Q4 2020 Invesco Ltd Earnings Call
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Good morning, and thank you all for joining US as a reminder, this conference call and the related presentation may include forward looking statements, which reflect management's expectation about future events and overall operating plans and performance. These forward looking statements are made as of today and are not guarantees.
Risks, uncertainties and assumptions and there 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 form 10-K and subsequent filings with the SEC Invesco 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 may be found at the end of our earnings presentation.
And welcome to Invesco fourth quarter results conference call all participants will be on a listen only mode until the question and answer session at that time to ask a question press star one.
This call will last one hour to allow more participants to ask questions. Only one question and a follow up can be submitted per participant.
Today's conference is being recorded if you have any objections. Please disconnect at this time.
And now I would like to turn the conference call over to your speakers for today, Marty Flanagan, President and CEO, Andrew of Invesco, and Allison Dukes, Chief Financial Officer.
From Flanagan you may begin.
Alright, Thank you operator, and thanks, everybody for joining and happy new year to everybody I think we're all very ready to terms from Sean what was a very challenging 2020, and while the global pandemic remains very pervasive we do see light at the end of the tunnel and we look forward to 2021 with cautious optimism that conditions will improve.
From 2020, we focus on executing our long term strategy, while recognizing the necessity to focus on employee health and safety, finding new ways to work and serving and delivering expect outcomes for our clients I would like to thank all our employees our clients during what has been a challenging period.
Over the past decade, we've been successful investing ahead of shifts Dan client demand, placing us in a strong position to take advantage of key industry tailwind in the future.
And these capabilities and our tremendous focus on our clients is now again producing good momentum in our business that became more visible as the year progressed by working better or do you anticipate understand and meet client needs. During the challenging times, we have achieved six straight months of net long term inflows totaling nearly $18 billion.
Second half of 2020 with progress across channels geographies and asset classes.
Retail sales improvement.
In the second half significantly our solutions enable industry from pipeline remain near record levels. We saw net inflows in the Asia Pacific totaling $17 billion in the second half of the year and improving flows in EMEA and the Americas over this timeframe.
Net long term flows net fixed income remained robust during that period. All of these factors combined Bill a strong foundation as we head into 2021.
And maybe a few highlights our fourth quarter.
Slide four if you happen to be following along more specifically during the quarter investment performance for a large portion of our high demand capabilities. We are in the upper quartile, we had net long term inflows from then.
With $10 billion during the quarter long term inflows in fixed income capabilities continued while we saw client demand for equities within Etfs quantitative and index strategies in particular.
We saw another quarter of strong net flows in Asia Pacific region and closed in the Americas turned positive.
Alison.
To provide more information on a few minutes on the flow of strategic valuation Mark details of the quarter, but I would like to note. We also improved our operating leverage during a period paid our credit facility zero and make progress in improving our cash position.
I would like to spend a few minutes on slides five and six to talk about our strength in key capabilities in areas with high client demand and our focus for 2021.
Slide five illustrates the market opportunities, we see for these key growth areas and demonstrates the majority of our investment capabilities are aligned with these opportunities in these areas. Our investment performance is strong we're highly competitive and well positioned for growth.
And as we move into 2021 plan to further expand our market leading position in Etfs in the U S and EMEA in particular and build our passive presence in Asia Pacific.
The fourth largest ETF provider globally, and our capabilities span passive active strategies and established and developing spectrum of ETF ESG Etfs and building on a 15 year legacy of innovation, we continue to develop the products in this space as demonstrated by the launch of the <unk> innovation suite and our first non transparent.
TFS.
<unk> delivered in the fourth quarter.
Strong alternative platform and our focus is growing our private markets business led by our market, leading real estate bank loan businesses.
Active fixed income and global equity remains areas of opportunity for us and our offerings are well positioned with strong investment performance and high client demand. In addition, we are focused on our solutions efforts and as we have seen by the contribution to the institutional pipeline clients value. The service the ability to offer solutions got bills.
The full power of our competitive set of capabilities and services.
Services as clients continue to be a priority for us during 2021.
We continue to invest in our leadership position in greater China.
Dan.
Management dedicated Chinese products from nearly 40 years, we have already seen the benefits of the early mover advantage in the China onshore market through our joint venture, which was the first foreign joint venture and the industry established almost 20 years ago.
Turning to slide six as we noted in the third quarter, we see opportunities to invest in areas of growth aligned with our strategic plan. These areas include Etfs alternatives active fixed income from local expertise, which includes emerging markets and.
And we will build on our market leading position in the fast growing China market and further develop.
Media solutions from asset allocation.
<unk>.
Given our investment in the business over the past decade, our most recent efforts to better align the organization with our strategy I am confident we have the talent the capabilities and the resources and momentum to drive.
Future growth and success.
Mr come off the new year and remain focused on helping our clients achieve their desired outcomes, regardless of where the markets take us and with that I will turn it over to get into further details.
Sure.
Thank you Marty good morning, everyone.
Moving to slide seven we had 61% from 70% of actively managed funds from the top half of peers on a five year and a 10 year basis.
