Invesco Ltd. (IVZ) Earnings Call Transcript & Summary

Welcome, everyone, to the first day of the conference. Before we begin, we are required to make certain disclosures in public appearances about Goldman Sachs' relationship with companies that we discuss. These disclosures can be found on the webcast page for your reference. Now with that, it is my pleasure to welcome Invesco. With us today are the company's CEO, Marty Flanagan; and CFO, Allison Dukes. Invesco is 1 of the most diversified global asset managers in the world with $1.2 trillion in AUM, spanning active, passive and private markets. With insights across the landscape as well as recently working through its large-scale acquisition, we look forward to getting an update from Marty and Allison on investment strategy. Now to begin, Marty has some quick prepared remarks. And then we'll jump into the fireside chat. For those on the webcast, you can enter your questions right there at the bottom of the screen, and we'll try to address them towards the end of the session. So with that, Marty, over to you.

Thanks, Alex, and thanks for having us. It's a pleasure to be here. And as we're all lamenting before we got started, we can't wait to see everybody sometime soon. It feels like next year. But with that, I just want to mention tomorrow we will release November assets under management, and you'll see the fifth month in a row of net long-term flows. We believe, as an organization, we've turned the corner. And all the work we've done over the years to build out the investment capabilities and strengthen our business has really put us in a strong position to deliver for clients and to compete in this ever-evolving industry and deliver organic growth over the long term. Just reflecting on the year, it's really hard to believe that we're about to leave 2020, and I don't think any of us are sad about that. It was a year ago that we were at this conference talking about delivering $500 million of expense savings in our 2020 plans. No one anticipated the pandemic and the pain it's caused to individuals and lives and the economic uncertainty. We, like all of you, immediately turned to prioritizing, taking care of our clients and employees during this period. We meaningfully expanded our ability to engage virtually with clients around the world and rotated to working from home. Again like everybody that is on this call, it was a massive undertaking, but it did enhance our ability to engage with clients and strengthen collaboration within the organization. That might be one of the few positive features of the pandemic that we're all working our way through. As we look forward to next year and beyond, we remain focused on executing long-term strategy. It's intended to further our ability to compete and anticipate and understand and meet client needs while sustaining organic growth. Just a quick update on The Street evaluation. I'm sure we'll talk about it more during the Q&A here. But we kicked it off earlier in the year. We're nearly complete with that work, and we'll continue to make investments in areas where we see sustained opportunity for us. That would include ETFs, China, solutions, alternatives and global equities, in particular, while continuing to optimize our organization to drive greater efficiency and effectiveness. And as we noted on our third quarter earnings call, we expect to achieve a net permanent expense improvement of $200 million by the end of '22 because of this work. And stepping back, the bigger picture, what we see going on in the industry. We have for some time said that the industry is going to consolidate. It's really happening. The pandemic has only advanced the thoughts of consolidation within the industry. The stronger going to get stronger. There's a little question about that. And it's really basic what's happening. Clients around the world are working with fewer money managers. They're demanding more from money managers. And on top of really needing a broad set of investment capabilities, so we can do everything possible to make sure that our clients are successful. While that is also true, we, as an organization, and our competitors need to continue to drive efficiencies across our operating platform, generating scale to meet the needs of clients. We are highly competitive in areas of strong demand, and the majority of our investment capabilities are in areas where we see future growth. And so, again, we feel that we're in a position to deliver for our clients and really confident about our business and determined to deliver high level of value over the long-term for shareholders. So with that, Alex, I'll stop and turn it over to you.

Great. Thanks very much, Marty, and thanks for a quick update on November as well. So maybe we'll start there and talk a little bit about organic growth. So one of the key priorities for Invesco, for you, obviously, has been returning the firm to more sustainable organic growth. We clearly have seen really nice progress on that. I actually remember this time last year at the conference you told us you expect to be in that long-term flow positive for 2020, too. I think there's definitely been some skeptics around that, and you guys have been delivering on that over the last -- certainly the last few months. So there's still some challenging areas, no doubt, but can you discuss key areas that you expect will keep Invesco's overall flows positive. And importantly, can this positive flow ultimately translate into positive organic fee growth and not just AUM growth? How do you think about that?

