Invesco Ltd (IVZ) — Q3 2016 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, geopolitical events and their potential impact on the company, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products or 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 for joining us on our third-quarter call. As is our practice, I will review the business results for the third quarter, and then Loren will go into greater detail about the financials, and then we'll open up to Q&A after that. So, let me begin by highlighting the firm’s operating results for the quarter; and you will find this on slide 4 if you happen to be following the presentation, which is available on our website. Long-term investment performance remains very strong at 68% to 79% of actively managed assets; we are ahead of peers on a three and five-year basis, respectively. Our continued focus on leveraging our broad investment capabilities provides meaningful solutions to clients and contributes to solid operating results during the quarter in what I think all of us would describe as a difficult business environment for money managers. Strong investment performance helped drive robust long-term net flows of $1.2 billion during the quarter, reflecting solid retail and institutional demand across both active and passive capabilities. Total flows during the quarter were just over $19 billion. Adjusted operating margin was 39.7%, an improvement over the prior quarter that reflects our continued focus on running a disciplined business. We also returned $176 million to shareholders through dividends and buybacks during the quarter. Assets under management were $820 billion at the end of the quarter, up from $779 billion in the second quarter. Adjusted operating income was $399 million in the quarter, up from $330 million in the prior quarter. Adjusted diluted EPS was $0.60 this quarter versus $0.56 in the prior quarter, and as noted earlier in the year, we raised our quarterly dividend to $0.28 per share, which is up nearly 4% from the prior. We also continued our stock program during the quarter. And before Loren goes into detail on the financials, let me take a moment to review the investment performance inflows for the quarter. Turning to slide 7 now, our commitment to investment excellence and our work to build and maintain a strong investment culture helped us deliver solid long-term investment performance across the enterprise during the quarter. Looking at the firm as a whole, 68% of assets were in the top half. On a three-year basis, 79% were in the top half, and on a five-year basis. On page 8, you’ll see that the quarterly long-term flows of $12.2 billion were quite strong across both active and passive capabilities. Flows in the passive capabilities were driven by strong demand from Invesco PowerShares capabilities, which has an all-weather line-up that’s well positioned to meet client demand in any type of market. This was the second-best quarter for Invesco PowerShares in its history, with roughly $4 billion in net flows, and strong flows are helping us continue to gain ETF market share. As we noted during our recent Investor Day, strong passive flows reflected our longevity in the ETF market, our deep experience, our comprehensive range of factor and smart data capabilities, and our significant track record of innovation. Results on the active side were equally as impressive, with solid demand in multi-asset given an income capability, fixed income and other capabilities such as real estate. Our delivery and strong investment performance in bringing our broad range of capabilities to clients contributed positive results in Asia-Pacific, with strengths across both retail and institutional channels. Globally, we saw institutional flows during the quarter, which continues a series of positive institutional flows going back more than two years now. Client demand trends remain consistent, with particular interest in fixed income, multi-asset, and real estate, and opportunities not funded and qualified are at an all-time high. Retail flows also demonstrated our strongest gross sales, rebounding nicely and redemptions moderated during the quarter. This includes a $6.5 billion Rhode Island 529 mandate. Before I hand the call over to Loren, let me say a few words about how Invesco is positioned against the changes being brought by the DOL fiduciary rule. We actively engaged with clients as they work to align platforms with the demands of the fiduciary rule as we make clear sense of rules approval. The key decisions reside with the distribution platforms, but we are actively supporting them. The market has gotten an early scare from recent announcements from Merrill Lynch and last night from Morgan Stanley, but I believe we are still in a very dynamic period regarding how this will play out. It is clear each distributor has a different business mix, and we will implement the rule in a manner that will meet client needs. Based on the discussions we are having with clients, we continue to believe that our comprehensive range of capabilities, our distribution expertise, and our market leadership all position us extremely well to help our clients navigate this change. If the shift is towards passive, as some believe, a decade of ETF experience, our comprehensive range of factors and smart data capabilities, our scale, and our significant track record of innovation all put us in a very competitive position. As mentioned during the Investor Day, there are low barriers to entry, but very high hurdles to overcome in the ETF business; it will make it difficult for latecomers to succeed. Now I will turn the call over to Loren to review the financials.

