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S&P 500   5,051.41
DOW   37,798.97
QQQ   431.10
ASML’s Earnings Could Bring The Stock to New Highs
Stock market today: Asian benchmarks trade mixed amid expectations for US rates to stay high
Kinder Morgan Stock Bid Up In An Oil Breakout
Undervalued UnitedHealth Group Won’t Be For Long
DocuSign and The Case for 66% Upside 
3 Computer Vision Stocks for Long-Term Gains From AI
Silicon Motion Proves That AI in Motion Stays in Motion
S&P 500   5,051.41
DOW   37,798.97
QQQ   431.10
ASML’s Earnings Could Bring The Stock to New Highs
Stock market today: Asian benchmarks trade mixed amid expectations for US rates to stay high
Kinder Morgan Stock Bid Up In An Oil Breakout
Undervalued UnitedHealth Group Won’t Be For Long
DocuSign and The Case for 66% Upside 
3 Computer Vision Stocks for Long-Term Gains From AI
Silicon Motion Proves That AI in Motion Stays in Motion
S&P 500   5,051.41
DOW   37,798.97
QQQ   431.10
ASML’s Earnings Could Bring The Stock to New Highs
Stock market today: Asian benchmarks trade mixed amid expectations for US rates to stay high
Kinder Morgan Stock Bid Up In An Oil Breakout
Undervalued UnitedHealth Group Won’t Be For Long
DocuSign and The Case for 66% Upside 
3 Computer Vision Stocks for Long-Term Gains From AI
Silicon Motion Proves That AI in Motion Stays in Motion

Invesco Q4 2021 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Corporate Executives

  • Allison Dukes
    Chief Financial Officer
  • Martin L. Flanagan
    President and Chief Executive Officer

Analysts

Presentation

Allison Dukes
Chief Financial Officer at Invesco

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 reflects management's expectation about future events and overall operating plans and performance. These forward-looking statements are made as of today and are not guaranteed. They involve 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-K and subsequent filings with the SEC. Invesco makes no obligation to update any forward-looking statements. 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.

Operator

Welcome to Invesco's Fourth Quarter Earnings Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] 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, Martin Flanagan, President and CEO of Invesco; and Allison Dukes, Chief Financial Officer.

Mr. Flanagan, you may begin.

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Thank you, operator, and thank you everybody for joining us and Happy New Year. We did end up 2021 with a strong fourth quarter [Indecipherable] going into 2022. So we'll spend a few minutes looking back to the fourth quarter and also take a quick look at 2021 because it really starts of context as we go into the new year.

Our focus has been and will continue to be on clients' employees as we execute in this COVID operating environment, and we could better new ways of working together to deliver outcomes for our clients and we've maintained our focus on six key capability areas; ETFs, Factors Index, Private Markets, Active Fixed Income, Active Global Equities, Greater China and Solutions. This approach has helped us generate consistent, strong and broad organic growth and we ended the year crossing over $1.6 trillion in assets under management.

And as you can see on slide three, our net long-term inflows of $12.5 billion represents organic annualized long-term growth of 4% despite the market volatility in the fourth quarter. This is a sixth 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 we have competitive strengths. For the year, Invesco delivered the strongest organic growth in our history. We generated over $81 billion of net long-term inflows, representing 7% organic growth rate, which is one of the best in the industry.

Looking at our specific capabilities, our global ETF platform closed up the year very strong. ETFs generated net inflows of nearly $22 billion in the fourth quarter, including our flagship QQQ product. The QQQ product had an exceptional quarter generated $13 billion of net inflows. For the year, ETFs globally generated a record $62 billion net inflows and we increased our market share in both assets under management and revenue. The Qs had an outstanding year with over $21 billion of net inflows, growing to $215 billion at year-end. QQQ product has become the fifth 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've launched a suite in October 2020 and it has been highly successful growing to $5 billion 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 higher return and Invesco has built a broad [Technical Issues] real estate [Technical Issues] to meet client demands. We are confident in our ability to accelerate the growth as we look to the future. In the private real estate business, the long-term net inflows were $2.4 billion in 2021 comprised of new acquisition activity of $12.4 billion and investment realizations of $9 billion. Our direct real estate assets under management grew by 12%. Our private credit business saw robust bank loan product demand resulted in net long-term inflows of $7.5 billion for the year, including the launch of several new CLOs. Our active fixed income business remained strong, generating net inflows of $9.3 billion in the fourth quarter including $7.1 billion from Greater China and $35 billion for the year, representing organic growth of 13% over the prior year. Within active global equities, although our $45 billion in developing markets fund, so our net outflows in the quarter, the fund generated net long-term inflows in 2021 of $1.2 billion, an improvement of $4.3 billion over 2020.

