,000 into our QQQ Innovation Suite, which crossed $3,000,000,000 in AUM 1 year after its launch. Our EMEA based ETF range generated $2,500,000,000 of net long we will now determine flows in the quarter with particular strength from the IBC S and P 500 USIP ETF and the Gold Exchange Traded Commodity Fund. Looking at flows by geography on Slide 6, you'll note that the Americas had net long term inflows of $4,800,000,000 in the quarter, Driven by net inflows into ETFs, as mentioned, as well as our institutional flows.

Speaker 1

Asia Pacific again delivered another strong quarter with net long term Net inflows were diversified across the regions, reflecting $6,800,000,000 of net long term inflows from Greater China, most of which arose in our JV and $3,100,000,000 from Japan. Turning to flows across asset classes, we continue to see broad strength in fixed income in the Q3 with net long term flows of $11,000,000,000 Drivers of fixed income flows include institutional net flows Into various fixed income strategies through our China JV, global investment grade, stable value and municipal strategies. Our alternatives asset class holds many different capabilities and this is reflected in the flows that we saw in the Q3. Net long term flows and alternatives were $2,300,000,000 driven primarily by our private markets business through a combination of inflows from direct real estate, we are pleased with the newly launched CLO that Marty mentioned and senior loan capabilities. When excluding global GTR net outflows of $1,700,000,000 alternative net long term inflows were $4,000,000,000 The strength of our alternative platform can be seen for the flows it has generated over the 5 quarters with net long term flows totaling $12,000,000,000 and organic growth rate that's averaging nearly 6% we are pleased to report that we are in the quarter over this time when excluding the impact of the GTR net outflows over this period.

Speaker 1

Turning to Slide 7, I wanted to spend a few minutes on our business in China, particularly given the level of flows we have seen from the region over the last several quarters and a high level of interest in our business there. Invesco launched the first Sino U. S. JV in China in 2003 as Invesco Great Wall. We've been in the market for almost 2 decades with a unique JV structure and relationship with our partner.

Speaker 1

How we operate in China is differentiated from others that have joint ventures. While we have 49% ownership of the JV, our partner is a Chinese government backed power company and has been a good partner. We've been leading the management of the JV, leveraging our global asset management expertise since the inception of this partnership. We run the business in China with Chinese management and our clients are Chinese investors. China's fund management industry is a very significant opportunity.

Speaker 1

In 20 years, it has grown from almost nothing to around $3,500,000,000,000 It's expected to become the 2nd largest fund management market in the world by 2025 with our IPO as an early entrant in China has developed a strong and comprehensive platform covering all business activities, including robust Investment capabilities with good long term performance track records. We have very strong relationships with banks and insurance companies digital distribution has been a major contributor in recent years in terms of bringing in new onshore business. Opportunities for Invesco in China include mutual funds, institutional clients and sovereign wealth funds. As China continues to open up and improve its capital markets, we also expect opportunities in pension reform, global investors increasing interest in investing in Chinese investments and cross border investment opportunities. The relationships, the unique business model we established with our JV partner and the amount of AUM we have sourced from Chinese onshore investors really sets us Apart from other global asset managers who are newer entrants in the Chinese market.

Speaker 1

Moving to Slide 8, we have built a diversified business in China with over $99,000,000,000 in AUM at the end of September. 60% of the AUM is from retail clients and 40% is institutional. We manage AUM in all asset classes and distribution is unique. Digital distribution to retail investors has become a mainstream channel Along with the traditional bank distribution channels and this is not just for money market funds. With our market position and tenure in China, we are beneficiaries of this our long term commitment and strong track record have put Invesco in an advantageous position and our strategic position and continued investment in China has resulted in a 42% annual growth rate over the last 3 years to date.

Speaker 1

In recognition of the strength of the business, Invesco was ranked the number 1 China Onshore Business and the number 3 for an asset management firm in overall China in 2020. Before we wrap up this discussion on China, in light of the recent developments around Evergrande, I want to note that our overall exposure of the direct equity or fixed income holding across the complex, including within our JV is de minimis. Market volatility in offshore markets, of course, does impact AUM And the market has been and could be volatile for future real estate developments. We remain positive towards the fundamentals of China's economy and most of the flows in our China business come from domestic onshore clients. So if anything, we've seen a flight to quality as investors look To NAV based products like the ones IGW offers.

