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spk00: Welcome to Invesco's fourth 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 one. 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 would like to turn the call over to Greg Ketron, Invesco's head of investor relations.
spk08: Thanks, Operator, and to all of you joining us on Invesco's quarterly earnings call. In addition to today's 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 reconciliation of the gap. 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 Alison Dukes, Chief Financial Officer, will present our results this morning. After we complete the presentation, we will open the call up for questions. Now I'll turn the call over to Marty.
spk09: Thank you, Greg, and thanks, everybody, for joining us. And I'm going to start on slide three if you're following along, which is the fourth quarter highlights. The fourth quarter concluded a year of significant headwinds in volatility in global markets. Seemingly, no geography or asset class was immune to the S&P. Experienced the worst year since 2008. NASDAQ composite declined over 30%. MSCI emerging markets index sank nearly 20%. In bond markets, you know, typically the safe haven when equities suffer. declined significantly due to the rise in interest rates, with the global aggregate bond index declining by more than 15% for the year. This resulted in the worst markets we've seen in decades. Rising COVID infections in China and tax loss harvesting in developed economies as the year came to a close made for a challenging organic growth dynamic in our industry. Despite industry challenges in 2022, we're pleased to see key capabilities in areas of high client demand continued to deliver organic growth, offsetting net outflows and capabilities that experienced redemption pressure as investors expressed a preference for risk-off assets. Key capabilities that delivered net long-term inflows for the year included ETFs, fixed income, greater China, and institutional channel. The firm's ability to deliver these outcomes demonstrates the strength and resilience of our Diversite platform in the face of extraordinary market headwinds. Although markets showed signs of stabilization in the fourth quarter, the uncertain backdrop continued to weigh on investor sentiment and impacted client demand. Invesco separated itself from most industry peers by generating net inflows in key capability areas led by strong growth in ETFs in the quarter. Our fixed income business institutional channel continued to build on their track record of organic growth, generating net inflows for 16 and 13 consecutive quarters, respectively. The depth and breadth of our investment capabilities that Invesco brings to the market have positioned the firm to return to organic growth when investor sentiment improves. Invesco ETFs delivered $4.3 billion in net long-term inflows during the quarter. For the full year, ETFs brought in $28 billion of net long-term inflows, the equivalent of 11% organic growth rate. Our ETF lineup remains differentiated from most competitor offerings with a focus on higher value, higher revenue market segments, like smart beta, and we continue to drive innovation in space with products such as our QQQ innovation suite. Fixed income capabilities in the institutional channel have been pillars of organic growth for several years now, and growth persisted in both of these areas in the fourth quarter, with 800 million and 900 million net inflows respectively. As Alison will discuss later, our institutional pipeline remains at healthy levels, And as interest rates stabilize, we have a significant opportunity to capture growth and fixed income capabilities in 2023. Our business in Greater China performed exceptionally well during 2022, building on our leading position in the world's fastest growing market for asset managers. We experienced modest net long-term outflows of $600 million in the fourth quarter due to significantly higher redemptions in fixed income throughout the industry in China. and rising bond yield stroke net asset values for fixed income securities lowered. Despite these challenges, we raised over $3 billion in new product launches during the quarter in China. For the full year, our China joint venture delivered $7 billion in net inflows, the equivalent of 11% organic growth rate. Market sentiment in China will be mixed for the next few months as the country works through the transition period. of higher COVID infections stabilizing interest rates and redemptions turned to more moderate levels. That said, there are also signs that the outlook for the remainder of 2023 is improving, and I'm optimistic for a return to organic growth rate throughout 2023 in China. Although we maintain momentum and key capabilities, the firm experience net long-term outflows this quarter of $3.2 billion. Active global equity remains the biggest drag on organic growth with $6 billion of net outflows in the fourth quarter, including $3 billion in our developing markets fund. As we've discussed previously, client appetite for these assets have been lower than in the past, but I'm optimistic redemptions will slow as client appetite for risk assets will eventually return. We enter 2023 with a strong balance sheet, giving us the needed flexibility to operate strategically in this environment. Long-term debt remains at low levels the lowest in 10 years, and our cash balance increased to over $1.2 billion at year end. As we discussed last quarter, we continue to be disciplined in our approach to expenses, tightly managing discretionary spending and limiting hires for roles that are critical to support the organization and future growth. We are thoughtfully managing market headwinds while investing for the long term. We remain focused on identifying areas of expense improvement that will deliver positive operating leverage as the market recovers and organic growth resumes. We are being extremely thoughtful about capital resource allocation in this environment, and we will be well-positioned to maintain investments in areas that deliver future growth. Looking ahead, we are partnering with our clients to meet their most pressing needs in this dynamic environment. We've dedicated the past decade to building a breadth of investment capabilities, a solutions mindset, and operating scale at Invesco that few in the industry can match. I'm proud of our talented when our talented employees have accomplished in 2022 on behalf of clients and stakeholders, and I'm optimistic for return to organic growth when market sentiment eases. Market direction may be uncertain, but I'm confident that Invesco is prepared to meet challenges that will arise in 2023 and well-positioned for future growth. With that, Allison, I'll turn it over to you.