On the institutional side, we finished a strong year with solutions-enabled opportunities accounting for 35% of our institutional pipeline. The business in Greater China closed out an exceptional year of growth with fourth quarter net long-term inflows of $9.5 billion. For the year, net long-term inflows were $28.7 billion, 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 four, 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 billion at 37% increase compared to 2020. Net revenues were 17% over the prior year, helping drive adjusted operating income to nearly $2.2 billion, a 31% increase over 2020. Revenue growth coupled with strong expense discipline led to a 450 basis point increase in our net operating margin to 41.5%.

In the second half of the year, we've reported the second highest net operating margin since the company became US listed in 2007. These factors drove a 60% increase in our full year EPS to $3.09. Strength in our business has generated strong cash flows, improving our cash position to a point where we are resuming our share buybacks. We intend to purchase up to $200 million in common shares during the first quarter. 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 are 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 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. 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 to represent delivering positive outcomes for clients while driving future growth and delivering volume over the long run for our stakeholders.

With that, I'll turn it over to Allison. Allison?

Allison Dukes
Chief Financial Officer at Invesco

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

Turning to slide six. We ended the year with over $1.6 trillion in AUM, a 19% increase over year-end 2020. As Marty noted earlier, our diversified platform generated net long-term inflows in the fourth quarter of $12.5 billion, representing a 4.1% annualized organic growth rate. Active AUM net long-term inflows were $1.8 billion and passive AUM net long-term inflows were $10.7 billion. Net market gains led to an increase in the AUM of $18.4 billion in the quarter. The retail channel generated net long-term inflows of $3 billion in the quarter, driven by inflows in the global ETF products in Greater China. The institutional channel demonstrated the breadth of our platform and generated net long-term inflows of $9.5 billion in the quarter with diverse mandates, both regionally and by capability funding in the period. Inflows in the Asia-Pacific region were particularly strong.

Regarding retail net inflows, our ETF capabilities generated net inflows of $21.7 billion. Excluding the QQQ, our net long-term inflows were $8.8 billion. As Marty noted in 2021, our global ETF business generated record net inflows of $62 billion, which was more than 2.5 times net inflows in 2020. Our global ETF platform captured 5.6% 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 seven, you'll note that the Americas had net long-term outflows of $4.3 billion 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. Our BulletShares suite also experienced gearing maturity activity, which is expected. Asia-Pacific delivered another strong quarter with net long-term inflows of $12.9 billion. Net inflows were diversified across the region, including a record $9.7 billion of net long-term inflows from our joint venture in China. Invesco Great Wall and $3.2 billion from other countries including Australia with $1.8 billion in India at $800 million. EMEA, excluding the UK also delivered a strong quarter of net long-term inflows totaling $4.7 billion, representing organic growth of 12%. This was driven by strength in ETF, 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 fourth quarter with net long-term inflows of $9.1 billion. Drivers of fixed income flows include institutional net flows and various fixed income strategies through our China JV and EMEA, global investment grade, stable value, and municipal strategies. Our alternatives asset class holds many different capabilities and this is reflected in the flows we saw in the fourth quarter. Net long-term flows and alternatives were $3.1 billion, 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 million, alternative net long-term inflows were $3.8 billion. The strength of our alternatives platform can be seen through the flow that is generated over the past four quarters with net long-term flows totaling over $17 billion, representing a 10% organic growth rate over this time excluding the impact of GTR net outflows over the period.

Moving to slide eight. Our institutional pipeline was $26 billion at year-end. The decline in the pipeline from the prior quarter was due to the funding of several significant mandates in the fourth quarter as reflected in our strong institutional inflows for the quarter. While the size of the pipeline will fluctuate quarter-to-quarter, it remains consistently strong, typically running in the $25 billion to $35 billion range, dating back to 2019. The pipeline also remains relatively consistent with prior quarter levels in terms of fee composition. Overall, the pipeline is diversified across asset classes and geographies. Our solutions capability enable 35% of the global institutional pipeline and created wins and customized mandates. This has contributed to meaningful growth across our institutional network.

