Invesco Ltd (IVZ) — Q3 2023 Earnings Call Transcript

Okay. Thanks, operator, and to all of you joining us today. In addition to today's press release, we've provided a presentation that covers the topics we plan to address. 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 2 of the presentation regarding these statements and measures as well as the appendix or 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 webcast are located on our website. Andrew Schlossberg, President and CEO; and Allison Dukes, Chief Financial Officer will present our results this morning, and then we will open the call up for questions. I'll now turn the call over to Andrew.

Thanks, Greg, and good morning to everyone. I'm pleased to be speaking with you today. But before I begin my commentary on the quarter, I did want to take a moment to acknowledge the humanitarian crisis in the Middle East. We are deeply saddened by the loss of life and devastation and the impact it's had on civilians across the region. We're focused on the safety and the well-being of our colleagues and their families, and our thoughts are with everyone who has been impacted by the heartbreaking recent events. But now, turning to the topic of the third quarter earnings, I'll start today's presentation on Slide 3. Volatility and uncertainty continue to define global financial markets with interest rates rising and investors awaiting more clarity from central bankers. There's an extraordinary amount of cash that's been moved to the sidelines where investors can earn acceptable returns while they await more certainty. The slowing and narrowing investor activity has been a near-term challenge for our industry, but it also sets the course for an eventual reallocation and money moving back into higher risk-based assets. Our results, which are highlighted on Slide 3, in many ways reflect these dynamics. However, our unique positioning with deep client relationships, a strong geographic mix, and a broad suite of investment solutions helped us deliver positive net long-term inflows in the third quarter. One of the primary contributors to our relative net flow strength is our robust ETF and SMA platforms. Our ETF business delivered record flows in the third quarter, which were concentrated in our leading factor-based capabilities. It was one of the strongest ETF quarters we have experienced as we continue to gain market share. We captured nearly three times our industry share of net asset flows to our market share of AUM and importantly, over three times our industry share on a revenue flow basis as well. Additionally, we continue to enhance the commercialization of our SMA platform and are seeing strong momentum in flows, particularly within fixed income, where we have posted 12 consecutive quarters of positive net flows despite the challenging market environment. Within these vehicles, we are well-positioned to meet the increasing interest around personalization and tax optimization that we're seeing by wealth management clients in both the US and around the world. While areas of growth like ETFs, SMAs, and fixed income have been strong for us this year, we continue to see flow pressure in active equities. While headwinds have persisted in this asset class industry-wide, we are beginning to see marked improvement in Invesco, in particular in the global, international, and emerging market equity segments. In aggregate, our net outflows in these strategies are significantly lower than what we experienced in 2022 and have stabilized at around $1 billion in outflows each of the last two quarters. We continue to put considerable effort into further improving investment quality, product differentiation, and client engagement in these capabilities to ensure we are well-situated ahead of the eventual renewed demand in these important and higher fee-yielding asset classes. We're going to spend some time on the call today highlighting how we're positioning the firm against shifting investor demand, its impact on our asset mix, net revenue and our net revenue yield, and how we're organizing to meet the evolving client demand in both the near and the longer term. As we've outlined previously, we are undertaking a multi-quarter plan to simplify and streamline the organization to position the firm around rapidly evolving client demands. Our aim is to operate with more agility, improve our consistency of investment quality, create a more seamless client experience, and more efficiently leverage our size and our global scale to enable better outcomes for our clients and drive even greater profitability. We have already made meaningful progress in these areas, and we will continue to execute this pace in the coming quarters. Some of the key highlights on the evolved investment platform that we have achieved to date include the following; we've established a unified globally integrated fixed income platform, we're creating a single, highly focused multi-asset group from three distinct teams. We're bringing together leadership across our fundamental active equity teams, and we're further strengthening our private market platform that spans both real estate and private credit capabilities. Notably, all of these simplification efforts will enable us to more fully take advantage of the benefits of our State Street Alpha platform, as a single global investment operation engine across asset classes. On the product and distribution side of our business, we've also made considerable progress in