Q3 2019 Earnings Call
Thank you for standing by the Cold start momentarily. Thank you for standing by the Costar momentarily.
Good morning. Thank you all for joining US as a reminder, this conference call and the related presentation may include forward looking statement, which reflects management's expectations about future. Then overall operating claimed in performance.
These forward looking statement I made as of today and I'm not guaranteed involve risks uncertainties and assumption.
No assurance <unk> actual results well not differ materially from our expectation for discussion of these risks and uncertainties. Please see the risks described in our most recent <unk> 10-K, and subsequent filings with the FTC and that's how they no obligation to update any forward looking statement.
We may also discuss non-GAAP financial measures during todays call reconciliations of these non-GAAP financial measures may be found at the end of our earnings presentation.
Welcome to Invesco third quarter results conference call all participants will be in listen only mode until the question answer session at that time choppy question Press Star. One today's conference is being recorded if you have any objections you may disconnect. At this time now I would like to turn the call over to your speakers for today Marty.
Flanagan, President and CEO of Invesco, Loren Starr, Chief Financial Officer, and grade Mcgreevey Senior managing director investments Mr. Flanagan you may begin.
[laughter] I think you pretty much insight. Thank you everybody for joining us stop so.
Q3 presentations I Wonder whats website for your reference.
A lot more time puts you in eight we're not short my prepared remarks, let me just a question. So no quite quickly. So I'll just give a brief overview role results or more like a couple comments and again, we'll get the questions. So we're working through.
Uh huh.
[laughter] personnel will only four months post the close of the acquisition of Oppenheimer made tremendous progress pretty much organizations together and you can see by this quarter, it's generating meaningful results already.
As we've discussed on previous calls we do look at this is a multiyear growth story the deepest relationships in the U.S. [laughter] provides capabilities take around the world. While also creating scale. The organization that said the first full quarter, but combined organization. So what are powerful results.
If you look at very strong earnings a quarter over quarter generating $502 million operating income, 38% improvement compared to last quarter.
Operating margin expansion exceeding 500 basis points taking.
Our March was 40.9% [laughter] combined Berman at a $200 million revenues during the quarter, while adding only less than $60 million expenses.
Particularly pleased to announce that worked we bring other expense synergies well ahead of schedule and exceeding our initial target for 75, we're now estimating a savings of $501 billion [noise].
[laughter] importantly.
We achieved these results and what wasn't very challenging macro environment flows.
Also being in the early days this combination between our two organizations.
During the quarter class reacted to them work at least by de risking which resulted in outflows.
Americas and UK retail businesses.
Flowserve legacy byproduct slowed during the quarter, which we had expected but they are stabilizing will speak about that in a couple of minutes.
These outflows were offset by positive flows in China or me ex UK business great Yes.
[noise]. So the positive flows during the quarter really demonstrate the tremendous strength, what's actually combination.
The more the operating financial strength of the combined for Fabless term $440 million to common shareholders during the quarter through dividends and stock buybacks. So finally, it is still very early days, but from our perspective. The initial results are very strong weren't great. Thanks, Marty So before we get security I wanted to spend a few minutes highlight.
I know some key items for you on the topics a flows and expense synergies that resulting from the Oppenheimer transaction.
So if you look to page fiber slide side as well, we had 10.5 billion a net outflows in the Americas. A majority of this is attributable to the retail business on the next page.
Well down on this a little more so on slide six so we showed that 2019 history of monthly gross sales and net flows for the Oh, Invesco and Oppenheimer U.S. active retail products combined which includes periods, both pre and post close.
It another way this illustrates the trend for the two firms together over the entire period, including the pre acquisition period. I think there are few important takeaways from this chart.
First a gross sales post close are increasing Oh, we see a positive trend line. However, while gross sales are improving they're not yet to the pre deal level. So there is obviously more room for improvement.
Such a the chart clearly highlights of the deal has had an impact on our gross sales levels integration of the two sales team are well underway and things are going quite well, but they're not yet complete and I'd be integration is completed we would expect to grow sales levels to come back to at least the pre acquisition levels.
And third point, a net outflows have been more elevated post close but this is largely a function of the abnormally low gross sales levels I, just mentioned and we'd expect that flows through improved as we complete all phases of the sales integration works for this year and into 2020.
Well stay on the topic of flows, but moving away from U.S. retail I'd like to point out that we continue to see a strong institutional pipeline.
The institutional won but not funded and when continues to build quarter over quarter in year over year end of particular note. A we were notified this quarter, although 10 billion dollar mandate, one buyer solutions team, which is expected to funds in the first half of 2020.
Also a we received notification of our recent hundred million dollar when into the newly launched over five emerging markets local debt spawned on our cross border fund reach in EMEA, It's still very early days, but we're beginning to see revenue synergies from the deal are there a strong retail and institutional interest in the old fly products in the pipeline is gone.
Morning.
So next I'll, let me move to a the topic of expense synergies.
As you'll recall, we have been projecting to achieve run rate and that expense synergies a 475 million by the end of the first quarter. That's 2021 have you ended the third quarter, we achieved 105% of our synergy targets for 501 million or run rate expense reductions for the combined organizations.
This sort of represents an elimination of 15% of expense base of the pre combined organizations.
