Operator: Welcome to Invesco's Q3 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, today's call is being recorded. Now I would like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations.
Greg Ketron: Thanks, operator, and to 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 on the call. 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 forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on slide 2, as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for the accuracy of our earnings 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 will open up the call for questions. I will now turn the call over to Andrew.
Andrew Schlossberg: Great. Thanks, Greg, and good morning to everybody. I am pleased to be speaking with you today. During Q3, we continued to execute against our strategic priorities, leveraging our advantageous market position globally to deliver for our clients and for our shareholders. We generated over $100 billion of net long-term inflows through the first nine months of the year, representing a 6.5% annualized organic growth rate. Well over half of those flows came from outside the US, demonstrating the breadth of our global platform and the relevance of our capabilities in meeting clients' evolving needs. The continued growth of our diversified AUM base is driving revenue growth and substantial operating leverage.
Andrew Schlossberg: On a quarterly sequential basis, net revenue increased 4%, while operating expenses declined 1%, driving operating income growth of 13% and operating margin expansion by more than 3 percentage points to 40.7%. Furthermore, on a year-over-year basis, operating income increased 39% and operating margins expanded by 650 basis points. These strong business results are enhancing our financial flexibility and supporting the ongoing strength of our balance sheet, while allowing us to continue investing in our business and returning capital to our shareholders. Over the past year, we have improved our leverage ratio from 2.5x to 1.6x, inclusive of the outstanding preferred shares. We have also increased our common share buyback by over 100% year-to-date versus the same period last year. This morning, we announced the repurchase of an additional $1.5 billion of the preferred stock held by MassMutual.
Andrew Schlossberg: This brings the total repurchase to $3 billion over the past 18 months, leaving just $1 billion outstanding. Accelerating the retirement of these otherwise non-callable preferred shares ultimately enables reduced leverage, increases our balance sheet flexibility, and enhances earnings available to common shareholders. Allison is going to discuss this transaction and our financial results in greater detail. I want to emphasize that the platform we have built at Invesco and continue to scale is delivering profitable growth, enabling us to hold true to our capital priorities of investing in our business for the future, meaningfully strengthening the balance sheet, and returning capital to shareholders. We are immensely proud of the progress we have made through the continued disciplined execution of our strategic roadmap and the collaboration of our colleagues across the company. We remain firmly focused on sustaining and building on our momentum.
Andrew Schlossberg: Shifting to asset flows, I would like to spend a few minutes highlighting Q3 client demand results within each of our investment capabilities noted on slide 4. The Q3 operating environment remained broadly constructive with resilient equity markets and strong pockets of demand amid rising rates and increased market dispersion. Our diversified scaled platform drove strong organic growth of 6.3%, or $35.1 billion of net long-term inflows as clients continue to entrust Invesco with significant new capital. Additionally, we generated $47 billion in global liquidity inflows, ending the period with $262 billion in AUM in this category. Importantly, we are encouraged by the continued breadth of our overall growth. We had positive flows across several dimensions, including in many of our strategically important investment capabilities across the Americas, EMEA, and the Asia-Pacific region, and in both our active and passive strategies.
Andrew Schlossberg: The breadth of our inflows is also demonstrated by the fact that 25 of our products generated more than $500 million in net inflows during the quarter. EMEA and Asia Pacific again produced very strong net inflows with nearly 16% and 11% annualized organic growth, respectively. In our ETFs and index offering, we continue to substantially scale our platform and our profitability. Ending AUM stood at a record $775 billion with nearly $29 billion of net inflows or a 15% annualized organic growth rate. We garnered net inflows across a diverse set of products with 14 ETFs generating more than half a billion dollars in net inflows. This growth was generated across the globe, with EMEA producing nearly half of the net inflows for the quarter and posting a 26% annualized organic growth. Our EMEA ETF AUM now stands at nearly $240 billion, including the QQQ.
Andrew Schlossberg: We remain focused on innovation in the ETF space. During the quarter, we launched seven highly targeted, strategically aligned products, including five active ETFs. We have built a robust active ETF platform globally, which continues to grow as demand has accelerated for high-quality, differentiated strategies. We currently manage $30 billion in active ETFs across nearly 50 products, and this AUM base increases to more than $45 billion when including index-based ETF strategies that are executed by our active investment teams. Our QQQ fund also attracted strong interest during the quarter with nearly $7 billion of net inflows or 6% annualized organic growth. This performance reflects QQQ's differentiated competitive position, supported by a very large and broad institutional and retail investor base. Unmatched liquidity with tight spreads and deep options and derivative markets developed over multiple decades.
Andrew Schlossberg: When looking more broadly across our full suite of QQQ products in the US and globally, which includes QQQM, we generated a very strong $16 billion in net inflows during the quarter. Moving on to fundamental fixed income. Within these capabilities, we had net outflows of $2.6 billion for the quarter, but this was heavily driven by a few relatively large institutional reallocations out of stable value and low-fee investment-grade index-oriented mandates. However, looking more broadly across all fixed income products managed throughout Invesco, including strategies reported within ETFs and our China JV, we generated a more respectable $1.3 billion of net inflows for the quarter. We continue to see strong inflows for active fixed income ETFs and SMAs within the wealth management channels. Our entire SMA platform, which also includes a portion of equity assets, now stands at nearly $41 billion in AUM.
Andrew Schlossberg: We have one of the fastest-growing SMA offerings in the market, generating an annualized organic growth rate of 11% this quarter. Moving on to our China JV and following strong momentum in the H1 of the year, flows moderated amid Q3 market volatility and equity markets drawdowns. Despite this, we reached record AUM of $166 billion and generated net inflows of $1.5 billion, or 5% annualized organic growth, driven by institutional demand for our bond strategies. The continued growth overall in our domestic Chinese business is supported by a diversified product line with various style offerings, which allows us to adapt to changing client needs in different market environments. To further support growth in the JV, we launched nine new funds this quarter that are aligned with the growing demand for innovation and balanced, as well as active and passive equity strategies.
