Q3 2020 Invesco Ltd Earnings Call
Good morning, and thank you all for joining us.
Mind or this conference call and the related presentation may include forward looking statements, which reflect management's expectations about future events and overall operating plans and performance.
These forward looking statements I made as of today and are not guarantees involve risks uncertainties and assumptions on that.
Can be no assurance that actual results will not differ materially from our expectations for a discussion of these risks and uncertainties. Please see the risks described in our most recent <unk> 10-K, and subsequent filings with the FCC and that's what makes no obligation to update any forward looking statement.
We may also discuss non-GAAP financial measures during today's call reconciliations of these non-GAAP financial measures maybe found at the end of our earnings presentation.
Welcome.
That's true that's third quarter results conference call all participants.
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I would like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco, Alison Dean Chief Financial Officer, and Greg <unk>.
Senior managing director of Investor Mr.
Mr. Flanagan you may begin.
Thank you operator and I. Thank you everybody for joining us this morning, [laughter]. So over the past decade, we've undertaken several strategic initiatives and made meaningful investments in key capabilities [laughter] position us well to deliver for clients can compete in what is now highly dynamic and competitive industry.
Forward everything you need to be very focused on executing our long term strategy, which is intended to further strengthen our ability to meet client needs.
Turning to sustainable organic growth [laughter] continued uncertainty in the economic at Pryor were sold during this third quarter driven by the global pandemic again, we remain very focused on our clients [laughter], ensuring that we're meeting their investment objectives, while also being really focus on running a very disciplined business unless certain.
Hi, [laughter]. These efforts combined with strong investment performance and high demand capabilities led to long term net inflows of $7.8 billion.
During the quarter across a broad variety of channels geography, some asset classes [laughter] retail flows significantly improved during the quarter [laughter].
Our solutions enable institutional pipeline remains robust [laughter] water flows into fixed income capabilities continued to be strong and we saw net inflows in Asia Pacific and EMEA regions during the quarter and net outflows in the Americas improved significantly.
Net flows inflows in Asia Pacific during the quarter $14 billion up significantly from the $2 billion, we saw in the prior quarter.
As we noted during the second quarter call, we've undertaken a strategic evaluation of our business and this evaluation has several objectives, including enhancing client outcomes, improving organic growth [laughter], reducing complexity and streamlining our operating apartment [laughter], we see opportunities to invest in areas of growth 1%.
Plan, that's supported by data and analytics and these include areas such as each yes, China solutions alternatives callable at least as we also look to optimize primarily in areas of the business that do not directly touch clients. We expect this optimization will produce our normalized annual operating expenses by net.
$200 million by the end of 2022 and I'll speak more to this in just a moment [laughter]. In addition, during the quarter, we continue to manage our balance sheet by reducing the outstanding borrowings under the revolver, while improving cash balances.
That's gonna has built a global diversified business with depth and breadth and resiliency to deliver positive outcomes for our clients through various market cycles have.
Having invested ahead of several macro trends that are shaping the future of our industry. As a result, we are now highly competitive in areas with strong demand with the majority of our investment capabilities [laughter] why would she future growth areas. These include a significant and growing solutions effort leadership positions in fixed income Dts factors global equities, which would include emerging market.
[laughter] alternatives in this fast growing China market and again, we remain very focused on meeting the needs of our client list, a very volatile environment, [laughter], well running a disciplined business and working towards sustainable organic growth [laughter] before I turn the call over to Allison, Let me comment on that 13 deed. It was filed by trying to go for a second.
Oh value shareholder input regularly engage with our major shareholders think constructive dialogue aimed at further strengthen our business and driving sustainable growth, we want to try and as a shareholder and our act as a constructive conversations with them [laughter].
And as you appreciate given we are still in the process of engagement, we're not in a position to comment further on this topic during the call today with that let me turn it over to Allison [laughter]. Thank you Marty good morning, everyone Slide five summarizes our investment performance.
63%, 68% of actively managed funds in the top of peers on a five year and a 10 year basis, reflecting strength in fixed income global equities, including emerging markets and Asian equities.
All areas, where we continue to see strong demand from clients globally.
Moving to slide six we ended the quarter with 1.218 trillion and AOL [laughter]. The 73 billion, an A.U.M. growth approximately 53 billion as a function of increased market value for the quarter.
Turning to slide seven our broad based platform generated long term net inflows in the third quarter of 7.8 million, representing 3.3% an annualized organic growth.
Notably we generated positive net inflows and activate U M of 1.8 billion and possibly you and Sixtyl Yeah [noise].
Our EPS experience net inflows of 12.4 billion, including 6.8 billion and long term <unk> and 5.6 billion and our Q2 kids representing the second largest not players in the industry for Q3.
[laughter] acute <unk> deliver significant marketing benefits to drive brand awareness and it increases in baskets, but <unk> leadership and relevance in the ATM market [laughter], including the success of the Q Twos are U.S. list, an ats had their best quarter in their 15 year history history, but those flows representing 10% of the overall industry.
Ladies and the corridor, which is two times our industry ETF market share.
Long term EG outflows in the U.S. enemy out were diverse across asset classes in the third quarter, including broad equity and commodity fixed income, yes de oriented equity and sector equity.
[laughter] positive V.T. outflows were contributors to the meaningful improvement in our retail not net outflows, which narrowed to $300 million in the third quarter on the institutional side, we had net inflows of 8.1 billion and I'll provide a little more color on those plans on the next few slides.