We always thought that they'd be opportunities to save more than 2020 5 million by the time of the transaction closing, we only had a clear line of sight regarding the 475 million of savings. After we close the deal we're able to look deeper into the business and we started making significant progress on the integration and we now see that we can run the business with the slower.
Expense base, there's still further integration work to be completed, but we're confident that we can deliver a higher level expenses Energy's there were presenting today.
And as a reminder, the synergy level is notably investments made in areas that further strengthen our distribution in investment capabilities and processes, which allow us to drive future growth and avoid future cost.
We presented on slide nine of our Duck summarizing these expenses synergies. So this illustrates the combined firms representative run rate annual operating expense base. So please do keep in mind.
This assumes FX and market conditions are in line roughly what the end of Q3 levels.
In summary, probably go to culinary let me just say that we see the potential for the long term that slowed to flows to trends in the right direction, although the clearly not where we welcome to the right now one of the key areas of outflows were experiencing centered in the U.S. retail space and that is largely due to the shortfall in gross sales, we expect will ultimately be.
Correct.
As the U.S. retail sales and complete their integration.
We continue to work hard managing the things within our control proving ourselves funny greater spend savings and adding to our deal related expense and revenue synergies and continuing to invest an area that we believe will allow us to grow more quickly in the future.
Operator, I'd ask you. The please open up the call for Tonight.
Thank you at this time, if you'd like to ask in audio question.
You will be announced prior to asking your question. Please pick up your hands that when asking your question.
Your question, Please press star too.
We do have our first question from Ken Worthington JP Morgan Your line is open.
Hi, good morning.
You might have.
Your first talk about the journey back to positive long term that sales. So our positive net long term sales something you foresee for invesco in 2020, if not 2021, and then can you maybe describe the top deposit of sales.
New or existing products or asset classes do you see driving the incrementally better sales or incrementally lower outflows them, we're seeing today.
More specifically can you could be the better and then you know.
So why.
Yes. Good question, Ken Let me get a couple of those MLS Lorne them Greg's pitching to so yeah, let's stay on the Oh, what warmest pointed out about the deal because I think it's actually quite critical.
The.
So with Salesforce points.
Yeah clarity as we've said in the past literally salesforce now represents half both old Invesco old old fight third literally going through training right now we actually as you always do have disruption when you do transfer agency conversions and the like.
They'll probably be up in running I'd say youre fully.
Since December so think early next year and the quality of the team is the best we've ever had so yes, we view that yeah. The historical gross sales Oh, yeah, we will exceed those that will be so when does that happen to next year that will surely happen ideally.
Yeah on the first half of next year from our perspective again I put it in the context that weren't they don't see.
[noise] tell depends on the market, but if this continues this market continues that's what we foresee.
Yes, and I think in terms of the path to positive. So we're clearly, saying we're going to become look like it up so that's what really were saying because of the sales improving I think the past path to positive it's going to be a function of some other things that are some within our control and somewhat out of our control.
So one thing that is still very much weighing on or slow picture took from globally. A is sort of just the macro environment and some of the political uncertainty that that exists where we see risk off it's affecting everybody and so a young Europe for example that risk costs Oh behavior as drug.
Driven flows into cash and away from active products and that's that's something that you know we can you can't control, but we're.
Definitely are looking to see you know a hopefully some some of these events, becoming more and more clear Brexit being the most of the most obvious one or the other element that I think is moving in a positive direction.
And is an important precursor to flows is performance <unk>. We've had some you know headwinds around performance. So that we're beginning to see you know sort of a turnaround and particularly in recent months where are you can see just how.
Strong they'll come back for the pull back into performance is when we see.
You know some release on somebody's macro topic. So for example, what we're seeing in terms of what's going on in Europe in the UK has a big impacts on our UK business for many Greg I mean, you can speak to that a little bit if we want yeah, maybe can just to get a little granular to yes answered. Your question. So it's like intersection between demand and.
Performance.
Maybe point to kind of four or five areas to get to the specific question that Yellowstone one would be fixed income were as you know we have very strong performance were seen quite strong demand in an almost all markets.
The transaction that we talked about before a with Oppenheimer was to do is to really leverage their global equity capability, which was incredibly strong there's theres quite strong demand for global equities and its various flavors and a lot of markets outside of the U.S. and so we're seeing out I think each yes, and the traction that born kind of mentioned.
With us when we're going to hopefully see in the first quarter and when it phones and solutions, we're seeing that traction or really take shape in almost all kind of all markets. If you will and then global liquidity.
It's kind of mentioned as well one of those areas not only in China that we've talked about on prior calls what was kind of saying that in other markets. So that's really for I think the the gross sale side, where that demand than performance, where we have that strong performance kind of intersects.
Clearly, we're seeing someone on the redemption side some of them for important and performance improvements on a number of those funds that have had the most significant amount of outflows and happy to drill into those numbers, but I think on a year to date basis, which is still short term.
So most of our farms both here with the legacy Oppenheim, we're seeing some notable improvement that has to continue but if we see that in concert with those things that I talked about that's really how I think we get some positive flow picture.
Thank you.
And then on the synergies.
You talk about the outlook from here.
Both synergies and just synergies so maybe starting with just synergies I believe there's still a 529 plan outflow I think that's a fourth quarter event correct me if I'm wrong any other deal related.
Just synergies that we should expect in the near term and then on the on the cost side, you took out 501 million.