spk01: Thank you, Marty, and good morning, everyone. I'm going to start with slide four. Overall investment performance improved in the fourth quarter with 61% and 63% of actively managed funds in the top half of peers or beating benchmark on a three year and a five year basis up from 57% and 62% in the third quarter. These results reflect strength and fixed income and balance strategies where there is strong client demand. Performance lags benchmark in certain equity strategies, but we experienced improvement over the past quarter in several key funds, and short-term performance is trending positively in several U.S. and global equity strategies. Moving to slide five, we ended 2022 with $1.41 trillion in AUM, an increase of $86 billion from the end of the third quarter, as most market indices partially recovered from prior quarter lows. Global market increases, foreign exchange movements, and reinvested dividends increased assets under management by $61 billion, and total net inflows were $25 billion, inclusive of $30 billion into money market products. As Marty mentioned earlier, the firm experienced net long-term outflows of $3.2 billion this quarter, equivalent to a 1% annualized organic decline. Despite some stabilization in global financial markets, Industry growth remained subdued in the fourth quarter, and Invesco's net flow performance was among the best in our peer group. Passive capabilities returned to net inflows this quarter with $7.3 billion, while net outflows were $10.5 billion in active strategies. Several of our key capability areas continued to deliver positive organic growth, including ETFs and fixed income, as well as the institutional channel. These capabilities also delivered positive organic growth for the full year, along with our greater China business, which enabled Invesco to offset outflows and strategies that experienced net redemptions as investors sought risk-off trades throughout 2022. Invesco's ETF lineup was once again a driver of net long-term inflows in the fourth quarter, with $4.3 billion. Net inflows were inclusive of $2.4 billion in maturing bullet shares ETFs, which are included in our gross redemptions. Growth this quarter was broad-based. Our top-selling ETFs included the S&P 500 Equal Weight, the NASDAQ 100 QQQM, and Invesco Senior Loan ETF. For the full year 2022, net long-term inflows into our ETF capabilities were $28 billion, equivalent to an 11% organic growth rate, and we gained market share. Excluding the QQQs, Invesco captured 3.8% of industry net inflows. higher than our 3.1% share of total industry assets under management. The institutional channel has been a steady source of growth, and that continued in fourth quarter as the channel has now achieved 13 straight quarters of net inflows. For calendar year 2022, the channel achieved net inflows of $13 billion, or a 4% organic growth rate. We sustained new fundings across geographies, asset classes, and the risk-return spectrum throughout the year, despite the very challenging market backdrop. This demonstrates the diverse range of client relationships we have nurtured, as well as the differentiated set of capabilities that we bring to the market. Retail net outflows were $4.1 billion in the fourth quarter, a meaningfully lower pace of outflows than the prior quarter, as the channel achieved positive flows in Asia Pacific and ETF flows improved in both the Americas and EMEA, despite an uptick in investors harvesting tax losses as the year ended. Moving to slide six, Net outflows declined quarter over quarter in Americas and EMEA, primarily due to improvement in ETF net flows. Net inflows in Asia Pacific were $3.3 billion, led by Japan and Australia. Our China joint venture experienced modest net long-term outflows of $400 million in the fourth quarter, as fixed income products experienced a meaningful industry-wide spike in redemptions throughout China, and a rapid rise in COVID-19 cases impacted the Chinese economy and financial markets. Despite that, we raised over $3 billion in the fourth quarter from new products, and investors showed signs of shifting back into equity products where we garnered $1.8 billion of net long-term inflows. Looking at full year 2022, our China joint venture delivered $7 billion of net long-term inflows, an 11% organic growth rate, and we're gaining market share. Building on Marty's points from earlier, the Chinese market may remain in transition in the short term, and through the first few weeks of 2023, the higher redemptions we experienced in the fourth quarter have persisted, driven by fixed income. This dynamic may be a drag on net flows in China through the remainder of the first quarter, though we expect to be launching new products after the Chinese New Year, and there is increasing optimism for the rest of 2023. Longer term, we remain one of the best position asset managers in what is expected to be the world's fastest growing market for asset management. Fixed income capability sustained organic growth in the fourth quarter with $800 million in net inflows. The firm achieved net inflows in this area despite the heightened redemptions in Chinese fixed income products, as well as a $2.4 billion outflow related to BulletShares ETF that reached their planned maturity last month. As interest rates stabilize, we have a diverse platform of fixed income offerings with strong investment performance across the full range of risk appetites and durations that are positioned to capture future growth. Alternatives experienced net outflows of $3.6 billion in the fourth quarter. Liquid alts accounted for more than two-thirds of the net outflows, driven primarily by commodity-focused ETFs. These strategies experienced net inflows for the full year, but gave back gains from the first half of the year. Private markets net outflows were $1.6 billion, primarily due to outflows and bank loan strategies. Net outflows and active equity strategies have been concentrated in global and developing markets equities, which experienced $6 billion of net outflows in the quarter, including $3.1 billion from our developing markets fund. Moving to slide seven, our institutional pipeline was $30 billion at quarter end, an increase from $23 billion last quarter. Dena Roche- Despite the challenging environment, we are winning new mandates, notably in fixed income and active equity in the fourth quarter, which contributed to the increase. Dena Roche- Our pipeline has been running in the mid 20 to mid $30 billion range dating back to late 2019 and we're pleased to see the pipeline this robust given the uncertain market environment. As we've noted previously, that uncertainty is causing some mandates to take longer to fund, and we would estimate the funding cycle of our pipeline has extended into the three to four quarter range versus the two to three quarters prior to the market downturn. Our solutions capability enabled one third of the global institutional pipeline in the fourth quarter, and it remains a differentiator with clients. The pipeline reflects a diverse business mix that has helped Invesco sustain organic growth in the channel throughout the full business cycle. Turning to slide eight, markets partially recovered in the fourth quarter, but the significant market declines that we experienced in the third quarter, especially in September, drove assets under management lower at the start of the period. Net revenue of $1.11 billion in the fourth quarter was flat the prior quarter and 19% lower than the fourth quarter