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spk00: 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 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.
spk09: Welcome to Invesco's third quarter results conference call. All participants will be in the listen-only mode until the question and answer session. At that time, to ask a question, please press star 1. To allow more participants to ask questions, only one question and a follow-up can be submitted per participant, as this call will last one 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, Alison Dukes, Chief Financial Officer, and Greg McGreevy, Senior Managing Director of Investment. Mr. Flanagan, you may begin.
spk07: Thank you, operator, and thank you, everybody, for joining us this morning. So over the past decade, we've undertaken several strategic initiatives and made meaningful investments in key capabilities that have positioned us well to deliver for our clients and compete in what is now a highly dynamic and competitive industry. Looking forward, we continue to be very focused on executing our long-term strategy, which is intended to further strengthen our ability to meet client needs while returning the firm to sustainable organic growth. With the continued uncertainty in the economic environment we saw during this third quarter, driven by the global pandemic, again, we remain very focused on our clients and ensuring that we're meeting their investment objectives while also being really focused on running a very disciplined business in this uncertain time. These efforts, combined with strong investment performance and high demand capabilities, led to long-term net inflows of $7.8 billion worldwide. during the quarter across a broad variety of channels, geographies, and asset classes. Retail flows significantly improved during the quarter, and our solutions-enabled institutional pipeline remained robust. Long-term flows into fixed-income capabilities continued to be strong, and we saw net inflows in Asia Pacific and the EMEA regions during the quarter, and net outflows in the Americas improved significantly. Net inflows in Asia Pacific during the quarter were $8 billion, up significantly from the $2 billion we saw in the prior quarter. As we noted during the second quarter call, we've undertaken a strategic evaluation of our business, and this evaluation has several objectives, including enhancing client outcomes, improving organic growth, reducing complexity, and streamlining our operating environment. We see opportunities to invest in areas of growth aligned with our strategic plan and supported by data and analytics, and these include areas such as ETFs, China, solutions, alternatives, global equities, as we also look to optimize primarily in areas of the business that do not directly touch clients. We expect this optimization will reduce our normalized annual operating expenses by a net $200 million by the end of 2022, and Alison will speak more to this in just a moment. In addition, during the quarter, we continue to manage our balance sheet by reducing the outstanding borrowings under the revolver while improving cash balances. Invesco has built a global diversified business with depth and breadth and resiliency to deliver positive outcomes for our clients through various market cycles. have invested ahead of several macro trends that are shaping the future of our industry. As a result, we are now highly competitive in areas with strong demand, with the majority of our investment capabilities aligned with key future growth areas. These include a significant and growing solutions effort, leadership positions, and fixed income, ETFs, factors, global equities, which would include emerging markets, alternatives, and the fast-growing China market. And again, we remain very focused on meeting the needs of our clients in this very volatile environment while running a disciplined business and working towards sustainable organic growth. Before I turn the call over to Allison, let me comment on the 13D that was filed by Tryon on October 2nd. We value shareholder input and regularly engage with our major shareholders in a constructive dialogue aimed at further strengthening our business and driving sustainable growth. We welcome try-ins as a shareholder and are active in constructive conversations with them. And as you appreciate, given we are still in the process of engagement, we are not in a position to comment further on this topic during the call today. With that, let me turn it over to Allison.
spk10: Thank you, Marty. Good morning, everyone. Slide five summarizes our investment performance. We had 63% and 68% of actively managed funds in the top half of peers on a five-year and a 10-year basis, reflecting strength in fixed income, global equities, including emerging markets and Asian equities, all areas where we continue to see strong demand from clients globally. Moving to slide six, we ended the quarter with $1.218 trillion in AUM. Of the $73 billion in AUM growth, approximately $53 billion is a function of increased market values over the quarter. Turning to slide seven, our broad-based platform generated long-term net inflows in the third quarter of $7.8 billion, representing 3.3% in annualized organic growth. Notably, we generated positive net inflows in active AUM of $1.8 billion and passive AUM of $6 billion. Our ETFs experience net inflows of $12.4 billion, including $6.8 billion in long-term ETFs and $5.6 billion in our QQQs, representing the second largest net flows in the industry for Q3. The QQQ ETF delivers significant marketing benefits that drive brand awareness, and it increases Invesco's footprint, leadership, and relevance in the ETF market. Including the success of the QQQs, our U.S.-listed ETFs have their best quarter in their 15-year history, with those flows representing 10% of the overall industry flows in the quarter, which is two times our industry ETF market share. Long-term ETF flows in the U.S. and EMEA were diverse across asset classes in the third quarter, including broad equity and commodities, fixed income, ESG-oriented equity, and sector equity. Positive ETF flows were contributors to the meaningful improvement in our retail net outflows, which narrowed to $300 million in the third quarter. On the institutional side, we had net inflows of $8.1 billion, and I'll provide a little more color on those flows on the next few slides. Looking at flows by geography, you'll note net outflows of $4.4 billion in the Americas, an improvement of $10.5 billion in the quarter. This improvement was driven by net inflows into ETFs, various fixed income strategies, our stable value capability, our balanced risk capability, and improvement in redemption rates, particularly in our international growth and value funds. Flows turned positive in the UK, generating $1.4 billion for the quarter, which was driven primarily by flows into our institutional quantitative equity capability. EMEA net inflows were $2.8 billion, driven by the strong flows into our gold, S&P 500, and EQQQ exchange-traded funds. And finally, Asia Pacific delivered one of its strongest quarters ever, with net inflows of $8 billion, driven by institutional fixed-income mandates in Japan and significant net inflows into balanced fixed-income and equity funds in our China JV. RJV has been in operation since 2003, and our early investment in China has positioned us uniquely to take advantage of this long-term macro growth opportunity. It's