Q4 2021 Invesco Ltd Earnings Call
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 ups.
Any forward looking statement, we may also discuss non-GAAP financial measures during today's call.
Conciliation of these non-GAAP financial measures may be found at the end of our earnings presentation.
Welcome to <unk> fourth quarter earnings 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 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.
Thank you operator, and thank you everybody for joining us and happy new year.
We did end up 2021, with a strong fourth quarter and momentum going into 2022. So we'll spend a few minutes looking back in the fourth quarter and also pick up.
Look at 2021, because it really starts a context as we go into the new year.
Our focus has been and will continue to be our clients' employees as we execute on this COVID-19 operating environment and we've embedded new ways of working together to deliver outcomes for our clients and we've maintained our focus on six key capability areas.
TFS factors index private markets active fixed income active global equity greater China solutions.
This approach has helped us generate consistent strong and broad organic growth and we ended the year crossing over 1.6 trillion dollars in assets under management.
And as you can see on slide three our net term net long term inflows of $12 $5 billion represents organic.
Our annualized long term growth of 4% despite the market volatility in the fourth quarter.
This is the sixth consecutive quarter of strong growth and is a direct result of the investments we've made over time to enhance and evolve our business to meet the needs of our clients and it also speaks to the broad diversification of our business.
Growth was driven by continued strength in our key capability areas as we strategically invest in areas, where we see client demand and perhaps competitive strengths.
For the year Invesco delivered the strongest organic growth in our history, we generated over $81 billion of net long term inflows, representing 7% organic growth growth rate, which is one of the best in the industry.
Looking at our specific capabilities, our global ETF platform closed up the year very strong.
<unk> generated net inflows of nearly $22 billion in the fourth quarter, including our flagship flagship <unk> product.
Q2, two products had an exceptional quarter generating $13 billion of net inflows for the year Etfs globally generated a record $62 billion net inflows and we increased our market share in both assets under management and revenue.
Yes.
<unk> had an outstanding year with over $21 billion net inflows growing to $215 billion at year end.
Q2 product has become the fifth largest ETF globally. Its popularity has spurred growth in the rest of our global ETF platform and laid the groundwork for the launch of the adjacent fee generating products such as the Q innovation suite.
We launched the suite in October 2020, and it has been highly successful growing to $5 billion in assets under management by the end of 2021.
We continue to see clients, increasing their allocation to alternatives strategies as they search for diversification higher returns and invesco is built abroad.
Across real estate private.
To meet client demands.
We are confident in our ability to accelerate the growth as we look to the future.
And the private real estate business long term net inflows were $3 $4 billion in 2021 comprised of new acquisition activity of $12 4 billion in investment realizations of 9 billion, our direct real estate assets under management grew by 12% our private credit business.
Robust bank loan product demand resulted in net long term inflows of $7 5 billion for the year, including the launch of several new Clo's are active fixed income business remains strong generating net inflows of $9 3 billion in the fourth quarter, including $7 $1 billion from greater China and 35 billion.
For the year, representing organic growth of 13% over the prior year.
Active global equities, although our $45 billion in developing markets funds.
So on net outflows in the quarter the fund generated.
Net long term inflows in 2021 of $1 2 billion.
An improvement of $4 $3 billion over 2020.
On the institutional side, we finished a strong year with solutions enabled opportunities accounted for 35% of our institutional pipeline.
The business in greater China closed out an exceptional year of growth with fourth quarter net long term inflows of $9 5 billion.
For the year net long term inflows were $28 7 billion, representing organic growth of 32%.
Business in China continues to be a source of strength and differentiation and we expect strong growth in the years ahead.
On slide four we highlight a very strong set of results for 2021. In addition to reporting net long term inflows in 2021 regenerated record gross inflows of $427 million at 37% increase compared to 2020.
Net revenues grew 17% over the prior year, helping drive adjusted operating income to nearly $2 2 billion or.
31% increase over 2020 revs.
Revenue growth coupled with strong expense discipline led to a 450 basis point increase in our net operating margin to 41, 5%.
In the second half of the year, we reported the second highest net operating margins of the company.
U S listed in 2007. These factors drove a 60% increase in our full year EPS to $3.09.
Strengthen our businesses generated strong cash flows improving our cash position to a point, where we are resuming our share buybacks, we intend to purchase up to $200 million in common shares during the first quarter. We remain focused on continuing to build a stronger balance sheet and improving our financial flexibility for the future.
I am pleased with the progress we've made over the last year I'm, even more confident that invesco is on the right path to sustainable organic growth and as we look to the future. We're determined to continue delivering consistent organic growth together with our disciplined approach to expense management should enable us to generate positive operating leverage while at the same time continuing to invest for growth.
The growth of our business and the efficiency of our business.
Do you want to take a moment to thank our employees for the continued resilience hard work and dedication through this COVID-19 operating environment. Their efforts are delivering the strong results youre seeing from invesco.
The breadth of our capabilities and our competitive strengths position us well as we look forward. We will continue to focus our efforts on delivering positive outcomes for clients, while driving future growth and delivering value over the long run for our stakeholders with that I'll turn it over to Alison Alison.
Thanks, Marty and good morning, everyone I'll start with slide five our investment performance was strong in the fourth quarter was 64% and 75% of actively managed funds in the top half of peers or beating benchmark on a five year and a 10 year basis. These results reflect continued strength in fixed income and foreign equities, most notably emerging markets in Asia.
