Q3 2022 Invesco Ltd Earnings Call
Our presentation today will include forward looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP.
Marty Flanagan, President and Chief Executive Officer, and Allison Dukes, Chief Financial Officer will present, our results. This morning.
After we complete the presentation, we will open up the call for questions.
Now I'll turn the call over to Marty.
Great. Thank you, Greg and those so inclined to follow along I'll start on slide three.
Highlights page.
So the challenging industry backdrop continued in the third quarter as most major equity and bond market indices move lower investors continue to behave cautiously seeking risk off trade impact industry flows as well as the level and mix of assets under management.
But NAMIC environment favors money managers that have a broad range of capabilities that meet client demand in this market.
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It proved to be one of the acute level investment managers that can do that that's why this momentum and market leadership positions in areas of high client demand.
Despite historic market declines the firm generated net long term inflows this quarter and active fixed income greater China and our institutional channel.
All three of these areas also garnered net long term inflows on a year to date basis, along with our global ETF business and the private markets capabilities I'll begin with our active fixed income capabilities, which has been a steady source of broke this year and is a testament to the diversity of the investment platform.
Asset class generated net inflows of $3 $7 billion in the quarter with strong demand from clients in Asia Pacific.
We managed to nearly $380 billion back to fixed income across the full spectrum.
Offerings vehicles sort of retail clients as some of the world's largest institutions.
Our greater China business delivered $2 1 billion of net.
Long term inflows this quarter Invesco, great wall, our China joint venture is fueled fuels our growth and we continue to successfully launch new products, most notably in fixed income.
We broke consistently the last several quarters. Despite the recent difficult difficulties faced by the Chinese economy as a result of.
Our strong local partner and our long standing reputation as one of the top global investment managers in China.
Our leading position in China as a result of many years of investment and hard work as China and the global economy. Eventually recover we expect our growth to accelerate in the fastest growing market in our industry.
Our institutional channel generated net inflows for the 12th consecutive quarter with $3 9 billion led by clients in Asia Pacific.
This has proven resilient throughout the COVID-19 pandemic and the market downturn, we are experiencing in 2022.
Growth in the institutional business as a result of investment in our distribution team to a range of capabilities, we bring to market and the build out of our solutions capability over the last several years, which is increasingly becoming a differentiator for invesco, despite volatility and the risk off sentiment impacting global markets. We continue to win new mandates in our pipes.
Line remains solid we look forward to continuing our partnership with many of the world's leading organizations to meet the challenges of this uncertain time.
While net inflows into Etfs were relatively flat in the third quarter demand for Etfs slowed industrywide.
Right.
Despite the slowdown we maintained our leading position in Etfs, and we expect to see growth rebound as market volatility eases on a year to date basis, we have generated strong organic growth and gained market share.
We have continued investing in our private markets capability, if experienced net outflows in the third quarter over.
Over the past year, we have generated organic growth against a very volatile market demonstrating the strength of our alternative platforms.
Key to our alternative strategy is our strategic relationship with Massmutual, which is meaningful and continues to strengthen in addition to managing over $10 billion in broker dealer variable annuity and sub advised assets prior to this decline.
We have over $3 billion and other investment relationships with best mutual.
This includes nearly $2 $5 billion in commitments to various invesco alternative strategies the commitment for mass mutual has been growing over time and work at various strategies, including $400 million committed to our <unk> product.
Having a partner like mass mutual.
As an investor at significant Reputational impact to our third party investors considering the combined investment, we havent seed and co investment vehicles, which totaled $900 million, along with $2 $5 billion in commitment for mass mutual various alternative strategies is compelling partnership that enables us to bring products to market more quickly.
With a stronger reputation backing of a world class financial institution.
While growth continued in key capability areas I've mentioned, the perm experiencing net long term outflows of $7 $7 billion during the quarter equity strategies have been under pressure industry wide were the largest contributor to net outflows totaling $7 4 billion for the quarter client demand for emerging markets remain subdued.
In our developing markets fund had $2 $8 billion in net outflows in the third quarter.
Near term headwinds persist we are confident that the equity global capabilities will be a driver of growth in the future where global markets recover and client demand for this important asset class returns.
As we discussed last quarter significant progress has been made building a stronger balance sheet position to help us weather this market downturn.
We ended the quarter with a zero balance.
Albert and total debt outstanding is at the lowest level in years.
Our cash balance increased over $1 billion and we've maintained the flexibility we need to sustain investment in key growth areas.
Last quarter, we mentioned that we met our target of $200 million in annual cost savings from our strategic evaluation.
As market volatility continues to need to maintain a disciplined approach to expense management is paramount we are reexamining all aspects of it discretionary spend relative to the environment. We're in and we will be focused on near term hiring a critical growth initiatives. We continue to thoughtfully balance managing through near term market headwinds, while investing for the long term growth.
As always we remain focused on helping clients meet their investment objectives investing in areas of strategic importance scaling our operating platform.
Actually allocated resources by executing our long term strategy I'm confident invesco will maintain its position as one of the leading firms our industry, while delivering compelling returns to shareholders with that I'll turn it over to Allison.
Thank you Marty and good morning, everyone.
I'll start with slide four.
My performance continued solid third quarter, with 57% and 62% of actively managed funds in the top half of peers or beating benchmark of three year and a five year basis.
These results reflect continued strength in fixed income and balanced strategies, where we continue to see strong client demand.