Turning to slide nine. You'll note that net revenues increased $40 million or 3% from the third quarter as a result of higher-than-expected performance fees as well as higher average AUM in the fourth quarter. The net revenue yield ex-performance fees was 33.4 basis points, a decrease of 1 basis point from the third quarter yield level. The decrease was driven mainly 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 third quarter and the fullest impact on the net revenue yield for the fourth quarter was six-tenths of a basis point.

Looking forward, we expect most of the dynamics impacting net revenue yield will continue. In addition, the first quarter contains two fewer days than the fourth quarter, which always impacts net revenue yield. 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 seek within the first 60 to 90 days after the first 25 basis point increase in the Fed funds rate. That would result in a recovery of about four-tenths to five-tenths of the negative impact waivers have had on our annualized net revenue yield. Performance fees for the fourth quarter were $53 million, higher than our expectations, and were driven by certain portfolios that have annual absolute return performance hurdles, including approximately $20 million 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 fourth quarter. The increase was mainly driven by the typical seasonal increase we see in marketing and higher G&A expense, which were partially offset by a decrease in compensation expense. Also impacting marketing and G&A expense was an increase in client events and travel in the fourth 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 first quarter activity to be as high as fourth quarter. G&A expense in the fourth quarter also included a non-recurring $10 million charitable contribution to the Invesco Foundation. The Invesco Foundation exists that support our communities and further progress pillars of education and financial literacy. We're pleased to have the ability to make this contribution at the conclusion of a very strong year.

As we look ahead to the first quarter 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 401K Plan Match. Typically, this is about $25 million to $30 million higher in the first quarter relative to the fourth quarter. 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.

Moving to slide 10, we update you on the progress we have made with our strategic evaluation. In the fourth quarter, we realized $5 million in savings. $4 million of the savings was related to compensation expense, reflecting the planned transition of certain roles in concert with our strategic review and $1 million is related to a reduction in property expense as we continue to right-size our facilities portfolio. The $5 million in cost savings or $19 million annualized combined with $148 million in annualized savings realized through the third quarter in 2021 brings us to $167 million in total or 84% of our $200 million net savings expectation.

As it relates to timing, the remainder of our net savings will be realized by the end of 2022 as planned. We expect the total program savings of $200 million through 2022 would be roughly 65% from compensation and 35% spread across property, office, technology, and G&A expense. In the fourth quarter, we incurred $32 million of restructuring costs related to the initiative. In total, we've recognized nearly $220 million of our estimated $250 million to $275 million in restructuring costs associated with the program. We expect the remaining restructuring costs for the realization of this program to be in the range of $30 million to $55 million in 2022. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.

Going to slide 11. Adjusted operating income improved $16 million to $578 million 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 fourth quarter. For the year, the degree of positive operating leverage was 1.8 times, underscoring our focus on driving scale and profitability across the company's diversified platform.

Non-operating income was $51 million, driven primarily by recognition of gains from funds that are in liquidation. The effective tax rate was 21.9% in the fourth quarter compared to 24.4% in the third 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 fourth quarter. We estimate our non-GAAP effective tax rate to be between 23% and 24% for the first quarter of 2022. The actual effective tax rate may vary from this estimate due to the impact of non-recurring items on pre-tax 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 AUM mix and the resulting impact on our net revenue yield excluding performance fees. 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. Our operating margin two years ago, in the fourth quarter of 2019 was 39.9%. At that time, we reported a net revenue yield of 40.5 basis points. In the fourth quarter of 2021, our net revenue yield declined a little over 7 basis points to 33.4 basis points, yet our operating margin improved to 42%. As Marty noted earlier, the operating margin we have generated in the third and fourth quarters of 2021 are the highest since Invesco became a US-listed company in 2007. This is against the backdrop of a mix-driven decline in 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 QQQ product. Growth of the QQQ product over this period is remarkable, growing from 7% of our AUM mix in the fourth quarter of 2019 to 13% in the fourth quarter of '21. Even though we do not earn a management fee, a sponsor of the QQQ, we managed fee of $100 million annual marketing budget generated by this product. Growth in the QQQ accounts for 2 basis points of the net revenue yield decline over this period shown on this chart. And as I noted earlier, discretionary money market fee waivers account for six-tenths 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 one-third of the decline in net revenue yield over this time period. Realizing our business mix is shifting, we continue to focus on aligning our expense base with these changes. 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 $1.9 million on December 31 and approximately $725 million of this cash is held for regulatory requirements. The cash position has improved meaningfully over the past year, increasing by nearly $500 million. 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 million in forward repurchase liabilities that we funded earlier in the year and the $254 million in fund shareholder reimbursements to complete the remediation of the MLP matter in the fourth quarter. We also received an insurance recovery of $100 million related to that matter in the fourth quarter. Our debt profile has improved considerably as well. As a result, we have substantially improved our leverage position with the leverage ratio as defined under our credit facility agreement at 0.79 times at year-end as compared to 1.37 times a year ago. If you choose to include the preferred stock, leverage has declined from almost four times to 2.47 times.

