Invesco Ltd

Good morning, and thank you all for joining us. As a reminder, this conference call and the related presentation may include forward-looking statements, which reflect management's expectations about future events and overall operating plans and performance. These forward-looking statements are made as of today and are not 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.

and welcome to Invesco's fourth quarter results conference call. All participants will be on a listen-only mode until the question and answer session. At that time, to ask a question, press star one. This call will last one hour. To allow more participants to ask questions, only one question and a follow-up can be submitted per participant. Today's conference is being recorded. If you have any objections, please disconnect at this time. And now I would like to turn the conference call over to your speakers for today, Marty Flanagan, President and CEO of Invesco, and Allison Dukes, Chief Financial Officer. Marty Flanagan, you may begin.

Thank you, Operator, and thanks, everybody, for joining, and Happy New Year to everybody. I think we're all very ready to turn the page on what was a very challenging 2020. And while the global pandemic remains very pervasive, we do all see light at the end of the tunnel, and we look forward to 2021 with cautious optimism that conditions will improve. Throughout 2020, we focused on executing our long-term strategy while recognizing the necessity to focus on employee health and safety, finding new ways to work, and serving and delivering expected outcomes for our clients. I would like to thank all our employees and our clients during what has been a challenging period. Over the past decade, we've been successful in investing ahead of shifts in client demand, placing us in a strong position to take advantage of key industry tailwinds in the future. Our investments in these capabilities and our tremendous focus on our clients is now again producing good momentum in our business that became more visible as the year progressed. By working better to anticipate, understand, and meet client needs during the challenging times, we've achieved six straight months of net long-term inflows, totaling nearly $18 billion in the second half of 2020, with progress across channels, geographies, and asset classes. Retail flows improved in the second half significantly. Our solutions enabled institutional pipeline remain near record levels. We saw net inflows in Asia Pacific totaling $17 billion in the second half of the year and improving flows in the Americas over this timeframe. And net long-term flows in a fixed income remain robust during that period. All of these factors combined build a strong foundation as we head into 2021. and maybe a few highlights of the fourth quarter on slide four if you happen to be following along more specifically during the quarter investment performance for a large portion of our high demand capabilities were in the upper quartiles we had net long-term inflows of nearly 10 billion dollars during the quarter long-term inflows and fixed income capabilities continued while we saw client demand for equities within etfs quantitative and index strategies in particular We saw another quarter of strong inflows in the Asia-Pacific region and flows in the Americas turned positive. Allison will provide more information in a few minutes on the flows, strategic evaluation, more details of the quarter, but I would like to note we also improved our operating leverage during that period, paid our credit facility to zero, and made progress improving our cash position. I would like to spend a few minutes on slides five and six to talk about our competitive strength and key capabilities in areas with high client demand and our focus for 2021. Slide five illustrates the market opportunities we see for these key growth areas and demonstrates the majority of our investment capabilities are aligned with these opportunities. In these areas, our investment performance is strong. We're highly competitive and well positioned for growth. And as we move into 2021, we plan to further expand our market-leading position in ETFs in the U.S., in EMEA in particular, and build our passive presence in Asia Pacific. We are the fourth-largest ETF provider globally, and our capabilities span passive active strategies and established and developing spectrum of ETFs, ESG ETFs. And building on our 15-year legacy of innovation, we continue to develop new products in the space, as demonstrated by the launch of the QQQ Innovation Suite and our first non-transparent ETFs that we delivered in the fourth quarter. Strong alternative platform, and our focus is growing our private markets business, led by our market-leading real estate and bank loan businesses. Active fixed income and global equity remains areas of opportunity for us, and our offerings are well positioned with strong investment performance and high client demand. In addition, we are focused on our solutions efforts, and as we have seen by the contribution to the institutional pipeline, clients value the service, the ability to offer solutions that builds on the full power of our competitive set of capability, and services to clients continue to be a priority for us during 2021. We continue to invest in our leadership position in Greater China. We've been managing dedicated Chinese products for nearly 40 years. We have already seen the benefits of our early move for advantage in the China onshore market through our joint venture, which was the first CINO foreign joint venture in the industry established almost 20 years ago. Turning to slide six, as we noted in the third quarter, we see opportunities to invest in areas of growth aligned with our strategic plan. These areas include ETF, alternatives, active fixed income, global equities, which includes emerging markets. And we will build on our market-leading position in the fast-growing China market and further develop our leading solutions and asset allocation offerings. Given our investment in the business over the past decade, our most recent efforts to better align the organization with our strategy, I'm confident we have the talent, the capabilities, and the resources and momentum to drive future growth and success. We're optimistic about the new year and remain focused on helping our clients achieve their desired outcomes regardless of where the markets take us. And with that, I will turn it over to Allison to get into further details in a moment.