Speaker 1

Now moving to Slide 9 to look at the institutional Which was $32,000,000,000 at the end of September. The pipeline remains relatively consistent to prior quarter level In terms of both assets and fee composition, overall, the pipeline is well diversified across asset classes and geographies. Our solutions capability enabled 38% of the global institutional pipeline and created wins and customized mandates. This has contributed to meaningful growth across our institutional network. Turning to Slide 10, you'll note that net revenues increased $31,000,000 or 2.3 percent from the 2nd quarter as a result of higher average AUM in the 3rd quarter.

Speaker 1

The net revenue yield excluding performance fees was 34.4 basis points, a decrease of 4 tenths of a basis point from the 2nd quarter yield level. The decrease was mainly driven by asset mix shift, including higher QQQ and money market average balances. The incremental impact from higher discretionary money market fee waivers was minimal relative to the 2nd quarter and the full impact on the net revenue yield for the 3rd quarter we expect the dynamics impacting net revenue yield will continue, The degree of which will be influenced by market direction, especially if we see a divergence in performance in areas such as developing or emerging markets where fees tend to be higher than our firm we do expect the discretionary money market fee waivers to remain in place for the foreseeable future until rates begin to recover to more normalized levels. One other area I want to note before moving to expenses are performance fees. Historically, we have realized meaningfully higher performance fees in the 4th quarter.

Speaker 1

These have been driven typically by a few funds each year that have reached the point in their life cycle where they generate performance fees usually in the 4th quarter. This year we do not expect to see performance fees increase in the Q4. We expect performance fees in the quarter will be more in line with our experience across the 1st three quarters of This is due to vintages in our portfolio not being at the lifecycle stage of recognizing performance fees, which is we are currently near the end of the life of the fund and is in no way related to the performance of the fund. Total adjusted operating expenses increased 1 point 2% in the Q3. The $10,000,000 increase in operating expenses was mainly driven by variable compensation and property office and technology expense.

Speaker 1

Higher variable compensation was driven by the revenue increase in the quarter, partially offset by savings resulting from our strategic evaluation. The increase in property office and technology expenses was largely driven by changes to the pricing of transfer agency services that we provide to our funds as we noted last this change went into effect in the Q3 and resulted in a $6,000,000 expense increase, which was offset by Funding increase in service and distribution revenue. As a reminder, we anticipate that our outsourced administration costs, which we reflect the property office and technology expense will increase by approximately $25,000,000 on an annual basis or approximately $6,000,000 per quarter and offsetting this will be a corresponding increase in service and distribution revenues resulting in a minimal impact to operating income. Operating expenses remained at lower than historic activity levels due to pandemic driven impacts to discretionary spending, travel and other business operations. However, we did see a modest increase in client activity and business travel in the 3rd quarter, which is reflected in both marketing and G and A expense.

Speaker 1

As we look ahead to the Q4, our expectations are for 4th quarter operating expenses to be relatively flat compared to the 3rd quarter, assuming no change in markets and FX levels from September 30, consistent with prior years, we expect a modest seasonal increase in marketing related expenses in the 4th quarter. 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. We are engaging in more domestic travel and in person client activities and we do expect to see continued modest resumption of these activities in the Q4. Moving to Slide 11, we update you on the progress we have made with our strategic evaluation. In the Q3, we realized $5,800,000 in cost savings.

Speaker 1

$4,000,000 of these savings was related to compensation expense associated with reorganization and $2,000,000 was related to property expense. The $5,800,000 in cost savings or $23,000,000 annualized combined with $125,000,000 in annualized savings realized through the Q2 and 2021 brings us to $148,000,000 in total or 74 percent of our $200,000,000 net savings expectation. As it relates to timing, we expect to modestly exceed the $150,000,000 target we have set for 2021 with the remainder realized by the end of 2022. We we expect the total program savings of $200,000,000 through 2022 would be roughly 65% from compensation and 35% spread across the other Of course. In the Q3, we incurred $18,000,000 of restructuring costs.

Speaker 1

In total, we've recognized nearly $190,000,000 of our estimated $250,000,000 to $275,000,000 of restructuring costs that were associated with the program. We expect the remaining restructuring costs for the realization of this program to be in the range of $60,000,000 to $85,000,000 through the end of next year. As a reminder, the costs associated with the strategic evaluation are not

Speaker 3

We are now

Speaker 1

going to Slide 12. Adjusted operating income improved $21,000,000 to of $562,000,000 for the quarter, driven by the factors we just reviewed. Adjusted operating margin improved 60 basis points, 42.1 percent as compared to the Q2. Most importantly, our degree of positive operating leverage reflected in our non GAAP results was 1.7 times for the quarter underscoring our focus on driving scale and profitability across our diversified platform. Non operating income was $29,000,000 driven primarily by unrealized gains in our co investment portfolios.

