Q4 2022 Invesco Ltd Earnings Call
Welcome to Invesco is fourth quarter earnings 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. One question and a follow up can be submitted for participants as a reminder, today's call is being recorded now I would like to turn the call over to Greg Ketron Invesco as head of Investor Relations.
Okay.
Thanks, operator, and so all of you joining us on Industrials quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics. We plan to address today. The press release and presentation are available on our website <unk> Dot com. This information can be found by going to the Investor Relations section of the website.
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 in measures as well as the appendix for the appropriate reconciliations to GAAP.
Finally, invesco is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference. Transcripts provided by third parties. The only authorized webcasts are located on our website.
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 the call up for questions now I'll turn the call over to Marty.
Thank you, Greg and thanks, everybody for joining us and I'm going to start on slide three if you're following along which is the fourth quarter highlights.
The fourth quarter concluded a year of significant headwinds and volatility in global markets seemingly no geography or asset class was immune to the S&P experiencing the worst year since 2008, NASDAQ composite declined over 30% MSCI emerging markets index, nearly 20% and bond markets typically.
Safe Haven, when equity suffer declined significantly due to the rise in interest rates with the global.
Aggregate bond index declining by more than 15% for the year. This resulted in the worst markets we've seen in decades.
Rising COVID-19 infections in China and tax loss harvesting harvesting in developed economies as the year came to a close make for a challenging organic growth dynamic in our industry.
Despite industry challenges in 2022, we're pleased to see key capabilities.
Areas of high client demand continued to deliver organic growth offsetting net outflows and capabilities that experienced redemption pressure as investors expressing a preference for risk off assets.
T capabilities that deliver net long term inflows for the year, including Etfs fixed income greater China and the institutional channel.
The firm's ability to deliver these outcomes demonstrates the strength and resilience of our diversified platform in the face of extraordinary market headwinds.
Although market showed signs of stabilization in the fourth quarter. The uncertain backdrop continue to weigh on investor sentiment impacted client demand.
VESCO separated itself for most industry peers by generating net inflows and key capability areas led by strong growth in Etfs in the quarter.
Fixed income business institutional channel continued to build on their track record of organic growth generating net inflows for 16 and 13 consecutive quarters respectively.
And breadth of our investment capabilities Invesco brings to the market and positioning.
Position the firm to return to organic growth when investor sentiment improves.
Invesco Etfs delivered $4 $3 billion net long term inflows during the quarter for the full year Etfs brought in $28 billion of net long term inflows the equivalent of about 11% organic growth rate. Our ETF lineup remains differentiated from most competitive offerings with a focus on higher value higher revenue markets.
Segments like Smart beta and we continue to drive innovation in this space with products such as our <unk> innovation suite.
Fixed income capabilities in the institutional channel had been pillars of organic growth for several years now.
And growth pursuits persisted in both of these areas in the fourth quarter with $800 million and $900 million net inflows respectively.
Alison will discuss later, our institutional pipeline remains at healthy levels as interest rates stabilize we have a significant opportunity to capture growth in fixed income capabilities in 2023.
Our business in greater China performed exceptionally well during 2022 building on our leading position in the world's fastest growing market process asset managers.
We experienced modest net long term outflows of $600 million in the fourth quarter due to significantly higher redemptions in fixed income.
The industry in China, and rising bond yield stroke net asset values for fixed income securities lower. Despite these challenges we raised over $3 billion from new product launches during the quarter in China for the full year, our China joint venture delivered $7 billion of net inflows the equivalent of an 11% organic growth rate.
Market sentiment in China will be mixed for the next few months as the country works through the transition period of higher Covid infection stabilizing interest rates and redemptions turned to more moderate levels that said there are also signs that the outlook for the remainder of 2023 is improving.
I'm optimistic for a return to organic growth rate throughout 2023 in China.
Although we maintained momentum in key capabilities with firm experienced net long term outflows. This quarter of $3 2 billion active global equity remains the biggest drag on organic growth with $6 billion of net outflows in the fourth quarter, including $3 billion in our <unk>.
All three markets from <unk>.
As we've discussed previously client appetite for these assets the assets had been lower than in the past, but I'm optimistic redemptions will slow.
Client appetite for risk assets will eventually return.
We enter 2023 with a strong balance sheet given us the needed flexibility to operate strategically in this environment long term debt remains at low levels.
The lowest in 10 years, and our cash balance increased to over $1 $2 billion at year end.
As we discussed last quarter, we continue to be disciplined in our approach to expenses tightly managing discretionary spending and living in.
Higher squirrels that are critical to support the organization in future growth, we are thoughtfully managing market headwinds, while investing for the long term, we remain focused on identifying areas of expense improvement that will deliver positive operating leverage as the market recovers and organic growth resumes, we're being extremely thoughtful about capital resource allocation in this environment.
And we will be well positioned to maintain investments in areas that deliver future growth.
Looking ahead.
We are partnering with our clients to meet their most pressing needs in this dynamic environment, we have dedicated the past decade to building.
Breath of investment capabilities as a solutions mindset and operating at scale at Invesco that few in the industry can match Im proud of our talented what our talented employees have accomplished in 2022 on behalf of clients and stakeholders and I'm optimistic for a return to organic growth when market sentiment eases market direction may be uncertain, but I'm confident that invesco is prepared.
To meet challenges that will rise in 2023, and well positioned for future growth with that Allison I'll turn it over to you.
Thank you Marty and good morning, everyone.
Let's start with slide four.
Overall investment performance improved in the fourth quarter with 61% and 63% of actively managed funds in the top half of peers are beating benchmark on a three year and a five year basis.
