Invesco Ltd. (IVZ) Earnings Call Transcript & Summary

Sure. First of all, I'm going to give my IR team the credit for those great slides. And I'm glad that you like them and to find them helpful. I think that they are very helpful, too. And I think they've created the catalyst for us to have more meaningful conversations with a lot of our investors and potential investors around really the growth drivers that we have at Invesco. I think it's really important for us to focus on those growth drivers. I think we've talked about a lot of these areas, as I mentioned them, through the lens of our strategic evaluation. And this is an area where we intend to continue to focus across these different areas, ETFs, fixed income, China, our solutions capabilities, our alternative capabilities and global equities as well. Now maybe spending a little bit of time on each one of those. With respect to ETFs, we are the fourth largest provider globally, and our capabilities span active capabilities, passive strategies and the ESG spectrum as well. We are continuing to develop new products in this space. You saw the launch in the fall of our QQQ innovation suite. And we also announced in December the launch of our first active nontransparent ETF. We have a strong global alternatives platform. And within that platform, we really are focused on growing our private markets business. And those -- the private markets businesses are really led by both our market-leading real estate and our bank-led businesses. Very focused on our active fixed income and global equities. Those are big areas of opportunity for us. Our offerings are very well positioned there, and we see strong investment performance and high client demand for those capabilities. Already mentioned solutions a couple of times. That's -- we've really seen the contribution of our solutions efforts through the institutional pipeline. As we've noted in the last few quarters, our solutions capabilities are really driving maybe about half the institutional mandates that are in there. And we see that clients really value this service. It's really the opportunity we have to bring the full power of our comprehensive set of capabilities and services to clients, and that's going to continue to be a priority for us. We have a terrific leadership position in Greater China, and we will continue to invest there. We've been managing dedicated Chinese product and -- through Greater China for nearly 40 years now. We've really seen the benefits of our early mover advantage in the China onshore market with our joint venture, which was the first of its kind in the industry, and that was established almost 2 decades ago. And I should note that really the majority of our investment capabilities are aligned with those areas of growth that were on that Slide 5 that you pointed to in our fourth quarter earnings release. Our investment performance is strong in those capabilities, more competitive, and so we're really well positioned for growth going forward.

So Allison, I wanted to go a little bit deeper into PowerShares. So I know you highlighted the new active ETF that you launched and also the QTOQ suite that you launched last year. But when you look across the entire ETF suite that you have today, which ETF products you think the most important for future growth?

Yes. The ETFs are, like I said, a very important driver for us. As I noted, we're the fourth largest provider globally. Our market share is around 5%, a little bit higher in the United States, a little bit higher than 5%; a little bit lower than 5% in EMEA. In both markets, we do continue to increase our market share. Our smart beta ETFs are about 25% of our total ETF suite. And so it is a very important component of our ETF capabilities. As I think about some of the drivers and where we see really good growth. I mean, look, in the fourth quarter, our net long-term inflows into our ETFs, excluding the QQQs, was about $4.7 billion. So a very positive driver for us. Of that $4.7 billion, about half almost was into our S&P 500 equal way ETF. That has been a very good performer. But I'd also point to our ESG capabilities in our ETF suite. About, I don't know, $1.5 billion or so of that $4.7 billion came -- probably a little north of that actually came through our Invesco solar ETF and our clean energy ETF. Those are -- have been terrific growth drivers. And I'd also note -- those are some of our higher fee ETF capabilities. Those -- both have published management fee rates of around 50 basis points. So as I think about the demand for our ETF capabilities, I think about our ability to marry our ESG capabilities with that and actually drive good, strong revenue growth. We're very bullish on our ETF suite overall.

All right. Let's turn over to ESG. So ESG implementation is now probably the cost of doing business and asset management. It's something we think everybody needs to be ready for, especially in Europe. Can you share with us how Invesco has adapted its business and what ESG products are expected to grow?