With respect to 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. As we stated, we intend to build towards the 30% to 50% total payout ratio 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 million in common shares during the first quarter. 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.

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 optimizing our organizational model and disciplined expense management. This approach has resulted in strong organic growth, driving positive operating leverage and operating margin improvement. This has also facilitated stronger cash flows, further strengthening our balance sheet and driving the improvement in our leverage profile. 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.

And with that, operator, I'd ask you to open-up the line for Q&A.

Questions and Answers

Operator

[Operator Instructions] Our first question comes from Brennan Hawken with UBS. Your line is open.

Brennan Hawken
Analyst at UBS Investment Bank

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 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 could have on net revenue yield and what kind of position are you in to maintain the operating margin level even if we see adverse equity market conditions? Thanks.

Allison Dukes
Chief Financial Officer at Invesco

Yeah. Good question, I mean, I think, let me start with net revenue yield. The biggest source of pressure is really the mix shift. The market 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 by some of the organic growth rates we just walked through. 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 two years. It's really that strong demand for our passive AUM that's creating this pressure. And so we do expect there to continue to be downward pressure on net revenue yield overall 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 -- the pressure that we also see just from money market fee waivers in the Qs, one of which is temporary and maybe an opportunity if we do see rates increase over the course of this year.

As it relates to then what does that mean for our operating margin, 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 450 basis points of operating margin improvement year-over-year, and 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 two, but I don't think we will get anywhere near back to where we were a couple of years ago. And we're being very disciplined and very thoughtful about that exact issue as we look at our budget for the year and how we think about a pretty significant expense base.

Brennan Hawken
Analyst at UBS Investment Bank

Yeah. Now the progress on the profitability has been really, really great. So agree on that. Then shifting gears a bit to follow up. The $200 million buyback that you announced for the first quarter, but as you flagged, there was a $100 million insurance settlement. So when we -- 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 run rate. Is that fair? And is there the potential for more insurance recoveries behind this one or is that -- this $100 million probably the end that we should expect? Thanks.

Allison Dukes
Chief Financial Officer at Invesco

I think, yes. So a couple of things to point out. That $100 million recovery is actually our non-GAAP results in our transaction, integration expense. So it really doesn't in our adjusted net income, you don't see it there. So it's really not a factor. I do think it's important to note the resolution of that MLP matter and that it was fully resolved in the fourth quarter with the $254 million, getting that liability behind us as really terrific progress after a couple of years. I don't want that to go unnoticed, because we've really cleared out all these contingent liabilities, but $100 million recovery against that [Indecipherable] relevant to our payout ratio targets of 30% to 50%.

Brennan Hawken
Analyst at UBS Investment Bank

No, I just meant in the $200 million balance, it was clearly some extra capital that you now received. Did that support the $200 million pace in the first quarter? That's all I meant by that, not the payout ratio.

Allison Dukes
Chief Financial Officer at Invesco

Fair enough. That, the $1.9 billion cash balance and so I would think about it from a cash perspective and the fact that our cash did grow about $500 million over the year after resolution of all of those contingent liabilities, $100 million insurance recovery with a positive there. It does somewhat factor into the timing of moving forward with us in the first quarter and after evaluation and these rather attractive prices factor into the timing as well. It's not now in is then our thinking as well.

