Invesco Ltd (IVZ) — Q4 2021 Earnings Call Transcript

Good morning and thank you all for joining us. As a reminder, this conference call and the related presentation may include forward-looking statements which reflect management's expectations about future events and overall operating plans and performance. These forward-looking statements are made as of today and are not guaranteed. They involve risks, uncertainties, and assumptions, and there can be no assurance that actual results will not differ materially from our expectations. For a discussion of these risks and uncertainties, please see the risks described in our most recent Form 10-K and subsequent filings with the SEC. Invesco makes no obligation to update any forward-looking statements. We may also discuss non-GAAP financial measures during today's call. Reconciliations of these non-GAAP financial measures may be found at the end of our earnings presentation.

Thank you, operator. And thank you everybody for joining us and Happy New Year. We ended 2021 with a strong fourth quarter and momentum going into 2022. So we'll spend a few minutes looking back at the fourth quarter, and also take a quick look at 2021 because it really sets the context as we go into the New Year. Our focus has been, and will continue to be, on our clients as we execute in this COVID operating environment. We've embedded new ways of working together to deliver outcomes for our clients and we've maintained our focus in six key capability areas: ETFs, Factors, Index, Private Markets, Active Fixed Income, Active Global Equity, Greater China, and Solutions. This approach has helped us generate consistent strong and broad organic growth. We ended the year crossing over $1.6 trillion in assets under management. As you can see on slide three, our net long-term inflows of $12.5 billion represents an organic annualized long-term growth of 4%, despite the market volatility in the fourth quarter. This is the sixth consecutive quarter of strong growth and is a direct result of the investments we've made over time to enhance and evolve our business to meet the needs of our clients; it also speaks to the broad diversification of our business. Growth was driven by continued strength in our key capability areas as we strategically invest in areas where we see client demand and have competitive strengths. For the year, Invesco delivered the strongest organic growth in our history. We generated over $81 billion of net long-term inflows which represents a 7% organic growth rate, one of the best in the industry. Looking at our specific capabilities, our global ETF platform closed out the year very strongly. We generated net inflows of nearly $22 billion in the fourth quarter, including our flagship QQQ product, which had an exceptional quarter generating $13 billion in net inflows. For the year, globally, ETFs generated a record $62 billion of net inflows, increasing our market share in both assets under management and revenue. The QQQ product has become the fifth largest ETF globally; its popularity has spurred growth in the rest of our global ETF platform, laying the groundwork for the launch of adjacent generating products such as the Q Innovation Suite, launched in October 2020, which has grown to $5 billion in assets under management by the end of 2021. We continue to see clients increasing their allocation to alternative strategies as they search for diversification and higher return investments to build a broad real estate platform to meet client demands. We are confident in our ability to accelerate growth as we look to the future. In our private real estate business, long-term net inflows were $3.4 billion in 2021, comprised of new acquisition activity of $12.4 billion and investment realizations of $9 billion. Our direct real estate assets under management grew by 12%. Our private credit business, with robust bank loan product demand, resulted in net long-term inflows of $7.5 billion for the year, including the launch of several new CLOs. Our active fixed income business remained strong, generating net inflows of $9.3 billion in the fourth quarter, including $7.1 billion from Greater China and $35 billion for the year, representing organic growth of 13% over the prior year. Within active global equities, although our $45 billion in developing markets fund saw net outflows in the quarter, the fund generated net long-term inflows in 2021 of $20 billion, an improvement of $4.3 billion over 2020. On the institutional side, we finished a strong year with solutions-enabled opportunities accounting for 35% of our institutional pipeline. Business in Greater China closed out an exceptional year of growth, with fourth quarter net long-term inflows of $9.5 billion. For the year, net long-term inflows were $28.7 billion representing organic growth of 32%. Business in China continues to be a source of strength and differentiation, and we expect strong growth in the years ahead. On slide four, we highlight a very strong set of results for 2021. In addition to reporting net long-term inflows in 2021, we generated record gross inflows of $427 billion, a 37% increase compared to 2020. Net revenues grew 17% over the prior year, helping drive adjusted operating income to nearly $2.2 billion, a 31% increase over 2020. Revenue growth, coupled with strong expense discipline, led to a 450 basis point increase in our net operating margin to 41.5%. In the second half of the year, we reported the second highest net operating margin of the company since becoming U.S. listed in 2007. These factors resulted in a 60% increase in our full year EPS to $3.09. Strength in our businesses generated strong cash flows, improving our cash position to the point where we are resuming our share buybacks. We intend to purchase up to $200 million in common shares during the first quarter. We remain focused on continuing to build a stronger balance sheet and improving our financial flexibility for the future. I'm pleased with the progress we've made over the last year, and I am even more confident that Invesco is on the right path to sustainable organic growth. As we look to the future, we are determined to continue delivering consistent organic growth, together with our disciplined approach. Expense management should enable us to generate positive operating leverage while at the same time continuing to invest in growth, the growth of our business and efficiency of our business. I do want to take a moment to thank our employees for their continued resilience, hard work, and dedication through this COVID operating environment. Their efforts are delivering the strong results you're seeing from Invesco and the breadth of our capabilities in our competitive strength positions as we look forward. We will continue to focus our efforts on delivering positive outcomes for clients while driving future growth and delivering value over the long run for our stakeholders. With that, I'll turn it over to Allison.

