Q3 2021 Invesco Ltd Earnings Call
Yeah.
Okay.
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 they involve 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.
<unk> K and subsequent filings with the SEC Invesco makes no obligation to update any forward looking statement.
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.
Welcome to Invesco as third quarter results conference call all participants will be in a listen only mode until the question and answer session at that time to ask a question. Please 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 you may disconnect. At this time now I would like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco, and Allison Dukes, Chief Financial Officer, Mr. Flanagan you may begin.
Got it.
Operator, I appreciate it very much and thanks, everybody for joining us and I'll make a few comments and turn it over to Allison.
In the.
Work in more depth and.
And then we'll open up to Q&A as we as we always do and hoping everybody stays safe and healthy as we continue to return to normalcy and I know we are all looking for that pace to continue in the months ahead.
Continue to have a high level of engagement with our clients, which is even more important as we navigate the market uncertainty brought about by the end of economic and market upside surprises experience from the depths of Covid.
Helping our clients by providing insights and solutions are utilized in a broad range of capabilities.
This approach has helped us deliver strong consistent growth over the past five quarters and as you can see on slide three if you're following along on the deck net.
Net long term flows for $13 billion during the quarter. This represents over 4% annualized long term organic growth for the quarter.
Growth was driven by continued strength in a number of our key capabilities, including Etfs fixed income China solutions alternatives and global equities strategically we continue to invest in areas, where we see client demand, whereas competitive strength.
And since the third quarter of last year, we generated $86 billion of long term inflows and average quarterly organic growth rate of 6%.
Five consecutive quarters of strong growth is the direct result of the investments we've made over time to enhance and evolve our business to meet client needs.
Etfs, excluding the Qs generated long term inflows of $3 $7 billion in the quarter with strong market share gains in our EMEA ETF range in private markets, we generated net long term inflows and our direct real estate business for one.
$1 2 billion and robust bank loan product demand resulted in net long term inflows of $2 billion. During the quarter. This included a launch of a new CLO.
We generated net long term inflows of $11 billion with an active fixed income.
The platform.
And with an active global equities, the developing markets fund a key capability that came over when we combined with Oppenheimer continue to see net long term inflows of $700 million during the quarter.
We remain focused and continue to work on areas, where there's opportunity for improvement.
In addition, our solutions enabled institutional pipeline.
Accounts for 38% of the pipeline at quarter end third quarter flows included net long term inflows of $6 $8 billion from greater China, Our China business continues to be a source of strength and differentiation differentiation for Invesco. We continue to expect the Chinese investment management industry to be the.
Fastest growing market in the world for the foreseeable future. We are an early entrant 20 years ago, and we are benefiting from that commitment and investment and we expect to see continued growth in the years ahead.
Before I turn the call over to Alison.
We will provide more information on the China business and the results I'd like to note that the growth you're experiencing is driving positive operating leverage reducing adjusted operating margin of 42% for the quarter. The strong cash flow being generated from our business improved our cash position and helping build a stronger balance sheet.
Moving our financial flexibility for the future.
<unk> depth and breadth of capabilities and competitive strengths position us well as we look forward.
We continue to focus our efforts on delivering positive outcomes for our clients, while driving future growth.
With that let me turn it over to Allison.
Thank you Marty and good morning, everyone.
Moving to slide four our investment performance was strong in the third quarter was 72 and 74% of actively managed funds in the top half of peers are beating benchmark on a five year and a 10 year basis.
This reflected continued strength in fixed income global equities, including emerging market equities and Asian equities, all areas, where we continue to see demand from clients globally.
Moving to slide five we ended the quarter with 1.529 trillion.
On a net increase of $3 6 billion.
As Marty noted earlier, our diversified platform generated net long term inflows in the third quarter of $13 3 billion, representing a four 4% annualized organic growth rate.
Activating net long term inflows were $6 $8 million and passive AUM net long term flows for six $5 billion.
Market declines and FX rate changes led to a decrease in AUM of $18 $6 billion in the quarter.
Our retail channel generated net long term inflows of $1 $8 billion, driven by positive ETF flows and inflows in greater China.
Institutional channel demonstrated the breath of our platform and generated net long term inflows of 11 $5 billion in the quarter.
First mandates both regionally and by CAD capability funding in the period.
Regarding retail net inflows are etfs, excluding the Q2 Q generated net long term inflows of $3 $7 billion.
Year to date, we have captured global ETF market share our global ETF platform again, excluding the QQ to capture the three 8% market share flows, which exceeded our two 7% market share of AUO.
We have also captured a higher share of the global ETF revenue pool over this period.
Our market share of the revenue pool was five 6%.
Net ETF inflows in the United States does include net long term inflows of $900 million into our Q2, Q innovation suite, which crossed $3 billion in one year after its launch.
Our EMEA based ETF range generated $2 $5 billion of net long term inflows in the quarter with particular strength from the Ivy <unk> S&P 500, UCITS ETF and the gold exchange traded commodity fund.