It's a great question. And we had a high degree of confidence 2020 was going to be a year post-integration with Oppenheimer going to be back in positive growth. And as I say, everybody has a plan until they get punched in the face. And the pandemic clearly did that. The good news is, what you're seeing is we're back on our front foot again. And let me step back and put that fundamental question into context. We have a really strong belief that the way that you're going to continue to grow organically is to have that broad range of capabilities, right, high conviction active, factor, alternative and passive. And you look at that set of capabilities that we have. That is really important, but it's not enough, right? You need to be able to deliver solutions along the way, deliver things like analytics for your clients and thought leadership. That's fundamental to who we are as an organization. You're starting to see that come through just last quarter, and you'll see more of it as we look forward. And it's also important when you look at the clients. So if you look by geography around the world, it's really the strength of the geographic footprint, where you're seeing strength come through. You've seen it by channel now. The institutional channel has been an area of strength. The wealth management channel was most challenged globally during this pandemic period. And during the integration, it is now changing quite dramatically to the positive. And so we're seeing the results come through. With regard to effective fee rate, it's really driven by client demand and asset mix shift. And it's a result of what we're seeing with the breadth of capabilities we have and really where clients are lining their assets for -- to meet their view of how they're going to deliver for their stated outcomes. That said, what you'll see is we do see from that, profitability, you get profitable growth with this mix shift change. And you have to look through to the different channels that you're in, in the fee rates. So effective fee rate doesn't tie all the way to operating income and expansion and growth. And again, we'll continue to demonstrate that in the quarters ahead.

Got it. That's helpful. So let's jump back, I guess, some of the key drivers of some of the key initiatives you guys talked about. So ETFs, obviously, being 1 of them. Invesco is one of the largest global ETF platforms on a significant scale. You've made a few acquisitions in that area over the years. Excluding the Qs, though, when you look at the organic growth, it's been sort of uneven over the years. So maybe talk a little bit about your strategy to drive more consistency and higher level of flows within ETF franchise. Are there product capabilities or pricing adjustments do you feel like you still need to make in order to sort of accelerate overall revenue growth here and really, importantly, the consistency of that growth?

Yes. Look, it is fundamental to our strategy and it's fundamental to what clients are looking for going forward, not just the capabilities within the ETF, which, for us, it's largely been focused on factors away from the Qs. And it's extending into the institutional market for us, and I'll spend a minute on that. So it really has been a period of expanding the capabilities that we have. Our first foray was into factor ETFs with PowerShares and really a focus on the U.S. wealth management channel. The extension was into the Qs with the relationship with NASDAQ. And then, more recently, it was into EMEA and then expanding our fixed income capabilities, largely around the BulletShares. And so -- and self-indexing. And let me -- I'll come back to that in a second. So it really was building up the breadth of this platform and most recently expanding the Q suite. So we think we are now in a place where the breadth is quite strong. We continue to see opportunities in fixed income as an area where we have an opportunity to probably move forward with some capabilities. ESG is another area. But again, we're in a position of growth in those areas right now. The side benefit of this was the self-indexing capability that came along in the last couple of years. It's been expanded and has allowed us to get into the indexing business in a much stronger way, which is really supportive of our solutions business. So overall, we think we've got the ETF platform in a position to continue to accelerate growth, and you saw that last quarter. It was the best quarter of flows that we've had since we've been in the ETF business, and we anticipate continued strength as we look ahead.

Great. Let's talk a little bit about another important channel where we're seeing meaningful progress from you guys recently, which is institutional. And Allison, this was probably for you, but Invesco has seen significant institutional momentum, as I mentioned, a pretty robust pipeline. It's over $30 billion at the end of last quarter, I believe. Can you talk a little bit about how the funding of that pipeline progressed since quarter end? Which strategies are resonating most and how can the firm sort of leverage recent momentum to drive a greater uptake in some of the higher fee products within the institutional channel?