worth noting that we continue to see strength in fixed income across all channels and markets in the third quarter, with net long-term inflows of $8.8 billion, this following net long-term inflows of $6 billion in fixed income in the second quarter. Now moving to slide eight, our institutional pipeline remains strong at $31.9 billion on the hill, the strong pull through in the institutional pipeline during the third quarter. This pipeline remains robust across asset classes and geographies, and our solutions capability has contributed to meaningful growth across our institutional network. Our investments thus far into our solutions team have been impactful to the dialogue we are having with institutional clients as evidenced by the pipeline. Turning to slide nine, as Marty mentioned in his opening remarks, we are well-positioned with investment capabilities aligned to key future growth areas. These include a growing solutions effort, capabilities in fixed income, ETFs, factors, global equities, including emerging markets, alternatives, and the fast-growing China market. These are high-performing capabilities and are illustrative of the breadth and diversification of our product offering. In addition, these are capabilities that present tremendous opportunity in large and growing parts of the market. On the left side of this slide, we highlight certain capabilities in China, where we have seen strong demand and good performance, as well as our deep and varied fixed income offerings. Through the Oppenheimer transaction, we broadened our platform with sizable global equity offerings, including developing markets and the OSI international growth capability. We have good performance in these areas, and we're well positioned for client demand to return. Additionally, we offer a range of real estate investment strategies across risk spectrums and geographies. On the right side of the slide, we illustrate ETF capabilities, upon which we will look to expand. The QQQ ETF is one such example. As announced earlier this month, we've expanded the QQQ product suite, which will allow us to market the capability to new and different investors. In addition, we're seeing client demand for ESG capabilities. Year-to-date, industry ESG ETFs have gathered over $20 billion in net flows. We manage over $5 billion in ESG ETFs. The Invesco Solar ETF is our top-selling ESG ETF with net inflows of $400 million in the third quarter. We will continue to invest in these areas, and we believe there's opportunity to take market share and that these capabilities will be important contributors to our organic growth. Turning to slide 10, you'll note that our revenues increased $59 million, or 5.6% from the second quarter, driven by higher average AUM in Q3. Net revenue yield, excluding performance fees, was 36 basis points, down 8 tenths of a basis point from the second quarter. 75% of the decline in yield was largely driven by the growth in our non-fee QQQQs. outside of this the fee rate declined modestly due to other mix shifts we experienced across products in the quarter total adjusted operating expenses increased 1.7 percent in q3 against a 5.6 increase 5.6 increase in revenue creating positive operating leverage the 11 million increase in operating expenses is driven by higher compensation as a result of strong market growth in the quarter Operating expenses continue to be lower than historic activity levels due to pandemic-driven impact to discretionary spending, travel, and other business operations. Now turning to slide 11 for a little more color on our expenses overall. Having successfully completed the integration of Oppenheimer funds and delivering savings of $501 million against the combined organization's expense base, we see additional opportunity to optimize our model. As I noted in our earnings call on July 28th, we've conducted a strategic evaluation across four key areas of our expense base. Our organizational model, our real estate footprint, management of third-party spend, and technology and operations efficiency. Through this evaluation, we see an opportunity to invest in key areas of growth aligned with our strategic plan and supported by data and analytics, including ETFs, China solutions, alternatives, and global equities, while creating permanent net improvements of $200 million in our normalized operating expense base. A significant element of the savings will be generated from realigning primarily our non-client-facing workforce to support key areas of growth and repositioning to lower-cost locations. On January 29th, we guided to a 2020 operating expense run rate of $3.02 billion, which included the full realization of the Oppenheimer synergies. Our annualized operating expense run rate as of the third quarter is at $2.74 billion, which reflects COVID-induced business impacts and market-driven expense reductions from the guide we provided at the beginning of this year. Our normalized operating expense base assumes a return eventually to normal business conditions once the pandemic subsides globally. This normalization of largely marketing expense, G&A, and the seasonality of our payroll taxes within compensation expense would add an additional roughly $134 million to our third quarter annualized operating expense base. And that would bring our normalized operating expense run rate to $2.88 billion. We see an opportunity to reduce this run rate further by $200 million net of reinvestments. We expect 150 million, or about 75% of the run rate savings, to be achieved by the end of 2021, with the remainder recognized in 2022. The savings represent low double-digit accretion to EPS in each of the next two years. We expect total one-time transaction costs for the realization of this program to be in the range of $250 to $275 million over the next two years, with roughly 40% of those charges occurring in the fourth quarter, 40% in 2021, and the remainder in 2022. With respect to fourth quarter 2020 operating expenses, I would expect them to be modestly higher than Q3, driven primarily by increased marketing spend, reflecting higher promotional and client activity in the quarter. Consistent with our past practice, this expense guidance is based on September 30th, 2020 assets under management, market, and FX levels, and therefore may fluctuate with these items and any discrete non-operating expenses going forward. Now moving to slide 12. Adjusted operating income improved $47 million to $407 million for the quarter, driven by the positive operating leverage in our core business. Adjusted operating margin improved 240 basis points as compared to the second quarter to 37.2%. Adjusted EPS was 53 cents compared to 35 cents a share in the second quarter, driven by lower non-operating expenses and higher non-operating income. Non-operating income included $29.2 million of net gains in equity and earnings in Q3 compared to a $53.2 million net loss in the second quarter. The increase in equity and earnings was driven by non-cash market valuation increases primarily in our CLO holdings, which demonstrated some recovery in value in the third quarter as compared to the second quarter. Interest expense of $33.8 million was lower by 2.9% in the quarter, reflecting the reduced credit facility balance during the period. I would note the third quarter was the final quarter in which we paid dividends related to our forward purchase agreements, which settle in January and April of 2021. As a result, we expect interest expense will