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spk09: Welcome to Invesco's third quarter earnings conference call. All participants will be in a listen-only mode until the question and answer session. At that time, to ask a question, press star 1. This call will last one hour. To allow more participants to ask questions, one question and a follow-up can be submitted per participant. As a reminder, today's call is being recorded. Now I'd like to turn the call over to Ged Ketron, Invesco's head of investor relations. Thank you. You may begin.
spk07: Thanks, Operator, and to all of you joining us on Invesco's quarterly earnings call. In addition to our press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website, Invesco.com. This information can be found by going to the investor relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two of the presentation regarding these statements and measures, as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Marty Flanagan, President and Chief Executive Officer, and Allison Dukes, Chief Financial Officer, will present our results this morning. After we complete the presentation, we'll open up the call for questions. Now I'll turn the call over to Marty.
spk10: Great. Thank you, Greg. And those so inclined to follow along, I'll start on slide three on the highlight page. So the challenging industry backdrop continued in the third quarter as most major equity and bond market indices move lower. Investors continue to behave cautiously, seeking risk off trades that impact industry flows as well as the level of and mix of asset center management. The dynamic environment we are in favors money managers that have a broad, diversified range of capabilities that meet client demands in this market. Invesco continues to prove to be one of the few global investment managers that can do that with net flows, momentum, and market leadership positions in areas of high client demand. Despite historic market declines, the firm generated net long-term inflows this quarter in active fixed income, greater China, and our institutional channel. All three of these areas also garnered net long-term inflows on a year-to-date basis, along with our global ETF business and the private market's capabilities. I'll begin with our active fixed income capabilities, which has been a steady source of growth this year and is a testament to the diversity of the investment platform. The asset class generated net inflows of $3.7 billion in the quarter, with strong demand from clients in Asia Pacific. We managed nearly $380 billion of active fixed income across a full spectrum of investment offerings, vehicles, serving retail clients as some of the world's largest institutions. Our greater China business delivered $2.1 billion of net long-term inflows this quarter. Invesco Great Wall, our China joint venture, has fueled our growth, and we continue to successfully launch new products, most notably in fixed income. We've grown consistently in the last several quarters despite the recent difficulties faced by the Chinese economy as a result of our strong local partner and our longstanding reputation as one of the top global investment managers in China. Our leading position in China is the result of many years of investment and hard work. As China and the global economy eventually recover, we expect our growth to accelerate in the fastest growing market in our industry. Our institutional channel generated net inflows for the 12th consecutive quarter with $3.9 billion led by clients in Asia Pacific. The business has proven resilient throughout COVID-19 pandemic and the market downturn we are experiencing in 2022. Growth in the institutional business is a result of investment in our distribution team, the range of capabilities we bring to market, and the build-out of our solutions capability over the last several years, which is increasingly becoming the differentiator for Invesco. Despite volatility and the risk-off sentiment impacting global markets, We continue to win new mandates, and our pipeline remains solid. We look forward to continuing our partnership with many of the world's leading organizations to meet the challenges of this uncertain time. While net inflows into ETFs were relatively flat in the third quarter, demand for ETFs slowed industry-wide. Despite the slowdown, we maintain the leading position in ETFs, and we expect to see growth rebound as market volatility eases. On a year-to-date basis, we have generated strong organic growth and gained market share. We have continued investing in our private markets capability, and we have experienced net outflows in the third quarter. Over the past year, we have generated organic growth against a very volatile market, demonstrating the strength of our alternative platforms. Key to our alternative strategy is our strategic relationship with Mass Mutual, which is meaningful and continues to strengthen. In addition to managing over $10 billion in broker-dealer variable annuity and self-advised assets prior to this decline, We have over $3 billion in other investment relationships with MassMutual. This includes nearly $2.5 billion in commitments to various Invesco alternative strategies. The commitment for MassMutual has been growing over time, and we work on various strategies, including $400 million committed to our INRI product. Having a partner like MassMutual as an investor adds significant reputational impact to our third-party investors. Considering the combined investment we have in seed and co-investment vehicles, which totals $900 million, along with $2.5 billion in commitment for MassMutual and various alternative strategies, is a compelling partnership that enables us to bring products to market more quickly and brings with it the strong reputational backing of a world-class financial institution. While growth continues in key capability areas I mentioned, the firm experienced net long-term outflows of $7.7 billion during the quarter, Equity strategies have been under pressure industry-wide. We're the largest contributor to net outflows, totaling $7.4 billion for the quarter. Client demand for emerging markets remained subdued, and our developing markets fund had $2.8 billion in net outflows in the third quarter. While near-term headwinds persist, we have confidence that the equity global capabilities will be a driver of growth in the future when global markets recover in client demand for this important asset class returns. As we discussed last quarter, significant progress has been made building a stronger balance sheet position to help us weather this market downturn. We ended the quarter with a zero balance on our over and total debt outstanding is at the lowest level in years. Our cash balance increased over a billion dollars and we maintained the flexibility we need to sustain investment in key growth areas. Last quarter, we mentioned that we met our target of $200 million in annual cost savings from our strategic evaluation. As market volatility continues, the need to maintain a disciplined approach to expense management is paramount. We are reexamining all aspects of our discretionary spending relative to the environment we are in, and we will be focusing on near-term hiring on critical growth initiatives. We continue to thoughtfully balance managing through near-term market headwinds while investing for long-term growth. As always, we remain focused on helping clients meet their investment objectives, investing in areas of strategic importance, scaling our operating platform, and efficiently allocating resources. By executing a long-term strategy, I'm confident Invesco will maintain its position as one of the leading firms in our industry while delivering compelling return to shareholders. With that, I'll turn it over to Allison.
