Q3 2023 Invesco Ltd Earnings Call

October 24, 2023

Okay.

Yes.

[music].

Welcome to Invesco, starting our 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 per participant as a reminder.

<unk> call is being recorded now I'd like to turn the call over to Greg Ketron Invesco as head of Investor Relations. Thank you you may begin.

Hey, Thanks, operator until all of you joining us today. In addition to the press release, we have provided a presentation that covers the topics. We plan to address 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.

Andrew Schlossberg, President and CEO , and Allison Dukes, Chief Financial Officer will present, our results. This morning, and then we'll open up the call for questions I'll now turn the call over to Andrew.

Thanks, Greg and good morning to everyone I'm pleased to be speaking with you today.

But before I begin my commentary on the quarter I did want to take a moment to acknowledge the humanitarian crisis in the middle East.

Saddened by the loss of life and devastation and the impact it's had on civilians across the region. We're focused on the safety and the wellbeing of our colleagues and their families and our thoughts are with everyone has been who has been impacted by the heartbreaking recent events.

But now turning to the topic of the third quarter earnings I'll start today's presentation on slide three.

Volatility and uncertainty.

To define global financial markets.

With interest rates rising and investors awaiting more clarity from central bankers. There was an extra extraordinary amount of cash that's been moved to the sidelines, where investors can earn acceptable returns while they await more certainty.

Slowing and narrowing industrial activity has been a near term challenge for our industry, but it also sets the course for an eventual reallocation and money moving back into higher risk based assets. Our results, which are highlighted on slide three in many ways reflect these dynamics however, our unique position.

With deep client relationships, a strong geographic mix and a broad suite of investment solutions helped us deliver positive net long term inflows in the third quarter.

One of the primary contributors to a relative net flows strength is our robust etfs and SMA platforms.

Our ETF business delivered record flows in the third quarter, which were concentrated in our leading factor based capabilities. It was one of the strongest ETF quarters, we've experienced as we continue to gain market share we captured nearly three times our industry share of net asset flows to our market share and.

And importantly over three times of our industry share on a revenue flow basis as well.

Additionally, we continue to enhance the commercialization of our SMA platform and are seeing strong momentum and flows particularly within fixed income.

Where we have posted 12 consecutive quarters of positive net flows despite the challenging market environment. Within these vehicles, we are well positioned to meet the increasing interest around personalization and tax optimization that we're seeing by wealth management clients in both the U S and around the world.

While areas of growth like Etfs, SMA and fixed income had been strong for us. This year, we continue to see flow pressure in active equities, while headwinds have persisted in this asset class industry wide. We are beginning to see marked improvement in invesco and particular in the global international and emerging market equity.

In aggregate our net outflows in these strategies are significantly lower than what we experienced in 2022 and have stabilized at around $1 billion in outflows each of the last two quarters, we continue to put considerable effort into further improving.

That's my quality product differentiation in client engagement in these capabilities to ensure we are well situated ahead of the eventual renewed demand in these important in higher fee, yielding asset classes, we're going to spend some time on the call today, highlighting how we're positioning the firm against shifting investor demand its impact on our ASP.

Mix net revenue and our net revenue yield and how we're organizing to meet the evolving client demand in both the near and the longer terms.

As we've outlined previously we are undertaking a multi quarter plan to simplify and streamline the organization to position the firm around rapidly evolving client demands.

Our aim is to operate with more agility improve our consistency of investment quality create a more seamless client experience and more efficiently leverage our size and our global scale to enable better outcomes for our clients and drive even greater profitability.

We have already made meaningful progress in these areas and we will continue to execute at pace in the coming quarters. Some of the key highlights on the evolved investment platform that we have achieved to date include the following we've established a unified globally integrated fixed income platform.

We're creating a single highly focused multi asset group from three distinct teams.

We're bringing together leadership across our fundamental active equity teams and we're further strengthening our private market platform that spans both real estate and private credit capabilities.

Ultimately all of these simplification efforts will enable us to more fully take advantage of the benefits of our state Street Alpha platform as a single global investment operation engine across asset classes.

Yeah.

On the product and distribution sides of our business. We've also made considerable progress in repositioning rose and efficiency.

We've combined our ETF SMA in model portfolios efforts into a single strategy and group.

Going forward, we believe that these capabilities will be the leading vehicles of choice for our clients. Our established infrastructure brand and innovation will enable us to continue to lead in big bring both active and passive capabilities to investors and an even more personalized and efficient way.

We're also continuing to prune our product line and we've reduced it by over 150 products in the past year.

Further by Globalizing, many aspects of our marketing and digital delivery, we're finding opportunities to leverage our scale and simplify our applications unify our data and use technology to strengthen these capabilities while lowering costs.

There are efficiencies to be gained from all of these simplification efforts, which we are beginning to realize and we will continue to do so over time. However, these efforts are much more are more about much more than just expense savings. We view. These as drivers of revenue acceleration, which will allow us to improve our investment quality reallocate our expenses.

And capital base, much more effectively and deliver sustainable profit growth and margin expansion at time.

Moving ahead to slide four.

As investors gain greater clarity on inflation and central Bank interest rate policy, we expect clients to move out of cash and extend their duration profiles of their fixed income allocations into a wider range of strategies.

Fixed income is a clear area of strength for Invesco and we're focused on ensuring we are well positioned to capture what we believe will be an outsized share of this reallocation as you can see on this slide are 500 billion dollar plus fixed income platform has strong investment performance requisite scale diversity across asset.

Classes and client geography, it spans public and private investments and it has a robust offering of both active and passive products.

The globally integrated institutional quality platform has been a consistently strong grower for invesco, having posted long term net flows over the previous 18 quarters and has very strong top tier investment returns across a wide range of fixed income capabilities a.

A few highlights to our highlights to note on our favorable position that are on the page include our global liquidity capabilities, which have grown AUM by over 150% over the past five years and we're now squarely in the top 10 of institutional money fund managers in the top five amongst nonbank on providers.

Our stable value capability is well placed in D. C platforms and ranked as a top manager in the U S institutional marketplace.

Municipal capabilities rank in the top five largest among mutual fund managers in the U S and number two and number two amongst high yield Muni fund managers within our investment grade capabilities. Our relative performance has been improving since the recent many banking crisis and our long term performance strength has helped us nearly double our.

AUM in the past five years.

More our global and emerging markets fixed income capabilities of stellar performance and are very well placed for growth in the U K European and Asian, institutional and retail markets and finally, we believe that significant opportunity exists for even greater expansion of our fixed income Etfs and bank loan capabilities, which are two notable.

Ranks of Invesco.

So against the backdrop, where clients are seeking to work with fewer asset managers that can meet the breadth of investment requirement fixed income is clearly an area of our business that is poised to continue to gain market share and drive even greater profitability as the eventual rotation beyond cash unfolds.

Finally, and before I turn the call over to Alison I wanted to take a moment to highlight on slide five another important piece of the Invesco investment thesis, our strategic relationship with massmutual.

Our engagement with Massmutual has many facets that create a meaningful mutually beneficial strategic relationship.

First mass mutual is one of our largest investors as both the common equity and preferred shareholder. So we're mutually aligned to delivering profitable growth and long term success against the backdrop of an evolving industry.

Mass mutual is also a significant investor over the past years and supporting many of our newly launched private market and the other key strategies with a total of $3 $5 billion of commitments.

Notably this is three to four times the multiple of seating on all of our own products on our own balance sheet mass mutual has significantly increased their commitments since the inception of our relationship and this is meaningfully bolstering our growth trajectory and our private markets business, both institutionally and in our wealth management channels, where <unk>.

Early access to capital is Paramount to setting the course for growth.

Finally, we work closely with mass mutual on behalf of their clients and we are pleased to be a third card Hardie manager of $9 billion billion of assets through their insurance and broker dealer channels, where we ranked as the largest sub advised and defined contribution investment only manager on the massmutual platform to summarize this is a powerful and important.

That relationship for Invesco with significant potential ahead, we continue to explore avenues with mass mutual to make this relationships even more meaningful in the future with that let me turn the call over to Alison for closer look at our results and I look forward to your questions.

Thank you Andrew and good morning, everyone I'll.

I'll begin on slide six with investment performance overall investment performance was solid in the third quarter was 67% to 65% of actively managed funds in the top half of peers are beating benchmark on a three year and a five year basis, respectively.

This is in line with that timeframe in the second quarter, we did see investment performance improved considerably on a one year basis going from 67% from second quarter to 70% in the third quarter reflective of the improved investment performance, we are seeing across several categories, including global and international equities and alternatives.

As Andrew noted with excellent performance in fixed income across nearly all capabilities and time horizons and important fact, given our strong conviction in our ability to attract flows as investors deploy money in to these strategies.

Turning to slide seven AUM was 1.49 trillion dollars at the end of the third corner $51 billion lower than last corner.

The quarter began with what appeared to be a continuation of a recovery in markets, albeit uneven and we saw in the second quarter. However that quickly shifted to a risk off posture again as the quarter progressed and uncertainty grill, marking another volatile quarter for markets worldwide.

Market decline, coupled with foreign exchange movements drove the decline in AUR.

Despite the market volatility, we did generate $2 $6 billion in net long term flows and we expect we will outperform peers in what has been a very difficult environment for organic asset growth.

Client demand for passive capabilities remain strong as we garner $13 $5 billion of net long term inflows during the quarter.

ETF inflows were $11 $8 million, marking one of our best quarters for Etfs.

Our S&P 500 equal weight Index fund at the corner of $3 $6 billion of net long term inflows.

This ETF is also our leading led driver year to date with our newer acute UQM drawing the second highest was in our ETF suite year to date.

The kids EQM was launched three years ago and has attracted $14 billion of AUM since inception, now, making it our fourth largest ETF.

We've demonstrated the ability to sustain growth in ETF throughout all market cycles with organic growth in 12 of the past 13 corners. We also saw solid growth in our index strategy the $2 $3 billion net long term flows for the quarter.

Offsetting some of the growth in passive with $10 $9 billion of net outflows in active strategies.

True meeting to the outflows with a single sizable redemption and our global targeted return strategy.

This strategy has been insignificant outflows for several years and now has less than $1 billion remaining in the fund in.

In September we announced plans to close a fund and focus on other capabilities within our multi asset franchise, where we are seeing stronger client demand.

Our global active equities, which includes the developing markets.

Were also drivers of net outflows in this corner a level of outflows from this investment offers moderated after significantly elevated redemptions in the second half of 2022.

Looking at flows by channel the retail channel generated $4 $3 billion of that long term plan, while the institutional channel had $1 $7 billion of net long term outflows.

This was driven by the global targeted returns redemption outside of this redemption, we would have had $800 million in institutional and flat for the quarter.

Moving to slide eight the flows by geography Asia Pacific delivered net long term inflows of $2 $8 billion due to growth in Japan, which offset outflows in greater China during the quarter.

In Japan, we experienced another quarter of strong growth with our Henley global equity and income fund garnering one $8 billion in net inflows from Japanese clients, making it the top selling retail fund or the industry in Japan on the corner to a quarterly and a year to date basis.

We are well positioned in Japanese Japanese markets are experiencing some of the most constructive conditions for risk on assets and many years, including favorable new regulations.

After resuming organic growth in the second quarter, our business in greater China experienced net long term outflows of $1 $9 billion for the quarter.

The outflows in our China, JV were $1 $7 billion.

Outflows were concentrated in active fixed income where continued weak market sentiment and interest rate tightening has led to a diminished growth across the industry. This year.

However, as China's economy recovers invesco is extremely well positioned to capture additional share in the world's fastest growing markets.

Turning to flows by asset class equities generated $7 $4 billion in net long term inflows, mainly driven by the strong growth in Etfs.

$2 4 billion in outflows in alternatives is largely driven by the previously mentioned single client global targeted returns for jumpshot.

Leading this redemption alternatives were in flight and Plaza a $100 million.

We have a good track record in our pilot markets platform. When we then alternatives and are well positioned to capture long term flows in this asset class as client demand shifts and the strategy.