Looking at flows by geography on slide six you'll note that the Americas had net long term inflows of $4 8 billion in the quarter driven by net inflows into Etfs as mentioned as well as our institutional flows.
Asia Pacific again delivered another strong quarter with net long term inflows of $9 3 billion.
Net inflows were diversified across our regions, reflecting $6 8 billion of net long term inflows from greater China, most of which arose in our JV and $3 $1 billion from Japan.
Turning to flows across asset classes, we continue to see broad strength in fixed income in the third quarter with net long term flows of $11 billion.
Drivers of fixed income flows include institutional net flows into various fixed income strategies through our China, JV global investment grade stable value and municipal strategies.
Our alternatives asset class pulp many different capabilities and this is reflected in the flows that we saw in the third quarter.
Net long term flows in alternatives were $2 3 billion driven.
Driven primarily by our private markets business.
A combination of inflows from direct real estate, the newly launched CLO that Marty mentioned and senior loan capabilities.
When excluding global GTR net outflows of $1 7 billion.
Alternative net long term inflows were $4 billion.
The strength of our alternatives platform can be seen through the flows it has generated over the past five quarters with net long term flows totaling $12 million.
Organic growth rate, that's averaging nearly 6% per quarter over this time when excluding the impact of the GTR net outflows over this period.
Turning to slide seven I wanted to spend a few minutes on our business in China, particularly given the level of flows we have seen from the region over the last several quarters and the high level of interest in our business there.
Invesco launched the first Sino U S. JV in China in 2003 as Invesco, Great wall, we've been in the market for almost two decades with a unique JV structure and relationship with our partner.
How we operate in China is differentiated from others that have joint ventures.
While we have 49% ownership of the JV or partner as the Chinese government backed power company and has been a good partner.
We've been leading the management of the JV, leveraging our global asset management expertise since the inception of this partnership.
We run the business in China, with Chinese management, and our clients are Chinese investors. China's fund management industry is a very significant opportunity in 20 years. It has grown from almost nothing to around three and a half trillion. It's.
It's expected to become the second largest and management market in the world by 2025 with assets of over six trillion dollars.
Also China is estimated to account for over 40% of global net flows through 2024 and.
Invesco as an early entrant in China has developed a strong and comprehensive platform covering all business activities, including robust domestic investment capabilities with good long term performance track Records.
We have very strong relationships with banks and insurance companies and digital distribution has been a major contributor in recent years in terms of bringing in new onshore business.
Key opportunities for Invesco in China include mutual funds institutional clients and sovereign wealth funds.
China continues to open up and improve its capital markets. We also expect opportunities in pension reform global investors, increasing interest in investing in Chinese investments and cross border investment opportunities.
The relationships the unique business model, we established with our JV partner and the amount of AUM, we have sourced from Chinese onshore investors really sets us apart from other global asset managers, who are newer entrants in the Chinese market.
Moving to slide eight we have built a diversified business in China with over $99 billion in AUM at the end of September 60% of the AUM is from retail clients and 40% is institutional.
We manage a AUM in all asset classes and distribution is unique.
Digital distribution to retail investors has become a mainstream channel along with the traditional bank distribution channels and this is not just for money market funds.
With our market position in tenure in China. We are beneficiaries of this trend are.
Our long term commitment and strong track record have put invesco in an advantageous position in our strategic position and continued investment in China has resulted in a 42% annual growth rate over the last three years to date.
In recognition of the strength of the business Invesco was ranked the number one China onshore business and the number three for an asset management firm in overall, China in 2020.
Before we wrap up this discussion on China in light of the recent developments around Evergrande I want to note that our overall exposure of the direct equity or fixed income holding across the complex, including within our JV is de minimis market volatility in offshore markets of course doesn't impact AUM levels and the market has been and could be volatile for future real estate development.
We remain positive towards the fundamentals of China's economy, and most of the flows in our China business come from domestic onshore clients.
So if anything we've seen a flight to quality as investors look to NAV based products like the ones I GW offers.
Now moving to slide nine to look at the institutional pipeline, which was $32 billion at the end of September the pipeline remains relatively consistent to prior quarter levels in terms of both asset and fee composition.
Overall, the pipeline is well diversified across asset classes and geographies our solutions capability enabled 38% of the global institutional pipeline and creative wins in customized mandates.
This has contributed to meaningful growth across our institutional network.
Turning to slide 10, you'll note that net revenues increased $31 million or two 3% from the second quarter as.
As a result of higher average AUM in the third quarter.
The net revenue yield excluding performance fees was $34 four basis points, a decrease of four tenths of a basis point from the second quarter yield level.
The decrease was mainly driven by asset mix shift, including higher <unk> and money market average balances.
Incremental impacts from higher discretionary money market fee waivers was minimal relative to the second quarter and the full impact on the net revenue yield for the third quarter was six tenths of a basis point.