From 57% and 62% in the third quarter.
These results reflect strength in fixed income and balanced strategies, where they are as strong client demand.
Performance lagged benchmark in certain equity strategies, but we experienced improvement over the past quarter and several key funds and short term performance is trending positively in several U S and global equity strategies.
Moving to slide five we ended 2022 with 141 trillion in.
AUM, an increase of $86 billion from the end of the third quarter as most market indices, partially recovered from prior quarter less.
Global market increases foreign exchange movements, and reinvested dividends increased acid assets under management by $61 billion. In total net inflows were $25 billion inclusive of $30 billion into money market products.
As Marty mentioned earlier the firm experienced net long term outflows of $3 $2 billion this quarter equivalent to a 1% annualized organic decline.
Despite some stabilization in global financial markets industry growth remained subdued in the fourth quarter and Invesco is net flow performance was among the best in our peer group.
Passive capabilities returned to net inflows this quarter was $7 $3 billion, while net outflows were $10 $5 billion in active strategies.
Several of our key capability areas continued to deliver positive organic growth, including Etfs and fixed income as well as the institutional channel.
These capabilities also delivered positive organic growth for the full year, along with our greater China business, which enabled invesco to offset outflows in strategies that experienced net redemptions as investors sought risk off trades throughout 2022.
Invesco D. T. F lineup was once again, a driver of net long term inflows in the fourth quarter with $4 $3 billion net.
Net inflows were inclusive of $2 $4 billion in maturing bullet shares Etfs, which are included in our gross redemptions.
This quarter was broad based our top selling Etfs included the S&P 500 equal weight, the NASDAQ100, cute UQM and Invesco senior loan ETF.
For the full year 2022, net long term inflows into our ETF capabilities, where 28 billion equivalent to an 11% organic growth rate and we gained market share.
Leading the Qs you choose invesco captured three 8% of industry net inflows higher than our three 1% share of total industry assets under management.
Institutional channel has been a steady source of growth and that continued in the fourth quarter as the channel has now achieved 13 straight quarters of net inflows.
For calendar year 2022, the channel achieved net inflows of $13 billion or a 4% organic growth rate.
We sustained new fundings across geographies asset classes and the risk return spectrum throughout the year, despite the very challenging market backdrop.
This demonstrates the diverse range of client relationships, we have nurtured as well as a differentiated set of capabilities that we bring to the market.
Retail net outflows were $4 $1 billion in the fourth quarter, a meaningfully lower pace of outflows in the prior quarter as the channel achieved positive flows in Asia Pacific and ETF flows improved in both the Americas and EMEA, Despite an uptick in investors harvesting tax losses as the year ended.
Moving to slide six net outflows declined quarter over quarter in Americas, and EMEA, primarily due to improvement in ETF net flows net.
Net inflows in Asia Pacific were $3 3 billion led by Japan and Australia.
Our China joint venture experienced modest net long term outflows of $400 million in the fourth quarter.
Fixed income products experienced a meaningful industry wide spike in redemptions throughout China, and a rapid rise in COVID-19 cases impact of the Chinese economy and financial markets.
Despite that we raised over $3 billion in the fourth quarter from new products and investors showed signs of shifting back into equity products, where we garnered $1 8 billion of net long term inflows.
Looking at full year 2020 to our China joint venture delivered $7 billion of net long term inflows and 11% organic growth rate and we're gaining market share.
Building on Marty's points from earlier, the Chinese market may remain in transition on the short term and through the first few weeks of 2023, a higher redemptions, we experienced in the fourth quarter have persisted driven by fixed income.
This dynamic may be a drag on net flows in China through the remainder of the first quarter that we expect to be launching new products. After the Chinese new year, and there is increasing optimism for the rest of 2023.
Longer term, we remain one of the best position asset managers and what is expected to be the world's fastest growing market for asset management.
Fixed income capability sustained organic growth in the fourth quarter with $800 million and net inflows. The perm achieved net inflows in this area. Despite the heightened redemptions on Chinese fixed income products as well as a $2 4 billion outflow related to bullet shares Etfs that reached their planned maturity last month.
As interest rates stabilize we are a diverse platform of fixed income offerings with strong investment performance across the full range of risk appetites and durations that are positioned to capture future growth.
Alternatives experienced net outflows of $3 $6 billion in the fourth quarter liquid alts accounted for more than two thirds of the net outflows driven primarily by commodity focused Etfs. These strategies experienced net inflows for the full year, but gave back gains from the first half of the year.
Private markets net outflows were $1 $6 billion, primarily due to outflows in bank loan strategies.
Net outflows and active equity strategies have been concentrated in global in developing markets equities, which experienced $6 billion of net outflows in the quarter, including $3 $1 billion from our developing markets fun.
Yeah.
Moving to slide seven.
Institutional pipeline with $30 billion at quarter end, an increase from $23 billion last quarter.
Despite the challenging environment, we are winning new mandates, notably in fixed income and active equity in the fourth quarter, which contributed to the increase.
Our pipeline has been running in the mid 20 to mid $30 billion range dating back to late 2019, and we're pleased to see the pipeline this robust given the uncertain market environment.
As we've noted previously that uncertainty is causing some mandates to take longer to fund and we would estimate the funding cycle of our pipeline has extended into the three to four quarter range versus the two to three quarters prior to the market downturn.
Our solutions capability enabled one third of the global institutional pipeline in the fourth quarter and it remains a differentiator with clients.
The pipeline reflect the diverse business mix that has helped invesco sustain organic growth in the channel throughout the full business cycle.
Turning to slide eight markets, partially recovered in the fourth quarter with a significant market declines that we experienced in the third quarter, especially in September drove assets under management lower at the start of the period.