Thanks, Marty. And good morning, everyone. I'll start with slide five. Our investment performance was strong in the fourth quarter, with 64% and 75% of actively managed funds in the top half of peers or beating benchmark on a 5-year and a 10-year basis. These results reflect continued strength in fixed income and foreign equity, most notably in emerging markets and Asian equity, all areas where we continue to see demand from clients globally. Turning to slide 6, we ended the year with over $1.6 trillion in AUM, a 19% increase over year-end 2020. As Marty noted earlier, our diversified platform generated net long-term inflows in the fourth quarter of $12.5 billion representing a 4.1% annualized organic growth rate. Active AUM net long-term inflows were $1.8 billion and passive AUM net long-term inflows were $10.7 billion. Net market gains led to an increase in AUM of $18.4 billion in the quarter. The retail channel generated net long-term inflows of $3 billion in the quarter driven by inflows into global ETF products and Greater China. The institutional channel demonstrated the breadth of our platform and generated net long-term inflows of $9.5 billion in the quarter with diverse mandates, both regionally and by capability funding in the period. Inflows in the Asia Pacific region were particularly strong. Regarding retail net inflows, our ETF capabilities generated net inflows of $21.7 billion. Excluding the QQQ, our net long-term inflows were $8.8 billion. As Marty noted, in 2021, our global ETF business generated record net inflows of $62 billion, which was more than 2.5 times net inflows in 2020. Our global ETF platform captured 5.6% of net new flows in 2021, increasing our market share of ETF AUM to 4.9% at the end of 2021. Our share capture of incremental ETF revenues was also above market share at 5.2%, excluding the QQQ. Looking at flows by geography on slide 7, you'll note that the Americas had net long-term outflows of $4.3 billion in the quarter. While we saw strength in ETFs and our institutional business, we did see pressure from select active equity strategies, including developing markets and diversified dividends. Our bullet share suite also experienced year-end maturity activity, which is expected. Asia Pacific delivered another strong quarter with net long-term inflows of $12.9 billion. Net inflows were diversified across the region, including a record $9.7 billion of net long-term inflows from our joint venture in China, Invesco Great Wall, and $3.2 billion from other countries, including $1.8 billion in India and $800 million. EMEA excluding the U.K. also delivered a strong quarter of net long-term inflows totaling $4.7 billion, representing organic growth of 12%. This was driven by strength in ETF sales, senior loan products, and investment grade fixed income. From an asset class perspective, we continue to see broad strength in fixed income in the fourth quarter with net long-term inflows of $9.1 billion. Drivers of fixed income flows include institutional net flows into various fixed income strategies through our China JV and EMEA, global investment grade, stable value, and municipal strategies. Our alternatives asset class holds many different capabilities, which is reflected in the flows we saw in the fourth quarter. Net long-term flows in alternatives were $3.1 billion, driven primarily by our private markets business, which included direct real estate property acquisitions, a newly launched CLO, and senior loan capabilities. When excluding global GTR net outflows of $700 million, alternative net long-term inflows were $3.8 billion. The strength of our alternative platform can be seen through the flows it has generated over the past four quarters with net long-term flows totaling over $17 billion, representing a 10% organic growth rate over this time, excluding the impact of GTR net outflows over the period. Moving to slide 8, our institutional pipeline was $26 billion at year-end. The decline in the pipeline from the prior quarter was due to the funding of several significant mandates in the fourth quarter, as reflected in our strong institutional inflows for the quarter. While the size of the pipeline will fluctuate quarterly, it remains consistently strong, typically running in the $25 billion to $35 billion range dating back to 2019. The pipeline also remains relatively consistent with prior quarter levels in terms of fee composition. Overall, the pipeline is diversified across asset classes and geographies. Our solutions capability enabled 35% of the global institutional pipeline in creative wins and customized mandates. This has contributed to meaningful growth across our institutional network. Turning to slide 9, you'll notice that net revenues increased by $40 million, or 3% from the third quarter as a result of higher than expected performance fees, as well as higher average AUM in the fourth quarter. The net revenue yield ex-performance fees was 33.4 basis points, a decrease of one basis point from the third quarter yield level. The decrease was driven mainly by asset mix shifts, including higher QQQ and money market average balances. The incremental impact from higher discretionary money market fee waivers was minimal relative to the third quarter. The full impact on the net revenue yield for the fourth quarter was six tenths of a basis point. Looking forward, we expect most of the dynamics impacting net revenue yield will continue. Additionally, the first quarter contains two fewer days than the fourth quarter, which always impacts net revenue yield. Regarding discretionary money market fee waivers, given the current forecast for higher rates in the near term, we anticipate that 75% to 90% of these waivers would cease within the first 60 to 90 days after the first 25 basis point increase in the Fed funds rate. That would result in a recovery of about four-tenths to five cents of the negative impact waivers have had on our annualized net revenue yield. Performance fees for the fourth quarter were $53 million, higher than our expectations, driven by certain portfolios that have annual absolute return performance hurdles, including approximately $20 million from our JV in China. Given the strong influence of the market on these portfolios, these performance fees are clearly difficult to forecast. Total adjusted operating expenses increased by 3.1% in the fourth quarter. The increase was mainly driven by the typical seasonal increase we see in marketing and higher G&A expense, which were partially offset by a decrease in compensation expense. Also impacting marketing and G&A expense was an increase in client events and travel in the fourth quarter before we saw the impact of the new Omicron variant. But the impact of the new variant resulted in a slowdown of travel and in-person client activity in January, and we would not expect first-quarter activity to be as high as the fourth quarter. The G&A expense in the fourth quarter also included a non-recurring $10 million charitable contribution to the Invesco Foundation. The Invesco Foundation exists to support our communities and further progress on pillars of education and financial literacy. We're pleased to have the ability to make this contribution at the conclusion of a very strong year. As we look ahead to the first quarter of 2022, consistent with prior years, we expect an increase in compensation expenses related to the seasonal increase in payroll taxes and the reset of other