Looking forward, we expect the dynamics impacting net revenue yield will continue the degree of which will be influenced by market direction, especially if we see a divergence in performance in areas, such as developing or emerging markets, where fees tend to be higher than our firm average.
We do expect the discretionary money market fee waivers to remain in place for the foreseeable future until rates begin to recover to more normalized levels.
Yeah.
One other area I want to note before moving to expenses of performance fees. Historically, we have realized meaningfully higher performance fees in the fourth quarter.
Been driven typically by a few funds each year that have reached the point in their lifecycle, where they generate performance fees usually in the fourth quarter.
This year, we do not expect to see performance fees increase in the fourth quarter, we expect performance fees in the quarter will be more in line with our experienced across the first three quarters of the year.
This is due to vintages in our portfolio not being at the lifecycle stage of recognizing performance fees, which are typically near the end of the life of the fund and has a no way related to the performance of the funds.
Total adjusted operating expenses increased one 2% in the third quarter, the $10 million increase in operating expenses was mainly driven by variable compensation and property office and technology expense.
Higher variable compensation was driven by the revenue increase in the quarter, partially offset by savings, resulting from our strategic evaluation.
The increase in property office and technology expenses was largely driven by changes to the pricing of transfer agency services that we provide to our funds as we noted last quarter.
This change went into effect in the third quarter and resulted in a $6 million expense increase which was offset by a corresponding increase in service and distribution revenues.
As a reminder, we anticipate that our outsourced administration costs, which we reflect in property office and technology expense will increase by approximately $25 million on an annual basis or approximately $6 million per quarter and offsetting this will be a corresponding increase in service and distribution revenues, resulting in a minimal impact to operating income.
Operating expenses remained at lower than historic activity levels due to pandemic driven impacts to discretionary spending travel and other business operations. However, we did see a modest increase in client activity in business travel in the third quarter, which is reflected in both marketing and G&A expense.
As we look ahead to the fourth quarter, our expectations are for fourth quarter operating expenses to be relatively flat compared to the third quarter, assuming no change in market and FX levels from September 30th consistent with prior years, we expect a modest seasonal increase in marketing related expenses in the fourth quarter and one area that still more difficult to forecast at this point is when <unk>.
But impacted travel and entertainment expense levels will begin to normalize.
We are engaging in more domestic travel and in person client activities and we do expect to see continued modest resumption of these activities in the fourth quarter.
Moving to slide 11, we update you on the progress we have made with our strategic evaluation in the third quarter, we realized $5 $8 million in cost savings.
$4 million of these savings was related to compensation expense associated with reorganization and $2 million was related to property expense.
A $5 $8 million in cost savings or <unk> $23 million annualized combined with the $125 million in annualized savings realized through the second quarter in 2021 brings us to $148 million in total or 74% of our $200 million net savings expectation.
As it relates to timing, we expect to modestly exceed the $150 million target. We had set for 2021 with the remainder realized by the end of 2022.
We expect the total program savings of $200 million through 2022.
It would be roughly 65% from compensation and 35% spread across the other categories.
In the third quarter, we incurred $18 million of restructuring costs.
In total we recognized nearly $190 million of our estimated $250 million to $275 million of restructuring costs that were associated with the program.
We expect the remaining restructuring costs for the realization of this program to be in a range of $60 to $85 million through the end of next year.
As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.
Yeah.
Now going to slide 12.
Adjusted operating income improved $21 million to $562 million for the quarter driven by the factors we just reviewed.
Adjusted operating margin improved 60 basis points to 42, 1% as compared to the second quarter.
Most importantly, our degree of positive operating leverage reflected in our non-GAAP results was one seven times for the quarter underscoring our focus on driving scale and profitability across our diversified platform.
Non operating income was $29 million.
Driven primarily by unrealized gains in our co investment portfolio.
The effective tax rate for the third quarter was 24, 4% compared to 22, 8% in the second quarter.
The rate increase was primarily due to an increase in the reserve for uncertain tax positions.
We estimate our non-GAAP effective tax rate to be between 23, and 24% for the fourth quarter. 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.
Looking at Slide 13, we illustrate our ability to drive adjusted operating margin performance against the backdrop of the client demand driven change in AUM mix and the resulting impact on our net revenue yield excluding performance fees.
Our operating margin in the third quarter of 2019, which was the first full quarter. Following the acquisition of Oppenheimer was 49%.
At that time, we reported a net revenue yield of 47 basis points.
In the third quarter of 2021, our net revenue yield had declined over six basis points to 34 four basis points, yet our operating margin has improved to 42, 1%.
The chart starts with the third quarter of 2019, but in fact, our third quarter 2021 operating margin is the highest since invesco became a U S listed company in 2007.
This is against the backdrop of a mixed driven decline in net revenue yield.
We've been building out our product suite to meet client demand and client demand has been tilted towards lower fee products.
In fact, the growth of the Q2 Q over this period is remarkable almost tripling in size and going from 6% of our AUM mix in the third quarter of 2019% to 12% at the end of this quarter.
