Invesco Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 23, 2024

There are 12 speakers on the call.

Operator

Thank you for standing by, and welcome to Invesco's 4th Quarter Earnings Conference Call. All participants will be in a listen only mode until the question and answer session. As a reminder, today's call is being recorded. Now I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations. Thank you.

Operator

You may begin.

Speaker 1

All right. Thanks, operator, and so all of you joining us today. In addition to the press release, we have provided a presentation that covers the topics we plan to address on the call 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.

Speaker 1

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 for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible And does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by 3rd parties. The only authorized webcasts are located on our website. Andrew Schlosberg, President and CEO and Alison Duke's Chief Financial Officer will present our results this morning and then we'll open up the call for questions.

Speaker 1

I'll now turn the call over to Andrew.

Speaker 2

Thanks, Greg, and hello, everyone, and I'm pleased to be speaking with you today. In a reversal from the Q3, overall market sentiment in 4th quarter turned more constructive as investors began to gain confidence, putting money back to work in the last several weeks of the calendar year. Equities and fixed income were both beneficiaries of a growing belief that central banks would cut rates sooner in 2024. The S and P was the best performing major equity index and while outside the U. S, there was solid market growth in Europe, while China continued to lag.

Speaker 2

Fixed income markets performed well led by government bonds as expectations for tightening interest rates earlier in 2024 prevailed. The market volatility and shifting macro trends exhibited this past quarter strengthened our conviction in the areas we focused on throughout 2023, continuing to reposition Invesco to perform through various market cycles and in front of the rapid evolution underway in our industry. As discussed on previous calls, we continue to streamline and simplify the company for the benefits of our clients, colleagues and shareholders. The focus of these efforts is to further emphasize long term investment quality, strengthen our diverse product offering and build on our value proposition that uniquely meets a broad range of client needs around the world. We are also tightening our financial discipline, which will further enable us to allocate resources to drive innovation and acceleration for the benefits of clients.

Speaker 2

We're going to continue to leverage our scale to more effectively invest in profitable growth and further strengthen a culture that attracts and retains the top talent in our industry. While our work in each of these areas continues, We are making good progress and I'm appreciative of the client focus and dedication of my Invesco colleagues around the world. Our results, which are highlighted on Slide 3 of the presentation, summarize many of these external and internal factors at play. During the quarter, we continued to benefit from growing client demand and assets beginning to move off the sidelines. In the Q4, we delivered $6,700,000,000 in net long term inflows, which is a testament to our advantageous position with deep client relationships, strong geographic mix and a broad suite of in demand solutions.

Speaker 2

While organic flow growth and improving sediment drove asset levels higher, Most of the gains occurred later in the quarter, limiting the revenue impact in the Q4, but increasing AUM nearly 7% from September 30 levels. Several factors contributed to our strong organic flow growth in the 4th quarter. Most notably, demand for our ETFs and our SMAs continue to drive market share gains in these important product platforms. During the quarter, we achieved $14,000,000,000 in positive flows in our ETF factor and index capabilities globally and hit a record high of $634,000,000,000 in AUM. We also produced our 13th consecutive quarter of positive flow growth in SMAs as we continue to see strong demand for custom tax optimized solutions in the U.

Speaker 2

S. Wealth management channel in particular. The 2nd set of quarterly organic growth drivers were the return to positive flows in 2 of our most critical growth areas, our China business as well as the broader Asia Pacific region and private markets alternatives. While overall sentiment in China remained relatively weak, Our well established position in the country drove positive organic growth in the Q4. The majority of the flow growth came from the launch of 7 new products, which were augmented by equity product sales in existing capabilities.

Speaker 2

Strong demand for these new products could signal in China. Long term, we remain optimistic about this market and our unique leadership position within it. We continue to believe that the Chinese asset management industry will grow and mature in the coming years with the development of the local retirement and capital market systems in the world's 2nd largest economy. In private markets, we generated net long term inflows led by a stabilization and modest inflow into direct real and inflows to credit strategies, notably bank loans, which include CLOs. We have over $6,000,000,000 in dry powder to capitalize on opportunities emerging from the market dislocation of the last several quarters, but we will need greater market clarity before we begin to see significant growth.

Speaker 2

Shifting to fixed income, which is a key area of strength for Invesco, we continue to see steady ongoing growth, having reported positive inflows in 19 of the past 20 quarters. Leading contributors in the 4th quarter included investment grade, custom SMAs as well as municipal bond strategies. As investors gain greater clarity on inflation and Central Bank interest rate policy, We expect clients to move out of cash and extend the duration profiles of their fixed income allocations into a wider range of strategies. As previously highlighted, fixed income is one of our absolute strengths at Invesco and we remain focused on ensuring we're well positioned to capture an outsized share of this ongoing reallocation. Finally, pressure on active equity flows continued in the Q4 for both the industry and for Invesco.

Speaker 2

We continue to emphasize investment quality, product differentiation and client engagement to ensure we remain a leading provider in this space with a focus on our in demand capabilities where we can gain market share. Despite the continued headwinds, we have seen some moderation in certain areas of active equity flows, particularly in Global, International and Emerging Markets segments. Our net outflows into these important strategies moderated during 2023 to $1,000,000,000 to $2,000,000,000 a quarter, significantly lower than what we experienced in 2022. These early signs of reversal have been led by our global equity and income strategy, which achieved top retail status in Japan and delivered an incremental $1,400,000,000 of net inflows in the 4th quarter. While we are cautiously optimistic about market conditions for 2024, we remain prepared to meet client and shareholder expectations across a range of scenarios.

Speaker 2

We have the breadth of capabilities, the discipline to drive performance as well as the organizational structure and focus to ensure we are well positioned to meet evolving client demands. As market sentiment improves, this should translate to even greater scale, performance and improved profitability. With that, I'm going to turn the call over to Allison for a closer look at our results, and I look forward to your questions.