Equities, all areas, where we continue to see demand from clients globally.
Turning to slide six we ended the year with over $1 six trillion in.
A 19% increase over year end 2020.
As I already noted earlier, our diversified platform generated net long term inflows in the fourth quarter of $12 5 billion, representing a four 1% annualized organic growth rate.
Activate AUM net long term inflows were $1 8 billion and passive AUM net long term inflows for $10 $7 million.
Net market gains led to an increase in AUM of $18 $4 billion in the quarter.
The retail channel generated net long term inflows of $3 billion in the quarter, driven by inflows into global ETF products and greater China.
The institutional channel demonstrated the breath of our platform and generated net long term inflows of $9 $5 billion in the quarter with diverse mandates both regionally and by capability funding in the period and fluids in the Asia Pacific region were particularly strong regarding retail net inflows, our ETF capabilities generated net inflows of <unk>.
$1 7 billion.
Excluding the Q2, two our net long term inflows were $8 8 billion.
As Marty noted in 2021, our global ETF business generated record net inflows of $62 billion, which was more than two five times net inflows in 2020.
Our global ETF platform captured five 6% of net new flows in 2020 , one increasing our market share of ETF AUM to four 9% at the end of 2020 one are.
Our share capture of incremental ETF revenues was also above market share at five 2%, excluding the Q2 two.
Looking at flows by geography on slide seven you'll note that the Americas had net long term outflows of $4 3 billion in the quarter, while we saw strength in Etfs and our institutional business, we did see pressure from select active equity strategies, including developing markets and diversified dividend.
Our bullet share suite also experienced year end maturity activity, which is expected.
Asia Pacific delivered another strong quarter with net long term inflows of $12 9 billion.
Net inflows were diversified across the region, including a record $9 7 billion of net long term inflows from our joint venture in China.
Invesco, great wall, and $3 $2 billion from other countries, including Australia with $1 $8 billion in India at $800 million.
EMEA, excluding the UK also delivered a strong quarter of net long term inflows totaling $4 7 billion.
Representing organic growth of 12%. This was driven by strength in ATF sales of senior loan products and institutional mandates in investment grade fixed income.
From an asset class perspective, we continued to see broad strength in fixed income in the fourth quarter with net long term inflows of $9 1 billion drivers of fixed income flows include institutional net flows into various fixed income strategies through our China JV in EMEA global investment grade stable value and municipal strategies.
Our alternatives asset classes asset class hold many different capabilities and this is reflected in the flows we saw in the fourth quarter net long term flows in alternatives with $3 $1 billion, driven primarily by our private markets business, which included direct real estate property acquisitions of new newly launched CLO and senior loan.
<unk> one.
When excluding global GTR net outflows of $700 million alternative net long term inflows were $3 8 billion.
The strength of our alternatives platform can be seen through the flows it has generated over the past four quarters with net long term flows totaling over $17 billion.
Representing a 10% organic growth rate over this time, excluding the impact of GTR net outflows over the period.
Moving to slide eight our institutional pipeline was $26 billion at year end the decline in the pipeline from the prior quarter was due to the funding of several significant mandates in the fourth quarter as reflected in our strong institutional inflows for the quarter, while the size of the pipeline will fluctuate quarter to quarter. It remains consistently strong typically running in the 25 to three.
$35 billion range dating back to 2019.
<unk> also remains relatively consistent to prior quarter levels in terms of fee competition overall, the pipeline is diversified across asset classes and geographies.
Our solutions capability enabled 35% of the global institutional pipeline and creative wins in customized mandates. This has contributed to meaningful growth across our institutional network.
Turning to slide nine Youll note that net revenues increased $40 million or 3% from the third quarter as a result of higher than expected performance fees as well as higher average AUM in the fourth quarter.
The net revenue yield ex performance fees was $33 four basis points, a decrease of one basis point from the third quarter yield level.
The decrease was driven mainly by asset mix shift, including higher QQ and money market average balances.
The incremental impact from higher discretionary money market fee waivers with minimal relative to the third quarter and the full impact on the net revenue yield for the fourth quarter was six tenths of a basis point.
Looking forward, we expect most of the dynamics impacting net revenue yield will continue.
In addition, the first quarter contains two fewer days in the fourth quarter, which always impacts net revenue yield.
Regarding discretionary money market fee waivers given the current prospects for higher rates in the near term, we anticipate that 75% to 90% of these waivers would seats within the first 60 to 90 days. After the first 25 basis point increase in the fed funds rate.
That would result in a recovery of about four turns to five tenths of a negative impact waivers have had on our annualized net revenue yield.
Performance fees for the fourth quarter were $53 million.
Higher than our expectations and were driven by certain portfolios that have annual absolute return performance hurdle.
<unk> approximately $20 million from our JV in China.
Given the strong influence of the market on these portfolios. These performance fees are clearly difficult to forecast.
Total adjusted operating expenses increased three 1% in the fourth quarter. The increase was mainly driven by the typical seasonal increase we see in marketing and higher G&A expense, which were partially offset by a decrease in compensation expense.
Also impacting marketing and G&A expense was an increase in client events and travel in the fourth quarter before we saw the impact of the new omicron variance with the impact of the new area. We have seen a slowdown of travel and in person client activity in January and we would not expect first quarter activity to be as high as fourth quarter.
G&A expense in the fourth quarter also included a nonrecurring $10 million charitable contribution to the Invesco Foundation the.