Sure. So yes, look, we continue to invest and grow in these capabilities like many others. And our focus is really on integrating these capabilities into our broad investment approach. So if I think about a narrow definition of ESG. And so very clear mandates that are very dedicated ESG mandates across a variety of strategies or geographies. I'd say we manage about $35 billion in ESG capabilities -- or excuse me, ESG AUM. Our focus is not just on the narrow mandates, but how do we continue to broaden that and integrate that into everything we do. So maybe thinking about it across the different demand spectrums. From an institutional perspective, we've definitely seen an increase in our client-based interest for ESG solutions and some bespoke approaches. And we continue to work with our institutional clients to implement those. From a retail perspective, we are the second largest provider of ESG ETFs in the United States. We have about 7 ETFs -- ESG ETFs, lot of acronyms, that account for about $9 billion in AUM for us right now. Our goal is that by the end the PAUSE we have 100% of our investment processes broadly and systematically incorporating ESG policies practices and proprietary tools into everything they do. We're going to be especially focused on proxy voting and clean technology. So our principal activity right now is really embedding and systematically integrating the ESG capabilities and mindsets across all of our strategies around the world. And we're pretty well into it at this point. I'd say we have different parts of the world that are at different stages. And the model's really going to continue to be investment led, but incorporated into each investment team specific process will have a global ESG team supporting them behind the scenes and really providing that expertise in the comprehensive set of tools.

So let's talk about another growth initiative, the private markets business. And I know you hit on real estate and loans. But this is a very profitable business for you. The management fee rates are very high. There's performance fees. And I also think this business tends to get overlooked and maybe it's a little bit of hidden inside of Invesco. So I was wondering if you could spend a little bit more time, walk us through the different businesses in a little more detail and talk about its growth prospects.

Sure. It is a little bit hidden, and our focus there has been very organically focused. Our growth there has come really through organic efforts. Our private market capabilities are the largest part of the alternative platform. So our alternative platform is around $176 billion, and the private capabilities are probably close to about $100 billion of that. So growing alternatives and growing our private markets capabilities inside of that is one of our key strategic priorities. And we do continue to be really focused on how do we execute this in a very balanced and disciplined way and scale mature products while also investing in some of our key new growth areas. Our direct real estate business, as I noted, or I should say, just a real estate business is one where we continue to see a lot of organic growth opportunities, especially as we look to expand our access to some unique opportunities with our retail clients. Our strategy there inside of real estate has 3 pillars, which is continue to focus on mature products, which would include global open to end core direct strategies; bringing high growth capabilities, products to scale, which would include some specialty real estate funds; and then supporting new organic growth opportunities through retail-targeted products. You noted our performance fees. And in the fourth quarter, we did record performance fees of around $78 million, almost $50 million of that actually came from our real estate business. So it is a meaningful contribution to our profitability inside of the fourth quarter. I'll give the caveat that performance fees vary by contract, and they're very difficult to predict. And so the fourth quarter was a terrific one, not one we would necessarily expect to see again in the first quarter. But I do think it demonstrates the ability of these businesses and the ability we have to generate fees through those products that are very impactful. On the private credit side, that platform is actually one of the largest senior loan managers in the world. We have over $32 billion of AUM inside of that platform. And we continue to look for opportunities to add more depth to our offerings around credit and extending the credit capabilities off the platform that we have. Our growth strategy in both of these areas has really been to continue to organically build to get to critical mass in this space.

So at this point, I just want to check and let the audience know if they have any questions. You can see Karim my Team's e-mail address, shoot him an e-mail because we're about 2/3 away through. So I'm going to continue here, but I just want to remind everyone if there's any questions out there. Allison, I didn't want to let you go without talking about technology and digital. So I wanted to ask you how recent technology advances changed how investment products are now distributed today? And also how Invesco's digital platforms have fared, including Jemstep, against this backdrop?