spk06: Thank you, Marty, and good morning, everyone. I'll start with slide four. Investment performance continued to be solid in the third quarter with 57% and 62% of actively managed funds in the top half of peers or beating benchmark, a three-year and a five-year basis. These results reflect continued strength in fixed income and balance strategies where we continue to see strong client demand. Performance lags benchmark in certain equity strategies, but we experienced improvement over the past quarter in several key funds. Turning to slide five, we ended third quarter with $1.32 trillion in AUM, a decrease of $67 billion from the end of the second quarter. Global market declines and foreign exchange movements reduced assets under management by $72 billion, partially offset by total net inflows inclusive of $10 billion into money market products. As Marty noted, the firm experienced net long-term outflows of $7.7 billion this quarter amid continued market volatility. Active capabilities accounted for most of the outflows, totaling $7.3 billion for the quarter, while passive net outflows accounted for the remaining $400 million. We sustained organic growth in several of our key capability areas, and our net flow performance remains strong relative to industry peers. A driver of our resilience and relative outperformance has been the institutional channel, which delivered a 12th consecutive quarter of net inflows with $3.9 billion. We generated the strong inflows despite not renewing a $2.5 billion relationship during the quarter. While clients are carefully considering new fundings in these challenging markets, our growth in the institutional channel accelerated from the second quarter, and we continue to see new mandates fund across geographies, asset classes, and the risk-return spectrum. Offsetting growth in institutional were $11.6 billion of net outflows in the retail channel this quarter, primarily in the Americas and EMEA, as investors continue to seek lower risk exposure amid extreme market volatility. Net flows into ETF vehicles were relatively flat in the third quarter, with $300 million in net long-term outflows. Demand for ETFs flowed industry-wide. That driver, coupled with net outflows in commodities and bank loan products, created net flow headwinds for Invesco. Offsetting this were net inflows into fixed income ETFs, the low volatility suite, and our QQQ innovation suite led by the QQQM. Despite the slowdown in the third quarter, we maintain a leading position in ETFs, and we expect to see growth rebound as market volatility eases. On a year-to-date basis, net long-term inflows into our ETF franchise are $23 billion, equivalent to a 12% organic growth rate. We've also gained market share year-to-date. Excluding the QQQs, Invesco captured 4.7% of industry net inflows, higher than our 3.1% share of total industry assets under management. Now turning to slide six, we experienced continued net outflows in the Americas and EMEA, primarily in the retail channel. Growth picked up in Asia Pacific with over $5 billion of net long-term inflows this quarter, led by China and Japan. Our China joint venture contributed $2.1 billion of net inflows, including $1.8 billion from nine new products launched during the quarter. As Marty highlighted, our joint venture remains a key strength, and we expect growth to accelerate there as markets recover. Fixed income capabilities have been a reliable source of growth for Invesco for several years now. To cite one of the most difficult bond markets in years, the third quarter was no exception to that reliability with $6.5 billion of net long-term inflows. The firm has now experienced net inflows into fixed income strategies for 15 straight quarters, a testament to the breadth of our offering as well as our strong investment performance in the asset class. Alternatives experienced net outflows of $5.3 billion in the third quarter. The largest drivers of net outflows were bank loans and commodity ETFs, which have attracted net inflows year-to-date but saw investors pull back in the third quarter. While growth may slow in the near term as investors carefully consider asset allocations, we're confident that our alternatives business will be a strategic driver of growth in the years to come. In fact, over the past volatile year, we've generated a 4% organic growth rate, excluding outflows in our GTR product, demonstrating the strength of our alternative platform. Finally, as Marty noted, we experienced $7.4 billion of net outflows and equity capabilities. Global and developing markets equities continue to account for the majority of net outflows in the asset class, with $4.3 billion in the quarter, including $2.8 billion from our developing markets fund. Moving to slide seven, our institutional pipeline was $23 billion at quarter end, modestly lower than $24 billion last quarter. Client fundings increased in the third quarter as compared to second quarter, and we continue to win new mandates despite the challenging environment. Our pipeline has been running in the mid-$20 to mid-$30 billion range, dating back to late 2019. So while this is at the lower end of the size range, we still see the pipeline as robust given the uncertain market environment. As we noted last quarter, that uncertainty is causing some mandates to take longer to fund, and we would estimate the funding cycle of our pipeline is now in the three to four quarter range on average as compared to two to three quarters previously. In summary, the pipeline continues to reflect a diverse business mix across asset classes, investment styles, and geographies. Our solutions capability enabled 38% of the global institutional pipeline and continues to be a differentiator with clients. Turning to slide eight, significant declines in global markets this year have put downward pressure on our revenue base. Net revenue of $1.11 billion in the third quarter was 5% lower than the prior quarter and 17% lower than third quarter of 2021, primarily due to declines in active asset levels. Total adjusted operating expenses were $741 million, a decrease of $21 million from last quarter, and $31 million as compared to the third quarter of 2021. The drivers of the decline from last quarter were G&A expenses, which were $11 million lower than last quarter, and marketing expenses, which declined by $7 million, consistent with the seasonally lower activity we often see in third quarter, as well as the decline in discretionary spending. We also saw a slight decline in employee compensation expenses. Drivers of the decline from the third quarter of 21 were compensation expenses and property office and technology expenses, despite the $3 million in duplicate rent for our new Atlanta headquarters that I mentioned last quarter. Embedded in our third quarter 2022 spending is continued investment and growth capabilities, as well as several transformational projects that will enhance the effectiveness of our corporate functions and enable us to reap the benefits of scale as markets recover. Current projects include a technology-enabled human resources