benefits, such as our 401k plan match. Typically, this is about $25 million to $30 million higher in the first quarter relative to the fourth quarter. As noted, one area that's still more difficult to forecast at this point is when COVID impacted travel and entertainment expense levels will begin to normalize. Moving to slide 10, I'd like to update you on the progress we have made with our strategic evaluation. In the fourth quarter, we realized $5 million in savings, with $4 million related to compensation expense reflecting the planned transition of certain roles in concert with our strategic review, and a million dollars related to a reduction in property expense as we continue to right-size our facilities portfolio. The $5 million in cost savings are $19 million annualized, combined with $148 million in annualized savings realized through the third quarter of 2021, brings us to $167 million in total, or 84% of our $200 million net savings expectation. As it relates to timing, the remainder of our net savings will be realized by the end of 2022 as planned. The expected total program savings of $200 million through 2022 would be roughly 65% from compensation and 35% spread across property, office technology, and G&A expenses. In the fourth quarter, we incurred $32 million of restructuring costs related to the initiative. In total, we have recognized nearly $220 million of our estimated $250 million to $275 million in restructuring costs associated with the program. We expect the remaining restructuring costs for the realization of this program to be in the range of $30 million to $55 million in 2022. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results. Moving to slide 11, adjusted operating income improved by $16 million to $578 million for the quarter, driven by the factors we have reviewed. The adjusted operating margin was relatively stable at 42%. Excluding the non-recurring contribution to the foundation, we generated positive operating leverage in the fourth quarter. For the year, the degree of positive operating leverage was 1.8 times underscoring our focus on driving scale and profitability across the company's diversified platform. Non-operating income was $51 million, driven primarily by recognition of gains from funds that are in liquidation. The effective tax rate was 21.9% in the fourth quarter, compared to 24.4% in the third quarter. The decrease in the effective tax rate was primarily due to a decrease in the valuation allowance recorded against net operating losses and a decrease in the expense for unpaid tax positions in the fourth quarter. We estimate our non-GAAP effective tax rate to be between 23% and 24% for the first quarter of 2022. The actual effective tax rate may vary from this estimate due to the impact of non-recurring items on pretax income and discrete tax items. Slide 12 illustrates our ability to drive adjusted operating margin improvement against the backdrop of the client demand-driven change in our AUM mix and the resulting impact on our net revenue yield excluding performance fees. We also illustrate the impact of the exceptional growth of our QQQ product, which does not earn a management fee, on our net revenue yield. Our operating margin two years ago in the fourth quarter of 2019 was 39.9%. At that time, we reported a net revenue yield of 40.5 basis points. In the fourth quarter of 2021, our net revenue yield declined a little over seven basis points to 33.4, yet our operating margin improved to 42%. As Marty noted earlier, the operating margins we have generated in the third and fourth quarters of 2021 are the highest since Invesco became a U.S. listed company in 2007. This is against the backdrop of a mix-driven declining net revenue yield. We have been building out our product suite to meet client demand, and client demand has been skewed towards lower fee products, including the highly successful QQQ product. Growth of the QQQ product over this period is remarkable, growing from 7% of our AUM mix in the fourth quarter of 2019 to 13% in the fourth quarter of 2021. Even though we do not earn a management fee as the sponsor of the QQQ, we manage the over $100 million annual marketing budget generated by this product. Growth in the QQQ accounts for two basis points of the net revenue yield decline over this period shown on this chart. As I noted earlier, discretionary money market fee waivers account for six-tenths of a basis point decline in the net revenue yield. The combination of the extraordinary growth in the QQQ combined with a temporary drag from money market fee waivers accounts for over one-third of the decline in net revenue yield over this time period. While realizing our business mix is shifting, we continue to focus on aligning our expense base with these changes. This has enabled the firm to generate positive operating leverage and operating margin improvements, despite the decline in net revenue. Now turning to slide 13, a few comments here. Our balance sheet cash position was $1.9 million on December 31st, and approximately $725 million of this cash is held for regulatory requirements. The cash position has improved meaningfully over the past year, increasing by nearly $500 million. We were able to drive improvement in our cash position while also funding the resolution of the remaining contingent liabilities in 2021. These included $294 million in forward repurchase liabilities that we funded earlier in the year, and the $254 million in fund shareholder reimbursements to complete the remediation of the MLP matter in the fourth quarter. We also received an insurance recovery of $100 million related to that matter in the fourth quarter. Our debt profile has improved considerably as well. As a result, we have substantially improved our leverage position; the leverage ratio, as defined under our credit facility agreements, is 0.79 times at year-end, compared to 1.37 times a year ago. If you choose to include the preferred stock, leverage has declined from almost four times to 2.47 times. With respect to our capital strategy, we are committed to a sustainable dividend and to returning capital to shareholders through a combination of modestly increasing dividends and share repurchases. We intend to build towards a 30% to 50% total payout ratio over the next several years by steadily increasing our dividends and resuming a share buyback program. As Marty noted earlier, given our strong and growing cash position combined with continued opportunity in our valuation, we expect to repurchase $200 million in common shares during the first quarter. Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility, and our 2021 results demonstrate that progress. In summary, 2021 was a very strong year for Invesco. We remain focused on executing the strategy that aligns with our key areas of focus, and we continue to invest ahead of client demand in these areas. At the same time, we're focused on optimizing our organizational model and disciplined expense management. This approach has resulted in strong organic growth, driving positive operating leverage and operating margin improvement. This has facilitated stronger cash flows, further strengthening our balance sheet and driving the improvement in our leverage profile. As we look toward the future, investors are in a very strong position to deliver value over the long run to all of our stakeholders. And with that operator, I'd ask you to open up the line for Q&A.