Andrew Schlossberg: Widening the scope to look at the entire Asia Pacific region from a client source perspective, our AUM has now reached $375 billion. During the quarter, we generated nearly $9 billion of net inflows or 11% annualized organic growth led by continued strength in Japan, where our AUM has reached $95 billion. We also saw strong demand for our QQQ product suite supported by our cross-listings in Hong Kong and Tokyo, as well as for our broader passive and active fixed income product lineup in the region. We value our strong and advantageous position in Asia, which continues to scale as we see capital market expansion, wealth creation, and extraordinary growth of the individual and retirement segments in several countries across the region over time. Shifting to private markets where we posted a modest $400 million of net outflows.
Andrew Schlossberg: In alternative credit, we saw strong institutional demand for our CLO products, including the funding of two new offerings, one in the US and another in EMEA. This growth was offset by nearly $700 million of net outflows in our industry-leading bank loan ETF in the United States. Overall, we continue to see strong demand for alternative and private credit solutions from institutional investors on a global basis. The current slower growth environment overall has not changed our long-term conviction for these strategies in both the retirement and wealth management channels. We have a favorable position with dry powder, diversification, and extensive experience. For managers with our discipline and profile, continued volatility could ultimately prove to be an opportunity.
Andrew Schlossberg: Within our real estate capabilities, INCREF, our real estate debt fund for US wealth management clients, continued to gain scale and generated $500 million in net inflows during the quarter. Assets in this fund, including leverage, now total $7 billion. Moving on to our multi-asset capabilities where we had over $3 billion of net inflows in the quarter, driven by a positive result across all three regions, with particularly strong demand in EMEA. This momentum was driven by systematic equities as interest in quantitative strategies and custom equity products continues to grow. I will also note that asset allocation model portfolios in the wealth management channels are quickly becoming a core distribution venue for delivering the breadth of Invesco's investment solutions.
Andrew Schlossberg: We have over $20 billion in assets across our model portfolios and anticipate continued expansion in both our custom and pre-built models where we are making investments to drive future growth. Finally, in fundamental equities, we saw significantly moderated net outflows of only $1.5 billion and another strong gross sales quarter. We continued to record net inflows from clients in Asia, driven by the ongoing momentum in our Invesco Global Equity Income Fund, which remains one of the top-selling retail active funds in the Japanese market. This fund, which generates a very favorable net revenue yield, posted net inflows of over $4 billion during the quarter, rapidly growing to over $30 billion in AUM and reflecting the sustained appetite for income-oriented global equity strategies.
Andrew Schlossberg: We also continue to see strength in our US small and mid-cap value funds, which drove nearly $1 billion of net inflows in the US during the quarter. Furthermore, our Invesco Developing Markets Fund in the US continues to experience significant moderation of outflows with just $400 million during the quarter. We have made substantial progress in building a fundamental equities platform globally, taking decisive action to simplify our structure, bring capabilities closer together across regions, strengthen investment talent and oversight, and create better pathways to work more efficiently and cohesively to build breadth and depth across our teams. We believe this puts us in a much stronger position to improve investor outcomes and garner fundamental equity market share gains globally, regardless of client demand and various market cycles. Finally, I will take a moment to speak to our investment performance on slide 5.
Andrew Schlossberg: This page shows our overall investment results relative to benchmarks and peers, as well as our performance and key capabilities where information is readily comparable and more meaningful to driving client demand. Investment performance is integral to winning and maintaining market share, and as such, achieving first quartile investment performance remains a key priority for Invesco. Overall, 47% of our active funds are performing in the top quartile of peers on a three-year time horizon, with 58% reaching that bar on a five-year basis. Further, 70% of our active AUM is beating its respective benchmark on both a three and five-year basis. As I mentioned, we are working to improve performance in our fundamental equities lineup, which currently has 40% of funds performing in the top quartile of peers on a five-year time horizon, with nearly half beating their benchmark.
Andrew Schlossberg: Likewise, in fundamental fixed income, we saw the percentage of funds performing in the top quartile of peers over a five-year time period increase to 45% this quarter. With that, I am going to take a pause and turn the call over to Allison Dukes to discuss the details and the benefits of the additional $1.5 billion repurchase of preferred stock and our financial results for the quarter, and we look forward to your questions.
Allison Dukes: Thank you. Thank you, Andrew Schlossberg, and good morning, everyone. I will start on slide 6 with the strategic rationale and impact of repurchasing an additional $1.5 billion of Invesco's preferred stock, bringing the total repurchases to $3 billion since the initial repurchase in May of 2025. We are very pleased that we were able to reach an agreement with MassMutual to repurchase additional preferred stock, as there are a number of advantages for Invesco in being able to repurchase the stock. We funded the purchase with a $1.5 billion five-year floating rate bank term loan that currently has a rate in the 5.35% to 5.4% range based on SOFR today or an approximate after-tax cost in the 4% to 4.05% range. This compares favorably to the fixed 5.9% dividend on the preferred stock, which is not tax-deductible. Both the preferred stock repurchase and related refinancing closed yesterday.
Allison Dukes: We expect the transaction to be earnings accretive in 2027, and the accretion will increase over time as we pay down the term loan. Ultimately, once the loan is fully repaid, we expect the EPS accretion related to the transaction will reach $0.20 on a run rate basis. Taking into account the aggregate $3 billion in preferred stock repurchases to date, we expect EPS accretion of $0.17 in 2027, reaching a run rate of $0.41 once the associated term loans are fully repaid. Based on our projected future cash flows, we expect to have the loans fully repaid in 2031. We would also anticipate prepaying the term loan should future cash flows provide the opportunity to do so.
Allison Dukes: By repurchasing the preferred stock, we will save an additional $88.5 million in annual preferred stock dividends, bringing the total to $177 million that now becomes earnings available to common shareholders. While the initial annualized borrowing costs associated with the additional repurchase will be in the $60 to $65 million range after tax, this will decline as the loan is paid down through future cash flows. The terms and conditions are similar to our floating rate revolving credit facility and the five-year term loan funding last year's repurchase. They are prepayable at any stage with no make-whole fees. There is a 12.5% premium being paid to MassMutual to repurchase the $1.5 billion of preferred stock based on the present value of a 5.9% dividend rate being eliminated nearly 14 years ahead of the first call date.