of 2021. That's primarily due to lower active assets under management. Total adjusted operating expenses were $769 million, an increase of $28 million from the prior quarter and a decrease of $27 million as compared to the fourth quarter of 2021. Compensation expenses increased by $8 million as compared to the third quarter, inclusive of incentive comp paid on the $56 million of performance fees earned in this quarter. As we've discussed, we manage variable compensation to a full year outcome in line with company performance and competitive industry practices. Historically, our compensation to net revenue ratio has been in the 38 to 42% range on an annual basis. During periods of revenue decline, as we experienced in 2022, the ratio tends to move towards the upper end of this range. For the full year 2022, our compensation to revenue ratio was 41%. At current AUM levels, we would expect the ratio to trend towards the higher end of the range for 2023. As a reminder, looking to first quarter, we expect seasonally higher compensation taxes and benefits of $20 to $25 million, consistent with prior year trends. We would expect this to be largely offset by lower incentive compensation on performance fee revenue after seasonally high revenues received in the fourth quarter. Marketing expenses were $4 million higher than prior quarter, consistent with the seasonally higher activity we typically see in the fourth quarter, though marketing expenses were $9 million lower than the fourth quarter of 2021. Property, office, and technology expenses were $6 million higher than the prior quarter. As we've mentioned previously, we're in the process of moving to our new Atlanta headquarters, which we expect to be complete by the middle of this year. However, we may experience moderate delays as a result of flooding that took place when bitterly cold temperatures caused pipes to burst around Atlanta in December. And we're working with relevant parties on a resolution. In fourth quarter, we also incurred $2 million of expenses related to the decommissioning of our current office building. These expenses are not repetitive in nature. Technology expenses in the fourth quarter included investment in ongoing technology programs that will benefit future scale, such as upgrading our human resources operating environment and the move of our financial systems to the cloud. G&A expenses were $10 million higher than prior quarter, influenced by $4 million of foreign exchange rate revaluations associated with the impact of currency movements on our balance sheet, and an additional $2 million of value-added taxes paid in non-U.S. jurisdictions. As I mentioned earlier, we are investing in foundational technology projects that will enable future scale in our operations. operating platform. These expenses span G&A and property office and technology expenses, and they are included in our results. We're investing in our key growth capabilities while balancing the need to diligently manage expenses in this uncertain environment. We have focused near-term hiring in the growth areas that we've outlined and deferred hiring for most other positions. Over the longer term, we're building a platform that will rapidly and efficiently scale, delivering positive operating leverage and margin expansion as markets recover. Now, moving to slide nine, adjusted operating income was $339 million in the fourth quarter, $30 million lower than the prior quarter due to flat net revenues combined with higher operating expenses. Adjusted operating margin was 30.6% as compared to 33.3% in the third quarter, and 42% in the fourth quarter of 2021 prior to the steep market declines that we experienced in 2022. Earnings per share was 39 cents as compared to 34 cents due to higher non-operating income driven by gains on our seed capital and co-investment portfolios as markets increased from third quarter lows. The effective tax rate was 26.9% in the fourth quarter lower than 28.7% in the prior quarter due to losses in lower tax jurisdictions last quarter that did not recur. We estimate our non-GAAP effective tax rate to be between 25 and 27% for the first quarter of 2023. 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. I'm going to conclude on slide 10. Maintaining a strong balance sheet remains a top priority. further underscored by the volatile environment that we have been navigating. Total debt was managed lower to $1.5 billion as of December 31st, which is the lowest level in 10 years. We built cash in the fourth quarter as we ended the year with over $1.2 billion in cash and cash equivalents, an increase of more than $200 million from September 30th. Our leverage ratio as defined under our credit facility agreement was 0.8 times at the end of the fourth quarter, slightly higher than the 0.7 times the third quarter as declining markets have led to lower EBITDA. Our leverage ratio is flat to the fourth quarter of 2021. If preferred stock is included, our fourth quarter leverage ratio was 3.2 times. In the face of one of the most challenging markets of the past half century, Invesco continues to capture client demand and high growth areas, and our net flow performance has been among the best in our peer group. Meanwhile, we've been building balance sheet strength and financial flexibility needed to navigate these uncertain times. We will be extremely disciplined in expense management and resource allocation while ensuring that we are meeting the needs of our clients and positioning the firm for long-term growth. With that, we're going to go ahead and open it up for Q&A.
spk00: At this time, if you would like to ask an audio question, please press star 1. You will be announced prior to asking your question Please pick up your handset when asking your question, and to withdraw your request, please press star 2. One moment, please, for the first question. Glenn Shore with Evercore, your line is open.
spk07: Hi, thanks very much. My question is on greatest trend. I like seeing, obviously, opening up a little bit, getting 3 billion new flows on the new products. I guess my question as we watched this develop over the last couple of years, you seem to get great flows when you launch new products. We don't talk much about the legacy or the older products. I wonder if you could just give us a little more color on is the bulk of the flows come through the new issue pipeline? And the reason I ask it is historically you've done best from a profitability standpoint when your products hit real scale. And you seem to be developing a huge set of new products, but most of the flows come through on day one. So I wonder if you could help with that, Carla. That'd be great. Thanks.
spk09: Yeah. Glenn, let me start. And Allison, please chime in. So look, that's really how that market is operating right now. In time, it had to get a little mature to something more similar to the United States where you'll have your launches. There'll be know fewer of them and you know you'll have ongoing you know flows into those capabilities but there are follow-on inflows but really the bulk of it comes through these launches and again it's just unique to the market um you know that said it i think it'll evolve over time but um i just want to again allison hit on this i did it's a really volatile time over the next you know few months here but um we just think the future is very very bright in china for us and you know when the covet uh transition completes itself, we anticipate 2023 being a very strong year in China.