Brennan Hawken
Analyst at UBS Investment Bank

Yeah. That's fair enough. Thanks very much.

Operator

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

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Great. Thanks. Good morning, folks. Again, thanks for all the color Allison on the expenses. I just wanted to come back to you on the operating margin and in the context of the Great Wall JV, obviously, you are 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 could be a positive contributor to the operating margin dynamic?

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Yes, absolutely. I mean, as we said before if you take it from a macro picture, the opportunity in China for asset managers is phenomenal. It's in picture estimate out there, but there is very assessments of -- if you look at the next three to five years, 50% of the organic growth in inflows to be coming from China. So being very, very strong in China is an enormous opportunity and it's very scalable. And so we continue to anticipate continued strength of the business and we think we're -- it's a very, very strong position that we have there and [Indecipherable] nothing about strength as we look forward.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

And then just maybe just on organic growth if you can give some color on traction in the sustainable product, ESG product, and both the active and ETF side and where you stand in terms of integrating ESG across the investment process that's completely done now and then just is that helping or do you expect that help inflows in Europe? So I guess on the institutional side and also your traction and gaining ETF share in Europe on that sustainable side as well?

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Yeah. Let me make a couple of comments, and Allison can chime-in, too. So right now, if you look at our assets under management is now 96% of our assets under management, our ESG that's up this quarter almost $45 million and where we're going there it was converted 69 funds of $45 billion to Article 8 in the fourth quarter and let's say on Europe for a second. ESG is fundamental to any money managers success there. And whether it's retail or institutional, you really have to have ESG integration at a minimum that's really our efforts without delays and they're going to continue to see that. So it's not just the business opportunity, it's a business imperative in the UK and on the [Indecipherable] right now and it's continuing through the rest of the world. Our commitment is to have ESG integration across all of our investment teams. Right now we are 75%. So we've made very good progress. And again from my perspective, you're going to be out three years out, you're really not going probably talking about ESG sort of a separate category. The integration piece at least, sustainability could be in the light, but it's just a reality of money management right now.

Allison Dukes
Chief Financial Officer at Invesco

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

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

And then just the flows in the fourth quarter on sustainable products?

Allison Dukes
Chief Financial Officer at Invesco

Flows, we had modest outflows in the fourth quarter, continue to see a little bit of pressure there, a lot of our ESG capabilities are somewhat I think dramatic 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 mandates for these ESG capabilities, but flows, I would say were relatively soft, almost flattish in the quarter. One thing I would note, in particular, as we see some outflows there related to our GTR capabilities, we talked about GTR quite a bit. GTR was about $800 million of outflows, that also contributes to what we would consider ESG outflows as well. So there are places where we see positive flows. There're other places of pressure for very specific reasons. But overall, continue to see this is just an important component of our portfolio. And I think as Marty said in a few years, we don't think will really be talking about the ESG as our own separate kind of category, but rather a standard that we hold ourselves to across the board.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Yeah. That's great color. Appreciate it. Thank you.

Operator

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

Glenn Schorr
Analyst at Evercore ISI

Hello there. Want to first follow-up on Greater China, if I could. You talked about the six new funds capturing $2.5 billion in long-term flow $7.2 from the existing products. On a base of $106 billion ending the quarter, that's a really high growth rate as some of that is ramping. So I know you talked about the big opportunity, but maybe you could talk about the next two years, '22 and '23 on are there new products in the pipeline and how [Indecipherable] this growth rate is probably now sustainable, but could be in the early years as new funds are ramping. So just talk about how the product is moving there? Thanks.

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Yeah. A couple of comments, and Allison will chime-in also. So look, the year-over-year were kind of across, it was 32%. I mean it's quite phenomenal. And if you look back, we have really maintained that over the last three years and you can just say its decades later overnight success. So a number of things have come together and we anticipate strong growth in the next year, two years, recognizing every market will have its volatile moments. What we are seeing last year is a very, very strong launches at the beginning of the year, new product you're talking about some of the more recent ones. We are starting to see greater flows into existing products too. So there'll be -- yeah, 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 going forward.

Allison Dukes
Chief Financial Officer at Invesco

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 and they've been in a bit of a marked-in state. They've been operating normally within the region. But now with case counts increasing [Indecipherable] 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 balanced products. And so as we continue to see perhaps a quite to safety and some conservatism if we see some softening of sentiment, we're very well positioned with our capability through our JV and we're seeing that so far this year.

