Invesco Ltd (IVZ) — Q4 2015 Earnings Call Transcript

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products, and other aspects of our business or general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts, and future or conditional verbs, such as will, may, could, should and would, as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Forward-looking statements are not guarantees and they involve risks, uncertainties, and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements, and urge you to carefully consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q filed with the SEC. You may obtain these reports from the SEC's website at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure, if any forward-looking statement later turns out to be inaccurate.

Thank you very much and thank you everybody for joining Loren and myself, and I'll briefly review the 2015 highlights before getting into a review of the business results for the fourth quarter, and then Loren will go into more depth of the financial results, and then of course we will open up to Q&A as we always do. So let me start by providing a brief overview of the operating results for the full year, and if you're so inclined, I'm on page 3 of the presentation. Long-term investment performance remained very strong in 2015, 79% and 85% of actively managed assets were ahead of peers over three-year and five-years respectively at the end of the fourth quarter. Strong investment performance, combined with a comprehensive range of strategies and solutions we offer, helped clients achieve their desired investment objectives contributing to long-term net inflows of $16.2 billion for the year. Our efforts to deliver for clients while taking a disciplined approach to managing our business resulted in an operating margin of 41% for the full year, off just slightly from the very strong prior year. The annual dividend totaled $1.08 per share which represents an 8% increase over the prior year. We also returned more than $1 billion to shareholders during 2015 through dividends and stock buybacks. Assets under management were $775 billion at the end of 2015, down from $792 billion at the end of the prior year, mostly reflecting some late-year volatility. Average assets under management were $794 billion for 2015 versus $790 billion for 2014. Adjusted earnings per share for the year were $2.44 versus $2.51 in the prior year. As you can see on Slide 4, foreign exchange had a significant impact diluting earnings per share by $0.15 per share from the prior year. During 2015, Fitch upgraded the firm's credit rating to a positive outlook, and we repurchased $549 million worth of stock. So let me take a moment and look back over the achievements over the past year, which will provide insights into our continued long-range plans. First and foremost of course we made focus on delivering strong long-term investment performance, which continued to drive to grow our business. And as I mentioned 79% and 85% of the assets were ahead of peers on a three-year and five-year basis respectively at the end of 2015. By delivering strong investment performance and focusing on clients needs, we achieved further growth across the business. In the U.S., Invesco was the only firm to appear in the top 5 over one, five and ten years in the Barrons Best Fund Family Annual Ranking. Our Asia-Pacific business continued to grow, and we saw strong inflows and a range of strategies resulting in net sales of $5.7 billion, the stronger showing in the region since 2011. Institutional sales of $14.2 billion nearly doubled the prior year. We also saw continued growth in our EMEA business, driven by a focus on delivering strong investment performance and meeting our client needs. Cross-border and institutional were particularly strong with $7 billion and $4.5 billion in net inflows respectively, and we remain in a very dominant position in the United Kingdom. We continue to invest in capabilities where we see strong client demand or future opportunities by hiring world-class talent, upgrading our technology platforms, launching new products, and providing additional resources where necessary in 2015. The ability to leverage the capabilities developed by our investment teams to meet client demand across the globe is a significant differentiator for our firm and we will continue to bring the best of Invesco to different parts of our business where it makes sense for our clients. By delivering strong investment performance, Invesco Global Targeted Returns achieved strong flows in its second year of offering, with assets under management surpassing $11 billion globally at the end of the year. We continue to invest and strengthen our fixed-income platform in 2015, which is enhancing our ability to meet our client needs. We also invested in our institutional business in 2015, refining our global strategy, bringing on additional highly regarded talent to more effectively align ourselves to the opportunities in the marketplace. We are seeing some early successes from this work; institutional flows during the first quarter were amongst the strongest in past several quarters, in spite of a very volatile market. We are very focused on bringing together the full range of our capabilities to help meet our client investment objectives; the Rhode Island mandate of $7.2 billion is an example of the success we are achieving with our Invesco Solutions effort. Throughout the year we continue to innovate and expand the range of alternative products we offer, leveraging our strong teams and capabilities for the benefit of our clients globally. Two years ago, we began leveraging our presence in China to explore and better understand the opportunities in digital and mobile technologies in the marketplace. We've also been exploring the possibilities with market-leading firms in Silicon Valley. Our acquisition of Jemstep in mid-January is an outcome of this research. Jemstep is one of the first digital platforms that focus exclusively on advisors and is the market-leading provider of advisor-focused digital solutions. Invesco Jemstep platform enables wealth management, home offices, and their advisors with a full suite of technology solutions that are highly flexible, customizable, and easily integrated into their existing systems. This acquisition represents an investment in our partnership with the advisor community and highlights our efforts to participate in the technology evolution within our industry. Turning to the fourth quarter let me take a moment to highlight the results which you'll find on Slide 8. Strong investment performance contributed long-term net inflows of $3.9 billion for the quarter. Adjusted operating margin for the quarter was 40.1% versus 41.4% in the prior quarter. Quarterly dividend remained at $0.27 per share. We also returned $329 million to shareholders during the quarter through dividends and stock buybacks. Assets under management were $775 billion at the end of the fourth quarter compared to $755 billion we reported in the prior quarter. Operating income was $356 million in the quarter down from $373 million in the prior quarter reflecting the very volatile markets we saw in the quarter. Earnings per share were $0.58 versus $0.61 in the prior quarter. We repurchased $214 million of stock during the quarter representing 6.5 million shares. Turning to page 11 and looking at investment performance, as I mentioned during the quarter it continued to be quite strong, with 79% of the assets in the top half over three-year basis and 85% were in the top half on a five-year basis. We also saw improvement in the one-year number, which was 60% of assets beating peers. Turning to flows on page 12, you'll see that active and passive flows were positive during the volatile quarter. Active flows during the quarter were driven by a variety of capabilities including Global Targeted Return, Investment Grade Fixed Income, Real Estate, and Quantitative Equities, to name a few. Passive flows were positive with renewed strength in Invesco's PowerShares ETF which saw net inflows of $2 billion. These flows were offset by $1.2 billion outflows associated with the Invesco Mortgage Capital deleveraging. This did have an impact across a number of categories. If you look at passive institutional fixed income in the U.S., and if you add $1.2 billion in each of those categories, you will eliminate the impact of the deleveraging of the Invesco Mortgage Capital during that quarter. Retail flows were relatively flat during the quarter, impacted by the macro environment as investors wavered their options during the very volatile quarter. Institutional flows were particularly strong driven by inflows in fixed income and real estate and reflecting our continued focus on this part of the business. The pipeline of one but not funded mandate remains at near all-time highs and is up more than 28% versus the prior year. Notably this excludes the previously announced $7.2 billion Rhode Island 529 win, which is expected to fund sometime in the third quarter. We feel good about the results for the year and the fourth quarter and that puts us in a strong position heading into a volatile year 2016. Continued strong investment performance, our focus on meeting client needs contributed to solid operating results despite a very volatile environment. We continue to see strength across the global business, in particular in Asia-Pacific and EMEA. Our focus remains on strengthening our efforts to deliver strong long-term results and help clients meet their investment objectives and enhancing our comprehensive range capabilities. But given the very volatile markets, we are taking a disciplined approach to managing our business, balancing our goals of reinvesting the business for the benefit of clients with the need to run our business effectively and efficiently as we have in past very volatile markets. I would now like to turn the call over to Loren to go through the financials in more depth.