decrease by approximately $9 million in the fourth quarter. Our tax rate for the third quarter was 24.2%, and for the fourth quarter, we estimate our tax rate to be between 24 and 25%, while the actual effective tax rate may differ due to non-recurring or discrete items. A few comments on slide 13. We reduced our revolver balance by $236 million to $90 million in the quarter, consistent with our commitment to improve our leverage profile. In addition to using excess cash to reduce leverage, we seek to improve liquidity and our financial flexibility. To that end, our balance sheet cash position improved to $1.067 billion in Q3 from $987 million at the end of the second quarter. Our goal remains to build cash to $1 billion in excess of regulatory capital requirements, and at September 30th, we were holding approximately $340 million in excess of regulatory requirements. As we've indicated, we're building financial flexibility in these uncertain times, and we believe we're making solid progress in our efforts. We remain committed to a sustainable dividend and to returning capital to shareholders longer term through a combination of modestly increasing dividends and share repurchases. In summary, we're focused on our strategic evaluation and reallocating our resources to position us for growth, and we remain prudent and cautious in our approach to capital management. Our focus on driving greater efficiency and effectiveness into our platform, combined with the work we have done to build a global business with a comprehensive range of capabilities, puts Invesco in a very strong position to meet client needs, run a disciplined business, and to continue to invest in and grow our franchise over the long term. And with that, I'll turn the call back to Marty.
spk07: Thank you, Allison. So, operator, can we open up to questions, please, and Greg, myself, and Allison? Sure.
spk09: Mr. Flanagan, at this time, if you would like to ask an audio question, please press star 1. You will be announced prior to asking your question. Please pick up your handset when asking your question. To withdraw your request, please press star 2. One moment for the first question. Our first question is from Dan Fannin with Jefferies. Your line is open, sir.
spk14: Thanks. Good morning. I was hoping you could expand a bit on the areas of the cost cutting. You gave some buckets, but I think you also mentioned it is really not client-facing. So I just want to see what might be the disruption from some of these changes in cost cuts, and then also if you could just kind of size the areas in terms of percentages maybe of where that $200 is going to come from.
spk10: Sure. Thanks, Dan. I'll start, and I might let Greg or Marty chime in on the client-facing impact. Of the $200 million that we've noted, about 50% to 60% of that I would expect to come through compensation expense. And of that, I'd say about 75% will occur in 2021, and the remainder of that would fall off in 2022. Okay. The other 40% to 50% would be split across occupancy, tech expense, and G&A. And that occupancy expense, I expect that's going to be kind of evenly split across 21 and 22. I think the G&A component will fully recognize in 21, and the tech expense will probably be pushed closer to 2022. On the compensation side, it is primarily realigning our workforce to lower-cost locations and reallocating and reorganizing across our business to make sure we're investing in our highest capabilities. There were some announcements that have already been made publicly. I'm happy to let Greg comment a little bit more on that, but that's largely behind us at this point. That help, Dan?
spk14: Yeah, it does. So just then on the client-facing side, we're just thinking about AUM at risk or anything you could put when we think about the investment professional components of what changes might happen.
spk11: yeah let me talk dan really good question so that strategic evaluation did include investment teams as you would expect um the total assets impacted is a relatively small one it's about 26 billion and even though that's a small amount we really believe that the changes really improved the overall organization improved our focus prioritization Maybe just to put a little bit in perspective from a high level, the changes were really designed on the investment side to accomplish a couple of objectives. One is to enhance our investment teams and processes so we can continue to drive performance. Two is to enhance and simplify our global equity offerings. We can talk more about that if you want to. Three was to reassign certain capabilities to stronger teams with, frankly, better processes and performance. And then for the non-investment professionals, But really it was to reduce complexity and eliminate dependency and adjust some service levels where we needed to. So on the investment side, we talked to employees. We've had detailed conversations with clients. And by and large, those changes are complete and behind us. And the feedback internally and externally has been very well received, very thoughtful. And I think everybody said it made a lot of sense from a strategic standpoint. Great. Thank you.
spk14: Thanks, Jeff.
spk09: Thank you for your question. Our next question is from Craig Siegenthaler with Credit Suisse. Your line is open, sir.
spk01: Craig Siegenthaler, Credit Suisse, Your line is open, sir. Craig Siegenthaler, Credit Suisse, Good morning, everyone. Good morning. The next question is actually for Marty. Marty, do you believe Invesco at $1.2 trillion of AUM now has enough scale to be successful? And I was especially interested in your comments on the distribution side.
spk07: Great question. The answer is yes. Let me step back to the core of the question. As we've talked about for the last few years, there's clearly a very different dynamic going on in the industry. It's driven by something very simple. Clients around the world are choosing to work with fewer money managers. whether it's the retail channel, the institutional channel, and again, every geography in the world. And so what they're looking for from clients is clients are expecting more from money managers, so it's that broad range of capabilities that we have, from passive all the way to alternatives. But beyond that, they want a solutions capability, they want thought leadership, they want the ability for us to build models for them, help in any way. And so, that has been a core focus for us as a firm, and you can see it in just the gross inflows, the net inflows now of that impact there. So, you have to be relevant to clients, you have to make a difference for clients, and that's really important. So, it's capabilities, it's also depth and breadth of capabilities and services. And also, I think what you have to do too is, yes, you want to have scale so you can drive efficiencies into the organization. which we've proven to do over any number of years, and just the conversation today proves that once again. But it's really so you can reinvest back in things like technology to create a better experience for your clients. And again, ourselves and I'd say the other larger firms have done very well in doing that during the global pandemic. the client interactions have never been better. And, you know, much of that was driven by historical technology investments. And again, not unique to us. But I think we've all been surprised that if you have scale and capability, you can really create a difference for your clients.