Speaker 3

Thank you, Andrew, and good morning, everyone. I'll begin on slide 4. Overall investment performance was solid in the 4th quarter when 64% 71% of actively managed funds in the top half of peers were beating benchmark on both a 3 year and a 5 year basis respectively. Investment performance improved considerably on a 5 year basis, going from 65% in the 3rd quarter to 71% in the 4th quarter, Reflective of improved performance that we're seeing across several categories, including in U. S, Global and International Equity.

Speaker 3

We continue to 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 as investors deployed money into these strategies. Turning to Slide 5. AUM was nearly $1,600,000,000,000 at the end of the 4th quarter, $100,000,000,000 higher than last quarter end. The 4th quarter began with weak markets in October, then recovered as the quarter progressed, Ending the year with equity and fixed income markets higher versus the 3rd quarter. Higher markets coupled with net long term inflows and favorable foreign exchange movements drove the increase in assets under management during the Q4.

Speaker 3

We generated $6,700,000,000 in net long term inflows, which was an organic growth rate of 2.4% that we expect will once again outperform peers in what has been a challenging environment for organic asset growth. Looking at flows by investment approach, client demand for passive capabilities remained strong as we garnered nearly $14,000,000,000 of net long term inflows during the quarter. ETF inflows were $12,400,000,000 an annualized organic growth rate of 17%, marking this as one of our best quarters for ETF. The S and P 500 equal weight index fund once again led the quarter with $4,600,000,000 of net long term inflows. This ETF was also our leading flow driver for the year nearly $13,000,000,000 of inflows.

Speaker 3

Our Q2QM ETFs were the 2nd highest inflows in our ETF suite with over $2,000,000,000 for the quarter. Q2QM was launched a little over 3 years ago and now stands at over $18,000,000,000 of AUM, making it our 3rd largest ETF outside the QQQ. We demonstrate the ability to sustain growth in ETF throughout the full market cycle with organic growth in 13 of the past 14 quarters. Offsetting some of the growth in passive was $7,200,000,000 of net outflows in active strategies. What's encouraging is that the level of close in the Q4 was the 2nd lowest since the market sell off began in early 2022.

Speaker 3

The lower level of net outflows was driven by growth in active fixed income products led by our custom fixed income SMA, which totaled $2,100,000,000 in inflows. Regarding active equity strategies, we experienced another quarter of strong growth in Japan with our Henley Global Equity and Income Fund garnering $1,400,000,000 of net inflows from Japanese clients. This fund continues to be the top selling retail fund for the in Japan on both a quarterly and a year to date basis. Active Global Equity Products experienced net outflows of $1,600,000,000 of which $1,200,000,000 came from the Developing Markets Fund. The level of outflows from this investment class has declined after significantly elevated redemptions in the second half of twenty twenty two.

Speaker 3

Looking at flows by channel, the retail channel generated 4 point Driving the growth in the retail channel were the ETF products I noted previously, as well as the custom fixed income SMA. Growth in the institutional channel resumed after net long term outflows in the 3rd quarter that were driven by the global targeted returns redemption. Moving to Slide 6 and flows by geography. Asia Pacific delivered net long term inflows of $5,800,000,000 representing organic growth of 12% driven by growth in Japan and a resumption of growth in our China joint venture. Japan's net long term inflows were $3,000,000,000 in the 4th quarter, representing an organic growth rate of 21% driven by the Henley Global Equity and Income Fund as well as income products.

Speaker 3

We believe Japanese markets are seeing the most constructive conditions for risk on assets in many years and we're well positioned to capture that growth. Our China joint venture generated $1,700,000,000 in net long term inflows, driven by ETF and fixed income strategies. Turning to flows by asset class. Equities generated $8,300,000,000 in net long term inflows, mainly driven by strong growth in ETF. Fixed income flows were impacted by our planned bullet share ETF maturities that occurred each December, which totaled $2,800,000,000 This is an annual occurrence and these outflows are typically offset by new bullet share products launched in the Q1 where we are already seeing strong inflows in January.

Speaker 3

Excluding these maturities, fixed income and net long term inflows were $2,900,000,000 In alternatives, we generated $1,000,000,000 of net long term inflows in bank loans, including CLOs and $400,000,000 of net long term inflows into direct real estate. These inflows were offset by outflows and other products that we classify as alternative products such as global asset allocation and commodity ETFs. We have a strong track record in our private markets platform with alternatives and are well positioned to capture long term flows in this asset class as client demand shift to these strategies. Moving to Slide 7. Secular shifts in client demand across the asset management industry coupled with more recent market dynamics have significantly changed our asset mix since the acquisition of OppenheimerFunds.

Speaker 3

Going back to 2019 after the acquisition, ETFs and indexed AUM, excluding the Q2Q have grown from $171,000,000,000 or 14% of our overall $1,200,000,000,000 in average AUM in 2019 to $362,000,000,000 or 22 percent of our average AUM of $1,500,000,000,000 in the 4th quarter. The QQQ, a product we are no management fees from, but does provide a substantial marketing benefit has tripled in size over this time, Going from $74,000,000,000 to $230,000,000,000 or from 6% to 14% of total average AUM. We've also seen very strong growth in global liquidity going from $82,000,000,000 or 7 percent of average AUM to $170,000,000,000 or 12 percent of average AUM in the 4th quarter. These product areas carry lower net revenue yields compared to our overall net revenue yield. During the same time frame, we've seen weaker demand for fundamental equities and multi asset products, which carry higher net revenue.