<unk> is that the and number we should expect in other words, if you get more do you have reinvested are you going to reinvest some of the 501.
And if not you know any any idea on how much more we'll be able to shareholders will be able to keep that wouldn't be reinvested.
Okay and on the first to appoint a the synergies you're correct. Yeah, there's a $2 billion in new Mexico outflows that has to be expected in the fourth quarter all that into the synergy.
The only other dis synergies are the ones. We just talked about in terms of the gross sales being abnormally low some of the kind of general disruption related this year conversions I mean, those have been to synergies to sort of flow picture that should and we're seeing begin to improve over time.
But there isn't anything else that we know of in terms of dis synergy.
And if anything you know again, we're seeing more positive revenue synergies the take on potential for products and as he cabs in Europe . For example is a good real to our lives slow coming in in terms of the fiber one that number is net of investments. So that is the number that we are saying you're going to get.
There is no intention for us to invest through that number.
So that's that's the bottom line there are more opportunities for us to a you know sort of generate more synergies. We believe some of that may get invested some may drop to the bottom line were at this point uncomfortable with the fiber one a and we will continue to keep you updated in terms of the potential upside on that number.
Yes.
Thank you very much.
You're welcome thanks.
Thank you. Our next question comes from my carrier with Bank of America. Your line is open.
Good morning, and thanks for taking the questions.
Yes first.
The sales in the flows Marty you mentioned over the past.
Two years.
The business whether it.
Brexit into the European.
Headwinds.
You side.
This growth.
It seems like some of those things are really starting.
Potentially.
Here, but just wondering if you're seeing any early signs.
<unk>.
Yes, so look what we think are fundamental strengths of our organization. So think of me I think a asiapac bakes in trade Wars <unk> services headwinds for us against <unk> results in light of that it's not excuses just a reality.
We are sensing you with Brexit in particular server and getting something here reconcile that you're starting to see just recently the performance is starting to.
Very strongly which is a very good sign and so again, a they say hope it's not a stretch your but you're definitely or something you know some relief you're in a look you know sterling being that or whatever but is there no 121 20 lives a whole lot different than 119. So again some of these oh, yes.
We will continue to manage managed through it but any relief is just really Oh I got on a few anything on the performance Yeah. Mike look I think the rotation is starting to happen from a growth to value the markets starting to recognize that thought all companies or.
The same so I'll make better capital allocation Oh are able to produce different returns on investment. So we're starting to see probably the most impactful thing is a little correlation that starts to the index and that really goes our active managers the ability to use their strong start picking skills and so I think that's part of the reason when we get kind of looked at our year to date for both.
Moments improvements, it's really the result of a of some of those factors that I was kind of a lot or performance to improve the 64000 dollar question. There's always is that kind of continue.
The one thing we know is it's not going to continue forever in terms of you know what we've seen.
Over the course of the last 10 years. So you know what gives us some comfort that a one this does it change.
Given the strong change that we have we'll be able to generate the performance and you come to expect.
Okay. Thanks, and then.
Loren maybe just on the fee rate. So you got to bump. This quarter you know with Oppenheimer you know the trend over the past couple of years has been a little bit more on the negative side just given the expansion on the upfront and then the industry seeing some pricing pressures, there's some news on amazed.
Come under pressure as well some platforms, but just when you look at some of the investments that you guys, you're making in out with Oppenheimer.
Form.
Tough to predict but do you see some areas.
Higher.
Momentum or trends universes.
Some of the areas that are going to pressure you know that fee rate over time, just any update on how you're thinking about that and then managing expenses you know with that mine.
So it's it's a very dynamic are there a lot of puts and takes and the fee rates. So there are some definitely some positive things in our fee rate you know what in terms of we've talked about in the past with our institutional pipeline you know where are the the assets that are funding or at a higher fee rates and the absence declining or we continue to build out you know I think a strong set of capabilities around or.
Alternatives, which tend to have a higher fee rates and aren't gonna be sort of so pressured by by indexing.
We are also very supportive and like our each yet business and we want to continue to grow at a and so those are coming in at lower fee rates and that is a good thing for us the great margin products as long as you can grow them quickly and in a sort of create scale in those products are we really embrace that phenomenon.
I want to grow that part of the book I think it is very hard to provide guidance on on this measure just some general and really there's just so much that's outside of our control in terms of the mix of products not to mention currency markets. So you know, we're probably not in a great position there were probably more.
Likely to refrain on providing guidance on fee rates going forward just because it is so dynamic.
But I would say, it's a real even fight in terms of the things that are sort of helping us on the fee rate on the positive side versus things that maybe you know putting it to each of the flip side.
Okay. Thanks, a lot.
Yes.
Our next question comes from.
Yes.
Great. Thanks, good morning folks.
Did you learn if you just go I'm used to just the integration process.
Obviously.
The 500 million of cost, but but like you said, there's there's definitely so more to do it still pretty early.
Maybe just can you outline what types of things are or being done over the next couple of quarters. You know for example, the or any kind of back office arrangement on cuts to the fund accounting and mid office. If that's your process for the combined organization in any thoughts on.
How much product rationalization has contributed to the 500 and in any future rationalization that might be plans.
Let me hit a couple things and then Florida reconciliation so yes, so Bob.
All the systems have converted over to our systems from Oppenheimer. So that's a good.
Development, we still have.
With the transfer agency, one more Oh software.