spk01: I actually just said, Marty, I had one follow-up for Greg on the strategic expense initiatives. So when you say that changes will enhance the global equity offering. Does this mean merging funds into other funds, removing teams? Does this mean shrinking the number of investment professionals and also reducing the number of products?
spk11: Yeah, so it's a combination of some of those things, Craig. So we will – the global equity capabilities that we have right now, especially that we've acquired from Oppenheimer, was very strategic in terms of filling some gaps within our portfolio. But we had other capabilities on the global side that were kind of nascent to that overall effort, if you will. So some of the things we're going to be doing is reassigning our Atlanta-based global core equity team to our Canadian global equity team and then realigning that Canadian global equity team into our New York team. It's going to simplify not only our overall offerings and capabilities, but it's going to be able to streamline our messaging and our branding into the kind of marketplace. So it will be those types of things that we're going to be doing under that umbrella of simplifying our global equity offerings.
spk07: I just want to be very clear, and both Greg and Allison made this point, those changes have been made, and we're done with the changes. The client's contacts have been made, and we're moving forward now. So I just want to make sure that there's no mystery there.
spk03: Greg, did I address your question? Yeah. Great job, Greg. Thank you.
spk09: Thank you for your question. Our next question is from Brian Bedell with Deutsche Bank. Your line is open, sir.
spk15: Great. Thanks. Good morning, folks. Maybe, Alison, just to start out with the expense question. So I think you said this, but just to confirm, the expense base assumptions, the dollar amounts, exclude any impact of market appreciation. They're based on September 30 data. So if we, just playing with numbers, if we normalize market returns from, say, the end of the year, I'd get around $400 million or so of additional revenue, so would it be fair to just put a comp to revenue number on the compensation line on that to think about how the expense base might grow in that market return dynamic and then just take the $200 million off of that?
spk10: Yeah, it's a great question, and obviously there are a couple of ways you could think about it, so let me just try to bring a little bit of clarity to it. One, yes, all the expense guidance, both the fourth quarter guidance and the $200 million target beyond that is all based on September 30th asset levels market FX. As you think about the $200 million reduction, again, I expect 50% to 60% of that comes from compensation. And that would be the component that is, you know, as you reduce compensation, that has the most variable component to it and obviously fluctuates the most. with any change in asset levels or market performance. The balance is really tied to discrete items across our occupancy, tech, and G&A expense, and so it doesn't have quite the same dependency on market or asset levels.
spk15: Okay, fair enough. Yep, thanks. And then maybe just to talk on the sales side, Marty, if you can use Marty or Allison. If you could just talk about some of the key drivers that you saw for improved flows in terms of the sustainability and your confidence of the sustainability of that. I don't know if you want to comment on October flows so far, but do you think that you continue to generate positive flows both in the near term and over the long term? And maybe if you could talk on a couple of initiatives that give you confidence on that.
spk07: Yeah, let me make a couple comments, and I'll let Allison and Greg chime in. So, yes, the answer is yes, right? And you saw a marked change in flows. And, again, we continue to point to look at the gross number always. That's really the health indicator always. And what you've seen over the last period of time, the institutional business continues to just be very strong. And, again, we pointed – the pipeline, again, it is strong. And if you look to Asia-Pac continues to be a very strong partner, since EMEA coming back on track and the Americas improving dramatically. So, what's behind it? ETFs generally continue to just be quite powerful. Fixed income is an area of absolute strength right now. And it's not just performance, it's the quality of the team, it's the breadth of the team, but it's also client demand. That's a really important element for our flows. And you saw marked improvement in the U.S. The biggest headwind continues to be where we have great confidence in the long-term you know, the global equity capabilities, you know, including emerging markets, you know, that is something of strength as we look forward. But the headwinds when clients don't want something and, you know, you're going against if you use the U.S. retail channel as just a proxy because it's, you know, some public information, the outflows in U.S. equities are, you know, a strong headwind. The second largest category of out is global equity capabilities. And those are two areas we have some real strength and some challenges in some of our capabilities there, but it's hard to overcome that. So what you're seeing is the rest of DePaul from part of the organization overtaking that, and I think that's really important. But Allison, Craig.
spk11: Yeah, the only thing I'd add is if you look at our business on a managed perspective, we saw significant improvement in our flows in every broad investment category on a quarter-over-quarter basis. So sustainability, I think, assuming we have continued strong performance, I think is there. In fact, if you look at our flows in the third quarter, they were positive in every category except retail equities and retail bank loans, where bank loans were essentially slightly negative for the quarter. So when you kind of look at the overall business, institutional and retail fixed income, institutional equities, institutional alternative and institutional and retail balanced products all contributed to, you know, the positive flow number. So we're encouraged by that trend, but we're probably more encouraged by the magnitude of improvement in every broad asset category. That really is much more of a testament to the sustainability we think of our flows moving forward.