transformation, moving core finance systems to the cloud, and the foundational elements of the Alpha NextGen program. The savings we achieved in our strategic evaluation and the continued discipline we have installed have enabled us to make these strategic investments without meaningfully growing technology expenses. Compensation expenses declined $45 million, or 9%, from the third quarter of 2021. Given the pace and magnitude of the market decline, it will take some time for certain elements of our expense base to adjust with lower revenue. We manage variable compensation to a full year outcome in line with company performance and competitive industry practices. This can cause quarter to quarter fluctuations in compensation expense. Historically, our compensation to net revenue ratio has been in the 38 to 42% range. In periods of revenue growth, the ratio tends to move towards the lower end of this range similar to 2021 when the ratio declined to 38%. During periods of revenue decline, as we are experiencing this year, the ratio tends to move towards the upper end of this range. Year to date, our compensation to net revenue ratio is 40%. If assets remain at quarter end levels, the full year ratio would continue to trend towards the upper end of the range, driven by the lower net revenue base. Given the uncertain market environment, we are diligently managing expenses and evaluating all aspects of discretionary spending. We continue to invest in our key growth capabilities, and we're focusing near-term hiring in those areas. We will defer hiring for certain other positions as we focus our efforts on critical initiatives. As always, we remain focused on meeting the diverse needs of our clients and investing where it's necessary to do so. Finally, we are proceeding with investments in foundational technology projects that will enable growth and support future scale in our operations. Balancing these objectives will allow Invesco to provide rewarding careers for our employees, position our business for future growth, and prudently manage our expense base. Moving to slide nine, adjusted operating income was $369 million in the third quarter, $43 million lower than the second quarter due to lower net revenue driven by market declines, partially offset by lower operating expenses. Adjusted operating margin was 33.3% as compared to 35.1% in the second quarter and an all-time high of 42.1% in the third quarter of last year. Earnings per share was 34 cents as compared to 39 cents last quarter, driven by the same factors that impacted adjusted operating income. The effective tax rate was 28.7% in the third quarter due to a change in the mix of income across tax jurisdictions, including non-operating losses, in lower tax entities. We estimate our non-GAAP effective tax rate to be between 26 and 28 percent for the fourth quarter of 2022. The actual effective rate may vary from this estimate due to the impact of non-recurring items on pre-tax income and discrete tax items. I'll conclude with a few points on slide 10. Maintaining balance sheet strength continues to be a top priority, particularly as we navigate this uncertain environment. Total debt was managed lower in the third quarter to $1.5 billion as of September 30th, and we ended the quarter with a zero balance on our revolving credit facility. Our cash and cash equivalents balance is over $1 billion, an increase of nearly $100 million from June 30th. Our leverage ratio, as defined under our credit facility agreement, was 0.7 times at the end of the third quarter, in line with last quarter. Our leverage ratio improved from 0.9 times in the third quarter of last year, despite lower EBITDA driven by the significant market declines. If preferred stock is included, our third quarter leverage ratio was 2.8 times. In this challenging environment, Invesco is strategically aligned to areas of high client demand, and we have the financial flexibility that will allow us to navigate current volatility while continuing to invest in the future. We will be extremely thoughtful in managing expenses through the near term so that we can rapidly scale when recovery takes place. We maintain our unwavering commitment to serving the needs of our clients in any market and delivering long-term value for our shareholders. And with that, I'll ask the operator to open up the line to Q&A.
spk09: Thank you. As a reminder, if you'd like to ask a question, please press star then 1. Remember to unmute your phone and record your name clearly when prompted. If you'd like to withdraw that question, you may press star 2. Now, first question comes from Brian Bedell with Deutsche Bank. Your line is open.
spk12: Great. Thanks. Good morning, folks. Maybe if I could just start off on the expense side, Allison. You mentioned a couple of things on the initiatives that you're working on for the transformational projects. Any sense of sort of how much that might lower the expense base going forward? And then also related to that, on the comp to revenue issue, 42%. Should we think of that as a potential quarterly ceiling, or as you indicated, it can be lagged and therefore can go over 42 in a really bad market, and then you seek to calibrate that soon thereafter?
spk06: Sure. Good morning, Brian. Let me take the first one. So on the transformational projects, not ready to provide any sort of estimates on what that could do in terms of lowering expenses. The way I would think about it, and I wouldn't even say not ready, I'm not sure it's just the right way to think about why we would be doing it. A lot of this is to avoid, I would say, future costs, and it's also to create scalability. So some of the things we're doing in these enterprise systems with our financial systems, with our human capital systems, moving our data into the cloud, It will reduce tech debt over the future. It will also give us the opportunity to scale as we just move more data into the cloud and just have a more nimble infrastructure and continue to globalize the corporate functions that support our large operation. We've talked about Alpha Next Gen in the past. We'll talk about it a whole lot more, I'm sure, in the future. Those are some early foundational investments that we're making in the middle and back office that will streamline and harmonize our operations and create efficiencies over time, but not necessarily from a P&L perspective that you'll see just yet. There's quite a bit of investment that's going in along the way. On the comp to revenue side, our range is typically 38% to 42% on a full year, and we really don't look at it quarter to quarter because the quarter to quarter fluctuations are always there just as revenue fluctuates, but also as you have seasonality and things like payroll taxes and FICA. So we really look at it and manage to a full year basis. We're on an annual comp cycle. And year to date, through the third quarter, we were at about 40%. So as we think about what could the full year look like, I'd say it'll be on the higher end of that range, not the lower end. And as we noted last year, full year 21, we were closer to 38%. That makes sense.