Over $6 billion of dry powder to capitalize on opportunities emerging from the market dislocation of last several quarters.

Later market clarity will be required for this opportunity to meaningfully materialized.

Fixed income net long term flows turned modestly negative with $1.3 billion of net outflows with grades and investment grade estimates and global debt offset by the outflows experienced in China.

As Andrew outlined we like our position in this space and believe we are well positioned to capture flows as investors put more money to work in fixed income products.

We have the track record to support our conviction with 18 straight quarters of that in place prior to this quarter.

Yeah.

Moving to slide nine we provided additional insight into our portfolio and the trends driving our revenue profile.

Secular shifts in client demand across the asset management industry, coupled with more recent market dynamics.

Significantly altered our asset mix and the acquisition of Oppenheimer funds.

As you'll know ETF and index AUM and this excludes the keeps you too have ground from $171 million or 14% of our overall 1.2 trillion dollars and AUM.

In 2000 $19 million to $318 million or 21% of our nearly one and a half trillion dollars of AUM in the third quarter.

Also seen very strong growth in Asia Pacific driven primarily by our success in China.

During the same timeframe, we've seen weaker demand for fundamental equity driven in part by the risk off sentiment that was sparked an early 2022 coupled with the pressure we experienced in developing markets and global equity as well as the closure of our GTR capabilities.

Our fundamental equity portfolio in 2019 was 348 billion or 29% of our AUM.

At the end of the third quarter that portfolio was 242 billion or 16% of our U M.

Resulting revenue headwinds created by these dynamics has weighed on our results over the last two years, while we have experienced excellent organic growth and lower fee capabilities like Etfs and level liquidity. It was not enough to offset the revenue loss from higher fees fundamental equity outflows and market depreciation.

Our overall net revenue yield has declined significantly during this timeframe, but that decrease has been driven by the shift in our asset mix not degradation in the yields of our investment strategies.

Net revenue yields by investment strategy have been relatively stable within the ranges provided on the slide.

The other point I want to emphasize is that this multiyear secular shift in client preferences has been increasingly captured in our results.

Our portfolio is better diversified today than four years ago, and our concentration risk in higher fee fundamental equities have been reduced.

These dynamics are challenging to manage through as they occur should portend, well for future revenue trends and marginal profitability improvement independent of market improvement.

Further we now have a more diversified business mix, which better positions the firm to navigate various market cycle events and shifting client demand.

Turning to slide 10, net revenues of $1 1 billion in the third quarter was $12 million lower than the third quarter of 2022, and $7 million or 1% higher than the second quarter.

Decline from the third quarter of last year was due largely to the shift in our asset mix that.

Operator: Welcome to Invesco's 13-Earnings Conference call. All participants will be in a listening mode into the question and answer session. At that time, to ask a question, press star one.

That was just discussed.

Total adjusted operating expenses on the third quarter were $789 million $48 million higher than the third quarter of 2022 and unchanged from the prior quarter.

Operator: This call will last one hour. To allow more participants to ask questions, one question, and a follow-up can be submitted per participant. As reminded, today's call is being recorded.

Included in our third quarter operating expenses were $39 million of compensation expenses related to the organizational changes, we are making to position the firm for greater scale and profitability as we grow our revenue base.

Greg Ketron: Now, like to turn the call over to Greg Ketron, Invesco's head of investor relations. Thank you. You may begin. Thanks, operator, until I'll be joining us today. In addition to the press release, we have provided a presentation that covers the topics we plan to address. The press release and presentation are available on our website, Invesco.com. This information can be found by going to the investor relations section of the website. Our presentation today will include four looking statements and certain on gap 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 reconciliation to gap.

In the second quarter, we had $27 million of compensation expenses related mainly to executive retirements.

Our full benefits from our simplification efforts will be seen over time, as we generate revenue growth and margin recovery.

At this point, we have identified $50 million of annual run rate expense savings that will be realized by the beginning of 2020 for the restructuring costs associated with these efforts were $39 million in the third quarter as we accelerated several of the reorganization activities that we were undertaking into the quarter.

Next quarter, the fourth quarter, we expect an incremental $15 million to $20 million of expense associated with these efforts, bringing the total expense associated with the efforts to $55 million to $60 million.

Greg Ketron: Finally, Invesco is net responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts, run by third parties, the early authorized webcasts are located on our website.

As we've discussed we manage variable compensation to a full year outcome in line with company performance and competitive industry practices.

Andrew Schlossberg: Andrews Lossberg, president and CEO and Allison Dukes chief financial officer will present our results this morning, and then we'll open up to call for questions. I'll now turn a call over to Andrew. Thanks, Greg. Good morning to everyone. I'm pleased to be speaking with you today, but before I begin my commentary on the quarter, I did want to take a moment to acknowledge the humanitarian crisis in the Middle East. We are deeply saddened by the loss of life and devastation and the impact is had on civilians across the region.

Historically, our compensation to net revenue ratio has been in the 38% to 42% range trending towards the upper end of that range in periods of revenue decline.

Andrew Schlossberg: Good morning to everyone. I'm pleased to be speaking with you today, but before I begin my commentary on the quarter, I did want to take a moment to acknowledge the humanitarian crisis in the Middle East. We are deeply saddened by the loss of life and devastation and the impact is had on civilians across the region. We're focused on the safety and the well-being of our colleagues and their families and our thoughts with everyone has been who has been impacted by the heartbreaking recent events.

At current rates at current AUM levels, we would expect the ratio to be slightly above the high end of the range for 2023, when excluding the costs pertaining to executive retirements and other organizational changes.

Andrew Schlossberg: We're focused on the safety and the well-being of our colleagues and their families and our thoughts with everyone has been who has been impacted by the heartbreaking recent events. But now, turning to the topic of the third quarter earnings of today's presentation on slide three, volatility and uncertainty continue to define global financial markets with interest rates rising and investors awaiting more clarity from central bankers. There's an extraordinary amount of cash that's been moved to the sidelines where investors can earn acceptable returns while they await more certainty.

Marketing expenses of $27 million or $6 million lower than the prior quarter and $3 million lower than the third quarter of last year as we continue to tightly manage discretionary spend given the ongoing challenging revenue environment.

Andrew Schlossberg: But now, turning to the topic of the third quarter earnings of today's presentation on slide three, volatility and uncertainty continue to define global financial markets with interest rates rising and investors awaiting more clarity from central bankers. There's an extraordinary amount of cash that's been moved to the sidelines where investors can earn acceptable returns while they await more certainty. The slowing and narrowing investor activity has been a near-term challenge for our industry, but it also sets the course for an eventual reallocation and money moving back into higher risk-based assets.

Property office and technology expenses were relatively unchanged as compared to last quarter and the third quarter of last year.

Another area in which we are diligently diligently managing expenses is G N N G.

G&A expenses of 108 million in the quarter were down $6 million from the prior quarter.

<unk> to the third quarter last year G&A expenses increased $2 million. However, the third quarter of this year includes $8 million in spending on our alpha platform, which prior to the second quarter of this year was included in transaction integration and restructuring expenses.

Andrew Schlossberg: The slowing and narrowing investor activity has been a near-term challenge for our industry, but it also sets the course for an eventual reallocation and money moving back into higher risk-based assets. Our results which are highlighted on slide three in many ways reflect these dynamics. However, our unique positioning with deep client relationships, a strong geographic mix and a broad suite of investment solutions helped us deliver positive net long-term inflows in the third quarter.

We expect quarterly average spending on our alpha platform to remain near this level for the next few quarters.

Andrew Schlossberg: Our results which are highlighted on slide three in many ways reflect these dynamics. However, our unique positioning with deep client relationships, a strong geographic mix and a broad suite of investment solutions helped us deliver positive net long-term inflows in the third quarter. One of the primary contributors to our relative net flow strength is our robust ETF and SMA platforms. Our ETF business delivered record flows in the third quarter which were concentrated on our leading factor-based capabilities.

Moving to slide 11, adjusted operating income was $309 million in the third quarter, which included the costs related to organizational changes.

Adjusted operating margin was 28, 2% for the third quarter, excluding the costs related to the organizational changes third quarter operating margin would've been 350 basis points higher.

Andrew Schlossberg: One of the primary contributors to our relative net flow strength is our robust ETF and SMA platforms. Our ETF business delivered record flows in the third quarter which were concentrated on our leading factor-based capabilities. It was one of the strongest ETF quarters we have experienced as we continue to gain market share. We captured nearly three times our industry share of net asset flows to our market share of AUM and importantly over three times of our industry share on a revenue flow basis as well.

Earnings per share was 35 cents in the third quarter, excluding the expenses related to the org changes third quarter earnings per share would have been seven points higher.

Andrew Schlossberg: It was one of the strongest ETF quarters we have experienced as we continue to gain market share. We captured nearly three times our industry share of net asset flows to our market share of AUM and importantly over three times of our industry share on a revenue flow basis as well. Additionally, we continue to enhance the commercialization of our SMA platform and are seeing strong momentum in flows particularly within fixed income where we have posted 12 consecutive quarters of positive net flows despite the challenging market environment.

The effective tax rate was 23, 6% in the third quarter, we estimate our non-GAAP effective tax rate to be between 23 and 25% for the fourth quarter of 2023.

Actual effective rate can vary due to the impact of nonrecurring items on pre tax income and discreet tax items.

Andrew Schlossberg: Additionally, we continue to enhance the commercialization of our SMA platform and are seeing strong momentum in flows particularly within fixed income where we have posted 12 consecutive quarters of positive net flows despite the challenging market environment. Within these vehicles we are well positioned to meet the increasing interest around personalization and tax optimization that we're seeing by wealth management clients in both the US and around the world. While areas of growth like ETS, SMAs, and fixed income have been strong for us this year, we continue to see flow pressure and active equities.

I'll finish up on slide slide 12.

Stated priority, where I'm pleased to say that we've made significant progress in building balance sheet strength.

This quarter, our cash balance exceeded $1 2 billion.

We've lowered our net debt significantly and it now stands at less than $250 million.

Andrew Schlossberg: Within these vehicles we are well positioned to meet the increasing interest around personalization and tax optimization that we're seeing by wealth management clients in both the US and around the world. While areas of growth like ETS, SMAs, and fixed income have been strong for us this year, we continue to see flow pressure and active equities. While headwinds have persisted in this aspect class industry wide, we are beginning to see market improvement in Invesco in particular in the global international and emerging market equity segments.

I'm pleased with the improvement we've made on the balance sheet as we continue to work to bring net debt excluding the preferred shares down to zero by the second half of next year.

Our leverage ratio as defined under our credit facility agreement with <unk> seven times at the end of the third quarter, we have an opportunity to further address outstanding job with the maturity of the $600 million in senior notes at the end of this January .

Andrew Schlossberg: While headwinds have persisted in this aspect class industry wide, we are beginning to see market improvement in Invesco in particular in the global international and emerging market equity segments. In aggregate, our net outflows and these strategies are significantly lower than what we experienced in 2022 and have stabilized at around $1 billion in outflows each of the last two quarters. We continue to put considerable effort into further improving investment quality, product differentiation, and client engagement in these capabilities to ensure we are well situated ahead of the eventual renewed demand in these important and higher fee yielding aspect classes.

We ended the third quarter with zero drawn on the credit facility.

To conclude the resiliency of our firm's net flow performance in a difficult environment for organic growth is evident again this quarter and I'm pleased with the progress, we're making to simplify the organization and build a stronger balance sheet, while continuing to invest in key capability areas.

Andrew Schlossberg: In aggregate, our net outflows and these strategies are significantly lower than what we experienced in 2022 and have stabilized at around $1 billion in outflows each of the last two quarters. We continue to put considerable effort into further improving investment quality, product differentiation, and client engagement in these capabilities to ensure we are well situated ahead of the eventual renewed demand in these important and higher fee yielding aspect classes. We are going to spend some time on the call today highlighting how we are positioning the firm against shifting investor demand, its impact on our asset mix, net revenue and our net revenue yield, and how we are organizing to meet the evolving client demand in both the near and the longer terms.

