Invesco Ltd (IVZ) — Q3 2022 Earnings Call Transcript

Thanks, operator, and to all of you joining us on Invesco's quarterly earnings call. In addition to our press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website invesco.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide two of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Marty Flanagan, President and Chief Executive Officer; and Allison Dukes, Chief Financial Officer, will present our results this morning. After we complete the presentation, we will open up the call for questions. Now I'll turn the call over to Marty.

Thank you, Greg. And those so inclined to follow along, I’ll start on Slide 3 and the highlight page. So the challenging backdrop continued in the third quarter as most major equity and bond market indices moved lower. Investors continue to behave cautiously, seeking risk-off trades that impact industry flows as well as the level and mix of assets under management. The dynamic environment we are in favors money managers that have a broad diversified range of capabilities that meet the client's demands in this market. Invesco continues to prove to be one of the few global investment managers that can do that, with net flows momentum in market leadership positions in areas of high client demand. Despite historic market declines, the firm generated net long-term inflows this quarter in active fixed income, Greater China, and our institutional channel. All three of these areas have also garnered net long-term inflows on a year-to-date basis, along with our global ETF business and the private markets capabilities. I'll begin with our active fixed income capabilities, which have been a steady source of growth this year and are a testament to the diversity of the investment platform. The asset class generated net inflows of $3.7 billion in the quarter with strong demand from clients in Asia Pacific. We managed nearly $380 billion back to fixed income across the full spectrum of investment offerings and vehicles serving retail clients as some of the world's largest institutions. Our Greater China Business delivered $2.1 billion of net long-term inflows this quarter. Invesco Great Wall, our China joint venture, has fueled our growth and we continue to successfully launch new products, most notably in fixed income. We've grown consistently in the last several quarters despite the recent difficulties faced by the Chinese economy as a result of our strong local partner and our long-standing reputation as one of the top global investment managers in China. Our leading position in China is a result of many years of investment and hard work. As China and the global economy eventually recover, we expect our growth to accelerate in the fastest-growing market in our industry. Our institutional channel generated net inflows for the 12th consecutive quarter with $3.9 billion led by clients in Asia Pacific. The business has proven resilient throughout the COVID-19 pandemic and the market downturn we're experiencing in 2022. Growth in the institutional business is a result of the investment in our distribution team, the range of capabilities we bring to market, and the build-out of our solutions capability over the last several years, which is increasingly becoming a differentiator for Invesco. Despite volatility in the risk-off sentiment impacting global markets, we continue to win new mandates, and our pipeline remains solid. We look forward to continuing our partnership with many of the world's leading organizations to meet the challenges of this uncertain time. While net inflows into ETFs are relatively flat in the third quarter, demand for ETFs slowed industry-wide. Despite the slowdown, we maintain the leading position in ETFs and we expect to see growth rebound as market volatility eases. On a year-to-date basis, we have generated strong organic growth and gained market share. We have continued investing in our private markets capability, and we have experienced net outflows in the third quarter. Over the past year, we have generated organic growth against a very volatile market demonstrating the strength of our alternative platforms. Key to our alternative strategy is our strategic relationship with MassMutual, which is meaningful and continues to strengthen. In addition to managing over $10 billion in broker-dealer, variable annuity, and self-advice assets prior to this decline, we have over $3 billion in other investment relationships with MassMutual. This includes nearly $2.5 billion in commitments to various Invesco alternative strategies. The commitment from MassMutual has been growing over time and work on various strategies, including $400 million committed to our INREIT product. Having a partner like MassMutual as an investor adds significant reputational impact to our third-party investors. Considering the combined investment we haven't seen in co-investment vehicles, which totals $900 million along with $2.5 billion in commitment from MassMutual in various alternative strategies is a compelling partnership that enables us to bring products to market more quickly and brings with it the strong reputational backing of a world-class financial institution. While growth continued in key capability areas I mentioned, the firm experienced net long-term outflows of $7.7 billion during the quarter. Equity strategies that have been under pressure industry-wide were the largest contributor to net outflows, totaling $7.4 billion for the quarter. Client demand for emerging markets remains subdued, and our developing markets fund had $2.8 billion in net outflows in the third quarter. While near-term headwinds persist, we have confidence that the equity global capabilities will be a driver of growth in the future when global markets recover and client demand for this important asset class returns. As we discussed last quarter, significant progress has been made in building a stronger balance sheet position to help us weather this market downturn. We ended the quarter with a zero balance on our revolver, and total debt outstanding is at the lowest level in years. Our cash balance increased by over $1 billion, and we maintain the flexibility we need to sustain investment in key growth areas. Last quarter, we mentioned that we met our target of $200 million in annual cost savings from our strategic evaluation. As market volatility continues, the need to maintain a disciplined approach to expense management is paramount. We are re-examining all aspects of discretionary spending relative to the environment we are in, and we will be focused on near-term hiring and critical growth initiatives. We continue to thoughtfully balance managing through near-term market headwinds while investing for long-term growth. As always, we remain focused on helping clients meet their investment objectives, investing in areas of strategic importance, scaling our operating platform, and efficiently allocating resources. By executing our long-term strategy, I'm confident Invesco will maintain its position as one of the leading firms in the industry while delivering compelling returns to shareholders. With that, I'll turn it over to Allison.

