Invesco Ltd (IVZ) — Q4 2022 Earnings Call Transcript

Thanks, operator, and to all of you joining us on Invesco's quarterly earnings call. In addition to today's 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 nor 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 the call up for questions. Now I'll turn the call over to Marty.

Thank you, Greg, and thanks everybody for joining us. I'm going to start on slide three if you're following along, which is the fourth quarter highlights. The fourth quarter concluded a year of significant headwinds and volatility in global markets. Seemingly, no geography or asset class was immune to the S&P experiencing the worst year since 2008, the NASDAQ Composite declined over 30%, the MSCI Emerging Markets Index nearly 20%, and bond markets, typically the safe haven when equities suffer, declined significantly due to the rise in interest rates, with the global aggregate bond index declining by more than 15% for the year. This resulted in the worst markets we've seen in decades. Rising COVID infections in China and tax loss harvesting in developed economies as the year came to a close made for a challenging organic growth dynamic in our industry. Despite industry challenges in 2022, we're pleased to see key capabilities in areas with high client demand continued to deliver organic growth, offsetting net outflows and capabilities that experienced redemption pressure as investors expressed a preference for risk-off assets. Key capabilities that delivered net long-term inflows for the year included ETFs, fixed income, Greater China and the institutional channel. The firm's ability to deliver these outcomes demonstrates the strength and resilience of our diversified platform in the face of extraordinary market headwinds. Although, the market showed signs of stabilization in the fourth quarter, the uncertain backdrop continued to weigh on investor sentiment and impacted client demand. Invesco separated itself from most industry peers by generating net inflows in key capability areas led by strong growth in ETFs in the quarter. Our fixed income business and institutional channel continued to build on our track record of organic growth, generating net inflows for 16 and 13 consecutive quarters, respectively. The depth and breadth of our investment capabilities that Invesco brings to market positions the firm to return to organic growth when investor sentiment improves. Invesco ETFs delivered $4.3 billion in net long-term inflows during the quarter. For the full year, ETFs brought in $28 billion of net long-term inflows, the equivalent of an 11% organic growth rate. Our ETF lineup remains differentiated from most competitive offerings with a focus on higher value, higher revenue market segments like smart beta, and we continue to drive innovation in this space with products such as our QQQ Innovation Suite. Fixed income capabilities in the institutional channel have been pillars of organic growth for several years now and growth persisted in both of these areas in the fourth quarter with $800 million and $900 million of net inflows, respectively. As Allison will discuss later, our institutional pipeline remains at healthy levels. And as interest rates stabilize, we have a significant opportunity to capture growth in fixed income capabilities in 2023. Our business in Greater China performed exceptionally well during 2022, building on our leading position in the world's fastest-growing market for asset managers. We experienced modest net long-term outflows of $600 million in the fourth quarter due to significantly higher redemptions in fixed income throughout the industry in China and rising bond yields drove net asset values for fixed income securities lower. Despite these challenges, we raised over $3 billion from new product launches during the quarter in China. For the full year, our China joint venture delivered $7 billion of net inflows, the equivalent of an 11% organic growth rate. Market sentiment in China will be mixed for the next few months as the country works through the transition period of higher COVID infections, stabilizing interest rates, and redemptions turning to more moderate levels. That said, there are also signs that the outlook for the remainder of 2023 is improving, and I'm optimistic for a return to organic growth throughout 2023 in China. Although we maintain momentum in key capabilities, the firm experienced net long-term outflows this quarter of $3.2 billion. Active global equity remains the biggest drag on organic growth with $6 billion of net outflows in the fourth quarter, including $3 billion in our developing markets fund. As we discussed previously, client appetite for these assets has been lower than in the past, but I'm optimistic that redemptions will slow and client appetite for risk assets will eventually return. We entered 2023 with a strong balance sheet, giving us the needed flexibility to operate strategically in this environment. Long-term debt remains at low levels, the lowest in 10 years, and our cash balance increased to over $1.2 billion at year-end. As we discussed last quarter, we continue to be disciplined in our approach to expenses, tightly managing discretionary spending and limiting higher roles that are critical to support the organization and future growth. We are thoughtfully managing market headwinds while investing for the long term. We remain focused on identifying areas of expense improvement that will deliver positive operating leverage as the market recovers and organic growth resumes. We are being extremely thoughtful about capital resource allocation in this environment, and we will be well positioned to maintain investments in areas that deliver future growth. Looking ahead, we are partnering with our clients to meet the most pressing needs in this dynamic environment. We've dedicated the past decade to building a breadth of investment capabilities and a solutions mindset and operating scale at Invesco that few in the industry can match. I'm proud of what our talented employees have accomplished in 2022 on behalf of clients and stakeholders, and I'm optimistic for a return to organic growth when market sentiment eases. Market direction may be uncertain, but I'm confident that Invesco is prepared to meet the challenges that will arise in 2023 and well positioned for future growth. With that, Allison, I'll turn it over to you.