Looking at flows by geography, you'll note net outflows of 4.4 billion in the Americas and improvement of 10, and a half billion in the quarter.
I'm, sorry that was driven by net inflows into each <unk> various fixed income strategies, our stable value capability, our balance risk capability and improvement in redemption rates, particularly in our international growth and value funds.
[laughter] flows turned positive in the UK generating 1.4 billion for the quarter, which was driven primarily by flows into our institutional quantitative equity capability.
EMEA net inflows were 2.8 billion driven by the strong flows into our gold S&P 500, and eat Q2, Q exchange traded funds [laughter] and finally Asia Pacific delivered one of its strongest quarters ever with net inflows of 8 billion driven by institutional fixed income mandates in Japan and significant net inflows into balanced fixed income.
<unk> equity funds and our China JV.
Our JV has been in operation since 2003, and our early investment in China has positioned us uniquely to take advantage of this long term macro growth opportunity.
It's worth noting that we continue to see strength in fixed income across all channels and markets in the third quarter with net long term inflows of 8.8 billion. That's following net long term inflows of 6 billion in fixed income in the second quarter.
Now moving to slide eight our institutional pipeline remains strong at 31.9 billion on the heels of strong pull through and the institutional pipeline during the third quarter.
This pipeline remains robust across asset classes and geographies and our solutions capability has contributed to meaningful growth across our institutional network.
Our investments thus far into our solutions team have been impactful to the dialogue, we are having with institutional clients as evidenced by the pipeline.
Turning to slide nine as Marty mentioned in his opening remarks, we are well positioned with investment capabilities aligned to key future growth areas. These include a growing solutions effort capabilities and fixed income each yeah factors global equities, including emerging markets alternatives and the fast growing China market.
[laughter] these are high performing capabilities, and our illustrative, but the breadth and diversification of our product offering.
In addition, these are capabilities that present tremendous opportunity in large and growing parts of the market.
On the left side of this slide we highlight certain capabilities in China, where we have seen strong demand and good performance as well as our deep and varied fixed income offerings.
Pretty Oppenheimer transaction, we broaden our platform with sizable global equity offerings, including developing markets and the O.S.I. international growth capability.
We have good performance in these areas and we're well positioned for client demand to return a.
Additionally, we offer a range of real estate investment strategies across risk backdrops and geography.
[noise] on the right side of aside we illustrate DTF capabilities upon which we will look to expand the.
The Q2 Q E. T up is one such example, as announced earlier. This month, we have expanded the Q2 product suite, which will allow us to market the capability to new and different investors.
In addition, we're seeing client demand for U.S.G. capabilities here to date and the street U.S.G.E.T.F. have gathered over 20 billion in net flows.
We manage over 5 billion any S.G.H., yes, the invesco solar ATM as our top selling U.S.G.E.T. us with net inflows of $400 million in the third quarter.
We will continue to invest in these areas and we believe there is opportunity to take market share and that these capabilities will be important contributors to our support to our organic growth.
Turning to slide 10, you'll note that our revenues increased $59 million or 5.6% from the second quarter driven by higher average age you in Calgary.
Net revenue yield excluding performance fees was 36 basis points down eight tenths of a basis point from the second quarter.
75% of the decline in the yield was largely driven by the growth in our non see Q2 kids outside of this fee rate declined modestly due to other mix shift we experienced across products in the quarter.
Total adjusted operating expenses increased 1.7% in Q3 against the 5.6 increase of 5.6% increase in revenue, creating positive operating leverage the $11 million increase in operating expenses was driven by higher compensation as a result of strong market growth in the quarter.
Operating expenses continued to be lower than historic activity levels due to pending it endemic driven impacts to discretionary spending travel and other business operations.
Now turning to slide 11 for a little more color on our expenses overall.
Having successfully completed the integration of Oppenheimer funds and delivering savings of $501 million against the combined organizations expense base, we see additional opportunity to optimize our model as I noted in our earnings call. On July 28, we have conducted a strategic evaluation across four key areas of our expense base.
Our organizational model, our real estate footprint management of third parties and in technology and operations efficiency.
During this evaluation, we see an opportunity to invest in key areas of growth aligned with our strategic plan and supported by data and analytics, including Ats, China solutions alternatives and global equities.
While creating permanent net improvement of $200 million and our normalized operating expense base.
A significant element of the savings will be generated from realigning, primarily our non client facing workforce to support key areas of growth and repositioning to lower cost locations.
On January 29, we guided to a 2020 operating expense run rate of 3.02 billion, which included the full realization of the Oppenheimer synergies.
Our annualized operating expense run rate as of the third quarter is a 2.74 billion, which reflects cobot induced business impacts and market driven expense reductions from the guide we provided at the beginning of this year.
Our normalized operating expense base assumes a return eventually to normal business conditions once the pandemic subsides globally.
This normalization of largely marketing expense DNA and the seasonality of our payroll taxes within compensation expense without an additional roughly hundred $34 million to our third quarter annual an annualized operating expense base and that would bring our normalized operating expense run rate to 2.88 billion we.
We see an opportunity to reduce this run rate further by $200 million net of Reinvestments.
We expect 150 million or about 75% of the run rate savings to be achieved by the end of 2021 with the remainder recognized on 2022.
The savings represent low double digit accretion to EPS and each of the next two years.
We expect total one time transaction costs for the realization of this program to be in the range of 250 to 275 million over the next two years with roughly 40% of those charges occurring in the fourth quarter, 40% and 2021 and the remainder and 2022.