spk01: Glenn, I would maybe say, if you think about the flow drivers in China, I mean, it's maybe with these new product launches, maybe somewhere half to two-thirds in any given quarter might come from these new product launches. It's not all of it, but it is, as Marty said, it's really the way the market works there right now. It's certainly a less mature market. and for now that is a large driver of flows. I don't want to leave anyone with the impression that's 100% of the flow drivers each quarter, but it's an important part of functioning in that market and it's an important driver of market share growth overall. To your point, it's nice to see flows coming from beyond China and across the region, but it's an interesting time in China right now.
spk07: Okay, thanks, Allison. Maybe one quick one for you on expenses. I guess margins in general. Market was up. Your AUM was up 6.5% in the fourth quarter. So some of that's going to flow through into the first quarter revenue. So maybe you could start, just help us with the jumping off point on starting the first quarter because sometimes there's some seasonal items on the expense side. So just how to think about the jumping off point in Q1. Thanks.
spk01: Sure, there are many puts and takes. You know, I think as we think about the revenue side of it, you're right. You know, markets have been a little bit better only a few weeks into January. That's certainly a positive, but I do think it's really important to underscore the mix shift that we saw in our portfolio overall in the fourth quarter. We pointed to the $6 billion of outflows and to particular active equity strategies, developing markets, as well as global and international funds. those are, you know, that has an impact overall in the jumping off point as we think about the revenue dynamics. At the same time, a lot of encouraging signs, as we've pointed to, as we see real strength and inflows in our ETF capabilities and fixed income in particular, but as you certainly understand, that comes at a different revenue level than what we've experienced as we see some of the remixing of the portfolio. So while markets could be a positive this quarter. There's also a bit of a headwind in the jumping off point in terms of remixing relative to prior quarters. As we think about expenses, you know, overall, I noted in comp expense, you should expect the usual seasonality of $20 to $25 million in the first quarter. That would be offset by what we, you know, would not expect, any recurrence and performance fees like we saw in the fourth quarter. just given the seasonality there. And, of course, the market will be what the market will be. We'll adjust for that. So hopefully that gives you a little bit of color as you think about some of the puts and takes. Overall, it's a difficult environment to navigate because you see a lot of forces moving at the same time, and we're trying to get our arms around that as well.
spk00: Thank you. And now Brian Bedell with Deutsche Bank.
spk11: Great. Thanks. Good morning, folks. Thanks for taking my questions. Maybe just one more on expenses, Alison, just to finish that. I missed the number, I think, that you said in property office and technology that seemed like it was one time and four keys. You also wanted to get the jumping off point there. I realize that you're going to have some duplicate expense, I think, in the first half as you transition to the new headquarters. But maybe just an outlook in that context for 2023, if you can, and then also in GNA, considering that spiked up in 4Q, but it sounds like you're working on some cost saves during the year in GNA.
spk01: Sure. Let me do my best to try to walk through a few of these. On property office and technology, a couple of things. points on some of what we're experiencing really specific to our Atlanta headquarters. As a reminder, we're carrying the cost of two headquarters right now. That will persist for a few more quarters. That's somewhere between $2 million to $3 million of incremental expense. We had a $2 million non-recurring charge in the fourth quarter related to decommissioning the existing, or I'll say outgoing, headquarters we're in. We also pointed to some uncertainty because we had a pipe burst in our new building on Christmas Eve, and that happened around Atlanta, and that will cause some delay in moving. And so there is a little bit of uncertainty right now as we try to work through what all of this means. Combined with G&A, you know, in G&A we pointed to a lot of FX revaluations and higher VAT taxes in the fourth quarter. Obviously, FX has been a pretty meaningful driver in some of the significant movements we saw over the last few quarters there. I would say overall as we think about property office and technology and G&A, I will just continue to underscore a lot of these key foundational projects that we are working on, and they really span those two categories in terms of both technology and professional services. We are working on installing a new HR environment. We are wrapping up moving all of our financial systems to the cloud. And we are in the early stages of Alpha Next Gen. And so as these projects are rolling off and rolling on, there is quite a bit of investment and focus right now in really creating scale for the future. Overall, as I think about GNA for the year and the fact that we do expect to be back in a full travel mode this year, and we do expect the reopening of China to allow us to get back to a really important region that we have not been able to get to for the last three years, I expect GNA this year on an average basis is somewhat consistent with GNA last year on an average basis when you think about some of the efficiencies and discretionary expense management we're trying to manage, but at the same time, the reopening of travel as well as some of these foundational investments we are making.
spk11: That's fantastic, Howard. Thank you. And then just to follow up on the revenue side, obviously the revenue yields pressure. It sounds like a lot of that came in the Oppenheimer Funds Complex, given just the outflows there so a two-part question would be are you seeing um increasing demand or risk appetite given you know foreign markets and especially emerging markets are starting to year off pretty well in performance um are financial advisors that you're speaking with starting to warm up to that or seeing some risk on appetite from their clients and can that help their revenue yield if that rebounds probably not in one queue but as we move through the year yeah i'll make a um
spk09: Just a comment. The contrast is dramatic. If you went through last year, there was really no interest at all in emerging markets, in particular, very much risk-off and the like. It's too early, but what we are seeing is starting to be some early interest in emerging markets in China, driven by China, quite frankly. and developing markets in Q4 had some very, very, very strong development performance, which it needs to have, and it's a really talented team. So the answer is if the client appetite is there, we should do quite well, which would be a nice change from this past year.