repositioning growth and efficiency. We've combined our ETF, SMA, and model portfolios efforts into a single strategy and group. Going forward, we believe that these capabilities will be the leading vehicles of choice for our clients. Our established infrastructure, brand, and innovation will enable us to continue to lead and bring both active and passive capabilities to investors in an even more personalized and efficient way. We're also continuing to prune our product line, and we've reduced it by over 150 products in the past year. Further, by globalizing many aspects of our marketing and digital delivery, we're finding opportunities to leverage our scale, simplify our applications, unify our data, and use technology to strengthen these capabilities while lowering costs. There are efficiencies to be gained from all of these simplification efforts, which we are beginning to realize and we will continue to do so over time. However, these efforts are much more than just expense savings. We view these as drivers of revenue acceleration, which will allow us to improve our investment quality, reallocate our expenses and capital base much more effectively, and deliver sustainable profit growth and margin expansion over time. Moving ahead to Slide 4. As investors gain greater clarity on inflation and Central Bank interest rate policy, we expect clients to move out of cash and extend their duration profiles of their fixed income allocations into a wider range of strategies. Fixed income is a clear area of strength for Invesco, and we're focused on ensuring we are well positioned to capture what we believe will be an outsized share of this reallocation. As you can see on this slide, our $500 billion plus fixed income platform has strong investment performance, requisite scale, diversity across asset classes and client geography, it spans public and private investments, and it has a robust offering of both active and passive products. The globally integrated institutional quality platform has been a consistently strong grower for Invesco, having posted long-term net flows over the previous 18 quarters and it's very strong top-tier investment returns across a wide range of fixed income capabilities. A few highlights to note on our favorable position that are on the page include our global liquidity capabilities, which have grown AUM by over 150% over the past five years, and we're now squarely in the top 10 of institutional money fund managers and in the top five amongst non-bank-owned providers. Our stable value capability is well-placed in DC platforms and ranks as a top manager in the US institutional marketplace. Our municipal capabilities rank in the top five largest among mutual fund managers in the US, and number two amongst high-yield muni fund managers. Within our investment-grade capabilities, our relative performance has been improving since the recent mini banking crisis and our long-term performance strength has helped us nearly double our AUM in the past five years. Furthermore, our global and emerging markets fixed income capabilities have stellar performance and are very well placed for growth in the UK, European, and Asian institutional and retail markets. Finally, we believe that significant opportunity exists for even greater expansion of our fixed income ETFs and bank loan capabilities which are two notable strengths of Invesco. So, against the backdrop where clients are seeking to work with fewer asset managers to meet the breadth of investment requirements, fixed income is clearly an area of our business that is poised to continue to gain market share and drive even greater profitability as the eventual rotation beyond cash unfolds. Finally, and before I turn the call over to Allison, I want to take a moment to highlight on Slide 5, another important piece of the Invesco investment thesis, our strategic relationship with MassMutual. Our engagement with MassMutual has many facets that create a meaningful, mutually beneficial strategic relationship. First, MassMutual is one of our largest investors as both a common equity and preferred shareholder. So, we're mutually aligned to delivering profitable growth and long-term success against the backdrop of an evolving industry. MassMutual is also a significant investor over the past years in supporting many of our newly launched private market and other key strategies with a total of $3.5 billion of commitments. Notably, this is three to four times the multiple of seating of our own products on our own balance sheet. MassMutual has significantly increased their commitments since the inception of our relationship, and this is meaningfully bolstering our growth trajectory in our private markets business, both institutionally and in our wealth management channels where early access to capital is paramount to setting the course for growth. Finally, we work closely with MassMutual on behalf of their clients, and we are pleased to be a third-party manager of $9 billion of assets through their insurance and broker-dealer channels, where we ranked the largest sub-advised and defined contribution investment-only manager on the MassMutual platform. To summarize, this is a powerful and important relationship for Invesco with significant potential ahead. We continue to explore avenues with MassMutual to make this relationship even more meaningful in the future. With that, let me turn the call over to Allison for a closer look at our results, and I look forward to your questions.