Thank you, Marty, and good morning, everyone. I'll start with Slide 4. Investment performance continued to be solid in the third quarter with 57% and 62% of actively managed funds in the top half of peers or beating benchmarks on a three-year and a five-year basis. These results reflect continued strength in fixed income and balanced strategies where we continue to see strong client demand. Performance lags benchmarks in certain equity strategies, but we experienced improvement over the past quarter in several key funds. Turning to Slide 5, we ended the third quarter with $1.32 trillion in AUM, a decrease of $67 billion from the end of the second quarter. Global market declines and foreign exchange movements reduced assets under management by $72 billion, partially offset by total net inflows inclusive of $10 billion into money market products. As Marty noted, the firm experienced net long-term outflows of $7.7 billion this quarter amid continued market volatility. Active capabilities accounted for most of the outflows totaling $7.3 billion for the quarter, while passive net outflows accounted for the remaining $400 million. We sustained organic growth in several of our key capability areas, and our net flow performance remains strong relative to industry peers. A driver of our resilience and relative outperformance has been the institutional channel, which delivered its 12th consecutive quarter of net inflows with $3.9 billion. We generated the strong inflows despite not renewing a $2.5 billion relationship during the quarter. While clients are carefully considering new fundings in these challenging markets, our growth in the institutional channel accelerated from the second quarter, and we continue to see new mandates fund across geographies, asset classes, and the risk-return spectrum. Offsetting growth in institutional were $11.6 billion of net outflows in the retail channel this quarter, primarily in the Americas and EMEA, as investors continue to seek lower risk exposure amid extreme market volatility. Net flows into ETF vehicles were relatively flat in the third quarter, with $300 million in net long-term outflows. Demand for ETFs slowed industry-wide. That driver, coupled with net outflows in commodities and bank loan products created net flow headwinds for Invesco. Offsetting this were net inflows into fixed-income ETFs, the low-volatility suite, and our Q-to-Q innovation suite led by the Q-to-Qm. Despite the slowdown in the third quarter, we maintain a leading position in ETFs, and we expect to see growth rebound as market volatility eases. On a year-to-date basis, net long-term inflows into our ETF franchise are $23 billion, equivalent to a 12% organic growth rate. We've also gained market share year-to-date. Excluding the Q-to-Q, Invesco captured 4.7% of industry net inflows, higher than our 3.1% share of total industry assets under management. Now, turning to Slide 6, we experienced continued net outflows in the Americas and EMEA, primarily in the retail channel. Growth picked up in Asia Pacific with over $5 billion of net long-term inflows this quarter, led by China and Japan. Our China joint venture contributed $2.1 billion of net inflows, including $1.8 billion from nine new products launched during the quarter. As Marty highlighted, our joint venture remains a key strength, and we expect growth to accelerate there as markets recover. Fixed income capabilities have been a reliable source of growth for Invesco for several years now. Despite one of the most difficult bond markets in years, the third quarter was no exception to that reliability with $6.5 billion of net long-term inflows. The firm has now experienced net inflows into fixed-income strategies for 15 straight quarters, a testament to the breadth of our offering as well as our strong investment performance in the asset class. Alternatives experienced net outflows of $5.3 billion in the third quarter. The largest drivers of net outflows were bank loans and commodity ETFs, which have attracted net inflows year-to-date, but saw investors pull back in the third quarter. While growth may slow in the near term as investors carefully consider asset allocations, we're confident that our alternatives business will be a strategic driver of growth in the years to come. In fact, over the past volatile year, we've generated a 4% organic growth rate, excluding outflows from our GTR product, demonstrating the strength of our alternatives platform. Finally, as Marty noted, we experienced $7.4 billion of net outflows in equity capabilities. Global and developing market equities continue to account for the majority of net outflows in the asset class, with $4.3 billion in the quarter, including $2.8 billion from our developing markets fund. Moving to Slide 7, our institutional pipeline was $23 billion at quarter-end, modestly lower than $24 billion last quarter. Client fundings increased in the third quarter as compared to the second quarter, and we continue to win new mandates despite the challenging environment. Our pipeline has been running in the mid-$20 to mid-$30 billion range dating back to late 2019, so while this is at the lower end of the size range, we still see the pipeline as robust given the uncertain market environment. As we noted last quarter, that uncertainty is causing some mandates to take longer to fund, and we would estimate the funding cycle of our pipeline is now in the three to four quarter range on average, as compared to two to three quarters previously. In summary, the pipeline continues to reflect a diverse business mix across asset classes, investment styles, and geographies. Our solutions capability enabled 38% of the global institutional pipeline and continues to be a