Performance lagged benchmark in certain equity strategy that we experienced improvement over the past quarter and several key findings.
Turning to slide five we ended third quarter with $1 three two trillion dollars.
A decrease of $67 billion from the end of the second quarter.
While market declines and foreign exchange movements reduced assets under management of $72 billion, partially offset by total net inflows increases inclusive of $10 billion into money market products.
As Marty noted the firm experienced net long term outflows of $7 $7 billion. This quarter amid continued market volatility.
Active capabilities accounted for most of the outflows totaling $7 $3 billion for the quarter, while passive net outflows accounted for the remaining $400 million, we sustained organic growth in several of our key capability areas and our net flow performance remains strong relative to industry peers.
The driver of our resilience and relative outperformance has been the institutional channel, which delivered a 12 consecutive quarter of net inflows of $3 $9 billion.
We generated the strong inflows despite not renewing at $2 5 billion dollar relationship during the quarter, while clients are carefully considering new fundings in these challenging markets our growth in the institutional channel accelerated from the second quarter and we continue to see new mandates fund across geographies asset classes and the risk return spectrum.
Offsetting growth in institutional were $11 $6 billion of net outflows in the retail channel this quarter, primarily in the Americas and EMEA as investors continue to seek lower risk exposure amid extreme market volatility.
Net flows into Etfs vehicles were relatively flat in the third quarter with $300 million and net long term outflows.
Demand for ETF slowed industry wide that driver coupled with net outflows in commodities and bank loan products created net flow headwinds for invesco.
Setting this where net inflows into fixed income Etfs, the low volatility suite and our Q2, two innovation suite led by the <unk> M.
Despite the slowdown in the third quarter, we maintained our leading position in Etfs and we expect to see can we expect to see growth rebound as market volatility eases on.
On a year to date basis, net long term inflows into our ETF franchise, our $23 billion.
Equivalent to a 12% organic growth rate. We've also gained market share year to date.
Reading the Q2, Qs Invesco captured four 7% of industry net inflows higher than our three 1% share of total industry assets under management.
Now turning to slide six we experienced continued net outflows in the Americas and EMEA, primarily in the retail channel.
Growth picked up in Asia Pacific with over $5 billion of net long term inflows this quarter led by China and Japan.
Our China joint venture contributed $2 $1 billion of net inflows, including $1 $8 billion from nine new products launched during the quarter.
As Marty highlighted our joint venture remains a key strength and we expect growth to accelerate there as markets recover.
Fixed income capabilities have been a reliable source of growth for invesco for several years now.
The site one of the most difficult bond markets in years, the third quarter was no exception to that reliability with $6 $5 billion of net long term inflows.
The firm has now experienced net inflows into fixed income strategies for our 15 straight quarters, a testament to the breadth of our offering as well as our strong investment performance in the asset class.
Alternatives experienced net outflows of $5 $3 billion in the third quarter.
The largest drivers of net outflows for bank loans and commodity Etfs, which have attracted net inflows year to date, but saw investors pull back in the third quarter.
While growth may slow in the near term as investors carefully consider asset allocations, we're confident that our alternatives business will be a strategic driver of growth in the years to come.
In fact over the past volatile year, we've generated a 4% organic growth rate, excluding outflows in our GTR product demonstrating the strength of our alternatives platform.
Finally, as Marty noticed noted we experienced seven $4 billion of net outflows in equity capabilities.
Global and developing market equity excuse me global in developing markets equities continue to account for the majority of net outflows in the asset class with $4 $3 billion in the quarter, including $2 $8 billion from our developing markets fund.
Moving to slide seven.
Our institutional pipeline with $23 billion at quarter and modestly lower than 24 point excuse me than $24 billion last quarter.
Quiet fundings increased in the third quarter as compared to second quarter, and we continue to win new mandates. Despite the challenging environment. Our pipeline has been running in the mid 20 to mid $30 billion range dating back to late 2019.
So while this is at the lower end of the size range, we still see the pipeline is robust given the uncertain market environment.
As we noted last quarter that uncertainty is causing some mandates to take longer to fund and we would estimate the funding cycle of our pipeline is now in the three to four quarter range on average as compared to two to three quarters previously.
In summary, the pipeline continues to reflect a diverse business mix across asset classes investment styles and geographies our solutions capability enabled 38% of the global institutional pipeline and continues to be a differentiator with clients.
Turning to slide eight significant declines in global market. This year have put downward pressure on our revenue base.
Net revenue of $1.11 billion in the third quarter was 5% lower than the prior quarter and 17% lower than third quarter of 2021, primarily due to declines in active asset levels.
Total adjusted operating expenses were $741 million, a decrease of $21 million from last quarter and $31 million as compared to the third quarter of 2021.
The drivers of the decline from last quarter, where G&A expenses, which were $11 million lower than last quarter, and marketing expenses, which declined by $7 million consistent with the seasonally lower activity, we often see in third quarter as well as the decline in discretionary spending.
We also saw a slight decline in employee compensation expenses.
Drivers of the decline from the third quarter of 'twenty, one where compensation expenses and property office and technology expenses. Despite the $3 million in duplicate rent for our new Atlanta headquarters that I mentioned last quarter.
Embedded in our third quarter 2022 spending is continued investment in growth capabilities as well as several transformational projects that will enhance the effectiveness of our corporate functions and enable us to reap the benefits of scale as markets recover.