Net revenue of $1 1 billion $111 billion in the fourth quarter was flat to the prior quarter and 19% lower than the fourth quarter of 2021.
That's primarily due to lower active assets under management.
Total adjusted operating expenses were $769 million, an increase of $28 million from the prior quarter and a decrease of $27 million as compared to the fourth quarter of 2021.
Compensation expenses increased by $8 million as compared to the third quarter inclusive of incentive comp paid on the $56 million of performance fees earned in this quarter.
As we've discussed we manage variable compensation to a full year outcome in line with company performance and competitive industry practices.
Historically historically, our compensation to net revenue ratio has been in the 38% to 42% range on an annual basis.
During periods of revenue decline as we experienced in 2022 the ratio tends to move.
The upper end of this range for the full year 2022, our compensation to revenue ratio was 41%.
At current AUM levels, we would expect the ratio to trend towards the higher end of the range for 2023.
As a reminder, looking to the first quarter, we expect seasonally higher compensation taxes and benefits of $20 million to $25 million consistent with prior year trends.
We would expect this to be largely offset by lower incentive compensation on performance fee revenue after seasonally high revenues received in the fourth quarter.
Marketing expenses were $4 million higher than prior quarter consistent with the seasonally higher activity. We typically see in the fourth quarter. The marketing expenses were $9 million lower than the fourth quarter of 2021.
Property office and technology technology expenses were $6 million higher than the prior quarter. As we've mentioned previously we're in the process of moving to our new Atlanta headquarters, which we expect to be complete by the middle of this year. However.
However, we may experience moderate delays as a result of flooding that took place when literally cold temperatures caused pipes to burst around Atlanta in December .
We're working with relevant parties on a resolution.
And fourth quarter, we also incurred $2 million of expenses related to the decommissioning of our current office building. These expenses are not repetitive in nature.
Technology expenses in the fourth quarter included investment in ongoing technology programs that will benefit future scale, such as upgrading our human resources operating environment and the move of our financial systems to the cloud.
G&A expenses were $10 million higher than prior quarter influenced by $4 million of foreign exchange rate revaluation associated with the impact of currency movements on our balance sheet and an additional $2 million of value added taxes paid and non U S jurisdictions.
As I mentioned earlier, we are investing in foundational technology projects that will enable future scale and our operating platform.
These expenses spanned G&A and property office and technology expenses and they are included in our results.
We're investing in our key growth capabilities, while balancing the need to diligently manage expenses in this uncertain environment. We are focused near term hiring in the growth areas that we've outlined and deferred hiring for most other positions.
Over the longer term, we're building a platform that will rapidly and efficiently scale deliver delivering positive operating leverage and margin expansion of market markets recover.
Now moving to slide nine adjusted operating income was $339 million in the fourth quarter $30 million lower than the prior quarter due to flat net revenues combined with higher operating expenses.
Adjusted operating margin was 36% as compared to 33, 3% in the third quarter and 42% in the fourth quarter of 2021 prior to the steep market declines that we experienced in 2022.
Earnings per share was 39 cents as compared to 34 cents due to higher non operating income driven by gains on our seed capital and co investment portfolios as markets increased from third quarter lows.
The effective tax rate was 26, 9% in the fourth quarter lower than 28, 7% in the prior quarter due to losses in lower tax jurisdictions last quarter that did not recur.
We estimate our non-GAAP effective tax rate to be between 25 and 27% for the first quarter of 2023. The actual effective tax rate may vary from this estimate due to the impact of nonrecurring items on pretax income and discreet tax items.
I'm going to conclude on slide 10.
Maintaining a strong balance sheet remains a top priority further underscored by the volatile environment that we have been navigating.
Total debt was managed lower to $1 $5 billion as of December 31, which is the lowest level in 10 years.
We built cash in the fourth quarter as we ended the year with over $1 $2 billion in cash and cash equivalents, an increase of more than $200 million from September 30th.
Our leverage ratio as defined under our credit facility agreement with 0.8 times at the end of the fourth quarter.
Lately higher than 0.7 times, the third quarter as declining markets have led to lower EBITDA.
Our leverage ratio is flat to the fourth quarter of 2021.
If preferred stock is included our fourth quarter leverage ratio was three two times.
In the face of one of the most challenging markets of the past half century Invesco continues to capture client demand in high growth areas and our net flow performance has been among the best in our peer group.
Meanwhile, we've been building balance sheet strength and financial flexibility needed to navigate these uncertain times.
We will be extremely disciplined on expense management and resource allocation, while ensuring that we're meeting the needs of our clients and positioning the firm for long term growth.
With that we're going to go ahead and open it up for Q&A.
Okay.
At this time, if you would like to ask an audio question. Please press star one if you will be announced prior to asking your question. Please pick up your handset when asking your question and to withdraw your request. Please press star two.
One moment please for the first question.
Glenn Schorr with Evercore Your line is open.
Hi, Thank you very much.
Question is on China, I I'd like to see them, obviously opening up a little bit getting one 3 billion in new flows on the new products.
I guess my question is we watched this develop over the last couple of years you seem to get great close when you launch new products.
We don't talk much about the legacy or the older products.
I Wonder if you could just give us a little more color on it is is the bulk of the pools come through the new issue pipeline.
The reason why I ask it is.
Historically, you've done best from a profitability standpoint, when your products at real scale and you seem to be developing a huge set.
Set of new products, but most of the flows come through on day, one so wonder if you could help with that color that'd be great. Thanks.
Well, let me start and Awesome go please chime in so.
It's very that's really how that market is operating right now in time, you'll have to go to war mature to something more similar to the United States, where you'll have your launches there'll be fewer.