With respect to fourth quarter 2020, operating expenses I would expect them to be modestly higher than Q3, driven primarily by increased marketing spend reflecting higher promotional and client activity in the quarter.
Consistent with our past practice. This expense guidance is based on September 30 of 2020 assets under management market and FX levels, and therefore may fluctuate with these with these items any discrete non operating expenses going forward.
Now moving to slide 12.
Adjusted <unk> adjusted operating income improved $47 million to $407 million for the quarter driven by the positive operating leverage in our core business.
Adjusted operating margin improved 240 basis points as compared to the second quarter to just 37.2%.
Adjusted EPS was 53 cents compared to 35 cents a share in the second quarter, driven by lower non operating expenses and higher non operating income.
Non operating income included 29.2 million of net gains and equity in earnings in Q3 compared to a $53.2 million net loss in the second quarter. The increase in equity in earnings was driven by noncash market valuation increases primarily NRC yellow holdings, which demonstrated some recovery in value in the third.
Order as compared to the second quarter.
Interest expense of 33.8 million was lower by 2.9% in the quarter, reflecting the reduced credit facility balance during the period.
I would note the third quarter was the final quarter in which we pay dividends related to our forward purchase agreements, which settled in January and April of 2021.
As a result, we expect interest expense will decrease by approximately $9 million in the fourth quarter.
Our tax rate for the third quarter was 24.2% and for the fourth quarter, we estimate our tax rate to be between 24 and 25% while the actual effective tax rate may differ due to nonrecurring or discrete items.
A few comments on slide 13.
We reduced our revolver balance by $236 million to $90 million in the quarter consistent with our commitment to improve our leverage profile.
In addition to using excess cash to reduce leverage we seek to improve liquidity and our financial flexibility should.
To that end, our balance sheet cash position improved to 1.067 billion in Q3 from $987 million at the end of the second quarter.
Our goal remains to build cash to $1 billion in excess of regulatory capital requirements and at September Thirtyth, we were holding approximately $340 million in excess of regulatory requirements.
As we've indicated we're building financial flexibility in these uncertain times and we believe we're making solid progress in our efforts [laughter], we remain committed to a sustainable dividend and to returning capital to shareholders longer term through a combination of modestly increasing dividends and share repurchases.
In summary, we're focused on our strategic evaluation and reallocating our resources to position us for growth and we remain prudent and cautious in our approach to capital management, our focus on driving greater efficiency and effectiveness and to our platform combined with the work we have done to build a global business with a comprehensive range of capabilities puts into.
Tesco and a very strong position to meet client needs run a disciplined business and to continue to invest in and grow our franchise over the long term.
And with that I'll turn the call back to Marty [noise]. Thank you Allison. So operator can we open up for questions. Please.
Greg myself from Allison.
Yes.
<unk>.
Please.
Yeah.
And your question please.
So your question.
<unk>.
For the first question.
Your first question.
Your line is open.
Hi, Thanks, good morning.
I was hoping you could expand a bit on the areas of the cost cutting you gave some buckets, but did you also.
I mentioned that it was really not client facing so just wanted to see what might be the disruption from some of these changes in cost cuts and then also if you could just kind of size.
In terms of percentages, maybe we got.
<unk> <unk>.
Sure. Thanks, Dan I'll, I'll start and I might let's grab or Marty chime on on on the client facing in part a of the $200 million that we've noted about 50% to 60% of that I would expect to come through compensation expense.
And of that I'd say about 75% will occur in 2021, and the remainder thought would fall off in 2022 [laughter].
The other 40%, 50% would be split across occupancy tech expense and DNA and not occupancy expense. Yeah, I expect that's going to be kind of evenly split across 21 and 22 I.
I think the DNA component will will fully recognize them 21, and the tech expense will probably be pushed closer to 2022.
On the on the compensation side. It is primarily realigning our workforce to lower cost locations and reallocating and reorganizing across our business to make sure. We're investing in our highest Ah capabilities. There were some announcements that have already been made publicly I'm happy to let Brad comment a little bit more on that but that's.
Largely behind us at this point.
That help Dan.
Yes, it does but it will just depend on the client facing side.
Just.
King about you were at risk or anything.
<unk>, a we think about the investing professional components of <unk> <unk> <unk> <unk>.
Yes, let me talk to him.
Good question. So that's strategic evaluation did include investment teams as you would.
Thats the total assets impacted as a relatively small it's about 26 billion and even though that's a small amount we really believe that the changes really improved the overall organization improved our focus prioritization, maybe just to put a little bit of perspective from a high level. The changes were really designed.
On the investment side to accomplish a couple of a job just wants to enhance our investment teams and processes. So we can continue to drive performance up to us to enhance and simplify our global equity offerings.
To talk more about that if you onto three was to redesign certain capabilities to stronger teams with frankly, better processes and performance from them for the non investment professionals are really was to reduce complexity and ultimately see.
Justin service levels, where we needed to so.
Investment side, we talk to employees, who got detailed conversations with clients and by and large those changes are completely behind us and the feedback internally and externally to sales.
Well, we see very thoughtful I think everybody said it made a lot of sense from a strategic standpoint.
Great. Thank you.
Great. Thanks, Jeff.
Thank you for your question our next question.
Yes.
Good morning, everyone.
Oh, good morning questions actually from Marty.
Good morning.
Even vasco at 1.2 trillion of anywhere I'm now has enough scale to be successful and I was especially interesting your comments on the distribution side.
Yes. So quick quick question. So let me the answer is yes, and let me step back to probably the core of the question and.