Speaker 3

This has been driven in part by the risk off sentiment that was sparked in early 2022, coupled with the pressure that we experienced in developing markets and global equities, as well as the closure of our GTR capabilities. Our fundamental equity portfolio in 2019 was 348,000,000,000 or 29% of our average AUM. By the 4th quarter, that portfolio had declined to $261,000,000,000 or 16% of our average AUM. Multi asset also declined from 7% to 3% of the average AUM over this time frame. Looking at the Q4 as compared to the 3rd of 2023, we continue to experience similar dynamics with ETF going from 21% to 22% and the Q2Q going from 13% to 14% of average AUM, while fundamental equities declined from 17% to 16% and multi asset from 4% 3% of average AUM in the quarter.

Speaker 3

The results of revenue headwinds created by these dynamics has weighed on our results over the last 4 plus years. While we've experienced excellent organic growth and lower fee capabilities like ETFs and global liquidity, it was not enough to offset the revenue loss higher fee fundamental equity and multi asset outflows. Our overall net revenue yield has declined meaningfully during this time frame, But that decrease has been driven by the shift in our asset mix, not degradation in the yields in our investment strategies. Net revenue yields by investment strategy have been relatively stable within the ranges provided on the slide. The other point that I want to emphasize is that this multi year secular shift in client preferences has been increasingly captured in our results.

Speaker 3

Our portfolio is better diversified today than 4 years ago and our concentration risk and higher fee fundamental equities and multi asset products has been reduced. These dynamics are challenging to manage through as they occur, should pretend well for future revenue growth and marginal profitability improvement independent of market gains. Further, we now have a more diversified business mix, which better positions the firm to navigate various market cycles, events and shifting client demand. Turning to Slide 8. Net revenue of $1,050,000,000 in the 4th quarter $62,000,000 lower than the Q4 of 2022 $52,000,000 lower than the Q3 of 2023.

Speaker 3

The decline from last year was due largely to a $35,000,000 decline in performance fees and the shift in our asset mix that was just discussed. The decline in performance fees was mainly driven by lower fees generated from real estate related and other private markets activity. The decline from the prior quarter was primarily due to incremental asset mix shift and lower average assets under management, partially offset by higher performance fees in the quarter. Total adjusted operating expenses in the 4th quarter were $771,000,000 relatively unchanged from the Q4 of last year. Included in Q4 2023 are $22,000,000 related to organizational change expenses and $12,000,000 of from related implementation expenses.

Speaker 3

Adjusting for these items, 4th quarter expenses were $32,000,000 lower than the Q4 of 2022. Total adjusted operating expenses were $18,000,000 lower than the 3rd quarter. More specifically looking at employee that has been impacted by the organizational change expenses. Compensation was $26,000,000 lower in the 4th quarter, which includes $11,000,000 in expense savings related to the organizational changes that I'll provide more detail on shortly. Marketing expenses of $28,000,000 or $6,000,000 lower than the Q4 of 2022, as we continue to tightly manage discretionary spend given the ongoing challenging revenue environment.

Speaker 3

Property office and technology expenses were flat last year and $4,000,000 higher than last quarter. G and A was $19,000,000 higher than last quarter as we typically see higher G and A in the 4th quarter. We also had $12,000,000 in spending related to our Alpha platform implementation, higher than the $8,000,000 incurred in the 3rd quarter due to incremental implementation costs in the 4th quarter. Going forward, we expect one time implement cost to be approximately $10,000,000 per quarter in 2024 with some fluctuation quarter to quarter. We will continue to update our progress on the implementation and related costs as we move forward.

Speaker 3

Now moving to Slide 9. We realized $11,000,000 in expense savings in the 4th quarter related to the organizational changes. On an annualized basis, we have achieved $44,000,000 or nearly 90% of the $50,000,000 in expense savings we expect to realize in 2024. We expect to realize the remaining $6,000,000 in the Q1. We're not expecting any further significant restructuring costs associated with these efforts.

Speaker 3

The full benefits from our simplification efforts will be seen over time as we generate revenue growth and margin recovery. As we've discussed, we manage variable compensation to a full year 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 the range in periods of revenue decline. At current AUM levels, we would expect the ratio to be at or slightly above the higher end of this range for 2024. Seasonally, we see approximately $25,000,000 in higher compensation expenses related to payroll tax and other benefit resets in the Q1.

Speaker 3

And as a result, we would expect the ratio will exceed 42% during the first half of twenty twenty four. Moving to Slide 10, adjusted operating income was $275,000,000 in the 4th quarter, which included the costs related to organizational changes. Adjusted operating margin was 26.3 percent for the 4th quarter. Excluding the costs related to organizational changes, 4th quarter operating margin would have been 2 10 basis points higher. Earnings per share was $0.47 in the 4th quarter.

Speaker 3

Excluding the costs related to organizational changes, 4th quarter earnings per share would have been 0 point to 9.9% in the 4th quarter from 23.6% last quarter. The decrease was primarily due to a discrete tax benefit related to the resolution of certain tax matters, favorable tax treatment related to a gain on sale of certain Hong Kong pension sponsorship rights and the favorable impact of a change in mix of income across tax rate to be between 23% 25% for the Q1 of 2024. The actual effective rate can vary due to the impact of non recurring items on pre tax income and discrete tax items. I'll conclude on Slide 11. The stated priority for us is building balance sheet strength.

Speaker 3

This quarter, our cash balance was $1,500,000,000 and we ended the year with nothing drawn on our credit facility. We have lowered our net debt significantly and it now stands near 0. We have a $600,000,000 senior note maturing on January 30, and we are in position to redeem the note at maturity. We estimate we'll have approximately $500,000,000 in excess cash and we'll draw approximately $100,000,000 on our credit facility to fully redeem the note. The Q1 is a seasonally high cash used this quarter, we do expect to have a balance on the credit facility at quarter end, which will pay down as we move through the second and third quarters and reach our goal of 0 net debt.