Fewer of them and you'll have our Gordon you'll flows into those capabilities, but there are follow on inflows, but really the bulk of it comes through these launches and again. This is unique to the market now that said I have to go evolve over time, but.
Got it I just want to forget analysis on this I did it's a really volatile time over the next year.
A few months here, but we just think the future is very very bright in China for us I'm sure when the Covid.
Transition.
Completes itself, we anticipate 2023 below a very strong year in China.
Yeah, Glenn I would say.
If you think about the the blow drivers in China I mean, it's maybe with these new product launches, maybe somewhere half to two thirds in any given quarter might come from these new product launches, it's not all of it but it is as Marty said it is a it's really the way the market works there right now and it's certainly a less mature market.
And for now that is a large driver of flows I do I don't want to leave anyone with the impression that the 100% of the flow drivers each quarter.
But it is it's an important part of functioning in that market and is an important driver of market share growth overall.
To your point, it's nice to see flows coming from beyond China and across the region, but you know it is it's an interesting time in China right now.
Okay, Thanks, and maybe one quick one for you.
Expenses.
So the more I guess margins and Jill.
Martha was up.
AUM was up six 5% in the fourth quarter. So some of that's going to flow through.
First quarter revenue up so maybe you could start just help us with the jumping off point on starting the first quarter.
So sometimes there are some seasonal items on the expense side. So just how to think about the jumping off point.
Oh in Q1.
Sure. There are many puts and takes them you know I think as we think about the revenue side of it you're right our markets have been a little bit better only a few weeks into January that's certainly a positive but I do think it's really important.
To underscore the mix shift that we saw in our portfolio overall in the fourth quarter, we pointed to the $6 billion of outflows and two particular active equity strategies developing markets as well as global and international funds.
Those are you know that that has an impact overall in the jumping off point as we think about the revenue dynamics at the same time a lot of encouraging signs as we've pointed to is we see real strength in inflows and our ETF capabilities in fixed income in particular, but as you certainly understand that comes out of a different <unk>.
Revenue level than what we've experienced as we see some of the the remixing of the portfolio.
So while market could be a positive add this quarter. There's also a bit of a headwind in the jumping off point in terms of remixing relative to prior quarters.
As we think about expenses you know overall I noted in comp expense you should expect the usual seasonality of $20 million to $25 million in the first quarter that would be offset by.
By what we would not expect.
Any recurrence in performance fees like we saw in the fourth quarter, just given the seasonality there and of course the market will be what the market will be we'll adjust for that so hopefully that gives you a little bit of color. As you think about some of the puts and takes and overall is a difficult environment to navigate because you see a lot of forces moving at the same time and we're trying to get our arms around that as well.
Thank you and now Brian Bedell with Deutsche Bank.
Great. Thanks, Good morning folks thanks for taking my questions maybe.
Maybe just one more on expenses Allison just to finish that thought just the I missed the number I think that you said in property office and technology that seemed like it was one time in <unk>. You said you also wanted to get the jumping off point, there I realize that you're going to have some duplicate expense I think in the first half as you transition to a new headquarters.
But it may.
Maybe just an outlook in that context for 2023, if you can and then also in G&A considering.
It spiked up in <unk>, but it sounds like you're.
You're working on.
On on some cost saves during the year.
G&A.
Sure. Let me do my best to try to walk through a few of these on property office and technology a couple of.
Points on some of what we're experiencing a really specific to our Atlanta headquarters out.
As a reminder, we're carrying the cost of two headquarters right now and.
That will persist for a few more quarters, that's somewhere between $2 million to $3 million of incremental expense.
We had a $2 million nonrecurring charge in the fourth quarter related to decommissioning at the.
Existing or I'll say outgoing headquarters wherein.
We also pointed to some uncertainty because we had a pipe burst in our new building.
On Christmas Eve and that happened around Atlanta, and that will cause some delay and moving and so there was a little bit of uncertainty right now as we try to work through what all of this means.
That combined with G&A them, you know in G&A, we pointed to a lot of FX revaluations on higher VAT taxes in the fourth quarter, and obviously FX has been a pretty meaningful driver in some of the significant movements. We saw over the last few quarters. There I would say overall as we think about property office and technology N G.
In a I will just continue to underscore a lot of these key foundational projects that we are working on and they really spam those two categories in terms of both technology and professional services.
We have been we are working on installing a new HR environment, we're wrapping up moving all of our financial systems to the cloud and we are in the early stages of Alpha Nextgen and so as these projects are rolling off and rolling on and there is quite a bit of investment and focus right now and really creating scale for the few.
Sure.
Overall as I think about G&A for the year and the fact that we do expect to be back in a full travel mode. This year and we do expect the reopening of China to allow us to get back to a really important region that we have not been able to get to for the last three years and I expect G&A. This year on an average basis is somewhat consistent with <unk>.
And a last year on an average basis. When you think about some of the efficiencies in our discretionary expense management, we're trying to manage but at the same time, the reopening of travel as well as some of these foundational investments we are making.
That's fantastic color. Thank you and then just a follow up on the revenue side.
Obviously, the revenue yield pressure it sounds like a lot of that came in the ER.
No doubt that the Oppenheimerfunds complex given just the outflows there. So a two part question would be are you seeing increasing demand or risk appetite given your foreign markets, especially emerging markets are certainly are off pretty well on performance or or or financial advisors that you're speaking with sterling.
The warm up to that are seeing some risk on appetite from their clients and can that help the revenue yield if that rebounds, I'll, probably not in <unk>, but as we move through the year.
Yeah I'll make just.
Just a comment.