We're committed to driving profitable growth and a high level of financial performance, we have the right strategic positioning to do just that.

And with that I'll ask the operator to go ahead and open it up to Q&A.

Thank you at this time, if you'd like to ask a question. Please press star one you will be announced prior to asking your question. Please pickup your handset when asking your question to withdraw your request. Please press star two.

Andrew Schlossberg: We are going to spend some time on the call today highlighting how we are positioning the firm against shifting investor demand, its impact on our asset mix, net revenue and our net revenue yield, and how we are organizing to meet the evolving client demand in both the near and the longer terms. As we have outlined previously, we are undertaking a multi-quarter plan to simplify and streamline the organization to position the firm around rapidly evolving client demands.

Andrew Schlossberg: As we have outlined previously, we are undertaking a multi-quarter plan to simplify and streamline the organization to position the firm around rapidly evolving client demands. Our aim is to operate with more agility, improve our consistency of investment quality, create a more seamless client experience, and more efficiently leverage our size and our global scale to enable better outcomes for clients and drive even greater profitability. We have already made meaningful progress in these areas and we will continue to execute a pace in the coming quarters.

One moment for our first question.

Okay and our first question comes from Glenn Schorr with Evercore. Your line is open.

Hi, Thanks very much.

So I appreciate all the commentary you made around fixed income I'm still.

Andrew Schlossberg: Our aim is to operate with more agility, improve our consistency of investment quality, create a more seamless client experience, and more efficiently leverage our size and our global scale to enable better outcomes for clients and drive even greater profitability. We have already made meaningful progress in these areas and we will continue to execute a pace in the coming quarters. Some of the key highlights on the evolved investment platform that we have achieved to date include the following.

I guess, a little surprise for everybody that flows haven't been stronger could you talk about what signposts. You think clients are looking for is it literally just the end of rate hikes and economic outlook.

And are you seeing that in dialogue with and solutions.

Through Rfps things like that.

And then maybe just the same comment on.

Andrew Schlossberg: Some of the key highlights on the evolved investment platform that we have achieved to date include the following. We've established a unified, globally integrated, fixed income platform. We're creating a single highly focused multi asset group from three distinct teams. We're bringing together leadership across our fundamental active equity teams, and we're further strengthening our private market platform that span both real estate and private credit capabilities. Notably, all of these simplification efforts will enable us to more fully take advantage of the benefits of our state street alpha platform as a single global investment operation engine across that classes.

With your words extraordinary amount of cash sitting on the sidelines, how called money market or money markets were an outflow. Thanks a lot.

Andrew Schlossberg: We've established a unified, globally integrated, fixed income platform. We're creating a single highly focused multi asset group from three distinct teams. We're bringing together leadership across our fundamental active equity teams, and we're further strengthening our private market platform that span both real estate and private credit capabilities. Notably, all of these simplification efforts will enable us to more fully take advantage of the benefits of our state street alpha platform as a single global investment operation engine across that classes.

Hey, Glenn Thanks, It's Andrew start and Allison will chip in as well.

The castle, the sideline a bit but whether it's from wealth managers are from institutions.

Something like 25% to 35% of portfolios or are allocated to the best we can tell from lots of conversations with clients and I think it's exactly what you described are waiting for clarity.

Clarity from Central banks are waiting for a reason to move off the sidelines and get paid to do so conversations have been very active.

Andrew Schlossberg: On the product and distribution side of our business, we've also made considerable progress in repositioning growth and efficiency. We've combined our ETF SMA and model portfolios efforts into a single strategy and group. Going forward, we believe that these capabilities will be the leading vehicles of choice for our clients. Our established infrastructure, brand and innovation will enable us to continue to lead and bring both active and passive capabilities to investors in an even more personalized and efficient way.

You know whether it's through our solutions efforts are just through direct conversations.

And you know, it's a I think it's really those things and that's straightforward and simple on the money market side I also want to why don't you pick up good morning, Glenn what I would say that our money market portfolio is at about 85% of our portfolio is positioned with an institutional client base so think about.

That is being managed by corporate treasurers and that those funds are going to stay in safer at that so I think what we saw in this quarter was a repositioning into treasuries just given the opportunity that those presented and just the yield that I. Just tried heroes are seeking and that will also in many respects prevents you know that those funds from being deployed into more risk on.

Andrew Schlossberg: We're also continuing to prune our product line and we've reduced it by over 150 products in the past year. Further, by globalizing many aspects of our marketing and digital delivery, we're finding opportunities to leverage our scale, simplify our applications, unify our data, and use technology to strengthen these capabilities while lowering costs. There are efficiencies to be gained from all of these simplification efforts which we are beginning to realize and we will continue to do so over time.

Strategies like equity so the.

The composition of our money market client base I think is important as you think about it being 85% institutionally owned.

I appreciate one just quick follow up is that yeah. As you noted that the fee rate on fixed incomes, obviously lower than the overall.

Andrew Schlossberg: However, these efforts are much more about much more than just expense savings. We view these as drivers of revenue acceleration, which will allow us to improve our investment quality, reallocate our expenses and capital-based much more effectively, and deliver sustainable profit growth and margin expansion at times. Moving ahead to slide four. As investors gain greater clarity on inflation and central bank interest rate policy, we expect clients to move out of cash and extend their duration profiles of their fixed income allocations into a wider range of strategies.

But I would imagine there are some pretty high incremental margins.

If flows do happen in the way you think into fixed income as people start extending duration, how should we think about that interplay between fee rates and margins kind of like the same conversation we've had for years. Thanks.

Now that your assumption is correct and that you've got a you know relatively.

Fixed cost base underpinning that our fixed income portfolio that you should think about flows into fixed income as being accretive to the overall firm operating margin.

Andrew Schlossberg: Fixed income is a clear area of strength for Invesco and we're focused on ensuring we are well positioned to capture what we believe will be an outside share of this reallocation. As you can see on this slide, our $500 billion plus fixed income platform has strong investment performance, requisite scale, diversity across asset classes and clients' geography, it spans public and private investments, and it has a robust offering of both active and passive products.

So and I think that's well that's a lot of what we want to draw out and providing some of this additional color is at where we are seeking to grow through scale and where that will be accretive to margins over all fixed income is certainly an area where that is true and Glenn. We you have some of the things we talked about last quarter and this quarter. We further brought together elements.

Disparate elements of our fixed income platform.

And we wanted to call up a scale in that platform for for just the reasons Alison described.

Andrew Schlossberg: The globally integrated institutional quality platform has been a consistently strong grower for Invesco, having posted long-term net flows over the previous 18 quarters and has very strong top tier investment returns across a wide range of fixed income capabilities. A few highlights to note on our favorable position that are on the page include our global liquidity capabilities, which have grown AUM by over 150 percent over the past five years, and we're now squarely in the top 10 of institutional money fund managers and the top five amongst non-bank owned providers.

Yeah.

Thank you.

Okay.

Thank you and our next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Thanks, and good morning, everyone.

So maybe just starting where you left off with with 25% of portfolio sitting in cash and waiting for rates to stop going higher.

Which bond verticals are you the most positive on in 2024.

And also do you think active fixed income can garner a significant share or do you expect most of the flows to come from passive which should also benefit through through the ETF platform.

Andrew Schlossberg: Our stable value capability is well placed in DC platforms and ranks with the top manager in the US institutional marketplace. Our municipal capabilities rank in the top five largest among mutual fund managers in the US and number two among high yield union fund managers. Within our investment grade capabilities, our relative performance has been improving since the recent banking crisis and our long-term performance strength has helped us nearly double our AUM in the past five years.

Yeah, Hi, it's Andrew just maybe I'll pick up on the second part first.

We think it will come in both active and passive and as you said the diverse range that we Havent Bose.

In some ways, we're a bit indifferent, but the conversations are happening on both sides of the equation.

In terms of areas that are particularly a focus and things that we're having conversations about it we're well positioned.

The municipal portfolio.

Whether that's investment grade or high yield the performance is stellar.

Andrew Schlossberg: Furthermore, our global and emerging market-specting income capabilities have stellar performance and are very well placed for growth in the UK, European, and Asian institutional and retail markets. And finally, we believe that significant opportunity exists for even greater expansion of our fixed income ETF and bank loan capabilities, which are two notable strengths of Invesco. So against the backdrop, our clients are seeking to work with few or half of managers to meet the breadth of investment requirements. Fixed income is clearly an area of our business that is poised to continue to gain market share and drive even greater profitability as the eventual rotation beyond cash unfolds.

The funds are highly rated they're well known and that's probably the first port of call. We would we would point to on the investment grade side, you know European corporate bonds that had been of interest and had been an area, where we're positioned well and then really just anything across as people move a little further on the <unk>.

Curve, even elements of our short term fixed income portfolio.

It's pretty wide, ranging but I'd I'd sort of point out those areas in particular are especially because we're just well you know, we're well placed there to take share.

Andrew Schlossberg: Finally, and before I turn the call over to Allison, I want to take a moment to highlight on slide five another important piece of the Invesco investment thesis, our strategic relationship with Mass Mutual. Our engagement movement with Mass Mutual has many facets that create a meaningful mutually beneficial strategic relationship. First, Mass Mutual is one of our largest investors as both a common equity and preferred shareholder, so we're mutually aligned to delivering profitable growth and long-term success against the backdrop of an evolving industry.

Thank you Andrew and just for my follow up on our Invesco, great wall in China.

Flows are negative in the <unk> I just wanted your perspective on if you thought they would snap back on a near term basis or if you think we'd go through a longer.

Term time period here, where you'd see net outflows from China.

Good morning, Craig I'll start I, you know I think the most important.

Component of the flows and I G. W was really that it was driven by fixed income and I think we're just seeing what the interest rate tightening that's happening inside of China, a diminished appetite for fixed income. The overall and we are we actually saw inflows am and in equity.

Andrew Schlossberg: Mass Mutual is also a significant investor over the past years in supporting many of our newly launched private market and other key strategies with a total of three and a half billion dollars of commitments. Notably, this is three to four times the multiple of seeding of our own products on our own balance. Bonshi. Mass mutual has significantly increased their commitment since the inception of our relationship, and this is meaningfully bolstering our growth trajectory in our private markets business, both institutionally and in our wealth management channels, where early access to capital is paramount to setting the course for growth.

Over the quarter. So we do think.

It's hard to gauge exactly the timing as to when economic sentiment will recover there and you know I think we're confident the government is doing quite a bit to try to stimulate.

Some stabilization there and improvement in the sentiment overall are hard to say exactly which quarter that will be and when things will snap back and we do we are very confident that we're very well positioned when that does occur.

Andrew Schlossberg: Finally, we work closely with mass mutual on behalf of their clients, and we are pleased to be a third-party manager of 9 billion of assets through their insurance and broker-dealer channels. Where we rank as the largest sub-advised and defined contribution investment-only manager on the mass mutual platform. To summarize, this is a powerful and important relationship for Invesco with significant potential ahead, we continue to explore avenues with mass mutual to make this relationship even more meaningful in the future.

Thank you Allison.

Thank you and our next question comes from Daniel Fannon with Jefferies. Your line is open.

Hi, Thanks, good morning.

On expenses first a clarification I believe.

And you mentioned that the savings from some of the charges won't begin until next year. So curious as to why you're not seeing some of the savings here in four Q and.

Then you know Theres a lot of.

Changes or kind of streamlining I think that was talked about could you maybe summarize like what you see as the most impactful in some of these changes that you got you got you.

Allison Dukes: With that, let me turn the call over to Allison for a closer look at our results, and I look forward to your questions. Thank you, Andrew, and good morning, everyone. I'll begin on slide six with investment performance. Overall, our investment performance was solid in the third quarter, with 67% and 65% of actively managed funds in the top half of peers or beating benchmark on both a three-year and a five-year basis respectively.

Great.

Sure Good morning, Dan.

So unexpected let me clarify that we expect that that $50 million will be fully realized by the first half of 'twenty 'twenty four.

And so that I expect we will actually start to see some of those savings materialize here in the fourth quarter.