Projects include a technology enabled human resources transformation, moving core finance systems to the cloud and the foundational elements of the Alpha next Gen program.
The savings we achieved in our strategic evaluation and the continued discipline. We have installed have enabled us to make these strategic investments without meaningfully growing technology expenses.
Compensation expenses declined $45 million or 9% from the third quarter of 2021.
Given the pace and magnitude of the market decline it will take some time for certain elements of our expense base to adjust with lower revenue.
We manage variable compensation to a full year outcome in line with company performance and competitive industry practices that can cause quarter to quarter fluctuations in compensation expense.
Historically, our compensation to net revenue ratio has been in the 38% to 42% range and periods of revenue growth the ratio tends to move towards the lower end of this range similar to 2021, when the ratio declined to 38%.
During periods of revenue decline as we are experiencing this year the ratio tends to move towards the upper end of this range.
Year to date, our compensation to net revenue ratio is 40%.
If assets remain at quarter end levels. The full year ratio would continue to trend towards the upper end of the range driven by the lower net revenue base.
Given the uncertain market environment, we are diligently managing expenses and evaluating all aspects of discretionary spending.
We continue to invest in our key growth capabilities, and we're focusing near term hiring in those areas we.
We will defer hiring for certain other positions as we focus our efforts on critical initiatives.
We remain focused on meeting the diverse needs of our clients and investing where it's necessary to do so.
Finally, we are proceeding with investments in foundational technology projects that will enable growth and support future scale in our operations.
Balancing these objectives will allow invesco to provide rewarding careers for our employees position our business for future growth and prudently manage our expense base.
Yeah.
Moving to slide nine adjusted operating income was $369 million in the third quarter $43 million lower than the second quarter due to lower net revenue driven by market declines, partially offset by lower operating expenses adjust.
Adjusted operating margin was 33, 3% as compared to 35, 1% in the second quarter and an all time high of 42, 1% in the third quarter of last year.
Earnings per share was 34 cents as compared to 39 last quarter driven by the same factors that impacted adjusted operating income.
The effective tax rate was 28, 7% in the third quarter due to a change in the mix of income across tax jurisdictions, including nonoperating losses, and lower tax entities, we estimate our non-GAAP effective tax rate to be between 26 and 28% for the fourth quarter of 2022.
The actual effective rate may vary from this estimate due to the impact of nonrecurring items on pre tax income and discreet tax items.
Yes.
I'll conclude with a few points on slide 10.
Maintaining balance sheet strength continues to be a top priority, particularly as we navigate this uncertain environment.
Total debt was managed lower in the third quarter to $1 $5 billion as of September 30th and we ended the quarter with a zero balance on our revolving credit facility, our cash and cash equivalents balance is over $1 billion, an increase of nearly $100 million from June 30th.
Our leverage ratio as defined under our credit facility agreement with 0.7 times at the end of the third quarter in line with last quarter.
Our leverage ratio improved from <unk> nine times in the third quarter of last year, Despite lower EBITDA driven by the significant market declines.
Preferred stock is included our third quarter leverage ratio was two eight times in this challenging environment Invesco is strategically aligned to areas of high client demand and we have the financial flexibility that will allow us to navigate current volatility while continuing to invest in the future.
It will be extremely thoughtful in managing expenses through the near term. So that we can rapidly scale when recovery takes place.
We maintained our unwavering commitment to serving the needs of our clients in any market and delivering long term value for our shareholders.
And with that I'll ask the operator to open up the line for Q&A.
Yeah.
Thank you as a reminder, if you'd like to ask a question. Please press Star then one remember to mute your phone and record. Your name clearly were prompted if you'd like to withdraw that question you May press star two.
The first question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great. Thanks, good morning folks.
Maybe I could just start off on the expense side Allison you you mentioned a couple of things on the.
On the initiatives that you're working on for the transformational projects any sense of sort of.
How much that might lower the expense base going forward and then also related to that on.
On the comp to revenue.
42% should we read you should we think of that as a potential quarterly ceiling or as you indicated it can be lagged and therefore can go over 42, and a really bad market and then you seek to calibrate that soon thereafter.
Yes.
Sure. Good morning, Brian Let me take the first one so on the transformational projects and not ready to provide any sort of estimates on what that could do in terms of lower expenses. The way I would think about it and I wouldn't even say not ready I'm not sure. It's just the right way to think about why we would be doing it a lot of this is to avoid them I would say future costs.
And it's also to create scalability. So some of the things we're doing them in these enterprise systems with our financial systems with our human capital systems, moving our data into the cloud and it will reduce tech that over the future and it will also give us the opportunity to scale as we just moved more data into the cloud and and just have a more nimble infrastructure.
Her and continue to globalize at the corporate functions that support our our large operation at we've talked about off of Nexgen in the past and we will talk about it a whole lot more I'm sure in the future of those or some early foundational investments that we're making in the middle and back office that will streamline and harmonize our.
Our operations and create efficiencies over time, but.
But not necessarily from a P&L perspective that you'll see just shot and theres quite a bit of investment that's going on along the way.
On the comp to revenue side and our range is typically 38% to 42% on a full year and we really don't look at it quarter to quarter because quarter to quarter fluctuations are always there just as revenue fluctuate, but also as you have seasonality and things like payroll taxes.