Thank you, Marty. Good morning, everyone. Moving to slide 7, we had 61% and 70% of actively managed funds in the top half of peers on a 5-year and a 10-year basis, reflecting strength in fixed income, global equities, including emerging market equities and Asian equities, all areas where we continue to see demand from clients globally. Looking at our AUM on slide 8, We ended the quarter with $1.35 trillion in AUM. Of the $132 billion in AUM growth, approximately $95 billion is a function of increased market values. Turning to flows on slide 9, our diversified platform generated long-term net inflows in the fourth quarter of $9.8 billion, representing 3.9% annualized organic growth. We generated positive net inflows in active AUM of $400 million and passive AUM of $9.4 billion. Our ETFs experienced net inflows of $6.1 billion, including $4.7 billion in long-term ETFs and $1.4 billion in our QQQs. Our U.S.-listed ETFs, excluding the QQQs, had their best quarter in their 15-year history. We saw net long-term ETF flows in the U.S. focused on equities in the fourth quarter, including a high level of interest in our S&P 500 Equal Weight ETF, which had $2.7 billion in net inflows in the quarter. Two of our top five inflowing ETFs were ESG-related. We continue to see momentum in our ETF business and demand for ESG funds, and as Marty highlighted, the market opportunity is significant for this key growth area in 2021. Retail net outflows were $800 million in the quarter, helped by the positive ETF flows. On the institutional side, we had net inflows of $10.6 billion. I'll provide a little more color on these flows on the next few slides, but importantly, the growth in our passive AUM and our institutional AUM is meaningful for the firm and contributed to the positive operating leverage we generated in the period. Also, as Marty noted earlier, we're seeing the mix of ETF inflows being weighted towards higher fee-generating products. Looking at flows by geography, you'll note that the Americas had net inflows of $2.2 billion in the quarter, an improvement of $6.6 billion from the prior quarter. This improvement was driven by net inflows into ETFs, institutional inflows, various fixed income strategies, and importantly, focused sales efforts and improvement in redemption rates. Our global equity products improved by over $1 billion, or 37%, from Q3, driven by our developing markets fund, which returned to positive net flows in the fourth quarter, following negative net flows in the first three quarters of the year. The UK experienced net outflows of $100 million in the quarter, as positive flows into our institutional quantitative equity capability were offset by net outflows in multi-asset and UK equities. The EMEA net outflows were $1.4 billion, driven by institutional lumpiness and ETF outflows, largely in our S&P 500 and NASDAQ 100 usage ETFs. And finally, I noted last quarter that Asia Pacific delivered one of its strongest quarters ever with net inflows of $8 billion. In the fourth quarter, net inflows were even higher at $9.1 billion. Net inflows were diversified across the Asia Pacific region. $4 billion of these net flows were from Japan, $3.8 billion arose from our China JV, and the remaining $1.3 billion was generated from several other countries in the region. It's worth noting that we continue to see strength in fixed income across all channels and markets in the fourth quarter, with net long-term inflows of $8.2 billion, this following net long-term inflows of $8.8 billion in the third quarter and $6 billion in the second quarter. It's also important to note that of the $26.1 billion in fixed income net inflows in 2020, 25 billion of these net inflows were from active fixed income capabilities. Active fixed income has been a growth area for us in 2020 and remains a key investment area in 2021. Now moving to slide 10, our institutional pipeline remains robust at $30.5 billion on the heels of strong pull through in the institutional pipeline during the fourth quarter. This pipeline is diversified across asset classes and geographies, and our solutions capability has contributed to meaningful growth across our institutional network, warranting our continued investment in this key capability in 2021. Turning to slide 11, you'll note that our revenues increased $135 million, or 12.4% from the third quarter, driven by higher average AUM in Q4, as well as a meaningful increase in performance fees. Net revenue yield at performance fees was 36 basis points flat and flat at the Q3 yield level. The impact of rising markets on our yield was offset by a modest fee rate decline from the mixed shift we experienced across products in the quarter, as well as the impact of non-management fee earning AUM. We recorded performance fees of $78 million in the fourth quarter. $48 million of these performance fees arose from our real estate business and $21 million from our institutional business and our China JV, two of our key growth areas. Seasonally, we tend to see higher performance fees in the fourth quarter. Total adjusted operating expenses increased 8.3% in Q4. The $57 million increase in operating expenses was driven by higher variable compensation as a result of both market growth and compensation related to the performance fees in the quarter. Operating expenses remained at lower than historic activity levels due to pandemic-driven impacts to discretionary spending, travel, and other business operations that persisted in the quarter. That being said, we did see a seasonal increase in marketing expenses as expected. Moving to slide 12, we wanted to update you on the progress we have made with our strategic evaluation. As we noted previously, we 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 will invest in key areas of growth, including ETFs, fixed income, China, solutions, alternatives, and global equities, while creating permanent net improvements of $200 million in our normalized operating expense base. As we noted, a large element of the savings will be generated from compensation, which includes realigning our non-client-facing workforce to support key areas of growth and repositioning to lower cost locations. In the fourth quarter, we realized $7.5 million in cost savings. $7 million of these savings were related to compensation expense, as depicted on slide 12. The remaining $500,000 in savings were related to facilities, which are shown in the property, office, and technology category. The $7.5 million in cost savings, or $30 million annualized, is 15% of our $200 million net savings expectation. Of the remaining $170 million in net savings, we anticipate we will realize roughly 50% of the savings through compensation expense. The remaining 50% would spread across occupancy, tech spend, and G&A. As it relates to timing, we still expect approximately $150 million, or 75% of the run rate savings, to be achieved by the end of this year, with the remainder recognized by the end of 2022. We estimate that we will realize roughly 75% of the anticipated compensation reductions in 2021, roughly 50% of the anticipated reduction in occupancy expense also in 2021, and all of the reduction in G&A this year. The deficiencies identified in our tech spend will not be realized until 2022. In the fourth quarter, we incurred $104 million of our total estimated $250 to $275 million in restructuring costs. We expect the remaining transaction costs for the realization of this program to be in a range of $150 to $175 million over the next two years, with roughly two-thirds of this remaining amount occurring in 2021. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results. With respect to Q1, after improved market performance and asset inflows in the fourth quarter, we start the year with over $1.3 trillion in AUM. Given the market improvement was more back-end weighted towards the end of the quarter, we expect both operating revenues, excluding performance fees, and the associated variable expenses to be modestly higher in the first quarter. This reflects the follow-through from the market and flow growth that occurred over the course of the fourth quarter, even as we assume no change in markets from year end. On the expense side, this will include higher associated variable compensation and the seasonal increase in payroll taxes, partially offset by lower compensation related to the seasonal decline in performance fees and the execution of our targeted cost savings. Turning to slide 13, adjusted operating income improved $78 million to $485 million for the quarter, driven by the factors we just reviewed. Adjusted operating margin include 230 basis points as compared to the third quarter to 39.5%, demonstrating the operating leverage in our model. This helped drive the $0.19 increase in adjusted EPS to $0.72 a share. we benefited from higher non-operating income and lower non-operating expenses in the quarter. Non-operating income included $31.9 million in net gains for the quarter compared to $15.2 million in net gains last quarter. The increase was driven by unrealized gains primarily in our seed money holdings. Interest expense of $24.4 million was 28% lower than the prior quarter. Q3 was the final quarter in which we paid dividends related to our forward purchase agreements and a portion of which we settled in January, with the remaining portion to be settled in April of 2021. Our tax rate for the fourth quarter was 21.7%. The reduction in the rate reflects the lower taxes on unrealized gains in our seed portfolio due to the jurisdiction of our holdings. We estimate our 2021 non-GAAP effective tax rate to be between 23% and 24%. 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. A few comments on slide 14. As Marty mentioned, we reduced our revolver balance by $90 million to zero 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 $1.4 billion in the fourth quarter from $1.1 billion at the end of Q3. $764 million of this cash is held for regulatory requirements. I will note we paid $117 million earlier in January to settle a portion of the forward share repurchase liability, with the remaining liability of $177 million to be settled in April. We believe we're making solid progress in our efforts to build financial flexibility. 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, Marty walked through our key capabilities, the organic growth opportunity each presents, and our focus on executing the strategy that aligns with these areas. We're also 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. With that, I'll ask the operator to open up the line for questions.