Strength in fixed income global equities, including Mark emerging market equities and Asian equities, all areas, where we continue to see demand from clients globally.
Looking at our AUM on slide eight we ended the quarter with 1.35 trillion.
Of the 132 billion.
AUM growth approximately $95 billion is a function of increased market values.
Turning to flows on slide nine our diversified platform generated long term net inflows in the fourth quarter of $9 8 billion.
Representing three 9% annualized organic growth.
We generated positive net inflows and activate your AUM of $400 million and passive AUM of $9 $4 billion.
Our Etfs experienced net inflows of $6 1 billion.
Including $4 7 billion in long term Etfs, and $1 4 billion and our QQ tiers.
Our U S listed Etfs, excluding the Q2 kids had their best quarter in their 15 year history.
Net long term ETF flows in the U S focused on equities in the fourth quarter, including a high level of interest in our S&P 500 equal weight ETF.
We had $2 7 billion in net inflows in the quarter two of our top five and flowing ETF or ESG related we continue to see momentum in our ETF business and demand for ESG funds and as Marty highlighted the market opportunity is significant for this key growth area in 2021.
Retail net outflows were $800 million in the quarter helped by the positive ETF flows.
On the institutional side, we had net inflows of $10 6 billion.
I'll provide a little more color on these flows on the next few slides, but importantly, the growth in our passive AUR and our institutional AUM is meaningful for the firm and contributed to the positive operating leverage we generated in the period.
Also as Martin you noted earlier, we're seeing the mix of ETF inflows being weighted towards higher fee generating products.
Looking at flows by geography, you'll notice that the Americas had net inflows of $2 2 billion in the quarter, an improvement of $6 $6 billion from the prior quarter.
This improvement was driven by net inflows into Etfs institutional inflows various fixed income strategies, and importantly focused sales efforts and improvement in redemption rates.
Our global equity products improved by over $1 billion or 37% from Q3, driven by our developing markets bond, which returned to positive net flows in the fourth quarter. Following negative net flows in the first three quarters of the year.
The UK experienced net outflows of $100 million in the quarter as positive flow them to our institutional quantitative equity capability were offset by net outflows in multi asset and UK equities.
In EMEA net outflows were $1 4 billion driven by institutional Lumpiness and ETF outflows largely in our S&P 500, and NASDAQ 100 use <unk> Etfs.
And finally, I noted last quarter that Asia Pacific delivered one of its stronger strongest quarters ever with net inflows of $8 billion.
In the fourth quarter net inflows were even higher at $9 $1 billion net inflows were diversified across the Asia Pacific region.
$4 billion of these net flows were from Japan, $3 $8 billion arose from our China, JV and the remaining $1 $3 billion was generated from several other countries in the region.
It's worth noting that we continue to see strength in fixed income across all channels and markets in the fourth quarter with net long term inflows of $8 $2 billion. This following net long term inflows of $8 $8 billion in the third quarter and 6 billion from the second quarter.
It's also important to note that of the $26 $1 billion in fixed income net inflows in 2020 25 billion of these net inflows were from active fixed income capabilities.
Active fixed income has been a growth area for us in 2020 and remains a key investment area in 2021.
Now moving to slide 10, our institutional pipeline remains robust at $35 billion on the heels of strong pull through in the institutional pipeline during the fourth quarter. This pipeline is diversified across asset classes and geographies and our solutions capability has contributed to meaningful growth across our institutional network.
Warranty our continued investment in this key capability in 2021.
Turning to slide 11, Youll note that our revenues increased $135 million or 12, 4% from the third quarter driven by higher average AUM in Q4, as well as a meaningful increase in performance fees.
Net revenue yield ex performance fees was 36 36 basis points flat and flat at the third at the Q3 yield level.
The impact of rising markets on our yield was offset by modest fee rate declined from the mix shift we experienced across products in the quarter as well as the impact of non management fee, earning AUM.
We recorded performance fees of $78 million in the fourth quarter $48 million of these performance fees arose from a real estate business and $21 million from our institutional business and our China JV two of our key growth areas.
Seasonally we tend to see higher performance fees in the fourth quarter.
Total adjusted operating expenses increased eight 3% in Q4, the $57 million increase in operating expenses was driven by higher variable compensation as a result of both market growth and compensation related to the performance fees in the quarter.
Operating expenses remained at lower than historic activity levels due to pandemic driven impacts to discretionary spending travel and other business operations that persisted in the quarter that being said, we did see a seasonal increase in marketing expenses as expected.
Moving to slide 12, we wanted to update you on the progress we have made with our strategic about evaluation as.
As we noted previously we conducted a strategic evaluation across four key areas of our expense base, our organizational model, our real estate footprint management of third party spend in technology and operations efficiency.
Through this evaluation, we will invest in key areas of growth, including Etfs fixed income, China solutions alternatives and global equities, while creating permanent net improvement of $200 million and our normalized operating expense base.
As we noted a large element of the savings will be generated from compensation, which includes realigning our non client facing work force to support key areas of growth and repositioning to lower cost locations.