The Invesco foundation exists to support our communities and further progress and pillars of education and financial literacy.
We're pleased to have the ability to make this contribution at the conclusion of a very strong year.
As we look ahead to the first quarter of 2022 consistent with prior years, we expect an increase in compensation expenses related to the seasonal increase in payroll taxes and the reset of other benefits such as our 401k plan match.
Typically this is about $25 million to $30 million higher than the first quarter relative to the fourth quarter.
As noted one area that is still more difficult to forecast at this point is when COVID-19 impacted travel and entertainment expense levels will begin to normalize.
Moving to slide 10, we update you on the progress we have made with our strategic evaluation.
In the fourth quarter, we realized $5 million in savings.
$4 million of the savings was related to compensation expense, reflecting the planned transition of certain roles in concert with our strategic review and $1 million related to a reduction in property expense as we continue to right size our facilities portfolio.
The $5 million in cost savings or <unk> $19 million annualized combined with $148 $8 million in annualized savings realized through the third quarter in 2021 brings us to $167 million in total or 84% of our $200 million net savings expectation.
As it relates to timing the remainder of our net savings will be realized by the end of 2022 as planned we expect the total program savings of $200 million through 2022 would be roughly 65% from compensation and 35% spread across property property office technology and G&A expense.
In the fourth quarter, we incurred $32 million of restructuring costs related to the initiative and total we've recognized nearly $220 million of our estimated 250 to 275 million in restructuring costs associated with the program.
We expect the remaining restructuring costs for the realization of this program to be in the range of 30% to $55 million in 2022.
As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.
Going to slide 11, adjusted operating income improved $16 million to $578 million for the quarter.
Driven by the factors we have reviewed.
Adjusted operating margin was relatively stable at 42% exclude.
Excluding the nonrecurring contribution to the foundation, we generated positive operating leverage in the fourth quarter.
For the year the degree of positive operating leverage was one eight times underscoring our focus on driving scale and profitability across the company's diversified platform.
Non operating income was $51 million driven primarily by recognition of gains from funds that are in liquidation.
The effective tax rate was 21, 9% in the fourth quarter compared to 24, 4% in the third quarter. The decrease in the effective tax rate was primarily due to a decrease in the valuation allowance recorded against net operating losses and a decrease in the expense our uncertain tax positions in the fourth quarter.
We estimate our non-GAAP effective tax rate to be between 23 and 24% for the first quarter of 2022. 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.
Slide 12 illustrates our ability to drive adjusted operating margin improvement against the backdrop of the client demand driven change in our AUM mix and the resulting impact on our net revenue yield excluding performance fees.
We also illustrate the impact the exceptional growth of our Q2, Q product, which does not earn a management fee has had on our net revenue yield.
Our operating margin two years ago in the fourth quarter of 2019 was 39, 9% at that time, we reported a net revenue yield of 45 basis points and.
In the fourth quarter of 2021, our net revenue yield declined a little over seven basis points to 33.4, yet our operating margin improved to 42%.
As Marty noted earlier, the operating margins, we have generated in the third and fourth quarters of 'twenty. One are the highest since invesco became a U S listed company in 2007.
This is against the backdrop of a mixed driven declining net revenue yield.
We have been building out our product suite to meet client demand and client demand has been skewed towards lower fee products, including the highly successful <unk> product.
Growth of the Q2 Q product over this period is remarkable growing from 7% of our AUM mix in the fourth quarter of 2019% to 13% in the fourth quarter of 'twenty one.
Even though we do not earn a management fee as sponsor of the <unk>, we manage the over $100 million annual marketing budget generated by this product.
Growth in the Q2, two accounts for two basis points of the net revenue yield decline over this period shown on this chart.
And as I noted earlier discretionary money market fee waivers account for six tenths of a basis point decline in the net revenue yield.
The combination of the extraordinary growth in the Q2, two combined with a temporary drag from money market fee waivers.
For over one third of the decline in net revenue yield over this time period.
Realizing our business mix is shifting we continue to focus on aligning our expense base with these changes. This has enabled the firm to generate positive operating leverage and operating margin improvement. Despite the decline in the net revenue yield.
Okay.
Now turning to slide 13, a few comments here our balance sheet cash position was $1 $9 billion on December 31, and approximately $725 million of this cash is held for regulatory requirements.
Cash position has improved meaningfully over the past year, increasing by nearly $500 million.
We were able to drive improvement in our cash position, while also funding the resolution of the remaining contingent liabilities in 2021.
These included $294 million forward repurchase liability liabilities that we funded earlier in the year and the $254 million and funds shareholder reimbursements to complete the remediation of the MLP matter in the fourth quarter.
We also received an insurance recovery of $100 million related to that matter in the fourth quarter.
Our debt profile has improved considerably as well as a result, we have substantially improved our leverage position with a leverage ratio as defined under our credit facility agreement at 0.79 times at year end as compared to 137 times a year ago.
If you choose to include the preferred stock Leverages declined from almost four times to 247 times.
Okay.
With respect to 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've stated we intend to build towards a 30% to 50% total payout ratio of the next over the next several years by steadily increasing our dividend and resuming a share buyback program as Marty noted.
Given our strong and growing cash position combined with continued opportunity in our evaluation, we expect to repurchase $200 million in common shares during the first quarter.
Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility and our 2021 results demonstrate that progress and.
In summary, 2021 was a very strong year for Invesco, we remain focused on executing the strategy that aligns with our key areas of focus and we continue to invest ahead of client demand in these areas.