spk12: Hopefully that helps. Yeah, definitely. And then maybe if I can ask you about fixed income. Again, that's been a strength, as you pointed out. As we now are in a much higher yield environment, just coming into fourth quarter versus even just the third quarter, maybe if you can talk about both on the retail demand side, if you're seeing that work into the channels yet, if you're seeing the sales pick up on retail funds, and then also on the institutional side, if you can comment on to what extent you think pension plans may reallocate to fixed income and how you're positioned there in Could we see this really offset equity outflows near term?
spk10: It's a great question. Look, where rates are going, you've seen what's happened. Everybody's shortened, gone very conservative. You've not seen that move yet, but the conversations are brought in very, very much. Look at the full spectrum of fixed income with the rates where they are making fixed income, longer-dated capabilities much more attractive. That's on the institutional side. As you know, institutions tend to be much less volatile, but they will make tactical allocations accordingly. On the retail side, again, I'd say it's too early, but all indications are I would anticipate a broader range of investments into fixed income because of where the yields are moving.
spk09: Thank you. Thank you. The next question comes from Brendan Hawkin with UBS. Your line is open.
spk11: Good morning. Thanks for taking my questions. I was hoping to follow up on the expense outlook, Alison. You flagged a bunch of investments that you're making, including laying the groundwork for Alpha. So as we're thinking about entering into 2023, I know you're probably in the middle of the budgeting process now. So it's an early asking for an early read here, but should we continue to expect that there will be pressure to make investments and continue to like, you know, gross initiatives like alpha, which may be ultimately lead to some efficiencies, but could could result in expenses being maybe a little bit more stubborn and inflexible in the near term. Is that, Is that fair for thinking about 23, or is it too pessimistic?
spk06: It's a great question, and it's a hard one to answer exactly. I'm certainly not going to give firm expense guidance just yet. We are deep into budgeting season, but let's just talk maybe generally about how we think about the expense base and what we can manage and what we can't manage. There is some variability in our expenses. As you know, we've always guided to that. About a third of our expenses are variable. It's You see it primarily on the compensation side, and you're certainly seeing that this year. I think I'd point to a couple of things. One, despite this really challenging environment, we are managing to keep expenses kind of flat to down on most line items relative to last year. And that's because we are continuing to invest in a lot of these growth areas that we don't think it makes sense to pause on. It just simply wouldn't be good business for us to pause on key foundational transformational projects that really puts the firm in a position to grow and to scale and to be where we need to be to support our clients. So as I think about how stubborn or not our expenses, I think a couple of things. I'd reiterate the comments I made around discretionary expenses. There are elements of discretionary expenses that we're looking at very rigorously. We're being very thoughtful about hiring. We're really focused on our key growth areas and managing our hiring against that. You've seen us, I think, do some pretty good work on facilities and some of the fixed costs that we have that we think we can continue to unlock and reallocate into areas of more transformational growth, and we'll continue to make progress against some of those areas as well. I don't feel like these investments hamstring our ability. I really don't. I think it actually puts us in a position to scale and recover faster when markets do turn, and they will.
spk10: Yeah, Brendan, Allison's exact. We are looking at everything you would imagine and hope we would do, and it's responsible for us to do it. And as you say, in the short term, the more discretionary things, you can make some progress. It's not going to change anybody's lives, but it's exactly the very responsible thing to do. And we're just very focused on building scale within the organization. that snapback will be very, very strong. Again, I would point you to what we've done historically. We continue to be very focused on putting the firm in a position of great success.
spk11: Sure. I recognize its balance, which is how I tried to position the question. Okay. Transitioning to revenue, fee rate was under more pressure than I had actually expected. Should we expect that fee rate to continue? Maybe could you give us an idea about what the exit rate or the October rate kind of looked like? Is that showing continued pressure just given the general profile of markets through the quarter? And just as sort of a more nitty item, the other revenue has been under some pressure. I know there's some transactional volume there. Is this sort of a a reasonable four to think about for the other revenue, or could this continue to come down?
spk06: Sure. Thanks, Brennan. Those are good questions. Let me say on the fee rate one, as you know, we really don't manage the fee rate. And the net revenue yield in particular is just an output of a whole lot of different factors. And so maybe thinking about what drove the net revenue yield declines in the quarter and then extrapolating that to what could that mean for the future. The biggest pressure on that revenue yield is the declining equity markets, and in particular, the declines in emerging markets. Developing markets, global equities, emerging markets, they are a meaningful part of our portfolio. And so the market declines in those particular asset classes further exacerbate the pressure on our fee rate. We also see just the asset mix shift and the demand that we experience for money markets and the risk-off exposure. So while we benefited on one side of the ledger from the growth and some of those risk-off exposures, certainly we've got a real pressure in the asset mix shift at the same time. You also saw a decrease in the other revenue line item, and I'll get to that in a second that you asked about. And so those are all the downward pressures. What could that mean for the future? Look, there are a few things going on. One, the ending assets under management was quite a bit lower, about $95 billion lower than the average AUM for the quarter. So that's going to continue to put pressure on revenue, which will put pressure on just the overall fee rate yield that comes out of that. If we expect to continue growth in passive, which we do, they come at lower fees. And at the moment, given the geopolitical tensions, I would expect continued pressure and some of those emerging markets, developing markets categories as well. So this does put pressure on the overall yield there. All that is dependent upon where assets were at 930. And of course, all that subject to change as the markets do what the markets will do over the balance of this quarter. Other revenue, as you noted, it was about $9 million lower than the prior quarter, and that was really due to lower transaction fees, in particular in global real estate and some front-end mutual fund fees. So it's a function of activity levels. I don't think it's a new normal necessarily, but if you think about just the activity levels and just really the pretty outstanding volatility we experienced inside of the third quarter, it did put pressure on that category. That will recover as activity levels recover.