Thanks very much, Marty. Quarter over quarter, our total assets under management increased by $48.6 billion, or 5.2%. This was driven by positive market returns of $23.6 billion, and we also saw long-term net inflows of $12.2 billion, which included, as you know, $6.5 billion related to Invesco’s Rhode Island 529 plan win. We also saw inflows from money market and QQQs of $5.9 billion and $1.1 billion, respectively. These were offset by negative FX translation, which amounted to $2.2 billion. Our average AUM for the third quarter was $814.1 billion, which was up 3.8% versus the second quarter. Our annualized long-term growth rate in Q3 was 7.1%, up from 2.6% in the second quarter. This measure represents our long-term flows in the quarter divided by the beginning of period long-term AUM, excluding the institutional money market assets and the QQQ assets. Our net revenue yield came in at 42 basis points, which was 1.7 basis points lower than the prior quarter. The change in mix, largely driven by currency, reduced the yield by 1.1 basis points. This was primarily a result of declining pound sterling rates, which were 8.4% lower on average during the third quarter compared to the second quarter. Also, we saw a decrease in other revenues, which reduced the yield by 0.7 basis points, and lower performance fees in the quarter further depressed the yields by 0.3 basis points. These factors were offset by one more day in the period, which increased the yield by 0.4 basis points. A little bit of guidance here: looking forward to the fourth quarter, we expect our net revenue yield to be roughly in line with the third-quarter level at 42 basis points, assuming consistent market and FX levels in line with today. Moving on to slide 12, as we’ve done before, we provide the US GAAP operating results for the quarter; my comments today, however, will focus exclusively on the variances related to our non-GAAP GAAP adjusted measures, which can be found on slide 13. Slide 13: you will see that net revenues decreased by $1.9 million, or 0.2% quarter over quarter to $854.7 million, which includes a negative FX rate impact of $18.5 million. Within the net revenue number, you will see that adjusted investment management fees increased by $19.8 million, or 2.1%, to $982.7 million. This reflects higher average AUM for the quarter, partially offset by the impact of currency on our AUM mix. FX decreased adjusted investment management fees by $23 million. Adjusted service and distribution revenues increased by $10 million, or 4.9%, reflecting higher average AUM for retail products. FX decreased adjusted service and distribution revenues by $0.1 million. Adjusted performance fees came in at $3.8 million in Q3 and were earned from a variety of different investment capabilities, including $2.3 million from bank loan products. Foreign exchange decreased these fees by $0.1 million. Again, some guidance here: in Q4, we'd expect performance fees to be in line with our historical guidance at $5 million in the quarter. Adjusted other revenues in the third quarter were $19.3 million, a decrease of $12.4 million from the prior quarter, primarily due to a decrease of $7.3 million in transaction fees from real estate and a $2 million decrease in transactional sales charges from our UIT products. Foreign exchange decreased these revenues by $0.1 million. Some guidance here: looking forward to Q4, we would expect to see this number increase in the range of $23 million to $25 million. Third-party distribution services and advisory expense, which we net against growth revenues, increased by $13.8 million, or 3.9%, and this movement was in line with higher revenues derived from our retail assets under management; FX decreased these expenses by $4.8 million. Moving on down the slide, you’ll see that adjusted operating expenses at $515.4 million decreased by $10.8 million, or 2.1%, relative to the second quarter. Foreign exchange reduced adjusted operating expenses by $8.2 million during the quarter. Our adjusted employee compensation came in at $339.1 million, a drop of $8.8 million, or 2.5%, and this was due to lower variable compensation on performance fees. Foreign exchange decreased adjusted compensation by $5.1 million. Adjusted marketing expenses fell by $2.2 million, or 7.6%, to $26.8 million, reflecting fewer client events held in the quarter. FX decreased adjusted marketing expenses by $0.3 million. Our adjusted property office and tech expenses were $82.1 million in the quarter, a decrease of $0.7 million over the second quarter, and FX decreased these expenses by $1.2 million. Adjusted G&A expenses at $67.4 million increased by $0.9 million, or 1.4%, driven by costs associated with several new product introductions, and FX decreased adjusted G&A by $1.6 million. Again, some guidance from Q4: we expect to see these expense line items roughly flat with the third quarter, other than marketing. We expect marketing spend to increase in the range of $32 to $35 million, which is seasonally consistent with prior years. Continuing on down the page, you will see that our adjusted non-operating income increased by $9 million compared to the second quarter. This was primarily driven by $4.9 million realized on our pound sterling US dollar hedge, as well as due to mark-to-market gains in our seed money investments in the third quarter. The firm's effective tax rate on pre-tax adjusted net income in Q3 came in at 26.5%, consistent with the prior quarter, and guidance here looking forward to the fourth quarter: we believe our tax rate will increase slightly to 27%, largely due to the currency impact on the mix of our earnings. This brings us to our adjusted EPS of $0.60 and adjusted net operating margin of 39.7%. I would say, just generally as you probably would expect, that foreign exchanges had a real impact on our operating results as reported in US dollars. Just to quantify that for you, when we look at our Q3 versus Q2 results, our operating EPS resulted $0.018 lower as a result of foreign exchange, as well as our margin being impacted by 0.3%. Looking at year-over-year, Q3 to Q3, the numbers are larger obviously: EPS is down $0.034 cents due to currency, and our margin is down 0.7% as a result of FX only. So, with that, before I turn it back to Marty, I would also like to provide a quick update on the business optimization work that we implemented in Q4 of last year. We made very good progress on our optimization efforts and have generated approximately $14 million in annual run rate savings by the end of the third quarter. Some of the bigger opportunities are ahead of us, however, but we are confident that we will be able to achieve the targeted rate savings number as we've discussed of $30 to $45 million in 2017. And with that, I would like to turn it back to Marty.