I'm expecting somewhere around like $10 million improvement in compensation expense in the fourth quarter, and so that run rate down to almost probably $40 million. So I actually think it.

Allison Dukes: This is in line with the timeframes in the second quarter. We did see investment performance improved considerably on a one-year basis, going from 67% in the second quarter to 70% in the third quarter, reflective of the improved investment performance we were seeing across several categories, including global and international equities and alternatives. As Andrew stated, we've excellent performance and fixed incomes across nearly all capabilities and time horizons, an important fact given our strong conviction and our ability to attract flows as investors deploy money into these strategies.

Well start to see the majority of those day doesn't materialize in the fourth quarter and then continue into next year that of course is all things being equal independent of where market scale with variable compensation.

Part of the increase and the severance and reorganization all expenses in the third quarter is because we did pull forward some of those savings. So we would start to realize the benefits of them in the fourth quarter.

Allison Dukes: Turning to slide seven, AUM was $1.49 trillion at the end of the third quarter, $51 billion lower than last quarter. The quarter began with what appeared to be a continuation of a recovery in markets, albeit uneven, that we saw in the second quarter. However, that quickly shifted to a risk-off posture again as the quarter progressed and uncertainty grew, marking another volatile quarter for markets worldwide. Market to clients, coupled with foreign exchange movements, drove the decline in AUM.

And so again I know there were some expectations because we provide is an expectation that severance expense would be closer to $20 million in the third quarter. It was $39 million as we seek to pull forward some of those savings.

Where do we expect to see them honestly, it's quite broad based as we are looking at just making thoughtful streamlining decisions across our entire organization atmos everywhere from the areas of operations too.

Streamlining some of our investment teams as Andrew noted in his remarks.

Allison Dukes: Despite the market volatility, we did generate $2.6 billion in net long-term flows and we expect we will outperform peers in what has been a very difficult environment for organic asset growth. Client demand for passive capabilities remained strong as we garnered $13.5 billion of net long-term in flows during the quarter. ETF in flows were $11.8 billion, marking one of our best quarters for ETFs. Our S&P 500 equal weight index fund led the quarter with $3.6 billion of net long-term in flows.

To just pockets of simplification, where we can globalize some of our teams and seek to do things one way across the globe instead of multiple ways and I couldn't point to any one particular area I will tell you. The majority of the savings you will see are in compensation expense and that is of course, excluding any.

Allison Dukes: This ETF is also our leading flow driver year-to-date with our newer QQQM drawing the second highest flows in our ETF sweet year-to-date. QQQM was launched three years ago and has attracted $14 billion of AUM since inception, now making it our fourth largest ETF. We demonstrated the ability to sustain growth in ETFs throughout the full market cycle, with organic growth in 12 of the past 13 quarters. We also saw solid growth in our index strategy with $2.3 billion in net long-term flows for the quarter.

First quarter seasonality that you see in payroll taxes and alike.

Thank you that's helpful and then just one.

On the institutional outlook you know the overall pipeline I think the numbers.

You didn't disclose you talked about the slides is 35% still solutions, which has been in the range. It's been so maybe just some context around.

The institutional activities and see it.

And building into the fourth quarter would obviously into next year.

Sure. The institutional pipeline are the won not funded pipeline. So the same as we typically provide some color to it was about $20 million in the third quarter, so a little bit lower than the prior corner, although the fee rate was a little bit better the competition pretty consistent and so it it still looks pretty good.

Allison Dukes: Offsetting some of the growth and passive was $10.9 billion of net outflows and active strategies contributing to the outflows was a single sizeable redemption and our global targeted return strategy. This strategy has been in significant outflows for several years and now has less than $1 billion remaining in the fund. Our global active equities, which includes the developing market funds, were also drivers of net outflows in this quarter. The level of outflows from this investment class has moderated after significantly elevated redemption and the second half of 2022.

I would say if I look at our inflows excluding the G. T are very sizable redemption that we pointed to you if I look at our gross inflows in the quarter. It was about $17 $5 billion in gross inflows from the institutional channel and that was about about 43% of that was from our pipeline. So our pipeline continues to be healthy strong.

It doesn't really reflect a full breadth of the activity in the institutional channel.

But it's certainly a good health measure and.

It's kind of consistent in that $20 billion to $30 billion range.

Great. Thank you.

Thank you and our next question comes from Ken Worthington with JP Morgan Your line is open.

Allison Dukes: Looking at floods by channel, the retail channel generated $4.3 billion of net long-term inflows while the institutional channel had $1.7 billion of net long-term outflows. This was driven by the global target of returns redemption. Outside of this redemption, we would have had $800 million in institutional inflows for the quarter. Moving to slide 8 and closed by geography, Asia Pacific delivered net long-term inflows of $2.8 billion due to growth in Japan, which offset outflows and greater China during the quarter.

Hi.

Good morning, and thanks for taking the question to follow up on the pipeline question. What was the backlog for alternatives if solutions increased to 35% I guess, what what sort of shrunk relative to look for in the pipeline and where this alternative stand and.

I'll just start there thank you.

Good morning.

What shrunk would've been equities alternatives actually held pretty consistent to the prior quarter and I think we mentioned, we've got about $6 billion in dry powder and that's been pretty consistent and so it's actually been one of the challenges is its been difficult to deploy just because the transaction activity, particularly in private.

Allison Dukes: In Japan, we experienced another quarter of strong growth with our Henley Global Equity and Income Fund garnering $1.8 billion in net inflows from Japanese clients, making it the top selling retail fund for the industry in Japan on both a quarterly and a year-to-day basis. We are well positioned in Japanese markets or experiencing some of the most constructive conditions for risk on assets in many years, including favorable new regulations. After resuming organic growth in the second quarter, our business and greater China experienced net long-term outflows of $1.9 billion for the quarter.

Real estate is relatively low just given some of the financing dynamics that are going on and but what we saw was a little bit of a diminishment in the pipeline for equities overall.

Okay, Great and then in private markets, so on the $6 billion of dry powder.

Allison Dukes: The outflows in our China JV were $1.7 billion. Outflows were concentrated and active fixed income, where continued weak market sentiment and interest rate tightening has led to diminished growth across the industry this year. However, China's economy recovers and Vesco is extremely well positioned to capture additional share in the world's fastest growing market. Turning to flows by asset class, equities generated $7.4 billion and net long-term inflows mainly driven by the strong growth in ETF.

Where what what represents the bulk of that dry powder is at real estate as a credit is sort of split between the two and are there any big funds in private markets that you expect to come to market in the next 12 months or so.

And the bulk of the $6 billion are would be more real estate oriented than it would be private credit. We've got at several things that are we are working on I would say in terms of what we're trying to bring to market in both the real estate space and the private credit space as we loved to capture some of the opportunities there.

Allison Dukes: The $2.4 billion in outflows and alternatives was largely driven by the previously mentioned single-client global targeted returns redemption. Excluding this redemption, alternatives were in slight inflows of $100 million. We have a good track record in our private markets platform within alternatives and are well positioned to capture long-term flows in this asset class as client demands shift to these strategies. We have over $6 billion of dry powder to capitalize on opportunities emerging from the market dislocation of the last several quarters.

We're out there right now and particularly from an opportunistic standpoint, just try standpoint, yeah in Kent in particular real estate debt for both institutions, but but mostly in the wealth management channels is probably the area, where we're seeing the greatest amount of demand and we're in market with strategies there.

And then as Alison said on the private credit side, you know just just traditional direct lending both in Europe and the U S.

Great. Thank you very much.

Allison Dukes: The greater market clarity will be required for this opportunity to meaningfully materialize. Fixed income net long-term flows turned modically negative with $1.3 billion of net outflows with growth in investment grade, SMAs and global debt, offset body outflows, experience, and China. An Andrew outlined, we like our position in this space and believe we are well positioned to capture flows as investors put more money to work and fix income products. We have the track record to support our conviction with 18 straight quarters of net inflows prior to this quarter.

Yeah.

Thank you. The next question comes from Brennan Hawken with UBS. Your line is open.

Hi, good morning, Thanks for taking my questions I wanted to start on fee rate. So so the actual investment advisory fear. It doesn't have a lot of pressure, but distribution you know offset you know kind of allowed that net revenue yields to be only down modestly. So was there any noise in that net distribution line or is it.

That the right way to think about that going forward.

I'll take that good morning, Brent on them you know the net distribution line. It tends to in that third party line. It runs about 41% to 42% of management fees on an annual basis and I think last year was about 41, 5%.

Allison Dukes: Moving to slide 9, we've provided additional insight into our portfolio and the trends driving our revenue profile. Secular shifts in client-demand across the asset management industry, coupled with more recent market dynamics, have significantly altered our asset mix since the acquisition of Oppenheimer funds. As you'll know, ETF and index AUM, and this excludes the QQ, have grown from $171 billion and $14% of our overall $1.2 trillion AUM in 2019 to $318 billion or 21% of our nearly $1.5 trillion AUM in the third quarter.

Year to date, it's been about 42% third quarter was a touch lower though so I mean, there's just a noise and it fluctuates quarter to quarter, but I would say in line, it's pretty in line with history right now.

So are you are you, saying that we should look at it more on a year to date basis than this quarter specific.

I would absolutely I would think about it in that 41% to 42% range and this quarter kind of brings that 42% starts to bring it down a bit I would look at it in that range. That's how we think about it it's hard to manage to it quarter to quarter.

Allison Dukes: We've also seen very strong growth in Asia-Pacific driven primarily by our success in China. During this same timeframe, we've seen weaker demand for fundamental equities driven in part by the risk off sentiment that was sparked in early 2022, coupled with the pressure we experienced in developing markets and global equities, as well as the closure of our GGR capabilities. Our fundamental equity portfolio in 2019 was $348 billion or 29% of our AUM.

Excellent. That's that's that's great and then not that I wanted to give Greg more work, but it definitely it would be great to see like few radar like revenue by asset class along with the flow disclosure it might help to given particularly given the dynamics at play for your business just a recommendation.

On for my follow up you.

Allison Dukes: At the end of the third quarter, that portfolio was $242 billion or 16% of our AUM. The result that revenue headwinds created by these dynamics has weighed on our results over the last two years. While we have experienced excellent organic growth and lower fee capabilities like ETFs and local liquidity, it was not enough to offset the revenue loss from higher fees, fundamental equity outflow, and market depreciation. Our overall net revenue yield has declined significantly during this timeframe, but that decrease has been driven by the shift in our asset mix, not degradation in the yields of our investment strategies.

You mentioned that there was a big loss of a single account with G. T. R was was the fee rate given that that was a single large investor a was that fee rate sort of below the average for your oldest business for the firm broadly I'm just given the size.

Yep. Thanks Brennan, Okay first time unemployment to page nine cause Greg did do the extra work and we've got some of the fee rates disclosed an from an AUM standpoint, there to try to provide exactly that and give a little bit more color.

And then on GTR, no that'd be right that capability with price significantly above the firm average and so that has been as you think about some of the challenges on the Remixing and some of what we were trying to draw out on slide nine GTR would've been one of the challenges we've been experiencing along with the pressure from developing markets in global equities those would've all had fee rates.

Net revenue yields by investment strategy have been relatively stable within the ranges provided on the slide. The other point I want to emphasize is that this multi-year secular shift in client preferences has been increasingly captured in our results. Our portfolio is better diversified today than four years ago and our concentration risk and higher fee fundamental equities have been reduced. These dynamics, though challenging to manage through as they occur, should pretend well for future revenue trends and marginal profitability improvement, independent of market improvement.

Allison Dukes: Net revenue yields by investment strategy have been relatively stable within the ranges provided on the slide. The other point I want to emphasize is that this multi-year secular shift in client preferences has been increasingly captured in our results. Our portfolio is better diversified today than four years ago and our concentration risk and higher fee fundamental equities have been reduced. These dynamics, though challenging to manage through as they occur, should pretend well for future revenue trends and marginal profitability improvement, independent of market improvement.

You know quite north of the firm average consistent with what you would see in that fundamental equities fee rate range on slide nine.