spk02: Thanks very much. Thank you. Our next question comes from Glenn Shore with Evercore.
spk09: Your line is open.
spk01: Thanks. I appreciate it. I'm curious about your comments on the retail side. Obviously, in an environment like this, retail is going to outflow. That's unfortunate, but it's going to happen every time. But as they transition towards lower risk exposures, as they try to capture yield, I'm curious on what you can specifically do to capture that demand. Your presence, obviously, is huge in the channel. Your product mix is great. There's rising demand on fixed income ETFs. I'm just curious, what can be done on the education front? How can you hold the channel's hand, so to speak, and do a better job of capturing some of those outflows?
spk10: You're exactly right, Clay. We're uniquely positioned here, right? So with the range of capabilities that we have, There's no discussion unless you start there. But secondly, just the capabilities on the distribution side, things like investment consulting in the field, working with financial consultants, all the financial advisors in the marketplace, already the conversations are positioning for when do you get back in the market, whether it be equities or fixed income. And those are real conversations. I'm sure it's happening everywhere. But we have the ability with the capabilities we have, but also the coverage we have in the market But also with our marketing digital capabilities, we're informed in the engagements that we have. So from my perspective, when is it turning? Is it one quarter, two quarters? I don't think you're that far out. You're probably closer to the bottom than the top. And with that, you'll get reallocation into a broader range of capabilities.
spk01: So part of ongoing processes, I guess.
spk10: Yes. Yes.
spk01: So I heard the comments on what outflowed on the alternative side, again, product of the environment, but can we focus a little more on your private market side and maybe just refresh what investments are being made now and where you're seeing client demand and if that could be an offset going forward as well?
spk10: Yeah, so real estate continues to be a very dominant asset class for us and also a you know, parts of, you know, um, within credit bank loans and CLOs about more challenged in the short term where people are nervous about, um, you know, recession and, you know, impact on credit. But that said, there are two areas where opposition continually see growth and it's an area of, you know, future focus very much. Uh, the other very specific area that we've been talking about is getting, um, uh, some alternative capabilities into the wealth management channels. Uh, we're continuing to be very focused on that. Um, And, you know, from my perspective, you know, 2023 should be a year when we start to see greater traction, you know, injury leading the way. And there'll be something behind that on the debt side. So that is another area of absolute focus for us as an organization.
spk01: Okay. Thanks, Marty.
spk09: Thanks, Glenn. Thank you. Our next question comes from Ken Worthington with J.P. Morgan. Your line is open.
spk04: Hi. Good morning. Thank you for taking the questions. Maybe to further the discussion on expenses, looking to think about how we can think about the concept of scalability better here. Maybe starting, what cost line items do you think are going to be most impacted by improved scalability and maybe which are not? I would assume it's G&A and tech that are really going to see the scale benefits. And I think Invesco maybe historically thought about margins on incremental revenue of somewhere 50%, 60%, maybe 50%, 60% plus. Do the investments that you're making in scalability take margins on incremental revenues to levels that are different than what we've seen in the past? And is it like a little bit or is it maybe meaningfully better given what you're doing?
spk06: Let me start with the first one around where should we see the most scalability, and I think you're right. It would be the GNA and tech line items, but I'd also point to marketing. Marketing is a pretty scalable line item as well, and one that You know, it's also a little bit you can pull back on some of the discretionary expenses in marketing, but we're not going to pull back on travel and being in front of our clients at precisely the time when they need to see us and we need to be in front of them and we need to be actively talking to them. And so, you know, I do think as I think about what that looks like on the upside, it doesn't budge quite as much on the way up. And there's some benefits there as well. In terms of, and maybe I'll let Marty chime in on sort of relative to the past, since mine's only a couple of years back, but I would say in terms of the expenses or the investments we're making in some of these technology projects, does it give us even more scalability? I think perhaps. It's really necessary. You think about where the firm's been and where we've come from. We closed the Oppenheimer acquisition just on the eve of COVID. And so you started to see, you saw a material increase in the size of the firm just on the eve of what has now been a few rather volatile, challenging years. But what we are doing in terms of just further integrating all the various aspects of the firm and creating a unified system and platform across many different parts of the overall enterprise framework all of this will allow us to just grow and scale from here I think in a more seamless fashion because you just don't have the redundancy and systems that are very difficult when the data is not in the cloud and so it gives us flexibility to adjust our platform and to serve our clients in ways that would have just been much more difficult said differently without doing this we'd be spending a whole lot more to make any nimble shifts in the environment yeah let me add so if you look at
spk10: not too long ago when our profit margin was over 40%, is that a cap? The answer is no. So if we had the same level of assets under management when we complete this work, we will be north of that operating margin. And how does that happen? This might be too much information, but literally application rationalization that is happening pretty holistically because of a new set of technologies that really didn't exist in the past that can allow that to happen. Also, just looking at what clients are looking for in front to back, the breadth of capabilities. If it's inconsistent with where client demand is, we're looking from all the front to back support structures around that. That's where you get the scalability. Those are the efforts that we're on right now. It's hard to explain in a simple line item because they're holistic in how we look at things. That has been, you know, scalability within our capabilities to meet client demand is really the headline, and there's a lot of detail underneath it.