Thank you, Marty, and good morning, everyone. I'm going to start with slide four. Overall, investment performance improved in the fourth quarter with 61% and 63% of actively managed funds in the top half of peers or beating benchmarks on a three-year and five-year basis, up from 57% and 62% in the third quarter. These results reflect strength in fixed income and balanced strategies where there is strong client demand. Performance lagged benchmarks in certain equity strategies, but we experienced improvement over the past quarter in several key funds, and short-term performance is trending positively in several U.S. and global equity strategies. Moving to slide five. We ended 2022 with $1.41 trillion in AUM, an increase of $86 billion from the end of the third quarter as most market indices partially recovered from prior quarter lows. Global market increases, foreign exchange movements, and reinvested dividends increased assets under management by $61 billion, and total net inflows were $25 billion, inclusive of $30 billion into money market products. As Marty mentioned earlier, the firm experienced net long-term outflows of $3.2 billion this quarter, equivalent to a 1% annualized organic decline. Despite some stabilization in global financial markets, industry growth remained subdued in the fourth quarter and Invesco's net flow performance was among the best in our peer group. Passive capabilities returned to net inflows this quarter with $7.3 billion, while net outflows were $10.5 billion in active strategies. Several of our key capability areas continued to deliver positive organic growth, including ETFs and fixed income as well as the institutional channel. These capabilities also delivered positive organic growth for the full year along with our Greater China business, which enabled Invesco to offset outflows in strategies that experienced net redemptions as investors sought risk-off trades throughout 2022. Invesco’s ETF lineup was once again a driver of net long-term inflows in the fourth quarter with $4.3 billion. Net inflows were inclusive of $2.4 billion in maturing BulletShares ETFs, which are included in our gross redemptions. Growth this quarter was broad-based. Our top-selling ETFs included the S&P 500 Equal Weight, the NASDAQ 100 QQQM and Invesco Senior Loan ETF. For the full year 2022, net long-term inflows into our ETF capabilities were $28 billion, equivalent to an 11% organic growth rate, and we gained market share. Excluding the QQQs, Invesco captured 3.8% of industry net inflows, higher than our 3.1% share of total industry assets under management. The institutional channel has been a steady source of growth, and that continued in the fourth quarter as the channel achieved net inflows for 13 straight quarters. For the calendar year 2022, the channel achieved net inflows of $13 billion or a 4% organic growth rate. We sustained new funding across geographies, asset classes, and the risk return spectrum throughout the year, despite the very challenging market backdrop. This demonstrates the diverse range of client relationships we have nurtured as well as the differentiated set of capabilities that we bring to the market. Retail net outflows were $4.1 billion in the fourth quarter, a meaningfully lower pace of outflows than the prior quarter as the channel achieved positive flows in Asia-Pacific, and ETF flows improved in both the Americas and EMEA, despite an uptick in investors harvesting tax losses as the year ended. Moving to slide six. Net outflows declined quarter-over-quarter in Americas and EMEA, primarily due to improvement in ETF net flows. Net inflows in Asia-Pacific were $3.3 billion, led by Japan and Australia. Our China joint venture experienced modest net long-term outflows of $400 million in the fourth quarter as fixed income products experienced a meaningful industry-wide spike in redemptions throughout China and a rapid rise in COVID-19 cases impacted the Chinese economy and financial markets. Despite that, we raised over $3 billion in the fourth quarter from new products, and investors showed signs of shifting back into equity products where we garnered $1.8 billion of net long-term inflows. Looking at the full year 2022, our China joint venture delivered $7 billion of net long-term inflows, an 11% organic growth rate, and we're gaining market share. Building on Marty's points from earlier, the Chinese market may remain in transition in the short term and through the first few weeks of 2023. The higher redemptions we experienced in the fourth quarter have persisted, driven by fixed income. This dynamic may be a drag on net flows in China through the remainder of the first quarter, though we expect to be launching new products after the Chinese New Year, and there is increasing optimism for the rest of 2023. Longer term, we remain one of the best positioned asset managers in what is expected to be the world's fastest-growing market for asset management. Fixed income capabilities sustained organic growth in the fourth quarter with $800 million in net inflows. The firm achieved net inflows in this area despite the heightened redemptions on the Chinese fixed income products, as well as a $2.4 billion outflow related to BulletShares ETFs that reached their planned maturity last month. As interest rates stabilized, we have a diverse platform of fixed income offerings with strong investment performance across the full range of risk appetites and durations that are positioned to capture future growth. Alternatives experienced net outflows of $3.6 billion in the fourth quarter. Liquid alternatives accounted for more than two-thirds of the net outflows driven primarily by commodity-focused ETFs. These strategies experienced net inflows for the full year but gave back gains from the first half of the year. Private markets had net outflows of $1.6 billion, primarily due to outflows in bank loan strategies. Net outflows in active equity strategies have been concentrated in global and developing markets equities, which experienced $6 billion of net outflows in the quarter, including $3.1 billion from our developing markets fund. Moving to slide seven. Our institutional pipeline was $30 billion at quarter-end, an increase from $23 billion last quarter. Despite the challenging environment, we are winning new mandates, notably in fixed income and active equity in the fourth quarter, which contributed to the increase. Our pipeline has been running in the mid-$20 billion to mid-$30 billion range dating back to late 2019, and we’re pleased to see the pipeline this robust given the uncertain market