Even though we do not earn a management fee a sponsor of the Q2, two we manage the over $100 million annual marketing budget generated by the product.
The marketing budget has allowed invesco to further raise awareness about the Q to Q.
That increased awareness has resulted and its ability to significantly increase our market share in the ETF space Invesco is today, the fourth largest ETF provider in the world.
Growth in the Q2, two accounts for two basis points of the net revenue yield decline over the periods shown on this chart.
And as I noted earlier discretionary money market fee waivers account for a six basis point decline in the net revenue yield.
These two factors alone account for over 40% of the decline in the net revenue yield over this period.
Realizing our business mix is shifting we continue to be focused on aligning our expense base with the changes in our business mix, which has enabled the firm to generate positive operating leverage and operating margin improvement.
Now a few comments on slide 14, our balance sheet cash position was $1 8 billion on September 30th and approximately $725 million of this cash is held for rent regulatory requirements.
The cash position has improved meaningfully over the past year, increasing by nearly $700 million largely driven by the improvement in our operating income.
Our debt profile has improved considerably as well with no draws on our revolver at quarter end as a result, we have substantially improved our net leverage position is shown in the top right chart on this slide our leverage.
<unk> as defined under our credit facility agreement declined from 143 times a year ago.
Under one times at <unk> 86 turns at the end of the third quarter.
If you choose to include the preferred stock the leverage ratio has declined from just over four times to 267 times at the end of the third quarter.
Regarding future cash requirements, we recorded an additional downward adjustment to the MLP liability in the third quarter.
Reducing the liability from our previous estimate of nearly $300 million down to $254 million.
We anticipate funding the liability this quarter and we have ample cash resources to do so.
While we anticipate a degree of insurance recovery related to this the insurance claims process is inherently complex and we do not have an update at this stage as to the exact timing or size of the recovery.
Regarding our capital strategy, we are committed to a sustainable dividend and to returning capital to shareholders through a combination of modestly increasing dividends and share repurchases.
As we look towards 2022 and beyond we will be building towards the 30% to 50% total payout ratio of over the next several years as we continue to modestly increase dividends and re reinstate a share buyback program in the future.
Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility.
And in summary, we continue to see growth in our key capabilities. We remain focused on executing the strategy that aligns with these areas, while completing our strategic evaluation and reallocating our resources to position us for growth.
And finally, we remain prudent in our approach to capital management, we're in a very strong position to meet client needs and run a disciplined business and to continue to invest in and grow our franchise over the long term.
And with that I'll ask the operator to open up the line for Q&A.
Thank you 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 pickup your handset when asking your question.
Draw your request press Star two one moment for the first question.
Our first question is from Glenn Schorr with Evercore ISI you May go ahead.
Hi, Thanks, very much so interesting comment about the driving towards 30% to 50% payout ratio eventually.
Hum.
I guess it brings up the strategic question of what what's left to do meaning you've scaled up you've gotten a lot more global you broaden the board you have China Etfs fixed income solutions everything that's working so what else would you be using your cash flow in the future.
It's a capital return is bad for like clothing things like alternatives I'm just.
Trying to put that number's question in a more big strategic question. Thanks.
Thanks, Glenn let me make a couple comments from Allison determined too so.
Look we've had the conversation the industry is increasingly competitive and.
Reinvesting in the business is still a very high priority for us as you said, whether it be product extensions gross probably more in private markets continue to focus on that business to grow there, but year over year investments in technology digital.
Really enlist so again, it's just a lot of.
Demand that we would have internally and we continue to make those investments. So you don't just increase <unk>.
<unk> continue.
Continuing to evolve the business in line with the client demands.
Yeah, I mean, I would just add.
Thank you could sum that up with just we seek to improve and increase our strategic optionality.
Want to have the ability to continue to invest in the business, we want ample cash resources.
For any downturn or any sort of market volatility that could lie ahead, we want to be in position to continue to pay down our debt and we have a $600 million note that comes due next year.
We do have the remaining MLP liability, which I noted has been lowered to $254 million, which is very good news. Nonetheless that is a cash obligation in the fourth quarter and we have ample cash resources.
To handle that and so really as we think about the balance sheet and you've seen the progress we've made over the last 18 months or so we really are trying to put our balance sheet and a very strong position. So we have the strategic optionality that will include returning capital to shareholders, but we want to be in a position to.
To really balance our priorities, which does include improving the balance sheet investing in the business.
Maintaining strategic Optionality and returning capital to shareholders.
Okay. Thanks for that thank you.
The next.
The next question is from Brennan Hawken with UBS you May go ahead.
Hi, good morning, Thanks for taking my questions.
First wanted to just start on waivers.
Allison you flagged a 0.6 basis points.
Right is there.
By your estimate I know, it's going to depend upon.
Some competitive dynamics or whatnot, but how.
How many hikes do you think we would need.
For those go away because you know.