spk04: Great. Thank you. And then maybe just following up, UK pensions, to what extent did you see stress in the UK pension market? Did that flow through to impact Invesco, either in 3Q or, as we began, 4Q? And given that Invesco has been building out fixed income and solutions globally for Um, might there be a change to the UK LDI pension market? And does that make for an opportunity for Invesco?
spk10: Yeah. So the good news is, uh, you know, we did not have any LDI exposure. So, um, so no immediate impact. I do think, you know, uh, post, uh, you know, this event, uh, it will definitely open up opportunities for other managers and capabilities like we have now. Is that next quarter? Likely not. But you know, when you look through next year, I suspect there's gonna be some real opportunities. Thank you.
spk06: I will say, I do think part of what we experienced there, you did see clients looking to meet some of these obligations, and so they were liquidating some of their positions, and we were on the receiving end of some of that. So we didn't see nothing there in terms of the overall impact, and that's just kind of part of the overall, I'd say, market stress and volatility we've been managing through.
spk10: Actually, that's a good point. So it's analogous, Kent, to... when there's pressure on money funds during the financial crisis. If you had a very liquid money fund portfolio, you became a source of funds. And that's a little bit what happened with some of these LDI situations.
spk04: Okay, great. Thank you.
spk09: Thank you. Our next question comes from Dan Fanning with Jefferies. Your line is open.
spk08: Thanks. Good morning. I wanted to follow up on fixed income and specifically active fixed income domestically. Can you talk about which products and capabilities you have that are either, you know, with good performance or already kind of at scale that could benefit from what is the potential for, you know, kind of larger flows? And I guess if they're separate between institutional and retail in terms of the products, that would be helpful also.
spk10: I'll make a couple of comments and Allison can chime in. So, It's a broad suite of capabilities, and it's really highly performing across the FIXUN team. So that's really good news. And not all is available in retail and institutional simply because of demand within that marketplace. So we have the long-term record stability of team. in demand coming. So we look at it as just a real opportunity for us over the next few quarters.
spk08: So I guess is that core, core plus? I guess I don't know what the funds are. Could you talk about what the actual products are?
spk10: Anything from short-duration core, core plus, bank loans, credit. It's the whole suite, Dan.
spk06: Unis.
spk10: Unis is a very strong capability. Okay. That was Outflow's last quarter.
spk08: You would characterize them all at scale already?
spk10: Not every single fixed income asset class is not at scale, which we've talked about. So, you know, direct lending is not at scale. Some of the distressed credit is not at scale. So, we have a number of them at scale with performance trackers and talented managers.
spk08: Okay, thanks. And then just to follow up on the China, there are several product launches in the quarter, and that seems to be kind of a continuing trend. Is there a backlog as we think about kind of launches here into the fourth quarter, into next year that you can quantify or talk to?
spk06: Hard to quantify that exactly. I mean, yes, just to reiterate, we saw about $2.1 billion in inflows into our China JV, and of that, about a billion eight came from new product launches. Those were mostly in fixed income asset classes, which it makes sense in this environment. We do tend to see a lot of fixed income and balanced interest, less so equity at the moment, though historically we've certainly benefited from some of the equity funds that have been launched in more risk-on environments. It is just a function, a dynamic of that market. Hard to point to a backlog, but I guess I would say it differently and say this is kind of the way that market functions, and I don't expect that to change in the near term. I do think the overall $2.1 billion just really, again, speaks to the resiliency of that market and the fact that we invested quite early ahead of many of our competitors in that market and were really well positioned to capture some of the flows there in both challenging markets and better markets. This has certainly been a more challenging year for China, though. Thank you.
spk02: Thank you.
spk09: Our next question comes from Bill Katz with Credit Suisse. Your line is open.
spk00: Okay, thank you very much for taking the questions this morning. Just three for me, just to maybe just round out the discussion. Can you tell me, when you say you think fixed income picks up, and that certainly seems logical, where do you expect that allocation to rotate from? Is it cash, equity, private market, alternative allocations? I know you obviously have a very broad client franchise, but what generally can you say in terms of where the money might come from?
spk10: Bill, it's a great question. The reality is every client is different. But what I would say just as a general comment, if you look in wealth management platforms, in particular cash levels, and you'll know this and everybody on the phone will know this, cash levels are very, very high. And I think allocations and equities and fixed income, the first port of call is going to be cash levels. I can't speak for how the other movements would happen. Again, as you know, every individual and every institution is very different in their profile. But I'd start with very high cash levels as a funding source.
spk00: Okay, that's what I figured. Second question is, just going back to China, you certainly have very impressive new product opportunity. Could you step back a little bit and where do you think you are in terms of the maturation of the platform itself? how many more incremental products do you think you can roll out? And then is it, or is it, and or is it a function of sort of scaling those products? And I think the average is about 200 million and what you sort of said this morning, but how big can these things get? Is there a, is there a proxy? Is it us as a marketplace? Is it Canada? How should we be thinking about maybe the, the end look for that platform?