Thank you, Andrew, and good morning everyone. I'll begin on Slide 6 with investment performance. Overall, our investment performance was solid in the third quarter with 67% and 65% of actively managed funds in the top half of peers beating benchmark on both a three-year and a five-year basis, respectively. This is in line with those time frames in the second quarter. We did see investment performance improve considerably on a one-year basis, going from 67% in the second quarter to 70% in the third quarter, reflective of the improved investment performance we are seeing across several categories, including global and international equities and alternatives. As Andrew noted, we have excellent performance in fixed income across nearly all capabilities and time horizons, an important fact given our strong conviction and our ability to attract flows as investors deploy money into these strategies. Turning to Slide 7, AUM was $1.49 trillion at the end of the third quarter, $51 billion lower than last quarter. The quarter began with what appeared to be a continuation of a recovery in markets, albeit uneven, that we saw in the second quarter. However, that quickly shifted to a risk-off posture again as the quarter progressed and uncertainty grew, marking another volatile quarter for markets worldwide. Market declines, coupled with foreign exchange movements, drove the decline in AUM. Despite the market volatility, we did generate $2.6 billion in net long-term flows, and we expect we will outperform peers in what has been a very difficult environment for organic asset growth. Client demand for passive capabilities remains strong as we garnered $13.5 billion of net long-term inflows during the quarter. ETF inflows were $11.8 billion, marking one of our best quarters for ETFs. Our SMB 500 Equal Weight Index funds led the quarter with $3.6 billion of net long-term input. This ETF is also our leading flow driver year-to-date, with our newer QQQM, drawing the second highest flows in our ETF suite year-to-date. The QQQM was launched three years ago and has attracted $14 billion of AUM since inception, now making it our fourth largest ETF. We've demonstrated the ability to sustain growth in ETFs throughout the full market cycle with organic growth in 12 of the past 13 quarters. We also saw solid growth in our index strategies with $2.3 billion in net long-term flows for the quarter. Offsetting some of the growth in passive was $10.9 billion of net outflows in active strategies. Contributing to the outflows was a single sizable redemption in our global targeted return strategy. This strategy has been in significant outflows for several years and now has less than $1 billion remaining in the fund. In September, we announced plans to close the fund and focus on other capabilities within our multi-asset franchise where we are seeing stronger client demand. Our global active equities, which includes the developing market funds, were also drivers of net outflows in this quarter. The level of outflows from this investment class has moderated after significantly elevated redemptions in the second half of 2022. Looking at flows by channel, the retail channel generated $4.3 billion of net long-term inflows, while the institutional channel had $1.7 billion of net long-term outflows. This was driven by the global target of returns redemption. Outside of this redemption, we would have had $800 million in institutional inflows for the quarter. Moving to Slide 8 and closed by geography. Asia-Pacific delivered net long-term inflows of $2.8 billion due to growth in Japan, which offset outflows in Greater China during the quarter. In Japan, we experienced another quarter of strong growth with our Henley Global Equity and income funds garnering $1.8 billion of net inflows from Japanese clients, making it a top-selling retail fund for the industry in Japan on both a quarterly and a year-to-date basis. We are well-positioned as Japanese markets are experiencing some of the most constructive conditions for risk-on assets in many years, including favorable new regulations. After resuming organic growth in the second quarter, our business in Greater China experienced net long-term outflows of $1.9 billion for the quarter. The outflows in our China JV were $1.7 billion. Outflows were concentrated in fixed income, where continued weak market sentiment and interest rate tightening has led to diminished growth across the industry this year. However, as China's economy recovers, Invesco is extremely well-positioned to capture additional share in the world's fastest-growing market. Turning to flows by asset class. Equities generated $7.4 billion in net long-term inflows, mainly driven by the strong growth in EPS. The $2.4 billion in outflows in alternatives was largely driven by the previously mentioned single client global targeted returns redemption. Excluding this redemption, alternatives were in positive inflows of $100 million. We have a good track record in our private markets platform within alternatives and are well-positioned to capture long-term flows in this asset class as client demand shifts to these strategies. We have over $6 billion of dry powder to capitalize on opportunities emerging from the market dislocation of the last several quarters, but greater market clarity will be required for this opportunity to meaningfully materialize. Fixed income net long-term flows turned modestly negative with $1.3 billion of net outflows with growth in investment grade, SMAs, and global debt offset by the outflows experienced in China. As Andrew outlined, we like our position in this space and believe we are well-positioned to capture flows as investors put more money to work in fixed income products. We have the track record to support our conviction with 18 straight quarters of net inflows prior to this quarter. Moving to Slide 9. We've provided additional insight into our portfolio and the trends driving our revenue profile. Secular shifts in client demand across the asset management industry, coupled with more recent market dynamics, have significantly altered our asset mix since the acquisition of Oppenheimer Funds. As you'll note, ETF and index AUM, and this excludes the QQQ, have grown from $171 million or 14% of our overall $1.2 trillion in AUM in 2019 to $318 million or 21% of our nearly $1.5 trillion of AUM in the third quarter. We've also seen very strong growth in Asia-Pacific driven primarily by our success in China. During the same