Yeah, Okay, great and thanks for pointing out that on page on slide nine of course, I I just more men in a way that we could actually embed within the financial models right. So we could have it in greater detail, but does this slide nine tie to the AUM disclosures that you guys have in your pressure.

Allison Dukes: Further, we now have a more diversified business mix, which better positions the firm to navigate various market cycles, events, and shifting client demand. Turning to slide 10, net revenues of 1.1 billion in the third quarter was $12 million lower than the third quarter of 2022, and $7 million or 1% higher than the second quarter. The decline from the third quarter of last year was due largely to the shift in our asset mix that was just obsessed.

Not exactly and I think that's part of the challenge and we hear you on that one and I know that is a desire that you have expressed and we will continue to work through our data in a way that app, we can make it as digestible as possible. Although I do think this gives you quite a bit of color as to what's been going on over the last four years and a lot of the Chi.

<unk> and the results that we've experienced being increasingly captured sure.

Allison Dukes: Total adjusted operating expenses in the third quarter were $789 million, $48 million higher than the third quarter of 2022, and unchanged from the prior quarter. Included in our third quarter operating expenses were $39 million of compensation expenses related to the organizational changes we are making to position the firm for greater scale and profitability as we grow our revenue base. In the second quarter, we had $27 million of compensation expenses related mainly to executive The full benefits from our simplification efforts will be seen over time as we generate revenue growth and margin recovery.

Of course, sorry to be a pain in the Bud. Thank you.

Got it all right.

[laughter].

Thank you. The next question comes from Michael Cyprus with Morgan Stanley . Your line is open.

Great. Good morning, Thanks for taking the question just one on regulation Basel III end game rules for the banks are slated to potentially raise capital requirements. It's just curious how you see that trickling down to the asset management industry and your business, whether it's availability and cost of warehousing use bespoke derivatives accessing leverage.

It's just what areas you think might be impacted.

Allison Dukes: To this point, we have identified $50 million of annual run rate expense savings that will be realized by the beginning of 2024. The restructuring costs associated with these efforts were $39 million in the third quarter, as we accelerated several of the reorganization activities that we were undertaking into the quarter. Next quarter, the fourth quarter, we expect an incremental $15 to $20 million of expense associated with these efforts, bringing the total expense associated with the efforts to $55 to $60 million.

From the new capital rules, and then can you speak to the opportunity set just in terms of where you guys might be a beneficiary, where you might be able to press to innovate to create new products to be able to take some share from the banking system.

Hi, Good morning, I'll take that one I you know I would say honestly the Basel III capital requirements have little to no impact on us at all there's very little that we do that has any empathy has any.

Any relationship to the areas that are impacted by Basel III. So.

Allison Dukes: As we've discussed, we manage variable compensation to a full-year outcome in line with company performance and competitive industry practices. Historically, our compensation to net revenue ratio has been in the 38 to 42 percent range, trending towards the upper end of that range in periods of revenue decline. At current AUM level, we would expect the ratio to be slightly above the high end of the range for 2023, what exclating the cost pertaining to executive retirement and other organizational changes.

I would say in terms of where might we have some opportunities. We can take advantage of certainly we're all seeing the opportunity to continue to think about capturing some private credit share as we continue to see that be a challenge for the banking system and a lot of that getting pushed out of the banking system.

We've certainly already seen the impact of that over the last five years and I expect that those trends will continue.

I think it also creates an opportunity on the real estate debt financing side am I think consistent with Andrew's prior comments and where we see some opportunities in our position positioning our our capabilities there to take advantage of that as well I'd just add bank loans, where we've been in it and an innovator.

Allison Dukes: Marketing expenses of $27 million were $6 million lower than the prior quarter, and $3 million lower than the third quarter of last year, as we continue to tightly manage discretionary spend given the ongoing challenging revenue environment. Property office and technology expenses were relatively unchanged as compared to last quarter and the third quarter of last year. Another area in which we are diligently managing expenses is GNA. GNA expenses of $108 million in the third quarter were down $6 million from the prior quarter.

As well as different things on the liquidity side of the business, but I'd Echo Alex's comment, it's just not Basel.

Basel has not been a focus of ours.

Sure I get it doesn't apply to you, but just curious how you see that impacting the banks, which then may reprice or pull back capacity, which is sort of the question I was getting at.

Allison Dukes: Compared to the third quarter last year, GNA expenses increased $2 million. However, the third quarter of this year includes $8 million in spending on our alpha platform, which prior to the second quarter of this year was included in transaction integration and restructuring expenses. We expect quarterly average spending on our alpha platform to remain near this level for the next few quarters. Moving to slide 11, adjusted operating income was $309 million in the third quarter, which included the cost related to organizational changes.

But maybe we will move on just a question here on efficiencies. That's an area of focus for you guys in streamlining the organization I was just hoping you might be able to speak to some of the potential from generative AI how're.

How are you guys are experimenting with that today, how do you see the opportunity set from that how about how it might be able to quantify the benefit there overtime.

Yeah. It's a great question early days of course, you know data and organizing our data and making a strategic asset as is one of our priorities and how we apply artificial intelligence and generative artificial intelligence to it is as high on the order. We're early days in experimenting with traditional application.

Allison Dukes: Adjusted operating margin was 28.2 percent for the third quarter, but excluding the cost related to the organizational changes, third quarter operating margin would have been 350 basis points higher. Earnings per share was 35 cents in the third quarter, excluding the expenses related to the work changes, third quarter earnings per share would have been 7 cents higher. The effective tax rate was 23.6 percent in the third quarter. We estimate our non-gap effective tax rate to be between 23 and 25 percent for the fourth quarter of 2023.

<unk>.

We think we'll and could lower costs and drive efficiency going forward, but also speed to market and friction that exists inside the client.

Experience, so things like Ah Ah marketing material and content.

Legal and regulatory.

Allison Dukes: The actual effective rate can vary due to the impact of non-recurring items on pre-tax income and discrete tax items. I'll finish up on slide 12. A state of priority, where I'm pleased to say that we've made significant progress, is building balance sheet strength. But this quarter, our cash balance exceeded 1.2 billion. We've lowered our net debt significantly, and it now stands at less than $250 million. I'm pleased with the improvement we've made on the balance sheet as we continue to work to bring net debt, excluding the preferred shares down to zero, but a second half of next year.

Procedures in filings all boarding of accounts things like that that are pretty operationally intensive at the moment. We haven't started to experiment yet without we'd apply that on the investment side, but on the sales side, we're applying it internally with finding ways to.

Get ourselves to a.

Products and get ourselves to attributes that we can express to clients rapidly. So we're going to continue to invest in the area explore it and and seek to seek to make it a part of our efficiency going forward, but it's a little too early to quantify.

Allison Dukes: Our leverage ratio is to find out our credit facility agreement with 0.7 times at the end of the third quarter. We have an opportunity to further address outstanding doubt with the maturity of the $600 million in senior notes at the end of this January. We ended the third quarter with zero drawn on the credit facility. To conclude the resiliency of our firm's net flow performance in a difficult environment for organic growth is evident again this quarter, and I'm pleased with the progress we're making to simplify the organization and build a stronger balance sheet. We're continuing to invest in key capability areas. We're committed to driving profitable growth and a high level of financial performance. We have the right strategic positioning to do so.

Great. Thank you.

Thank you and our next question comes from Brian <unk> with Deutsche Bank. Your line is open.

Oh, great. Thanks, Good morning folks thanks for taking my question.

Maybe just go back to slide nine.

Maybe just on the on the fundamental equities franchise, and obviously you know given industry pressures, that's that's shrunk as a proportion of your overall.

Asset base, but it is the highest revenue yielding area. So can you talk about maybe what types of investments you're making in the overall fundamental equities franchise that that might you know help the cause of the organic growth prospects of that in and then also maybe just you know.

Operator: And with that, I'll ask the operator to go ahead and open it up to Q&A. Thank you at this time. If you'd like to ask a question, please press star one. You will be announced prior to asking your question. Please pick up your hand fit when asking your question. To withdraw your request, please press star two. One moment for our first question.

What extent are you viewing.

Active etfs as a potential vehicle.

Hum.

You know enhancement for that platform.

Great. Thanks for the question it's.

Start with with how we're seeking to improve fundamental equities, both from an investment standpoint and from a.

Glenn Schorr: Getting a first question comes from Glenn Shaw with Evacore. Your line is open. Hi, thanks very much. So I appreciate all the commentary you made around six things come. I'm still a little, I guess a little surprise for everybody that flows haven't been stronger. You talk about what signposts you think clients are looking for is literally just the end of rate hikes and economic outlook. And are you seeing that in dialogue with solutions through RFPs, things like that.

Our client standpoint on the investment side, clearly our investment leadership.

We've put new investment leadership in place that leadership is focused on not just improving performance over time, but risk and tools and analytics and controls around it performance.

Performance will be the biggest driver in addition to where market demand is and getting strong investment quality across the piece is a high priority and youre seeing some of those investment performance returns sort of play through into into the results and I think that's what's mitigating some of the redemptions in particular on the international emerging and glue.

Glenn Schorr: And then maybe just the same comment on, you know, with your words of extraordinary amount of cash thing on the side, how come money market out where money markets were in outflow? Thank you a lot. Thank you, Glenn. Thanks.

<unk> equity sides of things from a distribution standpoint, given our history in both the U S and in the U K and Europe , where a lot of those assets are placed on retail platforms, we're very well placed.

Andrew Schlossberg: It's Andrew, a start in Alice and chip in as well. The cash from the sideline fit, but whether it's from wealth managers or from institutions, you know, is something like 25 to 35% portfolios are allocated to that from best we can tell from lots of conversations with clients. And I think it's exactly what you described, waiting for clarity from central banks, waiting for a reason to move off the sidelines and get paid to do so.

We have strong distribution in place we have high education, there as well so it's really about just being in front of clients are more actively where when demand comes in when we have quality. The one thing I'd really want to point out as you kind of decompose that fundamental equities is really around the.

Places, an international global and emerging markets, which are the relatively high field in component parts. The component parts that are less susceptible to passive and there are places where we think we can differentiate on product etcetera and those are the areas, where I was pointing out in my in my earlier comments and Alison was as well, where we're seeing them.

Andrew Schlossberg: Conversations have been very active, you know, whether it's through our solutions efforts or just through direct conversations. And, you know, it's, I think it's really those things and that's straightforward and simple on the money market side.

Allison Dukes: Alice, why don't you pick up. Good morning, Glenn. What I would say about our money market portfolio is about 85% of our portfolio is positioned with an institutional client base. So think about that as being managed by corporate treasures and those funds are going to stay and say for asset. So I think what we saw in this quarter was a repositioning into treasuries, just given the opportunity that those presented and just the yield that the treasures are seeking that will also in many respects prevent some, you know, those funds from being deployed into more risk on strategies like equity. So the composition of our money market client base, I think is important as you think about it being 85% institutionally owned.

Improvement in terms of net flows in fact for the quarter those categories globally.

We're just $1 billion of net outflows compared to.

Many multiples of that in 2022, so I think that's our first port of sort of of call in terms of where we could see growth in time, and then I think it's a little more challenging on the domestic equity side, but at the same comments I made would apply.

Also know if you want to add anything there to capture that on the on the shift from a mutual funds to Etfs, we're well placed in the ETF platform. We've brought active strategies to market over many years, we're going to continue to look for ways to take active strategies from the mutual fund vehicle.

Andrew Schlossberg: I appreciate one just quick follow up is, as you noted, the fee rate on fixed income is obviously lower than the overall, but I would imagine there's some pretty high incremental margins. If flows do happen in the way you think into fixed income as people start extending duration, how should we think about that interplay between fee rate and margins, kind of like the same conversation we've had for years. Thanks. Now, your assumption is correct and that you've got a relatively fixed cost base underpinning that fixed income portfolio.

Two other vehicles in time and not just Etfs I'd say SMA as we're gonna be another place.