Speaker 3

We also hope to begin a more regular stock buyback program as we move towards this goal. To conclude, the resiliency of our firm's net flow performance in a difficult market organic growth is evident again this quarter and we're 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 and we have the right strategic positioning to do so. And with that, I'll ask the operator to open up the line for Q and A.

Operator

Thank you. And our first question comes from Glenn Schorr with Evercore. Your line is open.

Speaker 4

Hi, thank you. Curt, you said something very intriguing towards the beginning. You said you expect clients to move out of cash into longer duration fixed income at some point. And I think a lot of us have been Waiting on that, you saw some fixed income flows, but a lot more money market outflows last couple of quarters. I'm curious where are the money market outflows going in general?

Speaker 4

And how do we determine the cash sitting on the sidelines is actually waiting to move out versus it's just Treasuries and money markets that used to sit in cash, meaning is it just another cash alternative or is it actually waiting? I hope that makes sense.

Speaker 2

Yes, it does. Let me start and Allison can pick up. It's a little of both. So some of the money market flows out of Invesco and our business is largely corporate treasurers. They're buying T Bills directly.

Speaker 2

So I wouldn't look at that as the great indicator from Invesco. As we're out talking to clients and we're looking at Where flows are going, early signs have been clearly into ETFs, which might be telling you a little bit about conviction and maybe the lack there of full conviction. And then on the fixed income side, active and otherwise, starting to move into municipal bonds, in particular, Some investment grade strategies. Europe's picking up a little bit, but I'd say it's pretty early days on assets moving off the sidelines.

Speaker 3

And maybe just to put a finer point on our money market products, in particular, our liquidity Our client base there is about 85% institutional. So when we see fluctuations in some of those balances, it is to Andrew's point really corporate treasurers Taking advantage of the increase in T bill rates and moving out of money markets in the T bill, it is only about 15% retail, which is where and course, on the institutional side, they're just limited in where they're going to go. So they're going to stay and cash yielding kind of products there. The retail side is smaller component of our client base there.

Speaker 4

Makes sense. So in that revenue yield slide, You showed us the come down and you talked about not degradation of product pricing, but just mix shift. With the markets up so much, Average assets, ending assets way above average assets. How much of that revenue yield pickup Could we see coming back the other way in the Q1? I'm not sure you've gone through that math yet, but obviously markets are up a bunch.

Speaker 3

Yes. No, they are for sure. And I mean the exit rate for net revenue yield will be, it was modestly higher coming into the Q1. I mean The delay, frankly, in the market pickup in the 4th quarter didn't do much for revenue, as you could see, But it does portend well for just the average AUM mix coming into the quarter, and it does give us a net revenue yield coming into the quarter that's modestly higher than the exit, call it 2 tenths of a basis point there, so very modestly higher. I think within those asset categories that we showed on that page, it is it's really the mix within there as well as the mix between those categories.

Speaker 3

One of the elements of our revenue performance in the quarter was even in our net revenue yield within our passive capabilities. And you saw our net revenue yield and passive decline about a basis point inside of the quarter as well, which really speaks to where client demand was in the quarter, largely for some of our lower fee products there like the Q2QM and the S and P 500 equal weight product that I noted earlier. So we do continue to see strong client demand. It's hard to predict where the client demand will be in the quarter and that has a huge impact on our revenue. All things being equal though the market run has been helpful.

Speaker 2

The other thing I'd add and you're seeing it as well, I'm sure the broadening out of the markets and as Allison mentioned earlier, the greater diversification in our overall portfolio of client assets puts us in a position under any kind of market environment where we think we're relatively well positioned.

Speaker 4

All right. Thanks. Thanks for all that. Appreciate it.

Speaker 3

Thanks, Glenn.

Speaker 5

Thank you.

Operator

And our question comes from Daniel Fanning with Jefferies. Your line is open.

Speaker 6

Thanks. Good morning. Wanted to follow-up on Slide 7 and talk a bit more about the alternatives and private markets dynamics in the quarter and more prospectively how you were thinking about the potential growth in that business considering the broader alts bucket has been seeing outflows for you, but yet I think there's some underlying trends. I think you've talked about seeing some inflows, Curious to get a little bit more of an update.

Speaker 3

So let me start with just maybe an update on the So I think we noted modest inflows on the direct real estate side, so about $400,000,000 And again, that's really Divestitures net of acquisitions. And so we continue to see some modest improvement, which is Nice to see just given some of the challenges on the real estate market. On the private credit side, we saw about $1,200,000,000 of inflows. Again, our business there is only about $42,000,000,000 so relatively nice pickup inflows there. That was primarily driven by bank loans and CLOs.

Speaker 3

It's a modest inflows in their distressed credit capabilities as well. That's all on the private side and that was largely state and global asset allocation that I noted on the call. So you've got a bit of a mix in our alternative strategies, again, with Good gains on the private side being offset by some outflows on the public alternative strategies.

Speaker 2

And as we look forward, we continue to view private market alternatives as one of our best opportunities. As Allison said, on the credit side, about $45,000,000,000 in assets and on the Private real estate side, another $70,000,000,000 in assets and seeing some moderation of flows and some positive gains, as Allison mentioned, We're good for us to see in this environment. I think if we take the long term view, what we've been very focused on over the last several years is diversifying from a largely institutional base into a wealth management base. And the issuance of our non traded REIT, real estate credit strategies and other sort of distressed and direct lending strategies, both into institutional, but probably more impactfully into retail, we continue to see as a great long term opportunity for us.

Speaker 6

Understood. And then just switching to expenses, I understand some of your comments, but maybe, Allison, if you could talk to, is the State Street project, is the goal to ultimately reduce expenses or just flat, get flatter growth going forward. So just want to understand the components post the $10,000,000 a quarter you mentioned for this year. And then underneath that, how we should think about the general growth rate of kind of G and A and other expense items for the year in terms of inflation or other factors?