And FICA, so we really look at it and manage to a full year basis or on an annual comp cycle and year to date through the third quarter. We were we were at about 40%. So as we think about what the full year look like I'd say it'll be on the higher end of that range not the lower end and as we noted last year full year 'twenty, one we were closer to 38%.
Yeah that makes sense, we'll play that out yeah, yeah that definitely and then maybe if I can ask you about fixed income again, that's been a strength as you pointed out.
We now are in a much higher yield environment, just coming into the fourth quarter versus even just just the third quarter maybe.
Maybe if you can talk about both on the retail demand side, if you're seeing that work into the channels yet if you're seeing the same sales pick up on the on retail funds and then also on the institutional side. If you can comment on to what extent you think pension plans may reallocate to fixed income and how you're.
Vision, there could we see this really offset.
QWERTY outflows near term.
Yeah.
It's a great question look where rates are going you've seen what's happened everybody's shortened.
Conservative.
You are.
I've seen that move yet, but the conversations are brought in very very much look at the full spectrum of fixed income with the rates, where they are making fixed income longer dated capabilities much more attractive that's on the institutional side as you know institutions tend to be much less volatile, but they will make tactical allocations accordingly on the retail side again, I'd say, it's too early.
But all indications are.
It's.
I would anticipate a broader range of investments into fixed income because of where the yields are moving.
Okay. Thank you.
Yeah.
Thank you and our next question comes from Brennan Hawken with UBS. Your line is open.
Oh good morning, Thanks for taking my questions I was hoping to follow up on the expense outwork, Alice and you flagged a bunch of investments that you're making.
<unk> laying the groundwork for alpha so as we're thinking about entering into 2023 I know you publish.
The middle of the budgeting process now so that's an early are asking for an early read here, but should we continue to expect.
There will be a pressure to make investments and continue to like you know Rosa initiatives like Alpha, which maybe ultimately lead to some efficiencies, but could could result in expenses being maybe a little bit more stubborn and inflexible in the near term.
Is that fair for thinking about 'twenty, three or is it too.
Domestic.
Hum.
It's a great question and it's a hard one to.
To answer exactly and it's certainly not going to give firm expense guidance, just yet and we are deep into budgeting season, but I mean, let's just talk maybe generally about how we think about the expense base and what we can manage and what we can't manage.
And there is some variability in our expenses is as you know we've always guided to that about a third of our expenses are variable and you know it's a it you see it primarily on the compensation side and you're certainly seeing that this year I think I'd point to a couple of things one despite the really challenging environment.
You know we are.
Managing to keep the staff expenses kind of flat to down on most line items relative to last year and that's because we are continuing to invest in a lot of these growth areas that we don't think it makes sense to pause on it just simply wouldn't be good business for us to pause on key foundational transformational projects that really put the the firm in a position to grow.
And to scale and to be where we need to be to support our clients. So as I think about how stubborn or not our expenses I think a couple of things I'd reiterate the comments I made around discretionary expenses. There are elements of discretionary expenses that were looking at them very rigorously, we're being very thoughtful about hiring we're really focused on our key growth areas.
And managing our hiring against that that you've seen us I think do some pretty good work on facilities and some of the fixed cost that we have that we think we can continue to unlock and reallocate into areas of more transformational growth and we will continue to make progress against some of those areas as well.
I don't feel like these investments hamstring our ability I really don't I think it actually it puts us in a position to scale and recover faster when markets do turn and they will.
Yeah Brennan I got.
Yeah.
Allison's exactly we are looking at everything that you would imagine and hope we would do it.
It's responsible for us to do it.
As you say in the short term.
Or discretionary things you can make some progress in select rotation anybody's lives, but it's exactly the very responsible thing to do and we're just very focused on building scale within the organization.
Yeah, that's that that will be very very strong and again I would point to what we've talked historically, we continue to be very focused on not putting an affirmative decision from great.
Great success.
Sure I recognize it's a balance just which is how I tried to position the question, okay transitioning to revenue.
Fee rate was under more pressure than I had actually expected should we.
We expect that fee rate to continue maybe could you give us an idea about what the exit rate or the October rate kind of looked like as I said showing continued pressure just given the the general profile of markets through the quarter.
And just a sort of a more nitty item. The other revenue has been under some pressure on others.
More volume there.
Is this sort of oh for a reasonable floor to think about for the other revenue or could this continue to come down.
Sure. Thanks Brennan those are good questions. Let me say on the fee rate one as you know, we really don't manage to the fee rate and then the net revenue yield in particular is just an output of a whole lot of different factors and so maybe thinking about what drove the net revenue yield declines in the quarter and then extrapolating that to what could that mean for the future.
And the biggest pressure on net revenue yield is the declining equity markets and in particular, the declines in emerging markets and developing markets global equities emerging markets. They are a meaningful part of our portfolio.
And so the market declines in those particular asset classes further exacerbate the pressure on our fee rate.
You also see just the asset mix shift in the demand that we experienced for money markets and in the risk off exposure. So while we benefited them on one side of the ledger from the growth in some of those risk off exposures and certainly we've got a real pressure in the asset mix shift at the same time you also saw a decrease in the other revenue from those are in the <unk>.
Other revenue line item and I'll get to that and secondly, you asked about and so those are all the sort of the downward pressures what could that mean for the future. I mean, I think look there are a few things going on one the ending assets under management was quite a bit lower about $95 billion lower than the average AUM for the quarter. So that's going to continue to put pressure on revenue, which will put pressure on <unk>.