There's a forward curve tells us we're getting closer to that so I'll want to sharpen up the model there.
Hard to say, how many I do think just the single first hike.
We'll certainly be helpful to starting to reduce those money market fee waivers that will certainly help on the institutional.
<unk> side for sure.
It does depend on a lot of supply demand dynamics, which will just impact the overall availability of the securities to purchase and so.
The the change in fed funds will be helpful. It won't be the only factor that will determine how quickly it goes away and just a.
An increase in short term rates overall will help on the retail side as well.
Okay.
And well just I guess following up on that was.
When you had waivers in the past was there a certain threshold for short term rates that were.
Were they were eliminated I would assume something like 50 basis points should be sufficient is that fair.
I think that's right I'd have to go back and recall blips and remember, but that sounds about you're in the right zone.
I'd come back to Allison's comment or two it's going to depend on the competitive dynamics.
Usually all freed it up it's probably not an unreasonable expectation. It's just how quickly when we get there can we can we unwind it.
Okay Fair enough fair enough. Okay. Thank you and then.
There's been some speculation in the news about a potential tie up with you all in another large financial services firm that has a big asset manager.
Curious what you can say about that and then separately you guys have been very clear that M&A.
When it's done right is definitely a considerate strategic consideration view and something that.
Is important and can be value created when done right.
Can you maybe walk us through your priorities on the M&A front, and whether or not invesco is interested in being a seller.
So I can assure you that were not interesting vena solar so let's start there.
But let me back up and put in context.
Yes, as we look at our capital priorities.
So I just spoke.
Sure.
Second a robot that its first reinvesting in the business to increase our competitive positioning.
But then strategically what we look at as we look at where client demand is and if we can't fill the gap.
Internally, we would look externally so it has to make strategic sense it has to be.
Complementary to our business it can't be duplicated to our business.
Work, so clients with larger employers awards and by the way shareholders don't either.
And I'd come back to the point in time and time again.
I've got the wherewithal to ensure you're protecting what you bought well.
Creating a better organization.
And also very importantly.
The cultural alignment matters, a lot if theres misalignments, if youre going to have a problem at some point.
So as we look at it right now the priority is continuing to build on what we have as I mentioned, a few minutes ago. It is our private markets business, where we're spending.
Specific amount of time as we are seeing client demand in and credit in particular, that's been an area of some extensions on our real estate area. So.
Not much different to what we've talked about in the past.
Thanks for taking my questions.
Right.
Thank you. The next question is from Dan Fannon with Jefferies. You May go ahead.
Hi, Thanks. Good morning, just wanted to follow up on the momentum in China, you guys have been highlighting this for several quarters. The numbers have been good I'm curious about the retail distribution and kind of how I.
I guess the burst of entrenched you are with.
The third party banks and others in there and maybe talk about.
There are certain concentrations in the regions or partners or just a little more color on the distribution breadth that you have there.
Yes, I'll make a couple of comments then awesome.
Ed.
So.
As you look to the materials at all some art.
Two six.
6% retail 40%.
Institutional.
Retail comes through the joint venture and it's very very broader than just the sheer size of the country you end up with any number of distributors, yes, there's the obvious thanks to insurance company, but.
An area of real strength and growth is really bad.
E Commerce distribution channels and there is many different avenues there beyond international were one.
One of the firms have spent quite a successful so the concentration risk.
An issue for us and we just looked at the whole distribution landscape continue to open and broadened.
But again.
It is a very competitive world.
Misunderstand my comments.
I don't know that I have a whole lot to add to that I mean, I think the online distribution channels have really overtaken the banking distribution channels in terms of market share overall in China, just given the time, we've had there and the strength in the tenure, we've got very strong relationships not just across the.
Those traditional banking distribution channels, which continue to be very good but also in the emerging online trend.
So very strong institutional relationships, there, which are going to continue to be important drivers of long term growth in China.
Got it.
Hello.
So can you expand a bit on the performance fee outlook for fourth quarter just.
Just so I'm understanding.
There was a basically an investment gap for some period several years ago, where you didn't put money to work and so the vintages.
The timing is just off just curious how that doesn't tied to performance just making sure I understand.
So this quarter and why before the fourth quarter of 'twenty, one and how we should think about that maybe for fourth quarter 'twenty two assuming.
Well performance holds here you would see that come back or normalize again next year.
Yeah.
I wouldn't say there was an investment gap and you know the nature of just performance fees and how they are.
Our structured into various contracts just remains.
Sure.
It's very bespoke and it can be somewhat chunky and difficult to predict there wasn't an investment gap, but as we do look at just the vintages.
What has performance fees in it.
That would be eligible there are it is it is not the typical year end spike of what we would typically see so no no performance misses just the way these vintages are kind of.
Cycling through and what we see in the fourth quarter of this year. We continue to have about $58 billion of AUM overall that is performance fee eligible <unk>.
Just don't have strike dates if you will of 12 31.