Speaker 3

Let me start with Alpha. And if you think back around the implementation costs the last few quarters, they have been growing. So we it was $7,000,000 in the 2nd quarter, dollars 8,000,000 in the 3rd quarter, dollars 12,000,000 in this most recent quarter. And then our guide was to roughly $10,000,000 a quarter Per quarter throughout 2024, there will be fluctuations. It is not precise.

Speaker 3

We are deep into implementation. And so there is Going to be some variability and some uncertainty quarter to quarter, but I think the $10,000,000 expectation is reasonable with what we know today. The expectation is we are building to a peak and then there are expenses that will be coming out the other side. So And that was 2025 and beyond. So we're not ready to give exact guidance on that yet.

Speaker 3

But it isn't just a flattening out, it is building to a peak and then there are some expenses that start to come back down as implementation costs fade and there are some The ability to continue to rationalize and streamline some of our systems, which will lead to some expense rationalization on the other side. And as a reminder, that is as much about the whole effort is as much about really eliminating the duplicate systems and some of the heavily customized processes that we have today and really more moving towards a single operating model. So our operations and accelerate some of what we can deliver from a client experience perspective. I think you mentioned some of the other expense line items, maybe just let me touch on some of those. Note that the G and A was seasonally high in the 4th quarter, and so I would expect that to be a bit lower in the first quarter.

Speaker 3

From a compensation expense perspective, as we noted, there's always seasonality in the Q1. We typically expect to see compensation expense about $25,000,000 higher in the Q1 for taxes, FICA and the like. But we also expect to fully realize our $50,000,000 in expense savings. So there's another $6,000,000 that we expect will be realized in the Q1. All of that is, of course, assuming flat markets at twelvethirty one, etcetera, etcetera.

Speaker 3

But hopefully that gives you some color as it relates to the primary driver of alpha, seasonality of G and A coming back down, seasonality and compensation expense going up modestly, but that's offset by the realization of our expense savings.

Speaker 6

Great. Thank you.

Operator

Thank you. Our next question comes from Ken Worthington with JPMorgan. Your line is open.

Speaker 7

Hi. Thanks for taking my question. I wanted to follow-up on margins on Slide 10. Excluding the unusual items, margins in 4Q 'twenty three We're the lowest level on the page. Can you give us some color as to how business mix is impacting margins?

Speaker 7

To what extent is margin pressure being impacted by growth of lower fees, lower margin businesses and slower or negative growth and higher margin, higher fee businesses. And I know it used to be some of the non U. S. Businesses were the highest margin. At this point, can you kind of call out what are your highest margin and lowest margin businesses?

Speaker 3

Sure. Let me take a stab at that. So yes, you are correct. The 4th quarter adding back severance expenses would be our lowest quarter. And so what is impacting that?

Speaker 3

Certainly, it's business mix. Before I go to business mix, I will also note from an underlying expense base standpoint. Keep in mind for all the years prior to the last three quarters on this chart, We had TIR as a line item and there was a significant amount of our expense base that was in TIR. And so our expense base has been fully loaded for the last three quarters, inclusive of all these alpha implementation costs. So that is part of the pressure on margins, although it is not the whole The business mix story and the degradation in revenue is absolutely part of the story as well.

Speaker 3

Business mix is a big driver of it. As you continue to see the shift in our business mix as we highlighted on page 7, from fundamental equities into some of our lower fee capabilities including ETFs and index, even global liquidity to some extent as well. And within that, as I noted, Even within those passive capabilities, you see some business mix pressure just in the most recent couple of quarters with the strong demand for products like the S and P 500 equal weight, the QQQM as opposed to commodity ETFs, bank loans and some of the other higher fee capabilities that would be within that asset category. So it is business mix among the categories and within the categories. In terms of margins, margins sort of by region are relatively consistent.

Speaker 3

I think it's worth noting, in China, we've often pointed to our margins there, which you can look at and See really as you add back the joint venture there are higher than the firm average. We they are modestly lower now With the implementation of the regulatory mandated fee cuts in China, which we have noted, that The margins there are still stronger than the firm average and still very attractive, very positive in our positioning there and our growth rate there. We're very optimistic there, but modestly lower than it would have been previously. And the Q4 was our 1st full quarter of the realization of those Because which has an overall impact of about $10,000,000 per quarter in revenue.

Speaker 7

Great. Okay. Thank you very much.

Speaker 3

Thank you, Ken.

Operator

Thank you. The next question comes from Bill Katz with TD Cowen. Your line is open.

Speaker 8

Okay. Thank you very much for taking the questions this morning. Maybe to mix up a little bit, just wondering if you could just sort of expand a little bit on where you stand with your relationship with MassMutual And the opportunity to potentially accelerate growth either into the alternative segment or perhaps even on building out some retail democratization products?

Speaker 2

Hey, Bill. Thanks for the question. Maybe just to refresh everyone's memory, MassMutual, in addition Owning our common and being a preferred shareholder has about $12,000,000,000 invested with us across broker dealer annuity sub advised general account capabilities. One of the most important parts of that has been The $3,000,000,000 they have invested into the seeding and co investment of many of our private market strategies, in particular, the ones we've been bringing to Wealth Management over the last several years. And so it's a very, very important partner in that regard and that's a multiple of 3 times what we carry on our own balance sheet around those sorts of strategies.

Speaker 2

So opportunities to continue to develop the relationship there are something we're focused on, although a lot of that growth has come already. I think the second area is just taking our relationship further where it makes sense on their insurance platform with things like our alternative strategies, models, SMAs and ETFs, and then select fixed income and equity products. And We're well placed there, but we're continuing to look for opportunities and ways to grow effectively. So it's an important partnership on many levels.