Allison Dukes: This is lower than the premiums paid on the 2025 repurchases, reflecting current higher market rates. The premium will be included in our Q4 GAAP results but will not impact our adjusted operating results. The slide shows the expected EPS accretion build and the forecasted repayment of the bank term loan and the impact the repurchase will have on our leverage ratio. Looking at the leverage ratio excluding the preferred stock, we do see a near-term increase in leverage from the term loan, but to a very manageable level near one time, followed by significant improvement as we repay the loan. The change to the leverage ratio, including the preferred stock, is not materially impacted as we are effectively replacing the preferred stock with the term loan. However, with this transaction, we are able to meaningfully improve our leverage profile over the next five years.
Allison Dukes: I would note the leverage ratios shown here are pro forma, assuming no change in EBITDA from what we are reporting as a trailing four-quarter EBITDA for the Q3 of this year. Moving to the financial results on slide seven. Strong organic growth and money market inflows more than offset a negative market impact in the Q3 and drove nearly a 3% increase in assets under management over the Q2. Net long-term asset inflows were $35 billion in the Q3, a 6% annualized organic growth rate, marking the 13th consecutive quarter of net inflows. Net flows into money market funds were very strong at $53 billion, while the negative market impact was -$26 billion for the quarter. AUM at the end of the quarter increased to over $2.5 trillion, 19% higher than the Q3 of last year.
Allison Dukes: Average long-term AUM was $2.2 trillion, a 4% increase over last quarter and 52% higher than last year. Net revenue, adjusted operating income, and adjusted operating margin continued to show significant improvement from the Q2 as well as the same quarter last year, while adjusted operating expenses continued to be well managed. On a sequential quarter basis, net revenue growth was 4%, while adjusted operating expenses declined by 1%, generating over 500 basis points of positive operating leverage and a 320 basis point operating margin improvement in the Q3, with operating margin improving to 40.7%, the highest level since 2021. Adjusted operating income increased nearly 13% to $562 million for the quarter, and adjusted diluted EPS increased to $0.72 from $0.71 in the Q2.
Allison Dukes: On a year-over-year basis, net revenue growth was over 16%, while adjusted operating expenses increased 5%, generating over 11 points of positive operating leverage and a 650 basis point operating margin improvement. Adjusted operating income increased over 38%, and adjusted diluted EPS were up 18% from the $0.61 we reported for the Q3 last year. Our focus on strengthening the balance sheet continues as we reduce net debt by nearly $400 million in the quarter. The reduction, combined with improved EBITDA, resulted in a substantial improvement in our leverage ratios. Finally, we increased common share repurchases in the Q3 as compared to prior quarters, buying back $65 million or 2.1 million shares.
Allison Dukes: Moving to slide 8, secular shifts in client demand continue to drive strong growth in lower fee products such as ETF, including the QQQ, while the demand for higher fee products, such as fundamental equities, has not been as strong. We have seen the impact of the asset mix shift moderate over the past several quarters, resulting in a more modest decline in the net revenue yield. Strong global liquidity growth through our money market funds did impact our net revenue yield trend to a greater degree in the Q3 than in recent quarters. We did see the net revenue yield stabilize towards the end of the Q3. To provide context, the net revenue yield was 21.5 basis points for the Q3, and the exit yield at quarter end was 21.3 basis points.
Allison Dukes: Turning to slide 9, net revenue of $1.4 billion in the Q3 was nearly $200 million higher compared to the same quarter last year and $53 million higher compared to last quarter. The increase in net revenue was largely driven by investment management fees, predominantly due to higher average AUM. On a year-over-year basis, the increase was also driven by the reclassification of the QQQ to fee earning. Performance fees of $19 million were also higher than we typically see in the Q3. $10 million and $14 million higher on a year-over-year and sequential basis respectively, due mainly to the timing of when the fees were earned. Given the level of performance fees in the Q3, we would expect Q4 performance fees to not be as seasonally impacted and may be relatively flat to slightly higher than the Q3.
Allison Dukes: Operating expenses increased $39 million versus the same quarter last year and decreased $11 million compared to last quarter. The year-over-year increase was mainly driven by higher employee variable compensation related to the growth in net revenue and marketing expenses related to the reclassification of the QQQ. The decrease from last quarter was mainly due to timing differences that resulted in lower property, office, and technology expense, in addition to a modest insurance recovery in G&A expense. The hybrid investment platform implementation costs were $15 million in Q3, in line with our expectations and prior quarters. The incremental operating expense associated with AUM that has been moved onto the hybrid platform was $8 million in the quarter. The majority of this expense is impacting property, office, and technology and will be going forward.
Allison Dukes: Regarding the hybrid implementation platform cost for Q4, we expect the one-time implementation cost to run closer to $15 million. As we continue to transition more AUM onto the platform, the incremental expense related to AUM on the platform will build towards $10 million in Q4. Expenses associated with the platform may fluctuate due to timing. Regarding property, office, and technology expense for Q4, we expect expense to be in the $120 million to $125 million range. Given these expense dynamics, we thought it would be helpful to provide our expectations for Q4 total adjusted operating expenses. We expect Q4 to be in the $830 million to $840 million range, assuming flat markets. The effective tax rate for Q3 was 25.1%, in line with expectations.
Allison Dukes: For Q4, we estimate our non-GAAP effective tax rate will be in the 25% to 26% range, excluding any discrete items. The actual effective rate can vary due to the impact of non-recurring items on pre-tax income and discrete tax items. I will wrap up on slide 10. As I noted earlier, we continue to make progress on building balance sheet strength and improving our leverage profile. During Q3, we reduced net debt by nearly $400 million as compared to Q2. This included reducing the amount drawn on the revolving credit facility from $736 million at the end of Q2 to $393 million at the end of Q3, accomplished through operating cash flow. The reduction in debt, coupled with improving EBITDA, resulted in a substantial improvement in our leverage ratios.
Allison Dukes: The leverage ratio inclusive of the preferred stock declined by three tenths of a turn in Q3 to 1.6 times, and the leverage ratio excluding the preferred stock declined by over two tenths of a turn to 0.33 times for the quarter. Looking back over the past year, the leverage ratio inclusive of the preferred stock has improved by nearly a full turn, driven by the $1.5 billion in preferred stock repurchases in 2025, debt reduction, and improving EBITDA. The $1.5 billion additional repurchase we announced today will further improve our leverage position. We also increased the degree of common share repurchases in Q3. We increased the amount repurchased to $65 million or 2.1 million shares. We intend to continue a regular common share repurchase program going forward as we target a total payout ratio, including common dividends and share buybacks, to be near 60%.