Thanks, Marty. Quarter-over-quarter, our total assets under management increased $19.8 billion or 2.6%. This was driven by market returns of $21 billion, long-term net inflows of $3.9 billion, and inflows from the Q of $2 billion offset by negative FX translation of $5.3 billion, and outflows from money market of $1.8 billion. Our average AUM for the fourth quarter was $783.7 billion and was down 0.7% versus the third quarter. Our net revenue yield came in at 45.2 basis points, a decrease of 0.6 basis points versus Q3. FX translation reduced the yield by 0.4 basis points and change in mix reduced the yield by another 0.4 basis points. These impacts were offset by an increase in performance fees and other revenues in the quarter, which in combination added 0.2 basis points. Next let's turn to the operating results. You'll see that net revenues declined by $16.9 million or 1.9% quarter-over-quarter to $886.1 million, which includes a negative FX rate impact of $8.1 million. Within the net revenue number, you'll see that investment management fees fell by $29.3 million or 2.8% to $1.01 billion. This reflects the lower average AUM during the quarter as well as changes in the AUM product and currency mix. Foreign exchange decreased fourth quarter management fees by $10.1 million. Service and distribution revenues decreased by $7.2 million or 3.4%, again reflecting the change in mix and lower average AUM during the quarter. FX reduced service and distribution revenues by $0.1 million. Performance fees came in at $18.8 million in Q4 and this was earned from a variety of different investment capabilities, including $9.8 million from real estate, and $3.2 million from UK equities. Foreign exchange decreased performance fees by $0.1 million. Other revenues in the fourth quarter were $29 million, an increase of $1.4 million driven by a higher real estate transaction fees. Foreign exchange decreased other revenues by $0.1 million. Third-party distribution, service, and advisory expense, which we net against gross revenues, fell by $17 million or 4.3%. This movement was in line with our lower retail management fees and service and distribution revenues. Foreign exchange decreased these expenses by $2.3 million. Moving on down the slide, you'll see that our adjusted operating expenses at $530.4 million increased by $0.8 million or 0.2% relative to the third quarter. Foreign exchange decreased operating expenses by $3.9 million during the quarter. Employee compensation came in at $338.8 million, a decline of $8.1 million or 2.3%. This was due to lower incentive compensation for the quarter. FX reduced compensation by $2.3 million. Marketing expenses increased by $8.8 million or 34% to $34.6 million. This is a function of seasonally higher expenditures for advertising and other marketing costs particularly in EMEA. FX reduced marketing expense by $0.4 million in the quarter. Property, office and technology expenses were $80.4 million in the quarter, an increase of $0.5 million over the third quarter. FX decreased these expenses by $0.5 million. General and administrative expenses came in at $76.6 million and that fell by $0.4 million or half percentage points. FX decreased G&A by $0.7 million. Going on further down the slide you'll see that non-operating income decreased $3.3 million compared to the third quarter. Included in the fourth quarter were a $7.3 million loss on the disposition of private equity partnership interest, as well as a $2 million mark-to-market on paid money investments. These were offset by gains from consolidated sponsored investment products compared to a loss in the prior quarter. The firm's effective tax rate on pre-tax adjusted net income in Q4 was 26.6%, up slightly from 26.5% in the prior quarter which then takes us to our adjusted EPS of $0.58 and our adjusted net operating margin of 40.1%. And before I turn things back to Marty, I would like to provide a little more detail on the business optimization work that we began to implement in Q4, in light of the current market volatility and as well as in light of our lower AUM levels. We believe this optimization work will make Invesco an even stronger company, further increasing the efficiency and effectiveness of our operating platform. The business optimization work that's underway is primarily focused on our use of our shared service centers, outsourcing, automation, and office location strategy. In the fourth quarter, U.S. GAAP results we recognized $16.2 million of expenses primarily in the form of staff severance costs and we expect costs associated with the optimization initiative to continue through 2016. Total costs for 2016 are estimated to be up to $85 million. Reducing our run rate operating expenses in 2016 and in future years is an important outcome of this work. And we expect the ongoing benefits of this project will be well in excess of the projected one-time implementation cost I just discussed. We anticipate the project will achieve cash payback within less than three years, and it will add an estimated $0.06 to $0.08 EPS accretion in fiscal year 2017 and beyond. Finally, in terms of reporting and consistent with our past approach to dealing with material one-off expenses, the incremental optimization charges will continue to be adjusted out of our non-GAAP presentation but will be detailed and tracked each quarter in the U.S. GAAP reconciliation table within the earnings release. Additionally, we will provide you updated estimates of the implementation cost and benefits of this initiative to the extent that these change in any material way.