spk07: And I'd add one other thing. So we continue to see a lot of success coming out of solutions and, you know, the factor capabilities from the past. And as you know, they are big mandates, but they are lumpy, right? So you could probably see some more lumpiness than historically we've seen in the past. But, you know, on balance, you know, that's a good thing from my perspective.
spk15: And do you see this continuing in October, this trend from the third quarter?
spk07: It's a short-term measure, but... Yeah, we're not going to do that. That's not served us very well every time we talk month-to-month, so... That's fair, that's fair. We'd like to be helpful, but I don't think it's been constructive, so... Okay, yep, thank you.
spk09: Thank you for your question. Our next question is from Glenn Shore with Evercore. Your line is open, sir.
spk06: Hi, thank you very much. I wonder if you could expand a little on your comments about the significant growing solutions effort and the combined company. And I guess I want to talk about the construct and how you deliver, you know, what you think it takes to be great and how you measure that success because, as you mentioned, with clients of all types consolidating providers, that seems to be the secret sauce that's going to help you deliver everything that you've built here. So I'm curious if you could expand on that a little bit. Thanks.
spk07: Yeah, I'm going to make a couple comments, and then I'm going to upgrade. So, the way that we've built our solutions business is, you know, obviously a very talented group of people. But what it does is, it sits, for example, across all of our investment teams globally. So, they don't compete with the investment teams. They literally use the content from the investment teams. And I think that's somewhat of a a minority approach in the marketplace, but also it's the analytical tools that have been built by the team that really enable these conversations. And we've seen the conversations with very sophisticated institutions that have resources to do their own work, and they do, but they're wanting to get a different view from organizations that have these capabilities. And again, it just changes the depth of the relationship that we have with these organizations. And again, it's taken all spectrums from creating models through our self-indexing capabilities, you know, creating indexes for a client for them to use for their own purposes to, you know, the more, you know, well-known, you know, solutions outcomes that people want with across different asset classes. But, Greg, I don't know.
spk11: Maybe just to kind of add to Marty's comments, look, our solutions business really has two primary segments. One is an enablement capability where We're going to help in conjunction with distribution to determine client needs and the best individual capability to align to those needs. And so we need to be great in that as really strong client engagement skills and really strong analytics. And then the second is where we're going to provide customized outcomes tailored to specific client needs across a number of different asset classes. And so there to be great. you need very strong asset allocation skills and so we've done over the last five years has really made probably one of the most significant investments in the company to build capabilities in those three areas and i think what we're seeing off of that investment that really started four years ago is a significant improvement in both our assets under management our assets under advisement both in the institutional channel which is up significantly you saw that on the pipeline chart that Allison had talked about where solutions is enabling over half of that business. But we've also seen a significant level of engagement and portfolio reviews in the retail side. So we've got a strong pipeline within solutions. I think that in concert with more favorable market conditions in the third quarter is going to provide additional tailwind to the business. And so we're pretty excited about, you know, just the opportunities both, you know, in the near term and in the long term.
spk06: Thanks for all that. I appreciate it. Great. Thank you.
spk09: Thank you for your question. Our next question is from Brennan Hocken with UBS. Your line is open.
spk03: Good morning. Thanks for taking my question. I was curious about how you view – I know that you've spoken in the past about the fact that you have a fairly small footprint in retail SMA. particularly given the fact that U.S. retail has been a bit of a headwind for you. You've got so much momentum in other parts of the business, but that one has been a bit more slow to turn around. Retail SMAs have been sort of the bright spot in that channel. How do you think about potential investment there? You've also got a dominant provider that will no longer be independent in the future, and so there might be increased demand for another independent provider from some firms and some FAs. So how do you view that opportunity? Where are you as far as capabilities in that market? And is that worth your while when you start to think about investment dollars here?
spk07: It's a great question. I think the core of where you're going, which we've always agreed with, separate investment capabilities from delivery mechanisms. You have to have different vehicles to deliver, because it's different in different parts of the world, different channels. You're highlighting a trend where SMAs have become important in segments of the wealth management channels. The good news is when, with Oppenheimer, they have had, they brought over a strong SMA capability, largely aligned to fixed income. And as we've turned our attention to it, that's where we're starting to see flows. We'll continue to, you know, expand that as, you know, in response to client demand. I think the other area that we've talked about over time is the rise of non-transparent ETFs. We still have our application in. We're excited that we're working with Fidelity, who's a very strong partner on bringing non-transparent capability into the market before the end of the year. We'll see where that goes. As I've said, I think that's longer dated, but I'm just really highlighting the need to, we have to respond to client needs with the vehicles also.
spk11: The other thing I'd add to that, Marty, a little bit is, look, we are spending time with our SMA business. We had a legacy business and then one that we were able to acquire with the Oppenheimer acquisition. We recognize it's a bright spot in the retail market, so I agree with all of Marty's points. Our team and capabilities is strong in fixed income. We're spending time right now in technology to really in the areas of operations, tax efficiency, and the things that are going to be requirements to kind of support that business overall. So we understand the essence of your question, and we're spending time to make sure that we address that bright spot that's in the market.
spk03: Excellent. Thanks for that, caller, Marty and Greg. You also made a few comments. It sounded like, although I might have misinterpreted it, that you're looking to make some investments in some of the EPF product lineup, trying to expand into a flag ESG. It sounded like there might be some further development of Q roadmap. Triple Q-related products. Did I read too much into that, or is that the case? What kind of opportunity set do you think that that will actually result in for Invesco? And if you're going to expand on the Qs, is that going to allow for Invesco to generate better economics on some of that innovation? How should we think about that?