Upgrades it'll happen that you have in November of all the middle and back office.
We'll end up converting through next year again, so they so still big first quarter a.
2021, as we said so that sort of progress to and those are the areas where look we'll know more when we when we get it further into it but that's all underway right now.
Yeah, I think listen it's a this one mergers and those types of product rationalizations I'm not happened yet I'm. So oh, that's not part of inherently the fiber one or there may be some you know sort of incremental savings and so it's it's out there was probably some incremental investments as well, although we're hoping to do.
So I'd say really it is a the probably the one is the number that we feel extremely confident that we'll be able to deliver through you know a variety of well well there right now or we're going to continue to look at some of the other integration opportunities really around tax run operations as well you know some.
There's all sorts of efficiencies that we can still could continue to create and ourselves effort.
As well as our investments efforts so.
No I can't get too specific at this point, but ultimately you know we're still looking out a wide range of opportunities around this integration as we get closer to the business I do want to come back to the product rationalization that they give you know it's a small thing not a big thing and I think I'll spend some overreaction to it in the past so it's a small.
Big thing it just remember that yeah, maybe just put a finer point on that Marty I mean, that's like when you look at the.
Passive assets, we think it's around 2% of our total assets you know roughly 14 legacy.
Invesco and maybe 15 Oppenheimer funds. So we're not in the Grand scheme of our a whole product mix, it's really a both small percentage of phones and that's an even smaller percentage of assets.
<unk>.
<unk> <unk> clear to think that operating margin, obviously is going up from the 40% that we're already seeing because there's sounds like there would be incremental seeds of course revenue dependent.
But maybe just talk to talk about the the gross sale initiatives.
And the potential to improve that from even levels before the deal.
What extent can you do that through <unk> institutional offering of the Oppenheimer products and the potential sale of Oppenheimer retail.
In Europe , and I guess any color 10 billion mandate and this was it seems that disciplines that's coming.
Yeah, So look I could be repeating myself, but there's nothing we are full steam ahead on driving gross gross sales right now and.
It does.
Like I said previously if you look at you know the most acute area, where there was disruption it wasn't U.S. wealth management platform.
We think Yep January 1st will be on her front feet and a full steam ahead, and we anticipate seeing higher gross sales.
On the back of bad.
Greg mentioned, yeah, we do not have are long and yet we do not have six oppenheimer funds on the or see kind of range. There just said road shows.
In Europe for two weeks two weeks ago. So early days, but as Lawrence I think every so you're already or $100 million incitement change our world, but Oh, that's very very fast and it's kinda continue.
So what we're seeing institutionally I talked about.
Like one on a fixed income lock on on a real estate.
So that's really.
Really the also part of the business continues to.
Be in high demand institutionally, and so looking for some opportunities in the retail channels. So.
We're very excited about what's in front of US Yeah. That's equity. We also haven't yet fully you know sort of explores the full opportunity with mass mutual and there the revenue synergies working with their advisors.
Again, as we've talked in the past day of 8500 advisors. There was a seventh largest distribution force.
The wealth management space and so we are now actively working with mass mutual you know with our products and our solutions that we just trying to understand what does a good fit within their network that is yet to sort of get plugged in so that will provide some further lift I was not their pre pre deal for any if any of that combine firms. So just as an example.
And again, we talked about as we really like our position in China. We go see that's a rapidly growing Uh huh.
Quarters in years ahead.
Yeah, I think as it relates to Oppenheimer, maybe you can just put a finer point on one of the biggest opportunities. We see is to promote the legacy Oppenheimer funds into both retail and institutional channels. We've been spending a lot of time post the merger between investments marketing and distribution and those would be things like our global equity suite things on the global fixed income.
Hi, beauty bonds to mention kind of three very specific areas. So we're optimistic it's still kind of early days, where we really come together across those three areas to see again and that intersection between demand and where we haven't done from capabilities, where we're going to be able to get out two prospects and clients and Brian just on the that the color on the $10 billion solutions.
Oh, it's not a appropriate for us to talk about it just as the client is not sort of at least there on a notification of that so a you know when and if it comes public well be able to talk a little bit more so that deal.
Fair enough. Thanks, Thanks for all that detail Super helpful.
Our next question comes from.
Yeah.
<unk>.
Good morning. This is actually Brian daily on behalf of Alex I was wondering going back to slide nine if we're looking at that 2.9 billion dollar number.
That's a REIT run rate I guess as we should be thinking about the expense base entering 2020, and then there any puts and takes in that number and then maybe coming back to the five or one.
That's a net synergy number can you give us a little bit of color around like maybe how much investments would be included in the gross number.
And then wet weather was investments are going.
Yeah, So I'm, a too and I know fives that is the right run rate for you to be assuming going into through and through 2020.
But again, it's just kind of markets slots in September and affects that that number is definitely achievable. It's not a it's one that we can do better on terms is a five or one that is a net number there is about 30 million of investment that is already been done relative to.
The Oppenheimer transaction. So you can think about our gross number being closer to 531 and <unk> says the fiber one and those have in areas, where we invested around technology sort of their sales team effectiveness, a really again trying to create a better platform for w. on my business to be success.
So oh, we do think there's opportunity for us to invest more and we do plan to invest more ought to continue to grow and make our team more effective a that will be some will be entirely funded by further.