In the fourth quarter, we realized $7 $5 million in cost savings of $7 million of these savings were related to compensation expense as depicted on slide 12, the remaining $500000 in savings were related to facilities, which are shown in the property office and technology category.
The $7 $5 million in cost savings of $30 million annualized is 15% of our $200 million net savings expectation.
Of the remaining $170 million and net savings, we anticipate we will realize roughly 50% of the savings for compensation expense, the remaining 50% with spread across occupancy tech spend and G&A.
As it relates to timing, we still expect approximately $150 million or <unk>, 75% of the run rate savings to be achieved by the end of this year with the remainder recognized by the end of 'twenty two.
We estimate that we will realize roughly 75% of the anticipated compensation reductions in 2021, roughly 50% of the anticipated reduction in occupancy expense also in 2021 and all of the reduction in G&A This year.
The majority of efficiencies identified in our tech spend will not be realized until 2022.
In the fourth quarter, we incurred $104 million of our total estimated $250 million to $275 million in restructuring costs. We expect the remaining transaction costs for the realization of this program to be in a range of $150 million to $175 million over the next two years roughly two thirds of this remaining amount occurring in 2021.
As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.
With respect to Q1 after improved market performance and asset inflows in the fourth quarter, we start the year with over one three trillion dollars and.
Given the market improvement with more backend weighted towards the end of the quarter. We expect both operating revenues excluding performance fees and the associated variable expenses to be modestly higher in the first quarter. This reflects the follow through from the market and flow growth that occurred over the course of the fourth quarter, even if we assume no change your markets from year end.
On the expense side. This will include higher associated variable compensation from the seasonal increase in payroll taxes, partially offset by lower compensation related to the seasonal decline in performance fees and the execution of our targeted cost savings.
Turning to slide 13, adjusted operating income improved $78 million to $485 million for the quarter driven by the factors. We just reviewed.
Adjusted operating margin include 230 basis points as compared to the third quarter to 39, 5%.
Demonstrating the operating leverage in our model.
This helped drive the 19th that increase in adjusted EPS to <unk> 72 cents a share.
In addition, we benefited from higher non operating income and lower non operating expenses in the quarter. Non operating income included $31 9 million and net gains for the quarter compared to $15 2 million and net gains last quarter.
The increase was driven by unrealized gains primarily in our seed money holdings interest expense of $24 $4 million was 28% lower than the prior quarter Q3 was the final quarter in which we pay dividends related to our forward purchase agreements.
<unk> of which we settled in January with the remaining portion to be settled in April of 2021.
Our tax rate for the fourth quarter was 21, 7% the reduction in the rate reflects the lower taxes on unrealized gains in our seed portfolio due to the jurisdiction of our holdings.
We estimate our 2021 non-GAAP effective tax rate to be between 23 and 24%. The actual effective tax rate may vary from this estimate due to the impact of nonrecurring items on pre tax income and discreet tax items.
A few comments on slide 14, as Marty mentioned, we reduced our revolver balance by $90 million to zero in the quarter consistent with our commitment to improve our leverage profile.
In addition to using excess cash to reduce leverage we seek to improve liquidity and our financial flexibility.
To that end, our balance sheet cash position improved to $1 4 billion in the fourth quarter from $1 $1 billion at the end of Q3.
$764 million of this cash is held for regulatory requirements I will note, we paid $117 million earlier in January to settle a portion of the forward share repurchase liability with the remaining liability of $177 million to be settled in April.
We believe we're making solid progress in our efforts to build financial flexibility, we remain committed to a sustainable dividend and to returning capital to shareholders longer term through a combination of modestly increasing dividends and share repurchases.
In summary, Marty walked through our key capabilities, the organic growth opportunity each presents and our focus on executing the strategy that aligns with these areas. We're also focused on our strategic evaluation and reallocating our resources to position us for growth and we remain prudent and cautious in our approach to capital management.
Our focus on driving greater efficiency and effectiveness onto our platform combined with the work we've done to build a global business with a comprehensive range of capabilities puts invesco 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.
With that I'll ask the operator to open up the line for questions.
Thank you and at this time, if you would like to ask an audio question. Please press star one you will be announced prior to asking your question. Please pick up the handset prior to asking your question and to withdraw your question Press Star two one moment for the first question.
Yeah.
Our first question. This morning is from Dan Fannon from Jefferies.
Hi, Thanks, good morning.
My question is on the fee rates and kind of the outlook first just I guess in terms of the fourth quarter is there are you seeing.
Abnormal in this period, obviously mix and data were positive. So just wanted to clarify that this is a good exit kind of run rate for the fee rate and then thinking about next year, assuming flat markets and the mix of business that youre seeing in terms of demand.
Institutionally and otherwise how we should think about that.
Trends in the fee rate for next year.
Sure Good morning, Dan.
So I'd say first on the fourth quarter. Your question around was there anything abnormal.
Let me just start with obviously, we had pretty high performance fees in the fourth quarter. So excluding performance fees. As you saw net revenue yield was flat at 36 basis points in the third quarter and the fourth quarter.