Speaker 1

Effective tax rate for the Q3 was 24.4% compared to 22.8% in the 2nd quarter. The rate increase is primarily we estimate our non GAAP effective tax rate to be between 23% 24% for the 4th quarter. The actual effective tax rate may vary from this estimate due to the impact of non recurring items on pre tax income and discrete Looking at Slide 13, we illustrate our ability to drive adjusted operating margin performance against the backdrop of the client demand driven change in our AUM mix and the resulting impact on our net revenue yield excluding performance fees. Our operating margin in the Q3 of 2019, which was the 1st full quarter following the acquisition of Oppenheimer, was 40.9%. At that time, we reported a net revenue yield of 40.7 basis points.

Speaker 1

In the Q3 of 2021, our net revenue yield had declined over 6 basis points to 34.4 basis points, yet our operating margin has improved to 42.1%. This chart starts at the Q3 of 2019, but in fact our Q3 2021 operating margin is the highest since Invesco we've been building out our product suite to meet client demand and client demand has been tilted towards lower fee products. In fact, the growth of the QQQ over this period is remarkable, almost tripling in size and going from 6% of our AUM mix in the Q3 of 2019 to 12% at the end of this quarter, even though we do not earn a management fee of sponsor the Q2Q, we manage the over $100,000,000 annual marketing budget generated by the product. The marketing budget has allowed Invesco to further raise awareness about the Q2Q. That increased awareness has resulted in its ability to significantly increase our market share in the ETF space.

Speaker 1

Invesco is today the 4th largest ETF provider in the world. Growth in the QQQ accounts for 2 basis points of the net revenue yield decline over the period shown on this chart. And as I noted earlier, discretionary money market fee waivers account for a 6 basis point decline in the net revenue yield. These two factors alone account for over 40% of the decline in the net revenue yield over this period. Realizing our business mix is shifting, we continue to be focused on aligning our expense base with the changes in our business mix, which has enabled the firm to generate positive operating leverage and operating margin improvement.

Speaker 1

Now a few comments on Slide 14. Our balance sheet cash position was $1,800,000,000 on September 30 And approximately $725,000,000 of this cash is held for regulatory requirements. The cash position has improved meaningfully over the past we expect to continue to be in the range of $200,000,000 largely driven by the improvement in our operating income. Our debt our net debt profile has improved considerably as well with no draws on our revolver at quarter end. As a result, we have substantially improved our net leverage position as shown in the top right chart on this slide.

Speaker 1

Our leverage ratio as defined under our credit facility agreement declined from 1.43x a year ago to under 1x we expect to be in the range of 2.5 times to 2.6 7 times at the end of the Q3. Regarding future cash requirements, we recorded an additional downward adjustment to the MLP liability in the 3rd quarter. Reducing the liability from our previous estimate of nearly $300,000,000 down to $254,000,000 we anticipate funding the liabilities this quarter and we have ample cash resources to do so. While we anticipate a degree of insurance recovery related to this, the insurance claims process is inherently complex, and we do not have an update at this stage as to the exact timing or size of the recovery. Regarding our capital strategy, we are committed to a sustainable dividend and to returning capital to shareholders through a combination of modestly increasing dividends and share repurchases.

Speaker 1

As we look towards 2022 and beyond, we will be building towards a 30% to 50% total payout ratio over the next several years as we continue to modestly increase dividends and reinstate a share buyback program in the future. Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility. In summary, we continue to see growth in our key capabilities. We remain focused on executing the strategy that aligns with these areas, while completing our strategic evaluation and reallocating our resources to position us for growth. And finally, we remain prudent in our approach to capital management.

Speaker 1

We're in a very strong position to meet client needs and run a disciplined business and to continue to invest in and grow our franchise over the long And with that, I'll ask the operator to open up the line for Q and A.

Speaker 2

Thank us. Our first question is from Glenn Schorr with Evercore ISI. You may go ahead.

Speaker 4

Hi, thanks very much. So interesting comment about the driving towards 30% to 50% payout ratio eventually. I guess it brings up the strategic question of what's left to do, meaning you've scaled up, you've gotten a lot more global, you've broadened the board, you have China, ETF, fixed income, every solutions, everything that's working. So what else would you be using your cash flow in the future besides capital return? Is that for like things like alternatives, I'm just trying to put that numbers question in a more big strategic question.

Speaker 4

Thanks.

Speaker 3

Thanks, Glenn. Let me make a couple of comments and Alison can chime in too. So, look, we've had the conversation. The industry It's increasingly competitive and reinvesting in the business is still a very high priority for us. And as you said, whether it be product extensions For us, LIBOR in private markets continue to focus on that business and grow there.