Custom sma's, both on the fundamental and index side, but on the fundamental side in particular, so we're going to look for ways to bring that forward I think the development of active Etfs is going to take some time, but.

But as it develops we'll definitely be a front runner there.

That's good that's good color. Thanks for that and then maybe just on the expense side Allison just a clarification the 10 million in the fourth quarter our improvement.

Andrew Schlossberg: So you should think about flows into fixed income as being a credo to the overall firm operating margin. And I think that's a lot of what we want to draw out in providing some of this additional color is where we are seeking to grow through scale and where that will be accreted to margins. Overall, fixed income is certainly an area where that is true. And Glenn, we, some of the things we talked about last quarter in this quarter, you know, we further brought together elements, disparate elements of our fixed income platform. And we wanted to call out the scale and that platform for just the reasons Allison described. Thank you.

Improvement in the compensation line, just does that exclude or include the.

The dynamic of the churches between the two quarters through Q4 Q.

That would be run rate and proving that so and that is independent of the $39 million of this quarter and the 15 to 20 that we anticipate in severance reorganization costs in the fourth quarter that would be true underlying run rate improvement and we will give you more transparency transparency to that as we realize.

So savings you have to know that that makes sense and just I don't know if I'm, if you're able to comment on other <unk> expenses and in a matter of marketing is typically seasonally high but anything else on the property line and the G&A line other than the made the state Street Alpha commentary, obviously, but.

Craig Siegenthaler: The next question comes from Craig Siegenthaler with Bank of America. Your line is open. Thanks. Good morning, everyone. So maybe just starting where you left off with 25% of portfolios sitting in cash and waiting for rates to stop going higher. Which bond verticals are you the most positive on in 2024? And also do you think active fixed income can garner significant share or respect most of the flows to come from passive, which you'd also benefit through the ETF platform?

Anything else on those two lines for four Q.

Yeah, I would say you know, we do often see a little bit of seasonality in both marketing and G&A in the fourth quarter as they are just professional services fees and the like that's usually true up there in the fourth quarter. So there might be a touch of seasonality marketing those two line items higher we are thoughtfully and very aggressively managing our discretionary.

That said, though.

Craig Siegenthaler: Yeah, hi, Sandra. Just maybe I'll pick up on the second part first. We think it'll come in both active and passive. And as you said, the diverse range that we have in both in some ways were a bit indifferent. But the conversations are happening on both sides of the equation in terms of areas that are particularly of focus and things that we're having conversations about where we're well positioned, the municipal portfolio, whether that's investment grade or high yield, the performances stellar, the funds are highly rated.

Okay, Okay, great. Thanks very much.

Thank you.

Thank you. Our next question comes from Alex Blaustein with Goldman Sachs. Your line is open.

Great. Thanks for taking the question as well good morning.

Lots of noise in expenses, obviously for you guys. This year. So maybe you can kind of help us level set and as you go through all these changes provide some color on how you're thinking about margins for 2020 for you know obviously the revenue backdrop could be volatile as we know, but assuming more stable market. It looks like you guys are doing sort of low 30% kind of clean up.

Craig Siegenthaler: They're well known. And that's probably the first port of call we would point to on the investment grade side, you know, European corporate bonds have been of interest and have been an area where we're positioned well. And then really just anything across as people move a little further on the curve, even elements of our short-term fixed income portfolio. So it's pretty wide-ranging, but I sort of point out those areas in particular, especially because we're just well, you know, we're well placed there to take share.

Pretty margin.

I'm, assuming there's no additional charges in 'twenty four is a room to build off of that into 2024 versus 23. So any any color you provide on that would be helpful.

Sure Good morning, Alex I R.

Our expenses this year.

A little bit noisy for two reasons, one a lot of these executive retirement the reorganization efforts.

Severance associated with that and then the fact that we no longer had T. I R. After the first quarter. So.

I will say when you back that out it's actually quite consistent they've been quite flat am and alpha has been running in our expense base to the tune of seven or $8 million a quarter since the second quarter when it moved out of DIR and fully into our expenses. So.

Craig Siegenthaler: Thank you, Andrew. And just for my fall on investment rate, well, in China, flows are negative in 3K. I just wanted your perspective on if you thought they would snap back on a near-term basis, or if you think we'd go through a longer term time period here, where you'd see net outflows from China. Good morning, Craig. I'll start. You know, I think the most important component of the flow than IGW was really that it was driven by fixed income.

Are sorted that we it's a fully loaded expense base and we are trying to call out where there are some one timers associated with that we will continue our simplification efforts well into next year, we aren't going to let up and continuing to find efficiencies I don't know that they will be to the tune of the materiality we've seen.

Craig Siegenthaler: And I think we're just seeing with the interest rate tightening, the tightening inside of China, a diminished appetite for fixed income overall, we actually saw inflows and equities over the quarter. So we do think, you know, it's hard to gauge exactly the timing to when economic sentiment will recover there. I think we're confident the government's doing quite a bit to try to stimulate some stabilization there and improvement in the sentiment overall. Hard to say exactly which quarter that will be and when things will snap back, we do, we are very confident, very well positioned when that does occur.

Craig Siegenthaler: Thank you.

In these last couple of quarters as we sought to bring a lot of that forward.

But we will continue with those efforts and we'll call it out when it is material.

As I think about next year, and what could help us improve operating margin above that 30% ish range.

It absolutely becomes.

It's largely a revenue story and we are very very focused on revenue and just the impact again that we have experienced.

With the Remixing of our asset base and the AD market depreciation that has impacted us quite significantly starting late last year again in developing markets and global equities, especially as Andrew noted earlier and I think independent of where revenue goes we are highly focused on really managing that expense.

Daniel Fannon: Next question comes from Daniel Fannon with Jeff Rees. Your line is open. Thanks. Good morning. Question on expenses. At first the clarification, I believe, Allison, you mentioned that the savings from some of the charges won't begin until next year. So curious is to why you're not seeing some of the savings here in 4Q. And then, you know, there's a lot of changes or kind of streamlining. I think that was talked about. Could you maybe summarize like what you see? Is the most impactful in some of these changes that you that you that you've made?

Base next year, we will provide more guidance as we get into January and Alpha is a huge focus for US next year and alpha is going to be fully loaded in our expense base will be giving more color to that as the quarters unfold.

But that will impact our ability to really drive our expenses down in 'twenty 'twenty four because we'll be working on fully going live and running parallel on several systems at the same time. So again will create transparency that all of this is with an eye towards simplifying and streamlining our end to end delivery. So that we can create pause.

Allison Dukes: Sure. Good morning, Dan. So on expenses, let me clarify that we expect that that 50 million will be fully realized by the first half of 2024. And so that I expect we will actually start to see some of those savings materialized here in the fourth quarter. I'm expecting somewhere around probably $10 million of improvement and compensation expense in the fourth quarter. So that run rates out to almost probably $40 million. So I actually think that we'll start to see the majority of those savings materialized in the fourth quarter and then continue into next year.

Is it a operating leverage.

Coming out of 24 and are anticipating further growth in our U M. I just want to underscore I mean, a lot of the flows that we're seeing and where we're we're very pleased with what we saw in the third quarter. We recognized it was quite a quite a bit better than what the rest of the industry is seeing and I think it really speaks to the diversification of our platform and.

How aligned it is the client demand, it's giving us the opportunity to make really thoughtful decisions as we continue to simplify our organization and really invest in the capabilities and the technology, that's going to be necessary to create that positive operating leverage going forward.

Allison Dukes: That, of course, is all things being equal and dependent of a, you know, and where markets go and variable compensation at part of the increase in the severance and reorganization expenses in the third quarter is because we did pull forward some of those savings. So we would start to realize the benefits of them in the fourth quarter. And so again, I know there were some expectations because we provided an expectation that severance expense would be closer to 20 million in the third quarter.

Alex we're going to continue to have the expense discipline that Dallas has been talking about in addition to these streamlining efforts playing through overtime and helping us grow our revenue base, but also be much more efficient with our expenses and be able to reallocate. Additionally to these growth areas in time as well. So you should expect to see both of them.

Allison Dukes: It was $39 million as we seek to pull forward some of those savings. Where do we expect to see them? Honestly, it's quite broad base as we are looking at just making thoughtful streamlining decisions across our entire organization. It's everywhere from areas of operations to streamlining some of our investment teams as Andrew noted in his remarks to just pocket the simplification where we can globalize some of our teams and seek to do things one way across the globe instead of multiple ways.

<unk> sides of the of the expense equation in the coming quarters.

Got it alright, that's helpful. Thank you and just a quick clarification question for you guys on the on the net revenue yield so you know I.

I appreciate the comments around diversification of the business, improving and that should provide some stability to the net revenue yield.

Just a quick reminder, on China I think there was some decreases in pricing that are either already occurred or yet to occur. So just remind us maybe the magnitude of that and whether it's already fully in the run rate and where you expect about that thanks.

Allison Dukes: I couldn't point to any one particular area. I will tell you the majority of the savings you will see are in compensation expense and that is, of course, excluding any first quarter seasonality that you see in payroll and taxes in the life. Thank you. That's helpful.

Sure. So in China that we do expect when some of the changes that happened there and the impact to fee rates, but it will have.

Allison Dukes: And then there's some institutional outlook. You know, the overall pipeline, I think, the numbers, you didn't disclose. You talked about the slides as 35% still solutions, which have been in the range. So maybe just some context around the institutional activities you see it, you know, in building into four quarter obviously into next year. Sure. The institutional pipeline, the one not funded pipeline. So the same as we typically provide from color to was about $20 billion in the third quarter.

Have an impact of about $10 million on our revenue overall, given the AUM that's impacted their the impact to operating income will be quite a bit less or not just given there will be some comp expense takeout, that's associated with that reduction in the fee rates.

And that's that's a 100% so keep in mind, how we reflect 100% and then back out the 50, 951% excuse me that we don't know and below the line.

So.

The one thing I would say to that is while that is a and.

Allison Dukes: So a little bit lower than the prior quarter, although the fee rate was a little bit better, the composition pretty consistent. So it still looks pretty good. I would say by look at our inflows, excluding the GTR, very size, the bull redemption that we pointed to, if I look at our gross inflows in the quarter, it was about $17.5 billion in gross inflows from the institutional channel. And that was about about 43% of that was from our pipeline.

An impact of revenue upfront, we actually think that portends very well for our business in China as regulation seeks to just further strength in the capital markets. There are we know as the top largest asset manager we are well positioned to be a net winner and we think we will benefit from some of these be rate changes and the impact of some of the smaller players.

I gotcha, great. Thank you very much.

Allison Dukes: So our pipeline continues to be healthy, strong. It doesn't really reflect the full breadth of the activity in the institutional channel. But it's certainly a good health measure and it's kind of consistent in that 20 to $30 billion range. James. Great, thank you.

Yeah.

Thank you and our next question comes from Patrick Davitt with Autonomous Research. Your line is open.

Allison Dukes: Thank you.

Hi, Good morning, Thanks for squeezing me in.

So it sounds like you're changing your tone a bit on the path to the future fee rate declines, but at the same time. It sounds like you expect much more bond fund flows in Etfs demand from here, which are among the lowest three buckets. So so.

Ken Worthington: The next question comes from Ken Worthington with JP Morgan. Your line is open. Hi. Good morning and thanks for taking the question. To follow up on the pipeline question, what was the backlog for alternatives? If solutions increased to 35 percent, I guess, what sort of shrunk relative to the pipeline and where does alternative stand and we'll just start there. Thank you. Good morning. What shrunk would have been equities? Alternatives actually held pretty consistent to the prior quarter and I think we mentioned we've got about $6 billion in drive powder and not been pretty consistent.

What changed.

So kind of change your tone on the potential for fee cuts or if the lowest fee buckets. You know ended up being the biggest contributors.

Sure. Thanks, Patrick.

A couple of things I don't know that I would say, we're changing our tone I mean, I do expect you'll continue to see some modest downward pressure in our fee rate as we just continue to see some of this mix shift we're not calling an N to mix shift I mean, we know we all are quite aware of the secular trends that are out there the demand for passive and the weaker demand for active and we're certainly benefiting.

