Q3 2024 Invesco Ltd Earnings Call
Speaker Change: Good morning and welcome to in Vesco's third quarter earnings conference call. Oppositions will be on a listen only mode and to the crescent answer session.
Speaker Change: Finally in Mexico is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties the only.
Speaker Change: Afterwards, Webcasts are located on our website, Andrew Schlossberg, President and CEO and Alex <unk>, Chief Financial Officer will present, our results. This morning, and then we'll.
Speaker Change: Open up the call for questions I'll now turn the call over to Andrew.
Andrew Schlossberg: Thanks, Greg and good morning, everyone seems to be speaking with you today, we continued our positive momentum this quarter executing across several strategically important areas of our business and finishing this quarter with record of long term AUM.
Andrew Schlossberg: Continued robust net long term inflows improved operating leverage a stronger balance sheet and higher return capital to shareholders. We achieved this despite continued volatility globally U S markets ended the quarter with strong equity returns, even though we saw high intra quarter market fluctuation is ongoing.
Andrew Schlossberg: Geopolitical concerns coupled with mixed signals drove cautious investor sentiment.
Andrew Schlossberg: Long awaited federal reserve cuts commenced by the end of the quarter and news stimulus in China was announced in Japanese policymakers dropped to less hawkish tone.
Factors that help assuage concerns and drive a rally in the quarter and as investors began to rotate money off the sidelines and into some risk assets. As a result, we began to see some broadening of investor demand in both the equity and fixed income markets. Conversely, the China's Chinese markets remained challenging for most of the period.
Andrew Schlossberg: And fixed income appetite waned mid quarter due to a rebound in bond yields which drove industry with them redemptions. However, the recent stimulus drove a strong equity rally late in September with only a few trading days to have a material impact on our quarterly returns.
Andrew Schlossberg: Turning to page three as we discussed last quarter, we maintained that our advantage advantageous market position and clearly defined strategic focus gives us conviction in our ability to deliver enhanced operating performance and returns for our shareholders across various market conditions.
Andrew Schlossberg: Albert you specific areas of third quarter performance momentarily, but I first wanted to highlight a few of the areas of meaningful and measurable progress in relation to our strategic priorities and the key performance drivers noted on the right hand side of this page.
Andrew Schlossberg: First this quarter, we leveraged our global client network, our extensive product suite and improving investment performance to drive strong net long term inflows of 16 $5 billion or five 2% annualized organic growth rate importantly, we achieved positive long term organic slow growth from each.
Each of our three regions led by Asia Pacific at 9% EMEA at 5% in Americas, and 4% at the asset classes and vehicle delivery levels. We continued to see strong flows and market share gains and scalable capabilities, including fundamental fixed income SMA is in Etfs and each of these areas we continue.
To see opportunities to increase operating leverage and profitability. Additionally, within private markets. We're building momentum in wealth management channels and extension of our historically strong institutional heritage.
Andrew Schlossberg: Second we ended the period with a record setting one eight trillion dollars of total AUM, an increase of 5% over last quarter and a 21% increase from the prior year.
Andrew Schlossberg: Third we again generated positive operating leverage in the quarter. We grew adjusted operating income by 4% and drove over 70 basis points of operating margin improvement from last quarter, we're improving the fourth we're improving the financial flexibility of the firm strengthening the balance sheet and enhancing capital returns to shareholders.
Andrew Schlossberg: Specifically, we met our zero net debt goal and executed $25 million of share buybacks. During the quarter. As you can see we are acutely focused on our strategic priorities and driving profitable growth. We have good reason to be optimistic given our performance in what was a choppy operating environment globally this quarter.
Speaker Change: Market breadth.
Speaker Change: <unk> to gain its footing, we are exceedingly well positioned to benefit.
Speaker Change: The strategic and operational clarity required an exceptional talent across the company to continue to execute quarter by quarter.
Speaker Change: Moving on to slide four let me expand a bit more on the third quarter asset flows results across our investment capabilities.
Speaker Change: Our growth continues to be led by our ETF platform, which had organic long term inflows of $17 $7 billion or 16% on an annualized basis.
Among the highest ETF growth quarters in our history.
Speaker Change: In the U S market continued to be led by factor based equity strategies are equity NASDAQ innovation suite and fixed income bullet shares. We also saw strong growth from the EMEA region with nearly $5 billion of net inflows, we continue to innovate in the quarter launching five new products in the U S and wanted to.
Speaker Change: EMEA with a focus on extending our active ETF lineup, we feel very well positioned to continue to gain market share and use our scale to drive profitability across both passive and active ETF strategies.
Speaker Change: Shifting to fundamental fixed income we garnered nearly $6 billion of net long term inflows in the quarter were an 8% annualized organic growth rate.
Speaker Change: Marking our best quarterly results in the past three years and three times our flow volume from last quarter with the fed now moving more aggressively tail risks have declined declined technicals have been strong and we have seen investors, adding duration to lock in yields institutional flows were the main driver for us this quarter comprising 70%.
Speaker Change: Our volumes, we recorded sizable new investment grade mandates globally, with particularly high demand in the Asia Pacific region.
Speaker Change: S. Wealth management flows were also strong led by our municipal bond strategies. This was in large part driven across our SMA platform, which continues to expand rapidly with AUM, reaching nearly $27 billion or 45% increase over the past year.
Speaker Change: With our continued strong investment performance across the fixed income risk and duration spectrum, we remain very optimistic about our ability to continue to capture fixed income flows and money increasingly rotating into these asset class asset classes.
Speaker Change: Shifting to private markets, which in aggregate had flat slow growth in the quarter, leading the category, though with our real estate capabilities, which recorded positive net inflows of $1 $2 billion in the quarter growth was led by <unk>, which is our real estate debt strategy targeting the wealth management channel.
This fund was launched last year and has steadily gained about momentum in the wealth space.
Speaker Change: Now distributed through several key platforms, including adding one of the largest U S wealth managers late in the third quarter.
Speaker Change: These developments complement our significant real estate presence in institutional markets.
Speaker Change: Also note that we have over $5 billion of dry powder to capitalize on emerging opportunities.
Speaker Change: Within alternative credit we recorded net outflows driven by bank loans, particularly in our Etfs.