We've talked about for last few years, you know, there's clearly a very different dynamic going on in the industry.
And it's driven by something very simple clients around the world are choosing to work with fewer money managers and.
And that's why there's a retail channel the institutional channel.
Again every geography in the world and so what they're looking for from clients is clients.
We are expecting more for money manager. So it's a broad range of capabilities that we have from possible, which alternatives, but beyond that they wanna solutions capability. They want thought leadership they want the ability for us to build models for them help in any way and so that has been a core focus for us as a firm.
And you can see it in just the growth gross inflows net inflows now as you know that impact there. So you have to be relevant to clients you have to make a difference for clients and that's really important so its capabilities. It's also the depth and breadth of capabilities and services and also I think what you have to do to is yes, you want to have.
Skills, we can drive efficiencies into the organization, which we've proven to do over any number of years and just a conversation today proves that once again, but its really sick and reinvest back and things like technology to create a better experience for your clients.
And again ourselves and I'd say the other larger firms have done very well.
During that during the global pandemic or the client interactions have never been better and see how much of that was driven by historical technology investments and again not unique to us and.
But I think we've all been surprised that if you have scale and capabilities can really create a difference for your clients.
Hi, so hopefully that I actually just have.
Good morning, Ed one step.
<unk>.
The strategic expense initiatives so yes.
Say that changes will enhance the global equity offering does this mean merging funds into other funds removing teams does this mean shrinking the number investment professionals and.
And also reducing the number of products.
Yeah. So it's a combination of some of those things so Craig so goals. We will you know the global equity capabilities that we have right now, especially that we've acquired from Oppenheimer was very strategic in terms of filling some gaps within our portfolio, but we had other capabilities on the global side that we're kind of nasal to that.
Overall effort if you will so some of the things we are going to be doing those reassigning, our Atlanta based global core equity team.
To our Canadian Global equity team and then realigning the Canadian global equity team into our New York team its going to simplify not only our overall offerings and capabilities, but it's got to be able to streamline our messaging and branding and so that kind of marketplace. So those types of things that we're going to be doing under that umbrella.
Simplifying our global equity offers.
Can I just I, just wanted to clear and both Greg and I will say at this point.
[noise] changes have been made and we're done with the changes the clients contracts have been made and there were shooting for moving forward now so I just want to make sure that there's no mystery there.
Correct that address your question.
Yes, great great job. Thank you.
<unk>.
Our next question is from.
Your bank.
Great. Thanks, good morning folks.
<unk> with the expense.
Scott I think.
He said this but just.
And from the expense base assumptions the dollar amounts.
Exclude any impact of market appreciation.
<unk> data so if we just playing with numbers if we normalize.
At retail.
From say the end of the year I get around 400 million or so of additional revenue Sue <unk> would it be fair to just put a.
Revenue number on the compensation line on that to think about how the.
Let's face it might grow in that market return.
Dynamic in there and then just.
Oh.
Yeah. It's a great question. Obviously, there are a couple of ways you could think about it. So let me just try to bring a little bit of clarity to it one yes, all the expense guidance, but the fourth quarter guidance and those are the 200 million target beyond Dod is all based on September thirtyth asset levels market FX.
As you think about the 200 million dollar reduction again, I expect 50% to 60% of that comes from compensation and that would be the component that is you know as you reduce compensation I'm that is the has the most variable component to it and you know obviously fluctuate the most with any change in asset levels are market.
Our formats the balance is really tied to discrete items across our occupancy tack and DNA expense and so it doesn't have quite the same dependency on a market or asset levels.
Okay. Thanks.
And then on.
To talk on the sales side Marty.
<unk> if you could just talk about some of the key drivers that you saw more fluid.
In terms of the sustainability and your confidence about the sustainability of that.
You want to comment on October flows so far.
But but.
You think the.
That you can continue to generate positive flows.
And over the long term and maybe if you could talk on a couple of initiatives that give you confidence on that.
Let me make a couple of comments and I'll call It Allison and Bret chime in so yes. The answer is yes, right and you saw a marked change in flows and again, we continue to point to look at the gross number always that's really the health indicator always.
So what you've seen over the last period of time institutional business continues to just be very strong and.
I'm going to get <unk> point is.
Pipeline again, it has strong and if you look to your Asia Pac continues to be very strong social media company back on track and the Americas improved dramatically. So what's BARDA each yes generally continued its just.
Quite powerful fixed income is our absolute strike right now.
And it's not just performances quality and the team is the breadth of the team, but its also client demand that's a really important.
Element for our flows and you saw a marked improvement in the U.S. The biggest headwind continues to be a work we have great confidence in the long term.
The global equity capabilities, including emerging markets, you know that that is something of strength as we look forward, but headwinds when clients don't want something [laughter], you're going to guess if you use the U.S. retail channel as a proxy because it's so public information the outflows in us equities are strong.
Edwin the second largest category ALD is a global equity capabilities and those are two areas where some.
Some real strength and there's some challenges and some of our capabilities there, but it's hard to overcome that so.
What you're seeing is the rest of the Paul part of the organization overtaking that I think that's really important.
Yeah. The only thing I'd add is looked at which is if you look at our business all of advantage perspective, we saw significant improvement in our flows and every broad indication category on a quarter over quarter basis on sustainability I think assuming we have continued its strong performance I think is there.
If you look at our flows in the third quarter. They were positive in every category, except we feel equities in retail bank loans were bank loans were essentially slightly negative for the quarter. So when you kind of look at the overall business institutional and retail fixed income institutional equities institutional alternative institutional and retail.