timeframe, we've seen weaker demand for fundamental equities, driven in part by the risk-off sentiment that was sparked in early 2022, coupled with the pressure we experienced in developing markets and global equity as well as the closure of our GTR capabilities. Our fundamental equity portfolio in 2019 was $348 billion or 29% of our AUM. At the end of the third quarter, that portfolio was $242 million or 16% of our AUM. The result of revenue headwinds created by these dynamics has weighed on our results over the last two years. While we have experienced excellent organic growth and lower fee capabilities like ETFs and liquidity, it was not enough to offset the revenue loss from higher fee, fundamental equity outflows, and market depreciation. Our overall net revenue yield has declined significantly during this timeframe, but that decrease has been driven by the shift in our asset mix, not degradation in the yields of our investment strategies. Net revenue yields by investment strategy have been relatively stable within the ranges provided on the slides. The other point I want to emphasize is that this multiyear secular shift in client preferences have been increasingly captured in our results. Our portfolio is better diversified today than four years ago, and our concentration risk in higher fee fundamental equity has been reduced. These dynamics, though challenging to manage through as they occur, should portend well for future revenue trends and marginal profitability improvement, independent of market improvement. Further, we now have a more diversified business mix, which better positions the firm to navigate various market cycle events and shifting client demand. Turning to Slide 10, net revenues of $1.1 billion in the third quarter was $12 million lower than the third quarter of 2022 and $7 million or 1% higher than the second quarter. The decline from the third quarter of last year was due largely to the shift in our asset mix that was just discussed. Total adjusted operating expenses in the third quarter were $789 million, $48 million higher than the third quarter of 2022 and unchanged from the prior quarter. Included in our third quarter operating expenses were $39 million of compensation expenses related to the organizational changes we are making to position the firm for greater scale and profitability as we grow our revenue base. In the second quarter, we had $27 million of compensation expenses related mainly to executive retirements. The full benefits from our simplification efforts will be seen over time as we generate revenue growth and margin recovery. To this point, we have identified $50 million of annual run rate expense savings that will be realized by the beginning of 2024. The restructuring costs associated with these efforts were $39 million in the third quarter as we accelerated several of the reorganization activities that we were undertaking into the quarter. Next quarter, in the fourth quarter, we expect an incremental $15 million to $20 million of expense associated with these efforts, bringing the total expense associated with the efforts to $55 million to $60 million. As we've discussed, we managed 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, trending towards the upper end of that range in periods of revenue decline. At current AUM levels, we would expect the ratio to be slightly above the high end of the range for 2023 when excluding the cost pertaining to executive retirements and other organizational changes. Marketing expenses of $27 million were $6 million lower than the prior quarter and $3 million lower than the third quarter of last year as we continue to tightly manage discretionary spend given the ongoing challenging revenue environment. Property, office, and technology expenses were relatively unchanged as compared to last quarter and the third quarter of last year. Another area in which we are diligently managing expenses is G&A. G&A expenses of $108 million in the quarter were down $6 million from the prior quarter. Compared to the third quarter last year, G&A expenses increased $2 million. However, the third quarter of this year includes $8 million in spending on our Alpha platform, which prior to the second quarter of this year was included in transaction integration and restructuring expenses. We expect quarterly average spending on our Alpha platform to remain near this level for the next few quarters. Moving to Slide 11, adjusted operating income was $309 million in the third quarter, which included the costs related to organizational changes. Adjusted operating margin was 28.2% for the third quarter. But excluding the costs related to the organizational changes, the third quarter operating margin would have been 350 basis points higher. Earnings per share was $0.35 in the third quarter. Excluding the expenses related to the organizational changes, third quarter earnings per share would have been $0.07 higher. The effective tax rate was 23.6% in the third quarter. We estimate our non-GAAP effective tax rate to be between 23% and 25% for the fourth quarter of 2023. The actual effective rate can vary due to the impact of nonrecurring items on pre-tax income and discrete tax items. I'll finish up on Slide 12. Stated priority, where I'm pleased to say that we've made significant progress in building balance sheet strength. This quarter, our cash balance exceeded $1.2 billion. We've lowered our net debt significantly, and it now stands at less than $250 million. I'm pleased with the improvement we've made on the balance sheet as we continue to work to bring net debt excluding the preferred shares down to zero by the second half of next year. Our leverage ratio, as defined under our credit facility agreement was 0.7 times at the end of the third quarter. We have an opportunity to further address outstanding debt with the maturity of the $600 million in senior notes at the end of this January. We ended the third quarter with zero drawn on the credit facility. To conclude, the resiliency of our firm's net flow performance in a difficult environment for organic growth is evident again this quarter, and I'm pleased with the progress we're making to simplify the organization and build a stronger balance sheet while continuing to invest in key capability areas. We're committed to driving profitable growth and a high level of financial performance. We have the right strategic positioning to do so. And with that, I'll ask the operator to go ahead and open it up to Q&A.