Allison Dukes: To conclude, we generated another quarter of significant organic growth and the diversity of our business continued to drive AUM higher. The resulting revenue growth, combined with well-managed expenses, delivered another quarter of positive operating leverage and significant improvement in our operating margin. We also continued progress on building a stronger balance sheet, enhanced further by the additional preferred stock repurchase. We are committed to driving profitable growth, a high level of financial performance, and enhancing the return of capital to our shareholders. With that, I will ask the operator to open up the line to Q&A.
Operator: Thank you. At this time, if you would like to ask an audio question, please press star 1. You will be announced prior to asking your question. Please pick up your handset when asking your question. To withdraw your request, please press star 2. One moment, please, for our first question. Our first question comes from Michael Cho with JPMorgan. Your line is open. You may ask your question.
Michael Cho: Hi. Good morning. Thanks for taking my question. I just wanted to touch on margins, just given the considerable operating leverage we saw this quarter. I guess maybe in the context of the key AUM buckets, if I just look at the net revenue yields slide, I appreciate the dynamics of the mix shifts. But is there a way to frame the margin or operating leverage discussion relative to some of the key buckets and mix shifts occurring on the net revenue slide? Thanks.
Allison Dukes: Thanks for the question, Michael. I think it is hard to frame the operating leverage specifically to the buckets because we really look at those investment capabilities as a whole, and we look at the business as a whole. But certainly, some of those investment capability scale matters. The ETFs and the QQQ would be the place I would point to where you certainly can see the difference-maker of scale and the impact that is having on our overall operating margin expansion. The other place I would point to, and it is the one area where the operating margin is visible, is our China JV. You can see that in the schedules and the press release, and the operating margin in the China JV is north of 60%.
Allison Dukes: It is a distinct entity, so you can certainly see the power of growth in a business like that with that kind of operating margin. I mean, our focus overall is growing each one of our investment capabilities and doing so with very responsible expense management. We really think about our expenses from a global perspective. One of the drivers, I think, of our operating leverage improvement over the last several years has been that philosophy of managing expenses from a global priority perspective and not allocating them out and really driving prioritization against our strategy and remixing our expense base where we can. I think that has been really one of the main drivers of the improvement we have seen.
Andrew Schlossberg: Yeah. I would say also, if you go into fundamental equities and fundamental fixed income, we have brought each of those together as single platforms, one for fixed income globally and one for equities globally. Of course, it has different teams inside of it. But I think running those more efficiently and for the benefit of scale is another reason we are seeing some of the operating leverage improvement. I would also say underneath many of these capabilities or investment capabilities, things like SMAs and model portfolios, quantitative strategies, these all scale relatively well.
Michael Cho: Great. No, thanks for all the color. If I could just follow up on ETFs and some platform fees discussion or industry news that has been out there recently. Andrew Schlossberg, you talked through the core, strong, stable of ETFs that Invesco has and launching some of the faster-growing actives franchise as well. I guess, without commenting on any specific negotiations or anything like that, do you see any areas of opportunity for Invesco to use its scale and ETF business to potentially take market share or focus on areas where you can create more robust partnerships?
Andrew Schlossberg: Yeah. I mean, with the Qs at $1.3 trillion of collective ETF assets, and then really strong client relationships, for instance, in the US wealth channel where we are a top 10 player, we have really strong relationships all across the piece there. Fee negotiations or fee-sharing has always been something that is part of those relationships. As we have said in past quarterly calls, what we are seeing is what everyone is seeing, a shift from mutual funds as the predominant vehicle. There was a shift to other things as the predominant vehicle.
Andrew Schlossberg: We are taking share as that shift is happening, both on the passive side and as we build out the active ETF lineup as well, as we bring our SMA lineup, which I was talking about as a major growth area, and then model portfolios, which house a lot of ETFs. So having a strong ETF business. All of those things bring a lot of relevance to our clients, not just the platforms, but RIAs and independent advisors. They are looking to do more with fewer people, and we are seeing that happen not just in public markets, but in private markets too.
Michael Cho: Great. Thank you.
Andrew Schlossberg: Thank you.
Operator: Thank you. This question comes from Brennan Hawken with BMO Capital Markets. You may ask your question.
Brennan Hawken: Good morning. Thanks for taking my question. I wanted to touch quickly on the net revenue yield and distribution. Thanks for the exit rate on net revenue yields. You guys had the Canadian transaction and some elevated money funds close in the quarter. Just curious about what kind of impact that had on the fee rate. Then we did see the net distribution tick down. Was that just continued trends there, or was there something noisy that might have driven that? Thanks.
Allison Dukes: Yeah. Thanks, Brennan Hawken. You are correct. The Canadian sale did have some impact on the net revenue yield, maybe about 0.2 of a basis point. 0.7 or so would have been really just driven by mix shift, and that mix shift would include the really strong growth we saw in money market funds in the quarter. So nothing in there that I would say is especially concerning. The money market fund growth certainly came with revenue, and the organic revenue growth in the quarter was very strong. I would point us all back to the organic revenue growth that we continue to generate even as the net revenue yield grinds tighter.
Allison Dukes: That is what we are trying to manage, that is what we are focused on, and net revenue yield is the outcome of where we are seeing the growth coming from. But it was about 0.7 from that mix shift. The growth in the QQQ and just ETFs overall was the other contributor to that mix shift. Then that does translate into some of what you see in the distribution fees. I would come back to the best way to think about this is third-party expenses plus distribution fees as a percentage of management fees. I think that relationship is the best relationship to think about. It was 22.9% this quarter. I think it is probably fair to think about it in the 23% range or so going forward.
Allison Dukes: That is really driven by the significant growth we continue to see in some of these lower fee-yielding ETFs like the QQQ, the QQQM, RSP. Those ETFs have lower management fees. They also have some higher licensing, trustee, and custodial fees, and that is what drives that relationship somewhere around that 23% context.
Brennan Hawken: Great. Thanks for that color, Allison. It was great to see you get to the low end of that 38% to 42% comp ratio range that you have laid out a few years ago. It certainly sounds like from the Q4 expense outlook that a lower comp ratio is durable. Is that the right read? How sustainable do you think it is to be at the low end of the range? By the way, is there anything structural preventing you from breaking through the low end of that range? Thanks.