Thank you, operator. Could you open it up for questions, please?

Marty, can you maybe breakdown I guess a little bit more color on kind of the retail flow trend? I know you mentioned Asia Pac, but kind of give some sense of what you're seeing Asia, US versus EMEA. And then maybe are we getting any sense that ahead of the overall implementation that’s starting to change kind of investor behavior or activity levels in the US?

Good questions. So I’ll make some comments and ask Loren to come in for some of the more specifics. So Asia-Pacific in particular is having a tremendous year, both retail and institutional, and it is also very broad-based there. EMEA continues to be strong for us; we've had the Brexit and some challenges on the continent. Generally, it is lower than what we had seen previously, but the UK has really come back from that Brexit low, but again not as robust in inflows as we saw a year ago. However, I think we feel we are on track. In the States, with regard to the DOL rule, it’s hard to point to the behavior as being driven by anything related to the DOL. I think it’s still more the active versus passive debate that’s really probably driving behavior, more than anything right now. Will it change going forward? It will definitely put a lot of money in motion in the US retail channel; there is just no question in my mind as people make the changes from brokerage to advisory and as brokers narrow the platform of money managers. What that sets up there will definitely be winners and losers. Firms with a breadth of capabilities in both active and passive will be the ones that do well. Loren, do you want to add a little more?

In Asia Pacific, we are observing substantial inflows, especially in Japan, where one of our offerings has performed exceptionally well. Additionally, mutual fund inflows from our joint venture in China have provided solid support, and this trend has remained steady. In continental Europe, net flows are quite mixed; however, our GTR product continues to see growth in both the UK and continental Europe, and we are excited about the upcoming launches of income-oriented products that are similar to the GTR product. In the US, the situation is varied; we are seeing strong interest in our diversified dividend product and our core bond plus fund is performing well. ETFs are also witnessing robust inflows, particularly in senior loan products and other fixed income investments. We are currently the third most successful ETF provider in fixed income year-to-date in the US, which indicates a positive trend. Some of the outflows we are experiencing are from other value-oriented products that have seen a slight decline in performance. I hope this information provides you with useful insights.

And maybe just quick follow-up. With the DOL theme, obviously there has been a focus on whether it's due to the mutual fund business and brokerage versus advisory. I would expect that if more money moves to advisory, as broadly expected, that benefits your SMA business. Could you maybe update us on how you feel about your positioning in the SMA business? How big is that for you, and do you truly feel like you have the right offering there or do you need to invest in those strategies?