At the same time, we are focused on optimizing our organizational model and disciplined expense management. This approach has resulted in strong organic growth driving positive operating leverage and operating margin improvement. This has also facilitated stronger cash flows further strengthening our balance sheet and driving the improvement in our leverage profile.
We look towards the future invest goes in a very strong position to deliver value over the long run to all of our stakeholders.
And with that operator, I'd ask you to open up the line for Q&A.
At this time, if you would like to ask a question. Please press star one you will be announced prior to asking your question. Please pickup your handset when asking your question to withdraw your request. Please press star two one moment for the first question.
Our first question comes from Brennan Hawken with UBS. Your line is open.
Good morning, Thanks for taking my questions.
Was curious.
Allison Thanks for all the color on.
On the expenses and whatnot, but.
If we think about.
The 2020 twos is not really off to such a great start here in the equity markets. So if we think about.
Where we stand here a year to date.
Did you have any sense about what kind of impact that could have on net revenue yield and how.
How are what kind of position are you in to maintain the operating margin level, even if we see adverse equity market conditions.
Yep.
Good question I mean, let me start with net revenue yield.
The the biggest source of pressure is really the mix shift market.
Doesn't help either but even in rising markets as we continue to see really strong demand for our passive capabilities and I think thats evidenced by some of the organic growth rates. We just walked through we continue to see real pressure on the overall net revenue yield I mean, if I look at net revenue yield of our active AUM, it's actually held up pretty nicely.
Over the last year or two years, and it's really that strong demand for our passive AUM that's creating this pressure.
And so we do expect there to continue to be downward pressure on net revenue yield overall as we continue to see that demand and the shift of our business mix and hopefully some of the detail and the color we provided.
On the the pressure that we also see just from money market fee waivers in the Qs one of which is temporary.
And maybe you know an opportunity if we do see rates increase over the course of this year.
As it relates to then what does that mean for.
Our operating margin, but yes, the volatility we're experiencing so far in January I mean, it does put pressure on it and it will require us to be incredibly disciplined from an expense management standpoint.
I think we've made terrific progress when I look at 450 basis points of operating margin improvement year over year, and we got ourselves to a new a new place a new position that we can operate within and it might not be as high as what we experienced in the last quarter or two but I don't think we get anywhere near back to where we were a couple of years ago.
And we're being very disciplined and very thoughtful about that exact issue as we look at the.
Our budget for the year and how we think about a pretty significant expense base.
No.
Progress on the profitability has been really really great. So agree on that.
Then shifting gears a bit to the follow up.
The $200 million buyback that you announced for the first quarter, but as you flagged there was a $100 million insurance settlement. So.
When we if we're thinking about calibrating to the run rate.
If we if we shift to your comments around the payout it would suggest that the <unk> probably has a little bit of excess from that insurance recovery.
And so backing that out it's probably the right way to think about.
It seems like the right way to think about a run rate is that fair and is that the potential for more insurance recoveries behind this one or is that there's 100 million probably then that we should expect.
Yes, so a couple of things to point out that $100 million recovery is actually and.
Our non-GAAP results in our transaction integration expense. So it really doesn't in our adjusted net income you don't see it there so it's really not a factor.
I do think it's important to note the resolution of that MLP matter and that it was fully resolved in the fourth quarter with $254 million getting that liability behind us is really terrific progress. After a couple of years, So I don't want that together.
Unnoticed, because we've really cleared out all these contingent liability, but the $100 million recovery against that somewhat irrelevant.
Two our payout ratio targets of 30% to 50%.
Oh, no I just mentioned the 200 million dollar balance I guess it was clearly some extra capital that you know.
<unk>.
Does that support the 200 million pace in the first quarter, that's all I meant by that not the payout ratio.
Fair enough.
Looking at the $1 $9 billion cash balance and so I would think about it from a cash perspective.
The fact that our cash did grow about $500 million over the year. After resolution of all of those contingent liabilities of $100 million insurance recovery was a positive there.
It does somewhat factor into the timing of moving forward with us in the first quarter.
Also our valuation and these rather attractive priced those factor into the timing as well if not now when is in our thinking as well yeah. That's fair enough. Thanks very much.
Okay.
Okay.
Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Hi, great. Thanks, good morning folks.
Again, thanks for all the color I was on the expenses.
I just want to come back to the operating margin.
And in the context of the great wall JV, well, obviously, we've seen really good success there continuing on on the organic growth side.
Do you view that as a more scalable I'm part of the model and if you continue to have this type of success there.
That could be a positive contributor to the operating margin dynamic.
Yes, absolutely I mean as we've.
We've said before if you take the macro picture the opportunity in China for asset managers as for novel.
Pick your estimate out there, but theres very assessments of if you look over the next three to five years, 50% of the organic growth.
Inflows could be coming from China. So.
<unk> been very very strong in China as an enormous opportunity.
It's very scalable and.
So we continue to anticipate.
Continued strength.
The business and we think we are.
Okay.
Very very strong position that we have there.
Dissipated method with strength as we look forward.
And then just maybe it's done organic growth if you can give some color on the.
Traction in sustainable products ESG products.
On both the active and ETF side and where.
Where you stand in terms of the integrating ESG across the investment process.
Are we done now and then just.
Is that helping or do you expect that to inflows in Europe , both I guess on the institutional side and also.
Our traction in gaining ETF share in Europe on that sustainable side as well.