Hi, thanks very much. I appreciate all the commentary you made about fixed income. I'm still a bit surprised that flows haven't been stronger. Can you discuss what indicators you think clients are looking for? Is it just the end of rate hikes and the economic outlook? Are you observing that in discussions around solutions, through RFPs, and so on? Also, could you comment on the significant amount of cash sitting on the sidelines while money markets are experiencing outflows? Thanks a lot.

Hey Glen, thanks, it's Andrew. I'll start, and Allison will also contribute. There is some cash sitting on the sidelines, but whether it's from wealth managers or institutions, it seems that about 25% to 35% of portfolios are allocated to that based on numerous discussions with clients. I believe it's exactly as you mentioned, as they are waiting for clarity from central banks and a reason to transition from the sidelines and start earning returns. The discussions have been very active, whether through our solutions efforts or direct conversations, and I think the situation is quite straightforward. On the money market side, Allison, why don't you take it from here?

Good morning, Glenn. What I would say about our money market portfolio is about 85% of our portfolio is positioned with an institutional client base. So, think about that as being managed by corporate treasurers, and those funds are going to stay and save for assets. So, I think what we saw in this quarter was a repositioning in the treasuries just given the opportunity that those presented and just the yield that the treasurers are seeking. That will also, in many respects, prevent those funds from being deployed into more risk-on strategies like equity. So, the composition of our money market client base, I think, is important as you think about it being 85% institutionally owned.

I appreciate. One just quick follow-up is as you noted, the fee rate on fixed income is obviously lower than overall. But I would imagine there's some pretty high incremental margins. If flows do happen in the way you think into fixed income as people start extending duration, how should we think about that interplay between fee rate and margins kind of like the same conversation we've had for years? Thanks.

Your assumption is correct that there is a relatively fixed cost base supporting the fixed income portfolio. Therefore, you should consider inflows into fixed income as beneficial to the firm's overall operating margin. A significant aspect of what we are trying to highlight is our focus on growth through scale and how that can positively impact margins. Overall, fixed income is definitely a key area where this is applicable.

And Glenn, some of the things we discussed last quarter and this quarter, we further integrated various components of our fixed income platform, and we aimed to enhance the scale of that platform for the reasons Allison mentioned.

Thanks. Good morning everyone. So, maybe just starting where you left off, with 25% of portfolios sitting in cash and waiting for rates to stop going higher, which bond verticals are you the most positive on in 2024? And also, do you think active fixed income can garner significant share? Or do you expect most of the flows to come from passive, which you'd also benefit through the ETF platform?