Thank you. And 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 the handset prior to asking your question. And to withdraw your request, press star 2. One moment for the first question. Our first question this morning is from Dan Fannin from Jefferies.

Thanks. Good morning. My questions on the fee rates and kind of the outlook. First, just I guess in terms of the fourth quarter, is there anything abnormal in this period? Obviously, mix and beta were positive. So just want to clarify that this is a good exit. kind of run rate for the fee rate and then thinking about next year, assuming flat markets and the mix of business that you're seeing in terms of demand and institutionally and otherwise, how we should think about the trends in the fee rates for next year.

Sure. Good morning, Dan. So I'd say first on the fourth quarter, your question around was anything abnormal? Let me just start with obviously we had pretty high performance fees in the fourth quarter. So excluding performance fees, as you saw, net revenue yield was flat at 36 basis points in both the third quarter and the fourth quarter. you know it's fairly straightforward in terms of what was driving that you've got the impact of the rising markets on our yield and then that's which was a positive of course and then we've got some offset there given the modest pressure we continue to see just from the client demand and the mix shift that's there we've got you know consistent with industry high and interest and our passive capabilities and some churn with Interactive, and that does put some downward pressure on net revenue yield. And this was a quarter where the impact of really strong market growth helped offset that. In terms of what does that mean for this year, I would say that trend right there, we would expect to continue. I do expect we will continue to see high interest in our passive capabilities and some continued churn within active. What does that mean for net revenue yield going forward? It's very difficult to predict, as you know. What I would point you to is that our focus is not simply on net revenue yield. We've really got the breadth of capabilities to serve our clients well. I think that's really starting to be demonstrated in the results over the last couple of quarters. And as we focus on that, we really are focusing on operating margin and making sure that we are managing our expense base to the top line of the firm and really driving profitable growth across our platform.