Good morning. I appreciate your insights on expenses, Allison. Given the underwhelming start to 2022 in the equity markets, could you share your thoughts on how this may impact net revenue yield? Additionally, how well-positioned are you to sustain the operating margin, even in the face of challenging equity market conditions? Thank you.

That doesn't help either. But even in rising markets, as we continue to see really strong demand for our passive capabilities, and I think that's evidenced by some of the organic growth rates we just walked through. We continue to see real pressure on the overall net revenue yield. If I look at the net revenue yield of our active AUM, it's actually held up pretty nicely over the last year or two. It's really that strong demand for our passive AUM that's creating this pressure. We do expect there to continue to be downward pressure on the revenue yield overall as we continue to see that demand and the shift of our business mix. Hopefully, some of the detail and the color we provided on the pressure that we also see just from money market fee waivers and the QQQ, one of which is temporary, might present an opportunity if we do see rates increase over the course of this year. As for what this means for our operating margin, the volatility we've experienced so far in January does put pressure on it. I mean, it will require us to be incredibly disciplined from an expense management standpoint. I think we've made terrific progress. When I look at 450 basis points of operating margin improvement year-over-year, we've positioned ourselves to operate within a new place. It may not be as high as what we experienced in the last couple of quarters, but I don't see us going back to where we were a couple of years ago. We're being very disciplined and thoughtful about this exact issue as we look at our budget for the year.