environment. As we’ve noted previously, that uncertainty is causing some mandates to take longer to fund, and we would estimate the funding cycle of our pipeline has extended into the three to four quarter range versus the two to three quarters prior to the market downturn. Our solutions capability enabled one-third of the global institutional pipeline in the fourth quarter, and it remains a differentiator with clients. The pipeline reflects a diverse business mix that has helped Invesco sustain organic growth in the channel throughout the full business cycle. Turning to slide eight. Markets partially recovered in the fourth quarter, but the significant market declines that we experienced in the third quarter, especially in September, drove assets under management lower at the start of the period. Net revenue of $1.11 billion in the fourth quarter was flat to the prior quarter and 19% lower than the fourth quarter of 2021. That’s primarily due to lower active assets under management. Total adjusted operating expenses were $769 million, an increase of $28 million from the prior quarter and a decrease of $27 million compared to the fourth quarter of 2021. Compensation expenses increased by $8 million as compared to the third quarter, inclusive of incentive compensation paid on the $56 million of performance fees earned in this quarter. As we’ve discussed, we manage variable compensation to a full-year outcome in line with company performance and competitive industry practices. Historically, our compensation to net revenue ratio has been in the 38% to 42% range on an annual basis. During periods of revenue decline, as we experienced in 2022, the ratio tends to move towards the upper end of this range. For the full year 2022, our compensation to revenue ratio was 41%. At current AUM levels, we would expect the ratio to trend towards the higher end of the range for 2023. As a reminder, looking to the first quarter, we expect seasonally higher compensation taxes and benefits of $20 million to $25 million consistent with prior year trends. We would expect this to be largely offset by lower incentive compensation on performance fee revenue after the seasonally high revenues received in the fourth quarter. Marketing expenses were $4 million higher than the prior quarter, consistent with the seasonally higher activity we typically see in the fourth quarter. Though marketing expenses were $9 million lower than the fourth quarter of 2021. Property, office, and technology expenses were $6 million higher than the prior quarter. As we’ve mentioned previously, we’re in the process of moving to our new Atlanta headquarters, which we expect to be complete by the middle of this year. However, we may experience moderate delays as a result of flooding that took place when bitterly cold temperatures caused pipes to burst around Atlanta in December, and we’re working with relevant parties on a resolution. In the fourth quarter, we also incurred $2 million of expenses related to the decommissioning of our current office building. These expenses are not repetitive in nature. Technology expenses in the fourth quarter included investments in ongoing technology programs that will benefit future scale, such as upgrading our human resources operating environment and moving our financial systems to the cloud. G&A expenses were $10 million higher than the prior quarter, influenced by $4 million of foreign exchange rate revaluations associated with the impact of currency movements on our balance sheet, and an additional $2 million of value-added taxes paid in non-U.S. jurisdictions. As I mentioned earlier, we are investing in foundational technology projects that will enable future scale in our operating platform. These expenses span SG&A and property, office, and technology expenses, and they are included in our results. We’re investing in our key growth capabilities while balancing the need to diligently manage expenses in this uncertain environment. We have focused near-term hiring in the growth areas that we’ve outlined and deferred hiring for most other positions. Over the longer term, we’re building a platform that will rapidly and efficiently scale, delivering positive operating leverage and margin expansion as markets recover. Now moving to slide nine. Adjusted operating income was $339 million in the fourth quarter, $30 million lower than the prior quarter due to flat net revenues combined with higher operating expenses. Adjusted operating margin was 30.6% as compared to 33.3% in the third quarter and 42% in the fourth quarter of 2021 prior to the steep market declines that we experienced in 2022. Earnings per share was $0.39 as compared to $0.34 due to higher non-operating income driven by gains on our seed capital and co-investment portfolios as markets increased from third quarter lows. The effective tax rate was 26.9% in the fourth quarter, lower than 28.7% in the prior quarter due to losses and lower tax jurisdictions last quarter that did not recur. We estimate our non-GAAP effective tax rate to be between 25% and 27% for the first quarter of 2023. The actual effective tax rate may vary from this estimate due to the impact of non-recurring items on pre-tax income and discrete tax items. I’m going to conclude on slide 10. Maintaining a strong balance sheet remains a top priority, further underscored by the volatile environment that we have been navigating. Total debt was managed lower to $1.5 billion as of December 31, which is the lowest level in 10 years. We built cash in the fourth quarter, ending the year with over $1.2 billion in cash and cash equivalents, an increase of more than $200 million from September 30. Our leverage ratio, as defined under our credit facility agreement, was 0.8x at the end of the fourth quarter, slightly higher than the 0.7x in the third quarter as declining markets have led to lower EBITDA. Our leverage ratio was flat in the fourth quarter of 2021. If preferred stock is included, our fourth quarter leverage ratio was 3.2x. In the face of one of the most challenging markets of the past half-century, Invesco continues to capture client demand in high growth areas, and our net flow performance has been among the best in our peer group. Meanwhile, we’ve been building balance sheet strength and financial flexibility needed to navigate these uncertain times. We will be extremely disciplined in expense management and resource allocation while ensuring that we are meeting the needs of our clients and positioning the firm for long-term growth. With that, we’re going to go ahead and open it up for Q&A.