So a good question. We have an SMA capability; we've had it for a long time like many people. Again, it’s not a limitation for us at all. We look at it as another vehicle offering to deliver our investment capabilities. Again, that is going to be a need that firms are going to have, they don't have it.

I have a follow-up on the DOL rule, and I’m assuming I probably won't be the last one in this call either. But I'm just wondering, are you actually seeing brokers strengthen the numbers of partners they work with just yet? Also, what key components of Invesco's platform do you think will help you remain large at the main US brokers? In some cases, do you think you will actually be able to increase your share?

I don’t want to get ahead of what announcements have been made and not been made, because I'm not sure what's public and what's not. However, it seems, and it’s only been different firm by firm. I think that’s the first point. So often when we have these conversations, we think it’s going to have a generic outcome, and it’s not. As I said, if you just look at where Merrill Lynch is going, where Edward Jones seems to be going, and now Morgan Stanley seems to be going, with all the public information, you can see that they are taking different approaches to it. That said, the firms that are going to do well, which we have been suspecting and seem to be getting early confirmation, are those firms with broad ranges of capabilities that are strongly performing. We’ve put ourselves in that category. Firms that actually have ETFs and a long track record of ETFs will also do well; those are capabilities that are in demand. And I would pull a third element into this, which is that those firms can take the capabilities, whether it be a mutual fund or an ETF vehicle, and help create solutions for clients, and this is even at the broker level, they are going to do well. The other element that people are talking about and I think we all get in the right context is the price sensitivity; it is real. The way that the financial advisor will meet that need is really a combination of active and passive capabilities that will drive down the overall effective key rate for their clients, which is a good thing. And again, specifically vehicle by vehicle, you need to be competitively priced. If you are selling at a premium price and if you are performing well, you’d hopefully be able to keep it there, but there is going to be real pressure. If you’re at a premium price or not performing well, you are in a lot of trouble. We do believe that the platforms will be narrowed, and again, each firm is going to be different; we look at ourselves as being on the right side of those outcomes.

I can’t help myself either on DOL; can you give us a sense of what percentage, if you have it, I know it’s tough given the omnibus relationships that you have with your distributors, what proportion of your retail is bucketed into brokerage-oriented qualified accounts versus advisory?

I don't have that right now, but again, I'd still come back to the point you're probably making, which is if you’re brokerage, it’s going to go away; it’s all going to go to advisors and you're going to be a loser. I don't think you can draw that conclusion from what we are seeing. Just look at Morgan Stanley; in the announcement today they are going to keep both advisory and brokerage open and again I think it doesn't really matter how our capability is there; whether it’s in the brokerage channel or in the advisory channel, if you have a good capability, you’re going to continue to be there. So, again, I know I'm not giving the specific number you're talking about; I just don't have it here.

Stepping back, there seems to be a bit of a pickup in M&A discussions you've seen in some of your markets, like Janus Henderson. What’s your sense of how the industry deals with this excess capacity, muted active flows, and some of the regulatory changes? Would you anticipate a big wave of consolidation, and what kind of shape and form do you think it takes, and what’s Invesco's role in that?

A good question; look, you've been around the industry a long time. There has been a declaration of massive consolidation for a couple of decades. The reality is the environment we are in now supports that notion more than ever. Much of it has been driven by the regulatory environment principally and just the ever-increasing costs. Then you have things like cybersecurity areas where we all spend a lot of money when we never did before. The extended period of active versus passive movement continues; I believe this will moderate but there will still be strong places for active capabilities too. Again, we are in a position where we can take both active and passive. We are well placed regardless. What you’re going to see on the M&A front is that firms without scale need to do something; you’ll probably see combinations of undersized firms more than in the past. The other point is somebody has to be a willing buyer; not everyone is going to be a willing buyer of some of those firms. You’ll see organic growth coming from firms that aren’t well positioned in the current environment.