Great. Thanks. And then just as a follow-up on expenses and your commentary sequentially, both an increase in revenue and expenses, obviously performance fees will be lower given the seasonality. So just want to clarify, you know, you're still talking sequential comp increase from a dollar perspective in the first quarter and then Also, on the synergies or not the kind of expense savings, just the cadence as we think about the year, are they more back-end loaded in terms of the realization? I get the exit by year-end numbers you gave, but just thinking about, you know, kind of the flow through the year, how we should think about the timing throughout 21. Sure. Sure.

So, yes, let me start with Q1, and there are a lot of puts and takes as you think about it, just given the really strong growth that we saw in the back half of the fourth quarter. That market growth, excluding performance, really did come in the back half of the year, and we started the year with a very high level of AUM, and You see what I see in terms of the markets thus far that we enter with strong revenue growth as that maintains, and we hope that maintains. And then along with that, we've got the associated variable compensation, and that does drive compensation higher, all things being equal for the quarter. And then we have the seasonality of payroll taxes and some pension expenses that occur in the first quarter of the year. Now, those are going to be offset by what we're doing in terms of our targeted cost saves and, of course, the lower compensation that we would have in this quarter, excluding performance fees. The net of all of that, the puts and takes, hard to say exactly given the strong run-up in revenue and the associated expenses, but it's, I would say, flat-ish, and I'm talking total expenses for the quarter. In terms of the cadence of the cost saves, I think it's reasonable to look at those as being spread relatively equally over the year. There may be a little bit of front-end loading into the first half of the year, but relatively equal.

Thank you. And our next question is from Craig Siegenthaler from Credit Suisse.

Thanks. Good morning, everyone.

Morning, Craig.

I wanted to see if you could update us on your M&A priorities and specifically what investment capabilities or distribution efforts would Invesco target or be interested in adding?

Thanks, Greg. So, you know, our perspective, you know, really has not changed. You know, as we look at M&A, it always has to start, has to be strategic. It has to be additive to the business, you know, in areas of client demand where we just really don't have a competitive capability or have the scale to compete. We also very much focus on the culture of the organization. As I pointed out, you know, historically, you have to have cultural alignment to be successful. And, you know, that will continue to be our criteria. And what we don't think makes sense is sort of the roll-ups where there's just a lot of duplication. Clients don't like it. Shareholders don't like it. It's just, you know, really hard. And so we will continue to stay away from that.

Got it. And then just as my follow-up, When we think of potential M&A targets in the various sizes of different businesses, I'm wondering, what are the largest managers by AUM that investment could target, or what is the upper band of the universe of firms that you would consider acquiring?

Look, Greg, it's always facts and circumstances, and I think – You know, size is a factor, but size, you know, the level of complexity is quite different with any organization. So it would really be facts and circumstances as opposed to some hard and fast, you know, hard and fast rule.

Thank you. Our next question is from Glenn Shore from Evercore. Hi.

Thanks very much. So a lot of good things to point to in the quarter. I do want to get a little more color on a lot of the flows coming on the institutional side. Retail seemed in the flat range, so wondering what efforts you can do to spur growth there, and then also if you can focus on the outflows on the alternative side and what the plan is for private markets from here. Thanks, Maureen.

Yes, a couple things. So, you know, again, as you saw, you know, gross flows were, you know, a record high for us. And, you know, taking them region by region, channel by channel, Allison, I think, went through that, you know, pretty clearly. You know, we continue to see momentum in the retail channels. It did slow down today in EMEA, as Allison spoke of. Some of that was Brexit-related sort of risk-off, you know, as it – came down to final negotiations. And quite frankly, there was some look over to the elections in the United States. The U.S. retail channel is really starting to make tremendous change and progress. We're not where we want to be, that's for sure. But, you know, the momentum there, the gross flows are there. We're seeing flows as you look into the year. Outside of ETFs in the traditional asset classes, you know, munis, short-duration fixed income, emerging markets is actually picking up, which is really good news. That's back in the flow. So, you know, cautiously optimistic. Within alternatives, it's largely better on GTR, and that was really the driver this past quarter. Bank loans were also, you know, an area that we're still in outflows. As we look into this year, we'll see what the opportunities are with bank loans in particular. But again, we're obviously very, very focused on any area where we're relatively underperforming.