Thank you. And so Loren and I will be happy to answer any questions people might have.

All right, thanks a lot. Hey guys may be just first on the flows in the quarter and then I guess the outlook. It seems like a lot of the strength, Marty, you highlighted is coming from the institutional side of the business. And then, Asia, you mentioned a pipeline near at all-time high. Just wanted to get a sense from a mix standpoint what's driving maybe that pipeline. And then when we think about, it may be for Loren like from a mix shift on products obviously the market or the beta side is having an impact for everyone. But just wanted to try to get a sense on how that pipeline is relative to the current mix or the fee rate?

I will be happy to pick that up, Mike. So the pipeline is being driven really in four big buckets, probably one of the biggest is direct real estate probably 30% of the pipeline continues to be strong driver. Fixed income generally, across broad fixed income, alternative fixed income, stable value, probably another 30%. And then, the remainder is split between asset allocation and multi-asset solutions and then quantitative and regional equities would be other. So it's fairly well diversified and generally high fee. And so when we look at the fee rates of the pipeline, it's actually at one of the highest levels we've ever seen it, it's well above our current net revenue yields for the firm as a whole. And so, as these assets come in it will be accretive to our fee rates, which is great news. Obviously the negative that we've seen in our fee rate is due to the compression on equities just given what's happened in the market and then foreign exchange has also had an impact as well. But in terms of the mix overall on the pipeline, the institutional pipeline we think it's very positive for our fee rates.

Yes, so I don't know if I could add much to it, other than it is a part of the business where we turn our attention. It's really seemingly getting stronger and stronger, frankly in each region in the world in the Americas and EMEA and in Asia-Pacific, and it is really quite broad-based. So it's a very positive.

And the other thing I would just mention I mean we would expect our fee rate, I mean given stability in assets and stability in FX to grow across 2016.

Okay. That's helpful. And then just quick follow-up, Loren, usually or sometimes you will give some guidance just on like the expense lines and I don't know if it's because of some of the work that you guys are doing here to streamline the expenses, as you get into '17. But just any, I guess, color I think comp you typically had the 1Q seasonality but maybe the marketing you have some 4Q seasonalities. So any color on the expense outlook just given the volatility in the markets right now.