Allison Dukes: Yeah. The range, that 38% to 42% range is an annual range. We do not really. There is a lot of seasonality in our compensation, so the quarterly comp to revenue ratios are not all that meaningful because we really accrue based on our full year forecast, and we have to manage based on our full year forecast. So I would continue to point you back to that annual relationship. I think we will be, for 2026, on the lower side of that range, probably in the 39% to 40% context for full year 2026. To your question of, is there anything keeping us from breaking through that range in the future, well, first of all, it is not going to be this year. As I said, I think this year will be in the 39% to 40% range.
Allison Dukes: I think it really depends on how we continue to grow and scale our business going forward. It is a function of headcount, of course. There is a pretty significant part of our compensation that is fixed. The variable component of our compensation and of total compensation is maybe 25% or so. So that fixed component is really driven by headcount. As we continue to run an efficient business and grow our business and scale our business, that could certainly drive that range a little bit lower over time. But for now, I think it is still probably the right overall range, and we will evaluate as the business continues to grow and shift.
Brennan Hawken: Thanks for taking my questions.
Andrew Schlossberg: Thanks, Brennan Hawken.
Operator: Thank you. This question comes from Glenn Schorr with Evercore ISI. You may ask your question.
Glenn Schorr: Hi. Thanks very much. I listened to a good podcast that you guys did, like 2 weeks ago, and you talked about prioritizing credit over yield in your real estate business, and all about downside protection and preserving capital, not chasing maximum yield. But within that, my main question is, it specifically talked about avoiding data centers. I was just curious, is that a stance specific to the real estate business and where you see value in real estate credit, or something more firm wide? Because underneath that is how are you and how are you not participating in what is this humongous capital raising cycle? Sorry if that is involved, but thanks.
Andrew Schlossberg: Sure. I think that is certainly more specific to that team in real estate that would have been expressing their view. I think real estate debt in general has been a phenomenal grower for Invesco. There is a ton of interest, not just from wealth clients. I mentioned INCREF, the strategy we have been building, that is performing quite well vis-a-vis its competitors, and there are not a lot of offerings out there for real estate debt in the US wealth space. But also in the institutional markets and non-US markets, we are continuing to see demand. That team's discipline, it is a long-tenured institutional team of good asset allocation, good security selection. I think we will continue, but that view would be specific to that team.
Glenn Schorr: Okay, maybe I will just follow up with the second part of it, is broader picture. As you see, I think yesterday was something like $200 billion in financing across the AI food chain, if you will. Where can you and where do you participate across that? I am not sure if you have any specific views on debt load coming and how Invesco plans to participate in that. Thanks so much.
Andrew Schlossberg: Yeah. Most specifically, you know we have a large public fixed income franchise, and you look at all of our public and private fixed income inclusive of cash, it is about $800 billion. So we are participating in a lot of ways. Specifically on the private side, we have around $50 billion of alternative credit platform, which is made up of senior loans, it is made up of direct lending, distressed. So we are participating throughout the lending on the private side. But as I said, also as it expands and as it continues to develop on the public side, we will participate as well. So it is pretty broad. Look, that extends into the equity markets too, when you look at where our exposure is.
Glenn Schorr: Thanks, Andrew.
Andrew Schlossberg: You are welcome.
Operator: Thank you. Our next question comes from Alex Blostein with Goldman Sachs. You may ask your question.
Alex Blostein: Hey, guys. Good morning. Wanted to dig in a little more into the way the business is evolving from a mix perspective. Obviously, the active equity headwinds have been with us for a while. It is a relatively high-fee product. One of the ways to obviously mitigate it is to see faster growth in the private markets, which is a similar fee. That has been relatively muted for you guys still. As you think on the forward basis, and let us say if the active equity business remains in the same range, is there anything more you guys could do to accelerate the private markets piece of the model to offset some of the headwinds on a fee yield perspective you are seeing on the equity side?
Andrew Schlossberg: Yeah, thanks for the question. I would start with the profile of our private markets business. About $90 billion of the $135 billion is in real assets. As we all know, the real estate equity side of demand has been quite muted. There have been challenges across the industry, obviously in that business. We think we have reached the bottom part of that and are coming out the other side, and we have a very strong franchise there. What we are doing on the equity side of that business, to repair and grow portfolios in the core and core plus space, but also get more into the value add space is going to be important.
Andrew Schlossberg: The growth on the debt side that I was just talking about a moment ago in real estate is going to be critical. That platform is not just in the US, it is a European and Asian platform too. As real estate improves and as we see opportunities for growth, that could be important for Invesco. We have introduced wealth management strategies for both the equity and the debt side. On the credit side, I talked a little bit about our profile before, but the two partnerships we formed to reach the wealth management and retirement space with Barings and LGT last year, those product lines have come into or are starting to come into formation. We have a multi-asset credit strategy in market. We will have a multi-asset growth strategy. These are both private in market.
Andrew Schlossberg: We will have a private ABF fund in market, all targeted towards the wealth space and ultimately towards the defined contribution space. We have built out a private real estate strategy and a commingled trust fund for defined contribution plans. We have over $1 billion of seed capital coming from those partners. We feel like the things we have done in the last couple of years to build that out are waiting for market demand in those segments, all credit and private real estate. In terms of other places we could grow and expand, we are still focused on the core of what we have in organic, but partnerships and other ways to form alliances to grow and be more expansive in private markets is definitely something on the docket.
Alex Blostein: Got it. Thank you for that. Just another one around capital, and it is awesome to see, obviously, all the progress you have made over the years and creating a lot more balance sheet flexibility on the forward. Does that at all change your approach to M&A and anything inorganic, given that you have a bit more financial flexibility today versus a couple of years ago?
Allison Dukes: No, it really does not. Let me say it differently. We are as opportunistic and open-minded to inorganic growth as we ever have been. It certainly by pulling that debt forward, it does not change it from a negative perspective. If anything, we think it gives us more flexibility, more optionality. The improvement in our stock price over the last few years also gives us more optionality as we have improved just the overall value of our currency. We have been focused on finding the right capabilities. We have been focused most of all on our organic growth. We have been able to demonstrate that organic growth. We have had peer leading organic growth for several years now. We have focused a lot in investing in ourselves, divesting certain businesses, getting a much more streamlined portfolio.