Speaker 3

But the investments in technology, digital, they're Really endless. So again, there's just a lot of demand that we would have internally and we continue To make those investments, just increase our competitiveness and continue to evolve the business in line with the client demands.

Speaker 1

Yes, I mean I would just add, I think you could sum that up with just we seek to improve and increase our strategic optionality. We want to have the ability to continue to invest in the business. We want ample cash resources for any downturn or any for market volatility that could lie ahead, we want to be in position to continue to pay down our debt and we have a $600,000,000 note That comes due next year. We do have the remaining MLP liability, which I noted has been lowered to 250 $4,000,000 which is very good news. Nonetheless, that is a cash obligation in the Q4 and we have ample cash resources to handle that.

Speaker 1

And so really as we think about the balance sheet and you've seen the progress we've made over the last 18 months or so, we really are trying to put our balance sheet in a very strong position. So we have the strategic optionality that will include returning capital to shareholders, but we want to be in a position to really balance our priorities which does include improving the balance sheet, investing in the business, maintaining strategic optionality and returning capital to shareholders.

Speaker 4

Okay. Thanks both for that. Thank you.

Speaker 2

Thank you. The next question is from Brennan Achin with UBS. You may go ahead.

Speaker 5

Good morning. Thanks for taking my questions. First, I wanted to start on waivers. Alison, you flagged 0.6 basis points of the fee rate is there. By your estimate, I know it's going to depend upon Some competitive dynamics and whatnot, but how many hikes do you think we would need before those go away because as the forward curve tells us, we're getting closer to that.

Speaker 5

So I want to sharpen up the model there.

Speaker 1

Hard to say how many. I do think just the single first hike will certainly be helpful to starting to reduce those money market fee waivers. It certainly help on the institutional client side for sure. It does depend on a lot of supply demand dynamics, which will just impact the overall availability of the securities to purchase. And so the change in Fed funds will be helpful.

Speaker 1

It won't be the only factor That will determine how quickly it goes away and just an increase in short term rates overall will help on the retail side as well.

Speaker 5

Okay. And we'll just I guess following up on that was When you had waivers in the past, was there a certain threshold for short term rates that where they were eliminated? I would assume something like 50 basis Points would be sufficient. Is that fair?

Speaker 3

I think that's right. I'd have to go back in the cobwebs and remember, but that sounds about you're in the right zone. And I'd come back to Allison's comment though too is going to depend on the competitive dynamics. Okay. Usually, I'll freed it up.

Speaker 1

It's probably not an unreasonable expectation. It's How quickly when we get there can we unwind it?

Speaker 5

Okay. Fair enough. Fair enough. Okay. Thank you.

Speaker 5

And then There's been some speculation in the news about a potential tie up with you all and another large financial services firm that has a big asset manager. Curious what you can say about that. And then separately, you guys have been very clear that M and A when it's done right is definitely a strategic consideration for you and something that Can you maybe walk us through your priorities on the M and A front and whether or not Invesco is interested in being a seller?

Speaker 3

So I can assure you that we're not interested in being a seller. So let's start there. But let me back up and put in context. Yes, as we look at our capital priorities and Alex, I just spoke a second ago about that, it's Reinvesting in the business to sort of increase our competitive positioning. But then strategically, what we look at is we look at where client demand is.

Speaker 3

And if we can't Fill the gap internally, we would look externally. So it has to make strategic sense. It has to be complementary to our business. It can't be To our business, that never works. Clients don't like it, employees don't like it.

Speaker 3

And by the way, shareholders don't either. And I've come back to the point time and time again that you have to have a wherewithal to ensure you're protecting what you bought while creating a better organization and also very importantly, the cultural alignment matters a lot. If there is misalignments, you're going No problem at some point. So as we look at it right now, a priority is again continuing to build out what we have. As I mentioned a few minutes ago, It is our private markets business where we're spending specific amount of time as we're seeing client demand.

Speaker 3

And in credit, in particular, that's been an area in some extensions in our real estate area, so not much different than what we've talked about in the past.

Speaker 5

Thanks for taking my questions.

Speaker 2

Thank you. The next question is from Dan Fannon with Jefferies. You may go ahead.

Speaker 4

Thanks. Good morning. Just wanted to follow-up on the momentum in China. You guys have been highlighting this for several quarters. The numbers have been good.

Speaker 4

Curious about the retail distribution and kind of how, I guess, diverse and entrenched you are with The 3rd party of the banks and others in there and maybe talk about if there's certain concentrations in the regions or partners Just a little more color on the distribution breadth that you have there.