Speaker Change: Moving on to Asia Pacific.
Speaker Change: On a managed basis in the region, we recorded modest outflows of $800 million, Conversely, and as I mentioned earlier flows sourced from Asia Pacific clients were quite strong at $5 billion in the quarter. This highlights how we're leveraging our broad product suite globally to meet demand across its important region spin.
Speaker Change: Specifically, we had very strong inflows in Japan for the quarter driven by continued success in our global equity and income strategy, which generated $1 $2 billion of net flows and is among the top selling active retail funds and the growing Japanese asset management market.
Institutional activity was also strong in Japan with inflows in our investment grade fixed income products.
Speaker Change: This was offset by some outflows and locally managed Japanese equity strategies.
Speaker Change: In China market volatility rain for the third quarter, particularly in fixed income.
Speaker Change: Where we recorded some outflows after a strong second quarter. During the period, we were pleased to launch for equity Etfs through our China JV.
Yes, they are a fast growing part of our China business and build on our strength in the U S and EMEA and we anticipate this vehicle type will continue to see strong demand.
Speaker Change: At a macro level in China, we're encouraged by the government's recent focus on Eagle economic stimulus, we've seen some positive effects of this over the past few weeks.
Speaker Change: And we believe that continued development should ultimately be very helpful for our business, particularly for equities, even if there is some volatility in the near term.
Speaker Change: Our business profile and our prospects in the Asia Pacific Region remained very strong led by our well established China JV, our long presence in Japan, and our recently announced JV in India.
Speaker Change: Turning to our multi asset related capabilities, we saw modest net inflows in the quarter driven by quantitative strategies.
Speaker Change: Finally, the relative pressure on fundamental equity flows continued in the third quarter. However, as I pointed out previously we have seen some moderation overtime and important global international and emerging market segments.
Speaker Change: Net outflows in these strategies have slowed during the past several quarters to approximately $1 billion to $2 billion per quarter remaining markedly lower than 2020, twos quarterly peak outflows of $6 billion.
Speaker Change: Typically outflows in our emerging markets equity strategy has been particularly are partially offset by continued strong inflows into our aforementioned global equity and income strategies as well as small cap equities across multiple markets.
Speaker Change: Asset flows in our fundamental equity capabilities remain below our long term expectations.
Speaker Change: AUM has benefited from market gains and stands at 15% higher than this time last year. Our investment leadership continued team continues to focus on driving high quality alpha upgrading our talent bench and strengthening our risk management tools.
Speaker Change: Regardless of client demand our focus remains on gaining market share in our fundamental equity categories in which we compete.
Speaker Change: Moving on to slide five we provide an alternative aggregation to our AUM and flows to provide additional context for our performance.
Speaker Change: I've covered most of the key highlights around the broad strength the results of our diversified profile by geography investment approach and channel, but one additional item that I would point out is at the bottom right section of the slide where you can see the continued positive net inflows coming into our institutional channel, we're beginning to see higher levels of money in motion.
Speaker Change: Typically in fixed income and greater overall client expansion across the firm.
Speaker Change: Moving on to slide six this slide summarizes our overall investment performance relative to benchmarks and peers as well as our performance in key capabilities, where information is readily comparable and more meaningful to driving results.
Speaker Change: Achieving first quartile investment performance is a top priority and we're making progress on this front on a one and three year basis, we increased the percentage of our AUM in the top quartile peers with over 50% of our funds now hitting that mark.
Speaker Change: One year and 43% over three years further 71% of our AUM is beating its respective benchmark on a five year basis with 42% in the top quartile.
Speaker Change: We continue to have excellent fixed income performance across nearly all capabilities and time horizons. This supports the conviction we have in our ability to attract flows as investors deploy money into these strategies.
Speaker Change: No 64% of our fundamental fixed income capabilities are in the top quartile peers on a one year basis with 70%, beating that beating their respective benchmarks over five years, 81% of our funds are in the top half of peers with three quarters, beating their benchmarks.
Speaker Change: Especially focused on improving fundamental equity performance and we continue to make incremental progress this quarter.
Speaker Change: Improve the percentage of our top quartile peers across each time periods shown here with 28% in the top quartile for one and five years and 24% over three years. Additionally, on a five year basis, we now have 61% of our AUM in the top half of peers.
Speaker Change: With that I'm going to leave it here and turn the call over to Alison to discuss our financial results for the quarter and I look forward to your questions.
Alison: Thank you Andrew and good morning, everyone. Let me begin on slide seven our.
Alison: Third quarter financial results total assets under management at the end of the third quarter from one eight trillion dollars $80 billion to 5% higher than last quarter and a record high for Heska.
Alison: Also had record high long term assets under management of $1 three trillion, an increase of 6% over last partner.
Alison: Higher markets accounted for $50 billion of the increase on that long term inside trial 16, and a half billion dollar increase in assets under management during the quarter.
Alison: Of the $50 billion increased due to higher markets $29 billion was driven by our ETF and index capabilities, including $5 billion I don't think you can.
Alison: Fundamental equity AUM increased $13 billion and fundamental fixed income AUM increased $6 billion as well due to higher markets.
Speaker Change: As Andrew noted net long term inflows are strong once again at 16, and a half billion, which represented organic growth of over 5%.
Speaker Change: ETF and index capability, excluding that keeps you too by the way on long term debt inside pedaling $18 billion.
Speaker Change: Fundamental fixed income capabilities generated $6 million in that part.
Speaker Change: Offsetting that is a $6 $3 billion in fundamental equity net outflows during the quarter.
Speaker Change: Average AUM increased $73 billion, a growth rate of over 4% quarter over quarter, one seven trillion at quarter end.
Speaker Change: Net revenues adjusted operating income and adjusted operating margin all improved from the second quarter and I'll cover the drivers of that shortly.
Speaker Change: Adjusted diluted earnings per share was <unk> 44 for the third quarter versus prior quarter Etfs to fourth Street.
We further strengthened the balance sheet during the third corner, we ended the quarter in a net cash position with cash and cash equivalents exceeding that better than our goal here at that time, we also resumed share buybacks in the third quarter.
Speaker Change: Purchasing $25 million during the quarter and we expect to continue buying back shares on a regular basis going forward.