Yes, I would say given the volatility we’re probably going to not give any explicit guidance around line items at this stage. There is a lot of work obviously that I discussed being done around some of this optimization work which will have some impacts on those line items as well. Generally, we are working hard to bring expenses down. Right, as you can imagine year-over-year decline in expenses. Our compensation generally moves and flexes in line with operating income, so those will be down. Some of the optimization work especially around, we just mentioned some of the severance, will also help bring some of the compensation line down. But the benefits of the optimization work will probably spread across most of the other categories other than marketing explicitly. But looking at marketing that's another interesting topic for us, it is one of these conundrums when you're in this market, your clients want to hear from you and you want to be out with them, but at the same time it certainly is a discretionary expense in this format where we're continuing to look at. So I'd say we're obviously going to be very vigilant to making sure that we manage expense smartly in this environment with no presumption of snapback or some reversal. The other thing I would like to just mention there is some impact just to the acquisitions that we discussed in terms of Jemstep and in terms of Religare Asset Management completing our 100% ownership there. It's absolutely immaterial in terms of the earnings impact, so you don't have to worry about EPS impacts, but it does add probably roughly $15 million of expense and a little bit more in revenue in 2016. So you will see some of those line items go up just as a result of those acquisitions but offset by obviously higher levels of revenues. So we normally wouldn't be surprised by that. The optimization work that we're doing should have a benefit in 2016 that you will see. So again we will quantify that as we get through it. But that will help drive expenses down year-over-year.

Okay. Thanks a lot.

Yes, I would just add to Loren's point. I mean, we feel like we're really quite capable at this, and if you look at our history, we use these volatile periods to really take advantage of opportunities as they show up. It is a period where I think '16 for the industry is going to be quite interesting, where clients will be looking for those firms that are in a position of strength and we're one of those firms and we feel we're operating from a position of strength right now. And so we're going to be very responsible on the expense side, but we have some real opportunities that we want to continue to advance at the same time. So that's what we're working through and we will continue to make sure that we're communicating very clearly with everybody.

I guess first can you expand upon the 529 mandates. I think the $7.2 billion you mentioned is going to fund in the third quarter. Can you talk about the mix of products that's going to be and then also it's obviously very large is that something that is a new channel for you guys or can you talk about how that evolved and maybe the other opportunities within that sub-segment?

Yes, so it will fund in July. It's two plans. The vast majority of the money is in one plan, just the Rhode Island alone that's ETFs alone, sort of a broad range of ETFs. It was driven by our Solutions team, so they are building the portfolio consistent with what RI's CIO has set as a set of investment objectives with a much larger part of the plan which is probably $6.8 billion of that is a broad range of active and passive capabilities again managed by our Solutions team. And from my point of view, Rhode Island has been very, very thoughtful and it is really well-constructed approach and again as our Solutions team is managing the capabilities. With regard to the channel, it is a new channel for us; from the standpoint of as we all know many people use 529s for kids and etc. And so it will be available in the advice channel throughout the country, and it's one of the largest 529 plans in the marketplace and we just think it's going to be that much more competitive. Our goal is to help Rhode Island meet the needs of the people in the portfolio but frankly they also want to grow their plan too and we work very hard to do that.

Great. And then you mentioned part of the strength in the fourth quarter has been in Asia and Europe, I think that has been for some time. I guess given the volatility to start the year, as this demand changes, as this demand kind of trends changed at all or kind of how would you characterize the start of the year?

It's really hard to assess the day-by-day, week-by-week changes in psychology. It does feel like the markets are becoming a bit more stable and we're gaining some clarity. I can say that business in Asia last week was very strong, so I expect continued strength there, as Loren mentioned in EMEA. It seems we're beginning to see a more positive response to the environment, but it's still too early to make any definitive statements regarding the dollar.

I mean, I think your point that you made before Marty is good, I mean institutional the strength on the institutional side is actually strong across every region.

Right.

Great pipeline. The retail behavior has been sort of hard to gauge, sort of in and out as pharmacy goes off. But generally I would say in EMEA we feel very, very comfortable and confident that the retail side is going to be quite strong. The GTR product is doing very, very well, pharmacy has been quite strong, and we think that will help continue to allow us to grow both in the UK and in Europe on the retail side.

Great.

And the other thing is the quantitative product as well is unbelievable off the chart performance, so also very, very strong performance and demand.

Quick follow-up on the 529. I'm just curious on how the fee structure works. Do you get a fee on each of the underlying assets is it a wrapper up top and is it at a normal institutional rate?

Yes, I can't recall the exact details, but just consider an institutional rate for the entire portfolio.

And that's down to somewhere around 35 basis points.