Hey, Loren, maybe just a couple for you on some of the guidance that you gave. So one is just on the other revenues; the rate or the level you gave is a little bit lower than where our expectations have been. Is that just fourth quarter? We’re heading into ‘17, I know it's lumpy and hard to predict, but just wanted to gauge what’s driving that. And then I think on the expense side, you gave a lot of color on FX in terms of how that's impacting the revenues, the expenses, and then the hedge and the non-op. I know you’ve got the efficiency program in place to lower the run rate, but if we’re continuing to be in this environment, is there any other levers you can pull on the expense side? How much can be offset by FX, pulling that down, just to manage through this volatile FX backdrop?

So, good questions. So on the other revenues, that was specifically just for Q4 guidance; we don't think it’s really a trend. Obviously, it moves around, it's hard to predict, and we’ve seen that line can be somewhat volatile based on timing in terms of transactions happening; they can lump up in a particular quarter or be a little absent in the quarter. And then certainly when there is more volatility and uncertainty in the markets, you can see that number; there is a slowdown; there is a component of our UIT sales that has slowed down in respect to the DOL uncertainties. I think that is something that should hopefully begin to become clearer as to whether that's the true run rate or whether it can come back. But right now, we’re looking at that line item on a quarter-to-quarter basis. In terms of expenses, there is always more that can be done. We’re continuing to look beyond some of the things that we identified in the optimization to see if there are other larger opportunities that can be realized into 2017. As we all know, when we get looking out over three years and understanding the need for our incremental margins to be where we want them to be, we have to continue to look and find ways to organize ourselves in a way that would provide that outcome. I would say there is more to come on that; to the extent that we can identify them, we will. But certainly in the near term, in terms of the optimization, we are eagerly going after those challenges.

Okay. And then Marty, maybe just as a follow-up on the question about M&A in the industry. Has anything changed for you guys? It seems like you’ve done things in the past that have created the business mix that you have. You’ve been focused on launching products, small things on the side, and then capital management, whether it’s the dividend or the buyback. Is there anything you see shifting in the industry that would cause a firm like you that has scale to think that you need to become bigger or do something that hasn't been the default over the past couple of years?

I would say, like always, we continue to pay attention to what's available in the marketplace, and the way that we look at it really hasn't changed. Is it filling a skill gap for a region, those types of obvious things? We’ll continue to do that. There are fewer gaps now than we’ve ever had; it gets back to the comment on the DOL. We think we've put the firm in a position where client demand is right, whether that involves alternatives, passive capabilities through factor investing, ETFs, etc. The institutional business continues to be a huge opportunity for us and the like. We’ll continue to pay attention to what's going out there. I think, again it's my opinion, those firms that are narrowly focused are going to be dramatically more challenged than those firms that are global in the retail market and institutional market with a broad range of high conviction fundamental factor-based capabilities. So, we’ll continue to be vigilant.

Michael, maybe one more point because I know your question was legitimate. We're spending more time honestly thinking about ways that we can grow revenues as opposed to looking at the position where we’re having to cut costs. We’re continuing to invest around new product introductions and continue to strengthen our capabilities. As Marty has mentioned, we think we are well-positioned to actually succeed in this environment. This positions us with the ability to grow organically in the 3% to 5% range and I think this should provide us with the ability to continue to expand margins going forward; we are not looking defensively to protect ourselves right now. We are thinking about the opportunities to grow in this market.

Let me stay on that, because I think this is what is different today than prior challenging times when there is a pullback. The traditional playbook during a market pullback was to focus on cutting expenses; that was with an eye to making sure that you didn't just vanish the firm. That sort of environment was more common five or ten years ago, but it’s nothing like today. Today you're dealing with competitors that face a market shift affecting pressures. We feel we’re uniquely placed with the capabilities we have, and it would be counterproductive not to continue to invest and grow the ETF business, institutional business, or solutions business. If you are a narrowly focused firm and you’re not investing in the future, that’s a dangerous position to be in. It’s critical to be disciplined, and that is why we’re very disciplined. We’re always looking to be more efficient and effective while also investing for the future.

Thanks. Loren, you talked about a flat fee rate for the fourth quarter; if we think about the ins and outs regarding products from a flows and your backlog, can you talk about the direction of the fee rate based on that, excluding markets and currencies?