differentiator with clients. Turning to Slide 8, significant declines in global markets this year have put downward pressure on our revenue base. Net revenue of $1.11 billion in the third quarter was 5% lower than the prior quarter and 17% lower than the third quarter of 2021, primarily due to a decline in active asset levels. Total adjusted operating expenses were $741 million, a decrease of $21 million from last quarter and $31 million as compared to the third quarter of 2021. The drivers of the decline from last quarter were G&A expenses, which were $11 million lower than last quarter, and marketing expenses, which declined by $7 million consistent with the seasonally lower activity we often see in the third quarter as well as the decline in discretionary spending. We also saw a slight decline in employee compensation expenses. Drivers of the decline from the third quarter of 2021 were compensation expenses and property, office, and technology expenses, despite the $3 million in duplicate rent for our new Atlanta headquarters that I mentioned last quarter. Embedded in our third quarter 2022 spending is continued investment in growth capabilities, as well as several transformational projects that will enhance the effectiveness of our corporate functions and enable us to reap the benefits of scale as markets recover. Current projects include a technology-enabled human resources transformation, moving core finance systems to the cloud, and the foundational elements of the Alpha NextGen program. The savings we achieved in our strategic evaluation and the continued discipline we have installed have enabled us to make these strategic investments without meaningfully growing technology expenses. Compensation expenses declined by $45 million, or 9% from the third quarter of 2021. Given the pace and magnitude of the market decline, it will take some time for certain elements of our expense base to adjust to lower revenues. We managed variable compensation to a full year outcome in line with company performance and competitive industry practices. This can cause quarter-to-quarter fluctuations in compensation expense. Historically, our compensation to net revenue ratio has been in the 38% to 42% range, and periods of revenue growth the ratio tends to move towards the lower end of this range, similar to 2021 when the ratio declined to 38%. During periods of revenue decline, as we are experiencing this year, the ratio tends to move towards the upper end of this range. Year-to-date, our compensation to net revenue ratio is 40%. If assets remain at quarter-end levels, the full-year ratio would continue to trend towards the upper end of the range driven by the lower net revenue base. Given the uncertain market environment, we are diligently managing expenses and evaluating all aspects of discretionary spending. We continue to invest in our key growth capabilities and we're focusing near-term hiring in those areas. We will defer hiring for certain other positions as we focus our efforts on critical initiatives. As always, we remain focused on meeting the diverse needs of our clients and investing where it's necessary to do so. Finally, we are proceeding with investments and foundational technology projects that will enable growth and support future scale in our operations. Balancing these objectives will allow Invesco to provide rewarding careers for our employees, position our business for future growth, and prudently manage our expense base. Moving to Slide 9, adjusted operating income was $369 million in the third quarter, $43 million lower than the second quarter due to lower net revenue driven by market declines, partially offset by lower operating expenses. The adjusted operating margin was 33.3% as compared to 35.1% in the second quarter and an all-time high of 42.1% in the third quarter of last year. Earnings per share were $0.34 as compared to $0.39 last quarter, driven by the same factors that impacted adjusted operating income. The effective tax rate was 28.7% in the third quarter due to a change in the mix of income across tax jurisdictions, including non-operating losses in lower tax entities. We estimate our non-GAAP effective tax rate to be between 26% and 28% for the fourth quarter of 2022. The actual effective rate may vary from this estimate due to the impact of non-recurring items on pre-tax income and discrete tax items. I'll conclude with a few points on Slide 10. Maintaining balance sheet strength continues to be a top priority, particularly as we navigate this uncertain environment. Total debt was managed lower in the third quarter to $1.5 billion as of September 30, and we ended the quarter with a zero balance on a revolving credit facility. Our cash and cash equivalents balance is over $1 billion, an increase of nearly $100 million from June 30. Our leverage ratio, as defined under our credit facility agreement, was 0.7 times at the end of the third quarter, in line with last quarter. Our leverage ratio improved from 0.9 times in the third quarter of last year despite lower EBITDA driven by the significant market declines. If preferred stock is included, our third quarter leverage ratio was 2.8 times. In this challenging environment, Invesco is strategically aligned to areas of high client demand, and we have the financial flexibility that will allow us to navigate current volatility while continuing to invest in the future. We will be extremely thoughtful in managing expenses through the near term so that we can rapidly scale when recovery takes place. We maintain our unwavering commitment to serving the needs of our clients in any market and delivering long-term value for our shareholders. And with that, I'll ask the operator to open up the line to Q&A.