I mean, it's it's fairly straightforward in terms of what was driving that you've got the impact of the rising markets on our yield and then that's it which was a positive of course and then we've got some offset there given the modest pressure we continue to see just from the client demand and the mix shift that's there.
We've got you know consistent with industry high interest and our passive capabilities and some churn with interactive and that does put some downward pressure on net revenue yield and this was a quarter, where the impact of really strong market growth helped to offset that.
In terms of what does that mean for this year I would say that trend right. There. We would expect to continue I do expect we will continue to see high interest in our passive capabilities and some continued churn with inactive.
What does that mean for net revenue yield going forward, it's very difficult to predict as you know what I would point you to is that our focus is not simply on net revenue yield and we've really got the breadth of capabilities to serve our clients well I think that that's really starting to be demonstrated in our results over the last couple of quarters and as we focus on that we really.
We are focusing on operating margin and making sure that we are managing our expense base to the top line of the firm and really driving profitable growth across our platform.
Great. Thanks, and then just as a follow up on expenses and your commentary sequentially, both an increase in revenue and <unk>.
Obviously performance fees will be lower given the seasonality. So just wanted to clarify.
Youre still talking sequential comp increase from a dollar perspective in the first quarter and then also on the synergies are not the kind of expense savings just the cadence as we think about the year are they more backend loaded in terms of the realization I guess exit by year end numbers, you gave but just thinking.
Thing about you know kind of flow through through the year, how we should think about the timing.
Throughout 'twenty one.
Sure.
So yes, let me start with Q1 and there are a lot of puts and takes as you think about it just given the really strong growth that we saw in the back half of the fourth quarter that market growth.
Excluding performance fees, you really did come on the back half of the year and we started the year with a very high level of a U M and.
You see what I see in terms of the market thus far.
That we enter.
With strong revenue growth as that maintains and we hope that maintains and along with that we've got the associated variable compensation and that does drive compensation higher all things being equal for the quarter and then we have the seasonality of payroll taxes and some pension expenses that occur in the first quarter of the.
Year now those are going to be offset.
By the.
What we're doing in terms of our targeted cost saves and of course, the lower compensation that we would have in this quarter excluding performance fees.
The net of all of that.
That are the puts and takes them cards day exactly given the strong run up in revenue and the associated expenses, but it's I would say flattish and I'm talking total expenses fourth quarter.
In terms of the cadence of the cost saves I think it's reasonable to look at those as being.
Spread relatively equally over the year, there may be a little bit of front end loading into the first half of the year, but relatively equal.
Thank you and our next question is from Craig Siegenthaler from Credit Suisse.
Thanks, Good morning, everyone.
Good morning, Greg I wanted to see if you could update us on your M&A priorities, and specifically what investment capabilities or distribution efforts with invesco target or be interested in adding.
Good.
Thanks, Greg So you our perspective, you know really has not changed.
As we look at M&A. It always has to start SP strategic it has to be additive to the business.
So in areas required demand, where we just really don't have a competitive capability or the scale to compete.
We also do very much focus on the culture of the organization as I pointed out historically, you have to have cultural alignment to be successful.
Dan.
Yes that will continue to be our criteria.
Okay.
Don't think makes sense as sort of the.
Were roll ups, where there's just a lot of duplication.
So larger shareholders don't like it it's just really hard and so we will continue to stay away from us.
Got it and then just as my follow up when we think of potential M&A targets in the various sizes of different businesses. I'm wondering what are the largest managers by a net investment could target or what is the upper band.
Of the universe of firms that you would consider requirement.
Greg, it's always facts and circumstances and I think.
Size is a factor but size.
A level of complexity is quite different with any organization. So it would really be facts and circumstances as opposed to some hard and fast.
First rule.
Thank you. Our next question is from Glenn Schorr from Evercore.
Hi, Thanks very much.
So a lot of good things to points during the quarter I do want to get a little more color on why the flows coming on the institutional side retail chains in the flat range. So wondering what efforts you can do to.
Slow growth there and then also if you can focus on the outflows on the alternative side and what the plan is for <unk>.
Profit markets from here.
Thanks Mark.
Yes, a couple of things so.
Yeah again as you saw in your gross flows were a record high for US and you know taking them a region by region channel by Channel Allison I think worked through.
Pretty clearly.
We continue to.
Let's see momentum in the retail channel.
It did slow down.
And let me as Alison spoke of.
Some of that was Brexit related sort of risk off.
It came.
It came down the final negotiations and quite frankly, there were some look over to the elections.
At this stage.
U S retail channel is really starting to.
Make tremendous change and progress, we're not where we want to be that's for sure but.
The momentum there the growth flows are there we're seeing flows as you look into the year.
Outside of Etfs in the traditional asset classes yield Muni is short duration fixed income emerging markets is actually.
Picking up which is really good news that back into the flow. So.
You're cautiously optimistic.
In alternatives, it's largely been around GTR.
That was really the driver of this past quarter of bank loans were also.
An area that we're still in outflows.
As we look into this year.
See what the opportunities are with bank loans in particular, but again, we're obviously very very focused on.