Sort of integration savings, but I would that said there is opportunity for us to deliver more net synergies to the bottom line well beyond the five along we believe but we're not at the point, where we're able to commit to that.
Got it Okay, and then maybe if we if we turn to capital for a second.
Sure forwards over the last few quarters, it's about $500 million <unk>. It sounds like you're you have to pay out between sort of one Qs.
21, do you expect to do any more of these over the next call. It Eurostar and then is there any shift in capital priorities are for all.
Hi, Good question on the answer is no we don't intend to do anymore forwards at this stage. We think that's a you know we will still be doing buybacks, but a there's only a 260 million left on on the remainder stub of what our commitment is and that's one that recommended that we think we can complete.
You know over through open market purchases easily and oh effectively without using forward purchases.
So that is.
Going to be done.
Probably through the course of 2020.
The in terms of changes the capital party. There are no changes to the cap a priority. We continue to focus on first returning capital to our organic needs through seed we've not seen.
See you know significant needs around seed a moved beyond expectations. So we think that is largely sort of status quo. A we want it continues to be able to grow our dividends every year under all markets and so that's still part of our priority and then the remainder of Oh capital will be returns to shareholders through through buybacks.
That priority, there's still exists I will say that we still is very important to us to maintain our investment credit.
Rating and we also want to continue to build to cash. So we have a billion dollars of cash in excess of what is required from a regulatory perspective, all that is consistent with our past priorities and all are still intact in terms of our thinking.
Thank you very much.
Welcome.
Thank you Sir our next question comes from Brennan Hawkins.
Your line is open.
Good morning, Thanks for taking the question just wanted to follow up on that last one on the [noise] expense come out and the 2.905 Lauren.
Just wanted to kind of clarify because previously you guys should walk through the synergy the expense synergy quarter by quarter.
And you've Upsized the ultimate targets is four Centsfive goes to fiber one that's really clear.
Clear that your and run rate for expenses would be the 2.905 billion, but I thought in your response to the prior question you said that that the to know if I would be the run rate.
Entering in 2020, but I'd thought previously you had said the expense synergies you get there by the time you exit one Q2 thousand 21 is that <unk> is the previous timeline still intact or are you.
Celebrating the timeline to.
We are selling the timeline so we're delivering the full synergies of 105% of the synergies effect of this quarter, so pretty much all that kind of wait for it to calm has gone or we can declare victory effectively in terms of bringing you that run rate effective this quarter, Oh I think the point that we're trying to make sure I've been making stuff there.
Still integration work happening in the background, but we're getting the synergies and those savings effective this quarter into Q4 into 21st quarter 2020. So forth. So that that is so hopefully helps answer your question. It does it's very clear. Thank you sorry, if that's a little if it was redundant previously indicated I just one dollar.
[laughter] clarity.
Yes, great good and helpful. So there was.
Previously referenced you know what are the announcement, we got recently from wire House I expected to launch program optional for participating asset managers.
On the S. M. A products is this is sort of product that you think would be compelling I know that a lot of times on the shelf you know having a you know you got to have a good product. It's got to be the performance has to be strong value add has to be clear, but it also has to be at a compelling value a compelling fee rate, especially.
Persist appears to show.
Is this is sort of program you know well not maybe not commenting specific to any program because I know you wouldn't want to do that until it and front run but is this is or program that you think will be compelling as this service program that you think you participate in.
Do you think it would help accelerate your sales.
In that important broker sold channel for you. Thanks.
Yes, so, but I think just to put some context in terms of the SMB business. Generally you know we're currently ranked 36 and the industry. So it's not a big part of our business. So we have you know sort of under $10 billion overall estimate business I think related to that particular platform that you're talking about.
You know our exposure is probably less than half a billion. So it's not a big deal for US just in general we did see it it is a little too early for us to say, just how interesting and attractive they love it might be for us So there's definitely.
Definitely some potential upside, but also some you know the thing that we'd have to get on doesn't understand before we know said it would be.
First of participates.
Yeah, and I I just had a.
It just listening to our conversation today, we just have so many opportunities in different channels to work and you know within the United States retail institutional globally, and our focus continues to be there and that's where you see the excitement and really what's going to.
Speed up the force behind the other computer growth of the organization. So.
We got plenty to work with what's on our Blake right now.
Okay fair enough. Thanks for taking my questions.
Thank you.
Thank you. Our next question comes from Patrick.
Autonomy is research your line is open.
Good morning, guys. Thank you.
The other one on the 2.9 billion dollar run rate.
Understanding that's kind of a baseline for 2020 should we still assume to the extent, we assume asset inflation.
Models, some upside to that.
What kind of normal increasing expenses related to asset built or is that really kind of what you think it will be in can go lower.
Yeah. So I think we made it made a caveat which is that's based on sort of assets. You know based on September and U.M.. If we saw a huge market up tick a there's definitely some amount of variability in our incentive plans that would you know scale up which is what we you'd expect so similarly, if we saw down.
Mark and we would also sort of see that's flex down so a there's normal kind of their ability that would happen around incentive plans, but ultimately you know there is no you should not expect any sort of hidden inflation numbers into 2020 on this number a at all this number we're feeling is comfortable based on the current levels.
Okay. That's helpful. Thanks, and then when you announced the deal you kind of announced an expectation of I think two basis points Oh revenue yield deterioration from breakage is that related to the rationalization process that we should still expect that when you do rationalize or is that something separate.