Great, thanks. Good morning, folks. Maybe I could just start off on the expense side, Allison, you mentioned a couple of things on the initiatives that you're working on for the transformational projects. Any sense of sort of how much that might lower the expense base going forward? And then also related to that, on the comp to revenue, 42%. Should we think of that as a potential quarterly ceiling? Or as you indicated, they can be lagged and therefore can go over 42% in a really bad market, and then you seek to calibrate that soon thereafter?

Sure. Good morning, Brian. Let me take the first one. So on the transformational projects, I'm not ready to provide any further estimates on what that could do regarding lower expenses. The way I would think about it, and I wouldn't say not ready, I'm not sure it's just the right way to think about why we would be doing it. A lot of this is to avoid future costs, and it's also to create scalability. Some of the things we're doing in these enterprise systems, with our financial systems, with our human capital systems, moving our data into the cloud, will reduce tech debt over the future. It will also give us the opportunity to scale as we move more data into the cloud and just have a more nimble infrastructure and continue to globalize the corporate functions that support our large operation. We've talked about Alpha NextGen in the past, and we'll talk about it a whole lot more, I'm sure in the future. Those are some early foundational investments that we're making in the middle and back office that will streamline and harmonize our operations and create efficiencies over time, but not necessarily from a P&L perspective that you'll see just yet. And there's quite a bit of investment that's going in along the way. On the comp-to-revenue side, our range is typically 38% to 42% on a full year, and we really don't look at it quarter-to-quarter. The quarter-to-quarter fluctuations are always there just as revenue fluctuates, but also as you have seasonality and things like payroll taxes and FICA. So we really look at it and manage to a full-year basis. We're on an annual comp cycle, and year-to-date, through the third quarter, we were at about 40%. So as we think about what the full year could look like, I'd say it'll be on the higher end of that range, not the lower end. And as we noted last year, full-year 2021, we were closer to 38%.

That makes sense. Yes, yes, definitely. And then maybe if I can ask about fixed income, again, that's been a strength as you pointed out, as we now are in a much higher yield environment just coming into the fourth quarter versus even just the third quarter. Maybe if you can talk about both on the retail demand side if you're seeing that work into the channels yet, if you're seeing the sales pick up on retail funds. And then also on the institutional side, if you can comment on to what extent you think pension plans may reallocate to fixed income and how you are positioned there, and could we see this really offset your equity outflows near-term?