Yes, let me make a couple of comments smells can chime in too. So right now if you look at our assets under management is now 96% of our assets under management, our ESG that's up this quarter.
About $45 million from where you were going it was.
Converted 69 funds $45 billion of article eight in the fourth quarter, and let's say on Europe for a second.
ESG is fundamental to any money manager success, there, whether it's retail or institutional.
You really have to have.
<unk> integration at a minimum that's really our effort with article H and Theyre going to continue to see that so.
It's not just a business opportunity, it's a business imperative.
In the U K and on the continent right now.
Can you run through the rest of the world.
Our commitment is to have ESG integration across all of our investment teams right. Now we are at 75%. So we've made very good progress.
And again from my perspective, Youre going to be.
Three years out and really not been private talked about ESG is sort of a separate category. The integration piece at least seem to believe it could be and the like but.
It's just a reality of.
<unk>.
Yeah, Good morning management right now.
Let me just clean up one thing, it's not 96% of our AUM, It's 96 billion.
AUM would be ESG qualified as Marty said, 75% of our funds are now at what we would consider kind of is minimal but systematic ESG integration.
Yes.
The flows in the fourth quarter on.
Sustainable products.
It flows there, where we had modest outflows in the fourth quarter.
<unk> to see a little bit of pressure there a lot of our ESG capabilities are somewhat I think thematic in nature as we continue to build the mountains today.
They can come in and out of favor definitely continuing to see demand overall in terms of institutional mandates for these ESG capabilities, but.
Flows I would say, we're relatively soft almost flattish in the quarter.
One thing I would note in particular as we see.
Some outflows there related to our GTR capabilities, we've talked about GTR quite a bit GTR was about $800 million of outflows.
That also contributes to what we would consider ESG outflows as well so.
There are places, where we see positive flows there other places a pressure for very specific reasons, but overall continue to see this is just an important component of our portfolio and I think as Marty said in a few years. We don't think we'll really be talking about ESG has its own separate kind of category, but rather a standard that we hold ourselves to across the board.
No that's great that's great color I appreciate it thank you.
Our next question comes from Glenn Schorr with Evercore. Your line is open.
Hello there.
One of the first follow up on greater China, if I could.
You talked about the six new funds subsequent two and a half billion in long term closed $7 two from existing products.
Based on 106 billion ending the quarter, that's a really high growth rate.
Some of that is ramping so I know you talked about the big opportunity, but maybe you could talk about the mix.
T H 'twenty teams with Mitsui.
Are there new products in the pipeline.
Yeah.
<unk>.
This growth rate is probably not sustainable but could be in Indiana.
In the early years as new funds are ramping can you just talk about how product is.
Thanks.
Yeah, a couple of comments and Allison will chime in also so looked at year over year organic growth rate. It was 32% I mean, it's quite phenomenal and if you look back.
We've really maintain that over the last three years.
And as you say it's decades.
Decades later overnight success. So you are a member of things have come together.
We anticipate strong growth in the next year or two years.
Recognizing you know every market will have its volatile moments.
We are seeing last year was very very strong launches at the beginning of the year new product.
You were talking about some of the more recent ones.
We are starting to see gray.
Greater flows into existing products too so.
Yes, I think that would be a sign of a market developing where you get onboard flows into existing products as opposed to a sort of a constant launch, but it will be both as we look forward. So we are anticipating continued strong growth.
In China, both at a retail level and institutional level is going forward.
One thing I'd add to that is I do think in the very near term China's experiencing some pretty new dynamics with COVID-19 , but they have not experienced in the last couple of years.
They've been a bit of a locked in.
Date, and they've been operating normally within the region, but now with case counts, increasing or do you think sentiment softening a bit domestically there and we're seeing that a little bit as we go into the Chinese new year here soon.
So I would say it's uncertain what impact some of the measures will have on just sentiment overall within the region.
As a counterpoint to that however, where we see real strength and continued demand in our capabilities within our JV is specifically for our fixed income and our balanced products and so as we continue to see.
Perhaps a flight to safety.
And some conservatism if we see some softening of sentiment, we're very well positioned with our capabilities through our JV and we're seeing that so far this year.
Okay I appreciate that Mike.
Thank you for the follow up I was curious.
Alluded to the market dropped so function the volatility. It's early couple of weeks, but just curious if you could give us insight into.
Both institutional and retail client behavior as the market stays a little lucky here.
Yes, I think.
We try to stay away from real flow updates intra quarter, but I will earn for month I will stay at say this.
Thank you could see with some of the publicly available data that.
With what we can control in terms of sales and redemption rates and the like we feel very good about where we are so far in the air.
And at the end of the benefits of having a very broad and diversified platform as we have that breadth of capabilities as people look to rebalance and shift some of their allocations were able to capture a lot of the flows even in a risk off environment.
At the same time, there's a lot of pressure in the market and a significant amount of volatility as we all experienced yesterday in particular and I think the next couple of days with the fed meeting and the minutes coming out of that are going to be quite.
Informative as well and so with what we can control we feel very good about it and I'd say the conversations with clients continue to be very constructive and very positive.
And we're where we need to be but this is an interesting market.
I appreciate it thank you.
Our next question comes from Craig Siegenthaler with Banc of America Securities. Your line is open.
Good morning, Marty Allison hope, you're both doing well and congrats on the 7% organic growth this past year.
Thanks, Craig.
So I'm sorry about this but I have another one on China.