Got it. Helpful. And then a question on Jemstep, I saw your details and rationale for growth in the slides. I just had a follow-up question. How do you expect the distributors to use it, and then more importantly, how do you differentiate because I'm assuming there's going to be many large asset managers having their version and may be even the distributors doing their own version. I'm just curious as to say early mover advantage that it makes their lives easier but just curious how you expect that to shape up?

Yes, that's a great question. We expect that the large distributors will create their own versions, which is consistent with what we've done historically. We've reached out to them, and we're anticipating this. There's significant interest in exploring other channels. Partnering effectively with our distribution partners is beneficial for both their clients and for us. I believe there is a first mover advantage here because many distribution partners likely won’t need multiple versions within their system. Like any other application, this requires education and investment to advance. That is one of our core beliefs.

To that end, is that your point with we have 300 people on the ground selling and educating as we speak?

Yes.

Okay, good. Last one, Loren, with the cash balances hitting your internal hurdles and the valuation in my words at a ridiculous level. How you think about the payout ratio relative to the past like can we start seeing 100% payouts even though you have a lot of things going on?

I think you saw something probably very close to that this last quarter. So again we certainly have demonstrated our willingness to respond when the stock is, as you call ridiculously low, and we would tend to agree with you on that one, just given our sense of optimism around our ability to grow over the long-term. So you should expect us to continue to pay a lot of attention, you know our needs for internal organic growth CDs and so forth are still pretty sizable, a lot of opportunities, so we need to balance those against returning capital. But you should certainly expect us to be operating in the stock buyback around in a non-business as usual approach, which is somewhat similar to what you're seeing in the fourth quarter maybe not at the actual level but something between business as usual and what you've seen us do.

Just trying to reconcile some of the numbers on the optimization program you delineated a little bit, Loren. You mentioned that you spend; I guess roughly $100 million between the charge in the fourth quarter and then what you expect for this year, and sort of in the three-year payback, $0.06 to $0.08 accretion in '17. Is it accretive to non-GAAP earnings for '16? And the reason I'm asking is I guess you got to run the expenses through the GAAP line. I presume if it's a three-year recovery either you really back-ended in '18 or you would get some pretty sizable savings this year as well. I’m just trying to figure out the cash flows?

The optimization process will take place throughout 2016, with the full benefits expected to be realized in 2017 and onwards. We anticipate savings of around $15 million in 2016 based on our non-GAAP run rate, and this amount should increase significantly in 2017 and beyond. Our estimate, which is grounded in our current knowledge and ongoing activities, suggests that the total funding required to implement these long-term savings will not exceed $85 million. Ultimately, we expect to achieve run rate cost savings between $30 million and $45 million after 2017.

Okay. That's very helpful. And then, Marty, may be both of you guys you gave a nice delineation also where by region and by product but the one area that seem to sort of not be within that list was more traditional equity mandates. What are you hearing from clients on the institutional side, is a still more this barbell notion or is there any sort of interest in more traditional plain vanilla type of mandates?

Yes, so there are actually, I mean this again I'll just use the A structures because I was there but I wouldn’t limit it to there. I mean you’re actually seeing institutional clients recognize this is probably the time to increase their exposure to the equity markets. So you’re actually hearing very constructive things and also you’re starting the year by the way this is a time where active management can really start to add value in a way that was harder from sort of a beta run from 2009 on. So I think you're at a point where you're actually going to see, if you're a high conviction manager, you're going to continue to start to do well. So I don’t know what you put in traditional but clearly international equities are high, we’re seeing a lot of regional capabilities people are interested in. So I think it's just where we're in the market cycle and I think you're going to continue to see, excuse me, you will begin to see much more commitment to active management.

I have another follow-up on the Rhode Island mandate. One, maybe I misunderstood how you framed this. But does this mean that there is a $7.2 billion of outflows coming from other people ETFs and funds on this fund?

Yes.

Yes.

Yes. And then I imagine that that approval of capital like this has a pretty stick inflow stream. Is that the case and if so can you kind of help us frame what the organic growth of it has been kind of over the last few years?

It's a great question, and I don't have a fully satisfying answer. What I can say is that the initial decision was made to engage us to support their investment program, as that was their primary goal. Additionally, they acknowledged the extensive reach of our retail distribution network with key distribution partners across the country, and their projected growth in the plan contributed to this decision. We are very interested in this opportunity and believe it will open a new channel for us, which we expect to be quite successful. To provide some context, they were able to establish themselves as the third largest 529 plan in the nation, and we anticipate stronger growth moving forward compared to the past.

And I would agree with your characterization about it being sticky, right?

Right.

And finally I guess on that again. Was this kind of a broad, kind of beauty show, what was kind of the decision process in terms of that?

Yes, you should view it as a typical institutional beauty show. Obviously, we have the option to work with anyone in the country who is highly competitive, and we are aware that this is the largest 529 transfer that has occurred in the industry.