It's a great question. Look, where rates are going, you've seen what's happened, everybody's shortened, gone very conservatively. You have not seen that move yet, but the conversations are strong, very much looking at the full spectrum of fixed income with rates where they are making fixed income and longer data capabilities much more attractive. That's on the institutional side. As you know, institutions tend to be much less volatile, but they will make tactical allocations accordingly. On the retail side, again, I'd say it's too early. But all indications are, I anticipate a broader range of investments into fixed income because of where the yields are moving.

Thank you.

Hi, good morning. Thanks for taking my questions. I was hoping to follow up on the expense outlook, Allison. You flagged a bunch of investments that you're making, including laying the groundwork for Alpha. So as we're thinking about entering into 2023, I know you're probably in the middle of the budgeting process now. So it's an early asking for an early read here. But should we continue to expect that there will be pressure to make investments and continue to like, gross out initiatives like Alpha, which maybe ultimately lead to some efficiencies, but could result in expenses being maybe a little bit more stubborn and inflexible in the near-term? Is that fair for thinking about 23? Or is it too pessimistic?

It's a great question and it's a hard one to answer exactly and certainly not going to give firm expense guidance just yet. We are deep in the budgeting season. But let's just talk maybe generally about how we think about the expense base and what we can manage and what we can't manage. There is some variability in our expenses. As you know, we've always guided to that about a third of our expenses are variable. You see it primarily on the compensation side; you're certainly seeing that this year. I think I'd point to a couple of things. One, despite this really challenging environment, we are managing to keep expenses kind of flat to down on most line items relative to last year. And that's because we are continuing to invest in a lot of these growth areas that we don't think it makes sense to pause on. It just simply wouldn't be good business for us to pause on key foundational transformational projects that really puts the firm in a position to grow and to scale and to be where we need to be to support our clients. So as I think about how stubborn or not our expenses are, I think a couple of things, I'd reiterate the comments I made around discretionary expenses. There are elements of discretionary expenses that we're looking at very rigorously. We're being very thoughtful about hiring. We're really focused on our key growth areas and managing our hiring against that. You've seen us, I think, do some pretty good work on facilities and some of the fixed costs that we have that we think we can continue to unlock and reallocate into areas of more transformational growth. And we'll continue to make progress against some of those areas as well. I don't feel like these investments hamstring our ability. I really don't. I think it actually puts us in a position to scale and recover faster when markets do turn, and they will.

Yes, Brennan, Allison is exactly right. We are looking at everything you would imagine and hopefully would do and are responsible for us to do. And as you say in the short-term, the more discretionary things you can make some progress. It's not going to change anybody's lives, but it's exactly the very responsible thing to do, and we're just very focused on building scale within the organization. And that snapback will be very, very strong. And again, I would point you to what we've done historically, and if we continue to be very focused on putting the firm in a position of great success.

Sure. I recognize it’s a balance, which is how I tried to position the question. Okay, transitioning to revenue, fee rate was under more pressure than I had actually expected. Should we expect that fee rate to continue? Maybe could you give us an idea about what the exit rate or the October rate kind of look like? Is that showing continued pressure just given the general profile of markets through the quarter? And just as sort of a more nitty item, the other revenue has been under some pressure. I know there is a transactional volume there. Is this sort of a floor - reasonable floor to think about for the other revenue? Or could this continue to come down?