Hi. Thanks very much. My question is on the Great trend. I’d like to see obviously opening up a little bit, getting the $3 billion new flows on the new products. I guess my question, as we watched this develop over the last couple of years, you seem to get great flows when you launch new products. We don’t talk much about the legacy or the older products. I wonder if you could just give us a little more color on, is the bulk of the flows come through the new issued pipeline? And the reason why I ask it is, historically, you’ve done best from a profitability standpoint when your products hit real scale. And you seem to be developing a huge set of new products, but most of the flows come through on day one. So I wonder if you could help with that color, that’d be great. Thanks.

Yes. Glenn, I'll start and Allison can add in. Currently, that's how the market is functioning. Over time, it will evolve to resemble the United States, where there will be fewer launches and ongoing flows into those capabilities. While there are some follow-on inflows, the majority comes from the launches. This situation is specific to the market. Nevertheless, I believe it will develop over time. It’s a volatile period ahead, but we see a very promising future in China, and once the COVID transition is complete, we expect 2023 to be a strong year there.

Yes. Glenn, if you consider the flow drivers in China, it seems that with the new product launches, perhaps half to two-thirds of the flows in any given quarter may come from these launches. It's not everything, but as Marty mentioned, that's how the market operates there right now. It is certainly a less mature market, and for the time being, this is a significant driver of flows. I don’t want to give the impression that this accounts for all flow drivers each quarter, but it plays an essential role in functioning within that market and is a crucial factor in overall market share growth. While it's encouraging to see flows coming from beyond China and throughout the region, it is indeed an intriguing time in China right now.

Thanks, Allison. I have a quick question regarding expenses and margins in general. The market was up, and your AUM increased by 6.5% in the fourth quarter, so some of that will contribute to first quarter revenue. Could you provide some insight into what the starting point for the first quarter looks like? There are sometimes seasonal factors affecting expenses, so I'd like to understand how to approach the beginning of Q1. Thank you.

Sure. There are many factors to consider. Regarding revenue, you're correct that markets have improved slightly in early January, which is a positive sign. However, it's crucial to highlight the mix shift we observed in our overall portfolio during the fourth quarter. We noted $6 billion in outflows from two specific active equity strategies: developing markets and global/international funds. This has an impact on our starting point as we analyze revenue dynamics. Concurrently, we are seeing positive signs, particularly with strong inflows in our ETF capabilities and fixed income. It's important to recognize that this generates different revenue levels compared to what we've previously experienced due to the remixing of the portfolio. While the market conditions could be favorable this quarter, there's also a challenge presented by the remixing in relation to prior quarters. Regarding expenses, I mentioned that you should anticipate typical seasonal costs of $20 million to $25 million in the first quarter. This will be balanced by the absence of performance fees that we experienced in the fourth quarter due to seasonality. The market will fluctuate, and we will adjust accordingly. I hope this provides some insight into the various factors at play.

Thank you. Good morning everyone. I appreciate you taking my questions. I have one more regarding expenses, Allison. I didn't catch the number you mentioned for property, office, and technology expenses that seemed to be a one-time figure in the fourth quarter. Could you clarify that? I understand there will be some duplicate expenses in the first half as you transition to the new headquarters. Could you provide an outlook for 2023 in that context? Also, regarding G&A, since it spiked in the fourth quarter, I understand you are working on some cost-saving measures throughout the year in that area.

Sure. I will do my best to walk through a few points. Regarding property office and technology, I want to highlight some specifics about our Atlanta headquarters. Currently, we are incurring the costs of maintaining two headquarters, which will continue for a few more quarters, amounting to an extra expense of $2 million to $3 million. In the fourth quarter, we had a $2 million one-time charge related to decommissioning our previous headquarters. Additionally, there was some uncertainty caused by a pipe burst in our new building on Christmas Eve, which has led to delays in our move. This situation is contributing to the uncertainty as we assess its impact. In terms of general and administrative expenses, we experienced several foreign exchange revaluations and higher VAT taxes in the fourth quarter, with foreign exchange being a significant factor in the movements we observed in recent quarters. Overall, when considering property, office and technology, as well as G&A, it's important to emphasize the foundational projects we're undertaking, which cover both technology and professional services. We are in the process of installing a new HR environment, transitioning all our financial systems to the cloud, and initiating Alpha NextGen. As these projects progress, there is considerable investment and focus on scaling for the future. For this year, I expect G&A to average somewhat consistent with last year's average, considering the efficiencies and discretionary expense management we are attempting to implement. However, the reopening of travel, along with our essential foundational investments, will also play a role.

That’s fantastic color. Thank you. And then just to follow up on the revenue side, obviously the revenue yields pressured, sounds like a lot of that came in the Oppenheimer Funds complex given just the outflows there. So two-part question would be, are you seeing increasing demand or risk appetite given you foreign markets, especially emerging markets are starting to year off pretty well in performance? Are financial advisors that you’re speaking with starting to warm up to that or seeing some risk-on appetite from their clients, and can that help their revenue yield if that rebounds? Probably not in 1Q, but as we move through the year.