The overall fee rate yield that comes out of that.
And if we expect to continue growth in passive which we do they come at lower fees.
And at the moment given the geopolitical tensions I would expect continued pressure and some of those emerging markets developing markets categories as well. So just does put pressure on the overall yield there.
All of that is dependent upon where assets were at 930 and of course, all that is subject to change as the markets do what the markets will do over the balance of this quarter.
Other revenue as you noted it was about $9 million lower than the prior quarter and that was really due to lower transaction fees in particular in global real estate and and some front end mutual fund fees. So it's.
A function of activity levels I don't think it's a new normal necessarily but if you think about just the activity levels and just really be pretty outstanding volatility we experienced inside of the third quarter. It did put pressure on that category and that will recover as activity levels recover.
Thanks very much.
Thank you and our next question comes from Glenn Schorr with Evercore. Your line is open.
Thanks I appreciate it.
I'm curious on your comments on the retail side, obviously in a environment like this retail is gonna outflow, that's that's unfortunate, but it's going to happen every time.
But as the transition towards lower risk exposures, I'd say try to capture yield.
I'm curious on what you can specifically due to to capture that demand you. Your presence obviously is huge in the channel your product mix is great as rising demand on fixing it can be to you. So I'm just curious what can be done on the education front, how can you hold the channels hands, so to speak it and do a better job of.
Capturing some of those outflows.
Yes.
You're right.
And equally positioned here right so with the range of capabilities that we have.
Yeah.
There's no discussion unless you start there and but secondly, just the capabilities on the distribution side things like Invesco consulting in the field working with financial consultants.
All the financial advisers in the marketplace already the conversations are positioning for when do you get back in the market, whether it be equities or fixed income and those are real conversations I'm sure. It's happening everywhere, but we have the ability with the capabilities. We have but also the coverage we have in the market, but also with her.
So the marketing digital capabilities were informed and engagements that we have so.
From my perspective.
When does the terms with one quarter two quarters.
Thank you that far out you're probably closer to the bottom than the top and with that you'll get reallocation into a broader range of capabilities.
Yeah.
So part of ongoing processes I guess, yes, yes.
So what.
Heard the comments on what outflows on the alternative side again product of the environment, but can we focus a little more on your private market side, what it maybe just refresh what investments are being made now and where you're seeing client demand.
And if that could be an offset going forward as well.
Yeah, So real estate continues to be a very dominant.
Asset class for Us and also.
So to deal.
Within credit bank loans Clo's about more challenged in the short term where people are nervous about.
A recession.
Impact on credit, but that said there are two areas, where well position to continue to see growth in that scenario, if youll future focused very much on the other very specific area that we've been talking about is getting.
Some alternative capabilities into the wealth management channels.
Continue to be very focused on that.
And from my perspective, 2023 should be a year when we start to see.
Greater traction.
Leading the way.
There'll be something go behind that.
On the debt side so.
That is another area of absolute focus for us This organization.
Okay. Thanks Martin.
Excellent.
Yes.
Thank you and our next question comes from Ken Worthington with JP Morgan Your line is open.
Hi, good morning, Thanks for taking the questions.
Maybe to further to the discussion on expenses.
Looking to think about how we can think about the concept of scalability better here.
Maybe starting what cost line items do you think are going to be most impacted by improved scalability, and maybe which are not I would assume it's G&A and Tech center are really going to see the scale benefits and I think invesco, maybe historically thought about margins on incremental revenue of somewhere you know 50 60 per se.
Maybe 50, 60% plus.
Do the investments that you're making in scalability take margin. So they can make incremental revenues to levels that are different than what we've seen in the past and is it like a little bit or is it you know maybe meaningfully better given what youre doing.
Let me start with the first one around where should we see the most scalability and I think you're right. It would be the G&A and tech line items, but I'd also point to marketing marketing as a pretty scalable line item as well and one that <unk> you.
You know, it's it's also a little bit you can pull back on some of the discretionary expenses and marketing, but we're not going to pull back on travel and being in front of our clients are precisely the time when they need to see us and we need to be in front of them and we need to be actively talking to them.
And so I do think as I think about what that looks like on the upside and it doesn't budge quite as much on the way up and there's some benefits there as well and in terms of and maybe I'll, let Marty chime in on sort of relative to the past since mine is only a couple of years back, but I would say in terms of the.
<unk>, where are the investments, we're making and some of these technology projects doesn't give us even more scalability.
Perhaps you know its really necessary or do you think about where the firm's ban them and where we've come from we closed the Oppenheimer acquisition just on the Eve of Covid and so you started to see you saw a material increase in the size of the firm I'm just on the Eve of what has now been a few.
Rather volatile challenging years and.
But what we are doing in terms of just further integrating all the various aspects of the firm and creating a unified system and platform across many different.
Part of the overall enterprise framework all of this will allow us to just grow and scale from here I think in a more seamless fashion.
Because you just don't have the redundancy and systems that are very difficult when the data is not in the cloud and so it gives us flexibility to adjust our platform to serve our clients in ways that would have just been much more difficult said differently without doing this we'd be spending a whole lot more to make any nimble chefs and the environment. Yeah. Let me add so if you look at not too long.
When our profit margin yeah. It was over 40% is that a cap the answer's no. So if we had.