Sure, thanks, Brennan, those are good questions. Let me say on the fee rate one, as you know, we really don't manage the fee rate, and then the net revenue yield in particular is just an output of a whole lot of different factors. And so maybe thinking about what drove the net revenue yield declines in the quarter and then extrapolating that to what could that mean for the future. The biggest pressure on that revenue yield is the declining equity markets, and in particular, the declines in emerging markets and developing markets. Global equities and emerging markets are a meaningful part of our portfolio. And so the market declines in those particular asset classes further exacerbate the pressure on our fee rate. You also saw asset mix shift and the demand that we experienced for money markets and the risk-off exposure. So while we've benefited on one side of the ledger from the growth in some of those risk-off exposures, certainly we've got real pressure and the asset mix shift at the same time. You also saw a decrease in the other revenue from those in the other revenue line item. And I'll get to that in a second that you asked about. And so those are all the sort of the downward pressures, what could that mean for the future? I mean, I think, look, there are a few things going on. One, the ending assets under management were quite a bit lower, about $95 billion lower than the average AUM for the quarter. So it's going to continue to put pressure on revenue, which will put pressure on just the overall fee rate yield that comes out of that. If we expect to continue growth in passive, which we do, they come at lower fees. And at the moment, given the geopolitical tensions, I would expect continued pressure in some of those emerging markets and developing markets categories as well. So this does put pressure on the overall yield there. All that is dependent upon where assets were at 930. And of course, all that subject to change as the markets do what the markets will do over the balance of this quarter. Other revenue, as you noted, that was about $9 million lower than the prior quarter, and that was really due to lower transaction fees, particularly in global real estate and some front-end mutual fund fees. So it's a function of activity levels. I don't think it's a new normal necessarily, but if you think about just the activity levels and just really the pretty outstanding volatility we experienced inside of the third quarter, it did put pressure on that category, and that will recover as activity levels recover.

Thanks very much.

Thanks, appreciate it. I'm curious about your comments on the retail side. Obviously, in an environment like this retail is going to outflow, that's unfortunate, but it's going to happen every time. But as they transition towards low-risk exposures as they try to capture yield, I'm curious about what you can specifically do to capture that demand. Your presence obviously is huge in the channel; your product mix is great. There's rising demand for fixed income ETFs. I'm just curious about what can be done on the education front, how can you hold the channel's hand, so to speak, and do a better job of capturing some of those outflows?

Yes, you're exactly right. I think we're uniquely positioned here. Right. So with the range of capabilities that we have, there's no discussion unless you start there. And secondly, just the capabilities on the distribution side, things like investment consulting in the field, working with financial consultants, and all the financial advisors in the marketplace already, the conversations are positioning for when you get back in the market, whether it be equities or fixed income. And those are real conversations; I'm sure it's happening everywhere. But we have the ability with the capabilities we have, and also the coverage we have in the market, and also with the marketing digital capabilities we’re informed in the engagements that we have. So from my perspective, you don't want to turn into one quarter, two quarters, I don't think you're that far out; you're probably closer to the bottom than the top. And with that, you'll get reallocation into a broader range of capabilities.

A part of ongoing processes, I guess.

Yes, yes.

So I heard the comments on what outflows on the alternative side, again, it’s a product of the environment. But can we focus a little more on your private market side, what it may be just refresh? What investments are being made now and where you're seeing client demand, and if that could be an offset going forward as well?

Yes, so real estate continues to be a very dominant asset class for us, and also, parts within credit bank loans and CLOs, are more challenging in the short term, where people are nervous about recession and the impact on credit. But that said, there are two areas where we continue to seek growth, and it’s an area of future focus very much. The other very specific area that we've been talking about is getting some alternative capabilities into wealth management channels. We continue to be very focused on that. From my perspective, 2023 should be the year when we start to see greater traction in leading the way, and there'll be something behind that on the debt side. So that is another area of absolute focus for us as an organization.

Okay. Thanks, Marty.

Hi, good morning, thanks for taking the questions. Maybe to further the discussion on expenses, looking to think about how we can think about the concept of scalability better here, maybe starting, what cost line items do you think are going to be most impacted by improved scalability and maybe which are not? I would assume G&A and tech that are really going to see the scale benefits. And I think Invesco maybe historically thought about margins on incremental revenue of somewhere, 50%, 60%, maybe 50%, 60% plus. The investments that you're making in scalability take margins on incremental revenues to levels that are different than what we've seen in the past. And is it like a little bit? Or is it maybe meaningfully better given what you're doing?