No question that the acceleration sort of the digital agenda over the past year has changed the way in which we distribute clients. I think it's changed the way we work across the world in every way. As we all know, it's almost becoming a little bit cliché, but without question, it's accelerated and validated. The path that we thought was before us and in some respects, we were already on, and we made the full transition, as many others did, but we did it in a way that really seemed seamless. Our transition to a virtual distribution process was almost seamless, and it was highly efficient. And we find that it yields very productive forms of client engagement. We've eliminated travel. We simplify logistics. We're all wondering how much of this is sustainable and how much we actually all want to get back together. I think the answer is it's a little bit of a mix. We won't forever stay working behind a computer. But what we've demonstrated is it's possible. And in doing so, we can really take the opportunity to further invest in our digital engagement tools and really the training for our distribution teams and for our clients so that we can continue to operate in a way that is really seamless and efficient, both for us and our clients. We wouldn't do it if it weren't seamless for our clients, but to the extend it's the way our clients want to be served, we are going to be ready to continue to serve them in that way. As reopenings occur, we expect virtual meetings to probably continue to be the preferred form of meetings for most of our adviser-based clients, especially where there are already existing relationships. That won't necessarily be the case where there aren't existing relationships. I do think there is going to be that strong desire to get back in front of people and build relationships. But nonetheless, we're going to see efficiencies and benefits with clients that are going to translate, I think, into new client engagement models of the future. Let me shift then to the second part of your question, which is around our digital capabilities and our digital platform, and that would include Jemstep and TeleFlow in addition to some of our other digital portfolio rebalancing and cash flow remodeling capabilities that we acquired over the last few years. We do continue to have a high conviction view that technology is going to be a critical enabler in client engagement. We continue to invest and are dedicated to investing in our digital wealth capabilities. Really trying to position ourselves to be ahead of competitors and in line with market trends in some cases. So we fundamentally believe that technology, when it's paired with investment expertise, will deliver better outcomes for both our advisers and investors. And I'd say we see an ability to capture AUM from our broader platform. That does exist, and we've got some pilot efforts out there to try to prove out this model. But really, it's our digital businesses that are going to offer that fast growing and sticky recurring revenue, that software revenue for the firm that we think will offer a diversifier alongside our investment management piece.

So now let's talk about the M&A. So historically, Invesco has been very active with M&A. It's a firm that's not afraid to do transactions. I'll just sort of ask an open-ended one. What are Invesco's current priorities today with respect to M&A?

I'd say we haven't wavered on our views around M&A. They're the same today as they were 2 years ago and 4 years ago. Any transaction that we would consider has to be additive in some way. The investment capabilities have to be complementary to what we have. We're not looking for significant overlap. It's got to be strategic, and that can take -- that word can take on a variety of different meetings. But I think it really means that something has to be differentiated. And again, complementary to the platform we already have. There's got to be client demand there. And then it's got to be culturally aligned. And so as we think about M&A in the future, I mean it's got to check a lot of boxes. We don't think that consolidation is talked about quite a bit in our industry right now. We don't think it necessarily comes just from one asset manager buying another asset manager. It also means clients moving money from one asset manager to another, which creates stronger and larger, more scaled asset managers. And I think that's going to be one driver of consolidation beyond traditional M&A.

Got it. And I have one follow-up on M&A. As you look across the business mix today, both from a geographic distribution side and also a product capability side. What do you feel are your major gaps today in the business mix?

Yes. I'd say I'd actually turn that to -- gaps are really consistent with where I'd say our key growth capabilities and areas are. So they're not necessarily gaps, but they're areas of focus. And so those 2 things sort of are going to fit together should opportunities arise. We've really built a global and client-centric business. I think we're well positioned to meet client needs in the areas where there's high demand. And again, we've got the depth and the breadth, and I think the resiliency to really deliver the positive outcome to our clients throughout different market cycles. As some of these investments that we've been talking about over the past decade that are really taking root, again, are examples of where we've invested ahead of some key macro trends. They're really shaping our industry right now, and we'll continue to shape the industry in the future. So again, kind of -- we talked about those key growth areas. And I'd say that's where we're going to continue to invest. Those are the areas that represent significant growth opportunities. There are always going to be opportunities that arise to augment our capabilities. They have to make sense. Of course, they have to be the right price or a structure, they have to be complementary, all the things we already discussed. And so I think bottom line is M&A is not necessarily our primary focus. Our primary focus is really growing our own business and really harvesting the value of these investments we're making in these key growth areas.

Great. And Allison, with that, we are out of questions, out of time. And we just wanted to give you a big thanks on behalf of everyone here at Crédit Suisse. And we hope to see you next year in-person in Miami. So Allison, thank you very much.

I hope so too. Thank you, Craig.

Bye-bye.

Goodbye.