Yes, the progress on profitability has been really, really great. So I agree on that. Then shifting gears a bit to the follow-up, there's the $200 million buyback you announced for the first quarter. But as you flagged, there was a $100 million insurance settlement. So when we think about calibrating to the run rate, if we shift to your comments around the payout, it would suggest that the 1Q probably has a little bit of excess from that insurance recovery. And so backing that out is probably the right way to think about it. Is that fair? And is there potential for more insurance recoveries behind this one, or is this $100 million probably the end that we should expect? Thanks.

Yes, a couple of things to point out. That $100 million recovery is actually in our non-GAAP results and our transaction integration expense. So it really doesn't factor into our adjusted net income. It’s important to note the resolution of the MLP matter and that it was fully resolved in the fourth quarter with the $254 million getting that liability behind us, is really terrific progress after a couple of years. That shouldn't go unnoticed because we've cleared out all these contingent liabilities. But the $100 million recovery against that is somewhat irrelevant to our payout ratio targets, which aim for a 30% to 50%.

No, I just meant in the $200 million balance, there's clearly some extra capital that you've now received. Did that support the $200 million pace in the first quarter? That's all I meant by that, not the payout ratio.

Fair enough. Look, at that $1.9 billion cash balance. I would think about it from a cash perspective, and the fact that our cash did grow about $500 million over the year after the resolution of all of these contingent liabilities and the $100 million insurance recovery is a positive. It somewhat factors into the timing of moving forward with this in the first quarter, and also our valuation and these attractive prices factor into the timing as well. If not now, when is in our thinking as well.

Great, thanks. Good morning, folks. Again, thanks for the callouts on expenses. Just want to come back to the operating margin. In the context of the Great Wall JV, obviously, seeing really good success there, continuing on the organic growth side. Do you view that as the more scalable part of the model? If you're continuing to have this type of success there, could that be a positive contributor to the operating margin dynamic?

Yes, absolutely. I mean, as we said before, if you take a macro picture, the opportunity in China for asset managers is phenomenal. Depending on the estimate, if you look at the next three to five years, 50% of the organic growth in inflows could be coming from China. So being very, very strong in China is an enormous opportunity. It’s very scalable, and we continue to anticipate continued strength in the business, which puts us in a very strong position.

Thanks for the color. And then maybe it's an organic growth, if you can get some color on traction in sustainable products, ESG products on both the active and ETF side, and where you stand in terms of integrating ESG across the investment process. Is that completely done now, and do you expect that to help inflows in Europe, both on the institutional side and also your traction in gaining ETF share in Europe on that front?

Yes, let me make a couple of comments and I was also going to chime in. Currently, if you look at our assets under management, it's now $96 billion that meets ESG qualifications, which is an increase this quarter. We converted 69 funds, totaling $45 billion to Article 8 in the fourth quarter. ESG is fundamental to any money manager’s success in Europe, whether it's retail or institutional; you must have ESG integration at a minimum, which is really what our effort with Article 8 involves. You can expect to see that continue to grow and evolve. Our commitment is to have ESG integration across all of our investment teams. Right now we are at 75%, so we've made very good progress. From my perspective, three years from now, we won't really be talking about ESG as a separate category. The integration piece is a reality of money management right now.