Let me start with the first one around where should we see the most scalability. And I think you're right; it would be the G&A and tech line items. But I'd also point to marketing; marketing is a pretty scalable line item as well. And one that, it's also a little bit, you can pull back on some of the discretionary expenses and marketing, but we're not going to pull back on travel and being in front of our clients at precisely the time when they need to see us and we need to be in front of them. And we need to be actively talking to them. And so I do think as I think about what that looks like on the upside, it doesn't budge quite as much on the way up, and there are some benefits there as well. In terms of, and maybe I'll let Marty chime in on sort of relative to the past since mine is only a couple of years back. But I would say in terms of the expenses, where the investments we're making in some of these technology projects doesn't give us even more scalability. I think perhaps, it is really necessary to think about where the firm's been and where we've come from. We closed the Oppenheimer acquisition just on the eve of COVID. And so you started to see, you saw a material increase in the size of the firm, just on the eve of what has now been a few rather volatile, challenging years. But what we are doing in terms of just further integrating all the various aspects of the firm and creating a unified system and platform across many different parts of the overall enterprise framework, all of this will allow us to just grow and scale from here, I think in a more seamless fashion because you just don’t have the redundancy and systems that are very difficult when the data is not in the cloud. And so it gives us flexibility to adjust our platform and to serve our clients in ways that would have just been much more difficult. Said differently, without doing this, we'd be spending a whole lot more to make any nimble shifts in the environment.

Yes, let me add. So if you look at not too long ago when our profit margin was over 40%, is that a cap? The answer's no. So if we had the same local assets under management when we complete this work, we will be north of that operating margin. So and how does that happen? And this might be too much information, but literally application rationalization that is happening pretty holistically because of a new set of technologies that really didn't exist in the past that can allow that to happen. Also just looking at what clients are looking for, from front to back, the breadth of capabilities, if it's inconsistent with where client demand is, we're looking from sort of all front to back, support structures around that. That's where you get the scalability. And those are the efforts that we're on right now. And it's hard to explain in a simple line item because they're holistic in how we look at things. So that has been scalability within our capabilities to the client demand is really the headline. And there's a lot of detail underneath it.

Great. Thank you. And then maybe just following up on U.K. pensions, to what extent did you see stress in the U.K. pension market? Did that flow through to impact Invesco either in 3Q or as we began 4Q? And given that Invesco has been building out fixed income and solutions globally, might there be a change to the U.K. LDI pension market? And does that make for an opportunity for Invesco?

Yes. So the good news is we did not have any LDI exposure. So that will be an impact. I do think post-call this event, it will definitely open up opportunities for other managers and capabilities like we have now. Is that next quarter? Likely not. But when you look through next year, I suspect there's going to be some real opportunities.

I believe part of what we encountered was that clients were trying to meet some obligations, leading them to liquidate some of their positions, which we benefited from. Therefore, we did not experience a significant impact overall, and this is just part of the market stress and volatility we have been managing.

Actually, that's a good point. So it's analogous to when there's pressure on money funds or in the financial crisis. If you had a very liquid money fund portfolio, you became a source of funds. And that's a little bit what happened with some of these LDI situations.

Okay. Great, thank you.

Thanks, good morning. Wanted to follow up on fixed income and specifically, active fixed income domestically. Can you talk about which products and capabilities you have that are either with good performance or already kind of scale that could benefit from what is the potential for larger flows? And I guess if they're separate between institutional and retail in terms of the products that would be helpful also.

I'll make a couple of comments, and Allison can chime in. So it's a broad suite of capabilities, and it's really highly performing across the fixed income team. So that's really good news. And it's not all available in retail and institutional simply because of demand within that marketplace. So we have the long-term record stability of the team and demand coming. So we look at it as a real opportunity for us over the next few quarters.

So I guess is that core, core plus, I guess I don't know what the funds are. Could you talk about what the actual products are?

Anything from short duration core, core plus, bank loans, credit, it's the whole suite, Dan.

Munis.

Munis is a very strong capability. That was outflow last quarter.

You would characterize them all at scale already.

Not every single fixed income asset class is at scale, which we've talked about. So direct lending is not at scale; some of the distressed credits are not at scale. So we have a number of them at scale with performance backers and talented managers.

Okay. And then just a follow-up on China. There are several product launches in the quarter, and that seems to be kind of a continuing trend. Is there a backlog as we think about kind of launches here into the fourth quarter or into next year that you can quantify or talk to?