Any area, where we're relatively underperforming loans.
The thing I'd add to that on the alternative outflows with the third area. We saw some outflows would be in real estate dispositions and that would be somewhat in the normal course of that business, but it did contribute to the negative flows there.
And I would say one positive point as it relates to our retail flows is if we look at our active U S. Retail net outflows there were actually $2 $6 billion better than the third quarter now they were still negative at $6 $7 billion, but that was an improvement of $2 $6 billion over the prior quarter really on the heels of a higher.
Our gross sales and redemption levels that were significantly lower than what we saw across the industry, so signs of growth and improvement there.
I appreciate all that Colin just maybe one little follow up on the alternative side.
Do you feel like you have the suite of products you want.
To Martin as you said compete and scale effectively as growth continues there or is that one of the areas, where you could see invesco ahead into overtime right place right.
Yeah.
Yeah. Good question. So look we clearly have a leadership position in real estate and bank loans.
Private.
Credit has been an area where it is.
<unk>.
Some good performance. So we don't have the scale that we would want the team is very strong tonnage through your track record. So that's.
An important opportunity for us as we look forward.
And.
Hey, Dan will just continue to.
Focus on the <unk>.
Standing up business.
The restructure.
Yeah.
Thank you. Our next question is from Robert Lee from K B W.
Great Good morning Martin.
Excuse me good morning algae.
My questions.
I was wondering if maybe.
Marty you can put a little bit.
I guess moving more meat on the bone.
The areas for growth mutual <unk> client engagement sales, but.
Maybe dig into them.
You bet.
By leveraging technology and reorganization.
Sales function.
So maybe give us a little more.
Fuel from.
What that is.
Yeah. Okay. So look this has been in the making for Idaho for years now and so all of a sudden see overnight success.
Our approach has been to have a very talented quantitative solutions team.
It was very strong at S allocation bill.
Anything from models too.
Uh huh.
Customer solutions for clients, so advisory to our clients, whether it would be great.
Yes.
The big corner office suites from the retail channel, but quite frankly.
Large pension plans.
Around the world.
Our approach has been to use our capabilities, whether it would be.
Our passive capabilities and factor capabilities you go all the way through alternative capabilities. So it's not a duplicative.
Instead of.
Skills, it's Liz.
Literally using what we've had.
The systems, we have built what is a very very strong analytical tools that we use with clients as a way to help them analyze their portfolios that's how the engagement skill.
And Andrew one of those outcomes.
And simply from.
This engagement to building a customized solution.
During that journey as you build at <unk>, how you engage how your fees off of clients. They are clearly modifications to how you do that.
And we seem to have bond ourselves.
Situation, where.
We seem to have a formula rate based on the outcomes that we're.
That's what we're seeing.
Come back to this really is.
The fundamental topics that is driving the change in the industry as clients.
Clients are working with fewer money managers, they're expecting more from money managers. So if you don't have that breadth of capability and if you don't have the ability to serve clients through these engagements you're truly disadvantaged.
So it is really making a difference for us and we expect that will be the case.
In the years ahead.
Hopefully that gives you a little more color.
Yes, Thanks, maybe a quick follow up just on capital management can you update us from New York.
And so the forward contract.
The revolver is Dan to Euro you had reset the day to day.
Yes.
But once you get to the eight.
Hey man.
How are you thinking about pointed that your capital management priorities should.
So we think that you may go back to the story.
To restore exhibiting growth reengage in net.
Share repurchases you know how should we think of kind of the priorities kind of post April.
Olympic.
Sure Rob I'll I'll take that so you don't look as we think about just sort of where we are now and as I think about kind of rolling forward over the next couple of quarters. You'll note. We built our cash balances and I'll also just remind everyone. We do have seasonality in comp expense that is ah seasonality in cash flow.
<unk> related.
Comp expense in the first quarter historically the company has drawn on the revolver in the first quarter. We've obviously managed our cash balances a little bit higher there is a strong cash flow just given the dynamics that we see right now I don't know what that will look like exactly as we worked through the quarter and we do have the liability to settle in April all of that said, we're in a very strong position on.
I continue I expect us to continue to build our cash balances longer term and improved net leverage and then as I think about just what does that mean for the financial flexibility that we're looking to achieve and returning capital to shareholders. We are committed to that financial flexibility, we do want to invest in the business first in <unk>.
Word of mouth to support future growth in the business and we do remain committed to strengthening our balance sheet and ultimately we want to be in a position to return excess cash to shareholders and I do expect that we'll be doing that through a stable and modestly growing dividend and eventually share repurchase the outcome. So we.
Our coming up soon here on the one year of having made some decisions around that and we've got the opportunity to think about what our capital.
Our return of capital to shareholders looks like and we will be working through that in the coming months.
We were I'll say that we're pleased to be in a very strong position to.
To be having those conversations and look forward to sharing more.
Great. Thanks for taking my questions.
Thanks Robert.
Thank you and our next question is from Ken Worthington from J P. Morgan.
Hi, good morning.