Speaker 8

Maybe just a follow-up on capital. So it sounds like you're in a much better spot just in terms of reengaging on buyback. Allison, are you expecting to be able to buy back stock In concert with carrying the line of credit? Or do you need to get on the other side of that before you'd restart buyback? And then more broadly, what kind of payout rate we be thinking about now that your earnings are more diversified and the earnings power is higher?

Speaker 3

All good questions. And I'd The short answer is yes, we'd like to be on the other side of we're very committed to getting our net debt down to 0. And that has been a stated goal of ours and Something we've been working closely in concert with our Board on achieving a stronger balance sheet. And so as we approach that, And we look forward to having conversations with the Board and evaluating the opportunity to reengage and some more regular share buybacks. I think our payout ratio would stay kind of modestly in that 40% to 60% range as it has been in the past.

Speaker 3

I think that's a reasonable range for us to operating as we think about both modestly increasing the common dividend each year as well as buying back stock. But we are a couple of quarters away from where we want to be there just given the seasonality of cash needs that are before us over the next few months. We are within sight for the first time in a long time and we're really pleased about the progress we're making with the balance sheet, just the growth in cash and where the debt is heading. So it does feel like for the first time in a long time, we're kind of getting back into a position where we can be a lot more opportunistic than we've been able to be in the last few years.

Speaker 8

Thank you.

Operator

Thank you. Our next question comes from Mike Brown with KBW. Your line is open.

Speaker 9

Great. Thank you for taking my questions. Maybe just a quick follow-up on that last question on capital allocation and the buybacks. As you get further along on your Goals on the balance sheet. Do you expect M and A to kind of come back into the equation, Not necessarily large M and A, but perhaps maybe more on the bolt on side as you think about adding capabilities and perhaps altering the strategic asset mix as you start to look out to say 2025?

Speaker 2

Yes. Hey, it's Andrew. At the moment, the focus is Very much on the organic side, the priorities around the balance sheet and the uses of cash as Allison described stay true. As we have described in the past, the place where we see opportunity for us to add on in time For the right situation, opportunity would likely be in that private market space as extensions to the things that We already believe we do well today and could continue to grow both organically and inorganically and that would be in the real asset space and in the private credit areas. But for now, very focused on the work we have to do organically.

Speaker 9

Okay, great. That's good to hear. And then maybe if I just change gears to the developing markets fund, you had flagged performance has improved there. That product is still outflowing. But assuming that performance can continue to improve, I guess my question is, what causes client interest to really come back To this fund, just given that it seems like investor sentiment and interest in EM Strategies is just kind of remains tepid.

Speaker 9

Is this going to be more about a kind of lower redemption story, any kind of narrowing on the redemptions or can that eventually translate to more of a growth story?

Speaker 2

Yes. Look, I think you outlined the question well. It's probably a bit of both. I mean, the first thing is continue to strengthen the investment performance there. And we're a known as you know, a known emerging markets manager, well known in the Spellet space, well placed in the wealth management channels.

Speaker 2

So the things we can control are investment quality. What we have started to see a bit is a redemption picture improve and that's sort of early sign. I think you're not really going to see a material uptick in gross sales until you see more demand come back in the marketplace from investors. And We've been waiting for that moment and we haven't seen it difficult to predict, but it's an important category as is More broadly, what we're doing in international equities and global equities where those categories as well have been under some pressure. Our performance has improved materially, redemption rates declining, but same comment on the gross sales side.

Speaker 9

Okay. Thank you, Andrew.

Operator

Thank you. And our next question comes from Brennan Hawken with UBS. Your line is open.

Speaker 8

Good morning. Thanks for taking my questions. Allison, appreciate the color on 1Q expense. But when we're thinking about Full year 2024, is the right base by which to grow off of that 3,600,000,000 that's adjusted for some of the charges? And how should we think about are you able to keep that flat?

Speaker 8

Or is that going to be having some pressure here through 2024?

Speaker 3

Good morning, Brendan. Good question. Yes. If you look at the expense base in 2023 adjusted for the severance and retirement expenses that we incurred in 2023, which We aren't anticipating at this point more of in 2024. When I look at our 2024 expectations relative to Where the markets are, where we ended the year in AUM, the usual caveat of all things being equal, I would say we expect the expense base to be flat to 23% to just relatively very, very modestly perhaps higher, but I'm going to call it just flat plus NAV.

Speaker 3

And that importantly in 'twenty three excuse me, in 'twenty four is inclusive of a full year of alpha, all four quarters, No TIR. So it is a 4 quarter no TIR year as compared to a 3 quarter year last year, inclusive of some of the inflationary pressures, merit increases and the like. So, we did a lot of work on our expense base last year. We've got A lot going on as it relates to output implementation costs and the $10,000,000 per quarter guide we put out there. All those things taken into account, we're expecting relatively flat this year.

Speaker 8

Okay. Thanks for that color. I appreciate it.

Speaker 3

And I'll note with that, with some of where we are in the markets, some of what we've seen in terms of appreciation and average AUM exiting the Q4 and coming into this year, we are optimistic that we start to see modest improvement in

Speaker 8

Thanks for taking my question.

Speaker 3

Thanks, Brendon.

Operator

And our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Speaker 5

Great. Thanks. Good morning, folks. Thanks for taking the questions. Let me just switch the conversation to the Q2 franchise.

Speaker 5

I guess as you obviously, that's a non fee earning products, but as you think about monetizing that whole franchise, can you talk about How you think you might be able to monetize that asset base? I think obviously, QQM is I think $20,000,000,000 in AUM and So the asset management revenue yield, is that just the expense ratio? And then how do you think about potentially Are there opportunities to effectively try to cannibalize the QQ in favor of developing a more sort of a fee bearing, tripleQ franchise at the Invesco level?