spk07: Thank you. Yeah, so from the last couple of weeks, we introduced sort of an expansion of the Q Suite asset, who is a fantastic partner. It's really following the great success with the Qs. They're complementary in nature to the QQQ. Again, they are more typical structures with more typical economics than what we have with the marketing allowance with the Qs. We see client demand there. It's a natural extension of the Q Suite. And as Allison spoke to, we showed some of the ETF-related ESG capabilities. They've been in the market for a good number of years, so track record does matter, and there are track records there. And the assets are now just really beginning to grow as people are turning more seriously to ESG. We have, you know, other focus areas in ESG is, you know, everybody's turning their attention there. But, again, we have a very strong capability internally there, and, you know, product will, you know, follow those capabilities as we look forward. So, Seth, did I get your point?
spk03: Yeah. Okay. Thank you, Marty. Yep.
spk09: Thank you for your question. Our next question is from Ken Worthington with J.P. Morgan. Your line is open, sir.
spk13: Hi, good morning. Given consolidation is a theme for traditional asset managers these days, and given where Invesco is with the integration of Oppenheimer and its efficiency program, is Invesco interested in pursuing, further pursuing, large-scale M&A? And if so, would it be practical to pursue large-scale M&A in the near term if an opportunity presented itself, given the goals you've pointed out for the balance sheet?
spk07: Yeah, Ken, that's a great question. So let me put it in the context of how we think about things. We have acquired over time, obviously. The principles have not changed. It needs to be additive to the organization, it has to have complementary investment capabilities, they need to be strategic, they need to be differentiated, it has to be something clients want. And I would contrast that to some of the things I've read that the notion of financial roll-ups is going to be the order of the day. We don't believe in that. It's disruptive, it's risky, and, you know, clients are not supportive of it. So we will not, you know, we will continue to be on the area if it makes sense for us, you know, we'll pay attention to it. And again, always to your point, it's got to be strategic and it also has to be financially sound. So our thoughts and beliefs have not changed there.
spk13: Yep. And if everything made sense, is Invesco in a position to pursue something near term? Longer term would make sense if you find the right fit after everything is digested, etc. But is Invesco in a position to do something now or in 2021 if that opportunity that fit all the criteria you mentioned presented itself?
spk07: Yeah, I can't address the hypothetical. What I can tell you right now is we feel really good about the organization. We feel really good about what we've accomplished. You know, for us, like many other organizations, you know, COVID was not a welcome experience. It sort of knocked us off our plan for 2020. Factually, we're now back on it. You can see it in these results. And we took very seriously... During this period of time, you know, making sure that we have the resources against the right opportunities and we believe we do right now. So, again, I we're heads are down and we're executing with what we're doing and we feel really good about it.
spk10: And I'd underscore our commitment to our balance sheet objectives. We are committed to continuing to improve our financial flexibility, reducing our leverage profile. and making sure we're in a very strong position to weather any uncertainty that comes our way and to continue to invest in our business and invest in our capabilities for growth. And I tell you that our scale is what gives us the opportunity to announce the cost target that we announced today, and we're going to take advantage of that.
spk07: And, Ken, let me come back to more, if you want to step back, you know, just our basic beliefs. So, the word consolidation is thrown around a lot in the industry. And, you know, what we said in the past and what I do believe is the stronger it gets, the stronger, there's no question about that, just because of the dynamic we talked about of what, you know, clients are looking for from organizations. But consolidation doesn't mean that organizations are going to be buying everything. I think there are many firms that no one will buy. The consolidation will happen organically, clients leaving some money managers for others where they're better served. That's how we think about it. And, again, anything we'll do will be very thoughtful and consistent with the principles we've laid out. But that is not our focus at the moment. Awesome. Thank you so much. Thank you.
spk09: Thank you for your question. Our next question is from Alex Blostein with Goldman Sachs. Your line is open.
spk16: Great. Thanks for the question. I was hoping you guys could expand a little bit on the $32 billion pipeline you highlighted on the institutional side. So maybe a little more color on the revenues or the fee rates associated with that and any notable redemptions that you're also aware of, again, on the lumpia side of things.
spk10: Sure. Thanks, Alex. You know, the pipeline, it actually looks very strong, obviously, as compared to prior quarters. Pretty balanced, I would say, across regions and asset classes, as you can see. In terms of the fee rate, it's perhaps maybe modestly higher than the pipeline at the end of the second quarter. I'd call it very modest. It continues to be consistent, and it's really – a strong mix of equity capabilities and fixed income that drive the fee rate just a little bit higher. And we're continuing to see growth from the United States as well, which is a really strong indication, the highest we've seen from them in a number of quarters. So overall, I'd say it's a good, healthy pipeline. In terms of redemptions, nothing notable, nothing unusual. And I think we continue to be very focused on redemptions. If anything, it's really as our clients just continue to look at MIPS within their own mandate. I would note in terms of the institutional flows in the third quarter, about two-thirds of those were from the pipeline itself. About another third or so was from client activity. So the institutional flows we're seeing are not just coming from the pipeline. They come from augmentation of existing relationships, and I think that really underscores just the strength of the franchise overall.
spk16: Gotcha. And then my second question just around the China JV, I was hoping maybe taking a step back, if you guys could talk a little bit about what's sort of the total AUM base and the operating income contribution to Invesco from that relationship today. So if you could break it up, kind of revenues, expenses, that would be helpful. And as you're thinking about scaling this over time, what are sort of the products that are resonating most? How can you sort of grow this to be a more meaningful contributor to the organizations?