L.'s products all contributed to the positive flow number. So we're encouraged by the trends, but we're probably more encouraged by the magnitude of improvement in every brought US a category that really is much more of a testament to the sustainability recycle more flows moving forward.
And I'd add one other thing so we continue to see.
A lot of success coming out of the solutions and the other factor capabilities and some of the process and as you know they are big mandates, but they are lumpy right. So you could probably see some more lumpiness than historically, we've seen in the past but on.
On balance you know that's a good thing from my perspective.
And do you see that.
Continuing in October.
From the third quarter.
<unk>.
Yeah.
We're not going to do that that's I surfaced straight what returns you're talking about them on so.
So that's a that's where we'd like to be helpful. But I don't think it's been constructive so okay.
Thank you.
Okay.
<unk>.
Sure with Evercore.
<unk>.
Hi, Thanks, very much why if you could expand a little on your comments about the significant growing solutions effort and the combined company.
And I guess a lot of talk about the cost structure and how you deliver <unk>. What you think it takes to be great. How you measure that success because as you mentioned with clients of all types consolidating providers.
Seems to be that secret sauce, that's going to help you deliver everything that youve built here. So curious if you can expand on that a little bit. Thanks.
Yeah, I'm going to make a couple of comments im not going to that group. So the way that we've built our solutions businesses.
We see very intelligent people, but what it does is it it's it's strong.
Across all of our investment teams globally. So they don't compete with the investment teams. They literally use the content from the investment teams.
And I think that's somewhat.
Minority approach in the marketplace, but also its the analytical tools that have been built by the team that really enable these conversations and we've seen the conversations with very sophisticated institutions that have resources to do their own working they do but they're they're wanting to get a different view from organization.
So to have these capabilities and again it just changes the depth of the relationship that.
That we have with these.
Organizations and and again, it's taken all spectrums from.
Creating.
Bottles through of self indexing capabilities, creating.
Indexes for client for them to use for their own purposes to you know the more.
Yeah, well known solutions outcomes that people want with it across different asset classes, but graceland, except maybe just to kind of add some marty's comments look our solutions business really has two primary segments.
One is an enabler enablement capability, where we're going to help you with in conjunction with distribution to determine client needs and the best individual capability to align to those needs and so you need to go to the grade and that is really strong client engagement skills or revenue strong analytics and then the second is where we're going to provide customized.
Oh comes tailored to specific client needs across a number of different asset classes and so there would be great. If he had very strong asset allocation skills and so we've done over the last five years has really made probably one of the most significant investments in the company to build capabilities in those three areas that I think what we're seeing off of that.
That investment to really started four years ago is a significant improvement in both our assets under management or assets under advisement, both in the institutional channel.
Which is up significantly you saw that on the pipeline chart that.
That also talked about were solutions is enabling over half of that business.
We've also seen a significant level of engagement and portfolio reviews on the retail side. So we've got a strong pipeline within solutions I think that in concert with more favorable market conditions in the third quarter is going to provide additional tailwinds to the business and so we're pretty excited about so just the opportunities for.
You know in the near term and over the long term.
<unk>.
Thanks for all that I appreciate it.
Great. Thank you.
Our next question from Brendan.
Yes.
Hi, good morning, Thanks for taking my question.
I was curious about how you view I know that you've spoken in the past about the fact that your <unk>.
Always small footprint retail estimate and particularly given the fact that the U.S. retail has been a bit of a headwind for you you've got so much.
Some in other parts of the business, but that one has been a bit more slow to turn around retail estimates have been sort of the bright spot in that channel.
Do you think about potential investment there you've also got a dominant provider that that will no longer be independent in the future and so there might be.
Increased demand for another independent provider from some from some firms and some some assays. So how do you view that opportunity where are you as far as capabilities in that market and is that worth your while when you stop.
Just think about Oh investment dollars here.
Yeah, It's a great question and.
I think the core where you're going in which we've always agreed with you know separates investment capabilities from delivery mechanisms and you have to have different vehicles to deliver because it's different in different parts of the world different channels and you are highlighting a trend, whereas amaze would become.
Importance in segments of the wealth management channels and.
The good news is when.
Oppenheimer. They have had that brought over a stronger somebody capability largely aligned to fixed income and as weve turned our attention to it that's what we're starting to see flows.
We'll continue to it.
Expand that Ah, yes, yes.
In response to client demand I think the other area that weve talked about over time is yogurt weizenbaum transparent each yes, we still have our application and we're excited that we're.
We're working with fidelity of who's very strong partner upbringing.
I'm transfer capabilities into the market. So before the end of the year, we'll see where that goes as I've said I think that's longer dated but.
I'm, just really highlighting the need to Oh, we have to respond to client needs with the vehicles also yeah, then I think I'd add to that party a little bit as look where we are spending time.
With our estimate business, we have the legacy business and one that we were able to acquire with the Oppenheimer acquisition, we recognize it's a bright spot in the retail market. So I agree with all those kind of orders points, our team and capabilities and strong fixed income.
We're spending time right, though in technology to really in the areas of operations of tax efficiency and the things that are going to be requirements to kind of support.
The business overall, so we understand the essence of your question and we're spending time to make sure that we address the bright spots in the market.
Excellent. Thanks, so thanks for that color Marty and Greg.
You also made a few comments it sounded like although I might have misinterpreted that you're looking to make some investments in some of the product line up trying to expand into you flagged U.S.G.