That is something that would include Oh, the potential for breakage with those rationalization and again that was 45 million. We don't think it's gonna be anywhere near that amount says I think it was already discussed its a small number of amounts of products are assets in general So I think as I've mentioned.
The pass that 45 million could be an upside to the overall modeling and the fee rate deterioration that weve provided in terms of Uh huh.
Economics.
Yeah.
[laughter] question Patrick.
Yes. Thank you.
Our next question comes from Bill Katz with Citi. Your line is open.
Okay. Thank you very much taking the questions or <unk>, which I do want to tell them what time on this 2.9 billion. So I'm still actually a little confused but it's I apologize for my Dan Smith. So is there enough synergies a go forward from here that could offset the inflation to the extent that flows what's a buildup gets to Pat do you think that could play through.
And just summit quote unquote normalized market lets call it 7% for equities, just trying to sort of see we know how that 2.9 might trend as the business gets a little bit better.
I mean, we haven't done sensitivity I mean, I think if you looked at how are the firm has you know.
It's a bonus pools is really the largest components of it and it's a percentage of PCB why isn't the proxy. It's it's kind of that's how we that's how we operate a you know it's the same concept that's going to come into effect.
You know going forward. So if we see slows really driving higher levels of the wound, which we'd love to see or if the markets improve from here, you're going to see sort of just a normal type of flex around those types of bonus pools.
So again I wish I would point you to kind of our past experience. The same kinda sorta ratios since you've seen in the past in terms of house complexes with revenues analysis.
But.
I think the point, though.
Profitability will improve if that's really the other last question and you would get your margin expansion.
Uh huh.
Yes, narrow, but you're talking about if that's the fundamental question yeah. The incremental margin is still you know at the high level of 50% to 65% as assets and revenues.
Okay that is very helpful. I'm, just a a teaching what questions and just like those average moment on the institutional channel I certainly appreciate the notion that your pipelines getting better and a few eight underneath that is better than what's going out the door, but when I look at just over the the slide that continues to sort of point to flattish flows patriot.
Hi, flattish flows overall at what point some of that you know very strong pipeline feed into maybe a more positive growth or maybe another way to think about is where are you, losing traction where you gain traction.
I mean, I think in terms of pipeline as we send worse is gaining traction and some of the places that were quite successful in China, but in China. So geographically that's been you know really a strong area for for growth across all sorts of asset classes Chinese equities fixed income that's one that I think.
As a lot of upside.
For us as we can do see successes for their penetration in that market. Oh, We do think that Europe is it's got a lot of opportunity, particularly as we build out the solutions capabilities and a you know we are meeting the needs around fixed income.
And.
Oh general use of factors and other capabilities that are been part of our growth engine stories, where for some time. So those are those are upsides real estate continues to be you know a major driver of opportunity for for the from overall you know I think in terms of downside there isn't a ton to downsize we don't see.
The big likely to terminates or they goglia storage on the downside for institutional the reason that as kind of turned negative here. A you know it's been largely because of the <unk> the volatile market that we've been in some of the fundings of have slowed just just because of the uncertainty you know work that we're doing in Europe and you.
Okay has definitely slowed to some extent just because of the no sort of the risk while sub behavior that we're seeing a as people want to understand you know what what direction.
Things are going in so we do believe I mean, those numbers, they're gonna funds, it's just a matter of timing.
Thank you just one last clarification I, probably I think you covered before on that $10 billion mandate that you expect a funny. The first half of the year is there a way to think about the fee rate associated with that I apologize if you're already covered that.
Yeah, I know again, just because it hasn't been disclose publicly we're not going to talk about it because it really will be transparent to the cline and if and when they just got to you know disclose it. So I was just like as appropriate supposed to be talking about see rates for clients.
Okay. Thank you.
Yeah.
Our next question comes from Dan Fannon with Jefferies. Your line is open.
Thanks, Mike My question is around the UK, obviously Brexit has been an overhang, but you also there has been the scrutiny of.
Woodford and the asset management industry as a whole.
Could you talk about you know kind of perpetual.
Because there are being just a brought into same into same discussions.
Around the platforms and how these funds are being sold and you. Obviously your performance there has been hit hit.
So I guess just in general can you talk about the outlook for perpetual what any ramifications you may or may not expect from some of the platforms and how phones were sold and how's your business practice might differ from the way. It's been written about in the press for other funds.
Yeah look it's a good question and you obviously, it's very topical.
In the UK and I can't speak for when but what I will say.
One of the most fundamental things that we did which strategically was no purchasing intelliflo and yeah. That's early days, but that is really a very powerful platform that we think it's going to make quite a difference for us in that marketplace and you'll see realized savings.
Percent marketshare, just boost the model portfolios.
Really deal clients are starting to go on the platform. It's gonna start picking up next year and I think that was a very important strategic decision that we made.
And with regard to investment performance again these markets more recently have been very very positive for us and those teams and.
You know the combination thereof, I think puts us in a good place and this is I'll speak it at a retail level I think that's what's your you know you're addressing.
Additionally, we continue to be very very strong in the market growing for the breakout.
Yeah look I'd just highlight the year to date improvement that we've seen in our on our Henley business overall, especially on the equity side with a number of our assets, especially those that have had the most significant size in the top half appears improving pretty dramatically from 2018 and 17, So don't Wanna get.
