Allison Dukes
Chief Financial Officer at Invesco
Thank you, Marty. And good morning, everyone. I'll start with slide four. Investment performance continued to be solid in the third quarter with 57% and 62% of actively managed funds and the top half of peers or beating benchmark a three year and a five year basis. These results reflect continued strength in fixed income and balanced strategies where we continue to see strong client demand. Performance lacks benchmark and certain equity strategies but we experienced improvement over the past quarter in several key funds.
Turning to slide five we ended third quarter with $1.32 trillion in AUM, a decrease of $67 billion from the end of the second quarter. Global market declines and foreign exchange movements reduced assets under management by $72 billion partially offset by total net inflows inclusive, inclusive of $10 billion into money market products.
As Marty noted, the firm experienced net long term outflows of $7.7 billion this quarter amid continued market volatility. Active capabilities accounted for most of the outflows totaling $7.3 billion for the quarter, while passive net outflows accounted for the remaining $400 million. We sustained organic growth in several of our key capability areas and our net flow performance remains strong relative to industry peers. A driver of our resilience and relative outperformance has been the institutional channel which delivered a 12 consecutive quarter of net inflows with $3.9 billion. We generated the strong inflows despite not renewing a $2.5 billion relationship during the quarter. While clients are carefully considering new fundings in these challenging markets, our growth in the institutional channel accelerated from the second quarter and we continue to see new mandates fund across geographies, asset classes and the risk return spectrum.
Offsetting growth and institutional were $11.6 billion of net outflows and the retail channel this quarter, primarily in the Americas and EMEA, as investors continue to seek lower risk exposure amid extreme market volatility. Net flows into ETF vehicles were relatively flat in the third quarter, with $300 million in net long term outflows. Demand for ETF slowed industry-wide. That driver, coupled with net outflows and commodities and bank loan products created net flow headwinds for Invesco. Offsetting this were net inflows into fixed income ETFs, the low volatility suite and our Q-to-Q innovation suite led by the Q-to-Q. Despite the slowdown in the third quarter, we maintain a leading position in ETF and we expect to see growth rebound as market volatility eases.
On a year-to-date basis, net long term inflows into our ETF franchise are $23 billion, equivalent to a 12% organic growth rate. We've also gained market share year-to-date. Excluding the Q-to-Q, Invesco captured 4.7% of industry net inflows, higher than our 3.1% share of total industry assets under management.
Now, turning to slide six, we experienced continued net outflows in the Americas and EMEA primarily in the retail channel. Growth picked up in Asia Pacific with over $5 billion of net long term inflows this quarter, led by China and Japan. Our China joint venture contributed $2.1 billion of net inflows, including $1.8 billion from nine new products launched during the quarter.
As Marty highlighted, our joint venture remains a key strength and we expect growth to accelerate there as markets recover. Fixed Income capabilities have been a reliable source of growth for Invesco for several years now. Despite one of the most difficult bond markets in years, the third quarter was no exception to that reliability with $6.5 billion of net long-term inflows. The firm has now experienced net inflows into fixed income strategies for 15 straight quarters, a testament to the breadth of our offering as well as our strong investment performance in the asset class.
Alternatives experienced net outflows of $5.3 billion in the third quarter. The largest drivers of net outflows were bank loans and commodity ETFs which have attracted net inflows year-to-date but saw investors pull back in the third quarter. While growth may slow in the near term as investors carefully consider asset allocations, we're confident that our alternatives business will be strategic driver of growth in the years to come. In fact, over the past volatile year, we've generated a 4% organic growth rate, excluding outflows and our GTR product, demonstrating the strength of our alternatives platform. Finally, as Marty noted, we experienced $7.4 billion of net outflows in equity capabilities. Global and developing market equities continue to account for the majority of net outflows in the asset class, with $4.3 billion in the quarter, including $2.8 billion from our developing markets fund.
Moving to slide seven, our institutional pipeline was $23 billion at quarter end modestly lower than $24 billion last quarter. Client fundings increased in the third quarter as compared to second quarter and we continue to win new mandates despite the challenging environment. Our pipeline has been running in the mid 20 to mid-$30 billion range dating back to late 2019. So while this is at the lower end of the size range, we still see the pipeline as robust given the uncertain market environment.
As we noted last quarter, that uncertainty is causing some mandates to take longer to fund and we would estimate the funding cycle of our pipeline is now in the three to four quarter range on average, as compared to two to three quarters previously.
In summary, the pipeline continues to reflect a diverse business mix across asset classes, investment styles and geographies. Our solutions capability enabled 38% of the global institutional pipeline and continues to be a differentiator with clients.