First any early read into quarter-to-date flow trends particularly given the seasonal step-up we typically see in retirement accounts in the first quarter. And then related to that, I think in the past you sort of targeted may be a 3% to 5% organic growth rate. So just assuming a more cooperative market backdrop going forward which realizes a big assumption these days. But in that sort of environment is that still sort of a reasonable range to expect?

Yes, I'll make a couple of comments and Loren continue. So we still look at that 3% to 5% organic growth rate as very achievable. And again, as Loren and I have talking about such as this ever previously we just continue to see ongoing strength throughout the regions, both retail institutional, so we think that is fully in place. You're now talking about a few weeks of January very, very hard to anticipate the quarter quite frankly and this week is a whole lot better than the first week of January. So I wish I could give you some great insights I really can't. That said, I do know and Loren made this point very clear that the institutional investors are continuing to move forward, the retail investors tend to be more risk on, risk off, depending on the daily movement in the markets although it feels like that's coming down probably the best I could describe at the moment. Could you add?

Yes, Marty, I think that's about right. Probably say there is a lot of risk cost behavior in the early part of January and so it's getting healthier.

Okay, fair enough. And then so if we focus on kind of the alternatives bucket net flows have been consistently positive for a number of years. I know the real estate business represents a big chunk of those assets but there are also a number of different strategies that are in there. So just wondering if you could sort of give us a sense of where you're seeing the best growth opportunities. And then, as it relates to fee rates, any sort of color there because I think the range of the respected fee rates within that bucket can be pretty wide?

So Mike, I think the other probably even larger in terms of what we're seeing certainly in the fourth quarter is GTR, I mean just continues to grow. I think it's brought in about $1.5 billion in net flows in the fourth quarter; it's about $11 billion in total size to-date. So that is one that certainly outside the U.S. has really taken on a lot of good momentum and I think the product that it competes with in the marketplace had some issues around its performance. And so the positioning is even better probably now than it's ever been. Still early days in the U.S. for us and so we like nothing more to see GTR sort of reach its appropriate timeframe and sort of get through all the hurdles that we need to get through for it to be on the platform. But I think that in real estate and then perhaps as well alternative fixed income is still an area where we believe we can play at a much more significant level than we have in the past and there are a lot of products that are still sort of early days in terms of their track record. So I think it's really GTR and real estate right now are the primary drivers for us and where the demand is.

Got it. Okay. And then just one quick one you mentioned or you called out the $7.3 million realized loss related to the disposition of private equity partnership interest. Can you just sort of give us some more color on exactly what that related to?

Yes, so that was previous time where we were warehousing partnership just before they were put into a vehicle for our clients and unfortunately the mark-to-market on that really hit us before I got into the vehicle and so that's what that is. Normally we would be able to get it in there faster, but there was just again some exposure to a pretty volatile market and that's what you saw.

I was looking for a little more color on excess capital. I think historically you would like to provide a sort of guidance here in terms of cash and investments versus long-term debt and they're pretty close here. So could you just provide an update here and maybe you're pretty comfortable where it is right now?

We ended the quarter with approximately $1.85 billion in total cash. The regulatory requirement in the UK and Continental Europe is around $550 million, which means we have about $1.3 billion above our capital requirements. We aim to maintain at least $1 billion, so we feel confident about our cash position and our ability to effectively utilize our capital for our clients, perhaps better than we have in a long time. However, our assets have decreased slightly, which is affecting our operating cash flow. Overall, we feel very strong and optimistic about our ability to deploy capital to benefit our shareholders in terms of return on capital.

That's very helpful, Loren. And then just my follow-up on Jemstep. I just wanted to get a better understanding for how this business will function, how it will generate profits and sort of what really attracts you to do this business?

Yes, I mentioned earlier that we believe it's crucial to pay attention to developments in the digital world, and ignoring them would be a mistake. That's why we invested significant time researching what's happening in this space. We concluded that a digital mobile tool to assist our distribution partners would be a smart move. It's a straightforward idea, and there will be various elements involved, though I won't discuss pricing specifics for Jemstep. We believe these elements will enhance the organization. Most importantly, it will strengthen our relationships with clients, allowing us to serve them better and effectively showcase our wider range of investment capabilities. Ultimately, this will lead to an increase in assets under management, provided we perform well. We believe that pursuing Jemstep represents a significant opportunity for growth for us.

First also on capital management. We're getting to the point in the year where I think you will be recommending to the Board the dividend increase for the coming year. In recent years the dividend increase has been particularly big. But given where the stock price is, how are you thinking about the kind of the mix of capital return between dividend and buyback as we look forward to the next year?