Speaker 3

Yes. I'll make a couple of comments and then Alison So as you looked in the materials that Allison referred to, it's 6% retail, 40% institutional, the retail comes through the joint venture and it's very, very broad. I mean, just the sheer size of the country, you end up with Any number of distributors, yes, there's the obvious, thanks to an insurance company, but an area of real strength and growth is really the e commerce distribution channels and there's many different avenues there beyond Ant Financial where we are one of the firms that's been quite successful. So The concentration risk is not an issue for us and we just look at the whole distribution landscape we continue to open and broaden, but again it is a very competitive landscape. So don't misunderstand my comments.

Speaker 1

I don't know that I have a whole lot to add to that. I mean, I think the online distribution channels have really overtaken the banking distribution channels in terms of market share overall in China and just given the time we've had there and the strength and the tenure, we've got very strong relationships not just across The traditional banking distribution channels, which continue to be very good, but also in this emerging online And also very strong institutional relationships there, which are going to continue to be important drivers of long term growth in China.

Speaker 4

Got it. And then as a follow-up, also can you expand a bit on the performance fee outlook for Q4, just understanding there was basically an investment gap for some period several years ago where you didn't put money to work and so the vintage is not like the timing is just off and just curious how that doesn't tie to performance, just making sure I understand the dynamics of this quarter and why Q4 2021 and how we should think about that maybe Q4 2022 assuming performance holds here and we would see that come back or normalize again next year. Yes.

Speaker 1

I wouldn't say there was an investment gap and the nature of just performance fees and how they our structured into various contracts just remains it's very bespoke And it can be somewhat chunky and difficult to predict. There wasn't an investment gap, but as we do look at just the vintages of what has performance fees in it that would be eligible. There are it is not the typical year end spike of what we would We see. So no performance misses, just the way these vintages are kind of cycling through and what we see in the Q4 of this year. We continue to have about $58,000,000,000 of AUM overall that is performance fee eligible.

Speaker 1

We just don't have Strike dates, if you will, of twelvethirty one or at least at the end of this year that would incur recognized performance fees in the 4th quarter. So our expectation Is that fees in this quarter will be consistent with the experience we've had in the 1st 3 quarters of this year rather than a spike at year end. And you shouldn't read anything into that in terms of what that means for 2022 or beyond. It's just simply a function of timing with the vintages this year.

Speaker 4

Okay. Thank you.

Speaker 2

Thank you. The next question is from Patrick Davitt with Autonomous Research, you may go ahead.

Speaker 6

Hey, good morning everyone. You touched on this briefly in the prepared remarks, but China flows were obviously Remarkably resilient given the increased volatility we saw there last quarter. Could you give a little bit more detail on kind of the flow and investing trends You saw through that volatility, was there any kind of drop off in activity as the volatility got worse later in the quarter? Because in short, like what I'm trying Do we need to worry about these slow slowing or even reversing if Chinese volatility continues to get meaningfully worse or do you think 3Q

Speaker 3

I'll make a couple of comments. And so if you're going to take to beginning of the year after Q1, we thought it was such an incredibly strong quarter that it couldn't be repeated and slowed some but We continue to be very, very strong and just what we're seeing is that there was just movement of investor behavior from Really, acquisition capabilities that were sort of growth focused to value focused and just continuing to work through the broad range of capabilities. So it's hard to I predict what's going to happen, but we're just not seeing that fall off to the degree that you would imagine in those very volatile periods, As you saw, if you went back to 2015, something like that, so what's really important is the market continues to evolve in a very positive way, and the regulators have been very Just on providing a greater investment in retirement savings market, and you're seeing that. So I'm not going to say that we'll never be in net redemptions, It's been very resilient through this year even with the volatility that we've seen. Yes, I

Speaker 1

mean the only thing I might add, if I look back over the Five quarters, this was our 2nd highest quarter for flows in China. And I think the No, we didn't necessarily see it trend down inside of the quarter. And in some of that volatility, you started to just hear, I'll call it softening in sentiment really in the Q2 and you see that more in the Q2 flow results. If I look at the flows into the joint venture in particular, it's about $7,000,000,000 which of That product launches drove a couple of $1,000,000,000 The remainder was really through existing products, particularly fixed income. There was a lot Our fixed income capability.

Speaker 1

That's different than what we saw in the Q1 where it was new product launches that drove the majority of the flows. In this quarter, it was really from our existing products and I think that not only speaks to just the strength and the sustainability in the market, But also the breadth of the capabilities in our platform that we're able to continue to gather assets without large new product launches just given the breadth of the capabilities we

Speaker 6

offer. Great. Thank you.