And I just wanted an update on your effort to increase your equity stake in the joint venture because I don't think you've done that yet, but you're you're working on that and then also you previously disclosed as the percentage of flows that come from digital platforms like ant financial I think it was trending around 50% before <unk>. So I don't know if you have an update on that number.
<unk>.
Yes.
And hope you're doing well too and hope you had a good good new year's.
So.
Just on the yes.
We continue to be in dialogue with our joint venture partner to increase our stake over 50%.
So a positive conversation we've now accomplished that.
That said I will come back to the most important element is that.
Which differentiate us even though we are 49% of the ownership.
We have management control and we have had since the beginning and that is really what has allowed us to be so effective and successful in China. So that's the main point to look at but we do feel in time that we will be able to end up.
Majority stake in <unk>.
Venture.
Not impeding progress at all.
Secondly, with regard to the digital platforms they continue to be.
Really very very important part of.
The market dynamic there.
The number really hasn't changed it's still about 50% booked.
Again, it's a very strong.
Part of the future successor will soon in China.
And then just for my follow up on the private REIT business you have the U S business and then you have the global distribution partnership with UBS.
It looked like the U S vehicle only raised about $16 million through month in November and I won't have the December number yet, but I was wondering if you could update us on the progress of those two products and any kind of slower AUM detail.
Yes, I'll make a couple of couches.
We're still in the process of Onboarding, various institutions and I don't want get too specific but.
Sure.
It is now being on board in the United States and will probably take.
Yes.
For the second quarter of this year before we would get to a level, where we feel that.
Sufficiently boarded the various places that you would hope it would be but again, it's an area.
So great opportunity for us at the receptions been very very strong it's just literally.
The due diligence process of working through those structural points.
Thank you Marty.
Got it thank you thanks Craig.
Our next question comes from Robert Lee with <unk>. Your line is open.
Okay.
Hi, Robert Please state your mute button.
Oh, sorry about that thank you.
Thanks for taking my questions and the happy belated, new year to everyone hope you're both doing well.
So maybe my first question I'd like to just go back to you know maybe dig into flows a little bit. So I mean, obviously you know the strong organic flow growth for the year I mean, thats, great, but can you maybe dig in a little bit sensors into such a focus on fee realization rates and whatnot, you know helped us better.
Maybe get a sense of the economic impact of the inflows I mean, I don't know if you've had.
For example, you know the net revenue net organic revenue or EBITDA growth.
That'd be a better metric or anything that could help us get a better sense of the economic impact youre seeing from from inflows, yes, that'd be my first question.
We don't disclose it in that way and the way that I think where you are where you're going I mean, I'd point to a couple of things, which is with the strong organic growth.
Right and.
We're generating positive organic revenue throughout the year on the flows.
There are points of strength and points of.
Challenges against that and as I noted the active and net revenue yield inside of our active capabilities has actually held up pretty strong at its barely moved in the last couple of years and it's really just the challenges we have there with just the demand is not as strong as it is for our passive capabilities and sell.
But I would point you to is and I, we've talked about this a few times as well and our passive capabilities in our Etfs in particular I'll point that out our operating margin that we generate from that is.
<unk>, whether a little better than the firm average operating margin.
It takes a higher volume it's more of a scale play for us and so as we continue to really see the positive demand for those capabilities, we're able to not only generate positive organic revenue growth, but also really contribute both to operating absolute operating margin and substantial absolute operating profit and sustain our operating margins at the same time.
Great. Thank you and maybe as a follow up going back to expenses.
Just remind us you know as you look good.
Given the difficult start to the year.
You know what the market. So far can you just remind us kind of how much.
Flex or variability you feel like you may have in the in the expense basis that may be linked to weather.
Whether it's pre tax operating income or asset levels of flows just trying to get a sense of what's kind of the natural built in.
Flex you could have to respond to the more difficult revenue.
Sure.
Couple of things one about a third of our expense base is variable in nature and so.
We would expect that to flex up with stronger revenue and flex down if.
If we don't see it and so.
That's 0.1 and the two thirds of our expense base that is more fixed in nature, that's really.
Some of where we continue to look at our expense discipline, and where we can look at opportunities to unlock cost.
In some cases, allowing that to fall to the bottom line in other cases reinvesting it in places, where we think it can be more productive for us and so we.
We do feel like we have continued opportunity there we've made good progress on our strategic review as we've talked about we're at 167 million. There, we still got a little ways to go.
Real estate properties portfolio as a place where we continue to make progress and we continue to look and Thats an element of.
Of our fixed expense that we continue to evaluate and an operating environment that.
Not only is it different than it was a couple of years ago. It continues to evolve.
And we're being responsive to that.
As is everybody else right now and really looking at how do we continue to unlock some of the fixed costs there.
Okay.
Great. Thanks for taking my questions.
Our next question comes from Dan Fannon with Jefferies. Your line is open.
Thanks, Good morning, just a follow up one more for you on expenses as we think about the sequential change from <unk> to <unk> with you highlighted the normal seasonal stuff, but I'm curious about this past fourth quarter, where you had elevated performance fees, what we should normalize for compensation within that and then the other maybe.
Maybe onetime or items to think about the kind of <unk> I'm sorry <unk>.
It's kind of a bulk of them.
Yeah.
Compensation expense for me to speak to it sort of broadly it tends to run somewhere between 38 and 42% of our revenues. If you just look at that on an annualized basis, that's been the range in which we've operated for quite some time in 2021. It was at 38% and that was on the low end of that range, which is what you would expect in a really strong year.