The same global assets under management when we complete this work we will be north of that operating margin, so and how does that happen.
Might be too much information, but literally application rationalization that is happening pretty holistically because of a new set of technologies that really didn't exist in the past that can allow that to happen also just looking at what clients are looking for front to back.
Yep.
The breadth of capabilities, if it's inconsistent with where client demand is we're looking from sort of all the front to back support structures around that that's where you get the scalability and those are the efforts that we're on right now and it's hard to explain in a simple why not them because they are holistic in how we look at things so.
That has been scalability within our capabilities to meet client demand is really the headlines and there's a lot of detail underneath it.
Great. Thank you and then maybe.
Just following up a U K pensions to what extent did you see stress in the U K pension market did that flow through to impact invesco, either in <unk> or as we began for Q and given that invesco has been building out fixed income and solutions globally might there be a change too.
The U K L D I pension market and does that make for an opportunity for invesco.
Yeah. So the good news is we did not have any ob accenture. So so cold you did impact I do think he go post no.
Political at this event.
It will definitely open up opportunities for other managers, who capabilities like we have now is that next quarter likely not but when you look through next year I suspect us to reach real opportunities.
Thank you I will.
I do think part of what we experienced there you did see clients looking to meet some of these obligations and said they were liquidating some of their positions and we were on the receiving end of some of that so you know we we didn't we didn't see nothing there in terms of the overall impact and that's just kind of part of the overall I'd say.
Market stress and volatility we've been managing through actually that's a good point so it's analogous to.
When there's pressure on money funds during the financial crisis if you.
Had a very liquid money fund portfolio became a source of funds.
That's a little bit what happened with some of these old yard.
Situations.
Okay, great. Thank you.
Okay.
Thank you. Our next question comes from Dan Fannon with Jefferies. Your line is open.
Thanks, Good morning wanted to follow up on fixed income and specifically <unk>.
And fixed income domestically can you talk about which products and capabilities do you have that or either with good performance. We're already kind of at scale that could benefit from what is the potential for any kind of larger flows and I guess, if they're separate between institutional and retail in terms of the products that are that would be helpful.
No.
I'll make a couple of comments of mills in China, and so it's a broad suite of capabilities and it's really highly performing.
Cross.
The fixed.
Teams, so that that's really good news and.
And.
Not always available in retail and institutional simply because of demand within that marketplace. So.
We have the long term record stability of team.
And demand coming so we look at it as just a real opportunity for us over the next few quarters.
So I guess is that core core plus I guess I don't know what the funds are could you talk about what the actual products are so anything from short duration core core plus.
Bank loans credit.
The whole suite.
Eunice.
<unk> is a very strong capability.
That was outflows last quarter, you you would characterize them all at scale already.
But not every single asset fixed income asset classes, not a skill, which we've talked about so for them.
The direct lending side at scale.
The distress credit startup scale so.
We have a number of them at scale with performance record records.
Talented managers.
Okay. Thanks, and then just a follow up on the China the.
There are several product launches in the quarter and that seems to be kind of a continuing trend is there a backlog as we think about you know kind of launches here into the fourth quarter into next year that you can quantify or talk to.
Hard to quantify that exactly I mean, yes, just to reiterate and we saw about $2 $1 billion in inflows into our China JV and of that about 1 billion eight came from new product launches, but those were mostly in fixed income asset classes, which.
It makes sense in this environment, we do tend to see a lot of fixed income and balanced interests are left so equity at the moment, though historically, we certainly benefited from some of the equity funds that have been launched in more risk on environment.
That is a it is just a function of dynamic of that market hard to point to a backlog, but I guess I would say it differently and say this is kind of the way that market functions and I don't expect that to change in the near term.
I do think the overall $2 $1 billion, just really again speaks to the resiliency of that market and the fact that we invest it.
Quite early ahead of many of our competitors in that market and we're really well positioned.
To capture some of that flows there about challenging markets and better markets. This has certainly been a more challenging year for China, though.
Thank you.
Thank you next question comes from Bill Katz with Credit Suisse. Your line is open.
Okay. Thank you very much for taking the questions. This morning, just three for me just to maybe just to round out the discussion.
Tell me when you say U S fixed income picks up that certainly seems logical where do you expect that allocation to rotate from is it cash equity private market alternative allocations. What I know you obviously have a very book client franchise, but what Joey can you say in terms of where the money might come from.
Bill It's a great question and it's.
The reality is every client is different so, but what I would say just as a general comment if you look in wealth management platforms in particular cash levels and Youll notice and everybody on the phone with all this cash levels are very very hard and I think allocations in equities and fixed income the first port of call is gonna be cash levels.
You know I can't speak for how the other that's what happened.
Again as you know every individual whenever institutions very different in their profile.
But I'd start with very high cash levels as a funding source.
Okay. That's what I figured <unk> second question is just going back to China.
It shouldn't have very impressive so a new product opportunity, who just want to step back a little bit and where do you think you are in terms of the maturation of the of the platform itself. How many more incremental products do you think you can roll out and then is it or is it <unk> or is it a function of sort of scaling those products and maybe average about $200 million in what you saw.
I've said this morning, but how big can these things get is there a is there a proxy as the U S. As a market places in Canada, how should we be thinking about maybe the and look for that platform.
Yeah. It's a it's a really good question Bill and it is a different market than the United States and I had just a couple of comments it's extremely competitive.