Speaker 2

Thank you. The next question is from Ken Worthington with JPMorgan. You may go

Speaker 7

ahead. Hi, good morning. The next sales picture continues to be quite solid and the pipeline continues to be strong. An area of weakness seems to be the U. K.

Speaker 7

It seems like outflows are persisting in the U. K, but getting better. So a couple of questions. So you mentioned GTR, I think you said $1,700,000,000 of outflows in the quarter. How much does GTR still manage and is the expectation for continued outflows given the performance there?

Speaker 7

And then what products and business the U. K. And what is the outlook for the U. K. To sort of move back broadly to positive flows in the future?

Speaker 1

Why don't I start with GTR and a little bit of that and let Marty chime in. So in terms of where GTR is today, at the end of ninethirty, it was down the $8,300,000,000 that was down from a peak of $30,000,000,000 The outflows in the quarter were $1,700,000,000 Now that $8,300,000,000 is not entirely in the U. K, but it is largely in the U. K. In fact, what is reflected in the U.

Speaker 1

K. Is about $6,000,000,000 So we are down to a point of at least diminishing headwinds. We do have an expectation that it will continue to decline. So I don't think we have seen a bottom there and we do expect it will continue to decline, but the headwinds are diminishing. And I think you see that just in terms of the improved outflows for the U.

Speaker 1

K. This quarter was $1,800,000,000 in outflows, which is Improvement from $3,200,000,000 in the 2nd quarter. So despite some of those outflows, we do see retail overall improving And we see good demand for active European equities and really improving redemption rates for our U. K. Equities.

Speaker 1

And so there are, I will call it bright spots and green shoots as we continue to work through these GTR headwinds.

Speaker 3

Yes. I'll just add a couple of things. So I think also important, when you look at the period we've been through with U. K. Equities in particular and underperformance, the sort of sentiment was quite negative in the sector too.

Speaker 3

The combination is not very positive for results, the short term performance has improved quite dramatically and in the U. K. Equities, which is important. The ETF flows are the other area where we're seeing demand and also the institutional business. And as we look forward, as Allison said, we're we're having some good expectations of being back in the flows in the U.

Speaker 3

K. Here.

Speaker 5

Okay, great. Thank you.

Speaker 2

Thank you. The next question is from Robert Lee with KBW. You may go ahead.

Speaker 4

Great. Good morning. Thanks for taking my questions. Maybe Marty and Allison, just like to go back to The China the Greater China business. So I mean you've talked for a while, it seems like a few years almost with the JV and maybe bringing it up To majority ownership, but I guess one question would be that, does it really since you operated, I mean, does it really even matter Getting into majority ownership, is that even something that is at this point even possible?

Speaker 4

And then have a follow-up question after that.

Speaker 3

Yes. So look, you hit it right on the head. I mean, the fundamental difference that we've had as composed as opposed to every other joint venture that we know of, there could be someone similar to us. I don't know who that is. But having sort of management control has been the separating factor.

Speaker 3

And So I think most people use majority control as a shorthand for management control, but we've had that. We continue to be in discussions with Our joint venture partner, it's likely we'll end up with majority, but it's not going to be a huge Change in the ownership, but it's not going to get in the way at all of our development in China and the success that we've had. So you've really hit The point that is most relevant for our success there.

Speaker 1

The only change if we were to do that would be an accounting change in terms of how We recognize the joint venture on the P and L. It wouldn't change anything day to day and how we operate it or the success of the venture.

Speaker 4

That's great. And then maybe to follow-up to shift gears a bit. I mean, I haven't really talked about it too much I think in recent But there was a time where you made some acquisitions, made investments in different technology platforms and I know bringing them all under the And TeleFlo umbrella, but can you maybe give us a quick update on kind of the strategic positioning or importance of that And maybe to what extent those platforms are you're starting to see some positive impact And how they're maybe helping the flow picture, if at all.

Speaker 3

Yes. So you're right. It was The combination of 5 smaller acquisitions to create the platform, last year was a year of Pulling it together under the Young Telefaux banner, the largest and most developed of is in Telefaux in U. K, which still has a 40% market share. We continue to look at ways to not just advance the technology, but how can it advance flows in that market.

Speaker 3

We've had some great success with that right now, but we're continuing to challenge that. Here in the United States, the same thing where we think the opportunity this is serving the RA market. And again, we're now just frankly turning our attention to it after really the consolidation last year and so look, we still think there's if you just look at the way digital technologies are being used in a place like China, that's really what gave us the impetus to spend time and energy there. It has proven to be stunningly successful in China. There's different regulatory We have barriers here in the United States and structures and the like, but we still think there's an opportunity for success there.