Yes. I’ll make just a comment. The contrast is dramatic, right? If you went through last year, there was really no interest at all in emerging markets in particular very much risk-off and the like. It’s too early, but what we are seeing is starting to be some early interest in emerging markets and China, driven by China, quite frankly. And developing markets in Q4 had some very, very, very solid performance, which needs to have, and it’s a really talented team. So the answer is, if the client appetite is there we should do quite well, which would be a nice change from this past year.

Thank you.

Thanks. Good morning. I wanted to follow up on the alternative suite of products. You saw some outflows. This is the second consecutive quarter of a little more elevated outflows. But you did highlight private credit? Or seeing inflows, and I think you said some of the liquid strategies goes. Could you talk about the mix of fees within alternatives and kind of where the positives and negatives are shaking out?

Sure, I’ll start by mentioning that when we examine alternatives, we noticed that a significant portion of the outflows was from liquid alternatives, specifically commodity and currency ETFs. These alternatives typically have lower fees, which contributed to the outflows. In private markets, we also experienced approximately $1.6 billion in outflows, primarily due to global bank loans and direct real estate, where we faced about $200 million in outflows, mainly from realizations net of acquisitions. However, we are still receiving commitments and have a substantial amount of dry powder in direct real estate, around $7.5 billion, as we enter the year. From a private credit standpoint, the environment has been intriguing. The past year for private credit featured floating rate loans and solid fundamentals that helped reduce losses. However, ongoing recession concerns are influencing overall credit appetite, which has been a factor we have to navigate. Entering this year, we maintain a positive outlook on all our private market asset classes, feeling well positioned with the funds we've launched and those we plan to launch, as we anticipate client demand will be strong this year. Your insights on higher yields and attractive entry points will significantly influence our flows on a quarterly basis. Overall, while we expect steady demand, the shifts in liquid alternatives, currencies, and commodities have put some downward pressure on flows.

Got it. Thank you. And then I think, Marty, you mentioned for fixed income, obviously the positioning and is positive and you’re helpful for pickup and demand, but I think you need to, you said interest rate stabilizing is the kind of key factor for decision making. So, as we think about growth, sales or redemption activity, do you feel like it’s more stagnant and so we kind of get more of a direction of where rates are on a global basis and then we start to see much more assets in motion?

Yes, absolutely. So, look, I think that’s true of equities also, right? Some certainty to the future is going to be a really, really important thing for how investors react this year. But for fixed income, absolutely that’s going to be the case. It’s on the back of a broad set of capabilities, with very good performance. And I’ll just follow on to Allison’s point in REIT, which we’ve talked about over the last year. It is now being launched on a very important Wirehouse, which is one of the things we’re waiting for. And we’re also in development of some follow on capabilities in our private markets that will end up in the wealth management channel. But again, that will be a multi-quarter introduction. But we’re now underway. So it’s again, this won’t be immediate, but we’re now moving forward, which is a really important thing for the firm.

Thank you.

Good morning. Thank you for taking my questions. We’d love to start on flows. Marty, you had some commentary in the press release suggesting you were waiting on a recovery in flows, some of the indications, maybe a weak start to China, slower funding on the institutional side. So are you all generally signaling that you’re expecting flows to remain soft here, just given that uncertainty that you’ve talked about based on what you can see in the activity here?

Yes, look, I think that’s a rational line would get you there, right? But as I say, from my perspective, we’re a lot closer to the end of the uncertainty than the beginning. And what we point to is just look at our relative flows, vis-à-vis our competitors and how we’re positioned. There’s a lot of things that are going well, and you don’t need a lot of change and sentiment to really start to make a really meaningful impact in our flows. And so as they say, they don’t ring the bell at the bottom, but we’re a lot closer to that, and I think that’s going to be a really positive development for Invesco.

Yes, Brennan, I wanted to highlight the improvement we observed from the third quarter to the fourth quarter. It’s risky to predict trends, and we’re not going to attempt to do that, but looking at the factors following the quarter and the current market sentiment, we noted a decrease rate. The decrease rate in the third quarter was 2.9%, which improved to negative 1% in the fourth quarter, showcasing some strong positive drivers. While it’s still a risky situation, we anticipate that these drivers will continue through the first quarter. Specifically, our ETF platform and associated strategies achieved 7% organic growth in the fourth quarter. This was despite some challenges such as tax loss harvesting and BulletShares maturity, indicating considerable strength as we move into the year. Fixed income has performed well for the reasons we discussed and is quite dependent on the rate environment, but we believe the fundamentals there are solid. We are well positioned, and the institutional channel appears to be rebounding, supporting Marty’s point that we may be closer to the end of uncertainty than the beginning. Many institutions have been waiting on the sidelines for convincing signs that could lead to improvement this quarter. Active equities faced significant challenges in the fourth quarter. Much will depend on the earlier discussion regarding developing markets and when investors find the right moment to re-enter that asset class, as the easing of that headwind would benefit us significantly. The situation in China is also unpredictable. Their shift in COVID strategy has been significant, and while it is impacting the market, we expect these effects to be relatively short-lived as the fundamentals remain strong. Overall, we feel slightly more optimistic than we did a quarter ago, although the current environment is challenging. It has been a tumultuous year, and we will see how things unfold over the next month or two.