spk11: Great. Thank you.
spk00: Thank you. Our next Dan Fannin with Jefferies.
spk14: Thanks. Good morning. I wanted to follow up on the alternative suite of products. You saw some outflows. This is the second consecutive quarter of a little more elevated outflows. But you did highlight private credit or seeing inflows. And I think you said some of the liquid strategies. Could you talk about the mix of fees within alternatives and kind of where the positive and negatives are shaking out?
spk01: Sure. I'll start. Marty, chime in. I would say a couple of things. As we look at alternatives, again, a lot of what we saw in terms of outflows would be the liquid alternatives, so commodity ETFs in particular, currency ETFs. I think from that perspective, those would be lower fee alternatives that were flowing out. Boiling that down to private markets, that also was an outflow at about $1.6 billion, but that was largely driven by global bank loans. Direct real estate, we were an outflow to the tune of about $200 million there. So that's really, again, realizations, net of acquisitions there, negative $200 million, continue to gather commitments and have a fair amount of dry powder and direct real estate, about $7.5 billion coming into the year overall on that side. On a private credit perspective, I think it's an interesting environment. It was an interesting year for private credit overall, just the floating rate nature of loans and some of the attractive fundamentals there have helped mitigate losses, but certainly As recession fears kind of persist and trying to navigate what that may or may not look like, that certainly impacts credit appetite overall. And so we continue to navigate that. I think we, you know, coming into this year, we're bullish on all of our private market asset classes. We feel like we're really well positioned. We feel very good about the funds that we have launched and will be launching and that they're going to be well positioned for where we expect to see client demand this year. But certainly your perspective on higher yields and what the attractive entry point is, is going to really dictate how our flows come together as we make it quarter to quarter through this. So, you know, overall, I think we'll continue to see good, strong demand there. But the liquid alts and some of the movements and currencies and commodities have put overall downward pressure on the flows there.
spk14: Got it. Thank you. And then I think, Marty, you mentioned for fixed income, obviously, the positioning is positive and you're hopeful for pickup and demand. But I think you said interest rates stabilizing as the kind of key factor for decision making. So as we think about growth sales or redemption activity, you feel like it's more stagnant. And so we kind of get more of a direction of where rates are on a global basis. And then we start to see much more assets in motion.
spk09: Absolutely. Look, I think that's true of equities also, right? Some certainty to the future is going to be a really, really important thing for how investors react this year. But for fixed income, absolutely that's going to be the case. It's on the back of a broad set of capabilities, very good performance. And I'll just follow on to Allison's point. INRI, which we've talked about over the last year, it is now being launched on a very important platform. which is one of the things we're waiting for, and we're also in development of some follow-on capabilities in our private markets that will end up in the wealth management channel. But again, that will be a multi-quarter introduction, but we're now underway. So again, this won't be immediate, but we're now moving forward, which is a really important thing for the firm. Thank you.
spk00: Thank you. Now Brennan Hawkin with UBS. Good morning.
spk10: Thank you for taking my questions. We'd love to start on flows. Marty, you had some commentary in the press release suggesting you're waiting on a recovery in flows. Some of the indications, maybe a weak start to China, slower funding on the institutional side. So are you all generally signaling that you're expecting flows to remain soft here just given that uncertainty that you've talked about based on what you can see in the activity here?
spk09: Yeah, look, I think that's, you know, a rational line would get you there, right? But as I say, we're, from my perspective, we're a lot closer to the end of the uncertainty than the beginning. What we point to is just look at our relative flows vis-a-vis our competitors, how we're positioned. There's a lot of things that are going well, and you don't need a lot of change in sentiment to really start to make a really meaningful impact in our flows. And so, as they say, they don't ring the bell at the bottom, but we're a lot closer to that, and I think that's going to be a really positive development for Invesco. Thank you.
spk01: I might point to just the improvement we saw from the third quarter to the fourth quarter. Look, it's a dangerous game to predict flows, and we're certainly not going to try to enter that game. But as we look at the drivers coming out of the quarter and just some of the overall market sentiment right now, we saw the decay rate in the third quarter was 2.9%. That improved to a negative 1% in the fourth quarter. Some really positive drivers there, the Again, this is a dangerous game, but we would expect those to continue to hold up through the first quarter. So the ETF platform in particular and our strategies there, 7% organic growth in the fourth quarter, despite some of the tax loss harvesting and the bullet shares maturity, again, a lot of strength coming into the year there. Fixed income, for the reasons we've just discussed, has performed well and certainly hinges quite a bit on the rate environment, but we feel like the fundamentals are strong there. We're well positioned. The institutional channel does seem to be coming back, underscoring Marty's point that perhaps we're closer to the end than to the beginning. And so as we saw, a lot of institutions sit on the sideline and remix, waiting on some conviction. That could improve here this quarter. Active equities. Very difficult quarter for us in the fourth quarter. I think a lot depends on just some of the earlier conversation around developing markets and as people find the right time to come back into that asset class and that exposure. Just diminishment and that headwind will help us quite a bit. And then the wild card at the moment is China. What's happening there is really... unique um and as they've changed their covet strategy and done a 180 it's having a real impact but we also expect that to be relatively short term and the fundamentals are really still strong there so you know i i think um we feel maybe a little bit better than we did a quarter ago but that sure is a hard place to be at the moment because it's been a wild ride of a year and uh we'll see where things go over the next month or two thank you for that uh all that color that's very very helpful
spk10: Shifting gears a little and thinking about real estate and your capabilities there, Alison, I believe you made some positive commentary on how the year shook out there on the real estate front. And I think, Marty, you referenced that you're getting close to a wire house launch on a product. I guess, number one, on the wealth management side, have you been looking at what some other products are? and some of the struggles and the gates that we've seen in some of these products on the retail side and how are you making adjustments to how you're thinking about structuring your own product in light of some of the lessons learned there. And then on the institutional side, there's been some press around a queue building on redemptions and yet prioritization sort of given to the um, not addressing the queue, but rather, uh, you know, addressing the needs of, of sustained investors, which makes perfect sense. It's just, how are you managing maybe that, that delicate customer service, um, uh, dance in order to make sure relationships aren't damaged?