Well long term organic asset growth was I think three 9% in the quarter can you estimate your organic revenue growth in the quarter.
There's lots of cross currents inflows outflows by different products and geographies. So how does that all shake out from an organic revenue perspective, and then maybe I'll sneak in my follow up at the same time as we think about the shift from active to passive how is that impacting your margins. So youre cutting cost equity market share of appreciate it.
Meaningfully affects is now helping but if we exclude those and just focus on these inflows and outflows from migration to passive and solutions in your mix does that end up helping margins and.
If so to what degree is that helping.
Okay. Let me let me take your first one around.
The long term organic revenue growth I mean, I guess, it's not a that's not a number we would disclose or think about exactly but if you think about if what youre looking at it excluding market and you purely look at the fee rate associated with where interest as you as we point to every.
Quarter U.
You continue to see a little bit of mix shift from some of the higher fee.
<unk> to some of the lower fee products. So that that is a that does put pressure on your organic fee growth no question without.
Some market improvement and there you would see downward pressure there. Our focus then really does shift to profitability. So I'll come to your second question.
How do we think about the profitability given those dynamics because markets go up and markets go down and we've seen the pressure that can put on the top line as we think about the profitability and I'm not sure I'm going to answer your question exactly.
I'm not sure I caught all the different puts and takes you were you were thinking about there, but I guess I would answer it this way.
Hmm.
While the absolute fee rate of some of our.
Lower fee products would be lower so taken ETF for example in the United States.
The absolute a.
Fee rate there would be about half of our U S based mutual fund.
That said the margin contribution is about the same very similar because you have lower servicing costs and at <unk> for.
The margin on both are neutral to positive to our overall firm margins and it really then becomes a function of volume because while.
While the margin is the same the absolute operating income yield would be lower until you have to drive more volume over a lower fee product to contribute the same dollar of operating income that you would over a higher fee product and that's really how we think about it I mean these are just the facts of our business and the facts of where demand is and making sure we're positioned to capture all of that.
Demand and then making sure we're well positioned to maintain our margins at a minimum even in markets, where we could be under pressure.
Okay. Okay.
But that's super helpful, but I guess part of the core of this and maybe you can opine on this for a second the organic growth organic asset growth.
Like quite good this quarter like three 9% is that contributing to revenue or is the underlying mix such that even though it was a solid three 9% asset growth is that actually just detracting from revenues because it happens to be you know EMEA was out some alts were.
We're out.
You've got high fees, each yes, but they're not quite high enough and even three 9% asset growth isn't enough to boost revenue growth, but I guess, that's kind of what I was really hoping to get and I'm still not sure I have a sense of that answer.
In a quarter like this a three 9% organic growth is contributing to revenue.
I think that yes, it's contributing to revenue.
And then obviously, even contributing more as we look at the positive operating leverage that comes from it but you do get positive contribution.
It is.
The high fees low fee products are not necessarily always obvious as to what category. They are in and you do see revenue contribution in a quarter like we just had.
Thank you. Our next question is from Bill Katz from Citigroup.
Okay. Thank you and good morning, everybody. So first question is a two part question for Alison.
I'm from Marty.
Asia Pac the compensation dynamics between the fourth quarter first quarter, maybe help us understand what what might roll off of the performance fees and say, we're so elevated.
Maybe the seasonal increase.
Just trying to get to sort of like a level of how to think about maybe the exit pacing for the second quarter.
Okay.
So I'll do my best to unpack that I mean, if you look at just the performance fees on the compensation expenses associated with those its going to be kind of closer to 50%. So it comes at a higher rate than what you would see in terms of the.
The compensation associated with other elements of revenue.
So so that's a roll off and then in terms of what would be higher the seasonality of payroll taxes on some benefit so that's somewhere in the $25 million to $30 million range.
Then use.
<unk> got the targeted cost saves that will be in there somewhere.
We're not giving specific guidance around that any more southern what I've already provided.
And I think that's probably the best way to think about it. The one thing that is not totally the same is the the.
The run up in the fourth quarter are is what yeah, we only had that for kind of call. It six weeks or so at the end of the quarter if asset levels hold where they began the year and we've certainly seen them hold through this thus far into the month.
You can expect that revenue and the associated compensation expense with that would be higher than what you would see in the fourth quarter and that's just thinking about the typical relationship between revenue and compensation expenses.
Okay and then just you had mentioned in terms of building cash well where are you in terms of your excess cash pool.
Our cash balances at the end of the year were $1 $4 billion.
We have $764 million of that is committed to European regulatory and liquidity requirements.
Uh huh.
They are different to ask question is from I'm sorry. Our next question is from Patrick Davitt from Autonomous research.
Hey, good morning.
So.
The bond flows have obviously been a bright spot for you and others, but concern around kind of taper tantrum or even more significant rate shock has grown over the last few weeks with.
With investors seemingly particularly worried about how large bond complexes will perform through that so through that lens could you remind us of invesco has experienced in the 2013 tantrum and maybe compare contrast, how you feel invesco is now positioned for another tantrum or or even bigger rate shock from here.
Yeah.