Let me just clarify one thing. It is not 96% of our AUM; it’s $96 billion of our AUM that is ESG qualified. As Marty said, 75% of our funds are now what we would consider to have systematic ESG integration.

Great. And then just to follow up on sustainable product flows. Were there any meaningful outflows in the fourth quarter? Are you seeing any pressure there? Could you continue to see some demand overall in terms of institutional mandates for these ESG capabilities?

We had modest outflows in the fourth quarter; there's some pressure there. A lot of our ESG capabilities are somewhat thematic in nature as we continue to build them out. They could come in and out of favor. We continue to see demand overall in terms of institutional mandates for these ESG capabilities, but flows were relatively soft and flattish during the quarter. One thing I'd note in particular is that some of the outflows we see are specifically related to our GTR capabilities, which saw about $800 million in outflows that also contributes to what we would consider ESG outflows as well. There are places where we see positive flows; however, there are other places under pressure for very specific reasons. Overall, we continue to view this as an important component of our portfolio. In a few years, we believe we won’t be talking about ESG as a separate category but more as standard practices.

Yes, that's great color. Appreciate it. Thank you.

Hello there. One of the first follow-ups on Greater China, if I could. You talked about the six new funds factoring two and a half billion in long-term flows from 7.2 from existing products on a base of $106 billion ending the quarter; that's a really high growth rate. Are there new products in the pipeline? How do you think this growth rate is sustainable?

Yes, a couple of comments, and Allison will chime in as well. The year-over-year organic growth was 32%, which is phenomenal. We have maintained that growth rate over the last three years. Over time, we expect strong growth in the next couple of years, bearing in mind that every market will have its volatile moments. We're seeing very strong launches of new products at the beginning of the year. Additionally, we're starting to see greater flows into existing products as well. This indicates a maturing market where we can get ongoing flows into existing products, rather than just constant launches, but we anticipate continued strong growth in China, both at the retail level and institutional level as we look forward.

One thing I'd add is that in the very near term, China is experiencing some new dynamics with COVID that they haven't seen in the last couple of years. With case counts increasing, we may see some softening of sentiment domestically as we head into the Chinese New Year. However, where we see real strength and continued demand within our joint venture is particularly for our fixed income and balanced products. We are well positioned with our capabilities through our JV and are seeing positive trends so far this year.

I appreciate that. That's a perfect segue to my follow-up. I was curious about the market's drops in the last few weeks. Can you give some insight into institutional client behavior during this period of volatility?

We typically try to avoid flow updates on a month-to-month basis, but I will say, you could see with some of the publicly available data that we feel very good about where we are so far this year in terms of sales and redemption rates. One of the benefits of having a very broad and diversified platform is that we have that breadth of capabilities as clients look to rebalance and shift some of their allocations. We’re able to capture a lot of the flows even in a risk-off environment. The market is experiencing a significant amount of volatility, as we all experienced, especially yesterday. I think the next couple of days, particularly around the Fed meeting, will be very informative. Conversations with clients continue to be constructive and positive, and we’re where we need to be despite this interesting market.

I appreciate that. Thanks.

Good morning, Marty and Allison. Hope you're both doing well, and congrats on the 7% organic growth this past year.

Thanks, Craig.

So I wanted to get an update on your effort to increase your equity stake in the joint venture, because I don't think you've done that yet, but you're working on that. Also, you previously disclosed the percentage of flows that come from digital platforms, like Ant Financial; I think it was trending around 50% before Q4. So I don't know if you have an update on that number either.

Yes, hope you had a good New Year too. We're continuing our dialogue with our joint venture partner to increase our stake over 50%. It's a positive conversation, though we have not accomplished that yet. I’d like to highlight that even though we hold 49% ownership, we have management control, which has allowed us to be effective and successful in China. We feel we will eventually attain a majority stake in our joint venture, but it is not impeding our progress. Secondly, regarding digital platforms, they continue to be a significant part of the market dynamics, and that number remains about 50%. This is a strong element for our future success in China.

Thank you. And just for my follow-up on the private REIT business, you have the U.S. business and then you have the global distribution partnership with UBS. It looked like the U.S. vehicle only raised about $16 million through month-end November, and I don't have the December number yet, but I was wondering if you could update us on the progress of those two products and any kind of flow or AUM detail.