The contract was dramatic right. If you went through last year.
Really no interest at all in emerging markets in particular.
Much risk all for my wife, it's too early but what we are seeing is.
Starting to be some early interest in emerging markets and China, driven by China, quite frankly, and developing markets in Q4 had some very very very satisfied performance, which as you know.
And it's a really talented team so.
The answer is.
Client appetite is there we should do quite well, which would be a nice change from this pressure.
Great. Thank you.
Thank you our next Dan Fannon with Jefferies.
Thanks, Good morning wanted to follow up on the alternative suite of products. You saw some outflows is the second consecutive quarter of a little more elevated outflows, but you did highlight private credit or are seeing inflows and I think you said some of the liquid strategies could.
Could you talk about the mix of fee.
She's within alternatives and kind of where the positive and negatives are shaking out.
Sure.
Yeah, I'll start Marty chime in I mean, I would say a couple of things as we look at them alternatives again, a lot of what we saw in terms of outflows would be the liquid alternatives so commodity.
Etfs in particular currency ETF. So you know I think from that perspective that would be those would be lower fee alternatives.
Alternative that we're flowing out at boiling that down to private markets and that also was in outflows at about $1 $6 billion, but that was largely driven by global bank loans are direct real estate Ah we were in outflows to the tune of about $200 million. There. So that's really it.
Again, you know realizations net of acquisitions, there negative $200 million continue to gather commitments and have a fair amount of dry powder and direct real estate about seven $5 billion coming into the year overall on that side.
On a private credit perspective, you know I think it's been a it's an interesting environment was an interesting year for private credit overall, just the floating rate nature of loans.
And some of the attractive fundamentals there have helped mitigate losses, but certainly.
As recession fears kind of persist I'm trying to navigate what that may or may not look like that certainly impacts credit appetite overall and so we continue to navigate that I think we you know coming into this year and.
We're bullish on all of our private market asset classes, we feel like we're really well positioned we feel very good about the funds that we have launched and will be launching them and that they're going to be well positioned for where we expect to see client demand this year.
But certainly your your perspective on higher yields than what the attractive entrant at attractive entry point is.
It's going to really dictate how.
How are flows come together as we make it quarter to quarter through the us. So you know overall I think we'll continue to see good strong demand there, but the liquid alts and some of the movements in currencies and commodities had put overall downward pressure on the float there.
Got it. Thank you and then I think Marty you mentioned for fixed income, obviously positioning and is positive and you're hopeful for a pickup in demand, but I think you.
You said interest rates stabilizing as the kind of key factor for decision, making so as we think about gross sales or redemption activity do you feel like it's more a stagnant and so we kind of get more of a direction of where rates are on a global basis, and then we start to see much more assets in motion.
Absolutely.
Look I think that's true of equities also right.
Some uncertainties.
Certainty to the future.
It can be a really really important for our investors.
<unk> react this year, but for fixed income absolutely that's going to be the case until the back of a broad set of capabilities very good performance and I'll just follow on to Allison's port.
We've talked about over the last year.
It is now belong shown are very important.
White House, which was one of the parents who are waiting for and we're also in development some follow on.
Capabilities or the private markets.
And do.
The wealth management travel, but again that will be a multi quarter.
Introduction, but we're now under way so that's it's a great again this won't be immediate but.
We're not moving forward, which is a really important thing for the firm.
Great. Thank you.
Thank you know Brennan hawken with UBS.
Good morning. Thank you for taking my questions, we'd love to start on on flows are Marty you had some commentary in the press release are suggesting.
We're waiting on a recovery in flows some of the indications you know well, maybe a weak start to China's slower funding on the institutional side. So are you all generally signaling that you're expecting flows to remain soft here just given that uncertainty that you've talked about based on what you can see.
In the activity here.
Look I think that's.
Russia would get you there right.
As I say from my perspective, we're a lot closer to the end of the uncertainty that at the beginning and.
What we point to is just look at our relative flows piece of your competitors are how we're positioned.
There was a lot of things that are going well and you don't need a lot of change.
Change in sentiment to really start to make a really meaningful impact on our flows and so on.
As I say, they don't ring, a bell with the bottom, but we're a lot closer to that and I think that's going to be a really positive development for invesco.
Yeah, Okay, and then I might point to just the improvement we saw from the third quarter. The FERC fourth quarter I E that look it's a dangerous game to predict flows in and we're certainly not going to try to enter that game, but as we look at the drivers coming out of the quarter and just some of the overall market sentiment right now we saw the decay rate.
Yeah, the decay rate in third quarter was two 9% that improved to a negative 1% in the fourth quarter.
Some really positive drivers there that are again this is a dangerous game, but we would expect those to continue to hold up through the first quarter. So the ETF.
<unk> platform in particular, and our strategies there are 7% organic growth in the fourth quarter and despite some of the tax loss harvesting and the bullet shares maturity again, a lot of strength coming into the year there.
Our fixed income for the reasons, we just discussed have performed well and certainly hinges quite a bit on the rate environment, but we feel like the fundamentals are strong there we're well positioned in the institutional channel does seem to be coming back underscoring Marty's point that perhaps we're closer to the end than does the beginning and so as we saw a lot of institutions sit on this.
Sideline and remix dependent waiting on some conviction and that that could improve here this quarter.
Active equities are very difficult quarter for us in the fourth quarter.
You know I think a lot depends on just as some of the earlier conversation around developing markets and as people find the right time to come back into that asset class and that exposure.
Diminishment and that headwind will help us quite a bit and then the wildcard at the moment is China and what's happening there is really a unique and as they've changed their COVID-19 strategy had done a 180, it's having a real impact, but we also expect that to be relatively short term and the fundamentals are really still strong there.