Yeah. I mean it's all positive. We’re continuing to see institutional pipeline at a much higher revenue yield coming in; what's coming out in terms of the mix generally of the products on the retail side. Asia, China is very positive relative to the overall fee rate for the firm. So that which would make you think while the fee rate must be going up has been offset obviously due to the FX impacts because the pound has declined even further from where we were in the third quarter. That’s why it’s settled into this flattish range. The trends that support a higher fee rate remain intact, and we feel it’s not a situation at all where we expect the mix to change in a negative way for us, other than the FX impacts, which we cannot control.

Great. And then I guess Marty, the comments around each of the brokers or the warehouses coming up with different solutions; that seems like a burden on the industry to now have to deal with all the various platforms in a not-uniform way. That seems like costs; that seems like more investment on your end. Is that the right way to interpret that?

It's a good question. Here is my view on it: at one level, there is no change from the standpoint that those firms have always had a brokerage business and advisory business. The movement to advisory has been a trend and the desire of the broker/distributors for a number of years. The industry is already positioned to serve that way. In this environment, there is a lot of work to comply with the DOL, and it is firms like us that have the depth of capability through wholesale and Invesco Consulting that can aid in making the necessary moves. Again, we have the resources, we have the capabilities, and we can assist them in making those changes. My biggest concern, which you alluded to, is that there will be a real proliferation of share classes since each distributor wants to serve clients in a different way. I know this isn’t major insight, but it seems the industry is coalescing on a couple of share classes. That might involve some costs, but it’s very manageable. It's a much better outcome for both us and the end clients; firms that have the resources and capabilities to help their clients through this transition will be in a better position than those that don’t. This relates back to the earlier questions about scale and M&A; if you can support your clients in ways beyond just investment capabilities, you're going to have an advantage.

Hey, thanks, good morning. Sorry to add to the extensive row of DOL questions, but I had a couple more for you. Not asking for attribution here, but thinking broadly in the dialogues you’ve had with your partners, can you give us a broad sense or even a range of how much you expect that the wealth management product shelf could end up shrinking for commission accounts?

It's hard to answer that question. I would say what is a truism across the board, you would get the feedback that the pace toward advisory accounts will pick up at a material rate driven by the DOL. However, again, you see cross currents in that. Morgan Stanley is going to support both channels, but their advisory business has been growing quite dramatically and it will continue to do so. It's hard to quantify, but I think if you look back five years from now, the predominance of assets will likely be in advisory. I think that’s a fair conclusion to draw.

Okay, that’s fair enough. Great, thank you. And then thinking about where this might lead to potential cost-cutting opportunities, understanding it isn’t a near-term thing, but this is probably going to lead to some substantial differences in distribution dynamics. You guys tend to have a pretty large wholesaler team. How do you think those selling dynamics might change, and what kind of expense-cut opportunity could that lead to if we see a channel that focuses more on home office and less on the field?

Yes, an interesting perspective. I think the answer is more along these lines: I don't think the demand for support is going to go down; it will probably only increase. The nature of the support is going to be different; if you went back 10 years and the role of a wholesaler was to say, 'Here is a great fund and here is why you should put it in your portfolio,' it had a great long-term track record. Now, the support will revolve much more around individual focus on solutions, helping them build a portfolio range of different investment capabilities with the various investment vehicles that would meet their needs. It would be a different type of support. So, it’s too early to determine whether or not there are real cost savings there. My instincts would lead me to believe the demand for support will increase, but in a different way, which gets back to the prior question that if you’re not a firm with the resources and capabilities to support the client in this changing environment, you’re at a disadvantage.

Okay, great. A lot of uncertainty, but thanks for the color and helping us walk through that.

Thanks. Just sticking with the theme, so Marty, one of your earlier comments, you mentioned the refocus on the management, obviously, as one of the critical criteria is the shelf space. People kind of rethink what stays in and gets taken off. We obviously haven’t seen any aggressive fee cut reductions from the active community yet. Do you anticipate that's coming? More importantly, thinking through Invesco's product lineup, which products could be more susceptible to fee cuts and do you anticipate yourself making any reductions to secure shelf space?