It's an interesting question.
Yes.
So 13 was a long time ago, but.
Bob.
As a yeah, we did fight through it and I suspect.
Really going to matter I think of the question is where the concentrations within your within your fixed income with or something like that and if you look at the range of fixed income capabilities that we have it really is quite broad.
You got a heavy concentration in an area where no sir.
Long duration.
Sharp could be.
Painful to the organization so.
Yes, My initial reflection on the question of if that's helpful.
Sure. Thank you.
Yeah.
Yeah.
Our next question comes from Brian Bedell from Deutsche Bank.
Great. Thanks, good morning folks.
So my question.
First one is on ESG.
Mentioned that.
The potential increasing contributors to 'twenty, one if you could talk a little bit about what you think.
Thank you, yes, you dedicated a U M is as of now I know, it's being integrated.
Charlie throughout the organization.
And then talk about you know how much do you think that can potentially contribute to your institutional.
Pipeline and weather.
You see it.
Coming to a bigger factor in the U S as well.
Yes, So look let me start.
Okay.
The bigger question to get specific.
Yeah, ESG is something that we're integrating throughout all our investment management teams.
Probably.
Most of that through our capabilities in EMEA, our fixed income teams real estate. So we're we're pretty well into it right now we're not done.
That is something that is.
Absolutely a top focus of ours as an organization.
The reality is if you are not.
Skilled at average U.
ESG capabilities, even within your traditional asset classes.
Really our goal.
You're going to be challenged in EMEA.
I'd say in the United States It is moving.
Moving beyond what was a conversation 12 18 months ago from being something very very real and Youre seeing commercial implications of it and that is the same thing in Asia Pacific specifically using a more narrow.
The definition that you're out so that we have about $34 billion.
ESG AUM, what is really quite broad.
<unk> 90 ESG.
ESG funds from mandates.
Yeah.
Through and I think the other area, where we're seeing outside of institutional is really picking up on a retail basis Andrew.
Right now, we're the second largest provider of.
ESG Etfs in the United States.
And theres about $9 billion from those assets.
So again more to go as I said, we haven't developed capabilities, but it's also developing and we're really being.
Quite aggressive in the area.
No. That's super helpful. And then just the follow up is on M&A.
But I guess from from two different sides.
Thanks for the commentary about reiterating the your stance on that.
From a from a product perspective, how would how would you view it.
Adding a beta ETF franchise as opposed to a smart beta.
Suite that you have right now and then I'm just in terms of overall stock price that we see for the asset managers in the last few years fees.
We had a peak in early 2018, and very few managers have been able to make it back to the that you've tripled your stock price since the lows of last last summer, but I guess, what's your confidence in being able to get let's talk back to the early 2018 level organically.
Yeah.
Yeah.
So let me start to stock price.
And again I have to be careful that that's your work not mine.
What drives the stock price, it's operating outcomes and.
Business momentum in all of us have been talking about today, you're just seeing a markedly different set of outcomes from the last couple of quarters.
As you look into 2021 again, it's about.
Getting into forward guidance.
It is.
Any more tailwind beyond behind.
Behind the organization that I've seen.
Since 2018, and it's quite broad by region by channel and also within your various capabilities, where we pointed out. This is very very high demand now that said there's always areas.
We have areas for improvement will continue to do that.
But again the tail winds are very different than what we've seen since the middle of 2018. So from my perspective, that's going to drive stock price.
With regard to.
Saturday mode.
A data provider.
Through M&A again.
To answer the question as I heard before it all depends on the facts and circumstances.
As to be additive to the organization.
Can't do something that is.
A net negative through the combination so organic.
It just really depends on the situation.
Yes.
Thank you and our next question is from Brennan Hawken from UBS.
Hi, good morning, Thanks for taking my questions.
The operating metrics and great wall will compresses.
And then thanks for providing the flow.
A big contributor, but what are the options for your stake with that entity Martin.
Marty I think in the past you've referenced getting your ownership above 49%.
I think your last comment on that was a little over a year ago. So is that still on the table.
And what would be the timeframe for that how should we think about the potential impact of you getting over 50%.
Yeah. Good question. So let me answer that in two parts. So I think what has been differentiated which is important too.
Recall as you got 49%, we uniquely have management control and so it is really operated as part of Invesco. So we operate as invesco in total with him.
China and that has helped our institutional business. Therefore.
Our traditional.
Invesco and also.
We go through Invesco, great wall institutional also and retail so that's really the successes because we've been able to operate as really a single organization there.
With regard to.
The 49%.
Percent, yes. It is a conversation we continue to have with.
Well, one on obviously slowed down I'd say the.
Uh huh.
The conversations between the U S. China were not helpful in advancing that simple.
So we'll just have to see I really can't put a timeframe on it.
Is.
It was clarity between the relationship between U S and China.
<unk>.
It eases I think that'll be a net positive.
Okay. That's fair thanks for that.
Thanks Bill.
The bottom line.
It's not getting in the way your Mark there's a success. So I think that's really the bottom line net of one on one of the big.