Yes, just a couple of points. We’re still in the onboarding process for various institutions. I don’t want to get too specific, but it’s currently being onboarded in the U.S. and we anticipate it may take into the second quarter of this year before we feel it’s sufficiently onboarded at various locations. Again, it’s an area of great opportunity for us, and the reception has been strong; it's just the due diligence process of working through these areas.

Thank you. Thanks for taking my questions. Happy belated New Year to everyone. Hope you're both doing well. For my first question, I'd like to revisit flows a bit. So I mean, you had strong organic flow growth for the year, which is great. But there is a focus on fee realization rates. Can you help us better understand the economic impact of the inflows? I don’t know if you have net revenue, net organic revenue or EBITDA growth that might be a better metric; anything that can help us get a sense of the economic impact you're seeing from inflows would be helpful for my first question.

We don't disclose it in that way, but I will point out a couple of things. With the strong organic growth rate, we’re generating positive organic revenue throughout the year on the flows. There are points of strength and points of challenges against that. As I noted, the active AUM's net revenue yield has held up pretty strong and hasn't changed much in the last couple of years. The pressure we're seeing really comes from high demand for our passive capabilities. While we continue to produce positive organic revenue growth and generate good operating margins from passive capabilities, it requires a higher volume, which represents a scale play for us.

Great, thank you. As a follow-up, going back to expenses, can you remind us how much flexibility you feel you have in the expense basis that may be linked to pre-tax operating income or asset levels or flows? I'm trying to get a sense of the natural flexibility you might have for a more difficult revenue environment to start the year.

Sure. A couple of points: about a third of our expense base is variable in nature, and we expect that to flex up with stronger revenue and flex down if we don't see it. That leaves two-thirds of our expenses to be more fixed in nature. That's where we continue to explore our expense discipline and look for opportunities to unlock costs. In some cases, this will allow costs to fall to the bottom line, and in others, we will reinvest in areas we think will be more productive. We feel we have opportunities here and have made good progress on our strategic review. We still have some work left to do, and we're closely examining our G&A expenses.

Thanks. Good morning. Just a follow-up, one more for you on expenses. As we think about the sequential change from Q4 to Q1, you mentioned it as normal seasonal stuff but curious about this past fourth quarter, where you had elevated performance; what should we normalize for compensation within that and the one-time items to think about from Q4 to Q1, considering the market impact?

Yes. Compensation expense tends to run somewhere between 38% and 42% of our revenues on an annualized basis. 2021 was at 38%, which is on the low end of that range, reflecting a strong year. As for expenses in Q1, there are several considerations. For instance, marketing tends to be seasonally high in Q4. You saw that in Q4 this year. We have the typical $25 to $30 million increase related to the seasonal rise in compensation expense. The other point is that we did start to see some return to normal in Q4 without the Omicron variant impacting travel, and that activity decreased toward the holidays. We’re hopeful to see some return to normalcy as we move through February.

That's helpful. Additionally, looking at slide 12, I appreciate the highlights around margin expansion against the backdrop of the mix shift. Considering flat markets, is margin expansion still part of the story, or should we think more about maintenance with ongoing shifts?

Flat-to-modest expansion is possible in a flat-market environment, provided we continue to see this mix shift at a stable pace. If the shift is quite fast, we might be looking at flat margins. We don’t intend to operate with an ever-increasing operating margin. As mentioned before, we are focused on investing in the business and maintaining competitiveness while delivering on our objectives.

I want to reiterate that it’s essential to continue investing in the business. We’re looking at all opportunities critically and reallocating to foster growth where we see client demand. We’ve shifted to focus on ETFs, factors, private markets, etc. It’s a competitive marketplace, and we’re dedicated to delivering results for shareholders.

Thank you.

Hi, good morning. Marty, I wanted to take a step back and consider the bigger picture. It's a new year, so first, Happy New Year. Invesco had a great year in 2021, but as we look back over a longer period, the stock price is roughly the same as it was a decade ago. It seems that Invesco has been successful on a value creation roadmap but hasn't reflected that in shareholder value. With an activist investor continuing to build a position in the company, are you considering changes in how you approach shareholder value creation as you make investment and capital allocation decisions? What is top of mind as you think about the upcoming year?