From from one side of that trend, but increasingly those words.

Ken Worthington: So it's actually been one of the challenges that's been difficult to deploy just because the transaction activity, particularly in private real estate, is relatively low just given some of the financing dynamics that are going on. But what we saw was a little bit of diminishment in the pipeline for equities overall.

The impact of that is captured in our results and so if you look at our net revenue yield ex performance fees and execute in Q and $32 nine basis points. This quarter. So it was actually four tenths of a basis point higher than last quarter.

That's a in some respects due to one additional day in the quarter.

But I will say, we have that seasonality occurs every year and this is one of the first third quarters in a long time, where you saw it would be flat or positive typically the pressure is downward.

Ken Worthington: Okay, great. And then in private market, so on the $6 billion of drive powder, what represents the bulk of that drive powder? Is it real estate? Is it credit? Is it sort of split between the two? And are there any big funds in private markets that you expect to come to market in the next 12 months or so? At the bulk of the $6 billion would be more real estate oriented than it would be private credit.

I still think it will have some downward pressure, but it's going to start to moderate and 32.9 Ah is a lot closer to an average passive fee rate of 18 ish basis points are then 40 was and so at some point you start to see where we get closer to that average and that remix thing.

Ken Worthington: We've got several things that are we are working on. I would say in terms of what we're trying to bring to market in both the real estate space and the private credit space as we look to capture some of the opportunities there out there right now, particularly from an opportune at six standpoint and a distrust standpoint. Yeah, and can in particular real estate debt for both institutions but mostly in the wealth management channels is probably the area where we're seeing the greatest amount of demand and we're in market with strategies there. And then as Allison said on the private credit side, you know, just just traditional direct lending both in Europe and the US. Great.

It starts to have less of an impact on fee rate I would also say keep in mind, while we're focusing on fundamental equities and passive and the difference and that net revenue yield important to look at APAC managed again, largely China and Japan under there with a 40 to 50 basis point fee range and the growth we're seeing over at.

Ken Worthington: Thank you very much.

Brennan Hawken: Thank you.

Through the cycle and those two areas very accretive to the overall fee rate.

And also the growth that we expect to continue to see in private markets and multi asset mm accretive so while the biggest drivers and the biggest change in terms of outflows and inflows have been passive and outflows in fundamental equities. There are other aspects of our portfolio that are very accretive and that's.

Brennan Hawken: That next question comes from Brennan Hawking with the UBS United's Open. Good morning. Thanks for taking my questions. I wanted to start on fee rate. So the actual investment advisory theory was in a lot of pressure, but distribution offset kind of allowed the net revenue yield to be only down modestly. So was there any noise in that net distribution line or is that the right way to think about that going forward?

Our objective is to take that one and a half trillion and average AUR and that's been relatively flat over the last couple of years, given the market depreciation and grow that and as we grow that and these pieces of the pie grow and you start to see the impact of the last couple of years really that are realized and our average fee rate and you start to see some stabilization.

The decline.

Patrick.

Add to what Alison said, the APAC multi asset private markets that you see on page nine volumes should increase on that in time.

Brennan Hawken: I'll take that. Good morning, Brennan. The net distribution line, it tends to in that third party line, it runs about 41 to 42% of management fees on an annual basis. I think last year was about 41.5% year-to-date. It's about 42%. Third quarter was a touch lower though. So there's just the noise and it fluctuates quarter to quarter, but I would say in line, it's pretty in line with history right now. So are you saying that we should look at it more on a year-to-date basis than this quarter specific?

Relative to where we are and then it'll the fundamental equity side, we've under we we sort of underperformed on our.

Our market share capture in our redemptions and so as you see redemptions start to mitigate in and get into positive flows eventually that's going to be through market share gains and.

So I think it's both sides of that and I think Allison.

Covered it well.

Okay. That's helpful. And then one quick follow up on margins I think many years ago, you used to say the ETF business was a drag on margin because it hasn't scaled yet so similar to glenn's point on bonds I imagine you're getting to a point, where we should start to see a lot more incremental margin from the CTF growth given how big some of the funds are getting so do you think we're at a point, where we could see kind of a step.

Brennan Hawken: I would absolutely. I would think about it in that 41 to 42% range and this quarter kind of brings that 42% starts to bring it down a bit I would look at it in that range. That's how we think about it. It's hard to manage to a quarter to quarter.

Brennan Hawken: Excellent. That's that's that's great and not that I want to give Greg more work, but it definitely would be great to see like few rate or like revenue by asset class along with the flow disclosure. It might help to given particularly given the dynamics of play for your business. Just a recommendation. For my follow up, you mentioned that there was a big loss of a single account with GTR. Was was the fee rate given that that was a single large investor?

Books and change in the margin contribution from the ETF growth you're saying.

Yeah, you know I would say going back to when I joined the firm in a few years ago, we were saying the ETF business was neutral to the firm.

It's been quite sometime since it would have been dilutive.

We are certainly in a position now where it is accretive to the firm's margin overall and we're very focused on continuing to grow that business.

Brennan Hawken: Was that fee rate sort of below the average for your all to business or for the firm broadly just given the size? Thanks, Brennan. Okay, first I'm going to point you to page nine because Greg did do the extra work and we've got some of the fee rates disclosed from an AUM standpoint there to try to provide exactly that give a little bit more color. And then on GTR, no, that fee rate that capability was quite significantly above the firm average.

That is accretive to the firm's margin and I think as you think about what kind of what are the two biggest things that could really improve margin for this firm overall it is a rapidly growing the size of that business stemming the redemptions in fundamental equities and again growing that pie overall from one and a half trillion and a U M to something quite a bit larger than that scale.

<unk> is what is going to add a contribution.

From a margin perspective.

Thanks, a lot.

Brennan Hawken: And so that has been as you think about some of the challenges and the remixing and some of what we were trying to draw out on slide nine, GTR would have been one of the challenges we've been experiencing along with the pressure from developing markets and global equities. Those would have all had fee rates, you know, quite north of the firm average consistent with what you would see in that fundamental equities fee rate range on slide nine.

We do have time for one final question and I'll ask question comes from Finian O'shea with Wells Fargo Securities. Your line is open.

Hi, Good morning. Thank you a question on the mass mutual partnership commentary in the beginning are you working toward a broader say private markets organic product build out with.

Brennan Hawken: Yeah, okay, great. And thanks for pointing out that on on page on slide nine, of course, I just more men in a way that we could actually embed within the financial models, right? So we could have it in greater detail that does this slide nine tied to the AUM disclosures that you guys have in your presser. Not exactly. And I think that's part of the challenge and we hear you on that one and I know that is a desire that you have expressed and we will continue to work through our data in a way that we can make it as digestible as possible.

With hopeful seeding through mass or is this more a focus on executing what's in the ground already for those areas of partnership. Thank you.

Yes, thanks for the question.

Much of the private market seating for the strategies, we talked about earlier has happened already and so the comments we made around the $3 5 billion or are largely inclusive of all of that as we move forward and bring additional private market strategies massmutual, hopefully will continue to be that kind of partner, but much of it has happened already.

Brennan Hawken: Although I do think this gives you quite a bit of color as to what's been going on over the last four years and a lot of the challenge and the results that we've experienced being increasingly captured. Sure. Of course, sorry to be a pain in the butt. Thank you. Want it all, right?

Which leaves us to executing on the ground as you said with growing third party assets from institutions and wealth managers, which is what we've been doing the last several years and getting ourselves situated for that demand to continue to come to that.

Brennan Hawken: Thank you.

Michael Cyprys: The next question comes from Michael Cypress with Morgan Stanley. You know, I was open. Great.

That's that what was the other piece on the mass mutual was did you have another piece on mass mutual.

Michael Cyprys: Good morning. Thanks for kicking the question. Just one on regulation, basil three endgame rules for the banks are slated to potentially raise capital requirements. So just curious how you see that trickling down to the estimate industry and your business, whether it's availability and cost, the warehousing, use the folk derivatives, accessing leverage. Just what areas you think might be impacted from the new capital rules and then can you speak to the opportunities that just in terms of where you guys might be a beneficiary where you might be able to press to innovate to create new products to be able to take some share from the banking system.

That was pretty much it. Thank you okay alright.

Okay, well, thanks, everybody for joining the call today and we continue to believe that we have great opportunities in invesco as we discussed today and we have momentum from which to build we're very well positioned as investors gain better visibility on rates and market direction and put their money back to work.

Hopefully you've seen that we have the breadth of products scale performance and competitive strength to meet a spectrum of client needs and we are simplifying and streamlining the organization to better position for greater scale performance and improve profitability. So thank you for your interest in Invesco and we look forward to speaking again soon in next quarter.

Allison Dukes: Good morning. I'll take that one. You know, I would say honestly the basil three capital requirements have little to no impact on us at all. There's very little that we do that has any input. You know, have any. Eddie, relationship to the areas that are impacted by Basel III. So I would say in terms of where might we have some opportunities we could take advantage of. Certainly we're all seeing the opportunity to continue to think about capturing some private credit share as we continue to see that be a challenge for the banking system and a lot of thought getting pushed out of the banking system.

Yes.

Thank you that concludes today's conference you may all disconnect at this time.

Yeah.

Allison Dukes: We've certainly already seen the effect of that over the last five years and I expect that those trends will continue. I think it also creates opportunity on the real estate debt financing side and I think consistent with Andrew's prior comments and where we see some opportunities and are positioning our capabilities there to take advantage of that as well. I just had bank loans where we've been an innovator as well as different things on the liquidity side of the business.

Allison Dukes: But I'd echo Allison's comment. It's just not Basel's not enough focus on ours. Sure, I get it doesn't apply to you but just just curious how you see that impacting the banks which then may reprise or pull back capacity which is the question I was getting at.

Allison Dukes: But maybe we'll move on.

Andrew Schlossberg: Just a question here on efficiencies that's an area of focus for you guys and streamline in the organization. I was just hoping you might be able to speak to some of the potential from generative AI. How are you guys experimenting with that today? How do you see the opportunities set from that? How might be able to quantify the benefit there over time? Yeah, it's a great question. Early days of course in data and organizing our data and making its strategic asset is one of our priorities and how we apply artificial intelligence and generative artificial intelligence to it is high on the order.

Andrew Schlossberg: We're early days in experimenting with traditional applications that we think will and could lower cost and drive efficiency going forward. But also speak to market and friction that exists inside the client experience. So things like marketing material and content, legal and regulatory procedures and filings, onboarding of accounts, things like that that are pretty operationally intensive at the moment. We haven't started to experiment yet with how we apply that on the investment side.

Andrew Schlossberg: But on the sales side, we're applying it internally with finding ways to get ourselves to products and get ourselves to attributes that we can express to clients rapidly. So we're going to continue to invest in the area, explore it and speak to make it a part of our efficiency going forward, but it's a little too early to quantify.

Andrew Schlossberg: Great, thank you.

Brian Bedell: Thank you. Our next question comes from Brian Badell with Doisterbank. You're on this. Great, thanks. Good morning, folks. Thanks for taking my question.

Brian Bedell: Maybe just to back to slide 9. Maybe to sum it on the fundamental equities franchise, obviously given industry pressures that shrunk as a proportion of your overall asset base, but it is the highest revenue yielding area. So can you talk about maybe what types of investments you're making in the overall fundamental equities franchise that might help the organic growth prospects of that? And also maybe just to what extent are you viewing active ETFs as a potential vehicle enhancement for that part?

Brian Bedell: Right, thanks for the question. Let me start with how we're taking to improve fundamental equities, both from an investment standpoint and from a client standpoint. On the investment side, clearly our investment leadership, we put new investment leadership in place, that leadership is focused on, not just improving performance over time, but risk and tools and analytics and controls around it. Performance will be the biggest driver in addition to where market demand is, and getting strong investment quality across the piece is a high priority.