Thank you for that all that color. That is very, very helpful. Shifting gears a little and thinking about real estate and your capabilities there. Allison, I believe you made some positive commentary on how the year shook out there on the real estate front. And I think, Marty, you referenced that you’re getting close to a warehouse launch on a product. I guess, number one, on the wealth management side, have you been looking at what some other products and some of the struggles and the gates that we’ve seen in some of these products on the retail side? And how are you making adjustments? How are you thinking about structuring your own product in light of some of the lessons learned there? And then, on the institutional side, there’s been some press around the queue building on redemptions and yet prioritization sort of given to the not addressing the queue, but rather addressing the needs of sustained investors, which makes perfect sense. It’s just how are you managing maybe that delicate customer service dance in order to make sure relationships aren’t damaged?

Yes, it's an important question and it's been on everyone's mind. We haven’t faced that issue, and our scale is not as large as others where this has been a topic. Our client experience has been quite different. I do recognize the importance of creating availability for these capabilities, and that’s a lesson for the market. If you’re looking to access these capabilities during tough times, you might encounter challenges. From my perspective, if we effectively educate investors and they have the appropriate time horizons for these exposures, they will likely do well. I wouldn’t hesitate to provide access to individual investors during particularly challenging times. I'm not sure if that helps, but that’s my perspective.

And then on the institutional side?

I’m sorry, can you repeat the question?

Yes. There has been some media attention regarding your institutional capabilities in commercial real estate and the significant number of redemption requests. However, due to the illiquid nature of these investments, it will take time to address these issues. Existing investors are prioritized in the current strategy. It's a challenging situation to balance, so how are you managing and possibly mitigating any negative impact on your relationships amid this inherent friction?

We’re not experiencing what you’re describing. When there are reductions, we maintain very strong relationships with our clients, and they are managed effectively. Therefore, we’re not feeling the friction that you mentioned.

Okay. I’ll follow up later. Thanks.

Thank you very much. Yes.

Hey, good morning, everyone.

Craig.

So given the rise that we’ve seen in interest rates, I just wanted to see if you have a view on the potential reallocations in the fixed income in 2023? And also, do you have a view within that on the potential mix between active and passive? And then how do you think Invesco is positioned within that to win these potential rebalancing?

It’s a great question, and I’ll give you an answer. I’m sure it’s wrong. But net-net I think getting the rise in interest rates, getting into more natural interest rate levels is healthy for the marketplace. I think it’s healthy for active equities over time. And again, as I said before, once it sort of hits its stability level, I think it’s good for different types of asset classes and fixed income say. I really don’t know what the relative allocations are, but it’s been a long time since you’ve had a market where it’s positive for stock pickers and active equity. And yes, my personal view, once you get relative outperformance, you’ll start to see money go back to active equities and various elements of it. And that would probably not be a popular view. And history suggests that that’s not been the case. But that’s how I think about it.

Thank you, Marty. And maybe just a follow-up on the other question on real estate, maybe asking a different way. So we have really great I think visibility into your liquid public funds and also INREIT’s investment performance. But maybe could you talk about how some of the performance in the other products, the private products trended in 2022? I’m especially looking for core real estate debt and also the opportunistic drawdowns?

Look, I don’t have specific performance in front of me, so hard to answer the question. What I will say is it’s a very, very strong team. The core capability has a very fundamental strength to the organization, and the client relationships have been very, very strong over an exceedingly long period of time. So again, I’m sorry, I don’t have the specific performance that you’re asking about.

No worries. Guys, thanks for taking my questions. Thank you, Marty.

Appreciate it.

Hey, Marty and Allison. Quick, maybe just a quick follow-up to Craig’s question around fixed income. I was hoping you guys could give some details around Invesco’s position with some of the specific products that you feel most kind of optimistic about if the recent recovery in fixed income flows from the industry continues. And how are you thinking about your ETF positioning in fixed income versus the active book in fixed income?

I would like to make a few comments. Within our ETF franchise, fixed income continues to present an opportunity for us. Historically, we have seen strength in equities. We believe we have the potential to grow our ETF franchise in fixed income. Moving into the year, our capabilities and performance in fixed income are quite strong. Ultimately, our direction will depend on client demands. In the retail channels in the United States, municipal bonds, particularly, are very appealing, especially the short-duration elements. Bank loans remain robust as well. Again, our focus will be dictated by the market conditions. Allison, do you have any additional insights to share from your perspective?

I think when inflation decreases and there's a pause in the Fed's rate movements, we expect strong total returns overall, likely in 2023. Marty highlighted areas of real strength. Municipal bonds are particularly appealing as our customers remain focused on taxes, which we anticipate will generate more bullish sentiment this year. Our global liquidity has remained robust, and we expect continued demand in that area. Fixed income SMAs have been strong for us and maintain real demand. Our stable value offerings have been a key strength for a long time. It ultimately depends on how rates and credit are perceived, but we anticipate an inflection point and ongoing demand across many of our capabilities this year. Currently, net flows are leaning towards ETFs over some of our active strategies, but we feel well-positioned in both.