I think it's probably not great for us to be talking about this in event of our discussion with our Board. But generally it's I think our sense of more modest, a modest dividend could be appropriate stride in light of the fact that that will create more capital for buybacks which I think given the market pricing of our stocks may be the better way to use that cash. But again we need to wait before we get in front of our Board, before we sort of signal anything quite honestly.

Okay. Thank you. And then just little ones the pound hedge, the pound obviously fell a lot in 2015, can't really tell how much you made at the end of the day on that. Bill said in your release you're hedged out to March, I thought you were actually hedged out to May. How are you thinking about hedging out the currency as we think about 2016 and actually what did you end up making in 2015 on it? Thank you.

Yes, great question. So the hedge as you know was structured, hedges were structured 1.493 that is reflective to the average rate for the quarter and so there was no quarter in 2015 that had a rate that averaged below 1.493. So we made nothing this year or last year in 2015. On the current quarterly hedges definitely in the money and again, so again more to come on what the value there is it's moving around. But it's certainly something we would see at this rate noticeably, notable number. We are expecting to hedge our currency going forward around the pound. In particular, we believe that the pound is potentially going to be still a little volatile in light especially with the BREXIT discussions that are going on. And so those are again as we've done in the past hedges we put in place that would be out of money puts that really will protect us from the downside, allow upside to occur and again would protect our cash flow in particular as opposed to operating results which we can't really protect against.

Most of my questions have been asked and answered. Just one left as far as the U.S. equity performance you saw some deterioration here this quarter. Could you speak to that? And I think that you referenced last quarter that there was some loading up in energy stocks did that play a part here?

It did. My perspective is that overall the performance remains very strong and is mainly short-term in nature. It didn't improve from last quarter to this quarter, but it remains short-term. However, moving into this year, it has continued to strengthen. The portfolio sets will have the energy exposure, which we believe will perform well, and we hope they will do very well for our clients.

And the other thing I would say is that the improvement that we saw in the one-year numbers relative to Q3 were due to our small cap growth equity team as well as our growth in income products. So there were definitely some equity capabilities that can show improvement in the quarter relative to last quarter.

Hi, I have two questions. The first one is kind of curious.

Hey Robert, it's hard to hear you.

Sorry. Is it any better?

Good, thank you.

Okay. I have a couple of questions regarding the regulatory targets mentioned in the release related to private equity. I'm curious about what that entails, and since we adjusted the EPS, should we expect that for this quarter as well?

Hey Rob we're really having a hard time in hearing you. I don't know you kind of grappled.

You know what I will call you offline. I'm on a cell phone that's probably not working well.

Sorry, Rob.

We're getting every other word.

A few questions on PowerShares. Are you guys seeing any fee pressure at all in that business? And then sort of related to that given how competitive smart beta is and it just keeps getting more and more competitive, do you think ultimately we might see new pressure in that area?

So a couple of things. I think when you want to think about us, think about it beyond smart beta it is really factor investing. So one of the delivery mechanisms are PowerShares, ETFs, but factor investor team is really the one team you’re seeing real demand for factor investor team outside of the United States both retail and institutional, institutional in particular in Europe, institutional in particular in Asia, and we’ve been doing it for 20 years. And I think the other thing if you look at the PowerShares lineup what is important is that differently than mutual funds you really can’t have more than three in a category. So there is a first mover advantage topic within ETFs is something very, very real. And if you look at the length of time that our smart beta ETFs have been in the market, they have liquidity, they have real track records and when you're the incumbent you're really in a strong position. So we think other people come in into smart beta areas, it's a confirmation that it’s a better way to create exposure and to passives. And again, we're just seeing continued strength within PowerShares in particular in fact investing outside of the United States.

I would like to follow up on the cost optimization plan. Can you provide more details about what those costs entail? Is it a combination of project spending and layoffs, or is it something different? Additionally, I'm curious why the spending is more weighted toward the end of the period; you would expect that layoffs would yield immediate benefits.

Okay, yes, it's good question. Thank you. So we will make sure it's clear. These are long dated infrastructure type program. So many years ago we have a low hanging fruit is we call it that's long on it's been long on for a long time. So these are efficiency-related undertakings hardcore system upgrades, process improvements type things. So it's large projects by having all of our institutions but they're pretty broad right now.

Yes, in many ways they are transformational around processes and the way we do things. So it's not just trimming people that kind of behavior, you're right. That could be done very quickly. This is very thoughtful that will make us a stronger better company at the end of the day. And again in an environment like this, we will move more quickly to get those things done, they have been on our list, and we have all these things that we would like to do to continue make ourselves a better company. But we’re absolutely accelerating a lot of these activities right now but they do take time to implement thoughtfully.

So on U.S. and Global Fixed Income, you have really terrific performance, over $10 billion of active flows in 2015. Can you maybe just talk about that area with rates maybe rising a little bit here with changes in the credit markets and how you see the pipeline shaping up for '16 and beyond?