Happy to. I'll say real kind of color on the fourth quarter pipeline for January. But what I can tell you is the pipeline remains robust. You've seen that throughout 2020. And the funding of that pipeline, I think you really start to see the pull-through and the demonstration of the strength of that pipeline in the third quarter where about $8 billion of net inflows in the third quarter was from the institutional channel. And of that, about 2/3 was funded from the pipeline and about 1/3 from existing client augmentation. So it's really a function of both the pipeline, but we've got that plan augmentation from existing clients. That's really there to demonstrate the strength and the health of our flows at this point. The pipeline is fairly well diversified across geographies. We see a little over 1/3 of the pipeline coming from the U.K., about 15% from Asia Pacific and around 40% from the United States, and it's really diversified across asset classes as well. One, I think, real interesting point around it. We've highlighted this for the last couple of quarters is that our solutions capability is really driving a lot of the pipeline. About half of the pipeline is coming from those solutions capabilities. And that's really a process to determine client needs and really using analytics, customized outcomes for our clients. And it's the demonstration of that strength that's building the pipeline and the pull-through. I think Marty mentioned, we're seeing a lot of client demand for indexing capabilities within these institutional mandates, and that creates a barbell to some of our alternatives and other allocations. And those indexing mandates are at a little bit of a lower fee, but they're barbell, again, with some of the higher fee capabilities. And so, overall, the institutional pipeline -- while the fee rate is a little bit lower than the average firm fee rate, it's the volume that's creating that profitability overall and kind of back to Marty's comments earlier is what's driving that volume and that scale across our platform. We're really starting to see the profitable growth.

Great. Let's talk a little bit more about the retail channel. Obviously, that's the other side of the coin that's been perhaps a little bit more challenging for you guys and the industry as a whole, particularly in the U.S. equities. Can you talk us through what are you working on to stabilize flows in this corner of the market? And importantly, as you think about investing in some of the growth areas, how do you balance the investment spend into some of those areas versus supporting this U.S. kind of equity retail part of the business, which is still considerable portion of your revenues?

Yes. A really important question, and as you say, incredibly focused on it. Look, we made a determination as a firm, if you look at the size of the assets around the world, the largest pool of assets in the world is U.S. wealth management channel. And we made a determination that we need to win in that channel. And to win in that channel, you need scale in capabilities, you need scale to be relevant to clients and a very strong range of strong performing products. When you look at it post Oppenheimer, I feel very strong that our distribution capabilities are really talented people, doing the right things, making all the right decisions as we move much more to data analytics to support the business. But the reality, the drag has been on -- as you're pointing out, some of the equity capabilities that were underperforming in -- out of favor and that has been a headwind. We're absolutely focused on that, absolutely, as an organization. And I think you also have to look at, for us, if you look at where our assets were. They're in large pools, so I think U.S. equities, global equities, international equities, emerging markets. From an industry point of view, if you look more recently, those have been the areas where there've been just outflows within the industry. So it's hard to fight that headwind. It's a reality, not an excuse. But again, I feel we have the right capabilities, the right talent, and we look at it as an area of important growth as we look forward.

Great. Look, another important theme in this space over the last couple of years has clearly been ESG. Why don't we spend a couple of minutes on that? I'm curious how is Invesco differentiating its strategies in the marketplace when it comes to ESG investment?

Yes. So for any skeptic in the United States, ESG is real. It's everywhere we go. Every client we talk to around the world, ESG is a part of the conversation. Where it is most advanced in execution is really in the U.K. and on the continent. If you do not have ESG capabilities, you are not invited to the party. So we're in a multi-phase focus of what are we doing with ESG. So within the investment teams, it is a focus on inclusion within our investment strategies. Some of the strategies are already ESG inclusion and competitive. A number of the equity capabilities in the U.K., on the continent, fixed income, real estate. And so again, we're in an area where we're advancing that very importantly. Our goal is to get through all of the investment teams with inclusion. What we think is somewhat unique from our perspective is ESG inclusion is driven by our investment teams. We have a central resource that -- of ESG experts, but they are advisers to the team to help ensure that they can get to the right answer for inclusion within their investment capability. The other thing I'd say, it's really been a focus on the products that we're offering in ESG. We have, I'd say, a reasonable set of specific products for ESG, but it's an area that we continue to look for opportunities to expand that for our clients. And then finally, it's really around thought leadership and the like. And again, that's an area where we continue to focus, and we'll continue to have our thoughts be made in the marketplace.