Yes, hi, it's Andrew. Just maybe I'll pick up on the second part first. We think it will come in both active and passive. And as you said, the diverse range that we have in both, in some ways, we're a bit indifferent, but the conversations are happening on both sides of the equation. In terms of areas that are particularly of focus and things that we're having conversations about it, we're well positioned, the municipal portfolio, whether that's investment grade or high yield, the performance is stellar. The funds are highly rated, they're well known, and that's probably the first protocol we would point to. On the investment-grade side, European corporate bonds have been of interest and have been an area where we're positioned well. And then really just anything across as people move a little further on the curve, even elements of our short-term fixed income portfolio. So, it's pretty wide-ranging, but I'd sort of point out those areas in particular, especially because we're well placed there to take share.

Thank you. And just for my follow-up on Investor of Great Wall in China. Flows are negative in 3Q. I just wanted your perspective on if you thought they would snap back on a near-term basis. Or if you think we'd go through a longer-term time period here where you'd see net outflows from China?

Good morning, Craig. I'll begin. The primary driver of the flows in IGW was fixed income. With the current tightening of interest rates in China, there seems to be a reduced appetite for fixed income overall. However, we did observe inflows in equities during the quarter. It is challenging to predict the timing of when economic sentiment in China will improve. We believe the government is making significant efforts to encourage stabilization and enhance overall sentiment. It's difficult to determine exactly when this will happen and in which quarter things will rebound, but we are confident and well-positioned for when it does.

Thanks. Good morning. A question on expenses. First, a clarification. I believe Allison, you mentioned that the savings from some of the charges won't be in until next year. So, curious as to why you're not seeing some of the savings here in 4Q? And then there's a lot of changes or kind of streamlining, I think, that was talked about. Could you maybe summarize what you see as the most impactful in some of these changes that you raised?

Good morning, Dan. Regarding expenses, I want to clarify that we anticipate the $50 million in savings will be fully realized by the first half of 2024. I believe we will begin to see some of those savings take effect in the fourth quarter, estimating around a $10 million improvement in compensation expenses. This would bring the run rate to nearly $40 million. I expect most of the savings will start to materialize in the fourth quarter and continue into next year, depending on assets under management and market conditions impacting variable compensation. The increase in severance and restructuring expenses in the third quarter is partly due to our decision to accelerate some savings for realization in the fourth quarter. There may have been expectations for severance to be closer to $20 million in the third quarter, but it came in at $39 million as we sought to front-load those savings. The anticipated savings will be broad-based, as we are implementing careful streamlining throughout the organization. This includes areas like operations and investment teams, as well as globalizing our efforts for more uniform processes. While I can't identify a specific area, I can say that most of the savings will be in compensation expenses, excluding the typical seasonality in payroll and taxes seen in the first quarter.

Thank you. That's helpful. And then just on the institutional outlook, the overall pipeline, I think the numbers you didn't disclose. You talked about the slide is 35% still solutions, which has been in the range it's been. So, maybe just some context around the institutional activities you see it in building into the fourth quarter and obviously into next year.

Sure. The institutional pipeline, the one not funded pipeline, so the same as we typically provide some color to, it was about $20 billion in the third quarter, so a little bit lower than the prior quarter, although the fee rate was a little bit better, the composition pretty consistent. So, it still looks pretty good. I would say if I look at our inflows, excluding the GTR, a very sizable redemption that we pointed to. If I look at our gross inflows in the quarter, it was about $17.5 billion in gross inflows from the institutional channel, and that was about 43% of that was from our pipeline. So, our pipeline continues to be healthy, strong. It does not really reflect the full breadth of the activity in the institutional channel. But it's certainly a good health measure, and it's kind of consistent in that $20 billion to $30 billion range.

Hi, good morning and thank you for the question. In relation to the pipeline, what was the backlog for alternatives? If solutions increased to 35%, how did that affect the pipeline? Additionally, where do we currently stand with alternatives? Thank you.

Sure. Good morning. What shrunk would have been equity. Alternatives actually held pretty consistent to the prior quarter. And I think we mentioned we've got about $6 billion in dry powder, and that's been pretty consistent. So, it's actually been one of the challenges is it's been difficult to deploy just because the transaction activity, particularly in private real estate is relatively low, just given some of the financing dynamics that are going on. But what we saw was a little bit of diminishment in the pipeline for equities overall.

Okay, great. Regarding the $6 billion of available funds, what makes up the majority of that amount? Is it primarily in real estate, in credit, or is it a combination of both? Also, are there any large funds in private markets that you anticipate being launched in the next year?