Brian Bedell: And you're seeing some of those investment performance returns sort of play through into the results, and I think that's what's mitigating some of the redemptions in particular on the international, emerging, and global equity sides of things. From a history in both the US and in the UK and Europe, where a lot of those assets are placed on retail platforms, we're very well placed. We have strong distribution in place, we have high education there as well.

Brian Bedell: So it's really about just being in front of clients more actively where when demand comes and when we have quality. The one thing I'd really want to point out, as you kind of decompose that fundamental equities, is really around the places in international global and emerging markets, which are the relatively high field and component parts, there's the component parts that are less susceptible to passive, and there are places where we think we can differentiate on product, et cetera.

Brian Bedell: And those are the areas where I was pointing out in my earlier comment, Ph. N. Allison, was as well, where we're seeing the most improvement in terms of net flows. In fact, for the quarter, those categories globally, were just $1 billion of net outflows compared to many multiples of that in 2022. So I think that's our first port of call in terms of where we could see growth in time. And then I think it's a little more challenging on the domestic equity side, but the same comments I made would apply.

Allison Dukes: Allison, if you want to add anything there. On the shift from mutual funds to ETS, we're well placed in the ETF platform. We've brought active strategies to market over many years. We're going to continue to look for ways to take active strategies from the mutual fund vehicle to other vehicles in time, and not just ETFs, I'd say SMAs are going to be another place, custom SMAs both on the fundamental and index side, but on the fundamental side in particular.

Allison Dukes: So we're going to look for ways to bring that forward. I think the development of active ETFs is going to take some time, but as it develops, we'll definitely be a front runner there. That's good. That's great color. Thanks for that. And then maybe just on the expense that Allison, just a clarification, the 10 million in the fourth quarter improvement in the compensation line, does that exclude or include the dynamic of the charges between the two quarters, three, Q and four, Q?

Allison Dukes: That would be run rate improvement. So that is independent of the 39 million dollars of this quarter and the 15 to 20 that we anticipate and several international costs from the fourth quarter. That would be true underlying run rate improvement. And we'll give you more transparency to that as we realize those savings. Yep, that makes sense.

Allison Dukes: And just I don't know if you're both a common other 4-Q expenses in metro marketing is typically seasonally high, but anything else on the property line and the GNA line other than the maybe state street alpha commentary obviously, but anything else on those two lines for 4-Q. Thank you. Yeah, I would say, you know, we do often see a little bit of seasonality in both marketing and GNA and the fourth quarter as there are just professional services and the like that's usually true up there in the fourth quarter. So there might be a touch of seasonality marking those two line items higher. We are thoughtfully and very aggressively managing our discretionary expenses though. Okay, great. Thanks very much. Thank you.

Alex Blostein: Next question comes from Alex Blostein with golden sex line is open. Great. Thank you for taking the question as well.

Allison Dukes: Good morning. You know, lots of noise and expenses. I was for you guys this year. So maybe you can kind of help us level said and as you go through all these changes provide some color on how you think about margins for 2024. You know, obviously the revenue backdrop could be volatile as we know, but assuming more stable markets. It looks like you guys are doing sort of low 30% kind of clean up pretty margin. Assuming there's no additional charges in 24 is a room to build off of that into 2024 versus 23. So any any color you provide on that will be helpful.

Andrew Schlossberg: Sure. Morning, Alex. You know, our expenses this year, a little bit noisy for two reasons. One, a lot of the executive retirement, the reorganization efforts and the severance associated with that. And then the fact that we no longer have TIR after the first quarter. So I will say when you back that out, it's actually quite consistent. They've been quite flat and Alfa's been running and our expense base to the tune of seven or eight million dollars a quarter since the second quarter when it moved out of TIR and fully into our expenses.

Andrew Schlossberg: So there's sort of that we it's a fully loaded expense base and we are trying to call out where there are someone timers associated with that. We will continue our simplification efforts well into next year we aren't going to let up and continuing to find efficiency. I don't know that they will be to the tune of the materiality we've seen in these last couple of quarters as we thought to bring a lot of that forward.

Andrew Schlossberg: But we will continue with those efforts and we'll call it out when it is material. As I think about next year and what could help us improve operating margin above that, you know, 30% ish range. It's absolutely become it's largely a revenue story and we are very, very focused on revenue and just the impact again that we have experienced with the remixing of our asset base and the market depreciation that has impacted us quite significantly starting late last year. Again, in developing markets and global equity, especially as Andrew noted earlier. I think independent of where revenue goes, we are highly focused on really managing that expense base next year.

Allison Dukes: We will provide more guidance as we get into January. Alpha is a huge focus for us next year and alpha is going to be fully loaded in our expense base will be giving more color to that as the quarters unfold. But that will impact our ability to really drive our expense base down in 2024 because we'll be working on fully going live and running parallel on several systems at the same time.

Allison Dukes: So again, we'll create transparency but all of this is with an eye towards simplifying and streamlining our end to end delivery so that we can create positive operating leverage coming out of 24 and anticipating further growth in our AUM. I just want to underscore I mean a lot the flows that we're seeing where we're very pleased with what we saw in the third quarter we recognize it was quite a bit better than what the rest of the industry is seeing and I think it really speaks to the diversification of our platform and how aligned it is with client demand.

Allison Dukes: Giving us the opportunity to make really thoughtful decisions as we continue to simplify our organization and really invest in the capabilities and the technology that's going to be necessary to create that positive operating leverage going forward. Now, so we're going to continue to have the expense discipline that Allison's been talking about in addition to these streamlining efforts playing through over time and helping us grow our revenue base, but also be much more efficient with our expenses and be able to reallocate additionally to these growth areas in time as well.

Allison Dukes: So you should expect to see both of those side of the expense equation in the coming course. Got it. Okay. That's helpful. Thank you. And just a quick clarification question for you guys on the on the net revenue yield. So, you know, appreciate a comment around diversification to business, improving, and that should provide some stability to the net revenue yield. Just a quick reminder in China, I think there are some decreases in pricing that either already occurred or yet to occur. So just remind us maybe the magnitude of that and whether it's already fully in the run rate and what you expect that to happen. Thanks.

Patrick Davitt: Sure. So in China that we do expect with some of the changes that happen there and the impact to fee rates that it will have an impact of about $10 million on our revenue overall, given the AUM that's impacted there, the impact to operating income will be quite a bit less than that. It's given there will be some confidence take out that's associated with that reduction in the fee rate. And that's that's 100%.

Patrick Davitt: So keep in mind how we reflect 100% and then back out the 59 51% excuse me that we don't own below the line. So the one thing I would say to that is, while that is an impact to revenue of prompt, we actually think this portans very well for business in China as regulation seeks to just further strengthen the capital markets there. We know as the 12th largest asset manager, we are well positioned to be a net winner and we think we will benefit from some of these fee rate changes and the impact of some of the smaller players.

Patrick Davitt: I got you. Great. Thank you very much. Thank you. The next question comes from Patrick Debit with autonomous research. Your line is open. Hi. Good morning. Thanks for squeezing me in. So it sounds like you're changing your tone a bit on, you know, the path to future fee rate declines. But at the same time, it sounds like you expect much more bonds, funds flows and ETF demand from here, which are among the lowest fee buckets. So what changed to kind of change your tone on the potential for fee cuts if the lowest fee buckets, you know, end up being the biggest inflow contributors.

Patrick Davitt: Sure. Thanks, Patrick. You know, a couple of things. I don't know that I would say we're changing our tone. I mean, I do expect you'll continue to see some modest downward pressure in our fee rate as we just continue to see some of this mixed shift. We're not calling an end to mixed shift. And we know we all are quite aware of the secular trends that are out there, the demand for passive and the weaker demand for active and we're certainly benefiting from from one side of that trend.

Patrick Davitt: But increasingly, those were, you know, the impact of that is captured in our results. And so if you look at our net revenue yield X performance fees and XQQ and 32.9 basis points this quarter. So it's actually four tenths of a basis point higher than last quarter. That's in some respect due to one additional day in the quarter. But I will say we have that seasonality occurs every year. And this is one of the first third quarters in a long time where you saw it be flat or positive.

Patrick Davitt: Typically, the pressure is downward. I still think we'll pass them downward pressure, but it's going to start to moderate and 32.9 is a lot closer to an average passive fee rate of, you know, 18ish basis points than 41. And so at some point, you start to see where we get closer to that average and that remixing starts to have less of an impact on fee rate. I would also say keep in mind while we're focusing on fundamental equities and passive and the difference in that net revenue yield imported to look at a pack managed again largely China and Japan under there with a 40 to 50 basis points fee range.

Patrick Davitt: And the growth we're seeing over, you know, through the cycle and those two areas very creative to the overall fee rate and also the growth that we expect to continue to see in private markets and multi asset. So while the biggest drivers and the biggest change in terms of outflows and inflows have been passive and outflows and fundamental equities, there are other aspects of our portfolio that are very creative. And our objective is to take that one and a half trillion an average AUM that's been relatively flat over the last couple of years given the market depreciation and grow that and as we grow that in these pieces of the pie grow, you start to see the impact of the last couple of years.

Patrick Davitt: And there's really better realized in our average fee rate and you start to see some stabilization and the declines. Yeah, Patrick, I just add to what Allison said, the APEC multi asset private markets, the field page nine volume increase on that in time relative to where we are. And then on the fundamental equity side, you know, we've under we've we sort of underperformed on our market share capture and our redemption. And so as you see redemption start to mitigate and and get into positive flows eventually that's going to be through market share gains and so I think it's both sides of that and I think Allison, as well. Great, that's helpful.

Andrew Schlossberg: And then one quick follow up on Margin. I think many years ago you used to say that ETF business was a drag on Margin as it hadn't scaled yet. So similar to Glenn's point on bonds, I imagine you're getting to a point where we should start to see a lot more incremental margin from the CTF growth, given how big some of the funds are getting. So do you think we're at a point where we could see kind of a step function change in the margin contribution from the ETF growth you're seeing?

Andrew Schlossberg: Yeah, you know, I would say going back to when I joined the firm a few years ago, we were saying the ETF business was neutral to the farm margin. It's been quite some time since it would have been dilutive. We are certainly in a position now where it is a credo to the firm's margin overall. And we're very focused on continuing to grow that business because it is a credo to the firm's margin.

Andrew Schlossberg: And I think as you think about what could one of the two biggest things that could really improve Margin for this firm overall, it is rapidly growing the size of that business, stemming the redemptions and fundamental equities. And again, growing that pie overall from one and a half trillion in AUM to something quite a bit larger than that scale is what is going to add, you know, contribution from a margin perspective. Thanks a lot.

Phineon O'Shea: We do have time for one final question. And our last question comes from Phineon O'Shea with Wells Fargo Securities. Your line is open. Hi, good morning. Thank you. A question on the mass mutual partnership commentary in the beginning. Are you working toward broader, say, private markets, organic product build out with hopeful feeding through mass or is this more a focus on executing what's in the ground already for those areas of partnership?

Phineon O'Shea: Thank you. Yeah, thanks for the question. Much of the private market feeding for the strategies we talked about earlier has happened already. And so the comments we made around the three and a half billion are largely inclusive of all of that. As we move forward and bring additional private market strategies, mass mutual hopefully will continue to be that kind of partner, but much of it's happened already, which leads us to executing on the ground, as you said, with growing the repartial assets from institutions and wealth managers, which is what we've been doing the last several years and getting ourselves situated for that demand to continue to come. So that's that. What was the other piece on the mass mutual? Do you have another piece on mass mutual? That was pretty much it. Thank you.

Andrew Schlossberg: All right. Okay. Well, thanks everybody for joining the call today. And we continue to believe that we have great opportunities in Embasco as we discuss today and that we have momentum from which to build. We're very well positioned as investors gain better visibility on rates and market direction and put their money back to work. Hopefully you've seen that we have the breadth of product, scale, performance, and competitive strength to meet a spectrum of client needs. And we are simplifying and streamlining the organization to better position for greater scale, performance and improved profitability.

Operator: So thank you for your interest in Embasco and we look forward to speaking again soon and next quarter. Thank you, Nick.

Operator: It concludes today's conference. You may all disconnect at it.

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