Great. Let's shift gears a little bit and talk about, I guess, some of the hot topics in the space recently, which has clearly been the deal activity and M&A. Now since Trian's investor took a stake in the stock, and obviously, you guys added Nelson Peltz and Ed Garden to the Board. Clearly, there's been increased speculation around further M&A. So I think it might be helpful for listeners and investors just to walk through Invesco's current acquisition philosophy and financial capacity if a compelling opportunity does come around.

Yes. So the good news Ed and Nelson, myself, the management team and the Board, have the exact philosophy on where we think the industry is going. It's consistent with the comments that I just made, right? You're going to see emerge over the next year a number of firms that will just continue to get stronger and be more impactful than -- and sort of start to leave the crowd. That's an absolute focus for us as an organization. When you step back and then put the overlay of what M&A is, what's our philosophy, it hasn't changed, right? It really needs to be in areas that are strategic. They need to be differentiated, really adding strength through the organization. It has to be in areas where there's client demand, and there really has to be a cultural alignment. And if you don't have those components, you will not be successful if you acquire an organization. As we all know, combinations are difficult just by themselves. And if they do not meet that criteria, they will not be successful. So we will continue to stay dedicated to that as an organization.

Yes. And just in terms of capacity, in terms of if something did come around, that was interesting, how do we think about the financial aspect of what it...

Again, it will be part of the formula of if a strategic makes a difference, it needs to drive -- hit the economic hurdles that any shareholder would expect. And needless to say, that will be an important part of the formula. And the management team and the Board are very much aligned on that.

Got it. Great. Let's shift gears a little bit and talk about just general client allocation trends for a second. Look, needless to say, 2020, obviously has been an incredibly volatile year. Equity markets are now near all-time highs, rates are still near all-time lows, but we are seeing prospects of an economic recovery underway for '21. What are the key client asset allocation trends just broadly are you seeing with respect to their outlook into '21 that could impact industry flows for the next 12 to 18 months?

Yes. So needless to say, I think what we all saw was risk off in an incredible way in the beginning of the year to a level that no one anticipated again with the pandemic. So the initial movements were -- it was asking no questions, just move. And so lots of movement into short duration cash type products. That started to change as you -- as greater confidence started to emerge. But it was in the cash, out of equities, out of credit during that period of time. And it continued to be heavy flows in the fixed income, and we continue to see that. Also, what we're starting to see more recently is people starting to take advantage of getting more confidence in the outlook. So we are starting to see RFPs around some of the emerging markets, international capabilities. I don't want to say it's -- everybody is running that way, but that's a positive sign, I'd say, from people developing confidence in area where we've been very busy, has really been and Allison just mentioned this with the institutional business, much more work around building solutions for a number of our clients through the analytics work. And then, quite frankly, some combination of multi-asset capabilities as they're trying to get the right balance for the portfolios that they're trying to create for meeting the goals that they have. So I don't want to say that around the world, everybody is looking to risk on back into equities, but there's a greater sense of that emerging, and we are having some of those conversations.

Great. Well, this is actually a great segue to talk a little bit about more of a financial aspects of the model and kind of how it all comes together within Invesco. So Allison, a couple of questions for you here. So one, why don't we start with fee rates first. I guess, excluding performance fees, Invesco's net revenue yield in the third quarter was about 36 basis points, obviously, down from the prior quarter, but the vast majority of the decline was really driven by the rally of non e-paying AUM, which is really the Qs. Now presumably, the move in the Qs will put a little bit of incremental pressure on the fee rate again, but there should be some offsets with higher market, et cetera. So putting it all together, can you help us maybe frame what you expect for Q4 revenue yield? And more importantly, how it's sort of trending, excluding the Qs, because that does create a lot of noise from our revenue perspective?