Speaker Change: Moving to slide eight as we've noted in prior calls secular shifts in client demand have altered our happen next and that revenue yield as our broad set of capabilities allowed us to capture he saw bank client products preferences, which has been increasingly reflected in our results.
Speaker Change: Our portfolio is better diversified today, and five years ago, and our concentration risks and higher fee fundamental equity and multi asset products has been very good.
Speaker Change: The firm is increasingly better positioned to navigate various market cycle, that's shifting client demand.
Speaker Change: As we noted last quarter. We have included a current net revenue yields trend alright, net revenue yield trends on the site.
Speaker Change: I capability are representative of where the net revenue yield has raised over the past five quarters.
Speaker Change: And we know and that revenue you'll drivers were in the range Del's have trended more recently.
Speaker Change: To provide you better visibility on current net revenue yield by capability.
Speaker Change: To provide context for the net revenue yield trend during the third quarter. Our overall net revenue yield was 25 three basis points.
Speaker Change: Isn't that Rodney almost 25 basis points.
Speaker Change: 310th of a basis point lower due to continued mix shift during the quarter.
Speaker Change: Turning to slide nine now.
Speaker Change: Revenue of $1 $1 billion in the third quarter was $18 million higher than the second quarter, a 2% increase and slightly higher than the third quarter of last year.
Speaker Change: And that's that management fee for $33 million higher than last quarter and $40 million higher than the third quarter of last year. The increases were driven by higher average AUR, partially offset by the mix shift to premium.
Speaker Change: Performance fees of $14 million lower than the second quarter due to seasonality as we typically see a decrease in the pharmacy and the third quarter compared to the second quarter.
Speaker Change: Total adjusted operating expenses in the third quarter were $756 million, a slight increase of $6 million or less than 1% of second quarter.
Speaker Change: So a slight increase over the prior year when taking into account the $39 million related to new organizational changes.
Speaker Change: Yeah.
Speaker Change: Compensation was $6 million lower than the prior quarter, mainly due to higher performance fee related compensation.
Speaker Change: As we reported in our GAAP operating results, we took a onetime noncash acceleration of $148 million in expense, resulting from changes to the retirement criteria related to vesting of currently outstanding long term awards.
Speaker Change: A one time acceleration of compensation expense for outstanding long term awards for our employees.
Speaker Change: <unk> newly defined eligibility criteria for retirement.
Speaker Change: <unk> reduced the recent volatility we have experienced in compensation expense due to retirement.
Speaker Change: Over the prior six quarters retirement expense related to the acceleration of long term awards by nearly $60 million and it varies meaningfully quarter to quarter.
Speaker Change: The changes to the criteria for retirement spring Thats more in line with the market for these types of plans.
Speaker Change: Other aligns us with how best companies account for the expenses associated with the acceleration of long term awards at retirement.
Speaker Change: G&A was $11 million higher than the prior quarter.
Speaker Change: Costs associated with our Alpha platform implementation increase from $12 million in the second quarter of $15 million in the third.
Speaker Change: And professional related fees were higher versus the prior quarter.
Speaker Change: At the implementation of Alpha continues to ramp up we expect alpha related one time implementation cost to be closer to $15 million in the fourth quarter of 'twenty 'twenty four.
Speaker Change: They will continue to update our progress and related costs as we move forward with the implementation.
Speaker Change: Quarter over quarter positive operating leverage by 100 basis points trading of $13 million, 4% increase in operating income and a 70 basis point improvement in our operating margin to 31, 6%.
Speaker Change: Our effective tax rate of 21, 8% in the third.
Speaker Change: We estimate our non-GAAP effective tax rate won't be near the lower end of our historic range of 23% to 25% for the fourth quarter of 'twenty 'twenty four yeah. So effective rate can vary due to the impact of nonrecurring items on a pretax income and discreet tax items.
Speaker Change: I'll wrap up on slide 10.
Speaker Change: As I noted earlier, we continue to make progress on building balance sheet strength on the hard corner.
Speaker Change: We ended the quarter in a net cash position with cash cash equivalents exceeding debt by $155 million better than our goal of zero net debt.
Speaker Change: We ended the quarter with no draw on our credit facility.
Speaker Change: Our leverage ratios continue to improve and we're now down to a leverage ratio excluding the preferred stock of 0.2 next time.
Speaker Change: <unk> improvement over the past couple years.
Speaker Change: They resumed share buybacks in the third quarter buying back $25 million or one 5 million shares during the quarter.
Speaker Change: We expect to continue our regular share buyback program going forward repurchasing around $25 million in the fourth quarter, depending on market conditions.
Speaker Change: We further anticipate a total payout ratio, including common dividends and share buybacks will move closer to 60%, which we expect will continue in 2025 as we continually continually evaluate our capital return level.
Speaker Change: Taking place the resiliency and strength of our firm's net flow performance as evidenced again this quarter and we continued to make progress on simplifying the organization building a stronger balance sheet, while continuing to invest in areas of growth.
Speaker Change: We remain committed to driving profitable growth high level of financial performance and enhancing return of capital to shareholders.
And with that I'll ask the operator to open up the line for Q&A.
Speaker Change: Yeah.
Speaker Change: Thank you at this time, if you'd like to ask and answer. Your question. Please press Star one you will be announced prior to asking your question. Please pick up your handset when asking your question to withdraw your request you May press star two.
Speaker Change: Okay and our first question comes from Brennan Hawken with UBS. Your line is open.
Brennan Hawken: Good morning, Thanks for taking my questions.
Brennan Hawken: Andrew you spoke to the stimulus in China, and not really impacting the third quarter, but you've seen some positive effects over the past few weeks could you maybe provide a bit more specificity to that you know what have you seen and how should we be thinking about the potential impact of the stimulus on on eye GW.
Andrew Schlossberg: Yeah, Hey, Brian. Thanks look it's early days in China, and we know how much volatility exists in that marketplace.
It looks like they did it honestly, we saw what happened in markets and that's good for our business that's good for.
Investor sentiment I think what we've seen mostly as the mix shifts going on so I think what had predominantly been earlier this year.