So you know I I think he we feel maybe a little bit better than we did a quarter ago, but that sure is a hard place to be at the moment, because it's been a wild ride of a year and we'll see where things go over the next month or two.
Thank you for that Oh that color, that's very very helpful shifting gears a little.
And thinking about real estate and your capabilities there.
Allison I believe you made some positive commentary on how.
How the ear shook out there on the real estate front and use I think Marty you referenced that you're getting close to a warehouse will launch on a product I guess number one on the wealth management side.
Have you been looking at what some of some other products.
Some of the struggles in the gates that we've seen in some of these products on the on the retail side and how are you, making adjustments to how youre thinking about structuring your own product.
In light of some of the lessons learned there and then.
On the institutional side Theres been some press around.
The two.
<unk> building on on redemptions and.
Prioritization sort of given to the not addressing the Q, but rather a.
Addressing the needs of of sustained investors, which makes perfect sense. Just how are you managing maybe that that delicate customer service a dance in order to make sure relationships aren't damaged.
Yeah, It's a it's a great question.
Needless to say, it's been in front of everybody.
We've not had that issue I'd also say, we don't have the magnitude of size that.
Where that has been sort of topical so again, our client experiences from.
So very different but again I recognize the relative scale.
That is what comes along with.
Crazy and availability into these capabilities and I think that's.
That'll be a lesson for the market.
I think.
If you Wanna get exposure to some of these capabilities.
An extremely challenging times, you're going to run into some situations like that and.
Perspective, if we do really good job.
Educating investors.
And they have the time horizons is necessary for these exposures, they're going to do really well so I would not.
Make a decision that drove it.
Provide access to individual investors during an extremely challenging time, so I don't know if that's helpful. But that's how I think about it.
Yeah.
And then on the institutional side.
I'm sorry can you repeat the question.
Yeah. There was some press coverage around the institutional your institutional capabilities on commercial real estate and the fact that.
There's a large queue rather of redemptions, but you know there given the illiquid nature, it's going to take time to work through that and there's prioritization given to the existing.
Investors in the actual strategy. So it just it's.
It's an understandable dance to try to balance, but how are you sustaining and maybe limiting damage control.
As far as relationships go around that inherent friction.
Okay.
We're not experiencing what youre, describing so when there are reductions.
We have very very strong relationships with our clients.
And that is really quite well so we're not we're appealing the friction that youre referring to.
Okay.
Great. Thanks.
Yes.
Thank you know hi, Siegenthaler with bank of America.
Hey, good morning, everyone.
Correct.
So given the rise that we've seen in interest rates I just wanted to see if you have a view on the potential reallocation into fixed income in 2023.
And also do you have a view within that on the potential next between active and passive and then how do you think invesco is positioned within that to win these potential rebalancing.
It's a great question.
I'll give you an answer and I'm sure it's wrong, but nothing that I think are getting the rise in interest rates get into more natural interest rate levels as healthy for the marketplace I think it's healthy for active equities over time.
And again as I said before once it sort of some sort of.
Stability level I think it's good for different types of asset classes from fixed income and he said I really don't know what the relative allocations are but it's been a long time, but you've got a market worth positive for stock pickers active equity and.
My personal view once you get relative outperformance youll start to see money go back to active equities.
There is a.
Women felt listen and that would probably not be a popular view and because he was suggesting that that's not been the case, but.
That's how I would think about it.
Yes.
Thank you Marty maybe just a follow up on the other question on real estate, maybe asking it a different way. So we have really great I think visibility into your liquid public filings and also in rights investment performance, but maybe could you talk about how some of the performance in the other products the private products trended in 2000.
22, I'm, especially looking for core real.
Real estate debt and also the opportunistic drawdown.
Yeah.
Look I don't have a specific performance in front of me so hard to answer the questions. You know what I will say, it's a stroke a very very strong team.
Core capability.
So it's the fundamental strength of the organization and.
Relationships are very very strong.
He has a long period of time, so again I'm, sorry, I don't have the specific performance of other drugs.
No worries guys. Thanks for taking my questions. Thank you Marty.
Got it.
And now Alex Blaustein with Goldman Sachs.
Hey, Marty how often.
Quick maybe just a quick follow up to Craig's question around fixed income I was hoping you guys could give some details around invesco is position with some of the specific products that you feel most are kind of optimistic about if the recent recovery in fixed income flows for the industry continues and how you're thinking about your ETF.
Positioning in fixed income versus the active book in fixed income.
I'll make a couple of comments.
Just with our.
Within the ETF franchise.
Fixed income continues to be an opportunity for us right. The strength has come historically from equities.
Surely think rattler capabilities to grow.
Your franchise from fixed income so we will look at those costs should be going into the year.
With regard to.
Fixed income in particular, you know the sweep.
Capabilities. The performance was really quite strong so it's really going to be driven by what we see in our client demands.
<unk>.
Yeah.
Uh huh.
And retail channels in the United States really bothers, you know very or you attract.
Tractive, although short duration elements bank loans continue to be very strong so it kind of depends on the market and where we are but.
How often do you have any further insights from your perspective.
No I mean, I think when whenever it is that inflation at least stabilize it real inflation declines and you start to see some pausing a with the fed in and rate movements. I think we expect total returns to be strong overall, we would expect that to be sometime in 2023, I think Marty hit on the areas of real stress.
Thanks.
Munis are certainly we see that as as are our customers continue to focus on taxes as being an area that we.
We expect to hear even more bullish sentiment over the course of this year.
Our global liquidity has held up very nicely and we expect demand to continue there and fixed.