And performance matters, there's lot of alpha there. So the vast majority of all the capabilities in the marketplace or active whether it be equity or fixed income.
Balancing products that are also but it it has.
A profile of.
Fund launches, which is not atypical Korea was the same way for a good period of time I think it will mature to arm.
I'm going to investments into the products in the marketplace.
Yeah, that's gonna come with time, and just the sheer size of the markets you've got to realize.
Yep.
At some point, they're going to be very very very big portfolios, we might imagine sort of tool.
Move away from <unk>.
Product launches as the primary.
Element of raising assets under management, but the build is probably.
Two three or four years before it starts to happen.
Okay. Thanks for the patients to answer all the questions. The final one for me, we haven't talked about a while M&A just given what's going on between the sort of the rolling over of Oh. So the reduction in until a trailing 12 month EBITDA improvement in the leverage ratio, but nonetheless still a pretty fat leverage ratios. When he concludes preferred how are you thinking about.
Reinvestment back into the business versus any kind of acquisition and within that acquisition, where you're most focused at this point in time.
Yeah.
Good question story has not changed Hum every next dollars reinvestment back in the company right now and if you look at what we've just talked about today were the key capabilities that we highlight where we see great opportunities.
Much in those areas and that is where our focus is we don't see a whole lot of gaps in our capabilities to go back to the conversation. Dan had mentioned you are we have scale in all the areas that we want to be no.
If we don't have the capability and we don't think it would.
Take too long for us to build it that's when we would go to the market. So.
Our view would be consisting of it has to be strategic has to be something to client demand. It has to be something that's complementary little overlap with the organization financials have to work and it's got to be cultural alignment. So that's just not change. This is how we think about it no debt.
Might lead you to more and.
Bolt on acquisitions and sort of the alternative space, but right now I don't see a whole lot moving.
As best we can tell them publicly.
Public market prices versus.
The view of a seller or were not aligned right now so but it's not our focus it's the focus on the order sushi.
Yeah, I would just chime in on that I I would say, there's nothing about our balance sheet, our share price thats changing our focus our focus continues to be that the greatest investment. We have is to continue to grow organically and invest in ourselves.
We've got a really strong well diversified platform today I think you see the benefits of that you really you saw it in these last few quarters, where our.
Flows.
<unk> continue to outperform the broader peer set and we continue to have real pockets of strength pockets of resiliency and its a testament because of the diversified platform that we have and so as we think about the opportunities. We have from here, we see an opportunity to continue to invest in ourselves and grow these capabilities.
At a much more efficient shareholder friendly way than anything we could ever do inorganically and at the same time, we are making progress on the balance sheet and we are returning capital to shareholders and I think we've made really significant progress on the balance sheet over the last year certainly over the last two years you saw it even in this quarter as we grow cash and continue to manage that.
[noise] levels down.
Every opportunity we have and at the same time, we're returning capital to shareholders and have done so pretty thoughtfully over the course of this year, despite the challenging environment. So.
Yes, we're more constrained than we would like to be given a really challenging industry backdrop, but the diversified platform. The opportunities we have to continue to invest in ourselves and grow some of these key growth capability areas.
We're pretty bullish on the opportunities we have within our own portfolio.
Thank you so much for taking all the questions today.
Thanks, Bill Thanks Bill.
Thank you and our next question comes from Michael Cyprus.
Hey, good morning, Thanks for taking the question wanted to circle back on the private market alternatives I was hoping you might be able to update us on the progress of the private REIT product that you guys have just in terms of the traction getting on platforms rather than a private credit you know here the comments around maybe not at the scale, where you'd like it to be but maybe you could talk about some of the steps you're taking.
To more meaningfully scale your private credit initiatives.
Yeah, great. Thank you.
So it <unk>.
Ability right now it's about $1 $1 billion that continues to yeah. We continue to onboard it are we where we want to be.
All the Onboarding no we're not done.
We'll continue to make progress with it just continues as I said last call is just it's just it's a slog to get through it we will do it.
That's why we think it's a 2023.
Topic for it.
The increasing flows beyond the level that it's at right now the performance is very very strong and.
We're behind that there is a.
Another capability that.
We hope to get into market next year more income type credit capability with regard to.
Private credit starts with a very very good team and.
They're seasoned they have a very good track record.
They'll be back in the market.
Again.
You're raising money and its performance track record and team and that's where we are right now and with dislocations we pick up.
Greater opportunities for them.
Just holistically, what we're doing or private mortgage platform is attrition sure. We have all the resources that we need to compete to make a difference from the investment teams all the way through the operational effectiveness and.
Everything else you would hope that we'd be doing we look at it as a real opportunity for us.
Great. Thanks, and just a follow up question, maybe on the balance sheet and capital management. So you paid down the credit facility in the quarter I guess, just what are the opportunities from here that there might be for incremental debt reduction before I think the next maturities in 2024, and then more broadly how are you thinking about capital management priorities into 2023, and what do you need.
Need to see before buybacks could resume.
Sure. Thanks, Mike.
In terms of the debt from here you're correct. Our next maturity is at the very beginning of 'twenty 'twenty four and in terms of Ah you know how are we thinking about it but now it it's it's a pretty attractive slug of capital just given where rates are moving we certainly have always have the opportunity to redeem something early you saw.
Let's do that with the 'twenty twos earlier this year I'm not sure what we'll do just yet, but we're always thinking about what that could look like and the tradeoff as we continue to grow cash.