spk07: Let me just talk, you know, conceptually at a high level about China for us. If you just look at what's happening in the post-regenerated product, China for us, you know, they're at all-time highs and largely driven by the JV. And it's just its depth and... a breadth of capabilities, and it just continues to get stronger. We anticipate that going forward. Again, institutionally, we continue to have great experience there. And it's a broad base through launches in China and existing products going forward. So, again, we just are in a very strong position there, and we anticipate I'll just be a material contributor as we move forward.
spk16: Okay. Any numbers around that?
spk11: Yeah, so we have – I'll give you a couple of numbers. We have about $66 billion in kind of mainland China overall. That footprint is across a variety of different kind of asset categories. If you look at the $8 billion of kind of flows from an asset category standpoint, they were quite diversified and positive in just about every area within Asia Pacific. Balance products – the largest driver of overall flows in Asia Pacific and the third quarter. You know, just related only to balanced products, I think the thing you have to think about there is there's a lot of diversification given the broad-based nature of needs within China, and I think there's a broad-based set of investment capabilities with very strong performance that relate to that.
spk16: Great. Thank you. Thank you.
spk09: Thank you for your question. Our next question comes from Michael Cypress with Morgan Stanley. Your line is open.
spk05: Hey, good morning. Thanks for taking the question. Just coming back to the expense saves, $200 million of net savings, understand that's net of investment. I was just hoping you could talk about how much exactly is embedded in there for investments back in the business. Maybe you could talk about how you're approaching that, how you're sizing that, what gives you confidence that's the right amount, and what would you say are the top three areas that you're investing in?
spk07: So let me just talk again. So we're not going to get into specifics. You know, I think, as we've all said, the work that we did was very comprehensive and very broad. So there was a lot of movement to, you know, realignment of resources against the areas that we care about. And it was just talking about China is going to continue to be a contributor, so we're making sure that we have all the resources that we need. ETFs continues to be, you know, a driver, and, you know, we continue to see that, you know... is a very important area for us um the factors continue you know a subset of that continues to be variable um solutions all the areas that we've talked about so um uh again most of the asset center management now we think are that we have are uh in high-demand areas as we go forward.
spk10: And, Michael, the way I just add to that is we're focused on creating positive operating leverage and sustaining that operating leverage. And so looking at these cost targets, it gives us the opportunity to realign our investments or permanently alter or take out some expenses so that we have the flexibility and the capacity to continue to invest in all those capabilities Marty spoke of.
spk05: Okay. And just on the uplift, $134 million on that slide with normalized business conditions, how do you think about the drivers there? How does that break down? And how would you describe what normalized is relative to, say, pre-COVID? So, for example, is it like 80% on, say, T&E versus pre-COVID? How should we be thinking about that?
spk10: Yeah, sure. Good question. So, again, there are a couple of ways to think about this. Of the $134 million, it's a rather specific number, I know, but I'd tell you about $25 million or so is really purely a function of seasonality and compensation expense, so it has nothing to do with COVID. It's just third quarter would not be the right quarter to really create a run rate there. The remainder, 100 million or so plus, is very COVID-induced, and it's hard to figure out for any of us how much of that comes back and the way in which it comes back and the timeframe in which it comes back. I couldn't tell you if we're running at, you know, 80% or 20%. I mean, I can tell you we're not traveling, and I can tell you that most of our offices either remain closed or at somewhat of a 20% or so capacity. And so if you just think about the expenses that would be tied around that, we're not having in-person engagements with clients, you know, consistent with what you would expect everywhere. So, I mean, in some respects you could assume it's, We're at 5% of what it used to be. We don't expect it will stay there forever. We just don't know when it would come back. We do believe it comes back. We do believe there is an environment someday where we're largely back in the office, where we are traveling to see clients again, that we are in person together again, and we do think it's reasonable to expect some of that to come back over time. i just don't know when uh and then the point i made earlier the 200 million dollars is largely independent of that it's really tied to discrete uh line items that have all been identified and and really has nothing to do uh with a covet environment great thank you thank you for your question our next question is from mike carrier with bank of america your line is open good morning and thanks for the question
spk04: First, the turn in flows is great. I realize that the quarter fee rate was impacted by some of the rise in the non-CUM, but excluding that, I think it still ticked down despite strong equity markets. Can you provide some color on the theory on that institutional solution inflows more versus the overall fee rate versus the prior pipeline, just to gauge the trend line for the application?
spk10: I would say the fee rate for the institutional pipeline and the component that is driven by solutions, it's very consistent. So I would just think of it very consistent to what we've experienced certainly in the third quarter and a couple of quarters prior to that.
spk04: Okay, thanks, Ned. Allison, just given the efficiency initiatives and where your guys' adjusted margin is right now at 37, roughly in line with the sector, when you're looking at these efficiency initiatives, is it a way to improve the margin further, like free up money to invest in the business longer term, offset some of the structural headwinds in the industry? I'm just trying to get a sense because each firm has very, you know, different strategic, you know, kind of initiatives or outlets in the industry. And then if we do get a 5% rise in the markets, if you can just, you know, let us know how you think about the variable component of cost and how that could impact the core expense, you know, levels.
spk10: So, I would say the way we're thinking about it is we want to be able to create positive operating leverage. It's hard to create positive operating leverage quarter after quarter after quarter, but that's longer term over the medium term. That's what we're trying to do so that we actually have the capacity to reinvest. And we can't underscore enough our commitment to reinvesting in our business. and reinvesting in those growth capabilities because we really believe that's what drives the longer term flow dynamics and value of the firm and so as we think about uh operating leverage um you know and and we think about the fact that the fee environment is one uh that is uh there is downward pressure um it is not the same downward pressure quarter after quarter but in general at a macro level the pressure is more down than anything and so as we seek to maintain the fee level as we continue to see just the growth in our etf business and the qqq suite we are looking at really creating profitability across the broad platform and thinking of these expense levers as a way for us to create capacity to continue to reinvest to drive the top line and that's where we think we get the operating leverage In terms of the variability, I mean, I just point to the fact that our expense base in general is about a third variable, two-thirds fixed. And so as you think about a rise in markets, that's a reasonable data point to use.