It's difficult to quantify that precisely. Just to reiterate, we experienced approximately $2.1 billion in inflows into our China joint venture, with about $1.8 billion coming from new product launches. Most of these were in fixed income asset classes, which aligns with the current market environment. We usually see a strong interest in fixed income and balanced products, while equity interest has waned for now. Historically, we've benefited from some equity funds launched during more risk-on periods, but that reflects market dynamics. It's challenging to identify a specific backlog, but I can say this is how the market operates, and I don't anticipate changes in the short term. The $2.1 billion figure highlights the market's resilience and our early investment ahead of many competitors, positioning us well to capitalize on inflows in both difficult and favorable markets. However, this year has certainly presented challenges for China.

Thank you.

Thank you for taking my questions this morning. I have three to ask. When you mention that you believe fixed income will increase, it makes sense. From which areas do you expect that allocation to shift? Is it from cash, equities, or private market alternatives? I know you have a wide-ranging client base, but can you provide some general insights on where the funds might originate?

It's a great question. The reality is that every client is different. However, as a general comment, in wealth management platforms, cash levels are currently very high. I believe that allocations in equities and fixed income will primarily focus on cash levels in the first quarter. I can't comment on how other movements may occur, as each individual and institution has a unique profile. But I would emphasize that cash levels are a significant funding source.

Okay. That's how I see it. My second question is about China. You have an impressive array of new product opportunities. Could you give us some insight into the maturation of the platform itself? How many additional products do you think you can launch? Is it a matter of scaling these products? You mentioned earlier an average of about $200 million, but how large can these products become? Is there a comparable market, like the U.S. or Canada? How should we envision the future of that platform?

Yes. It's a really good question, Bill. And it is a different market than the United States; and just a couple of comments. It's extremely competitive. And performance matters. There's a lot of alpha there. So the vast majority of all the capabilities in the marketplace are active, whether it be equity or fixed income, balanced products there also. But it has the profile of fund launches, which is not atypical; Korea was the same way for a good period of time. I think it will mature with ongoing investments into the products in the marketplace, but that's going to come with time. And just the sheer size of the market, you're going to realize at some point, they're going to be very, very big portfolios. And I’d imagine starting to move away from product launches as the primary element of raising assets under management, but that's probably 2, 3, 4 years before it starts to happen.

Okay. Thanks for the patience answering all the questions. Final one for me, we haven't talked about in a while. M&A just given what's going on between the sort of the rolling over of also the reduction in sort of trailing 12-month EBITDA, improvement in the leverage ratio, but nonetheless, still pretty fat leverage ratios when it concludes preferred. How are you thinking about reinvestment back into the business versus any kind of acquisition, and within that acquisition, where are you most focused at this point in time?

Yes, that’s a good question. The situation remains unchanged. Every additional dollar is currently being reinvested in the company. As we've discussed today, we see significant opportunities in the key capabilities we've identified, and that is where our attention is directed. We don't perceive many gaps in our capabilities, as Dan mentioned. Are we fully scaled in all desired areas? If there's a lack of capability and we believe building it won't take long, that’s when we would consider the market. Our approach remains consistent; it must be strategic and align with client demand. It should also be complementary with minimal overlap, financially viable, and culturally aligned. This mindset hasn't shifted; it's our way of thinking. This may lead to more bolt-on acquisitions in the alternative space. However, currently, we don't see much activity, as the public market prices do not align with seller expectations. Nevertheless, our focus remains on the organization.

I would like to add that nothing about our balance sheet or share price is shifting our priorities. Our main focus remains on organic growth and investing in ourselves. We have a robust and well-diversified platform today, and the benefits are evident. In recent quarters, our flows have continued to outperform our peers. We have areas of real strength and resilience, which speaks to our diversified platform. Looking ahead, we see further opportunities for self-investment and growing our capabilities in a more efficient, shareholder-friendly manner than through any inorganic methods. Additionally, we are making progress on our balance sheet and returning capital to shareholders. We have achieved significant improvements over the past year, especially in the last two years, as we increase cash and reduce debt levels whenever possible. We are returning capital to our shareholders thoughtfully this year, despite a challenging environment. Although we face more constraints than we would prefer due to a tough industry backdrop, our diversified platform and opportunities for further self-investment and growth in key areas make us optimistic about our prospects within our own portfolio.

Thank you so much for taking all the questions today.

Thanks, Bill.

Thanks, Bill.