It sounded like there might be some further development of late Q.
Triple Q related products.
Did I read too much into that or is that the case, what kind of opportunities that you think that that.
So will actually result in for Invesco, and if you're going to expand on the queues.
Is that going to allow for invesco to generate better economics on some of that innovation, how should we think about that.
Thank you, yes, so yes, so [noise].
In the last couple of weeks, we enter produced a sort of a.
Expansion of acute C or the Q suite of assets, who is a fantastic partner and it's really following the great success with the queues, they're complementary in nature.
To the Q to Q and again they are more typical structures with a more typical economics, then what we have with the marketing allowance with accuse so.
We see client demand there is a natural extension of the Q Sweet and as Allison spoke to we showed some of the DTF related DSG capabilities. They have been in the market for a good number of years so try.
Back record does matter and a there there our track records there ER and the assets are now just really beginning to grow as people are turning more seriously, yes, Gee, we have no other focus areas and yes. She is everybody's turning their attention there, but again, we have a very strong capability internally.
[noise], there and your product will follow that those capabilities as we look forward.
So essentially the tickets your.
Yeah, Okay, yeah. Thank you Marty.
Yep.
Thank you for your question our next question from Ken.
Your line is open.
Hi, Good morning, given consolidation is a theme for traditional asset managers. These days.
Given where invesco is with the integration of Oppenheimer Insufficiency program is invesco interested in pursuing further pursuing large scale M&A and if so would it be practical to pursue large scale M&A in the near term if an opportunity presented itself given the goals you've pointed out for the balance.
[music].
Yeah kind of spread question, So let me put.
Put it in the context of how we think about things we have acquired over time, obviously the principles have not changed it needs to be additive to the organization that has to have complementary investment capabilities, they need to be strategic they need to be differentiated.
Ask me something clients watch.
And I would contrast that to some of the things I've read that the notion of finding.
Financial roll ups is going to be to the order. The day, we don't believe in that its disruptive is a risky and yeah clients are not supportive of it so.
We will not we will continue to be on the area. If it makes sense for US you know, we'll pay attention to it and again always tierpoint.
It's it's got to be strategic and it also has to be financially sound. So our thoughts and we'll be said about change there.
Yeah and in India.
And if everything made sense is invesco in a position to pursue something near term like longer term you know would make sense. If you find the right fit after everything is digested it et cetera.
But our AR is invested in a position to to do something you know now were in 2021, if that opportunity that fit all the criteria you mentioned presented itself.
Yeah, Kenny I I can address the hypothetical what I can tell you right now is a we feel really good about the organization, we feel really good about what we've accomplished.
Yep.
For us like many other organizations cobot. It was not a welcome experience serves knocked us off our plan for 2020 factually. We're now back on it you can see it and these results and.
We took very seriously during this period of time, you are making sure that we have the resources against the right opportunities and we believe we do right now so again I work.
We're heads are down and we're executing with what we're doing and we feel really good about it and I'd underscore our commitment to our balance sheet out objectives, and we are committed to continuing to improve our financial flexibility, reducing our leverage profile, a and making sure. We're in a very strong position to weather any uncertainty that comes our way.
And and to continue to invest in our bills nothing and can invest in our capabilities for growth and I tell you that our scale is what gives us the opportunity to announce a the cost target that we announced today and we're going to take advantage of that.
And Ken let me come back anymore.
It's one step back you know just our basic belief so the word consolidation is thrown around a lot in the industry and.
What we said in the past and what I do believe is the stronger gets stronger. There's no question about that just because of its been a dynamic you talked about of what clients are looking for from organizations, but consolidation doesn't mean that organizations are going to be buying everything I. Just think I think there are many firms that.
No one will buy.
Consolidation will happen you know.
Organically, you know clients, leaving some.
Some money managers for others, where there are better served so.
I I think that's how we think about it and again anything will do will be very very thoughtful one consistent with both the.
Yes, we played out but that is not our focus at the moment.
Awesome. Thank you so much yep. Thank you.
Thank you for your question. Our next question is from.
Steve Goldman Sachs. Your line is.
Great. Thanks. Thanks for the question I was hoping you guys could expand a little bit on the 32 billion dollar pipeline you highlighted on the institutional side, so maybe a little more color on the revenues or the fee rates associated with that and any notable redemptions that you're also aware of you got on the Lumpiest side of things.
Sure. Thanks, Alex that you know that the pipeline or it actually looks very strong obviously as compared to prior quarters pretty balanced I would say across regions and asset classes. As you can see in terms of the fee rate. It's perhaps a modestly higher then then the pipeline at the end of the second core.
There I'd call it very modest it continues to be consistent and and it's really a strong mix of a equity capabilities and fixed income that we drive the fee rate just a little bit higher and we're continuing to see growth from the United States as well, which is which is a really strong indication of the highest we've seen.
From them and a number of quarter. So overall.
Overall, I'd say, it's a it's a good healthy pipeline in terms of redemptions nothing notable nothing unusual and I think we continue to be very focused on redemptions. If anything it's it's really our as our clients just continue to look at mix within their own mandate I would note.
Terms of the institutional flows in the third quarter about two thirds of those where from the pipeline itself about another third or so was from client activity. So the institutional flows were seeing are not just coming from the pipeline. They come from augmentation of existing relationships and I think that really underscores.
The strength of the franchise overall.
Gotcha.
And then my second question just around the China JV I was hoping maybe taken a taken a step back if you guys could talk a little bit about what sort of the total 81 days and maybe operating income contribution to invesco from that relationship today. So if you could break it out kind of revenues expenses that will be helpful and as you think about scaling this over time.