Speaker 3

And we'll see in the quarters ahead of Fort Wright.

Speaker 4

Great. Thank you for taking my questions.

Speaker 1

Thank you.

Speaker 2

Thank you. The next question is from Bill Katz with Citigroup. You may go ahead.

Speaker 4

Okay. Thank you very much

Speaker 8

for taking the questions this morning. So first question is just on the opportunity to take advantage of the democratization of retail alternatives. Could you maybe expand a little bit on strategically what you're doing there to gin up the volume? Certainly the $1,000,000,000 or so was favorable and the $4,000,000,000 overall is very good, but Seeing some very big numbers elsewhere, so I'm wondering what you're doing to leverage both the product and distribution relationships you have?

Speaker 3

Yes, Bill, great question. So it's where we see the immediate opportunity for us is with our direct real estate business. Earlier in the year, we entered into a partnership with UBS using Enriq real estate capability that's been distributed in Switzerland, Asia and EMEA, we now have an InterReach product here in the United States and we're just working with our distribution partners right now to get it on the platform. It's probably through the end of the year to get to all the platforms that we're hopeful to get on, but we look at it as a huge opportunity just because there are very, very few competitors there. And if you look at the success and pedigree of our real estate team, it's very, very strong.

Speaker 3

But it's traditionally been in the institutional market. It has not been in the real estate market and that's really, Bill, I think where you're going is a combination of having Alternative capability, but also the ability to distribute into the wealth management platforms and that's what we're looking forward to Hopefully taken advantage of.

Speaker 8

Great, thanks. And maybe one big picture question as well as a follow-up. Some of the distributors talking about accelerating the direct indexation opportunity, so the customized thought process, how would that affect Invesco good or bad?

Speaker 5

Well, it's hard to know.

Speaker 3

It all depends on where everybody goes. What we do have is through we have a self indexing capability ourselves. I can tell you the experience we've had in building models, we use that in those model creations. So You could see that to continue to be an extension there. Also with our institutional clients, again, we're using that self indexing capability To build customized indexes for our institutional clients.

Speaker 3

So we look at it as we're probably one of very few institutions that have that capability and we expect that we'd use it probably in partnership with a number of our clients and Wealth Management Partners.

Speaker 5

Thank you.

Speaker 3

Thanks, Phil.

Speaker 2

Thank you. The next question is from Brian Bedell with Deutsche Bank. You may go ahead.

Speaker 9

Great. Thanks. Good morning folks. Maybe just back on indexing and on the M and A front in terms of the strategic optionality that you mentioned, Allison, and the comments you mentioned, Marty, as well, just I guess how important is having a beta index franchise, so as opposed to smart beta and beta ETF capability, Is that a strategic imperative for you or do you think you can grow organically in factor based or self Findex based strategies on your own. And then also I guess would you consider a joint venture As an option in doing that if you had I assume you'd want management control of that just like you have in China.

Speaker 3

Yes. So look, if you just follow the flows, I mean, there continues to be demand in Cap weighted indexes and also in smart data, our history is that we really started in sort of the smart data category And you're seeing just ever increasing demand there. So it's really the answer is both is what's happening in Polios and you want to be relevant in those marketplaces. And our focus has been heads down and continues to grow. And Alison talked about the Hughes in particular, Recognizing it's the limitation we have from a fee generation point of view, but it's been very, very We're very excited about our EKS platform and the reputation of the firm.

Speaker 3

So again, we'll just continue to challenge our competitive positioning and I'm not sure which is the best way forward, but so far I'd say our success has been quite good.

Speaker 9

If you did want to enter into an arrangement, would you consider a JV in that type of structure or is that None even doable.

Speaker 3

It's hard to know. I mean it's all facts and circumstances, so I wouldn't want to speculate on it.

Speaker 9

And then just on sustainable flows for 3Q and total dedicated sustainable AUM and I don't know if you wanted to comment on the Bitcoin ETF strategy between physical and futures for that option.

Speaker 3

Yes, why don't I start on what we're doing in Bitcoin and the like. So we've entered Due to a partnership with Galaxy Digital, that's who we're going to work with to build out our whole suite of ETF capabilities, Underlying blockchain technology, digital assets and crypto, our focus is on a physically backed current. It's going to be some time I think before we get into the market, right? It's at the SEC right now and we've all they're still working through that as a topic. We've introduced 2 ETFs into the markets and sort of invest in companies that build off and play on the blockchain technology and the like.