And so I think that is still a very reasonable range to be thinking about as you think about just our overall compensation expense regardless of revenue, whether it's coming from.
From performance fees or management fees that that range is the right range to think about.
Looking towards expenses in the first quarter overall.
I would say a couple of things look marketing tends to be seasonally high in the fourth quarter, you certainly saw that in the fourth quarter of this year.
We've got the $25 million to $30 million increase that is the seasonality in compensation expense and the other point that we're trying to get our own arms around is we did start to see something that looks like a return to normal in the fourth quarter abdominal kron variant really didn't impact our in person activity in travel until we were almost on.
The holidays and so we were pretty active Friday filled out and then things change just as the holidays would've brought a natural sort of closure to things for a few weeks and we obviously haven't seen any traveler engagement really picked back up just yet.
I do think we'll start to see some return of that later in February we're certainly hopeful.
And I think that's an area that we.
We hope.
<unk> to grow throughout the year, we've said that now for a while and we just haven't seen it but fourth quarter was the first time, we started to feel like it was close to normal so hard to guide as to whether or not.
You know, we as to when we see the pick up but I do expect it comes down a bit in the first quarter relative to the fourth quarter.
Great. That's helpful. And then just looking at slide 12.
Appreciate it obviously, the what you've been highlighting around the margin expansion versus the fee.
Good mix shift that's happening, but if we flat markets assume for the next couple of years and the trends hold is margin expansion for you still part of the story or do we think about that more maintaining without markets do have this mix shift that's ongoing.
Yeah.
So sorry, I was flipping to slide 12, Youre asking if markets hold so if a loan level sort of markets hold is operating margin expansion a possibility was that your question.
With the same underlying mix shift of flows yes, so take markets out.
Yeah, I would say it is the I would be thinking about flat to modest expansion in a market where.
In an environment, where market hold and we continue to see this mix shift. The question is really just the pace of the mix shift.
If it's if it's quite fast that we're looking at flat if it continues at the pace we've seen.
We could get some modest expansion out of that and we've said before we don't intend to run our business with an ever increasing operating margin and I'll reiterate that and we do feel like we're in a pretty nice operating range, we would be happy to see it improve some but.
We're not going to starve the business in order to allow it to grow we've got some key investments we want to continue to make ahead of where we see demand.
And so I think that in a flat markets with real mix shift could get us to a flat operating margin, yeah, and I do just want to reiterate it's really important for us to continue to invest in the business and we're going to continue to do with along the way that we've been have you continue to look at areas of opportunity and you look at our expense base can we reallocate and invest in.
It's going to be in those areas of client demand, where there is growth.
It's going to continue to be Etfs factors private markets.
Yes, et cetera, and also the investment in technology that we need to do so.
As you know it's a real.
Really really competitive marketplace.
One of the things Thats really important is.
As we drive results for shareholders. We're also investing in the business for shareholders and for clients.
That's really what was reflected in our results. We had this year and again, we're going to very much stay focus on that path as we go forward.
Great. Thank you.
Okay.
Operator, do we have any other questions.
Yes. Our next question comes from Ken Worthington with JP Morgan Your line is open.
Hi, good morning.
Arty I wanted to step back and think bigger picture, it's a new year. So maybe first happy new year.
<unk> had a great year in 2021, but as we look at the stock price over a longer period of time the stock price is at about the same level as it was a decade decade ago and it seems like Invesco has executed well on our value creation roadmap that resulted in size and scale and better positioning, but one that has.
Rip them reflected in shareholder value creation as measured by the stock price. So you have an activist investor that continues to build a position in the company. I guess are you thinking about things differently in terms of how you're approaching shareholder value creation, when youre, making an investment in capital allocation decisions.
And as you think about driving improved results for for shareholders. What is sort of top of mind for you as you think about you know 2022 and beyond.
Yeah look it's a great question and if that doesn't go beyond this either and I think what's really important is.
Yes.
The result that you talked about the share price.
From our perspective, you really have to deliver results for clients and you are doing a very thoughtful and meaningful way and ensuring that.
We're hitting with <unk>.
All the constituents need and I think.
Again, you just look at where the business has evolved we think we've evolved it very strongly to meet those needs and that's been reflected in the operating results.
So our perspective is continue to be very focused on that.
So not just clients but.
With our shareholders in mind.
<unk> share price should reflect that.
Just today as we've talked about we're looking to buy back our stock we think its a very very.
<unk> attractive for all the reasons that you've laid out.
I mean, I would only add to the valuations frustrating to us and so what we focus on is what we can control and where we can influence I think as Marty said really making sure we're delivering for clients and building out our capabilities. So that we are capturing client demand by 2021 results would point to our success and that is one of the highest growth rates.
And the industry and we are certainly winning vis vis the competition there.
We've also made meaningful progress with 450 basis point improvement in our operating leverage and it was important we had some work to do there and we needed to get ourselves back into the right operating range and there was a lot of hard work that went into that and we feel very good about the work that we've done there.
And that falls to the bottom line and then the balance sheet needed. Some work and we've made tremendous progress in strengthening the balance sheet and continue to work on that and put ourselves in a position to do further work on the balance sheet as the year unfolds and so as we look at what should influence that return to shareholders.
We think we're making real progress against each one of those.