What is sort of the products that are resonating most how can you sort of grow this could be more meaningful contributor to the organization.
So let me just start conceptually at a high level about China for US. If you just look at what's happening is supposed to be generated.
And for US there at the other.
All time highs and largely driven by the JV.
And it's just it's depth and.
A breadth of capabilities and it just continues to get stronger we anticipate that going forward again institutionally. We continue to have great experience, there and Oh, it's a broad base of through your launches in China and existing products going forward. So.
Again, we just [noise].
A very strong position there and we anticipate it will just be a material contributor.
As we move forward.
Okay any numbers around that.
See how so we have to give you a couple of numbers, we own about $66 billion in kind of mainland China overall footprint is across a variety of different kind of asset categories. If you look at the $8 billion of kind of flows from an asset category standpoint, they were quite.
Diversified and positive in just about every area with Asia Pacific balanced process.
The largest driver of overall flows in Asia Pacific in the third quarter.
You know just related only to balance products I think the thing you have to think about there is there's a lot of diversification.
Given the broad based nature of needs within China, and I think that it's a broad based set of investment capabilities with very strong performance that relate to the.
Great. Thank you.
Thank you.
[laughter].
Thank you for your question.
Question comes from.
Morgan Stanley Your line is open.
Hey, good morning, Thanks for taking the question just coming back to the expense saves a 200 million.
Savings understand that's not up investments I was just hoping you could talk about how much exactly embedded in there for investments back in the business, maybe you could talk about how you're approaching that how you're sizing that what gives you confidence that the right amount and what would you say are the top three areas that you're investing in.
So let me just talk in general so we're not going to get into specifics you know I think as we've all said or the work that we did was very comprehensive and very broad. So there was a lot of movement to.
Realignment of resources and I guess here is that we care about and Oh. It was just talking about China is going to continue to be a contributor. So we're making sure that we have all the resources that we need you to U.S. continues to be a driver and we continue to see that you know.
As a very important area for US factors continue a subset of that continues to be very solutions. All the areas that we've talked about so.
Again, most of the assets under management now we think are that we have are [noise].
<unk> revenue sources and they are in high demand areas as we go forward and Michael the way I I just add to that is and we're focused on creative pot, creating positive operating leverage and sustaining that operating leverage and so looking at these cost targets and gives us the opportunity to realign our investments or permanently alter.
Her take out some expenses so that we have the flexibility and the capacity to continue to invest and all those capabilities money stuff.
Okay, just on the the uplift 134 million on that slide with normalized business conditions. I guess, just how do you think about the drivers there how does that break down it how would you describe what normalized is relative to say pretty cold Winter. For example is it like 80% on say T. any worse is pretty cold, but how should we be thinking about.
That.
Yeah sure. Good question. So yeah again, there are a couple of ways to think about that of the 134 million at the rather specific number I know, but I you know I'd tell you about 25 million or so is really it is purely a function of seasonality and compensation expense. So it has nothing to do with coal that its just third quarter would not be the right quarter to reach.
Great Great a run rate there or the remainder hundred million or so plus is very covert induced and you know it's hard to figure out for any of us how much of that comes back and the way in which it comes back in the timeframe in which it comes back I I couldn't tell you if we're running it.
You know, 80% or 20% I mean, I can tell you we're not travelling [laughter] and I can tell you that most of our offices either remain closed or at somewhat of a 20% or so capacity and so if you just think about the expenses that would be tied around that and we're not having in person engagements with clients you know consistent with what you would have.
Back to everywhere, so I mean in some respects you could assume it's yeah.
You know were 5% of what it used to be we don't expect will stay there forever. We just don't know when it would come back and we do believe it comes back we do believe there is an environment Sunday were largely back in the office, where we are traveling to see clients again that we are in person together again, and we do think it's reasonable to expect some of that to come back over time I just don't know.
No win and then the point I made earlier that $200 million is largely independent of that it's really tied to discrete line items that have all been identified and really has nothing to do with a co that environment.
Great. Thank you.
Thank you for your question our next question.
Bank of America.
<unk>.
Hi, good morning, and thanks for taking the question.
Yes, the turn in flows is great I realized this quarter.
Some of the rising will not be on.
Including excluding that I think it's still take downs funky markets.
We provide some color on that.
Yeah.
A more versus the overall rate.
Yes.
[music].
I would say the fee rate for the institutional pipeline and the component that is driven by solutions. It's very consistent so I would just think of it very consistent to what we've experienced and I.
Certainly in the third quarter, and probably you know a couple of quarters prior to that.
Okay. Thanks, and then also just given efficiency initiatives and where you guys adjusted margin isn't it.
Yes.
Roughly in line with the Doctor on when.
When you're looking at these efficiency initiatives is that a way to improve the margin further experience money to invest in the business longer term often.
Yes.
I'm, just trying to get a sense because each firm has very different Egypt.
Initiatives or outlets in the industry and then if you get a 5% rising markets. If you can just.
It is now how you think about the variable component.
And how that could impact works.
Ah So I would say the way we're thinking about it is we want to be able to create positive operating leverage its hard to create positive operating leverage quarter after quarter after quarter, but that's you know longer term over the medium term. That's what we're trying to do so that we actually have to compare.
Funny to reinvest and <unk> and we cant underscore enough our commitment to reinvesting in our business and reinvesting in those growth capabilities, because we really believe that's what drives the longer term flow dynamics and value of the farm and so as we think about operating leverage you know and we think about the fact that the fee.