spk10: Yeah, it's a, it's a really good question, Bill. And it is a different market than the United States. And just a couple of comments. It's extremely competitive. Um, and, um, you know, performance matters. There's a lot of alpha there. So the vast majority of all the capabilities in the marketplace are active, whether it be, you know, equity or fixed income, uh, balanced products that are also, um, but it, it has, um, a profile of fun launches, which is not a typical, you know, Korea was the same way for a good period of time. I think it will mature to, you know, ongoing investments into. the products in the marketplace, but that's going to come with time. And just the sheer size of the market, you're going to realize at some point they're going to be very, very, very big portfolios. And I'd imagine starting to move away from product launches as the primary element of raising asset center management. But Bill, that's probably... you know, two, three, four years before it starts to happen.
spk00: Okay, and thanks for the patience answering all the questions. The final one for me we haven't talked about in a while. M&A, just given what's going on between the sort of the rolling over of sort of the reduction and sort of trailing 12 with EBITDA, improvement in the leverage ratio, but nonetheless still, you know, pretty fat leverage ratios when it concludes preferred. How are you thinking about reinvestment back into the business versus any kind of acquisition, and within that acquisition, where are you most focused at this point in time?
spk10: Yeah, good question. The story has not changed. Every next dollar is reinvestment back in the company right now, and if you look at what we've just talked about today, the key capabilities that we highlight, we see great opportunities very much in those areas, and that is where our focus is. We don't see a whole lot of gaps in our capabilities. Back to the conversation Dan had mentioned, are we at scale in all the areas that we want to be? No. If we don't have the capability and it would take too long for us to build it, that's when we'd go to the market. Our view would be consistent of it has to be strategic, it has to be something client demand, it has to be something that's complementary, little overlap with the organization. financials have to work and there's gotta be cultural alignment. So that's just not changed. This is how we think about it. Um, you know, that might lead you to, you know, more in, um, you know, bolt on acquisitions and sort of the alternative space. But right now, um, I don't see a whole lot moving. Um, as best we can tell, um, public market prices versus, um, um, the view of, uh, a seller are, are not aligned right now. So, um, But it's not a focus. It's the focus on the organization.
spk06: I would just chime in on that. I would say there's nothing about our balance sheet or our share price that's changing our focus. Our focus continues to be that the greatest investment we have is to continue to grow organically and invest in ourselves. We've got a really strong, well-diversified platform today. I think you see the benefits of that. You saw it in these last few quarters where our flows continue to outperform the broader peer set. We continue to have real pockets of strength, pockets of resiliency, and it's a testament to the diversified platform that we have. And so as we think about the opportunities we have from here, we see an opportunity to continue to invest in ourselves and grow these capabilities in a much more efficient, shareholder-friendly way than anything we could ever do inorganically. And at the same time, we are making progress on the balance sheet and we are returning capital to shareholders. I think we've made really significant progress on the balance sheet over the last year, certainly over the last two years. You saw it even in this quarter as we grow cash and continue to manage debt levels down with every sort of opportunity we have. And at the same time, we're returning capital to shareholders and have done so pretty thoughtfully over the course of this year, despite the challenging environment. Yes, we're more constrained than we would like to be given a really challenging industry backdrop, but the diversified platform, the opportunities we have to continue to invest in ourselves and grow some of these key growth capability areas, we're pretty bullish on the opportunities we have within our own portfolio.
spk00: Thank you so much for taking all the questions today.
spk09: Thanks, Bill.
spk06: Thanks, Bill.
spk09: Thank you. Our next question comes from Michael Cypress.
spk05: Hey, good morning. Thanks for taking the question. Wanted to circle back on the private market alternatives. I was hoping you might be able to update us on the progress of the private REIT product that you guys have, just in terms of the traction getting on platforms. And then in private credit, you know, hear the comments around maybe not at the scale where you'd like it to be, but maybe you could talk about some of the steps you're taking to more meaningfully scale your private credit initiatives.
spk10: Yeah, great. Thank you. So the in-ring capability right now, it's about $1.1 billion. We continue to onboard it. Are we where we want to be with all the onboarding? No, we're not done. We'll continue to make progress. It just continues. As I said last call, it's a slog to get through it. We will, though, and that's why we think it's a 2023 topic for increasing flows beyond the level that it's at right now. The performance is very, very strong. and behind that, there's another capability that we hope to get into market next year, more income-type credit capability. With regard to private credit, it starts with a very, very good team, and they're seasoned. They have a very good track record. They'll be back in the market again, raising money, and It's performance, track record, and team, and that's what we are right now. And with dislocations, we think of greater opportunities for them. And just holistically, what we're doing around the private markets platform is just ensuring we have all the resources that we need to compete to make a difference from the investment teams all the way through operational effectiveness and everything else you would hope that we would be doing. We look at it as a real opportunity for us.
spk05: Great, thanks. And just to follow the question, maybe on the balance sheet in capital management, so you paid down the credit facility in the quarter. I guess just, you know, what are the opportunities from here that there might be for incremental debt reduction before I think the next maturity is in 2024? And then more broadly, how are you thinking about capital management priorities into 2023? And what do you need to see before buybacks could resume?