spk09: Yeah, it's a, it's a great question. And, uh, needless to say, it's been in front of everybody. Um, look, we've not had that issue. Um, I'd also say, uh, we don't have the magnitude of size that, um, where that has been sort of topical. So, again, our client experience has been very different. But, again, I recognize the relative scale. That is what comes along with creating availability into these capabilities, and I think that would be a lesson for the market. And I think if you want to give exposure to some of these capabilities in terms extremely challenging times, you're going to run into some situations like that. And my personal perspective is if we do a really good job educating investors and they have the time horizons that's necessary for these exposures, they're going to do really well. So I would not make a decision not to provide access to individual investors during just an extremely challenging time. So I don't know if that's helpful, but that's how I think about it.
spk10: And then on the institutional side? I'm sorry, can you repeat the question? Yeah, there was some press coverage around your institutional capabilities on commercial real estate and the fact that there's a large queue, rather, of redemptions. But they're given the illiquid nature. It's going to take time to work through that. And there's prioritization given to the existing investors in the actual strategy. It's an understandable dance to try to balance, but how are you sustaining and maybe limiting damage control as far as relationships go around that inherent friction?
spk09: We're not experiencing what you're describing, so when there are reductions, we have very, very strong relationships with our clients, and they're managed really quite well, so we're not we're not feeling the friction that you're referring to. Okay. I'll follow up later. Thanks. Thank you very much.
spk00: Thank you now. Hi, Siegenthaler with Bank of America.
spk04: Hey, good morning, everyone.
spk00: Greg.
spk04: So given the rise that we've seen in interest rates, I just wanted to see if you have a view on the potential reallocations into fixed income in 2023 and And also, do you have a view within that on the potential mix between active and passive? And then how do you think Invesco is positioned within that to win these potential rebalances?
spk09: It's a great question, and I'll give you an answer. I'm sure it's wrong. But net-net, I think the rise in interest rates getting to more natural interest rate levels is healthy for the marketplace. I think it's healthy for active equities over time. And again, as I said before, once it sort of hits its stability level, I think it's good for different types of asset classes and fixed income, as you say. I really don't know what the relative allocations are, but it's been a long time that you've had a market where it's positive for stock pickers and active equity. My personal view, once you get relative outperformance, you'll start to see money go back to active equities and various elements of it, and that would probably not be a popular view, and history suggests that that's not been the case, but that's how I think about it.
spk04: Thank you, Marty. Maybe just a follow-up on the other question on real estate, maybe asking a different way. So we have really great, I think, visibility into your liquid public funds and also in REITs investment performance. But maybe could you talk about how some of the performance in the other products, the private products, trended in 2022, and especially looking for core real estate debt and also the opportunistic drawdowns?
spk09: Look, I don't have a specific performance in front of me, so hard to answer the question. What I will say, it's a very, very strong team. The core capability is just a fundamental strength of the organization, and the client relationship has been very, very strong over an exceeding long period of time. So, again, I'm sorry I don't have the specific performance that you're asking about.
spk04: No worries. Guys, thanks for taking my questions. Thank you, Marty.
spk09: Appreciate it.
spk00: And now Alex Ballstein with Goldman Sachs.
spk12: Hey, Marty Halston. Maybe just a quick follow-up to Craig's question around fixed income. I was hoping you guys could give some details around Invesco's position with some of the specific products that you feel most kind of optimistic about if the recent recovery in fixed income flows when the industry continues, and how are you thinking about your ETF positioning in fixed income versus the active book in fixed income?
spk09: I'll make a couple comments. Just within the ETF franchise, fixed income continues to be an opportunity for us. The strength has come historically from equities. We surely think we have the capabilities to grow off the ETF franchise and fixed income, so we would look at that opportunity going into the year. With regard to fixed income in particular, the sweet the capabilities and performance is really quite strong. So it's really going to be driven by, you know, what we see in our client demands. You know, there's been, you know, in the retail channels in the United States, muni bonds is, you know, very attractive. All those short duration elements, you know, bank loans continue to be very strong. So again, it depends on the market and where we are. But Allison, do you have any further insights from your perspective?
spk01: No, I mean, I think when... Whenever it is that inflation declines and you start to see some pausing with the Fed and rate movements, I think we expect total returns to be strong overall. We would expect that to be sometime in 2023. I think Marty hit on the areas of real strength. Muniz, certainly we see that as our customers continue to focus on taxes as being an area that We expect to hear even more bullish sentiment over the course of this year. Our global liquidity has held up very nicely, and we expect demand to continue there. Fixed income SMAs, that's been a very strong area for us. That continues to be a wrapper that's in real demand. Stable value has been a leading capability for us for a very long time. I think it really does depend on your perspective on rates and credit, of course, but we do expect there to be an inflection point and continued demand across a lot of our capabilities this year. I think overall, net flows are still favoring ETFs over some of our active strategies, but we feel well-positioned in both.