Got it. Thanks for that. And then, Marty, you mentioned strong balance sheet, and I think the commentary you’ve made around it is sort of enabling you to operate strategically. Could you expand a little bit on that? Does that just mean sort of build liquidity and then eventually resume more active capital return program? Or do you think this environment opens up incremental M&A opportunities for Invesco?

Yes. Let me make a comment, then Allison can pick up. So, what we’ve been using our balance sheet for right now, and we’ve talked about it in different ways are really investments that are going to continue for any other company to grow in the future. So the alternative capabilities, this scenario where we’ve been using the balance sheet. Yes, we’ll continue to do that. And you’ve heard us talk over time. MassMutual has been an amazing partner helping us to really augment our balance sheet to a very material degree. So that’s really been the more specific we’re talking about now in some of these foundational enterprise programs that Allison was referring to. They might not be “interesting” if they’re necessary, but that’s what creates scale within an organization. And so that’s the other way that we’ve been using very, very short term. But Allison, you want to pick up more on the other elements of the balance sheet?

Yes, I mean, I think Marty hit some of the high points. But again, we just continue to be focused on supporting our future growth and maintaining a really strong balance sheet to do that. And part of that is continuing to be really good stewards of our capital overall, being very thoughtful about the debt on the balance sheet, which has been top of mind for us, and we’ve been shipping away at and feel really good about the progress we’re making there, making progress there. It’s freeing up capacity for us to again, continue to focus on our own future growth. Some of that is investing in our product launches. We are fortunate to have a really good strong strategic partner there with us. But we continue to really prioritize investing in ourselves, both in terms of our product launches but also the technology projects and some of the foundational capabilities that we know are really going to be necessary to create the scale and this business that we expect to have over the coming years. Hopefully, that’s helpful?

Yes. Thanks so much.

Terrific. Thank you very much for taking the questions. Appreciate all the colors so far. Marty and Allison, you both mentioned sort of the longer-term outlook for China does sound very strong. Could you help unpack a little bit about where you have a queue for product launches for 2023? And if you could break down the mix between equity and fixed income and other assets in the region? That’d be super helpful.

Sure. Well, I’ll take a stab at it. I would say in terms of product launches, overall, it’s hard to say exactly, but I’ll tell you the demand there does favor balanced and fixed income products over equities. So it would probably skew a little bit more to the balance side than fixed income than equity. But that’s not a perfect science, as I think about just the mix overall in China. I would say it skews probably 50% or so balanced and fixed income maybe as much as 60%. Balanced is a very popular asset class there. So equity is probably a little bit smaller in the overall mix there relative to what you might expect to see in a portfolio in the United States.

Okay, thank you. And just to follow-up, certainly hear you on sort of all the different drivers for flows. When you think about the base fee rate exiting the year entering 2023, where does that sit today and should we presume sort of a gradual decline just given the ins and outs between across geographies, products, and distribution channels?

Yes, I mean, I would say the factors that impacted the net revenue yield and the overall base fee rate in the fourth quarter, we would expect a lot of those to continue into the first quarter primarily as we continue to benefit from the demand for our ETF and our passive strategy. So while that is a significant positive, and we are capturing demand where demand is right now that does put downward pressure on our average fee rate. And we would expect a lot of those trends to continue into the first quarter at developing markets in particular in global equities. And what happens there in terms of redemptions and demand overall, that will remain a headwind. If nothing else, just given the exit rate of those particular asset classes in December as we come into this year, that does put downward pressure overall because of the outflows that we experienced in the last probably three quarters there. And overall though, I’ll just say, as I do every quarter, we’re not focused on managing to a net revenue yield or an average fee rate. We’re focused on managing the operating income and operating margin of the company overall. And so while we see that downward pressure given the mix shift in our portfolio, and that mix shift really did accelerate in 2022. We are really focused on how do we continue to operate the business to create scale and to get to scale in these passive capabilities. We’ve taken market share, we’ve gained quite a bit in terms of our organic growth over the last few years, but we’re not at scale in those capabilities, and getting to scale and continuing to remix our expenses and reallocate against these higher growth capabilities is our primary focus. And that’s what’s ultimately going to give us the opportunity to improve operating margin.

Thank you very much.

Hi, good morning everyone. Most of mine have been asked, just one quick one on credit ratings. I think S&P's on record is saying their ratings and outlook are based on the expectation that your leverage ratio with the preferred will be in the two-and-a-half times to three times range, which you went over in 4Q. I suppose the market recovery could already have that back below three times, which could you speak to any potential risks to your capital return or new investment outlook around that issue? And based on your past experience, how much of a grace period can we expect from the ratings agencies after kind of breaching that three times bogey for one quarter?

Hi, Patrick, I’ll take that. We have had no discussions with S&P suggesting any risk on that front. The key point is that we have been successfully managing our debt levels lower. Although EBITDA has decreased due to market effects, we believe this decline is likely to be temporary. We anticipate a market recovery at some stage. Concurrently, we have reduced our balance sheet debt to its lowest level in a decade and addressed various contingent liabilities that existed when they made their assessment two to three years ago. In terms of overall liabilities, we are in a much better position than we were back then. We received an upgrade from Fitch last year and believe we are in a solid position regarding our credit ratings.