Or at least the end of this year that would incur a recognized performance fees in the fourth quarter. So our expectation is that fees in this quarter will be consistent with the experience. We've had in the first three quarters of this year rather than a spike at year end.
And you Shouldnt read anything into that in terms of what that means for 2022 or beyond it's just simply a function of timing with the vintages the share.
Okay. Thank you.
Thank you. The next question is from Patrick Davitt with Autonomous Research you May go ahead.
Hey, good morning, everyone.
You touched on this briefly in the prepared remarks, the Chinese ones are obviously.
Given the increased volatility we saw there last quarter could you give a little bit more detail on kind of the flow and investor trends you saw through that volatility was there any kind of drop off in activity as the volatility got worse later in the quarter isn't short.
What I'm trying to get you don't need to worry about these flows slowing or even reverse Chinese volatility continues to get worse or do you think Q3, Q suggests that could be resilient through that.
I'll make a couple of comments.
So if you're going to take at the beginning of the year. After Q1, we thought it was such an incredibly strong quarter that we couldn't be repeated in <unk>.
Slowed somewhat continue to be very very strong and just what we're seeing is.
There was just movement of investor behavior from.
Really equity capabilities that were sort of growth focused value focused in <unk>.
Just continuing to work through the broad range of capabilities. So it's hard to.
Ah, yes, predict what's going to happen.
We're just not seeing the fall off to the degree that you would imagine the most very volatile periods. As you saw if you went back to 2015 something like that so.
What's really important is.
The market continues to evolve in a very positive way.
And the regulators have been very focused on providing a greater investment.
Retirement savings market and Youre seeing that so I'm not going to say that we'll never in net redemptions, but it's been very resilient through this year, even with <unk>.
The volatility that we've seen.
Yeah, I mean, the only thing I might add if I look back over the last five quarters. This was our second highest quarter for flows in China.
And I.
I think the volatility no we didn't necessarily see it trend down inside of the quarter.
And some of that volatility you started to just here I'll call. It softening in sentiment really in the second quarter and you see that more in the second quarter flow result, if I look at the flows into the joint venture in particular, it was about $7 billion, which of that product launches drove a couple billion.
The remainder was really through existing products, particularly fixed income there was a lot of strength in our fixed income capabilities.
That's different than what we saw in the first quarter, where it with new product launches that drove the majority of the flows in this quarter. It was really from our existing products and I think that.
Not only speaks to just the strength and the sustainability in the market, but also the breadth of the capabilities in our platform that we're able to continue to gather assets without large new product launches just given the breadth of capabilities we offer.
Great. Thank you.
Thank you. The next question is from Ken Worthington with J P. Morgan you May go ahead.
Hi, good morning.
The next sales picture continues to be quite solid and the pipeline continues to be strong and area of weakness seems to be the U K. It seems like outflows are persisting in the UK, but getting better. So a couple of questions. So you mentioned GTR I think you said $1 7 billion of outflows in the quarter how.
Much does Chi Chi are still manage and is your expectation for continued outflows given the performance there and then what products and businesses are working best in the U K and what is the outlook for the U K to sort of move back broadly to positive flows in the future.
Why don't I start with GTR, and a little bit that let Marty chime in so in terms of where GTR is today at the end of 930, it was down to $8 $3 billion that was down from its peak of $30 billion at the outflows in the quarter were $1 7 billion.
Now with that $8 3 billion is not entirely in the U K, but it is largely in the U K in fact.
What what is reflected in the UK is about $6 billion. So.
We are down to up.
Point of at least diminishing headwinds, we do have an expectation that it will continue to decline. So I don't think we have seen a bottom there and we do expect it will continue to decline, but the headwinds are diminishing and I think you'd see that just in terms of the improved outflows for the U K this quarter with $1 8 billion and outflows, which is an.
<unk> from $3 2 billion in the second quarter.
So despite some of those outflows, we do see retail overall improving.
And we see good demand for active European equities, and really improving redemption rates for our UK equity center. So there are I will call it bright spots and green shoots as we continue to work through these GTR headwind yes.
I just had a couple of things so I think also important.
When you look at the period, we've gone through with UK equities in particular, and our performance in sort of sentiment was quite negative and the secretary of the combinations not very positive.
For results.
The short term performance has improved quite dramatically.
In the UK equities, which is important.
Jeff flows are the other area, where we're seeing demand and also the institutional business and as we look forward results et cetera.
<unk>.
Having some.
Good expectations of the referendum.
Flows into your pager.
Okay, great. Thank you.
Yes.
Thank you. The next question is from Robert Lee with K B W. You May go ahead.
Great. Good morning, Thanks for taking my question. So maybe a morning, Alison just like to go back to the.
The China, Greater China business, So I mean, you've talked for a while it seems like a few years almost with.
The JV, you know and maybe bringing it up to a majority ownership, but you know I guess one question would be does it really since you operate it I mean, there's really even matter you know getting into majority ownership is that even something that.