To too far ahead of the fact that it's relatively short term performance, but since September was especially strong month for outperformance with them of the Henley equity side, and so we'll try and definitely on the right direction. If you will that we've seen significant improvement also within <unk>. The end like fixed income side, so the what a lot.
On that business, because it kind of gets too.
Flows and what we May see there I think that group historically like a lot of or other equity James has an incredibly strong culture skill and capabilities and I think that team. Historically has produced incredibly strong performance. It's really been the recent market environments in the short long as kind of impacted Oh.
Performance notwithstanding what does it all the positive things that have happened on your those places so highly popular we'll be able to given those skills to return back all too well, what we would expect that groups and what they historically have produced in terms of quality and look at you know you're out of what the.
Breaks it.
Coming into.
More bomb it is done a tremendous headwind for us, but that's a.
Hi degree of confidence and our investment teams and at some point it will not be a risk off world and yes, you're participating or strongly.
I guess to clarify and the performance I'm looking at slide 14, and I look at the UK under one three and five year numbers and so what improvement are you, saying I guess or is it somewhere else, but I can see that.
Yeah. So the.
Yeah. So this is at the end of this is looking at about a one of your base. That's always given your year to date numbers. So the fourth quarter last year that that's an always on especially troubling year for kind of all equity performance and so that really impacted when you looked at the wonder.
September of 19, those numbers if you looked at it on the journey. So she was definitely see.
Pre but I'm not I was referencing specifically the September number where we had roughly about 90% of all of our assets within the end that group in the top half of our peer groups. So again, it's relatively short term all but we're starting to see that trend in the right direction for the same reasons that we talked about earlier.
Well, hopefully that that up or <unk>, yes, yes. It does and then just a follow up.
On on Asia outside of money markets, I guess, what products are selling in that region.
Kind of what I guess or what do you or where are you see potential. Other you know kind of avenues of growth in that region.
Yeah. So through Invesco, great wall is very broad equity products are very very strong highly performing I recognized as one of the top local money managers there institutionally in.
In China is very broad deal heavy a real estate fix things done rather they want the fabric your markets, so very broad and very deep in that area.
Okay. Thank you.
Yep.
Thank you. Our next question comes from Michael.
Morgan Stanley Your line is open.
Hey, good morning, Thanks for taking the question just hoping to digging a little bit more on the institutional channel. It's good to hear that the pipeline. So improving here just hoping you could talk a little bit about some of the investments that you've been making in the institutional business, particularly around data technology and also the ability to customize and I guess the question is how is your approach different today versus say.
Two years ago, and what might be most different as you look out over the next two to three years.
Yeah look it's a great question and let me add a couple of question I have Greg pitching to.
<unk>.
We and all our competitors would tell you it's a great opportunity. The other reality is the demands on clients have never been Oh, yeah from clients has never been stronger and so yeah. This depth and breadth that that's my capabilities has matter, but right behind is exactly what you're talking about investments in technology around analytics insights.
Has been very material, yeah, and we look at that is.
The armed isn't necessity as you're going to compete and win with.
Situtions thought leadership is another area that becomes very very important in these conversations because what we're seeing with appliances that are wanting to work at this very deeply and very broadly and so its effect, we opening up the organization to whatever set of capabilities that we have and so it's been material and it's been real.
Greg what would you.
Yeah type of a victory areas that we've invested in our.
Capabilities on the solutions font, the client experience, which would be bold technology and systems as well as thought leadership, where we've added with very strong content from our investment teams the ability of both in marketing and within that group to be able to provide that content a into the marketplace on the solutions front. It's been one of the largest investments I think.
We've made a as an organization than the ability to partner with clients to help them create a outcomes that they really desire is where the market is moving too and it gives us I think an ability because of the individual resources and expertise that we've added a to really have the conversations that we need to enter.
Why those outcomes that I think or so.
Clients are looking for a part of the reason that we were able to talk about all that the plant on the institutional side and a lot of the other pipeline is really the result of that investment that we made a number of years ago and solutions. We wouldn't have been able to obtain a client win that we talked about that was $10 billion without the investments we made and we're seeing a lot of.
Momentum.
With other clients as a result of those three areas that I kinda talk about them already talked about within the institutional side and we think that's only going to be a trend that will continue so we're excited about though.
Great just a quick follow up is there any way to sort of quantify how much investment spend is currently in the expense run rate and how we should think about that if anything kind of peeling back over the next couple of years. That's got just get recycling each other investments how should we be thinking about that.
I mean, so I mean, we have an enormous amount of investments.
Our run rate Oh, I think weve.
Well in excess of sort of $100 million of investments just generally around the from across a variety of.
In the areas that we've talked about in the past around China around solutions around factor based investing Oh. So that is in our run rate. We expect to continue to build that number over time, but offset that with no further savings as we've talked about so through synergies and just general.
Sort of prudent expense management and disciplined.
I think the key thing for where we're out within solutions, which is kind of Oh broad area, where we feel quite confident that the majority of the investments. We've made within solutions has already been made although the other things that we might need to do all distribution side and then other areas to kind of support though but we really felt all like we've <unk>.
You know the significant <unk> headway until the individuals that we need higher there [noise].
And I really.
I guess just to put some you know how do we see it and what do we Don.