Speaker 3

Great questions. And precisely the topic we spend a lot of time talking about, thinking about and really working on as a team. That The QQQ is a tremendous asset for us and the brand awareness that that creates can't be underestimated. The opportunity that creates for us in terms of the marketing budget that comes from that, all of our sort of ad campaigns, the brand work we do is really fueled, by the QQQ. Q2.

Speaker 3

And so it is a tremendous asset to us. It is certainly unique in nature and that's the value it creates. So we have to be very thoughtful about how do we optimize the value that is created from that capability. The QQQM, as you note, is approaching $20,000,000,000 and has been a cannibalization strategy and a very successful one given it's only about 3 years old and it has grown that quickly. And assuming there is continued demand in the underlying interest in the underlying exposure there, We expect the growth in that capability to continue.

Speaker 3

In terms of the actual net revenue yield from the Published fee rate, it would be about half net of all of the costs there. So it is it would be one of the lower yielding capabilities. Again, part of what we were pointing to in terms of the business mix that is driving some of the pressure on net revenue yield overall. So it's a 2 sided coins, but one that is certainly well positioned to capture client demand.

Speaker 2

Her relationship with the NASDAQ on the queues goes back, celebrating I think its 25th year coming up soon. And very much what Allison was describing, how we've been growing that relationship. In addition to it being a QQQM being an alternative, it's also worth Creating a situation where the traditional Q is really for traders and the QQQM can be more for buy and hold investors. I think it's indicative of what's happening in the ETF industry in general is it's a preferred vehicle now for people that have short term interest and long term interest. And so I think part of our strategy is just indicative of that.

Speaker 2

You should expect to see more of that from us, whether it's passive or active.

Speaker 5

Great. That's great color. And then maybe just a follow on. I think, Allison, you mentioned, of course, you are investing in the business Well, you're sort of reinvesting some of those cost saves. Maybe if you can just talk about the top 2 or 3 areas From an investment management perspective in terms of product that you are investing in to growth.

Speaker 5

You just talked about the Triple Q franchise, maybe you can leave that one out. And I think on private markets, you mentioned that That's an investment area. However, that can also be an area where M and A can play a role. So maybe if there if you can talk about any other Say a couple of areas that you are most excited about in terms of investment dollars that you're putting in and growth Beth, could we go from that?

Speaker 3

Sure. I'd probably point you back to our key capability areas and those being the areas where We've really focused the most on continuing to grow and invest. So, certainly within our ETFs, SMAs, Factor and index there, capabilities, we continue to look at how do we build those capabilities out to really capture the client demand that's there. Private markets, Both for the retail channel and the institutional channel. The institutional product capability really being our legacy capabilities and our strength where we've got a tremendous Amount of history and success and continuing to build those out, invest in those capabilities and position those for client demand, but increasingly so on the retail side.

Speaker 3

And I think as we've talked about before, it's not just seeding and launching the product, it's really building out the distribution capabilities there and working closely with our clients as we expect that shift to be A multi year shift in transformation in the education that's involved there and investing significantly in the education that's involved on that side. I'd also point to China and continuing to invest in our capabilities there. That is a It is self funded and largely speaking as we've discussed before it is a very Attractive business, highly profitable, cash flow positive, but we are able to continue to invest in those capabilities. Your question was primarily around our product and client facing capabilities, but I would also note a lot of what we invest in for the benefit of clients, it's not just the products, but the systems, the client experience, and really streamlining the overall client experience behind The themes there, a lot of our investment goes into our platform, our technology and our capabilities in order to continue to deliver a better client experience.

Speaker 2

And to afford room on our shelf for that, I mean, we've been routinely pruning and closing parts of the product line that We haven't seen demand in and closed several 100 strategies over the last few years. The only other thing I'll point to beyond what Allison covered would be, It's probably less investment capabilities that you'll see extensions on and more how it gets delivered to the market. And so The trend towards vehicles like ETFs and SMAs, and bringing things beyond passive capabilities or fixed income capabilities is something where we're going to continue to seek to lead in.

Speaker 5

Okay, great. That's great color. Thank you.

Operator

Thank you. Our next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Speaker 10

Thanks. Good morning, everyone. My first question is on the 40% to 60% payout target after you reach your goal of 0 net debt later this year. So why not a higher payout target, Because it sounds like MA isn't a big part of the intermediate term strategy.

Speaker 3

Briefable question. I would say, as Andrew said, we do continue to think about the opportunities we have from a bolt on perspective with certain capabilities from an M and A perspective. And given our balance sheet is Returning to a better position, but we want to be in position to continue to build cash as we think about some of those opportunities and making sure we're in position should we find the right bolt on capabilities to be able to execute. So It's a balance of making sure we have the ability to execute on several of those priorities, and it's not going to be all in returning cash to or capital to shareholders.

Speaker 10

Makes sense, Allison. And just as my follow-up, With the $3,000,000,000 in Alt Seed Capital for MassMutual, can you remind us which products the $3,000,000,000 has been invested in? And then to date, how successful has that been? Like, one way to quantify that is how much third party AUM Have you been able to attract around that $3,000,000,000 of initial seed capital from MassMutual?

Speaker 2

Yes. Let me start and then Allison can pick up. Probably the most the 2 most important strategies were the non traded REIT or in REIT strategy where MassMutual was an exist or early seating partner. I don't have the exact percent that they have, but I would say It's still relatively large, although we've been generating a decent amount of volume over time from one of the big wealth platforms in the U. S.

Speaker 2

And then the second one was our real estate debt strategy that we just brought to the wealth management market. That was the other sort of strategically important strategy. But I'll turn it to Allison maybe for more specifics on the numbers you asked about.

Speaker 3

Yes, I would say, look, it's largely their general accountant where they would want to make sure they've got exposure as well across various capability. So I mean, they are invested in everything from Enrate, which we've been public on that strategy to things like Municipals and CLOs and some of our private credit capabilities, It's really kind of the breadth of those types of capabilities where you would see them really both invested.