Andrew Schlossberg: At the end of last year, our focus on fixed income is starting to shift a bit more towards the equity side of things or the fixed income plus we call. It which is a balanced portfolio. I think it's also important to remember that the mix of our business at ITW and in the Chinese market is more skewed towards fixed income and Bal.
Andrew Schlossberg: So our Iga GW business is about 30% equities fell 30% fixed income, 20% balanced and 20% money market. So we expect to see.
Andrew Schlossberg: I think demand improve but it is it's early days to speculate too much.
Speaker Change: Got it thanks for that that's helpful.
And then Alison.
Speaker Change: You have to effectively do ever.
Speaker Change: The balance sheet really well and it's certainly encouraging to see the buyback restart, but I'm curious if you considered rather than buying back common.
Approach mass mutual to see whether or not you could do a buyback program for the birds.
Speaker Change: You know when you when you talk to investors. The preferreds are one of the big issues and executing on that type of buyback could you know kind of.
Speaker Change: Effectively continue the Delevering efforts that you guys have done so well in the past few years.
Speaker Change: Thanks, Brent yes, we.
Speaker Change: Having ongoing conversations but now it's all about the preferred.
Speaker Change: It is a non call instrument as you know and are they 100% of until it is.
Speaker Change: Certainly with you know a negotiated a conversation in one but given the duration of that piece of paper and as a liability that they vote against that.
Speaker Change: It's not a straightforward exercise to think about any opportunity that might exist to repurchase any element of that certainly top of mind for us and something we've been talking about for four years now, but not straightforward not simple and one that I think they certainly understand as well is there are as you know.
Speaker Change: Our largest common shareholder and take quite a bit of attention to how that prefer it impacts on both sides of the equation as well.
Speaker Change: In the meantime, our strategy has been and as you noted to successfully delever around that preferred instrument everywhere, we can and I think we've done a nice job doing that we've got a little bit further to go the next maturity isn't until 2026 and in the meantime, we're really focused on continuing to build capital at her quiddity in returning capital to our core.
Speaker Change: Common shareholders.
Speaker Change: Got it thanks, well good luck with those continued discussions I hope they go well.
Speaker Change: Right.
Speaker Change: Thank you and our next question comes from Dan Fannon with Jefferies. Your line is open.
Dan Fannon: Thanks, Good morning, Alison I wanted to follow up on the change in some of the accounting associated with the the awards you obviously took a charge this quarter curious about the benefits of as we think about things going forward. If there's anything to the adjusted results and also are you anticipating any change in the pace of retirements sources to incentives.
Speaker Change: Behavior internally as well.
Speaker Change: Sure. Thank you for the question. So a couple of things one we really have not.
Speaker Change: Had clear criteria around retirement in the past and so that is the motivation for this change and the benefits are really there are multiple benefits. One is it does put us more in line with how most company handle retirements recognizing everybody is going to retire.
Speaker Change: Chile, and creating clear criteria around it in terms of that age and years of service. That's very helpful. It provides clarity and transparency for our employees.
Speaker Change: It also gives us an opportunity from an accounting perspective too.
Speaker Change: It really better plan for those events and this acceleration is the acceleration of all of those employees that meet those eligibility requirements today and accelerating the awards that have already been issued and they will all be paid eventually but it allows us to go ahead and accelerate the expensive.
Speaker Change: With that the benefit as we as I noted before we just in the past few quarters, we've had about $60 million of retirement.
Speaker Change: Without eligibility requirements you can't recognize the acceleration that doesn't work until the day in which they tell you. They are retiring and then you kind of take the forehead.
Speaker Change: Volatility and uncertainty and our compensation expense and therefore in our earnings and so that's really well reduce that volatility you saw quite a bit of it last year, we announced some executive retirements and a lot of the repositioning had we had this criteria you wouldn't have seen that kind of volatility in our.
Speaker Change: Earnings profile in 2023.
Speaker Change: Those that were already retirement eligible doesn't work, but have already been amortized over a shorter timeframe.
Speaker Change: Okay understood.
Speaker Change: And then just following up on fixed income obviously, a good quarter for you in terms of flows can you talk about the dialogue in and where you see opportunity, particularly both I guess in the U S and globally and maybe in the context also you guys used to give us a big backlog.
Speaker Change: Of unfunded wins, just curious how that sits today and the makeup of that.
Speaker Change: In terms of the contribution of asset classes.
Speaker Change: Yeah. Thanks for the question, let me, let me start and then Alison can can chip in on the pipeline a little bit from a fixed income perspective as I noted 70% of the volume. We saw this quarter inflows came from institutions and maybe the first thing I'll say is I think we're starting to see more money kind of move into motion Horsley.
Speaker Change: Greater clarity around interest rates, but I think also with.
Speaker Change: Backlogs of mandate and Reallocations that had kind of been put on hold in quarters delayed as we've talked about previously so in the institutional marketplace. I just think it's a we're just sort of seeing a greater velocity in particular in fixed income and then in the retail space. The wealth space. We continue to see positive flows are large.
Speaker Change: For us in the municipal space in the U S has been quite strong and that's both you know.
Speaker Change: Mostly active but some put some passive and then people using a separately managed accounts in wealth management again, particularly in the U S. That's starting to increase more rapidly in fixed income in particular, where we have a really we have a competitive edge in a strength and we were relatively early in that space. So volume is definitely.
Speaker Change: Definitely picking up across the board for for fixed income and you saw it in their flows this quarter with regard to the pipeline Allison Yeah. The pipeline continues.
Speaker Change: Pretty consistent quarter to quarter for the last few quarters I'd say it hovers right around 15.
Speaker Change: $15 billion, sometimes some quarters, a little higher some quarters, a little bit lower.
Speaker Change: But we just see consistency there and hence the reason yeah, we really didn't find it all that valuable either because when you look at our flows in any given quarter. It's about a third of our institutional flows come from the pipeline, but about two thirds come from outside the pipeline. So it's an interesting barometer, but it doesn't you know it isn't that.
Speaker Change: Great have a forward indicator.
Speaker Change: But it is around $15 billion, its pretty balanced across our regions and as Andrew noted, we are starting to see greater and greater interest on the fixed income side. I mean, we have about $350 billion of of long long term fixed income. It's a scaled platform profitability will continue to improve and in particular as people.