Turning to slide eight, significant decline in global markets this year have put downward pressure on our revenue base. Net revenue of $1.11 billion in the third quarter was 5% lower than the prior quarter and 17% lower than third quarter of 2021, primarily due to decline in active asset levels.
Total adjusted operating expenses were $741 million, a decrease of $21 million from last quarter and $31 million as compared to the third quarter of 2021. The drivers of the decline from last quarter with G&A expenses which were $11 million lower than last quarter and marketing expenses which declined by $7 million consistent with the seasonally lower activity we often see in third quarter as well as the decline in discretionary spending. We also saw a slight decline in employee compensation expenses.
Drivers of the decline from the third quarter of 2021 were compensation expenses and property office and technology expenses, despite the $3 million and duplicate rent for our new Atlanta headquarters that I mentioned last quarter. Embedded in our third quarter 2022 spending is continued investment in growth capabilities, as well as several transformational projects that will enhance the effectiveness of our corporate functions and enable us to reap the benefits of scale as markets recover. Current projects include a technology enabled human resources transformation, moving core finance systems to the cloud and the foundational elements of the Alpha NextGen program. The savings we achieved in our strategic evaluation and the continued discipline we have installed have enabled us to make these strategic investments without meaningfully growing technology expensive.
Compensation expenses declined $45 million, or 9% from the third quarter of 2021. Given the pace and magnitude of the market decline, it will take some time for certain elements of our expense base to adjust with lower revenue. We managed variable compensation to a full year outcome in line with company performance and competitive industry practices. This can cause quarter-to-quarter fluctuations and compensation expense.
Historically, our compensation to net revenue ratio has been in the 38% to 42% range and periods of revenue growth the ratio tends to move towards the lower end of this range, similar to 2021 when the ratio declined to 38%. During periods of revenue decline, as we are experiencing this year, the ratio tends to move towards the upper end of this range.
Year-to-date, our compensation to net revenue ratio is 40%. If assets remain at quarter end levels, the full year ratio would continue to trend towards the upper end of the range driven by the lower net revenue base. Given the uncertain market environment, we are diligently managing expenses and evaluating all aspects of discretionary spending. We continue to invest in our key growth capabilities and we're focusing near term hiring in those areas. We will differ hiring for certain other positions as we focus our efforts on critical initiatives. As always, we remain focused on meeting the diverse needs of our clients and investing where it's necessary to do so.
Finally, we are proceeding with investments and foundational technology projects that will enable growth and support future scale and our operations. Balancing these objectives will allow Invesco to provide rewarding careers for our employees, position our business for future growth and prudently manage our expense base.
Moving to slide nine, adjusted operating income was $369 million in the third quarter $43 million lower than the second quarter due to lower net revenue driven by market declines partially offset by lower operating expenses.
Adjusted operating margin was 33.3% as compared to 35.1% in the second quarter and an all-time high of 42.1% in the third quarter of last year. Earnings per share were $0.34 as compared to $0.39 last quarter, driven by the same factors that impacted adjusted operating income. The effective tax rate was 28.7% in the third quarter, due to a change in the mix of income across tax jurisdictions, including non-operating losses in lower tax entities. We estimate our non-GAAP effective tax rate to be between 26% and 28% for the fourth quarter of 2022. The actual effective rate may vary from this estimate due to the impact of non-recurring items on pre-tax income and discrete tax items.
I'll conclude with a few points on slide 10. Maintaining balance sheet strength continues to be a top priority, particularly as we navigate this uncertain environment. Total debt was managed lower in the third quarter to $1.5 billion as of September 30 and we ended the quarter with a zero balance on a revolving credit facility. Our cash and cash equivalents balance is over $1 billion, an increase of nearly $100 million from June 30.
Our leverage ratio as defined under our credit facility agreement was 0.7 times at the end of the third quarter in line with last quarter. Our leverage ratio improved from 0.9 times in the third quarter of last year despite lower EBITDA driven by the significant market declines. If preferred stock is included, our third quarter leverage ratio was 2.8 times. In this challenging environment, Invesco is strategically aligned to areas of high client demand. And we have the financial flexibility that will allow us to navigate current volatility while continuing to invest in the future. We will be extremely thoughtful in managing expenses through the near term, so that we can rapidly scale when recovery takes place. We maintain our unwavering commitment to serving the needs of our clients in any market and delivering long term value for our shareholders.
And with that, I'll ask the operator to open up the line to Q&A.