The only thing I'd add to that on the alternative outflows, the third area we saw some outflows would be in real estate dispositions. And that would be somewhat in the normal course of that business, but it did contribute to the negative flows there. And I'd say one positive point as it relates to our retail flows is if we look at our active U.S. retail net outflows, they were actually $2.6 billion better than the third quarter. Now, they were still negative at $6.7 billion, but that was an improvement of $2.6 billion over the prior quarter, really on the heels of higher growth sales and redemption levels that were significantly lower than what we saw across the industry. So signs of growth and improvement there.

Appreciate all that, Colin. Just maybe one little follow-up on the alternative side. Do you feel like you have the suite of products you want to, Marty, as you said, compete and scale effectively as growth continues there? Or is that one of the areas where you could see Invesco heading to over time, right place, right place, obviously?

Good question. So, look, yeah, we clearly have a leadership position in real estate and bank loans. Private credit has been an area where it's had some good performance. We don't have the scale that we would want. The team is very strong. Turn it into a three-year track record, so that's, you know, an important opportunity for us as we look forward. And, you know, again, we'll just continue to focus on, you know, expanding that business, you know, over this next year.

Thank you. Our next question is from Robert Lee from KBW. Great.

Good morning, Marty. Excuse me. Good morning, Allison. Thanks. Take my questions. I was wondering if maybe, you know, Marty, put a little bit, I guess, a little bit more meat on the bone. You know, if I think of the areas for growth, I mean, you talk about leveraging solutions, client engagement, sales, but can you maybe dig into that a little bit? I mean, is that about leveraging technology? Is it reorganization of sales function or reengineering of it? Kind of, you know, maybe give us a little more feel for, you know, what that is and what's driving it.

Yeah, okay, good. So, look, this has been, you know, in the making for, I don't know, four years now, and so all of a sudden it's the overnight success. You know, our approach has been to have, you know, a very talented, you know, quantitative solutions team that's very strong at asset allocation, you know, building anything from models to, you know, customized solutions for clients and also advisory to clients, whether it be, you know, sort of the you know, the big, you know, corner office suites and the retail channel, but quite frankly, you know, large pension plans around the world. And our approach has been to use our capabilities, whether it be our passive capabilities, our factor capabilities, you know, all the way through alternative capabilities. So it's not a duplicative set of capabilities. skills. It's literally using what we've had in existence. We have built what is a very, very strong analytical tool that we use with clients as a way to help them analyze their portfolios. That's how the engagements happen. And any one of those outcomes can happen simply from an advice engagement to building a customized solution. During that journey as you build it out, how you engage, how you face up with clients, they're clearly modifications to how you do that. And we seem to have found ourselves in a situation where We seem to have the formula right based on the outcomes that we're seeing. This really is the fundamental topic that is driving the change in the industry is that clients are working with fewer money managers. They're expecting more from money managers. If you don't have that breadth of capability and if you don't have the ability to serve clients through these engagements, you're truly disadvantaged. So it is really making a difference for us, and we expect that will be the case, you know, in the years ahead. So hopefully that gives you a little more color.

Yes, thanks. And maybe a quick follow-up just on capital management. Can you update us? I mean, your intent for the foreign contract is pretty much revolvers down to zero. You had reset the dividend. You're building liquidity. And once you get through the April payment, You know, how are you thinking at that point about your capital management priorities? You know, should we think that you may go back to starting to kind of to restart, you know, some dividend growth or re-engage and, you know, share repurchases? You know, how should we think of kind of the priorities kind of post-April foreign payment?

Sure, Rob, I'll take that. So, you know, look, as we think about just sort of where we are now and as I think about rolling forward over the next couple of quarters, you'll note we built our cash balances. I'll also just remind everyone we do have seasonality and comp expense that is seasonality and cash flow related. comp expense in the first quarter. Historically, the company has drawn on the revolver in the first quarter. We've obviously managed our cash balances a little bit higher. There's strong cash flow just given the AUM dynamics that we see right now. I don't know what that will look like exactly as we work through the quarter, and we do have the liability to settle in April. All that said, we're in a very strong position, and I expect us to continue to build Our cash balance is longer term and improved net leverage. And then as I think about just what does that mean for the financial flexibility that we're looking to achieve in returning capital to shareholders, we are committed to that financial flexibility. We do want to invest in the business first and foremost to support future growth in the business. We do remain committed to strengthening our balance sheet, and ultimately we want to be in a position to return excess cash to shareholders. And I do expect that we'll be doing that through a stable and modestly growing dividend and eventually share repurchases. We are coming up soon here on the one year of having made some decisions around that, and we've got the opportunity to think about what our return of capital to shareholders looks like, and we will be working through that in the coming months. I'll say this. We're pleased to be in a very strong position to be having those conversations and look forward to sharing more.

Great. Thanks for taking my questions. Thanks, Rob.

Thank you. And our next question is from Ken Worthington from JP Morgan.