Glenn Schorr
Analyst at Evercore ISI

I appreciate that. That's a perfect reading for the follow-up. I was curious -- and alluded to the market drop, so funds in the volatility. It's early, it's a couple of weeks, but just curious if you give us insight into both institutional with client behavior as the markets gets a little wanky here?

Allison Dukes
Chief Financial Officer at Invesco

Yeah. I think we try to stay away from real flow updates intra-quarter, but I will earn for the month. I will say that I think you could see with some of the publicly available data that with what we can control in terms of sales and retention rates and the like, we feel very good about where we are so far in the year. And one of the benefits of having a very broad and diversified platform as we have that breadth of capabilities as people look to rebalance and shift some of their allocation we're able to capture a lot of the flows even in a risk-off environment. And 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 next couple of days with the Fed meeting and the minutes coming out of that are going to be quite informative as well. And so but what we can control, we feel very good about it. And I'd say the conversations with client continue to be very constructive and very positive and where we need to be, but this is an interesting market.

Glenn Schorr
Analyst at Evercore ISI

I appreciate that. Thanks.

Operator

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

Craig Siegenthaler
Analyst at Bank of America

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

Allison Dukes
Chief Financial Officer at Invesco

Thanks, Craig.

Craig Siegenthaler
Analyst at Bank of America

So I'm sorry about this, but I've another one on China. And I just wanted to update on your efforts 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 in financial, I think it was trending around 50% before 4Q. So I don't know if you have an update on that number either?

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Yeah. Hope you're doing well though, and hope you had a good New Year. So just on the -- we continue to be in dialog with our joint venture partners to increase our stake over 50%, still a positive conversation, we've not accomplished that. That said, I'll come back to the most important element is that, which differentiates us even though we've 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, and successful in China. So that's the main point to look at, but we do feel in time that we will be able to end up with a majority stake in our joint venture. It is not in peak progress at all.

Secondly, with regards to the digital platforms, they continue to be sort of 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.

Craig Siegenthaler
Analyst at Bank of America

And then just for my follow-up on the private REIT business, here the US business and any of the global distribution partnership with UBS, it looked like the US vehicle only raised about $16 million 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 lower AUM detail?

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Yeah, I'll make a couple of comments. Just the -- we're still in process of on-boarding various institutions and I don't want to get too specific, but it is now being on-board in the United States and it will probably take into the second quarter of this year before we would get to a level where we feel that it's sufficiently afforded 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.

Craig Siegenthaler
Analyst at Bank of America

Thank you, Marty.

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Yeah. Thank you.

Allison Dukes
Chief Financial Officer at Invesco

Thanks Craig.

Operator

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

Robert Lee
Analyst at Keefe Bruyette & Woods

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, like to just go back to maybe dig into flows a little bit. So I mean obviously strong organic flow growth for the year. I mean that's great. But you maybe begin a little bit since there has been 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've for example, the net revenue, net organic revenue or EBITDA growth, maybe that'd be a better metric, anything that can help us get a better sense of the economic impact you're seeing from inflows. This would be my first question.

Allison Dukes
Chief Financial Officer at Invesco

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 and that 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. And so what I would point you to is and I'd talk about this a few times as well in our passive capabilities and our ETFs in particular I will point that out. Our operating margin that we generate from that is consistent whether 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 with the absolute operating margin and absolute operating profit and sustain our operating margins at the same time.

Robert Lee
Analyst at Keefe Bruyette & Woods

Great, thank you. Maybe as a follow-up going back to 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 whether it's pre-tax operating income or asset levels or flows just trying to get a sense of what's kind of the natural built-in flex you could have to respond to the more difficult revenue to start the year?

Allison Dukes
Chief Financial Officer at Invesco

Sure. A couple of things. One; about a third of our expense base is variable in nature. And so we would expect that to flex up as stronger revenue, and flex down if we don't see it. And so that's point one. And the two-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 is part of the bottom line, in other cases reinvesting it in places where we think it can be more productive for us. And so we do feel like we have continued opportunity there. We've made good progress on our strategic review as we've talked about we're at $167 million there, looks like a little ways to go.