Fixed income SMA and that's been a very strong area for us and that continues to be a wrapper, that's unreal demand and stable value has been a leading capability for us for a very long time so.
You know I think it really does depend on your perspective on rates and credit of course, and but we do expect there to be an inflection point and continued demand across a lot of our capabilities. This year I think overall net flows are still favoring etfs.
Over some of our active strategies, but we feel well.
Well positioned in both.
Got it thanks for that and then Marty you mentioned strong balance sheet and I think.
The commentary you made around that is sort of enabling you to operate strategically could you expand a little bit on that does that just mean sort of build liquidity and then eventually resume more active capital return program or do you think this environment opens up incremental M&A opportunities for investors. So let me make a comment then Alison can pick up so you know what we bid.
Our balance sheet for right now.
<unk> talked about in different ways are really investments that are going to continue for another company to grow.
And futures hopeful the alternatives capabilities is an area, where we've been using the balance sheet. You will continue to do that when you've heard us talk over time recipe. So it's been an amazing partner.
Enough to really augment our balance sheet to a garden material degree.
So that's really been the more specifically, we're talking about now and some of these foundational.
Enterprise programs with Dallas or was referring to that that he might not be.
Interesting that they're necessary, but that's what craig's scale within an organization and Oh.
So that's the other way with everything you said very very short term, but Alex you want to pick up more of them.
Other elements of the balance sheet.
Yeah, I mean, I think Marty you had sort of a high point, but then we just continue to be focused on supporting our future growth and maintaining a really strong balance sheet to do that and part of that is continuing to be really good stewards of our capital overall and being very thoughtful about the debt on the balance sheet, which you know has been.
Top of mind for us and we've been chipping away at and feel really good about the progress, we're making there and making progress there it's freeing up capacity for us to again continue to focus on our own future growth. Some of that is in investing and our product launches we are.
Fortunate to have a really good strong strategic partner, there with us and but we continue to really prioritize investing in ourselves both in terms of our product launches, but also the technology projects and some of the foundational capabilities that.
We know are really going to be necessary to create the scale in this business and that we expect to have over the coming years.
That's helpful.
Yeah. Thanks, so much.
Thank you Bill Katz with credit Suisse. Your line is open.
Perfect. Thank you very much for taking the questions I appreciate all the color so far Marty and I'll show you both mentioned towards the longer term outlook for China does some very strong could you help unpack a little bit about where you have a Q4 product launches for 2023, and if you could break down the mix between equity and fixed income and other assets in the region.
That'd be super helpful.
Okay.
Sure.
Take a stab at it.
I would say in terms of product launches over all of them.
Hard to say exactly but I'll tell you the demand there does favor balanced and fixed income products over our equity. So it would probably skew a little bit more to the balance side than fixed income than equity, but that's not a perfect science as I think about just the mix overall in China I would say.
Say it skews probably.
50% or so balanced in fixed income maybe as much as 60% are balanced with a very popular asset class. There. So equity is probably a little bit smaller than the overall mix there relative to what you might expect to see and our portfolio in the United States.
Okay. Thank you and just a follow up Tony here you want to have all the different drivers for flows when you think about the base fee rate exiting.
Exiting the.
Your entry toy twenty-three, where does that sit today and should we presume sort of a gradual decline just given the ins and outs between across geographies products and distribution channels.
Yeah, I mean, I would say the factors that impacted the net revenue yield in the just the overall base fee rate in the fourth quarter. We would expect a lot of those to continue into the first quarter and primarily as we continue to benefit from the demand for our ETF and our passive strategy. So while that is a significant positive.
And we are capturing demand where demand is right now and that does put downward pressure on our average fee rate and then we would expect a lot of those trends to continue into the first quarter at developing markets in particular in global equities and what happens there in terms of redemptions and demand overall that will remain a headwind.
If nothing else just given the exit rate of those particular asset classes in December as we come into this year that does put downward pressure overall because of the outflows that we experienced in the last probably three quarters there.
And overall, though I'll, just say as I do every quarter and we're not focused on managing to our net revenue yield or an average fee rate. We're focused on managing the operating income and operating margin of the company overall and so while we see that downward pressure given the mix shift in our portfolio and that mixed shift really did access.
<unk> and 2022 and.
We are really focused on how do we continue to operate the business to create scale and to get to scale. In these passive capabilities. We've taken market share we've gained quite a bit in terms of our organic growth over the last few years, but we're not at scale in those capabilities and and getting to scale and continuing to remix our.
Expenses and reallocate against these higher growth capabilities.
As our primary focus in and that's what's ultimately going to give us the opportunity to improve operating margin.
Thank you very much.
Yeah.
And now Patrick Davitt with autonomous research.
Hi, Good morning, everyone. Most of mine have been asked just one quick one on.
Credit ratings I think S&P is on record as saying their ratings and outlook are based on the expectation that your leverage ratio with the preferred will be in the two and a half to three times range, which you went over it for Q I suppose the market recovery could already have that back below three times, which could you speak to any potential risks to your capital return or new investment outlook.
Around that issue and based on your past experience how much of a grace period can we expect from the ratings agencies after kind of breaching that three times bogey for one quarter.
Yeah.
I'm Patrick I'll take that I, you know look I. We are we've had no conversations with S&P that would indicate we have arrest of there I think the important point is all the work we've done and continuing to manage our debt balances lower.
And so while EBITDA has declined given the market impact.
One would expect that to be more temporary in nature and given we do expect there will be an in flight and inflection excuse me in the market at some point.