Speaker Change: To go further out this the.
Speaker Change: <unk> curve, which is what we're seeing.
Speaker Change: Okay. Thank you.
Thank you. Our next question comes from Bill Katz with TD Cowen Your line is open.
Bill Katz: Thank you very much taking the questions. This morning, So maybe a big picture question now that your balance sheet is more healed, there's been a significant amount of M&A around you whether it be some attrition there just trying to bulk up in the alts or the old man just trying to broke up further into the alt a space or with the sort of focus of driving opportunity to fixed income replacement.
Bill Katz: Or retail democratization I was wondering if you could talk a little bit how you're positioned to participate in those trends either de novo or perhaps inorganically. Thank you.
Speaker Change: Yeah, Hey, Bill Thanks.
Speaker Change: Look the number one thing for us as as you mentioned in terms of.
Speaker Change: So the opportunity in growth is in the private market space and you can see.
Speaker Change: As I mentioned, what's happening there in wealth management and for US, there's a ton of organic opportunity.
Speaker Change: For us to continue to pursue especially if we take a real asset capabilities and our alternative credit capabilities to that wealth management market.
Speaker Change: And we're beginning to see sort of that that pace pick up with our real estate debt strategy. In particular, the interest has been quite high in the U S wealth management Arena.
Speaker Change: We were added to another one of the largest platforms just at the end or the latter part of the third quarter.
Speaker Change: So I guess, what I'm, saying is we continue to see lots of organic opportunity to take private markets into wealth management, where we have distribution strength.
Speaker Change: Product origination capability, we've invested in already the specialized skills and tools you need to to pull that through and create less friction in the marketplace.
Speaker Change: We'll continue to look Inorganically, if theres places, where we can bolt on to that set of strategies, but we really do feel like we have a tremendous amount of opportunity right.
Speaker Change: Right here in Invesco.
Speaker Change: Okay. Thank you and just as a follow up as you think about the go forward mix of the business. It sounds like at the edges. Some of the higher fee products could have some incremental demand into a new quarter, but broadly speaking it continues to be passive and fixed income.
Speaker Change: In SMA. So as you think about the interplay between the fee rate and operating leverage I was wondering can you continue to drive positive operating leverage if there's really no change to the underlying drivers to growth.
Speaker Change: Yes, we can.
Speaker Change: I would say a couple of things and I'm hopefully slide eight does help you and seeing some of that I mean, we are certainly things like strong growth across a number of our.
Speaker Change: Our investment capability and we are seeing you know underlying I would say green shoots and positive dynamics just about everywhere, we're really focused on driving that positive operating leverage by driving growth incremental progress in every single one of them.
Speaker Change: The ability to think these are really the areas, where we have deliberately chosen to compete we are focused on strengthening our capabilities inside of each one strengthening our investment performance really driving broad distribution across both our retail and institutional clients.
Speaker Change: And it is it's incremental progress on each one that drive that positive operating leverage I think notably at we're working very hard and we've demonstrated that our strength around expense management and really demonstrating expense discipline in controlling our expenses. So that we can generate that positive operating leverage with all incremental growth on the top.
Speaker Change: Offline. So certainly net revenue yield is just a mathematical sort of output of how we grow across these investment capability and our key focus is on revenue growth and I think we've demonstrated that again that's corner yeah. Bill just to further emphasize what Alex was saying I mean, we're gonna be well focused in each of these areas on profitability.
Bill Katz: On quarter and continuing to show operating leverage Yeah, I think there's some other areas of growth across Asia Pacific and we've talked about that market beyond just China as I'm really giving us some good positive growth in a place where we can continue to see revenues expand over time.
Speaker Change: Yeah.
Speaker Change: Thank you both.
Speaker Change: Thank you Bill Thanks Bill.
Speaker Change: Thank you and our next question comes from Glenn Schorr with Evercore. Your line is open.
Glenn Schorr: Hi, Thank you.
Glenn Schorr: So.
Glenn Schorr: Like a $107 billion in gross sales. So there's obviously huge brand and powerful distribution and so follow on to maybe Bill's question is if you don't have everything now that that clients want you can build organically. It takes a long time you could buy stuff you you commented on that.
Speaker Change: Is there room in the repertoire and I'm curious how you think about the general concept of.
Speaker Change: Our partnerships to lever your brand level your distribution.
Speaker Change: And strike, while the iron is hot and client preferences are changing for some things that you might not have on the shelf.
Speaker Change: Yeah, Let me start I mean partnerships.
Speaker Change: Had been a part of our our history and even a risk recent history with what we did in <unk> and in India with our joint venture we're going to continue to look for ways to create partnerships and we will continue to look for them geographically will continue to look for them from a distribution standpoint, and as well as investment capabilities and so while there's nothing specific more.
Point out this quarter I'm, just look to what we did in India look to what we did in China look at how we grow our ETF business over time.
Speaker Change: Just to indicate how much we see partnership being an Avenue and Avenue to our future growth.
Speaker Change: Maybe I'll stay on theme and ask a follow up on mass mutual.
Speaker Change:
Speaker Change: I feel like you can come in in plenty on the press issue, but there is a great opportunity to grow within their channel further penetrate their retail network and do more with them can you.
Speaker Change: Talk about some of the things you're thinking about working on.
Speaker Change: With them as as a you know obviously big distribution partner not just big owner.
Speaker Change: Yeah, one of the Ah Theres several yeah, we're starting at about a little over 13 $14 billion of assets that we manage on behalf of massmutual is either generally counter or the affiliated affiliated.
Speaker Change: Distribution and what I would say one of the bigger opportunities as model portfolios into their broker dealer network, which we think is a huge growth area. It's a place where they've been successful we have a strong models business and certainly lots of capabilities underneath to populate them alongside other other players.
Speaker Change: There is just as we continue to build out sub advised into their into.
Speaker Change: Into their insurance products and capabilities and that could exist across equities and fixed income. So those are just a few of the things that we're working on a regularly with massmutual and I agree with you that that should continue and can be.
Speaker Change: A powerful partnership.
Speaker Change: Thanks, Andrew.
Andrew Schlossberg: Thank you.
Speaker Change: Thank you and our next question comes from Craig Siegenthaler with Bank of America. Your line is open.