spk12: Got it. Thanks for that. Marty, you mentioned strong balance sheet. And I think the commentary you made around that is sort of enabling you to operate strategically. Could you expand a little bit on that? Does that just mean sort of build liquidity and then eventually resume a more active capital return program? Or do you think this environment opens up incremental M&A opportunities for investors? Yes.
spk09: Let me make a comment and then Allison can pick up. So what we've been using our balance sheet for right now, and we talked about in different ways, are really investments that are going to continue for the company to grow in the future. So the alternative capabilities is an area where we've been using the balance sheet. We'll continue to do that. And you've heard us talk over time. MassFuture has been an amazing partner, helping us to really augment our balance sheet to a very material degree. So that's really been the more specific we're talking about now. And some of these foundational things, enterprise programs that Alison was referring to, they might not be, quote, interesting, they're necessary, but that's what creates scale within an organization. And so that's the other way that we've been using very, very short term. But Alison, you want to pick up more on the other elements of the balance sheet?
spk01: Yeah, I mean, I think, you know, Marty hit some of the high points, but then we just continue to be focused on supporting our future growth and maintaining a really strong balance sheet to do that. and part of that is continuing to be really good stewards of our capital overall, being very thoughtful about the debt on the balance sheet, which you know has been top of mind for us, and we've been chipping away at and feel really good about the progress we're making there. Making progress there is freeing up capacity for us to, again, continue to focus on our own future growth. Some of that is investing in our product launches. We are fortunate to have a really good, strong strategic partner there with us, but we continue to really prioritize investing in ourselves, both in terms of our product launches, but also these technology projects and some of the foundational capabilities that we know are really going to be necessary to create the scale in this business that we expect to have over the coming years. Hopefully that's helpful.
spk12: Yep. Thanks so much.
spk00: Thank you, Bill Katz with Credit Suisse. Your line is open.
spk03: Terrific. Thank you very much for taking the questions. Appreciate all of the colors so far. Marty and Elsie both mentioned sort of the longer-term outlook for China. It does sound very strong. Could you help unpack a little about where you have a queue for product launches for 2023? And if you could break down the mix between equity and fixed income and other assets in the region, that would be super helpful.
spk01: Sure. I'll take a stab at it. You know, I would say in terms of product launches overall, hard to say exactly, but I'll tell you the demand there does favor balanced and fixed income products over equities. So it would probably skew a little bit more to the balance side than fixed income than equity. But that's not a perfect science. As I think about just the mix overall in China, I would say it skews probably 50% or so balanced and fixed income, maybe as much as 60%. Balanced is a very popular asset class there. So equity is probably a little bit smaller in the overall mix there relative to what you might expect to see in a portfolio in the United States.
spk03: Okay, thank you. And just to follow up, certainly hear you on sort of all the different drivers for flows. When you think about the base fee rate exiting the year, entering 2023, where does that sit today, and should we presume sort of a gradual decline just given the ins and outs across geographies, products, and distribution channels?
spk01: Yeah, I mean, I would say the factors that impacted the net revenue yield and just the overall base fee rate in the fourth quarter, we would expect a lot of those to continue into the first quarter, primarily as we continue to benefit from the demand for our ETF and our passive strategy. So while that is a significant positive, and we are capturing demand where demand is right now. That does put downward pressure on our average fee rate. And we would expect a lot of those trends to continue into the first quarter. Developing markets, in particular in global equities and what happens there in terms of redemptions and demand overall, that will remain a headwind, if nothing else, just given the exit rate of those particular asset classes in December as we come into this year, that does put downward pressure overall because of the outflows that we experienced in the last probably three quarters there. Overall though, I'll just say as I do every quarter, we're not focused on managing to a net revenue yield or an average fee rate. We're focused on managing the operating income and operating margin of the company overall. And so while We see that downward pressure given the mix shift in our portfolio and that mix shift really did accelerate in 2022. We are really focused on how do we continue to operate the business to create scale and to get to scale and these passive capabilities. We've taken market share, we've gained quite a bit in terms of our organic growth over the last few years. but we're not at scale in those capabilities. And getting to scale and continuing to remix our expenses and reallocate against these higher growth capabilities is our primary focus. And that's what's ultimately going to give us the opportunity to improve operating margin.
spk03: Thank you very much.
spk00: And now Patrick Davitt with Autonomous Research.
spk13: Hi, good morning, everyone. Most of mine have been asked. Just one quick one on... credit ratings i think s p's on record is saying their ratings and outlook are based on the expectation that your leverage ratio with the preferred will be in the two and a half to three times range which you went over in 4q i suppose the market recovery could already have that back below three times which could you speak to any potential risks to your capital return or new investment outlook around that issue and based on your past experience how much of a grace period can we expect from the ratings agencies after kind of breaching that three-times bogey for one quarter?
spk01: Patrick, I'll take that. You know, look, we've had no conversations with S&P that would indicate we have a risk there. I think the important point is all the work we have done in continuing to manage our debt balance is lower. So while EBITDA has declined given the market impact, One would expect that to be more temporary in nature, given we do expect there will be an inflection in the market at some point. And at the same time, we've managed not only the debt on the balance sheet to the absolute lowest level in 10 years, but managed a number of contingent liabilities that would have been present when they made that statement two to three years ago. Those of all been taken care of as well. So in terms of the overall liabilities, we're in a significantly better place than we were when they made that statement a few years ago. We did receive an upgrade last year from Fitch. We do feel like we are overall in a good position as far as our credit ratings are concerned.