Sure. So yes, as you noted, in the third quarter, net revenue yield was down about 8/10 of basis point. And of that -- 75% of that was driven by the Qs. And so it is -- it was meaningful. And also, it's not necessarily a bad thing. I think Qs really provide significant marketing benefits to us. They drive brand awareness. They really increase our overall footprint, our leadership and our relevance in the ETF market. The remaining driver of that decline of the 8/10 of basis point was really product mix shift. And again, that just reflects client preference. As clients continue to rotate out of some of the higher-yielding equity, fixed income alternatives products and into some of our passive AUM, you just see some mix shift and some modest pressure, and I would call it very modest overall on net revenue yield. At the same time, we look at the flows and the improvement we see is real evidence of the strength of the platform, the diversification that we have and the ability to serve our clients across that diversified platform. As I think about net revenue yield and think about the fourth quarter, I would also point to operating income and margins, and we've talked about that before. But even in a quarter where we might have downward pressure, and it's modest, but if we have downward pressure on that revenue yield, we also look at operating income and those operating margins because our objective is to really drive that profitable growth and make sure we're managing the expense base to reflect the top line revenue that we have and really capture the overall profitability of our broader complex.

Great. Well, speaking of profitability, maybe we'll talk a little bit about expenses. So again, on the last quarter's call, you announced plans to reposition the business with an emphasis on reinvesting into some of that faster growth areas like we talked earlier on today, which should result in $200 million in net savings for the end of '22. You guys expect $150 million of that to come in, in '21. Can you help -- can you, I guess, update us on what's been done already? What's on your to-do list over the next 6 months? And how do you sort of ensure that this cost plan does not result in additional AUM attrition?

Sure. So as we noted, really, as we kind of gave a preview around this back in July and then a little more color in October, this cost program cuts across 4 different areas. It's really looking at our organizational model. And so that impacts compensation expense, obviously. Our real estate footprint, our management of third-party spend and discretionary expenses and then our tech and operations efficiency. As we talked about back in October, we expect about 50% to 60% of that net $200 million to come through compensation expense. And that's really through a mix of realigning our workforce to support some of those key areas of growth that we've already talked about and also repositioning some of our workforce to lower-cost locations. In terms of what we expect with any AUM attrition? And what impact could that have? The client-facing impacts of those were all announced and executed in the third quarter. We -- it impacted about $26 billion of AUM. So those impacts are well-known by clients in the marketplace, and, frankly, digested at this point. We've had very little, if any, feedback. So I really don't expect any AUM attrition from that. The balance of the non-client-facing impacts, those are ongoing, and we do expect about 75% or so of the compensation related savings to hit in 2021. So we are in the process of realizing -- or starting to realize a significant amount of those savings as we roll into the first quarter. In terms of what's left on our to-do list, we are -- the review of our real estate footprints ongoing. We are, like many, looking across our real estate footprint where we have opportunities, and we anticipate continuing to make those decisions as well as a lot of decisions around third-party spend and tech and ops efficiency. So we start to transition away from the organizational model and really start to focus on 2021, on the other elements of this cost program.

Great. This might fall a little bit outside of the cost program for you guys, but I want to spend a minute on some of the structural expense changes that might happen in the business, in all of our businesses, really on the back of this year and everything that we've learned. Now in the expense bridge that you provided on the last call, you talked about 2020 expenses being positively impacted by, I think, $134 million, again, largely due to COVID environment, et cetera. How much of this is likely to normalize do you think in '21? And as we talked about earlier, maybe anybody's guess whether or not we're going to be doing this live next year. But if you were to take your best guess, how much of that do you expect to come back into run rate? But more importantly, do you think some of these savings could be more permanently crystallized? So in a way, in addition to the $200 million that you guys talked about, it doesn't sound like $134 million is fully in that number. So is there a way to kind of build around that?

Sure. I mean, hardest question of the day in a lot of ways. So of that $134 million, first, we've got some of our Q1 seasonality and favorable expenses and the payroll taxes. So you've got to add that back, that doesn't go away. So let's call it, $110 million, $115 million of expenses in 2020 that were avoided. So around marketing, travel, G&A expenses. So of that $110 million, $115 million, what would we perhaps expect in a normalized environment. And I think there are really 2 assumptions we have to make to try to answer that. One is when we return to a normal environment. The second is what does a normal environment look like. On the question of when, again, hardest question of the day, but it's all vaccine dependent. Look, no travel in Q1. Maybe in Europe, we start to see some domestic travel in Q2, I don't know. And perhaps in Q3, we start to see domestic travel in other places. So I think in the second half of the year, maybe some travel will be back there. Question of what does normal look like? Do we all rush back to in-person engagement? Or do we take advantage of this digital adoption we've become so accustomed to? And I think that's a really interesting question. I guess -- and it's a pure swag, but I'd say we might only travel about 75% of what we used to, even in a fully safe COVID-free environment. We may not ever get back to 100%. I think we've learned other ways of doing business together.