Craig Siegenthaler: Hey, good morning, everyone I had a question on alpha it looked like integration expenses rose $3 million sequentially in the quarter. So when should expenses peak and when will you start to see a net quarter over quarter improvement in profits of mouth, especially cuz Alpha was.
Speaker Change: Saves invesco money over time.
Speaker Change: Yeah. Thanks, Craig.
Speaker Change: Yeah, I think as we as we noted last quarter, we expect to be transitioning our U M onto the alpha platform in a series of waves.
Speaker Change: Expect that first made to be in the fourth quarter of this year.
Speaker Change: Through 2020, five and as we continue to test and learn with these ways, even perhaps early into 2020 effects.
Speaker Change: We are incurring implementation costs as we go as we expect we will be paying state street feet on the even as we transition that AUR on and so to your question. Yes. It did the implementation costs were up a little bit in the third quarter, we expect it to be relatively consistent here in the fourth quarter is implemented.
Speaker Change: Asia continues to ramp up as we get into next year and we're paying state Street's piece on the AUR that we're transitioning over and we're still paying a honest about that other platforms, where we will be running parallel for some time and we expect we expect overall costs start to peak next year, and we'll be giving you more guidance around all of that as we get it.
Speaker Change: In 2025, and then in 2026, we expect to start to see the benefit of ramping some of those other system off and really starting to extract the benefits of going to a single platform.
Speaker Change: It's a it's been a long time coming and we're deep at the testing and we're learning quite a bit but we'll continue to give you guidance as we evolve and then that's fine with going into 2025.
Speaker Change: Thank you Alison and for my follow up on the ETF business bullet share flows were particularly strong in the quarter. So I was hoping you could talk about the key drivers and if you expect this to continue over the next few quarters given that interest rates are somewhat declining now which minutes may benefit longer duration treasures.
Speaker Change: Yeah.
Speaker Change: Yeah, I mean, it's the butchers are thanks for pointing it out I mean butchers are a great franchise.
Speaker Change: And we have a very built out diverse range and it's our leading fixed income franchise insider ETF capabilities are one of them and so the same trends that I mentioned before about investor demand happening in the wealth space and institutional frankly applied to the bullet shares and so we it's not just been this past quarter, but the previous.
Speaker Change: This quarter, we saw good bullet share growth then I think I'd expect that to continue there are maturities that happen every year in December you know the thing get repopulate it into the into the first quarter.
Speaker Change: So I continue to watch that where we feel great about the bullet share range.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question comes from Alex Blaustein with Goldman Sachs. Your line is open.
Alex Blaustein: Hey, everybody. Good morning. Thanks for the question I was hoping to double click into the private real estate flows you highlighted in the prepared remarks, and a couple of times in the Q&A.
Alex Blaustein: So it sounds like the the contribution was relatively healthy for them, maybe one of the platforms that got added towards the end of the quarter was that the bulk of the growth and does that come from are almost kind of like a one time ish sort of benefits. Since you just got at it or the growth and the strength there has been a little bit more broad based and I guess on the institutional side could you update.
Alex Blaustein: It is on what the key when redemptions look like it sounds like that's starting to ease a little bit for the industry.
Alex Blaustein: So I'm just curious have you seen the same.
Speaker Change: Yeah. Thanks for the question, let me clarify a little bit on the real estate credit side. The platform that we got added to the large U S wealth platform that happened at the end of the quarter doesn't come with flows. It just comes with the opportunity and so none of the flows in the quarter really were materially related to that so that's a maybe call it on the come.
Speaker Change: The demand for our real estate debt strategy is where a significant part of the real estate flows for this quarter came from now that strategy has been out market for the better part of a year. It is already on one other large U S. Both platform and several others that relate to the independent and RIAA channel.
So we started to see that volume pick up in and hopefully that that flywheel continues as we get into next year. I also want to talk about the redemptions chair I mean, and I would just add maybe Alex to double down on that Wow that that product was a strong driver of the real estate funds that wasn't the only driver of our real estate.
Speaker Change: You also saw really strong growth in our real estate estimates and I think just our improvement overall in demand.
Speaker Change: For this asset class, which is really encouraging.
Speaker Change: As it relates to the redemption two yes, I mean, the pressure certainly starting to moderate there a little bit with just the overall improvement in the broader markets that has an impact on the denominator effect.
Speaker Change: So maybe a little bit higher than they are for sort of a normal cycle or do you start to see a slow improvement, but certainly I would take a cautious.
Speaker Change: Our views on that as you as people are really trying to get their arms around the path.
Speaker Change: Of interest rate and what that means for transaction activity overall, but certainly seeing the pressure abate there and overall more encouraging signs on the private real estate.
Speaker Change: And just to remind everybody. It's you know all of our real estate assets are the 70 billion or so that's correct only about half of it are in funds. So the restaurants separate accounts in our closed end vehicles.
Speaker Change: On a global basis.
Speaker Change: Great. That's helpful and Allison just a quick question for you the the service and distribution fee. It looks like came down sequentially, despite higher markets and higher AUM levels, which tends to correlate it something that I think started to become a little more disconnected recently.
And I guess at the same time distribution expense increased sequentially. So kind of the net effect of that on profitability continues to become a bigger drag I know, they're not perfect. There's a few things that go in there, but maybe just expand on kind of what drove the decline in the revenue side and kind of further creep up on the expense side.
Speaker Change: Sure I mean, just a couple of things one there is a relationship between service and distribution fees in the third party distribution Contra revenue line item.
Speaker Change: Because there's an element of past three is between this category and so you really do have to look at them together and you come in net them against management fees and when you do that and you look over kind.
Speaker Change: Kind of a historical time period had the last few quarter or several years for several years, it's really run historically in that 13% to 14% range as a percentage of management fees, but.
Speaker Change: But in more recent quarters, it's trending towards the higher end of that range and that's really at due to the product mix shift towards the higher ETF flows in these more recent quarters in Egypt don't generate as much service and distribution fee revenue as mutual funds do.
Speaker Change: And there are third party expenses, such as licensing fees. So it tends to make that ratio is skewed slightly higher.