Hey, good morning. Long-term organic asset growth was, I think, 3.9% in the quarter. Can you estimate the organic revenue growth in the quarter? There's lots of cross-currents, inflows, outflows by different products and geographies. So how does it all shake out from an organic revenue perspective? And then maybe I'll seek in my follow-up at the same time. As we think about the shift from active to passive, how is that impacting your margins? So you're cutting costs. Equity markets have appreciated meaningfully. FX is now helping. But if we exclude those and just focus on these inflows and outflows and migration to passive and solutions in your mix, does that end up helping margins? And if so, to what degree is that helping?

Okay, let me take your first one around the long-term organic revenue growth. I mean, I guess that's not a number we would disclose or think about exactly, but if you think about what you're looking at is excluding market, and you surely look at the fee rate associated with that, where interest is, as we point to every quarter, you continue to see a little bit of mixed shift from some of the higher fee products to some of the lower fee products. So that does put pressure on your organic fee growth, no question. Without some market improvement in there, you would see downward pressure there. Our focus then really does shift to profitability. So I'll come to your second question. How do we think about the profitability given those dynamics? Because markets go up and markets go down, and we've seen the pressure that can put on the top line. As we think about the profitability, and I'm not sure I'm going to answer your question exactly. I'm not sure I caught all the different puts and takes you were thinking about there, but I guess I would answer it this way. While the absolute fee rate of some of our lower fee products would be lower, so take an ETF, for example, in the United States, the absolute fee rate there would be about half of a U.S.-based mutual fund. That said, the margin contribution is about the same, very similar, because you have lower servicing costs. And so the margin on both are neutral to positive to our overall firm margins. And it really then becomes a function of volume because while the margin is the same, the absolute operating income yield would be lower. And so you have to drive more volume over a lower fee product to contribute the same dollar of operating income that you would over a higher fee product. And that's really how we think about it. I mean, these are just the facts of our business and the facts of where demand is and making sure we're positioned to capture all of that demand and then making sure we're well positioned to maintain our margins at a minimum, even in markets where we could be under pressure.

Okay. Okay. That's super helpful. But I guess part of the core of this, and maybe you can opine on this for a second, is The organic growth, organic asset growth, was quite good this quarter, like 3.9%. Is that contributing to revenue, or is the underlying mix such that even though it was a solid 3.9% asset growth, is that actually detracting from revenues? Because it happens to be EMEA was out, some alts were out. You've got high fee ETS, but they're not quite high enough, and even 3.9% asset growth isn't enough to boost revenue growth. I guess that's kind of what I was really hoping to get, and I'm still not sure I have a sense of that answer.

In a quarter like this, the 3.9% organic growth is contributing to revenue. Yes, it's contributing to revenue. and then obviously even contributing more as we look at the positive operating leverage that comes from it. But you do get positive contribution. The high-fee, low-fee products are not necessarily always obvious as to what category they're in, and you do see revenue contribution in a quarter like we just had.

Thank you. Our next question is from Bill Katz from Citigroup.

Okay, thank you. Good morning, everybody. So first question is a two-part question for Allison, and then I have a follow-up for Marty. Allison, could you just unpack the compensation dynamics between the fourth quarter and the first quarter and maybe help us understand what might roll off for the performance pieces that were so elevated and maybe the seasonal increase, if you will, just trying to get to sort of like a level of how to think about maybe the exit pacing for the second quarter?

So I'll do my best to unpack that. I mean, if you look at just the performance fees and the compensation expense that's associated with those, it's going to be kind of closer to 50%. So it comes at a higher rate than what you would see in terms of the compensation associated with other elements of revenue. So that's a roll-off. And then in terms of what would be higher, the seasonality of payroll taxes and some benefits. So that's somewhere in the $25 to $30 million range. Then you've got the targeted cost saves that will be in there somewhere. We're not giving specific guidance around that anymore so than what I've already provided. And I think that's probably the best way to think about it. The one thing that is not totally the same is the run-up in the fourth quarter is what we only had that for kind of call it six weeks or so at the end of the quarter. If asset levels hold where they began the year, and we've certainly seen them hold through this, you know, thus far into the month, you can expect that revenue and the associated compensation expense with that would be higher than what you would see in the fourth quarter, and that's just thinking about the typical relationship between revenue and compensation expense.

Okay. And then just you mentioned in terms of building cash, where are you in terms of your excess cash goal?

Our cash balances at the end of the year were $1.4 billion. We have $764 million of that is committed to European regulatory and liquidity requirements.

Our next question is from Patrick Davitt from Autonomous Research.

Hey, good morning. Good morning, Patrick. So, bond flows have obviously been a bright spot for you and others, but concern around kind of taper tantrum or even more significant rate shock has grown over the last few weeks with investors seemingly particularly worried about, you know, how large bond complexes will perform through that. So, through that lens, could you remind us of Invesco's experience in the 2013 tantrum and maybe compare and contrast how you feel Invesco is now positioned for another tantrum or even bigger rate shock from here?