Allison Dukes: In doing that, I think we have created additional value that can be used as we think about inorganic growth in the future. It does not change the strategy. If anything, perhaps it improves the optionality.
Alex Blostein: Got it. Great, Alice. Thanks so much.
Operator: Thank you. Our next question comes from Bill Katz with TD Cowen. Your line is open. You may ask your question.
Bill Katz: Great. Thank you very much for taking the question. Excuse me, I have a little bit of hoarse voice. Just thinking through capital return priorities going forward. Certainly hear you on the graduating up to 60% total payout rate and the accretion from pulling forward of the preferred redemptions. Just thinking from a perspective of earnings yield, looks like if you just simply multiply your Q4 and divide by the stock price, the earnings yield is about 10%. You mentioned that the after-tax cost of debt is about 4%. How does that inform your decision in terms of buyback versus debt reduction as you look out through 2027 and 2028?
Allison Dukes: I would say our strategy is maybe a bit more simple than that. As we think about buybacks versus debt reduction, we think we have got to make progress against both. We are always going to be evaluating in any given year, what the highest and best use is as we move forward. We think it is really important we continue to return capital to shareholders. We have heard that loud and clear over the years. We have seen the improvement as we continue to deliver these returns in more of a continuous fashion. As we think about paying down debt, look, the debt is floating rate, so that will certainly factor into our judgment calls year to year as we think about how we return capital versus pay down debt. Right now, certainly relative to the preferred, it was very advantageous to do it.
Allison Dukes: We don't think the changes we've made in the capital structure today in any way impact our ability to target a return near 60% of net income to our common shareholders. It also does not impact our ability to continue to invest in ourselves. We have a pretty aggressive CapEx and product launch strategy each year. We will continue to do so as we look at how we can continue to generate the strongest organic growth for ourselves.
Andrew Schlossberg: I think just adding to what Allison said, I think the thing we're most pleased about is that we have the flexibility to do the things that Allison mentioned, and that flexibility is pretty different than it was 18 months ago.
Bill Katz: No question. Okay. Just as a follow-up, just coming back to think about the longer-term margin opportunity. Certainly great to see the margin crack through 40% this quarter, I think well ahead of what most people were anticipating. If I did the math right, you had about an 80% incremental margin year on year, just to take out some of the seasonality and obviously some puts and takes across the different line items. Nonetheless, I think you mentioned in another question, about 25% of your costs are fixed. Should we be positing that the incremental margin's still in that 70% to 75% range? Within that, can you just give us an update on where you are in terms of the Alpha transition and when you might be done with the implementation costs, and then what might be a longer-term run rate on the servicing side? Thank you.
Bill Katz: Or onboarding side. Thank you.
Allison Dukes: Okay, there was a lot in there. Let me go back to one cleanup. My comment earlier was that of our total compensation, about 25% is variable. Of compensation itself, a large component of it is fixed. I think that is important as you think about margin and where we have got leverage. As we think about overall operating margins going forward, look, our focus is, as we have said for a long time, our focus was getting back to the high 30s this quarter. We obviously exceeded that on a quarterly basis. Quarters can have a lot of noise, and there is also seasonality. Our focus is on maintaining and sustaining that margin in the high 30s. That is, as we think about all of our growth going forward, where we are most focused.
Allison Dukes: At times, that might mean generating a margin north of 40%, and we are certainly not opposed to moving that margin higher. More than anything, we have been working on really rehabilitating the business. Of course, the year-over-year changes are pretty substantial because of the reclassification of the QQQ. I think that is important to keep in mind when comparing 2026 to 2025. In terms of the implementation of our hybrid investment platform, we are still working towards transitioning all of our AUM onto the platform by the end of this year, perhaps some of it into the beginning of next year. Implementation costs, as I said, were $15 million in Q3. We expect them to be about $15 million in Q4. From there, they should start trending off. They do not necessarily go automatically to zero on 1 January.
Allison Dukes: It is not completely tied to a calendar year, but I think it becomes very immaterial in Q1, and I hope to not be talking about implementation costs in Q1 at all. With that, as we noted, the platform fees for transitioning all that AUM on will increase to about $10 million in Q4. We will then start to turn our attention, once we get into next year and hopefully everything is running smoothly, we will start to turn our attention to decommissioning various software. That will continue 2027 and into 2028.
Andrew Schlossberg: One thing I would add on the margin side, it is a more strategic comment on just expenses in general. The business has been pretty disciplined, and we thank our colleagues for that. That does not mean we have not been reinvesting in the business. We have been remixing that expense base. It has funded the product lines and launches that we have done, the private markets build-outs that are underway, things we are doing in ETFs, things we are doing overseas. I think our ability to reallocate our expense base and that discipline is much higher than in the past.
Operator: Thank you. Our next question comes from Brian Bedell with Deutsche Bank. You may ask your question.
Brian Bedell: Great. Thanks. Good morning, folks. Thanks for taking my questions. Just maybe just a cleanup on the Q4 on the expense $830 million to $840 million guide, assuming flat markets. I think, Allison, you touched on all the components of that. The one thing is, I think the property costs are going up to $120 million to $125 million. Does that imply a reduction in the G&A or a lack of seasonality in marketing spend? Also just if you could just go through Q4 preferred stock dividends and the interest expense given the actions that you took on the preferred stock dividend.
Allison Dukes: Okay. Let me start the expense guide. There is maybe very modest seasonality in marketing. I would point you back to the components and some of what we noted, and there was some one-time in G&A and property office and technology in the Q3. I think with the guide of $830 million, $840 million, we give you most of what you need there, comp being in the 39% to 40% range full year, and property office and technology about $120 million to $125 million. Again, that is because as we are moving AUM onto the hybrid investment platform, the majority of that cost that we noted starts to impact property office and technology. I think that kind of gets you what you need there. No, that was my point on your second one. Interest expense.
Brian Bedell: You already did. You said preferred stock.
Allison Dukes: So-
Brian Bedell: Yep
Allison Dukes: in the expense, I think you will be able to get to what you need with all the debt costs, which are all publicly filed. You have the new $1.5 billion on the term loan. The pref dividend will work just as it has in the past. I think it goes through 1 November or 1 December. That is all publicly available as well.