Solutions team uses our capabilities I think that's quite different then yeah, what a number of our competitors.
So it's just literally.
Well you know sits on top of or you're looking through all the investment capabilities that we have in its really hand in hand with declines in what we're seeing clients to where you go back two or three and four years. It was more of a you know what product does a quite want and what do we havent doesn't match up much more is becoming a much more holistic engagement with our cloud.
Science.
Now.
It might be a capability or second capability, but it's really that insights and analytics that is really just changing to the dynamic with the client for any institutional money manager to be successful in our view.
Great. Thank you.
<unk>.
Thank you. Our next question comes from Glenn Schorr ever.
Evercore Your line is open.
Thank you.
I wanted to drill down a little bit more on the mass mutual potential you mentioned the 85 advisors in the past it talks about the general account.
The advisors are not the same type of businesses as say the retail broker dealers. The wire houses. So can you talk about what you expect.
To be selling into that channel what do they typically consume and how quickly that can be and then anything you could add on the general account that'd be great.
So look it with the [noise].
With mass mutual again, I'd say early days, it's a very strong robust relationship and we're working through those multiple areas. We've talked about what we'll do better on is telling you. Once we've accomplished something is supposed to whats coming that's not a and receive so well on these calls I've said with the 500, we're looking at your building models.
As for that Salesforce or you can pick up your traditional yeah investment <unk> believes that would be available and.
You know some of the other wire houses so it's not as different as it is different but again the commonality is there that a sector.
For us and frankly, we are in multiple conversations around the general counsel right now massmutual and again once we accomplished something we'll let you know.
And the models are that a product of jemstep.
If there.
It's really the solutions team that's doing them certain building a combination of our active in factor capabilities.
And Oh yeah.
In consultation with Oh, the CIO and what they are looking for for their client base.
Cool and then maybe just you could just update us on.
GTR.
In the past and choppy markets like we saw this quarter that was.
A decent backdrop for GE, just if you could just talk about what you're seeing on the ground in terms of potential demand.
I mean, I think what we've seen is you know there's been a fair amount of outflow retail side, particularly in EMEA as that.
Got it has underperformed some lots and I think there's sort of generally then again as I mentioned sort of risk often people have sort of moves into cash it's still actually appeals to a lot of people in principle in terms of what is trying to achieve isn't outcome in a lower risk a than than equity markets.
You know good return over cash Oh, it's currently I think a you know somewhat underperforming that a that level, maybe by 200 300 basis points its been improving in the current markets and so the performance has a you know sort of come to raise moving into right direction.
So again, we're hopeful that we can see that product a at least stabilize or at a minimum as opposed to sort of currently where it's an outflow.
Okay. Thanks.
Yeah.
Thank you our last question comes from Kenya.
RBC capital markets. Your line is open.
Hi, Thanks for taking my question.
Just a follow up on the UK flows I'm looking at it from a broader perspective, just wanted to get some of your thoughts you know whether any of the recent regulatory activity or Briggs <unk> had been changing client preferences over the past year and maybe just how would you characterize the sentiment of clients all within the U.
Okay.
Yeah look it is.
Yes, it's really where lean on our clients by that's been a boat.
<unk> transition has been.
Long in difficult, but from our perspective, where it's really come to light where you can feel it is really of 18 into this year. I mean, you can see in our business you can see it and the actions of.
Clients and what they're doing so it's more of a movement to risk off cash type things that we're seeing less of a little bit towards Oh passive as you see here or in the United States and Ah.
Yeah. So again, you know what has been a headwind and again so what.
What do we done about it or we think it's been very important.
You know too.
Change or.
[noise] ways.
No support our clients and until the close of an important part of that and again it was.
Greg talked about the active performance is picking up what we are seeing though in our portfolios are Oh, we are bringing factors and pass it into the market and that is also something that will be Yum Yum Teletwo also yeah that trend will pick up there and are in our mind and.
Again, I think you can see it's just more broadly.
From our Egypt flows yolks route to many other just incredible strong and right now where the.
The number two flowing ETF provider in that part of the world. So again, a source transaction was very important for us and we see that pace just picking up as we look to the future and if you remember what do you go back.
When we announced that you can look at the.
The EG ETF business in AMEA literally looks like it's 10 years behind where the United States was and that was a couple of years going you are absolutely seem that demand pick up as as we anticipated and we're a beneficiary of that and we look at that is another area very important growth for us.
Great. That's helpful and just one more looking further out you know when you take into account potential synergies with mass mutual.
A fully integrated sales force being able to leverage a broader products said it any updated thoughts on what could be like a long term potential organic growth expectations for for the combined a invesco and Oppenheimer funds complex.
Yeah.
[noise] I wish I had the crystal ball, but what I will tell you is organic growth rate will exceed that of you know or competition and yeah. We strongly believe with what we're building in what we have built puts us in a very strong position for where the industry is going and how we're positioned against that and she'll we're starting to see doesn't vary.
The areas, we've talked about Oh. This call are they all that full potential absolutely not but they're absolutely contributing right now we're seeing that you're seeing it and we're very excited about it.
Great. Thanks.
Yep.
At this time, we have no further questions.
[noise] again on behalf of Lauren Greg myself. Thank you for the time and appreciate the flushes good dialogue and have a great <unk>.
Yes.
That concludes today's conference. Thank you for participating you may disconnect at this time.