And at the same time, we've managed to not only the debt on the balance sheet to the absolute lowest level in 10 years, but managed a number of contingent liabilities that would've been present when they made that statement two to three years ago and those have all been taken care of as well. So in terms of the overall liabilities and we're in a significantly better.
Place than we were when they made that statement a few years ago. We did receive an upgrade last year from fetch them. We do feel like we are overall in a good position as far as our credit ratings are concerned.
That's helpful. Thank you.
Yeah.
Mike Cyprus with Morgan Stanley Your line is open.
Hey, good morning, Thanks for squeezing me in here just a follow up on expenses Alison just coming back to the transformational project that you were mentioning earlier I guess, just how much might that lower run rate expenses as you kind of look out over the next couple of years and as you think about expenses for this year. How are you thinking about the <unk>.
Bookends for the growth rate in expenses.
So in terms of transformational projects lowering expenses in the next couple of years I would say they will not contribute to lowering expenses in the next couple of years as we've noted before be Alpha Nexgen is it's really our most significant investment that we will be making we will be in the next couple of years deep end.
The investment period of that and then we'll be running parallel for some period of time before we can start to streamline and decommission apps on the other side. So we are several years away from seeing the benefit of that investment.
Again, it's the right near term and long term at move for US as a company overall as we think about building to the scale, we want to be out in the next five 710 years, but it it's an investment and it will take some time before we see the payback on that investment.
In terms of the bookends of expenses like the biggest driver of that is gonna be comp and the biggest driver that's going to be market related I'm Ed. So as you think about the variability in our expenses and what could move our you know the most beyond our expectations and beyond some of the guidance already gave them it would be compensation related and the good news in that is that.
It comes with revenue and I think that right now as we think about at what expense flex we have on the air.
I want to make sure. It's clear we're managing discretionary expenses at every level and really focused on the must haves only and all the nice to haves are things we are foregoing them, but there are a lot of must haves and this business that we think really position us well to capture demand over the next several years and we want to stay the course on that even in some of these challenging market.
Actions and we're reallocating the discretionary expenses to some of these foundational investments that we think will serve us well and create the operating leverage for the future.
Great and just a follow up question on the cash position 1.2 billion how much of that is discretionary and how do you think about the scenario where buybacks might resume thank you.
So of the $1 2 billion about $640 million is held for regulatory purposes. So it's a little bit higher than the last quarter and that's really FX related and so you could consider the amount above that $640 million roughly discretionary I'm as I think about buybacks I'll just underscore our capital priorities. The first is supporting our.
Our future growth and we've got a lot of investments, we want to make and ourselves and we think that's going to serve shareholders. The best over the long run and we want to focus on maintaining that strong balance sheet and continue to focus on the leverage levels that we have in managing those down and we also continue to focus on returning capital to shareholders, but that we're gonna do first through dividends and steady dividend.
The increases.
And it's really excess cash that we will think about for buybacks.
Great. Thank you Marty Marty anything else yeah.
Hum.
I do want to follow up on this.
Conversation around expenses photos for longer term investments with Alex was talking about which we've talked about it from an M. B obvious elements around discretionary, but as a management team we are.
Absolutely focused on what we call driving scale within the organization against capabilities that are in client demand.
We're deeply into that process and we were constantly doing it and from that you get the opportunity to make a decision to invest in.
Our capability for a client, let's say or have a drop to the bottom line. So that's another element that we've been working on very very diligently and.
It'll make us a better company, but at the same time at some point the markets will recover you'll get further operating leverage.
From the organization. So I think you should look at it three different elements and that's nothing new you've seen us do it time and time again.
It's a normal practice for them.
Ramos and.
Yeah in general just correct, but better outcomes for for sure shareholders and clients.
Yeah.
Our last question is from Mike Brown with K B W. Sir Your line is open.
Great Hi, good morning, I wanted to ask a couple of follow up questions on the real estate business. So I believe the total real estate exposure from vessels around 92 billion and 75 billion or so is in the direct real estate side. So within direct real estate, how much is tied to the U S. And then how much is <unk>.
I'd to office, our office and retail.
I would say in terms of how much is tied to the U S probably around.
Two thirds is probably.
Roughly I would have to we know we can follow up with you on specifics there, but I'd say roughly we've been managing our exposure to office and retail quite a bit over the last couple of years three years, probably in particular and really favoring asset classes like cold storage and.
Industrial and medical office buildings, and and you know some of the asset classes, you would expect us to be and so the story around retail has been known for quite a long time, probably five or six years office has obviously been quite challenged since the advent of Covid and we've been managing those exposure. So that those are not a real concern overall.
And as I think about really where our acquisitions have been focused over the last two or three years they've been in these areas of real high demand multifamily would be another example of an asset class we've been favorably.
Okay, great. Thanks, Allison and then just specifically in terms of some of the <unk>.
Line items here, how much does real estate contribute to performance fees drove the 68 million how much was from real estate and then how much do real estate transaction fees contribute to to other revenue.
So on the performance fees this quarter and real estate was the majority of the performance fees. If I think about prior years, you would've seen more coming from my GW in China overall, and then what we saw this year. So the two biggest drivers in any given year would be China and real estate, but in 'twenty.
'twenty two is definitely coming more from real estate in terms of other revenue I would say, it's a I'd have to come back to you on what portion of it is I will say the increase and other revenue in the fourth quarter was driven largely by higher real estate transaction fees.
Okay, great. Thanks for thanks for the color there.
Okay.
Okay, well, thank you very much everybody and appreciate the engagement of the questions and.
Driving a quarter so have a good rest of the day. Thank you.
Thank you.
The conference has concluded again. Thank you for your participation. Please go ahead and disconnect at this time.
Yeah.
Yeah.
Yeah.
Yeah.