Our real estate properties portfolio is a place where we continue to make progress and we continue to look and that's an element of a fixed expense that we continue to evaluate in an operating environment, but not only it is different than it was a couple of years ago. It continues to evolve and we're being responsive to that as is everybody else right now and really looking at how do we continue to unlock some of the fixed cost there.

Robert Lee
Analyst at Keefe Bruyette & Woods

Great. Thanks for taking my questions.

Operator

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

Daniel Fannon
Analyst at Jefferies & Company Inc.

Thanks. Good morning. Just a follow-up one more for you on expenses. We think about the sequential change from 4Q to 1Q when you highlighted the normal seasonal stuff but curious about this past fourth quarter you had elevated performance fees, what we should normalize for compensation within that in many 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?

Allison Dukes
Chief Financial Officer at Invesco

Yeah. Compensation expense, maybe speaks to it sort of broadly. It tends to run somewhere between 38% and 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 38%. And so on the low end of that range, which is what you would expect in a really strong year. And so I think that is still a very reasonable range to be thinking about as you think about just overall compensation expense regardless of revenue, whether it's coming from performance fees or management fees that range is the right range to think about.

Looking towards expenses in the first quarter, overall, I would say a couple of things. Look, marketing tends to be seasonally high in the fourth quarter, you certainly saw that in the fourth quarter of this year. We've got the $25 million to $30 million 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 looks like a return to normal in the fourth quarter 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 to 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 to share.

I do think we'll start to see some return of that later in February, we're certainly helpful. 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 the fourth quarter was the first time we started to feel like it was close to normal. So hard to guide to whether or not we -- so when we see the pick up, but I do expect it comes down a bit in the first quarter relative to the fourth quarter.

Daniel Fannon
Analyst at Jefferies & Company Inc.

That's helpful. 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 we think about that more maintaining the developed markets, as you have this mix shift that's ongoing?

Allison Dukes
Chief Financial Officer at Invesco

Sorry, as I was flipping to slide 12, you're asking if markets hold, so as AUM level sort of markets hold is operating margin expansion a possibility? Was that your question?

Daniel Fannon
Analyst at Jefferies & Company Inc.

With the same underlying mix shift of flows. Yes. So if the market is out.

Allison Dukes
Chief Financial Officer at Invesco

Yeah. I'd say it is, I would be thinking about flat to modest expansion in the market were, 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 that we're looking at flat. If it continues at the pace we've seen, we could get some modest expansion out of that. We said before, we don't intend to run our business with an ever-increasing operating margin, and I'll reiterate that. 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.

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Yeah. And I do just want to reiterate, it's really important for us to continue to invest in the business and we're going 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 reallocate and invest and it's going to be in those areas of client demand where there is growth that's going to continue to be ETFs factors, private markets, etc and also the investment in technology that we need to do. So as you know, it's a really really competitive marketplace and one of the things is really important is as we drive results for shareholders, we're also investing in the business for shareholders and for clients and that's really what was reflected in the results we had this year and again we're going to very much stay focused on that path as we go forward.

Daniel Fannon
Analyst at Jefferies & Company Inc.

Great. Thank you.

Allison Dukes
Chief Financial Officer at Invesco

Operator, do we have any other questions?

Operator

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

Ken Worthington
Analyst at JPMorgan Chase & Co.

Hi, good morning. Marty, I wanted to step back and think bigger picture. It's New Year, so maybe first, Happy New Year. Invesco had a great year in 2021. But as we look at the stock price over a longer period of time, the stock price is at about the same level as it was a decade ago, and it seems like Invesco has executed well on the value creation roadmap that resulted in size and scale and better positioning for one that hasn't been reflected in shareholder value creation as measured by the stock price. So you have an active 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?

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Yeah, look, it's a great question and that doesn't go beyond these either. And I think what's really important is get the -- the result that you've talked about in share price from our perspective, you really have to deliver results for clients and have do it a very thoughtfully 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 has 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. Just today, as we talked about, looking to buy back our stock, we think it's very, very attractive for other institute to light up.