It's an interesting question. 2013 was a long time ago, but... We did fine through it, and I suspect what's really going to matter, I think, in the question is, where are the concentrations within your fixed income, if there's something like that? If you look at the range of fixed income capabilities that we have, it really is quite broad, and not a heavy concentration in an area where long-duration shock could be quite painful to the organization. That's my initial reflection on the question, if that's helpful.

Sure. Thank you.

Our next question comes from Brian Bedell from Deutsche Bank.

Great. Thanks. Good morning, folks. Thanks for taking my questions. The first one is on ESG. mentioned that as a potential increasing contributors 21 if you can talk a little bit about what you think your ESG dedicated AUM is as of now I know it's being integrated you know more thoroughly throughout the organization and then talk about you know how much you think that can potentially contribute to your institutional you know pipeline and whether you see it becoming a bigger factor in the U.S. as well.

Yeah, so look, let me start with the... you know, the bigger question gets specific. You know, ESG is something that we're integrating throughout all our investment management teams. Probably, you know, most advanced through our capabilities, you know, in EMEA, our fixed income teams, real estate. So we're pretty well into it right now. We're not done. But that is something that is, you know, absolutely a top focus of ours as an organization. The reality is if you are not, you know, skilled at managing ESG capabilities even within your traditional asset classes, you know, you really are going to be challenged in EMEA. I'd say in the United States it is moving beyond what was a conversation 12, 18 months ago to being something very, very real, and you're seeing commercial implications of it, and that is the same thing in Asia Pacific. Specifically, using that more narrow approach, The definition that you're asking, we have about $34 billion in ESG AUM, but it's really quite broad. We have about 90 ESG funds or mandates that comes through. And I think the other area where we're seeing outside of institutional is really picking up on a retail basis. And right now, we're the second largest provider of ESG ETFs in the United States. And there's about $9 billion in those assets. So, again, more to go. As I said, we have a developed capability, but it's also developing, and we're really being quite aggressive in the area.

That's super helpful. And then just to follow up on M&A, I guess from two different sides, thanks for the commentary about reiterating your stance on that. From a product perspective, how would you view adding a beta ETF franchise as opposed to a smart beta suite that you have right now? And then just in terms of overall stock price that we've seen for the asset managers in the last few years, We had a peak in early 2018, and very few managers have been able to make it back to that peak. You've tripled your stock price since the lows of last summer, but I guess what's your confidence in being able to get the stock back to that peak early 2018 level organically?

So let me start with the stock price. And, again, I have to be careful that you're working on mine. You know, what drives stock price is, you know, operating outcomes and, you know, business momentum. And as Alice has been talking about today, you're just seeing a markedly different set of outcomes in the last couple quarters. As you look into 2021, again, without getting into forward guidance, you know, it is – many more tailwinds behind the organization than I've seen since 2018. And it's quite broad by region, by channel, and also within various capabilities where we pointed out there's very, very high demand. Now, that said, there's always areas where we have areas for improvement. We'll continue to do that. But, again, the tailwinds are very different than what we've seen since the middle of 2018. So from my perspective, that's going to drive stock price. With regard to adding a beta provider through M&A, again, I'll just answer the question as I had before. It all depends on facts and circumstances. It has to be additive to the organization. It can't be something that is – you know, a net negative through the combination. So, again, it just really depends on the situation.

Thank you. And our next question is from Brennan Hawken from UBS.

Good morning. Thanks for taking my questions. The operating metrics in Great Wall look impressive, and thanks for providing the flow. Definitely a big contributor. But what are the options for your stake with that entity? Marty, I think in the past you've referenced getting your ownership above 49%. But I think your last comment on that was a little over a year ago. So is that still on the table? And what would be the timeframe for that? How should we think about the potential impact of you getting over 50% there?

Yeah, good question. So let me answer that in two parts. So I think what has been differentiated, which is important to recall is even 49%, you know, we uniquely have management control. And, you know, so it is really operated as part of Invesco. So we operate as Invesco in total within, you know, mainland China. And that has helped our, you know, institutional business there for, you know, our traditional, you know, Invesco and also You know, we go through Invesco Great Wall, institutional also, and retail. So, you know, that's really the success is because we've been able to operate as really a single organization there. With regard to the 49%, you know, it is a conversation we continue to have with one on. It's obviously slowed down, I'd say, the numbers. you know, the conversations between U.S. and China were not helpful in advancing that. So we'll just have to see. I really can't put a timeframe on it. You know, as clarity between the relationship between U.S. and China, if it eases, I think that'll be a net positive. Okay. That's fair. Thanks for that. The bottom line, it's not getting in the way of our business success. So I think that's really the bottom line that I want to make.