Speaker Change: Yeah, I think that mix shift and as it's something obviously, we're increasingly seeing is we're seeing not just in our own mix, but just across the industry that demand for Etfs outstripping the demand for the mutual fund wrapper. If we do you expect that to continue then I would say, it's reasonable to expect that relationship to be closer to.
Speaker Change: 14% than it had been historically, 13%. So I know that was kind of a detailed answer there, but I think it's the way to really look at it the way we're wrapping our heads around it year to year kind of quarter to quarter right now.
Speaker Change: No that makes perfect sense alright, thank you very much.
Speaker Change: Okay.
Speaker Change: Thank you and our next question comes from Ben Buddhist with Barclays. Your line is open.
Ben Buddhist: Hi, good morning, and thanks for taking the questions.
Ben Buddhist: I wanted to first ask about the competitive dynamics in the fixed income business. You know you called them in the prepared remarks, you called out a number of factors a new investment grade mandates U S. Wealth management flows, but just curious am I I guess I suppose you don't always know where the flows are coming from if they're coming from somewhere else, but is there an opportunity from for share gains in that in that sort of space is there was there any.
Ben Buddhist: You saw in the quarter or do you see that as an opportunity for the fourth quarter or is this more sort of money in motion rates coming down more of a kind of organic pick up.
Speaker Change: Yeah, It's a great question and its also hard hard to parse it completely you know I think the trends are what we're largely seeing his money. That's in motion for the reasons that we mentioned before fixed income is a competitive space and so you're you're largely are also having to compete and take assets from from <unk>.
Speaker Change: Petters, even as money is in motion could be growing but also its takeover mandates theres nothing in particular that I can that we can point to from this quarter in that regard I'd also say that a lot of the assets that are flowing into fixed income arent just coming here in the United States. You know they are coming out of Asia, Theyre coming out of Europe as well, so it's really been a global.
Speaker Change: <unk>, a global phenomenon for us across global investment grade corporates, even elements of E. M. And then as I said before municipals are included in the United States.
Speaker Change: Got it very helpful.
Speaker Change: Maybe one one more kind of follow up on the private wealth side. Just you mentioned that you launched on it on a very large distributor just curious how would you describe your current distribution.
Speaker Change: Capabilities relative to kind of broader invesco as it applies to just the the private markets products. Thank you.
Speaker Change: Yeah. So we we have a generalist specialist model.
Speaker Change: And how we take private markets both in the institutional and in the wealth space over the last several years.
Speaker Change: We've been strengthening that mix and so we've been adding specialists to the team.
Speaker Change: Sit alongside our generalist in private markets in particular in the U S wealth space and we think that's working pretty.
Pretty well given the pick up that we're seeing but we've made those investments already I don't expect to see us doing a whole lot more there in terms of investing behind those areas of distribution now it's just a matter of taking the products that we have on platform and growing our volume and continuing to find a few new products.
Speaker Change: That we can bring to that wealth space I'd say, we've also and we will continue to invest in beyond just distribution. It's all the things that are required to minimize the friction that's in place and bringing mandates on servicing those mandates and the specialized things that are required in private markets. So it's more than product and distribution.
Speaker Change: When in private markets in the wealth space, we feel like we've made a most if not all of those investments.
Speaker Change: Okay got it thank you very much.
Speaker Change: Yeah.
Speaker Change: Thank you and our next question comes from Michael Cyprus with Morgan Stanley. Your line is open.
Michael Cyprus: Thank you. Good morning, I was hoping you could talk a little bit more about the India JV that you set up if you could maybe just elaborate a bit on the opportunity set that you see how you see that market place to opening up and talk about some of the steps that you are looking to take in your approach there and any sort of lessons back lessons learned looking back at the really gear relationship that you have.
Speaker Change: Over the years and how that May inform your approach here. Thank you.
Speaker Change: Yeah. Thanks, So we're still working through regulatory approvals and that joint venture.
Speaker Change: Sure and the disposition of our portion of it.
Speaker Change: We're planning to have completed in the first quarter.
Speaker Change: But as it relates to opportunities and lessons learned.
Speaker Change: First I think it's important you pick a good partner and we feel like we have a good partner.
Speaker Change: In India, that's going to that has captive distribution, that's bank oriented and that can really help us expand the clients, we serve and help us continue to grow in India. We believe very much in the Indian market.
Speaker Change: You know really for us it was less about Indian more about really wanting to make sure. We are focusing our attention in other in all the areas that are that are critical to us that we've talked about it.
Speaker Change: Concentrating in consolidating our efforts. So we're pleased to be able to participate in the Indian market as a minority investor in this JV and as a provider of investment capabilities behind that a that our JV partner and the company can take forward to the marketplace.
Speaker Change: Look on the lessons learned I'd, just say back to the earlier question. You know partnerships are a great way for us to expand in certain markets around the world and it'll continue to be a place that we'd look to four for distribution and product going forward as well and so each partnership you learn something but I think our appreciation of them is only growing.
Speaker Change: Great. Thanks, and then just a follow up question on the expense on the expense outlook I was hoping you could maybe elaborate on how you see that taking shape here into the fourth quarter and next year, how you see expenses trending and if you could maybe help quantify how much the state Street alpha fees on AUM might be how meaningful might that be next year and as you think about <unk>.
Speaker Change: For continued positive operating leverage as you look out from here how much uplift in market beta do you need to drive that positive operating leverage.
Speaker Change: Ah Okay, what's left there.
Speaker Change: Let me, let me actually take your last one first we can drive.
Speaker Change: Positive operating leverage without market beta so long as we continue to drive strong organic crest and maintain that expense discipline that I think we have been able to demonstrate over these last couple of years.
Speaker Change: Positive market beta is obviously tremendously helpful, but we're really focused on delivering.
Speaker Change: Operating leverage and operating income and margin in prison that with or without a market games and that's really fundamental to how we're planning for the company and as we said several times before our focus is on getting ourselves back to a mid thirty's operating margin, we demonstrated two quarters of <unk>.
Speaker Change: Our operating margin growth, we're pleased with that but we're nowhere near where we want to be or intend to be and so our focus is on really building. The business. So that we can outperform at least deliver positive operating leverage with or without market and prevent its not easy, but that's the focus.