Environment is one.
That is there is downward pressure and that is not the same downward pressure quarter after quarter, but in general at a macro level the pressures more down.
Than anything and so as we seek to maintain that the fee level as we continue to see just the growth in our LTL business and the the QQ suite. A we are looking at really creating profitability across the broad platform and thinking of these expense levers as a way for us to create capacity to continue.
Reinvest to drive the top line and that's where we think we get the operating leverage in terms of the variability I mean, I just point to the fact that our expense base in general is about a third.
Variable two thirds fixed and so as you think about a rise in markets that that's a reasonable data point to yes.
Got it thanks.
Thank you for your question.
Our next question, we have about five minutes left in today's conference call.
Next question will come from Bill Katz.
Your line is open.
Okay. Thanks, just one clarification a lot of my questions have been asked on the $26 billion of anyone that had been sort of identify what some team changes is that money sort of sticky at this point in time or do you think that there could be some subject to run off and what might be the associated revenue is with that.
Yeah, we think that it's quite sticky bill.
Conversations I've mentioned before both with the teams at our clients I think like I mentioned the feedback was was quite positive for the changes that we made both why we did it was strategically the rationale behind them.
So you know we just don't expect there to be a significant amount of write off related to those assets under question remember what we're trying to do is use those things to the strengths and areas, where we really think there is strong demand in the marketplace or move assets to stronger teams with better processes and performance overall so.
As you know should we see that as being a good thing kind of overall not look it's tough to go through those things, but there was right things to do strategically for the business.
Okay and then just one quick follow Marty you mentioned in your prepared commentary that you're looking to take share with any Ts I was just sort of wondering where that share might come from is that within the passive bucket broadly is that relative to active some of the existing players and trying to get a sense of how that show with transpire.
Yes and.
Bill it's going to be a combination right I think you know we talked earlier about the Kikuyu sweet it's so strong spot for us.
That will be an area, we were very strong factor capability I mean, that's sort of fundamental to our ETF suite and so we'll continue that.
That area I also mentioned Oh.
Relatively small by $5 billion and yes, you related EPS right now yeah. It is an area of you know is market demand is moving there having those longer track records are our important when so we look at that as an area of growth also so you should think broadly about it and again I still think as long.
Her dated but you're paying attention to what happens with non truck nontransparent ETF so something.
I have you.
As we look out into the future and then again, yeah, we'll we'll start to get some sense of it.
So yes, we are.
Launch.
So not transparent.
Along with fidelity, a by the end of the year, so pretty broad spill okay.
Okay. Thank you very much taking the questions.
Much appreciated.
We have a question from Robert.
<unk>.
[music].
Great. Thanks, Thanks for your patience.
Students versus the yen.
The shaded.
Most of my questions were asked but Molly you touched on the I apologize if I missed this earlier, but Oh Anita it's Jamie.
<unk> or how are you thinking.
Really strategy may be focused on.
Yes.
<unk> strategy and how are you.
Greetings and water.
Yes, you can.
That's impossible.
Dissipating will you add a border.
Got it.
These strategies, just trying to get a sense of that.
Yeah, Let me make a couple of comments and Greg can chime in so its multi tier two so.
Principal activity right now is.
Embedding he or she across all of our strategies throughout the throughout the world.
We're well into it you know some will take longer but that's yeah. It is just a reality and that's well under way and again I think different parts of the world are different stages. If you are betting TSG and your investment capabilities and in Europe, you know, you're just not competitive and we anticipate that no.
Across the World and then just looking at our products, we just Nike Jeffs alone. It continues to be well look at active capabilities.
I'd say, we're probably leader in the fixed income area with.
Yes, we've been embedded in that process and then the other thing we have a.
Ah, Yes, GE capability and thought leadership there is an area that is an area of strength for us and again, we're taking it very very seriously for Greg would you rather yeah. The thing, but you know look I think we're well positioned Robert from yes, GE perspective, the market is to Marty's point, we've been very quickly you need to move quickly we're prepared to.
So if you got to think about our book right now we have roughly about $30 billion of E.S.G. mandates by the narrows to market definition, that's across 90000 mandates vary by strategy and geography and client type. So we view SG strategically to something that will continue to grow with them.
So in every region.
It's a good growth area for the firm we have a desire to be a top tier globally SG manager.
To marty's point kind of prepared to have.
Yes, she systematically integrated across our entire platform, which as you know a big kind of undertaking and then we will support that with a ray of sustainability and impact products. Overall, so strong performance I guess is really key in all areas as critical TSG moving forward and that's what our model is very investment led you asked about how we bid.
Anish this vessel live, but we make sure our teams incorporate iasci requirements at each team specific processes and then we support them by a globally as T. G team that provides expertise and a comprehensive set of tools. So a lot of work there, but I think it gives you a little bit of understanding of the seriousness.
So we'll take any S.G. a tough for me this opportunity is going to be moving forward.
Thats a great answer your question, yes, yes.
Yes. It does thanks so much.
Thanks, Robert and so we're well wrap up the call again, thank you very much for all the questions very thoughtful [noise].
I feel good about the quarter, we feel good about the undertakings that.
That we described today, they're all meant to make us a better stronger from.
And we will continue to be very focused on that as we move forward and for.
Ongoing conversation. So thank you very much and have a good rest of the day.
This does conclude today's conference call. We thank you all.
You may now disconnect.
[music].
Yeah.