Well, that is clear from the results, but thanks for that, Marty. Follow-up is a two-parter. So first, you know, you've got some questions so far today and a bunch in the past on M&A and Invesco as a buyer, but, you know, just to be provocative, you know, how should we think about you as a seller? I mean, I know the company is large, and so the list isn't really long of who could buy you but there are some large buyers out there talking pretty vocally about writing checks so curious about how you would think about that and i believe you have had uh there's been at least one board meeting uh since nelson pelts and ed garden joined the board so could you add maybe some color on what kind of impact um that has had on the board dynamic and any incremental details about plans or areas of focus for your new board members. Thanks.

Great. Good questions. It's a good way to get three questions in, not two, but very good. You've done this before. uh let's be very very clear today the board is obviously dedicated to driving success of this uh organization they value uh uh Invesco being an independent uh global asset manager and again the results are uh as I said you can see the momentum and we anticipate uh we're on a good track so that that's the first point and secondly um within any conversation around M&A my comments would be very similar to somebody looking at any money manager. And if it's not strategic, if there's a lot of overlap, if it's inconsistent with what clients want, it is uh very hard to do and so um as you say that that that would get you to a even narrower set of uh options you know if you consider something like that so again the criteria works both ways and i think that's important to understand and then with regard to the board again we've had a very strong board And Nelson, Ed, and Tom Fink from Barings have joined. All three are very, very talented. You know, Tom was former CEO of Barings. Nelson had been around the space for a very long time. They know the space. They've obviously been very outspoken about the opportunities that they see, you know, within the asset management space. And the dynamic's been very good. I mean, you brought three new experts onto the board. And, again, just making sure we as an organization are laser focused on, you know, providing for clients and shareholders. And that with the existing board members, I think if anybody owns a stock, they should feel really good about it.

Thank you. Our next question is from Mike Carrier from Bank of America.

Good morning. Thanks for taking the question. Just one question. Just on growth versus value, on the performance charts and appendix, it looks like growth performance remains strong, but value continues to be on the weaker side. So I just wanted to get your thoughts. If we continue to get a shift towards value, do you have some active products that are performing well that can benefit from flows versus maybe what we see in that chart, which is just the average across the pool categories?

Yeah, so the value-related equity capabilities have been the area of focus for us as an organization. There's no question about it relative to performance. We're absolutely focused on making sure that the portfolios are in a position to And again, I don't want to get too far ahead of myself, but if you looked at that value suite during the fourth quarter, the relative performance was really, really quite strong. And that said, let's be clear, it's a quarter. It's not one year, three years, five years, but it was important to see that within the fourth quarter.

Okay, thank you.

Yeah, okay.

Thank you.

Christ, your line is open.

Yeah, great. Question on operating margin. You guys have a target in mind for this as you execute on your expense savings plan and then related. What do you think is the long-term potential for this business as it relates to operating margin?

Good question. We have not set a targeted operating margin coming out of this. Our focus has really been to think about the continued dynamics that are really driving client demand and thinking about getting our business oriented to capture that demand and make sure we're doing so efficiently. in the most profitable way. And we continue to see how these trends are playing out. You know, what do I think is long-term? I think that's a hard one to answer because I think we continue to see some of these shifts. We remain committed to our active capabilities and we do We believe we will continue to see interest there and demand there, and we could see, you know, even more positive growth coming from that. So as client preferences continue to evolve, we're going to continue to evolve our platform to operate at the highest profitability we can with it.

Okay. Thank you.

Thank you. And our next question is from Chris Shootler from William Blair.

Hi, everybody. Good morning. Marty, what are your thoughts on the potential for direct or custom indexing? And, you know, is this a place that Invesco plans to participate in, and if so, how?

Sorry, I didn't get the question. I apologize.

Oh, sorry about that. Just direct or custom indexing? Is that a place that Invesco plans to participate? Yes.

We have a self-indexing capability, and it actually has been an area of growing success recently. We just turned our attention to it a couple years ago. And where it's really been, it's through the solutions group where we've had the greatest success in building unique indexes for clients. So, again, we look at it as success. a real area of growth to go forward. And what we're really looking for is just really building that deeper relevance for our clients. And it's off to a very strong start.

Okay. And then separately, just on the registered investment advisor space, or just the financial advisor space overall, can you give us an update on Gemstep and Intelliflow and What's been going on at those platforms? How are they growing? And at what point should we expect those to generate some meaningful flows for Resco?

Yeah, it's a good question. There's about $900 billion in assets under administration right now. And the last year has been really focused on pulling together that platform through the last couple acquisitions. And so we're looking for this year to be the beginning of some – some additive growth after a period of just really building out that platform. So, again, we'll have more to say later in the year, but we're hopeful that we're at that spot right now.

And I am showing no further questions. That was time.

Okay. Again, on behalf of Alice and myself, thank you for your time and questions. I appreciate the dialogue, and we'll be in touch. Thank you.

Thank you. This does conclude today's conference. You may disconnect at this time.