Right. Makes sense. Okay. Let's talk a little about the balance sheet and capital management. So in the past, you talked about the need to rebuild corporate cash back to about $1 billion in excess of sort of regulatory minimum, which I believe implies something in the $650 million range or so of sort of incremental cash that you continue to build up here. In addition, you still have the forward settlement, I think it's $270 million coming up in early '21. And I don't know if any cash related charges on the back of this reposition. So when you take all of that into account and, I guess, assume normal market conditions, which, is a big if, but I guess, what does this mean for Invesco's outlook for capital returns in terms of further deleveraging, dividend growth, share repurchases? And kind of help us understand if there's any flexibility around that $1 billion of excess cash versus a regulatory minimum that you guys feel like you have?

Sure. So look, on the $1 billion target, it's a legacy target. There is no magic to the $1 billion. What that does allow us to do, though, is build financial flexibility for uncertain times. And we do remain cautious and thoughtful about making sure we have the financial flexibility that we think is really important to really meet all of our priorities. And those priorities do include building liquidity, managing our leverage profile, investing in the business and, ultimately, returning capital to our shareholders as well. We are very focused on our balance sheet optimization and delevering as a part of that. You saw the revolver balance was down to $90 million at the end of the third quarter. I'd like to be in a position where we may have some seasonality in terms of needs there, but that we're not typically in the revolver outside of the seasonality. Now that said, as you know, we do have the settlement of the share repurchase obligation. In the first quarter of January and April, it's somewhere around $270 million. That obviously fluctuates with the stock price, but that is a cash liability that will be out there in the first 4 months of 2021. So as I think about it and I think about that financial target, we're really looking at it not so much as a waterfall, but balancing across all of those priorities. I want to invest in our business, first and foremost. Investing in our products, investing in our clients, investing in our technology, is how we actually really drive growth. And then we seek to improve our leverage and liquidity profiles and, ultimately, returning capital to shareholders in the form of steady, but gradually increasing dividend. And longer term, we would like to return to share repurchases as well.

Great. That makes sense. So we've got about 2 minutes left. I have a few questions in the queue, so maybe I'll shift gears to those, and we'll kind of try to hit on some of those as well. And again, I think, Allison, I think a lot of them are for you. But I guess, the first question around variable expenses. And with the markets being up 10% or so from the end of the last quarter, can you talk a little bit about your early thoughts in Q4 expenses? Any update to the guidance you could give us? I think the last update was up modestly, overall expense base, was the message from 3Q. Any update on that, just on the back of the markets?

Sure. So whenever we have given expense guidance, it really does assume flat markets and flat FX. And so the expense guidance we would have given for the fourth quarter was with that assumption. Now that said, compensation expense absolutely is -- there's a large variable component, and that will grow with the increase in revenue, which is a function of the increasing market. So that component of expenses, you should expect it to grow consistent with the same relationship you've seen on our income statement over time. In terms of our other expense areas, I think we noted in October that marketing expenses might be up modestly inside of the quarter as we continue to really evaluate the opportunities we have around promotional campaigns. There's no travel as we just talked about. So I would say expenses, again, the guidance is consistent with marketing expenses, might be up modestly. And yes, you should expect compensation expense to grow with the market.

Great. Well, makes perfect sense. All right. Well, we're almost out of time. So I'm going to try to keep everybody on schedule being you guys are the first presentation of the day. So thank you both. Marty, thank you very much. Allison, thank you very much for joining us. And as we said earlier, hopefully, we'll see you guys live here next year in person.

Look forward to it, and thanks for having us. Much appreciate it.

Thanks very much.

Thank you, Alex.

Take care.