spk13: That's helpful. Thank you.
spk00: Mike Cypress with Morgan Stanley. Your line is open.
spk05: Hey, good morning. Thanks for squeezing in here. Just a follow-up on expenses, Allison, just coming back to the transformational project that you were mentioning earlier. I guess just how much might that lower run rate expenses as you kind of look out over the next couple of years? And as you think about expenses for this year, how are you thinking about the bookends for the growth rate and expenses?
spk01: So in terms of transformational projects, lowering expenses in the next couple of years, I would say they will not contribute to lowering expenses in the next couple of years. As we've noted before, the Alpha Next Gen is really our most significant investment that we will be making. in the next couple of years, deep into the investment period of that. And then we'll be running parallel for some period of time before we can start to streamline and decommission apps on the other side. So we are several years away from seeing the benefit of that investment. Again, it's the right near-term and long-term move for us as a company overall, as we think about building to the scale we want to be at in the next five, seven, 10 years. But it's an investment, and it will take some time before we see the payback on that investment. In terms of the bookends of expenses, look, the biggest driver of that's going to be comp, and the biggest driver of that's going to be market-related. And so as you think about the variability in our expenses and what could move, you know, the most beyond our expectations and beyond some of the guidance I already gave, it would be compensation-related. The good news in that is that comes with revenue. And I think that right now, as we think about what expense flex we have on the year, I want to make sure it's clear we are managing discretionary expenses at every level. Really focused on the must-haves only and all the nice-to-haves are things we are foregoing. But there are a lot of must-haves in this business that we think really position us well to capture demand over the next several years. And we want to stay the course on that, even in some of these challenging market conditions. And we're reallocating the discretionary expenses to some of these foundational investments that we think will serve us well and create the operating leverage for the future.
spk05: Great. And just a follow-up question on the cash position, $1.2 billion. How much of that is discretionary, and how do you think about the scenario where buybacks might resume? Thank you.
spk01: So the $1.2 billion, about $640 million, is held for regulatory purposes. So it's a little bit higher than the last quarter, and that's really FX related. So you could consider the amount above that $640 million roughly discretionary. As I think about buybacks, I'll just underscore our capital priorities. The first is supporting our future growth. And we've got a lot of investments we want to make in ourselves, and we think that's going to serve shareholders the best over the long run. We want to focus on maintaining that strong balance sheet and continue to focus on the leveraged levels that we have and managing those down. And we also continue to focus on returning capital to shareholders, but that we're going to do first through dividends and steady dividend increases. And it's really excess cash that we'll think about for buybacks.
spk09: Great.
spk01: Thank you. Marty, anything else?
spk09: Yeah. Excuse me. I have to get off mute. I do want to follow up just on this question. conversation on expenses. So there's the longer-term investments that Alice is talking about, which we've talked about some, and then the obvious elements around discretionary. But as a management team, we are absolutely focused on what we call driving scale within the organization against capabilities that are in client demand. And we're deeply into that process, and we're constantly doing it. And from that, you get the opportunity to make a decision to invest in you know, a capability for a client, let's say, or have it dropped at the bottom line. So that's another element that we have been working on very, very diligently. And, um, it'll make us a better company, but at the same time, at some point the markets will recover, you'll get, uh, further operating leverage with, you know, from the organization. So I think you should look at it as three different elements and that's nothing new. You've seen us do it, you know, time and time again. Um, and it's a normal practice, uh, from us. And, uh, Again, it'll just create better outcomes for shareholders and clients.
spk00: Our last question is from Mike Brown with KBW. Sir, your line is open.
spk02: Great. Hi. Good morning. I wanted to ask a couple follow-up questions on the real estate business. I believe the total real estate exposure for Invesco is around $92 billion and $75 billion or so is in the direct real estate side. Within direct real estate, how much is tied to the U.S. and then how much is tied to office and retail?
spk01: I would say in terms of how much is tied to the U.S., probably around two-thirds is probably roughly. We can follow up with you on specifics there, but I'd say roughly. We've been managing our exposure to office and retail quite a bit over the last couple of years, three years probably in particular, and really favoring asset classes like cold storage and industrial and medical office buildings and some of the asset classes you would expect us to be in. So the story around retail has been known for quite a long time, probably five or six years. Office has obviously been quite challenged since the advent of COVID, and we've been managing those exposures. those are not a real concern overall. And as I think about really where our acquisitions have been focused over the last two or three years, they've been in these areas of real high demand. Multifamily would be another example of an asset class we've been favoring.
spk02: Okay, great. Thanks, Allison. And then just specifically in terms of some of the line items here, how much does real estate contribute to the performance fee? So of the $68 million, how much was from real estate, and then how much do real estate transaction fees contribute to other revenue?
spk01: So on the performance fees this quarter, real estate was the majority of the performance fees. If I think about prior years, you would have seen more coming from IGW, China overall, than what we saw this year. So the two biggest drivers in any given year would be China and real estate, but in 2022, it was definitely coming more from real estate. In terms of other revenue, I would say it's a – I'd have to come back to you on what portion of it is. I will say the increase in other revenue in the fourth quarter was driven largely by higher real estate transaction fees.
spk02: Okay. Great. Thanks for the call there.
spk09: Okay. Well, thank you very much, everybody. I appreciate the engagement, the questions, and we'll be – chatting next quarter. So have a good rest of the day. Thank you.
spk06: Thank you.
spk00: Conference is concluded. Again, thank you for your participation. Please go ahead and disconnect at this time.
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