Speaker Change: Second in terms of and then kind of going backwards on your question, but as it relates to outside the state Street feet and I can tell you is immaterial for the fourth quarter, just given given that says it's really based on the AUM that we move and we move it in waves.
Speaker Change: Certainly dependent on the level and the quantum of AUR and each way so.
Speaker Change: We're continuing to scope out this way that has a pretty material impact on on the fees and that will be paying next year in terms of that's fourth quarter immaterial less than $5 million. So it really it's TBD a bit next year as we continue to work through the wave in the quantum in each wave that will give you more guidance that's why.
Speaker Change: Continue to have certainty around that.
Speaker Change: As it relates to expenses in the fourth quarter.
We always have some seasonality in the fourth corner either in terms of both marketing and G&A and a compensation, usually it's a little bit higher in the fourth quarter. It dependent on performance fees. So those are the three areas that I would love to unexpected a little bit of a seasonally higher expenses I would say overall our expense basis.
Speaker Change: It's trending.
Speaker Change: Consistently for the year to the guidance, we gave at the beginning of the year. We said we expected our total expenses to be around $3 billion for 2024 without any market improvement and we've certainly seen some revenue end market improvement.
Speaker Change: The beginning of the year and something we would expect our expense base to be a bit higher than that but you know on a year to date basis, you can see how that's trending and then I would expect some seasonally higher increases modestly higher in the fourth quarter.
Speaker Change: Great. Thank you there's a lot of that question I hope I covered it all.
Speaker Change: You did thanks.
Thank you. Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Oh, great. Thanks, most of my questions have been asked and answered, but just a couple maybe just one going back to the great wall JV.
Speaker Change: You talked about this earlier in the presentation, but.
Brian Bedell: Is there an opportunity for the fee rate to improve if you look at the contracting elements of the of the fee cuts and obviously the shift out of fixed income, but but but you're you're I think correct me if I'm wrong, but you're thinking that we may see a positive mix shift into equities in.
Brian Bedell: And the great wall coming in for Q, maybe if you could just discuss that dynamic and whether we could see a rebound in that fee rate in as early as four key versus <unk>.
Speaker Change: Yeah. Thanks for the question and as mentioned earlier the dynamics that have occurred in the last several weeks certainly has changed a lot in China and will have an impact both of them have had an impact on the markets and certainly have an impact on our business.
Speaker Change: Equities as I mentioned before is and.
Speaker Change: An important part of the business. It's it's 30% so just keep that in mind.
Speaker Change: But we certainly exited the months feeling a lot better than we did or exited the quarter a lot better than we did intra quarter and you've continued to see what's happened in the marketplace. Since then.
Speaker Change: Flows coming out of fixed income.
Speaker Change: And we're going into equity over time, both passive and active from.
Speaker Change: From a fee rate perspective, you know that's a that's a generally good thing for for our business, but again lots of volatility in China, but we you know we exited as you can see the quarter.
Speaker Change: Some of the highest rates that we've seen in some time.
Speaker Change: Got it thanks, and then just on the global liquidity. If you could just comment on that is a good idea of outflows here and it's Ricky maybe just just if you can talk about any seasonality factors in <unk> and then do you expect liquidity flows to benefit from the rate cutting cycle or are there are there other dynamics, but my press.
Speaker Change: Sure It does.
Speaker Change: It was.
Speaker Change: Yeah.
Speaker Change: Thanks on the cash liquidity business. Just a reminder, you know most of our assets.
Speaker Change: Assets and liquidity business are institutionally oriented about 85% of them and so these institutions do have other tools that they can use outside of money market and our cast tools when interest rate pictures are changing and I think that probably was the the most material part of the impact in the third quarter and things were.
Speaker Change: Skewing a lot more towards the banks that have dominated that space going forward, our liquidity business is $170 billion that.
Speaker Change: A profitable part of our company. It's a place that we're continuing to expect a lot out of and we have the scale. So.
Speaker Change: I think you know time will tell here in the fourth quarter of what occurs but do keep in mind. It's a it's different than a lot of other asset managers, given the big institutional SKU that we have.
Speaker Change: Okay fair enough okay, great. Thank you.
Speaker Change: It's Eric we have time for one more question.
Eric: Sure thing and our last question comes from Patrick Davitt with Autonomous Research. Your line is open.
Patrick Davitt: Thanks, a lot I just have a quick follow up on that last question. Obviously, a narrative a lot of people have been trying to push for a while now is this idea of the cash on the sidelines well fewer will fuel the bond allocations, but we're seeing both money funds and bond funds broadly with big inflows in the last few months.
Speaker Change: Do you have a sense of where in the allocation stack I guess the strong bond flows are coming from for you where where it's rotating from within your client's allocations because it certainly doesn't appear to be money funds at this point.
Speaker Change: Yeah, I mean, I'm not sure it's from our client allocation as much as from their own their.
Speaker Change: Their own allocations, we're definitely seeing people go.
Speaker Change: Further out in duration were seeing that in our interest in that business, which went really short to more intermediate.
Speaker Change: We're seeing that in and you know just in the in the core fixed income space, both in institutional and retail so we're definitely seeing both money come.
Speaker Change: Off the sidelines and money you know go off on the duration curve as well.
Speaker Change: Or where it's coming from in our business as I said, it's not coming from our from our money fund business. That's a totally different dynamic we think that it's coming from the sidelines there were from competitors.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: Okay and back to you Mr Schlossberg.
Andrew Schlossberg: Okay, well. Thanks, operator in closing, we are well positioned to help clients navigate the impact of evolving market dynamics and subsequent changes to their portfolios as market sentiment improves and clients conviction strengthen this should translate to even greater scale performance and improve profitability.
Andrew Schlossberg: For Invesco as we've discussed today given all the work that we've done to strengthen our ability to anticipate understand and meet evolving client needs I'm very excited for the future of Invesco I really want to thank all of my industrial colleagues for their continued hard work I'm proud of our collaboration with one another and our focus on our clients.
Andrew Schlossberg: Thanks, everybody for joining the call today, please reach out to our Investor relations team for any additional questions and we appreciate your interest in Invesco and look forward to speaking with all of you again soon.
Speaker Change: Thank you that concludes today's conference you may all disconnect at this time.
Yeah.