It's not a quarter to quarter game and it is a long term game and we're going to stick to the plan because we think it's actually.
Not really yielding the results that investors are looking for and certainly has the support of our board as well.
Right well I know, it's a tough question, but it's great to hear your comments.
You again.
I'm glad you asked yes. Thank you.
Our next question comes from Patrick Davitt with Autonomous Research Your line is open.
Hey, good morning, everyone.
I have a quick follow up on Brennan's repurchase question eyeballing, it looks like the $200 million and once you would would already get you to the 35% to 50% payout. So should we assume that's more of a one off or when we're modeling this or or assume a resumption of more regular repurchases every quarter beyond that.
Yeah.
Hard to say just yet youre right that does get us into that range and we did feel like the timing was right to actually move rather aggressively on it for all the reasons that we talked about earlier and feel good about that whether or not we will continue to do more as the year unfolds. I think we'll just have to address that as the year unfolds and results will dictate.
Pat.
Alright fair enough and then a mass mutual recently announced a new reinsurance platform with Centerbridge and bearings acting as the asset managers. Just curious how you think that news fits with your relationship with them and does it change your thinking on the opportunity for managing more of their assets at all.
Yes no.
It does not as you said, it's a very strong relationship obviously two board members on our board they own 60% of the company they've been very helpful.
Supporting our alternative business will continue to do that.
We couldn't be more aligned and that's a very strong relationship.
Thank you.
Sure.
Our next question comes from Bill Katz with Citigroup. Your line is open.
Okay. Thank you very much for taking the question. This morning, So Marty I think you mentioned that you hope to deliver some operating leverage.
Going forward are you guys just spend in your opening remarks, and then Alex can you sort of qualify that.
Not here with infinite margin improvement so as we look into maybe 2023.
Can you unpack, maybe your gross spending rate.
And then the net spending rate just trying to see as you get to the final part of your $200 million realization, how we should be thinking about the core expense growth into 2023 yesterday appreciate with sitting here on January 22 of course.
Yes.
I can go ahead and tell you we're not going to give guidance into 2003, I think we've tried to give some color as to what we expect in the first quarter and.
The operating margin within which we intend to operate.
Yeah, and Bill I think you.
Youre asking a question less connected to some of the other questions that were asked you are trying to many things here right, you're trying to invest for the future and be competitive to drive results for clients and ultimately shareholders and we think we've done that right. If you look at the business today look at where it was five years ago.
Yes, it's a very attractive business investment in China, Etfs private markets et cetera that just was not where invesco was five years ago 10 years ago.
And at the same time, we talked about the margin expansion year over year with that expansion. We have also been able to invest in the business to improve our competitive.
Positioning so youre really trying to do any number of things all at once.
Yeah, we're showing that we can do that.
Okay. Thank you and then just one last one from me and thanks for taking both of them. So a couple of your competitors have been spending pretty aggressively to build out their platforms, particularly alts bucket.
You guys are probably a little bit further along strategically, but how are you thinking about M&A from here I know you certainly gave some guidance around in terms of capital return, but how does M&A incrementally fit into discussion from here.
Yes, you are.
It's hard with the answers can be the same one.
Look.
We look at the business very strategically and we look at where client demand is coming from and can meet our COO.
Clients' needs.
We're always going to look internally first to develop what we can and when we come up short there. That's when we'll start to look to the market and it has to be a capability that.
Yes.
There is client demand for it.
Additive to our capability set and it's.
Something that.
We take also.
Very nicely within the business from a cultural point of view. So again, our first focus is internally, but we will continue to pay attention to the market when it makes sense.
Okay. Thank you.
Thanks Bill.
Our last question comes from Michael Cyprus with Morgan Stanley . Your line is open.
Hey, Marty Alison Thanks for squeezing me in here just wanted to circle back on expenses you mentioned, one third of the expense base is variable about two thirds.
Fixed or so I guess, where would you like to see that mix over time, and how do you see that evolving and when you think about the margin more medium to longer term, where do you see that operating margin is mid forties.
<unk> does that make sense for the business, how do you think about that.
Okay.
In terms of the variable fixed mix I think it's actually probably accurate where it is.
And I don't necessarily see it evolving to be terribly more variable over time so.
I think one of the things we focus on quite a bit is just driving scale over that fixed expense cost is actually where we deliver that operating margin growth.
In terms of.
Where we could be.
Look we.
450 basis points of improvement one year was pretty extraordinary I don't expect to replicate that year. After year. After year, we had work to do to get it back into the range, where we are.
The strategic review that maybe has been in as you know is not easy, but looking at those opportunities. They gave us gave us a chance to look at a lot of good opportunities that made sense for us.
In terms of where could you be could you be mid forty's overtime thats a longer term comment I couldnt tell you by when or how and certainly we've made some very supportive market dynamics behind that as well so.
I'll never say never but I can tell you it certainly won't be in 'twenty, two we're probably not in 'twenty three because we really are focused on investing in the business and getting to a margin of that level. In the next couple of years would require us to do things as I think Marty noted a few times, but just really arent tenable, because it would not position us well in terms of investments.
That we need to build the platform for the future.
And so I think in the short term to low <unk> is a really good operating range for us to be in.
Great I'll leave it there. Thanks. Thanks, thanks, so much for taking the questions.
Sure. Thank you.
That was our operator, I think that brings us to the end.
Yeah. Thank you for your participation today you may disconnect at this time.
Thank you very much.
Yeah.
Yeah.
Yes.