Greg Ketron: Yeah. Hey, Brian, Greg. The way the preferred dividend works, it is paid in arrears. So the one that is declared and will be recorded in Q4 will be based on from 1 September through 26 October, is going to be the $2.5 billion that exists before we did the repurchase yesterday. From 27 October through 30 November, it will be $1 billion, and that will be at the 5.9% preferred dividend rate.
Brian Bedell: Got it. Yeah, that little detail was just what I was after. Then just maybe on a longer-term question. Can you talk about your digital asset strategy and willingness to start engaging in tokenizing funds? Obviously, we are seeing some more pickup across the asset manager space. Maybe framing that in line with your growth initiatives. I guess just how do you see that market developing, and do you see that more as an overseas impact initially or more in the US?
Andrew Schlossberg: We think the tokenized fund market is going to continue to grow, and we think it is important. As you would have recalled a quarter or two ago, we took on our first tokenized money market type fund, an on-chain US Treasury fund that we took over with Superstate for about $1 billion. That was our first foray. We are looking at some other stablecoin reserve money market fund tokenizations to do. Then, of course, we are looking at ETFs, potentially traditional funds. That tokenization trend is going to happen not just overseas, it is going to happen in the US. We think it is very early. It is going to take time for it to develop, but through these partnerships, and through some launches on our own, we are absolutely going to participate.
Operator: Thank you. Our next question comes from Craig Siegenthaler with Bank of America. You may ask your question.
Craig Siegenthaler: Good morning, everyone. Our follow-up is on Invesco Great Wall. The Chinese stock market peaked about 12 months ago, and it significantly underperformed US equities over the last year. We wanted to see how that has impacted your net flow outlook for the China JV. Are you expecting fixed income and liquidity to be the primary flow drivers over the next year? I think almost all your open equity franchise there is mostly domestic. Also, Liu Yanchun stepped down as Deputy General Manager, and I believe will be just focusing on investing. I was curious about what your change.
Andrew Schlossberg: Yeah. On the Invesco Great Wall JV, just to reiterate some things I mentioned in the prepared remarks. This quarter, we hit our high water mark for assets under management ending the quarter at $166 billion. I mention that just to highlight the resilience of that platform against, as you said, a more tricky background in Q3. It is also important to know how diverse the mix of assets is that we have in that JV. Equities are only about 15% of the total assets under management that we have. We do have some balance funds that are a mix between equities and bonds. They have held up. We have built out an ETF business as people are shifting, like everywhere else in the world, to that vehicle. That business is now about $15 billion.
Andrew Schlossberg: Regardless of how the equity market demand goes in the next several quarters, our business will, I think, perform relatively well given that resilience. There is also a growth in the capital markets system in general, and there is a build-out in the retirement system too. While markets may not be the tailwind that they were over the past year or two in China, just the organic growth that happens in that market, we participate too. That maybe gives you a sense of where we are with the business. It is a very sustained business. We have great growth, not just in the business itself, but the product line. We launched almost 10 new products this quarter. We continue to recruit top talent and retain top talent. We feel reasonably good about our China JV.
Operator: Thank you. Our next question comes from Mike Brown with UBS. You may ask your question.
Mike Brown: Great. Good morning. Thanks for taking my questions. Maybe just to start, I wanted to follow up on the hybrid platform discussion. The sunsetting of the legacy systems, that will of course take some time. Maybe what are the specific legacy systems you are focusing on over the next 6 to 12 months, Allison? Then maybe can you size some of the expenses that you could see come through in 2027 and maybe even into 2028?
Allison Dukes: I don't think we are going to disclose some of the legacy systems. There is a litany of them, large and small, lots of different contracts behind that as well. Not things we can comment on publicly. I think in terms of sizing of saves, we will give more guidance around 2027 expenses when we get to January. I think what we are looking at now as we continue to work across the firm in building out our 2027 plan is how we will reallocate some of our capacity, some of which we will allow to fall to the bottom line. Some of it, we will reallocate our capacity. By that, I don't just mean expenses. I mean, there has been tremendous time and focus, many individuals focused on the hybrid investment platform for several years now.
Allison Dukes: We have an opportunity as we think about moving into the next phase. It doesn't just end. There is that next phase of making sure these systems are stabilized and we decommission, but also, what else is going to be important as we continue to think about the growth of the firm, the growth of our technology infrastructure, and where we want to invest going forward. More to come on all of that, but I don't think it would be wise for us to give specifics around the software.
Andrew Schlossberg: I mean, we are excited, as you can imagine, to get the hybrid investment platform done at the end of this year. As you recall, it is not just consolidating the systems of which Allison Dukes said there are many, over 100 different tools are going to get unified into the platform. But it is also a way for us to match the simplicity and clarity that we have brought into our investment teams and platforms, so that the way that we are not just processing trades, but the way that folks are using the system goes from many different instances to just a few. So there is a lot of benefit to this beyond just the cost.
Mike Brown: Of course. Okay, great. Thank you for that color. Maybe just change gears a little bit. Obviously, we have seen interest rates really spike, and they have come down a bit from the recent highs. This quarter, you had really strong money market fund flows. Fixed income saw some net outflows. But Andrew Schlossberg, as you talked about, there are some unique dynamics underneath the surface. That was helpful color. Just as you think about clients and how they allocate here, just love some thoughts on maybe where do the cash and fixed income flows go here. Are clients starting to reallocate after that move, and how do they think about maybe a higher for longer global interest rate environment?
Andrew Schlossberg: I will make a couple comments on liquidity, and Allison Dukes will chip in as well. Just to recall, our liquidity or money funds business is largely an institutional business. So those flows that came in are from platforms and portals and corporate treasurers. Those flows were a function of good performance in our liquidity business as well. But they are not indicative necessarily of cash allocations increasing, and we would not want to overstate that too much. In terms of where those flows are going, I mean, if you just look at, I think we are at an inflection point. If you look at where our flows have been, the trends are going towards the vehicles we mentioned before, SMAs, ETFs, model portfolios.
Andrew Schlossberg: There is much more activity, I would say, in markets like the UK, out in Asia, institutionally, with money just being in motion for different pension reform reasons or insurance consolidations or pension outsourcing consolidations or just wealth creation. So some of these dynamics have nothing to do with rates. They just have to do with secular changes that are happening, and we are trying to be in front of that money when it comes. Our fixed income platform, you are seeing people shorter on the duration side, but you are starting to see folks look at higher yielding strategies as well in fixed income. We are starting to hear more demand for that. Quantitative strategies, people are starting to deploy beyond just passive to using factor-based strategies. That is a trend that we are seeing. What else would you add?