Now it is at this point, even possible and then.
I have a follow up question after that.
Yeah. So.
You hit them.
Peter REIT I've had I mean.
<unk> difference that we've had as composed as opposed to every other joint venture that we know of there could be somewhat similar to us I don't know who that is.
Having sort of management control has been the separating factor and so I think most people use majority control of the short term for management control, but we tried that.
We continue to be in.
Discussions with.
Our joint venture partner.
It's likely we will end up with a majority, but its contribution huge change in the ownership, but it's not going to give them away at all of our development in China and the success. We've had so you really hit the point that is most relevant for our success there the only change.
If we were to do that would be an accounting change in terms of how we recognized.
The joint venture on the P&L It wouldn't change anything day to day, and how we operate it or the success of the venture.
Okay, Great and then maybe as a follow up to should shift gears a bit.
I haven't really talked about too much I think in recent quarters, but you know there was a time, where you you made some acquisitions made investments in different technology platforms, and bringing them all under the until the flow umbrella, but can you maybe give us a quick update on kind of the strategic positioning or importance of that and maybe.
To what extent.
Those platforms are you starting to see some positive impact.
And how there may be a helping on the flow picture.
If at all so yes. So you are right. It was a combination of five smaller acquisitions to create the platform last year was a year of pulling it together under the <unk> banner.
The largest and most developed a as in telephone the U K, which still has a 40% market share.
We continue to look at ways to not just advanced technology for alternate advanced flows in that market.
We've got some great success with that right now.
Continuing to challenge that.
Here in the United States. The same thing, where we think the opportunity is serving the already market.
And again, we're not just frankly turned our attention to it after the consolidation.
Last year, and so look we still think there is.
If you just look at.
The way digital technologies are being used to places like China.
Really what gave us the impetus to spend time and energy there.
It has proven to be stunningly successful in China, there is different regulatory.
Yes barriers here in the United States and structures and.
And the like but we still think there's an opportunity.
For success there.
We will see in the quarters ahead of before right.
Great. Thank you for taking my questions.
Thank you.
Thank you. The next question is from Bill Katz with Citigroup. You May go ahead. Okay. Thank you very much for taking the questions. This morning. So first question is just on the the opportunity to take advantage of the democratization of a retail alternatives could you maybe expand a little bit on what strategically what you're doing there to gin up the volume.
Show me the 1 billion so was favorable in the 4 billion overall, it's very good but seeing some very big numbers elsewhere, just sort of wondering what you're doing to leverage both the product and distribution relationships you have.
Yes, so great question so.
We're.
It's where we see the immediate.
Katy for us is with our direct real estate business.
Earlier in the year REIT entered into a partnership with UBS using.
<unk>.
Real estate.
Capability, that's been distributed in Switzerland, Asia and EMEA.
We now have an enriched product here in the United States and we're just working with our distribution partners right now to get it on the platform.
It's probably good.
Through the end of the year suggest to all of the platforms.
Hopefully we will get on what we look at it as a huge opportunity just because they are very very few competitors there and if you looked at.
The success and pedigree of our real estate team is very very strong.
What has traditionally been in the institutional markets. It has not been in the.
The real estate market.
Bill I think it's a combination of having alternative capability, but also the ability to distribute into the wealth management platforms.
What we're looking forward to.
Hopefully taking advantage of.
Great. Thanks, and maybe one big picture question as well just a follow up.
Some of the some of the distributors are talking about accelerating the direct indexation opportunity. So the customize our thought process, how would that affect invesco good or bad.
Well, it's hard to note all types of work or where that goes but we do have as you know.
Through <unk>.
So conduction capability ourselves.
I can tell you the experience we've had in building models, we use that.
And those model creation. So you could see that to continue to be an extension. There also with our institutional clients again, what you said.
Self indexing capability.
You know to build customized indexes for for institutional clients. So we look at it is we're probably one of very few institutions that have that capability and we expected we'd use it.
Robert way partnership with a number of our.
Clients in.
Wealth management partners.
Thank you.
Thanks Bill.
Thank you. The next question is from Brian Bedell with Deutsche Bank You May go ahead.
Great. Thanks, Good morning folks, maybe just back on the indexing and on the M&A front in terms of the strategic Optionality that you mentioned Nelson and the comments you mentioned Marty as well just like how important is having a beta index franchise. So.
You know as opposed to smart beta and beta ETF capability is that a strategic imperative for you or do you think you can grow organically.
And factor based.
We're self index based strategies, you're on your own and then also I guess would you consider.
<unk> venture and Ah is an option and in doing that if you had.
I assume you'd want management control of that just like you haven't China.
Yes so.
Look if you just follow the flows I mean, there continues to be demand and.
Cap weighted indexes and also in smart beta.
Our history is we really started in sort of the smart smart beta category and Youre seeing.
This ever increasing demand there so.
It's really the answer is both is what's happening in portfolios and you want to be relevant in those marketplaces and our focus.