Hey, good morning. Thanks for squeezing me again here. Just to follow-up on expenses, Allison, just coming back to the transformational project that you were mentioning earlier. I guess just how much might that lower run rate expenses as you kind of look out over the next couple of years, and as you think about expenses for this year, how are you thinking about the bookends for growth rate and expenses?

So in terms of transformational projects, lowering expenses in the next couple of years, I would say they will not contribute to lowering expenses in the next couple of years. As we’ve noted before, the Alpha NextGen is really our most significant investment that we will be making. We will be in the next couple of years deep into the investment period of that, and then we’ll be running parallel for some period of time before we can start to streamline and decommission apps on the other side. So, we are several years away from seeing the benefit of that investment. Again, it’s the right near-term and long-term move for us as a company overall as we think about building to the scale we want to be at in the next five years, seven years, 10 years. But it’s an investment and it will take some time before we see the payback on that investment. In terms of the bookends of expenses, look the biggest driver of that’s going to be comp and the biggest driver of that’s going to be market related. And so as you think about the variability and our expenses and what could move, the most beyond our expectations and beyond some of the guidance I already gave would be compensation related. The good news in that is that comes with revenue. And I think that right now as we think about what expense flex we have on the year? I want to make sure it’s clear, we are managing discretionary expenses at every level and really focused on the must-haves only, and all the nice-to-haves are things we are foregoing. But there are a lot of must-haves in this business that we think really position us well to capture demand over the next several years. And we want to stay the course on that even in some of these challenging market conditions. And we’re reallocating the discretionary expenses to some of these foundational investments that we think will serve us well and create the operating leverage for the future.

Great. And just a follow-up question on the cash position, $1.2 billion, how much of that is discretionary? And how do you think about the scenario where buybacks might resume? Thank you.

So the $1.2 billion, about $640 million is held for regulatory purposes, so it’s a little bit higher than the last quarter, and that’s really FX related. So you could consider the amount above that $640 million roughly discretionary. As I think about buybacks, I’ll just underscore our capital priorities. The first is supporting our future growth, and we’ve got a lot of investments we want to make in ourselves, and we think that’s going to serve shareholders the best over the long run. We want to focus on maintaining that strong balance sheet and continue to focus on the leverage levels that we have and managing those down. And we also continue to focus on returning capital to shareholders, but that we’re going to do first through dividends and steady dividend increases, and it’s really excess cash that we’ll think about for buybacks.

Yes, excuse me. I get off mute. I do want to follow up just on this conversation on expenses. So there’s some longer-term investments that Allison was talking about, which we’ve talked about some, and then the obvious elements around discretionary. But as a management team, we are absolutely focused on what we call, driving scale within the organization against capabilities that are in client demand. And we’re deeply into that process and we’re constantly doing it. And from that, you get the opportunity to make a decision to invest in a capability for a client, let’s say, or have it dropped at the bottom line. So that’s another element that we have been working on very, very diligently. And it’ll make us a better company, but at the same time, at some point the markets recover, you’ll get further operating leverage with, from the organization. So, I think you should look at it as three different elements, and that’s nothing new. You’ve seen us do it time and time again. And it’s a normal practice from us and again, it’ll just create better outcomes for sure, shareholders and clients.

Great. Hi, good morning. I wanted to ask you a couple follow-up questions on the real estate business. So, I believe the total real estate exposure for Invesco is around $92 billion, and $75 billion or so is in the direct real estate side. So within direct real estate, how much is tied to the U.S. and then how much is tied to office and retail?

I estimate that about two-thirds of our exposure is related to the U.S. We can provide more detailed specifics later, but that's a rough figure. Over the past few years, particularly the last three, we have been actively managing our exposure to office and retail sectors. Instead, we've been focusing on asset classes such as cold storage, industrial, and medical office buildings, as well as other expected sectors. The challenges facing retail have been clear for quite some time—around five or six years—and the office sector has faced notable difficulties since COVID emerged. We’ve been actively managing those exposures, so they are not major concerns overall. Looking back at our acquisitions over the last two to three years, they have centered on high-demand areas. Additionally, multifamily properties are another asset class we've prioritized.

Okay, great. Thanks, Allison. And then just specifically in terms of some of the line items here, how much does real estate contribute to performance fees? So of the $68 million, how much was from real estate, and then how much do real estate transaction fees contribute to other revenue?

In this quarter, the majority of performance fees came from real estate. In previous years, we would have seen a higher contribution from IGW China than what we observed this year. Typically, the main contributors each year are China and real estate, but in 2022, real estate accounted for a larger share. Regarding other revenue, I will need to provide the specific portion later. However, I can say that the increase in other revenue in the fourth quarter was primarily due to higher real estate transaction fees.

Okay. Well look thank you very much everybody. I appreciate the engagement, the questions, and we’ll be chatting next quarter. So have a good rest of the day. Thank you.

Thank you.