We have made substantial progress against our debt this year and so now we're in a position where were rebuilding kashi saw cash grow by $100 million with it with the revolver pay down at the same time this quarter and so as I think about it you know more than anything I'd say, we're thinking about it from a net leverage standpoint at the moment as we look to build cash.
Particularly in a volatile environment.
As we think about returning capital to shareholders. You know first and foremost we're committed to our common dividend and a steady increase in that common dividend. Then we start there and then we think about excess capital as a form of returning capital to shareholders in a in terms of share repurchases. So should we get to a point, where we make the <unk>.
She'd progress, we want to make and we've got excess cash and then we can think about share repurchase as we think about that sort of year to year and certainly it's a difficult environment to be thinking about it and at the moment and as we are looking to continue to make progress against the balance sheet and make sure we weather a rather volatile market environment, but we will re.
Turned to that at some point.
Great. Thank you.
Thank you and our next question comes from Craig Siegenthaler with Bank of America. Your line is open.
Thanks, Good morning, everyone.
I wanted to start with a longer term question on China.
You used to highlight a mckinsey target for 40% of global industry net flows from China over the coming years currently.
Currently do you think China can drive about half of flows are 40% of flows and also any perspective on the mix between domestic and then foreign players like Youre, great wall JV would be helpful too. Thank you.
Yeah look I do right.
It's the fundamentals are strong secular <unk> com in the world They continue to develop.
Our capital markets, they must for to support the growth that they have debate.
Continue to develop a retirement system.
They must do again for the population.
Even with the geopolitical topics. They are absolutely committed to continuing to open up to the capital markets and for organizations, such as Invesco and as I said, a few minutes ago.
Body, joining just has so it's a very competitive market is going to continue to evolve.
But there's no question in my mind that.
When.
The economy strengthens you're going to see flow levels increase to it.
Yeah for sure back to the levels that we saw before and we're gonna grow from there. So we looked at over the next three to five years. It was a very very important market.
With regard to what was the question about the competitors will also be the mix between our domestic business is there.
And then also the foreign managers and foreign JV like great wall joint venture.
Yeah. So.
Again, we can point to.
We have something that I believe on our website Andrew Lo went through there's very specific information in there. There's a presentation from last summer that has some disclosures, yes. So it's worth looking at that but.
From a local joint venture.
At the top of the pack.
Which is great again it takes us.
With all the market movements.
The 12th largest moneyman local money manager or excuse me the 12th largest money manager.
And the wealth management channel in China, now that could change now because of levels without sooner measure. So that was the last picture that I saw I've taken so so it's really competitive.
The local managers and you know as you know there are a number of foreign money managers are I think the very important thing that we point to that.
It has differentiated us and allow us to have the success that we've had is we've had management control of the Detroit pressures from the beginning and many of the other joint ventures.
Money manager had an ownership stake, but did not have management control and that has really been the big movement, where when you see our competitors, making the point that they've taken a majority stake in the joint venture.
What it really means is that movement towards them.
The joint venture so.
You've seen it over the last number of years, so we'd like the position. We're in we're not naive to the competition levels, but the opportunity is a material one.
Thank you Marty and just for my follow up I have a more short term question probably for Allison, but other revenues declined by $9 million sequentially on an adjusted basis.
Most of that was probably real estate transaction fees, but can you talk about the drivers of that decline and then just given sort of a muted backdrop I wanted your perspective on if $48 million is roughly a floor given that <unk> was a bad backdrop in those fees probably were allow or do you think there could be incremental downside risk from <unk> levels into <unk>.
<unk>.
Okay.
So it was both real estate, but also front end mutual fund fees. So it was really kind of transaction volume driven as the way to think about it no I don't necessarily think and.
What I guess, what I would say is its transaction volume driven.
It doesn't necessarily mean that it continues to decline from here I don't think we're setting some new level very volatile fourth quarter, given the risk off environment that we have been at it obviously impacted EM market levels, but also activity levels in transaction levels. As you saw it was pretty holistically challenging so really just a function of the <unk>.
We're in I'm not necessarily a harbinger of where we will be from here.
Thank you very much.
Got you great.
Thank you and our last question comes from Patrick Davitt with Autonomous Research. Your line is open.
Okay.
Hey, good morning, guys. Most of my questions have been answered, but just a quick follow up on the tax guidance.
Is it fair to assume that the <unk> guidance of <unk> 26 to 28 is kind of a good run rate for three quarters beyond.
Very hard to say it really is a function of where the market will be and the mix of jurisdictions and where our operating income will be across those jurisdictions. We do expect as we said in the fourth quarter for it to be 26 to 28, I can't say, just yet as to whether or not.
And that's where it'll be in 2023, it's possible it could be a little bit lower but it's very much dependent on whether or not we start to see a market recovery and in particular, you see a real impact on our non operating losses, which are or nonoperating gains those are booked and some lower tax jurisdictions.
And so when there are gains it's quite beneficial to us at a lower tax rate, but when there are losses, we don't get the benefit of those losses and so.
Just hard to predict but we'll give more guidance on first quarter win when we get to January .
Thank you.
Okay. Thank you everybody I.
I appreciate the engagement the questions always very helpful and we'll be speaking with you soon have a good rest of the day. Thank you.
Thank you and that concludes today's conference you may all disconnect at this time.