The effort we initiated nearly four years ago to broaden our fixed income capabilities is yielding significant results. The fixed income performance has been exceptionally strong, and we are witnessing increasing demand across all channels and regions. However, some capabilities do not yet have three-year track records, so we are not fully at the level we expect. Nevertheless, we are beginning to receive new commitments, particularly from institutions seeking high-quality fixed income providers. Although we haven't reached the peak contribution from this area yet, we remain very optimistic about it.

It's only growing for us. I mean, it's such a big market and we're still underpenetrated that our opportunity to continue to grow, even if there is some rate impacts. I think they is significant.

All right. And then maybe a last one topic. The DOL fiduciary standard, just given the increasing thought that that's going to through; I just want to get your latest take there on. And realizing that the final rule is not out, what could be the impact to Invesco's strategy and maybe any impact on expenses that we should think about?

Yes, that's a good question. It's challenging to envision the full impact since we are still in the process of imagining it. However, I can say that the range and depth of our capabilities are very significant. We believe that having strong conviction in fundamental and factor investing is crucial. We consider ourselves among the few firms that offer such diverse services. Additionally, Jemstep acts as a valuable tool for our advisory clients, allowing them to foster deeper relationships with their clients and support individuals who might be disadvantaged by the fiduciary role that's been established. We're actively exploring how Jemstep can assist both us and our clients amid the evolving landscape. I hope this provides some clarity.

Bigger picture on the expenses. When you take a step back, I understand that the initiative may have been in the works for some time but the revenue probably accelerated some of that. But when you take a step back and you look at your fixed expense base versus the variable expense base, to achieve that kind of 3% to 5% organic growth, what kind of inflation and investment do you need to see in your fixed portion of the expense base to achieve that target?

Nothing more than what we have quite frankly.

We are utilizing our existing capabilities that we believe are currently underutilized, and we can scale them significantly beyond their present state. We are also taking capabilities that are region-specific and making them accessible on a global scale. We can rely on our existing sales teams, so there is no need to establish new infrastructure for this effort. The focus is on coordination and education to ensure that our sales teams, in particular, understand these products and can effectively communicate their benefits to clients.

Understood. When considering the product dynamics and the organic growth sources we've observed in the industry this quarter, particularly over the last few quarters, European retail, especially in the UK, has been a significant strength for firms like BlackRock and Threadneedle, among others. Looking at the competitive landscape in that market, how has it changed? More importantly, are you noticing increases in market share from other companies, or is the market overall expanding due to factors like bank deposits flowing into investment products, while some captive asset managers are steadily losing market share?

Over the past four years, particularly in Europe, independent global asset managers from the U.S. have been steadily increasing their market share. Although there are several strong competitors, this trend has persisted for various reasons. As you've noticed, we've been making significant progress on the continent and believe there is still considerable room for market penetration. In the UK, the situation is quite different; it's a highly competitive market where very few non-UK firms succeed. Our strong historical presence in the UK contributes to our success there, and while the competition remains intense, we are well-positioned to thrive. However, this market is largely influenced by regulatory changes, similar to the challenges faced by smaller firms in the United States. We believe our strengths will only enhance our position in the UK and will likely mirror our trajectory in the United States.

Hi, thanks for taking my question. Most of them have been asked. Just this one on the solutions asset, Marty, if you want to talk a little bit more about that. I guess first of all, would you consider that Rhode Island win one of your best successes in the solutions effort? And how do you think you might be able to leverage that, whether you will use this as a template to further broaden the effort across your sales force?

Rhode Island could be considered our most significant achievement in the United States. We're seeing that a key aspect of our success is our combination of a wide range of capabilities along with a strong belief in our fundamentals. Both elements are crucial for our effectiveness in delivering solutions, and this success is evident across various regions, including the U.S., Asia-Pacific, particularly China, and on the Continent. We anticipate continuing along this trajectory as opportunities in this area expand. It's essential to have a diverse set of offerings to succeed, and we begin with that foundation, supported by talented individuals who can deliver effective solutions for our clients.

And would just say in terms of the effort going forward on this and your 3% to 5% organic AUM to organic growth targets, would just say solutions is a very substantial part of that?

It is challenging to predict where the strength will come from as we look ahead. However, it will definitely be a contributor and is expected to grow over the next two to three years. This is another reason why I am confident in the 3% to 5% growth range.

Okay. And lastly, on the solutions side, do you think it's more focused on fixed income alternatives, or is it really broad across all your asset classes?

It's been 100% broad across the asset class utilizing anything from as I said really factor-based capabilities to alternatives. So it’s client-dependent but it has used the full range of capabilities in most cases.

On behalf of Loren and myself, thank you very much for your time and look forward to talking to you next quarter. Have a good rest of the day.