spk06: Michelle Woodbridge- Sure thanks Mike so in terms of the depth from here you're correct the next maturity is at the very beginning of 2024 and in terms of. Michelle Woodbridge- You know how are we thinking about it look now it's it's a pretty attractive slug of capital just given where rates are moving, we certainly. Michelle Woodbridge- always have the opportunity to redeem something early you saw us do that with the 22 earlier this year. Um, not sure what we'll do just yet, but we're always thinking about what that could look like in the trade off as we continue to grow cash. Uh, we have made substantial progress, uh, against, uh, our, our debt this year. And so now we're in a position where we're rebuilding cash. You saw cash grow by a hundred million dollars, um, with the, with the revolver pay down at the same time this quarter. Uh, and so as I think about it, uh, you know, more than anything, I'd say we're thinking about it from a net leverage standpoint at the moment, as we look to build cash, particularly in a volatile environment. As we think about returning capital to shareholders, first and foremost, we're committed to our common dividend and a steady increase in that common dividend, and we start there. And then we think about excess capital as the form of returning capital to shareholders in terms of share repurchases. So should we get to a point where we make the balance sheet progress we want to make and we've got excess cash, then we can think about share repurchases. And we think about that sort of year to year. Certainly, it's a difficult environment to be thinking about it at the moment as we are looking to continue to make progress against the balance sheet and make sure we weather a rather volatile market environment, but we will return to that at some point.
spk02: Great. Thank you. Thank you.
spk09: Our next question comes from Craig Siegenthaler with Bank of America. Your line is open.
spk03: Thanks. Good morning, everyone. I wanted to start with a longer-term question on China. You used to highlight a McKinsey target for 40% of global industry net flows from China over the coming years. Currently, do you think China can drive about half of flows or 40% of flows? And also any perspective on the mix between domestic and then foreign players like your great wall of JV would be helpful too.
spk10: Thank you. Yeah, look, I do, right? It's, you know, the fundamentals are, strong second-largest economy in the world. They continue to develop capital markets. They must to support the growth that they have. They continue to develop a retirement system, which they must do, again, for the population. Even with the geopolitical topics, they are absolutely committed to continuing to open up the capital markets for organizations such as Invesco. And as I said a few minutes ago, know everybody joining just has to know it's a very competitive market it's going to continue to evolve but there's no question in my mind that you know when the economy strengthens you're going to see flow levels increase to you know you know for sure back to the levels that we saw before and they're going to grow from there so we look at over the next three to five years is a very very important market with regard to what was the question about the competitors
spk03: Also, the mix between domestic businesses there and then also the foreign managers and foreign JVs like your Great Wall Joint Venture.
spk10: Yeah. So, again, we can point to – we have something, I believe, on our website. Andrew Lowe went through. There's very specific information in there.
spk06: There's a presentation from last summer that has some disclosures, yes.
spk10: So we're looking at that. But from a local joint venture, you know, we're – at the top of the pack, which is great. Again, takes us up out with all the market movements. I think we're the 12th largest local money manager, excuse me, the 12th largest money manager in the wealth management channel in China. Now that could change now because of levels of asset management. So that was the last picture that I saw taken. So it's really competitive against the local managers. And as you know, there are a number of, form money managers. I think the very important thing that we point to that has differentiated us and allow us to have the success that we've had is we've had management control with joint ventures from the beginning. And many of the other joint ventures that form money manager had an ownership stake but did not have management control. And that has really been the big movement where when you see our competitors making the point that they've taken a majority stake in their joint venture, what that really means is a movement towards them managing the joint venture. So we've seen that all the last number of years. So we like the position we're in. We're not naive to the competition levels, but the opportunity is a material one.
spk03: Thank you, Marty. And just for my follow-up, I have a more short-term question, probably for Allison. But other revenues declined by $9 million sequentially on an adjusted basis. I think most of that was probably real estate transaction fees. But Can you talk about the drivers that decline? And then just given sort of a muted backdrop, I wanted your perspective on if $48 million is roughly a floor, given that 3Q was a bad backdrop and those fees probably were low, or do you think there could be incremental downside risk from 3Q levels into 4Q or 1Q?
spk06: So it was both real estate but also front-end mutual fund fees. So it was really kind of transaction volume driven is the way to think about it. No, I don't necessarily think what, I guess what I would say is it's transaction volume driven. Um, it doesn't necessarily mean that it continues to decline from here. I don't think we're setting some new level, very volatile court quarter, given the risk off environment that we have been in, obviously impacted, um, market levels, but also activity levels and transaction levels, as you saw, it was pretty holistically challenging. So. Really just a function of the quarter we're in, not necessarily a harbinger of where we will be from here.
spk03: Thank you very much. Thank you, Kirk.
spk09: Thank you. Our last question comes from Patrick Davitt with Autonomous Research. Your line is open.
spk13: Hey, good morning, guys. Most of my questions have been answered, but just a quick follow-up on the tax guidance. Is it fair to assume that the 4Q guidance of 26 to 28 is kind of a good run rate for the quarters beyond?
spk06: Very hard to say. It really is a function of where the market will be and the mix of jurisdictions and where our income will be across those jurisdictions. We do expect, as we said in the fourth quarter, for it to be 26 to 28. I can't say just yet as to whether or not that's where it'll be in 2023. It's possible it could be a little bit lower, but it's very much dependent on whether or not we start to see a market recovery. In particular, you see a real impact on our non-operating losses, which are, or our non-operating gains, those are booked in some lower tax jurisdictions. And so when there are gains, it's quite beneficial to us at a lower tax rate, but when there are losses, we don't get the benefit of those losses. And so Just hard to predict, but we'll give more guidance on first quarter when we get to January.
spk02: Thank you.
spk10: Okay. Look, thank you, everybody. Appreciate the engagement, the questions, always very helpful, and we'll be speaking with you soon. Have a good rest of the day.
spk06: Thank you.
spk09: Thank you. That concludes today's conference. You may all disconnect at this time.
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