It's been your heads down and continues to grow at Allison talked about the Qs in particular.
Recognizing it's.
Yes, the limitation, we have from a fee generation point of view, but it's been very very important for building out our ETF platform and the reputation of the firm so.
Then we will just continue to challenge our competitive positioning and determine which is the best way forward, but.
So far I would say our success has been quite.
Alright good.
And if you if you did want to enter an arrangement would you consider JV and that type of structure or is that are you.
And you'd be doable.
It's hard to know I mean, it's all facts and circumstances, so I wouldn't want to speculate on it.
Alright, and then just on sustainable fund flows for <unk> and total dedicated sustainably U M and I don't know if you want to cover off on the bitcoin.
E T F a strategy between physical and futures for the auction.
Yeah.
Yeah.
Yeah, why don't I start on.
Yeah, what we're doing in bitcoin and alike.
We've entered into a partnership with <unk>.
Our galaxy digital.
That's where we're going to work with the build out of our whole suite of ETF capabilities.
Underlying blockchain technology digital assets and crypto our focus is on a physically backed.
Correct.
Sure.
It's going to be some time I think before we get into the market right. It's at the SEC right now in revolt.
No.
They are still working through.
That is a topic.
We've introduced two etfs into the markets that sort of invest in companies that build off and your point on that.
Blockchain technology and like them.
We did back away from.
Futures.
Yeah.
That product because we picked up.
Best alternatives going forward is really this.
Physically back.
Right.
Yeah.
On your AR.
Sustainability questions.
RFP flows into ESG capabilities in the third quarter was.
A little bit talked about $300 million positive inflows in the quarter. We continue to have about $51 $5 billion of AUM that we would consider to be ESG funds and mandates.
Not really spans across 160, ESG funds and mandates and a variety of asset classes.
Importantly, we remain the second largest ESG ETF player in the world.
Pleasure, a little bit softer in the third quarter relative to what we've seen in the first half of the year no nothing to point to one way or the other there, but our expectation is to continue to see demand for those capabilities.
Great great. Thanks for all the color.
Thank you. Our final question is from Alex <unk> with Goldman Sachs. You May go ahead.
Good morning, Thanks for taking the question.
I wanted to shift gears, a little bit maybe go back to slide 13, Allison and you highlighted in the prepared remarks, so definitely impressive to see the margin expansion. Despite the headwinds that you've seen in the fee rate, but I'm curious, how you're thinking about the margin trajectory longer term, assuming a more normalized market.
Which you know normally it is always a question Mark but you know clearly market. So it's been pretty significant over the last year or so so with the cost cutting program I think most of the way through is it still likely for invesco to see operating leverage off of this kind of 42% level over time.
Assuming again kind of a more normalized market spectrum.
Yeah, I mean, I would say a couple of things one in terms of the outlook for net revenue yield of just how we think about the fee rates from here I mean, the biggest driver is always going to be the mix of flows that we see that's going to have a huge impact on that as we continue to see client demand for all of our capabilities, but certainly.
Increasing demand for our passive capabilities, you see that downward pressure.
At the same time you can.
Market impact can work in either direction and it doesn't work consistently across those different asset classes and capabilities and so it's an inherently difficult to predict for that reason.
In terms of though just bigger picture, how do we think about it I mean I do think we'll continue to see some modest downward pressure on it just as we continue to grow our passive capabilities.
And we see demand for those capabilities.
Hopefully it was also helpful to kind of understand the impact that the <unk> has on that and so while it puts downward pressure on net revenue yield it creates a tremendous benefit for us.
Through the marketing.
<unk> support budget. It provides us and I think really most importantly, we are able to generate that positive operating leverage and really improve margins against us and so where do I think it goes from here I would say a couple of things one as we come towards the end of this expense management effort that we put in place.
Last year, and we expect to complete that next year.
I don't think we I don't think we have to continue to do things like that in order to sustain the strong operating margins. We've got an expense base, that's over $3 billion with a significant budget to work with and so how we think about it is really how do we deploy that expense base, how do we continue to reallocate where we invest.
Our areas of highest demand and as we built out the breadth of capabilities.
That scale and the volume of flows is what continues to generate.
Really the positive operating leverage that we're looking for and gives us the opportunity to sustain beef.
40% plus operating margins, even with some of that downward pressure in that net revenue yield.
And I appreciate you asking the question because I think it's a really important point that we what we wanted to drive home and we wanted it to come through today.
Because this didn't happen by accident. It really reflects a lot of deliberate work by the company over the last couple of years and an operating expense base that really gives us the leverage we need to continue to invest in the areas of growth that we see ahead.
Perfect Great. Thank you very much.
Thanks, Alex.
Okay.
On behalf of Alex and myself. Thank you very much for joining I appreciate the questions and the engagement and dialogue.
Forward to talking to everybody next quarter.
Thank you that does conclude today's conference. Thank you all for participating you may disconnect at this time.
Yeah.