The bulk of the $6 billion would be more real estate-oriented than it would be private credit. We've got several things that we are working on, I would say, in terms of what we're trying to bring to market in both the real estate space and the private credit space as we look to capture some of the opportunities there out there right now, particularly from an opportunistic standpoint and a stress standpoint.

Yes. And Ken, in particular, real estate debt for both institutions, but mostly in the wealth management channels is probably the area where we're seeing the greatest amount of demand and we're in market with strategies there. And then as Allison said, on the private credit side, just traditional direct lending, both in Europe and the US.

Good morning. Thanks for taking my questions. I wanted to start on fee rate. So, the actual investment advisory fee was a lot of pressure, but distribution offset kind of allowed the net revenue yield to be only down modestly. So, was there any noise in that net distribution line? Or is that the right way to think about that going forward?

I'll take that. Good morning, Brennan. The net distribution line in the third-party segment typically runs around 41% to 42% of management fees on an annual basis. Last year, it was about 41.5%. So far this year, it's around 42%. The third quarter was slightly lower, so there's some variability that occurs from quarter to quarter. Overall, it remains consistent with historical trends.

So, are you saying that we should look at it more on a year-to-date basis than this quarter specific?

I would. Absolutely. I would think about it in that 41% to 42% range and this quarter kind of brings up 42%, starts to bring it down a bit. I would look at it in the range. That's how we think about it. It's hard to manage to it quarter-to-quarter.

That's great. It would be helpful to see details like fee rates or revenue by asset class along with the flow disclosure, especially considering the current dynamics of your business. Just a suggestion. For my follow-up, you mentioned a significant loss from a single account with GTR. Given that this was a large investor, was the fee rate associated with that account lower than the average for your alternatives business across the firm?

Yes. Thanks, Brennan. Okay. First, I'm going to point you to Page 9 because Greg did do the extra work and we've got some of the fee rates disclosed from an AUM standpoint there to try to provide exactly that and give a little bit more color. And then on GTR, no, that fee rate, that capability was priced significantly above the firm average. And so that has been, as you think about some of the challenges and the remixing and some of what we are trying to draw out on Slide 9. GTR would have been one of the challenges we've been experiencing along with the pressure from developing markets and global equities. Those would have all had fee rates quite north of the firm average, consistent with what you would see in that fundamental equities fee rate range on Slide 9.

Yes, thank you for pointing out that on Slide 9, I meant that we could actually incorporate this within the financial models for more detail. Does Slide 9 relate to the AUM disclosures you have in your press release?

Not exactly. And I think that's part of the challenge, and we hear you on that one, and I know that is a desire you have expressed, and we will continue to work through our data in a way that we can make it as digestible as possible. Although I do think this gives you quite a bit of color as to what's been going on over the last four years and a lot of the challenges in the results that we've experienced being increasingly captured.

Sure. Of course. Sorry to be a pain in the butt. Thank you.

Not at all, Brennan. Thank you.

Great. Good morning. Thanks for taking the question. Just one on regulation, Basel III end game rules for the banks are slated to potentially raise capital requirements. Just curious how you see that trickling down to the asset management industry and your business whether it's availability and cost to warehousing? You spoke derivatives accessing leverage? Just what areas you think might be impacted from the new capital rules? And then can you speak to the opportunity set just in terms of where you guys might be a beneficiary where you might be able to press to innovate, to create new products to be able to take some share from the banking system?

Good morning. I'd say, honestly, the Basel III capital requirements have little to no impact on us at all. There's very little that we do that has any relationship to the areas that are impacted by Basel III. So, I would say in terms of where might we have some opportunities, we could take advantage of. Certainly, we're all seeing the opportunity to continue to think about capturing some private credit share as we continue to see that be a challenge for the banking system and a lot of that getting pushed out of the banking system. We've certainly already seen the impact of that over the last five years, and I expect that those trends will continue. I think it also creates opportunity on the real estate debt financing side, and I think consistent with Andrew's prior comments and where we see some opportunities in positioning our capabilities there to take advantage of that as well.