From a broad perspective, I think that's a good question. The reality is, if you look at the larger firms right now, their fees are already very competitive because they have the scale to lower fees. I don't sense that there is going to be a massive change among those firms. The disadvantaged firms are those with less scale; therefore, their fees are comparatively higher and they're under a lot of pressure. You have to address that problem one way or another. We can also see that we know everything is heavily competitive; we have the added benefit of adding factor-based capabilities, which allows us to lower the blended fee rate that firms have with their financial advisers. We also have a good array of solutions capabilities within that portfolio too.

Hi, there. Just a quick follow-up on a lot of this. I'm curious in terms of the factor-based ETF world specifically; as the business evolves, you gave us some good stats on the importance of first mover advantage. However, when you talk about supporting your distribution partners, how important is the established 3 to 5 year track record in terms of not just getting on the shelf but actually getting the flows? Given your presence, how much is that 3 to 5 year track record advantage?

It's huge. I think, again, go to the macro point we’ve all talked about. Don't extrapolate your knowledge on mutual fund development and ETF development. There is a limit to how many ETFs can exist within a certain segment. Typically, it’s the three that succeed. So there’s an inherent limitation. The other thing is that you’re looking at real track records with these factor-based ETFs that have a long track record versus back-tested type experiences; nobody needs to take that risk when you have a broad range of capabilities. In addition, the total cost of ownership of those ETFs isn’t just the fee; it’s the liquidity. Firms that have a presence are going to have the backing to create the liquidity, which will drive down the total cost of ownership as well. We’ve found that the breadth of product, first mover advantage, along with long track records really matter a lot, and we’ve reiterated that the barriers to entry are low, but the barriers to success are high.

I appreciate that. Just one follow-up: you mentioned in your comments on Japan the success in selling some REIT products there as you look for yield. Can you discuss real estate demand in general? You’ve got a big real estate business, but I didn’t hear much about it in the puts or takes in terms of the current environment?

Yeah. The demand for our real estate capabilities continues to be high; we see that reflected in the institutional pipeline and qualification. It has been high demand globally. We have one of the best real estate teams in the business, and they continue to do very well. We don't expect that to change anytime soon.

Hey, good morning. Thanks for taking the question. Marty, if I could just follow up on your point earlier on price sensitivity, just curious how Invesco is planning to deal with that over the next few years, particularly as DOL goes into effect? It just seems like more money is shifting into passive and lower fee products. How do you think about competitively pricing active management and the elasticity of demand? Given your scale, how do you think about the opportunity to be more aggressive?

Yes. Look, again, those are broad questions; it’s hard to provide a broad answer on that. I think what I would say is we look at where we are priced; our prices are very competitive, and they tend to be very competitive with firms that have a certain size and very competitively priced products, especially those with solid performance; they will continue to do well. I don't see a massive shift in pricing within large firms. On the contrary, I think smaller firms are under significant pressure. We do believe that with larger asset levels, fees will be affected., A lot of this will be driven by the share classes that are introduced. We have seen both cost share classes introduced; these stripped down, don't have transfer agency costs, etc. I believe that’s where the biggest near-term impact will be, but obviously, the management fees will be looked at too.

Okay, great. Just a last follow-up here on the DOL: you mentioned more money moving from brokerage to advisory. Can you talk about how you are positioned to capture those flows? Could you elaborate a bit more in terms of marketing and sales efforts you are implementing to capture that and also potential vehicle delivery changes?

Yes. So I mean, it is vehicle; again, everybody is going to solve it. I don’t think that's going to be much of a competitive advantage one way or the other. You’re going to respond to your partners as they need it. I believe those firms that can help their partners make the shift from brokerage to advisory will do very well. We have extensive support through Invesco Consulting, our broad field support, and thought leadership to help them work through those changes and again, a broad range of capabilities. We believe we’re positioned very well for that, and with the money involved, we like the money in motion; that’s going to be a good event for us, and we believe we are going to be net beneficiaries as we get through to the other side. Okay. Well, thank you, everybody very much. We’ll talk to you next quarter. Have a good rest of the day.