Speaker 3

And we did back away from doing a futures back product because We think that the best alternative going forward is really the physically backed routes. And

Speaker 1

on your our sustainability question, our flows into ESG capabilities in the Q3 was A little bit soft about $300,000,000 positive inflows in the quarter. We continue to have about $51,500,000,000 of AUMs that we would consider to be ESG funds and mandates and that really spans across 160 ESG funds and mandates in a variety of asset classes and say importantly, we remain the 2nd largest ESG our SG and A are a little bit softer in the Q3 relative to what we've seen in the first half of the year. No Nothing to point to one way or the other there, but our expectation is to continue to see demand for those capabilities.

Speaker 9

Great, great. Thanks for all the color.

Speaker 2

Thank you. Our final question is from Alex Blostein with Goldman Sachs. You may go ahead.

Speaker 10

Good morning. Thanks for taking the question.

Speaker 3

I wanted to shift gears a little bit, maybe go

Speaker 10

back to Slide 13, You highlighted in the prepared remarks. So definitely impressive to see the margin expansion despite the headwinds that you've seen in the fee rate. But I'm curious how you're thinking about The margin trajectory longer term, assuming a more normalized market, which normalize is always a question mark, but clearly market tailwind has been pretty significant over the last year or So with the cost cutting program, I think most of the way through, is it still likely for Invesco to see operating leverage off of this kind of 42 Level over time, assuming again kind of a more normalized market spectrum.

Speaker 1

Yes, I mean I would say a couple of things. 1 in terms of outlook for net revenue yield and just how we think about the fee rate from here. I mean the biggest driver it's going to be the mix of flows that we see. That's going to have a huge impact on us. We continue to see client demand for All of our capabilities, but certainly increasing demand for our passive capabilities, you see that downward pressure.

Speaker 1

At the same time, market impact can work in either direction and it doesn't work consistently across those different asset classes and capabilities and so it's inherently difficult to I predict for that reason. In terms of though just bigger picture, how do we think about it? I mean, I do think we'll continue to see some modest downward pressure Shawna, just as we continue to grow our passive capability and we see demand for those capabilities. Hopefully, it was also help To kind of understand the impact that the QQQ has on that. And so while it puts downward pressure on net revenue yield, it creates a tremendous benefit for us Through the marketing support budget that it provides us.

Speaker 1

And I think really most importantly, we are able to Generate that positive operating leverage and really improve margins against us. And so where do I think it goes from here? I'd say a couple of things. 1, As we kind of come towards the end of this expense management effort that we put in place last year and we expect to complete that next year, I don't think we have to continue to do things like that in order to sustain these strong operating margins. We've got an expense base It's over $3,000,000,000 It's a significant budget to work with.

Speaker 1

And so how we think about it is really how do we deploy that How do we continue to reallocate where we invest against our areas of highest demand and as we build out the breadth of capabilities that The scale and the volume of flows is what continues to generate really the positive operating leverage that we're looking for and gives us the opportunity The same these 40% plus operating margins, even with some of that downward pressure in that net revenue yield. And I appreciate you asking the question because I think it's a really important point that we wanted to drive home and we wanted it to come through today, because this didn't happen by accident. It really reflects a lot of Deliberate work by the company over the last couple of years and an operating expense base that really gives us the leverage we need to continue to invest in the areas of growth

Speaker 3

On behalf of Alice and myself, thank you very much for joining. I appreciate the questions and engagement and I look forward to talking with everybody next quarter.

Speaker 2

Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.

Powered by Quartr

Key Takeaways

  • Invesco delivered $13.3 billion of net long-term flows in Q3, representing 4.4% annualized organic growth, driven by ETFs (ex-QQQ), fixed income, Greater China, alternatives and global equities.
  • The China joint venture recorded $6.8 billion of Q3 inflows and now manages $99 billion AUM, achieving a 42% annual growth rate over three years through its 20-year Sino-US JV model and broad digital and bank distribution.
  • Investment performance remained robust, with 72% of actively managed funds in the top half of peers over five years (74% over ten years), led by fixed income, emerging market and Asian equity strategies.
  • Adjusted operating margin improved to 42.1% (up 60 bps QoQ) with non-GAAP operating income of $562 million and positive operating leverage of 1.7x, despite downward pressure on net fee yields.
  • The strategic evaluation program has realized $148 million of annualized cost savings (74% of a $200 million target) and incurred $190 million of restructuring charges, on track to exceed $150 million savings in 2021 and complete $200 million by end 2022.
AI Generated. May Contain Errors.
Earnings Conference Call
Invesco Q3 2021
00:00 / 00:00