spk04: Guy, thanks.
spk09: Thank you for your question. As a reminder, before we take our next question, we have about five minutes left in today's conference call. Our next question will come from Bill Katz with Citigroup. Your line is open, sir.
spk12: Okay, thanks. Just one clarification. A lot of my questions have been asked. On the $26 billion of AUM that have been sort of identified with some team changes, is that money sort of sticky at this point in time, or do you think that there could be some subject to runoff, and what might be the associated revenues with that?
spk11: Yeah, we think it's quite sticky, Bill. We've had conversations, as I mentioned before, both with the teams and our clients, and I think, like I mentioned, the feedback was quite positive for the changes that we made, both why we did them and strategically the rationale behind them. So we just don't expect there to be a significant amount of runoff related to those assets on our question. Remember, what we're trying to do is use those things to strengthen areas where we really think there is strong demand in the marketplace or move assets to stronger teams with better processes and performance overall. So clients, you know, should perceive that as being a good thing kind of overall, not, you know, look, it's tough to go through those things, but they're the right things to do strategically for the business.
spk12: Okay, and then just one quick follow-up. Marty, you mentioned in your prepared commentary that you're looking to take share within the ETFs. I was just sort of wondering where that share might come from. Is that within the passive bucket broadly? Is that relative to active? Some of the existing players have been trying to get a sense of how that share would transpire.
spk07: Yeah, and those can be a combination, right? I think we talked earlier about the QQQ suite. It's a strong spot for us. Look at that. We'll be an area with a very strong factor capability, and that's sort of fundamental to our ETF suite, and so we'll continue that area. I also mentioned relatively small, about $5 billion in ESG-related ETFs right now. It is an area of, as market demand is moving there, having those longer track records are important. So, we look at that as an area of growth also. So, you should think broadly about it. And again, I still think it's longer dated, but paying attention to what happens with non-transparent ETFs is something to have on, you know, as we look out into the future. And, again, you know, we'll sort of get some sense of it as, you know, we launch some non-transparent along with Fidelity by the end of the year. So pretty broad for this bill.
spk12: Okay. Thank you very much for your questions. Much appreciated.
spk09: Thank you for your question. We have a question from Robert Lee with KBW. Your line is open, sir.
spk02: Great, thanks. Thanks for your patience with all the questions. First, thanks for the added practice, folks. Appreciate it. Most of my questions are asked, but Marty, you touched on, and I apologize if I missed this earlier, but on ESG, can you elaborate a little bit more on how you're thinking more broadly? Is really the strategy mainly focused on ETF business where you'll have more ESG's specific strategies within that and how are you really looking to incorporate into the broader active business? Is it just the investment process? Are you anticipating rolling out a broader suite of kind of thematic strategies?
spk07: Just trying to get a sense of that. Yeah, let me make a couple of comments and Greg can chime in. multi-tiered, so principal activity right now is embedding ESG across all of our strategies throughout the world. We're well into it. Some will take longer, but it is just a reality. that's well underway. And again, I think different parts of the world are at different stages. If you aren't embedding ESG in your investment capabilities, you know, in Europe, you know, you're just not competitive. And we anticipate that, you know, across the world. And then just looking at our product suites, it's not ETFs alone. It continues to be, you know, we'll look at active capabilities. I'd say we're probably leader in the fixed income area with ESG being embedded in that process. And then the other thing, we have an ESG capability and thought leadership there is an area that is an area of strength for us. And, again, we're taking it very, very seriously. But, Greg, what would you add?
spk11: Yeah, I think that, you know, look, I think we'll position, Robert, from an ESG perspective. The market is, to Marty's point, moving very quickly. We need to move quickly. We're prepared to do that. If you kind of think about our book right now, we have roughly about $30 billion of ESG mandates by the narrowest of market definitions, and that's across 90 funds and mandates, varied by strategy and geography and client type. So, you know, we view ESG strategically as something that will continue to grow in importance in every region. uh will be a significant growth area for the firm we have a desire to be a top-tier global esg manager and to marty's point we kind of prepared to have esg systematically integrated across our entire platform which is you know a big kind of undertaking and then we'll support that with a ray of sustainability and impact products overall so strong performance i guess is really key in all areas it's critical to esg moving forward, and that's why our model is very investment-led. You asked about how we manage this. It's investment-led. We make sure our teams incorporate ESG requirements into each team's specific processes, and then we support that by a global ESG team that provides expertise and a comprehensive set of tools. So a lot of work, but I think it gives you a little bit of understanding of the seriousness of how we're taking ESG and how we believe this opportunity is going to be moved forward.
spk07: Thank you. Thank you very much. Thanks, Trevor. And so we'll wrap up the call again. Thank you very much for all the questions. Very thoughtful. Again, we feel good about the quarter and we feel good about the undertakings that we described today. They're all meant to make us a better, stronger firm. And we'll continue to be very focused on that as we move forward and look forward to ongoing conversations. So thank you very much and have a good rest of the day.
spk09: This does conclude today's conference call. We thank you all for participating. You may now disconnect. And have a great rest of your day.
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