Allison Dukes: I think you covered it.
Mike Brown: Great. Thank you both.
Operator: Thank you. Our next question comes from Alex Blostein. You may ask your question.
Alex Blostein: Hey, good morning, everyone. Thanks for squeezing me in here. I wanted to ask around organic growth in EMEA specifically. You highlighted the strong asset growth there in the quarter, specifically in the ETF and index suite and also multi-asset, I believe. But can you just speak to your organic growth expectations there moving forward, and if you think the recent pace of growth in the region is something you all feel is sustainable near term? Thank you.
Andrew Schlossberg: I mean, growth's been very strong, as you noted. I mean, we're up to about $420 billion of assets in EMEA, about half of that coming from ETFs. AUM is up about 25% year-on-year. A lot of that growth this quarter was in ETFs. Also in systematic equities, multi-assets. As I mentioned, you're seeing some secular changes that I just referenced, for instance, in the United Kingdom. It's hard to project going forward, but we're pretty pleased with the strength of our European profile, and we continue to take share. Despite some of the expectations on growth in Europe, the asset management business is pretty healthy, though.
Alex Blostein: Okay, great. Thanks for that color. Then maybe one more just around the outlook for the fundamental equities business. The pace of outflows did slow in the quarter, as you noted, and it sounds like some positive trends, maybe in terms of both gross inflows and outflows in Q3. But can you speak to your line of sight in that area and maybe share what the expectation is near-term in terms of net flows for that bucket? Thank you.
Andrew Schlossberg: Yeah, in terms of expectations, as I mentioned, what we're trying to do is look at net flow market share gains regardless of market outcomes. So whether we're in a cycle that's favoring fundamental equities or not favoring fundamental equities, we just want to outgrow the competition in net flows. That starts from both directions, increasing our gross sales which we have been able to do the last few quarters, but also really reducing our redemption rates, which is a function of also investment performance. So we're really focused on investment performance and quality. We're focused on getting the right people on the right teams if they're not there, and then just participating in an outsized market share growth.
Alex Blostein: Great. Understood. Thanks for the talk.
Andrew Schlossberg: You are welcome.
Greg Ketron: Operator, we have time for one more question.
Operator: Thank you. That question comes from Michael Cyprys with Morgan Stanley. You may ask your question.
Michael Cyprys: Hey, good morning. Thanks for squeezing me in here. Maybe just on the operating margin, coming back to that. Heard about you guys looking to maintain and sustain a high 30s operating margin. I guess, why high 30s? Why is that the right level given the strength, nearly 41% on Q3? Any noise that you would want to call out in terms of seasonality or other items in Q3? I get that Q1 has seasonally elevated comp costs, but just on the look forward, just curious, any change in terms of the pace of investments in the business that might see margins staying high 30s?
Allison Dukes: No, it is not just Q1 that has seasonally high comp costs. It kind of bleeds into Q2 as well, just the way the deferred comp approvals work over the course of the year. They start high, and they kind of grind tighter all the way through Q4. So there is seasonality that kind of impacts all four quarters, but H1 certainly being higher. Look, we have divested a lot of businesses. We have changed the platform. We are continuing to invest in our growth. As we think about high 30s, as I noted, look, if we can run this business well and invest for growth and generate higher than 40% margins, we certainly will. We have no ceiling on ourselves whatsoever. But we are also not going to manage specifically to margins and starve the business.
Allison Dukes: We want to continue to invest in our future growth capabilities. It is critical as we think about technology investments and product investments and really investing in the people that are going to be necessary to grow this business over the next decade. We want to make sure we are being very thoughtful about investing ahead of growth. So high 30s is really because we have only had two recent quarters at or above high 30s. We are focused on making sure we are at high 30s through any market environment. We think that gives us more cushion. We are very cognizant of where we have come from over the last three years, and we were south of 30% just three years ago. We have made tremendous progress getting back to where we are today.
Allison Dukes: We want to be able to run this business at this margin level for the long term. We have had very constructive markets for the last couple of years. We recognize we will not always have constructive markets. So our focus is on managing this margin in high 30s, even in more challenging market conditions.
Michael Cyprys: Great. Then just a follow-up question on AI. I know you have talked about in the past fairly broad adoption across the organization. Just curious, as you look out from here over the next couple of years, where do you see some of the biggest opportunities to meaningfully change how Invesco operates leveraging AI? How do you think about those benefits ultimately translating into the financials?
Andrew Schlossberg: The top focus we have for AI right now, and we believe in the future, too, is twofold. One is to ensure that we can deliver high-quality investment returns. If we can improve upon the way we manage money and the way that we generate returns, the way that we think about risk, and the way that we have information flow across our teams, that is a huge benefit and ultimately will drive revenue. The second is likewise for client engagement. If we can strengthen our client delivery, know our clients that much better, shorten cycles with them, and delight them, that will also turn to driving revenue. All of that could create some efficiency gains, but we are really focused on how to improve the business.
Andrew Schlossberg: It is a competitive business, and so how we can improve in our portfolios and how we can continue to improve with our clients, that will yield the greatest benefits. We are applying it, as you would expect, bottom up every day with each of our colleagues using AI tools, but also top-down in some of those key areas I mentioned to do them at scale.
Michael Cyprys: Great. Thank you.
Andrew Schlossberg: You are welcome. Okay, well, in closing, we are pleased with the continued strong results this quarter. We advanced several strategically important investment capabilities and vehicles, with many reaching record assets under management. With discipline, focus, and the benefits of scale, we are generating meaningful operating leverage and improving margins, as well as continued strength of our balance sheet, as evidenced by the additional preferred stock repurchase we discussed today. We are going to continue to stay focused on our highly defined growth strategy with an emphasis on relentless execution, client-focused innovation, and teamwork across our firm. We want to thank everybody for joining the call today. As always, please reach out to our investor relations team for any additional questions. We appreciate your interest in Invesco, and we look forward to speaking with you all again soon.
Operator: Thank you. This concludes today's conference. We thank you for your participation. At this time, you may disconnect your line.