I'd just add bank loans where we've been an innovator as well as different things on the liquidity side of the business. But I'd echo Allison's comment it's just not Basel has not been a focus of ours.

Sure. I get it doesn't apply to you, but just curious how you see that impacting the banks, which then may reprice or pull back capacity, which is to the question I was getting at. But maybe we'll move on. Just a question here on efficiencies. That's an area of focus for you guys in streamlining the organization. I was just hoping you might be able to speak to some of the potential from generative AI, how you guys are experimenting with that today? How do you see the opportunity set from that? How might you be able to quantify the benefit there over time?

Yes, it's a great question. Early days, of course, data and organizing our data and making it a strategic asset is one of our priorities and how we apply artificial intelligence and generative artificial intelligence to it is high on the order. We're early days in experimenting with traditional applications that we think will and could lower costs and drive efficiency going forward. But also speed to market and friction that exists inside the client experience. So, things like marketing material and content legal and regulatory procedures and filings, onboarding of accounts, things like that, that are pretty operationally intensive at the moment. We haven't started to experiment yet, but how we'd apply that on the investment side. But on the sales side, we're applying it internally with finding ways to get ourselves to products and get ourselves to attributes that we can express to clients rapidly. So, we're going to continue to invest in the area, explore it and seek to make it a part of our efficiency going forward. But it's a little too early to quantify.

Great. Thanks. Good morning everyone. I appreciate you taking my question. Referring to Slide 9, concerning the fundamental equities franchise, I understand that it has been reduced as a portion of your overall asset base due to industry pressures, but it still represents the highest revenue-generating area. Could you share insights on the types of investments you are making in the fundamental equities franchise that could enhance organic growth prospects? Additionally, how are you considering active ETFs as a possible enhancement for that platform?

Thanks for the question. Let me start by discussing how we're working to enhance fundamental equities from both an investment and a client perspective. On the investment front, we've implemented new leadership focused on not only improving performance over time but also on risk management, tools, analytics, and controls. Performance remains a key driver, along with aligning with market demand and ensuring top-notch investment quality. We're starting to see positive investment performance reflected in our results, which I believe is helping to mitigate some of the redemptions, particularly in international, emerging, and global equities. From a distribution perspective, our strong history in the US, UK, and Europe positions us well, especially as many of those assets are on retail platforms. We have robust distribution and high education levels in these areas. Our main goal is to engage with clients more actively to capture demand when it arises. It's important to highlight that within fundamental equities, international, global, and emerging markets represent higher-fee components and are less vulnerable to passive investment strategies. We believe we can differentiate our products in these markets, which is where we're observing the most improvement in net flows. In fact, in the last quarter, these categories only saw $1 billion in net outflows compared to significantly larger losses in 2022. This indicates potential growth areas for us moving forward. The domestic equity side presents more challenges, but similar comments apply. Regarding the transition from mutual funds to ETFs, our ETF platform is well-positioned. We've launched active strategies over the years and will continue to seek opportunities to transition active strategies from mutual funds to other vehicles—beyond just ETFs, including custom SMAs on both fundamental and index sides. We will explore ways to advance this approach. While the development of active ETFs will take time, we are committed to being a leader in that arena as it evolves.

That's great color. Thanks for that. And then maybe just on the expense side, Allison, just a clarification, the $10 million in the fourth quarter improvement in the compensation line. Does that exclude or include the dynamic of the charges between the two quarters, 3Q and 4Q?

That would indicate an improvement in the run rate, which is separate from the $39 million this quarter and the expected $15 million to $20 million in severance and reorganization costs in the fourth quarter. This represents genuine underlying run rate improvement, and we will provide more transparency on that as we realize those savings.

Yes, that makes sense. I'm not sure if you can comment on the other fourth quarter expenses in EMEA, as marketing is typically high in this season, but is there anything else regarding the property line and general and administrative expenses, aside from the comments you made about State Street? Is there anything else to discuss concerning those two lines for the fourth quarter?

Yes, I would say we do often see a little bit of seasonality in both marketing and G&A in the fourth quarter as there are just professional services fees and the like that's usually true up there in the fourth quarter. So, there might be a touch of seasonality in marketing those two line items higher. We are thoughtfully and very aggressively managing our discretionary expenses, though.

Thank you.