Speaker 2

And aside from the capital, which is clearly important, I think the signaling and showing up at these wealth management platforms in particular, not with new investment capabilities, but there are new packages that we're putting things together in. And I think that's really critical in terms of credibility that we show up at these platforms with.

Speaker 10

Andrew, thank you.

Operator

Thank you. Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Speaker 5

Hey guys, this is Luke on for Alex. Thanks for taking the question. Appreciate some of the color on expenses and revenues in 2024 and I appreciate that it's not easy to forecast going out so far, but do you have any high level goal post war margins over the longer period into 25, especially as some of the State Street alpha costs come down? Thanks.

Speaker 3

I would say high level goalpost, And this is going to longer term and it's going to take us some time to get there. But getting back into the mid-30s is absolutely our high level kind of goalpost. I hope everybody hears us loud and clear. We are in no way satisfied with where our margins are today and getting them Back on a quarterly basis north of 30 and starting to climb back into the low 30s and mid 30s from there is absolutely the goal over the next handful of years. Our focus coming into 2024 is absolutely around expense discipline.

Speaker 3

We've done a lot of work on our expense base. We've got a lot of headwinds and things we have to make our way through, alpha implementation being the most notable and sizable of that. But despite that, our expectation is to really try to hold our expense base relatively flat. And as you know, and thank you for giving us a little bit of grace on that one that it is hard to predict quarter to quarter, especially with the impact of revenue and markets. So it's really about being very disciplined on everything we can control and we can continue to take expenses out in places where it's not necessary and evaluate opportunities to eliminate those expenses or reinvest them in areas that will help facilitate and fuel further growth.

Speaker 5

Awesome. Thanks for the color. Just for my follow-up, you guys highlighted the plans to continue to shift from institutional to wealth and some of the strategies that you're looking to build on. Do you have any upcoming product launches in the wealth space that you guys are either working on or are free to talk about at this point? Thanks.

Speaker 2

Yes. And look, I think there I'll just speak generally about them because getting specific is difficult. The real estate debt strategy, we were seeing a lot of demand and interest for that and you should expect to see more of that in the market and we to be talking more about that going forward. And then, private credit strategies, whether they're distressed or direct lending, how we can position and factor those into the wealth channels. And just to be clear, this isn't just in the U.

Speaker 2

S, it's in Europe and Asia Pacific as well.

Speaker 1

Operator, we have time for one more question.

Operator

Okay. And our last question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Speaker 11

Good morning. Thanks for squeezing me in here. Just a follow-up question on expenses. I was hoping you could maybe elaborate on some of the steps you guys are taking to drive greater operational efficiency in business, additional steps you might look to take over the next couple of years? And how is the variable nature of the expense base Evolved and how should we think about the sort of sensitivity of expenses if markets are up say in 2024?

Speaker 11

I know you guided to around flattish expenses adjusted for things, But that was assuming flat markets, if markets are up 10%, how do we think about the impact on expenses?

Speaker 3

Thanks, Mike. I would Say, but the relationship of our expense base being about a third variable is still a reasonable relationship to think about as you think about the potential growth in revenue. So I would start with that. Certainly, as we've seen some of the real revenue pressure, It has made it difficult because there is some element of our expense base that's fixed. But I think as we anticipate starting to climb out a revenue perspective, I think the 1 third relationship is still a reasonable expectation.

Speaker 3

In terms of What we will do and how we will continue to think about streamlining, I mean, look, it's a continuation of so much of what we've done and a lot of what I just said, which is We are going to continue to evaluate our expense base everywhere. We're looking at our margins at a granular level and where we can really unlock some costs and evaluate some of what's been done in the past and perhaps where it doesn't need to be done that way in the future. We have been on a multi year effort as it relates to Facilities and rationalization of office space, and I would say I'd call that some usual suspects that you would expect us to be focused on elements like that. That's going to continue. That many years to really make a dent in and we will continue to do things like that.

Speaker 3

But it's broader than that and really thinking about how do we streamline our business, How do we really think about operating more holistically and a lot of the work that started almost a year ago now. I mean, maybe with that, Andrew, if you want to kind of close on some of our thoughts there. Yes.

Speaker 2

And Mike, thanks for the question. Look, the simplification efforts in 2023, we believe were some of the most impactful things that we did that will bear fruit as we go forward here. I think bringing together elements of the investment platform and investment areas, The distribution areas, marketing and product and then allowing our enterprise and operational areas to match off against A much more simplified platform was the goal. I think the areas in investments where we started to bring some things together, It also gives us an opportunity to think about the margins in those businesses and the way that we make money and how to run those strategies and disciplines, not from the investment side, but from the platform side at scale where scale is needed, at quality enhancement where quality enhancements needed, etcetera. And so the simplified organization helps us in those ways.

Speaker 11

Great. Thanks so much.

Speaker 2

So, maybe just to wrap up here in closing, as we enter 2024, hopefully, as you can tell, we feel Well positioned to help clients navigate the impact of the evolving market dynamics and subsequent changes to their portfolios that we expect. I had the pleasure of meeting with many of our clients around the globe this past year and hearing directly from them has assured me that we really are well positioned across a range of outcomes. And when and as the market sentiment improves, we believe this should translate to even greater scale performance and improved profitability. And finally, I'd like to thank my colleagues around the world, the executive leadership team, our Board of Directors for their efforts in 2023. They're focused on our clients and our shareholders and their support for a smooth transition during the year.

Speaker 2

And given the work that we've done to strengthen our ability to anticipate, understand and meet evolving client needs, we're on truly excited for the future of Invesco. So I want to thank everyone for joining the call today. Please continue to reach out to our Investor Relations team for any additional questions. And we appreciate all of your interest in Invesco and look forward to

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Earnings Conference Call
Invesco Q4 2023
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