Allison Dukes
Chief Financial Officer at Invesco

I mean, I would only add to -- the valuation is frustrating to us. And so what we focused 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 capability so that we are capturing client demand 2021 results with 0.2%, our success from that one of the highest growth rates in the industry and we're certainly winning vis-a-vis the competition there. We've also made meaningful progress of 450 basis point improvements in our operating leverage. It was important, we have some work to do there, and we needed to get ourselves back into the right operating range and there is a lot of hard work that went into that. 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 the 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 gain and it is a long-term gain and we're going to stick to this plan because we think it's actually really yielding the results that investors are looking for and certainly have the support of our Board as well.

Ken Worthington
Analyst at JPMorgan Chase & Co.

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

Martin L. Flanagan
President and Chief Executive Officer at Invesco

I'm glad you asked.

Allison Dukes
Chief Financial Officer at Invesco

Yes.

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Thank you.

Operator

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

Patrick Davitt
Analyst at Autonomous Research

Hey, good morning everyone. I have a quick follow-up on Brennan's repurchase question. Just eyeballing, it looks like the $200 million in 1Q would already get you to the 35% to 50% payout. So should we assume that it'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?

Allison Dukes
Chief Financial Officer at Invesco

Hard to say this yet. Yeah. 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 for 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 unfolds and results will dictate that.

Patrick Davitt
Analyst at Autonomous Research

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 of their assets at all?

Martin L. Flanagan
President and Chief Executive Officer at Invesco

No, it does not. As I said, it's a very strong relationship, obviously, to board members on our board, they own 60% of the company. They've been very helpful and supporting our alternative business, they will continue to do that. We couldn't be more aligned and that's a very strong relationship.

Patrick Davitt
Analyst at Autonomous Research

Thank you.

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Yeah.

Operator

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

William Katz
Analyst at Smith Barney Citigroup

Okay, thank you very much for taking the questions this morning. So Marty, I think you've mentioned that you hope to deliver some operating leverage going forward you have explained in your opening remarks and then Allison you sort of qualified that. You're not here with infinite margin improvement. 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 final part of your $200 million realization, how we should be thinking about the core expense growth into 2023? So I appreciate what's in January '22, of course?

Allison Dukes
Chief Financial Officer at Invesco

Yes. I can go ahead and tell you, we are not going to give guidance on the '23. I think we've tried to give some color to what we expect in the first quarter and the operating margin within which we intend to operate.

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Yeah. And Bill, I think you're asking the question was connected to some of the 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? If you look at the business today, look where it was five years ago, it's a very attractive business, invested in China, ETFs, private markets, etc. That's just was not where the investor was five 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, 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.

William Katz
Analyst at Smith Barney Citigroup

Okay, thank you. And then just one last one from me. Thanks for taking both of them. So a couple of your competitors have been spending pretty aggressively to build out their platforms, particularly all its bucket. And I think you guys probably little bit further launched strategically, but how do you think about M&A from here I know you certainly gave some guidance around in terms of capital return, but how does M&A incrementally fit into discussions from here?

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Yeah. You're going to [Indecipherable] 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 and it has to be a capability that there is client demand for us, it's additive to our capability set and it's something that we think also can hit very nicely within the business from a cultural point of view. So again, our first focus is internally, but we will continue to pay attention to the market when it makes sense.

William Katz
Analyst at Smith Barney Citigroup

Thank you.

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Thanks, Bill.

Operator

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

Michael Cyprys
Analyst at Morgan Stanley

Hey Marty, Allison, thanks for squeezing me in here. Just wanted to circle back on expenses. You mentioned one-third of the expense base is variable, about two-thirds fixed or so. I guess where do would you like to see that mix over-time? And how do you see that evolving? 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?

Allison Dukes
Chief Financial Officer at Invesco

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. And in terms of where we could be, look, we -- 450 basis points of improvement one year was pretty extraordinary. I don't expect to replicate that year after year after year. We had work to do to get it back and to the range where we are. The strategic review that we have been in, it's not easy. But looking at those opportunities 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 in the mid-40s ever? That's a longer-term comment I couldn't tell you by when or how and certainly we need some very supportive market dynamics behind that as well. I'll never say never, but I can tell you it certainly won't be in '22, probably not in '23 because we've 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 for the future. And so I think in the short-term the low 40s is a really good operating range for us to be in.

Michael Cyprys
Analyst at Morgan Stanley

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

Allison Dukes
Chief Financial Officer at Invesco

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

Operator

[Operator Closing Remarks]

Martin L. Flanagan
President and Chief Executive Officer at Invesco

Thank you.

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