Yes, it's a great question. The result regarding share price is significant. From our perspective, we must deliver results for clients in a thoughtful and meaningful way to meet our constituents' needs. The evolution of our business aligns strongly with those needs and has been reflected in our operational results. We are focused on continuing down that path, and in time, the share price should reflect that. Today, as we discussed our stock buybacks, we find it a very attractive investment for many reasons.

I would add that valuation is frustrating for us. Our focus is on things we can control. Delivering for our clients and building out our capabilities is important, and the 2021 results show success and one of the highest growth rates in the industry. We're making significant strides on our operating leverage and strengthening our balance sheet, putting us in a position to do further work throughout the year. As we look at shareholder returns, we see real progress in those metrics over the long term.

Well, I know it's a tough question, but it's great to hear your comments. Thank you.

Hey, good morning, everyone. A quick follow-up on the repurchase question. Eyeballing it looks like the $200 million in Q1 would already get you to the 35% to 50% payout. Should we assume that's more of a one-off for modeling or expect a resumption of regular repurchases in every quarter beyond that?

It’s hard to say yet. You’re correct that it does get us into that range, and we felt that the timing was right to move aggressively for the reasons discussed. We do feel good about this approach, but whether or not we will continue at that pace as the year unfolds, it will depend on results.

Alright, fair enough. I noticed Mass Mutual recently announced a new reinsurance platform with Centerbridge, and Bearing Asset Management acting as the asset managers. Just curious how you think that news fits with your relationship with them? Does it change your perspective regarding managing more of their assets?

No, it does not. We enjoy a very strong relationship, with board members on our board; they own 60% of the company. They’ve been instrumental in supporting our alternatives business and will continue to do so. Our relationship is very strong.

Thank you.

Thank you very much for taking the question this morning. So, Marty, I think you mentioned that you hope to deliver some operating leverage going forward in your opening remarks, and then Allison maybe sort of qualified that by saying you're not here for infinite margin improvements. As we look into maybe 2023, can you unpack your gross spending rate and then the net spending rate? Just to see how we get to the final part of your $200 million realization, how we should think about the core expense growth into 2023, even if we’re sitting here in January 22.

Yes, we’re not providing guidance into 2023. I'd suggest that we’ve attempted to provide some perspective as to what we expect in Q1, as well as the operating margin within which we intend to operate.

Bill, you're asking a question that connects to others. We’re trying to do multiple things. We aim to invest in the future while being competitive and driving outcomes for clients and shareholders. If you look at our business today versus five years ago, it’s highly attractive. We’ve invested in China, ETFs, private markets, etc. It's not where we were five or ten years ago, and we’re producing margin expansion while also reinvesting in the business. We're showing we can execute on all fronts.

Thank you. Just one last one for me. Your competitors have been aggressively investing to build out their alts bucket. I think you’re probably further along strategically, but how is M&A factoring into your discussion moving forward?

You’ll be tired of my answer because it’s the same. We approach this from a strategic perspective. We look at client demand and if we can meet those needs. We always prioritize internal development and only look to the market when we fall short. New opportunities must have client demand, be additive to our capabilities, and fit our culture. Our first focus remains internal, yet we will monitor the market for opportunities that align.

Thank you.

Hey, Marty, Allison, thanks for squeezing me in here. Just want to circle back on expenses. You mentioned one third of the expense base is variable and about two thirds fixed, so where would you like to see that mix over time? Additionally, when you think medium to longer-term, do you see that operating margin in the mid-forties as achievable? Does that make sense for the business as you think about it?

Regarding the variable mix, that's actually where it seems to be accurate. I do not see it varying significantly over time. Our focus is on driving scale over that fixed cost base, as that's where we deliver operating margin growth. For operating margins, while I can't give specific targets, I don't expect to replicate 450 basis points of improvement year-over-year constantly. Stronger market dynamics play a role in achieving high operating margins. It’s plausible to aim for mid-forties, but not in the immediate future. We need technology investments and competitive advantages to succeed.

Absolutely. I want to echo that it’s crucial to keep investing in the business. We are critically evaluating areas of opportunity and determining how to reallocate towards growth. This will be in sectors driven by client demand, ETFs, factors, private markets, and so on. It’s a competitive marketplace. The metrics reflecting operations are significant. We’ll maintain focus on serving our shareholders.

Great, I'll leave it there. Thanks for taking my questions.

Thank you. That brings us to the end of our call.

Thank you very much.