Well that is clear from the results and thanks for that Mark.
Just follow up is a two parter.
So first you know you've got some question so far today in a bunch in the past on M&A.
M&A and invesco as a buyer, but just to be provocative.
How should we think about you as a seller I mean I know your the company's large so the list isn't really long of who could you, but there are some large buyers out there talking pretty vocally about writing checks. So curious about how you would think about that and I believe you have had.
There's been at least one board meeting.
Since Nelson Peltz, and Ed Garden joined the board. So could you add maybe some color on what kind of impact.
That has had on the board dynamic.
Any incremental details about you know plans or areas of focus for your new board members right.
Yes, good questions.
The way to get three questions and not too but.
Very good you've done this before.
So look with regard to.
Let's be very very clear the board is absolutely dedicated to driving success of this organization they value.
Invesco being independent global asset manager and again the results are.
As I said, you can see the momentum than we anticipated.
We're on a good track so that's the first point.
Secondly.
Within any conversation around M&A.
My comments would be very similar to.
Somebody.
Looking at any money manager and if its not strategic if theres a lot of overlap.
Consistent with what clients want.
It is.
Very hard to do and so as you say that.
That would get you to where.
You can narrow set of options if you consider something like that so again the criteria works both ways and I think that's important to understand.
And then with regard to the board Jim We've had a very strong board.
And Nelson and Ed and testing from bearings have joined.
All three are very very talented.
From what was the former CEO of bearings Nelson had been around this space for a very long time.
They know the space they've obviously.
<unk> been very outspoken about the opportunities that they see within the asset management space and the dynamics, but very good I mean, you got three new experts onto the board and.
Thank you Andrew it's making sure we as an organization are laser focused on providing for our clients and shareholders and.
But with the existing board members I think if anybody who owns a stock they should feel really good about it.
Yeah.
Thank you. Our next question is from Mike carrier from Bank of America.
Good morning, and thanks for taking the question.
Just one question just on growth versus value underperformance charts index it.
It looks like growth performance remained strong with value continues to be on the weaker side.
So just wanted to get your thoughts if you continue to get a shift towards value do you have some out of the product.
Well that can benefit from flows versus maybe what we see in that chart, which is just the average across the full cash.
Yeah. So.
The value related equity capabilities within the area of focus for us as an organization. There's no question about it relative performance.
Absolutely.
<unk> on making sure that the portfolios are in a position to.
To perform and again I don't want to get too far ahead of myself, but if you looked at that value suite.
During the fourth quarter.
The relative performance was really really quite strong.
That said, let's be clear, it's a quarter, it's not one year three year five years, but.
It was important to see that bill.
Yeah within the fourth quarter.
Okay. Thanks.
Okay.
Thank you.
Okay.
Chris Your line is open.
Yeah, Great question on operating margin.
You guys have a target in mind for this as you execute on your expense savings plan and then related.
Do you think is the long term potential for this business as it relates to operating margin.
Yeah.
Good question, we have not set a targeted operating margin coming out of this our focus has really been to think about the continued dynamics that are really driving client demand and thinking about getting our business oriented to capture that demand and make sure. We're doing so in the most profitable way.
And we continue to see how these trends are playing out.
What do I think as long term I think that's a hard one to answer because I think we continue to see some of these shifts we remain committed to our active capabilities and we do believe we will continue to see interest there in demand there and we could see even more positive growth coming from that so as client.
Preferences continue to evolve we're going to continue to evolve our platform to operate at the at the highest profitability we can with it.
Okay. Thank you.
Thank you and our next question is from Chris Schuettler from William Blair.
Hi, everybody. Good morning, Marty what are your thoughts on the potential for direct or custom indexing and is this a place at invesco plans to participate and if so how.
I'm, sorry, I didn't get the question I apologize.
Sorry about that just direct or custom indexing.
Is that a place.
Plants participate yet.
We have a self indexing capability and it actually has been.
Are you of growing success recently, we just turned our attention to a couple of years ago.
And where it's really been it's with.
Through the solutions group, where we've had the greatest success in building.
Indexes for for clients. So again, we look at it is.
A real area of growth forward and what we're really looking for is just really building that deeper relevance for our clients.
It's off to a very strong start.
Oh.
Okay, and then separately just on the.
The registered investment adviser space, maybe maybe or just a financial advisor space. Overall can you give us an update on gen. Gen. Jim step in a tele flow in.
It's been going on at those platforms how are they growing.
And then some.
What point should we expect those to generate some meaningful flows for invesco.
Yeah. It's a good question Theres about 900 billion in assets under administration right now and.
The last year has been really focused on pulling together.
Platform through the last couple of acquisitions and so were looking for.
This year to be at the beginning of some.
Some additive growth after a period of just really building out that platform. So again, we'll have more to say later in the year.
We're hopeful that growth that spot right now.
Yeah.
And I am showing no further questions that this time.
Okay again on behalf of Alex and myself. Thank you for your time questions I appreciate the dialogue and that will be in touch. Thank you.
Thank you. This does conclude today's conference you may disconnect at this time.
Okay.
Yeah.