Invesco Ltd. (IVZ) Earnings Call Transcript & Summary

Okay. Great. Well, good afternoon, everyone. Thanks for joining us. We're going to get started with our next presentation. I'd like to welcome Marty Flanagan, President and CEO of Invesco. Over the course of 2021, Invesco continued to deliver strong organic growth, really leaning into areas with robust secular underpinnings, such as ETFs, global equities, fixed income, obviously, a unique position in China as well. So I'm sure we'll get to spend time with Marty on a lot of them this afternoon. In addition to that, Invesco have been streamlining their business and strengthening the balance sheet. So it feels like things are really firing on all cylinders. Thanks for being here, and welcome.

Yes, good. Great to be here, and thanks for having me and looking forward to the conversation.

Great. So I think Marty was going to open up with a couple of brief comments, and then we'll jump into the Q&A.

Yes, just a couple of comments. Obviously, we've been in strong markets. But if you look at Invesco through the year, if you just lead by looking at the organic growth -- the best organic growth we've ever had. It's very broad. Just picking up on your comments and sort of go around the world, China is an important area of growth. We continue that -- expect that to continue. The ETF franchise continues to grow quite rapidly. We expect that to continue also. And if you look at the alternative business, which is about $191 billion, private markets is about $100 billion. That continues to be an area of ongoing strength. And if you look at the institutional channel, again, it continues to grow, but much of it -- about 40% of all the new clients that have had a solutions engagement. So the development of the solutions capability over the years has been really very important. But let me stop there, and we can go ahead.

Yes. No, look, lots to cover. So why don't we start with a couple of top of mind investment themes for 2022.

Yes.

'21 has been an incredible year for equity markets. Even with the latest kind of volatility, we still up over 20% on the S&P. But as you look forward, obviously, inflation is top of mind, higher rates top of mind. The direction of the pandemic and the volatility that could cause is top of mind. So given your really wide global reach, what are some of the interesting investment trends you're seeing into next year?

Yes. Look, it feels like common wisdom has move away from this idea of transitory inflation and that we're going to have inflation that can come down some, but not down to 2%. Within that, if you look at sort of impacts on asset classes and -- look, it's going to depend on if it is a rising rate environment, the speed, the magnitude, I can't predict that, but you can already see what's happening with -- fixed income for most of us have been an area of growth. It will continue to be, but you'll probably see more movement into things like bank loans and -- real estate will be another area. Our commodities suite of capabilities has also been seen quite a bit of growth in all, really, as you can see this pivot towards inflation. So yes, we would expect those areas to continue to be areas of interest for the organization.

Great. And then now if we think about Invesco a little bit more narrowly and just kind of let us talk about some of the organic growth dynamics, 2021, obviously, strong fundamentals to your point, very good organic growth, and that sort of continued from what we could see. As you look out into next year, what's your outlook for organic AUM growth? And importantly, organic base fee growth because obviously, some of the areas you guys have been flowing have come in with lower fee rates naturally, high incremental margin, but lower fee rates?

Yes. So I won't predict a number, but we, like everybody else, is sort of looking forward into 2022. And if you have some version of the environment that we're in right now that we were speaking of, we anticipate that we'll have similar organic growth next year, which is -- again, would be 2 very, very strong years of -- or 2.5 years of organic growth. I'll come back to the point you talk about, and I think it's probably an area that there's focus and not fully understood. If you look at our effective fee rate, it's been dropping. But I'll put it in a context of effective fee rate and profitability are 2 different things, and you have to look at it in both hand in hand. So if you look at the high watermark of our effective fee rate, call it, just north of 40%. And our margin of 40%, that would have been in Q4 of '19. If you look at the effective fee rate today at 36%, our operating margin is 42%. So lower fee doesn't affect -- doesn't correlate to lower profitability, and it is the volume element that comes along with some of those capabilities specifically. But the dynamic continues to be very strong for us, right?

And as I guess as you look across your pipelines, maybe let's spend a couple of minutes on the building blocks supporting your sort of optimism around organic growth.

All right.

These going to be things that we saw -- that we've seen over the course of '21. So again, ETFs, China, solutions-oriented products or something else is coming into the fold?

Yes. More of the same there. But again, I think you're going to continue to see -- again, if we're in this environment, where we're expecting inflation rising rates, our credit business will continue to get traction. Bank loans, private credit are emerging areas for us as an organization. We'd expect that. But again, we just anticipate next year to continue to be broad and deep in the various asset classes that we have.

Great. Let's dig into some of the individual product categories. So I was hoping to spend a couple of minutes on private markets.

Yes.

Obviously, it's a huge area of focus for the market as a whole. We've seen a lot of the kind of traditional alternative managers speak a lot about that and bringing significant amount of capital into some of their retail-oriented products. Invesco, obviously, has a really robust footprint on the retail distribution side. How are you thinking your private markets product is positioned to kind of benefit from this trend? Spend a couple of minutes on how you thinking about building it out and maybe how it's being distributed, right?

Yes.

You have an untraded REIT. It's not, by any means, huge or has not taken in a ton of assets yet, but help us kind of think about the path for growth there.

Yes. Look, this is an old idea, right, of great interest, and it's not been cracked yet. And it's of interest to the wealth management channels and obviously to money managers. And it's really this convergence of taking private markets alternatives to retail investors. And the formula is -- obviously, it's a high-quality alternative investment capability that's matched within, let's call it, traditional asset manager that has this depth, breadth and success within wealth management channels. There aren't a lot of firms that have both of those, and that's really been the impediment. There have been a couple of examples of success, but not many. The INREIT product that you're talking about, we've just started it in June, and it has that formula. Our direct real estate team, great 30-year track record. It's only been in the institutional market. Very impressive client list, matching with our historical wealth management capabilities. And importantly, MassMutual has committed $400 million to it. They've put $200 million in, it's one not just capital, but it's the credibility of an institutional investor third party. We're focused on the RIA market right now. You have to get some scale in the product before you're going to get on the wire houses. So we would imagine that's going to be first quarter or second quarter of next year. But as you pointed out, it's a great opportunity. I think the success stories will be fewer than people would imagine just because of this dynamic that I'm speaking of.

Great. And besides the real estate product, obviously, there's private credit, there's private infrastructure. What sort of mix...

Those are the next couple that make a lot of sense. And you can see it also working within the wealth management channel. It's in the conversation earlier today with an executive of one of those firms. And they need to get high-quality capabilities so they can get their financial advisers in a position where they can take the privates alternative asset mix they want for their individual investors higher, and there's just a limitation right now. So there's a demand, a desire, and it's really now solving the capability problem.

In terms of the capabilities within Invesco, you obviously have the bank loan product on the liquid side.

Yes.

Do you need to buy? Or is this is a buy versus build decision as you think about adding other layers in the old bucket?

Yes. So from that capability, we've been extending it into private credit, right? That's a natural one for us. Direct lending is a natural one. We've chosen to build organically, and we're starting to get some traction on the private credit. That would be an area where we would anticipate some growth as we look into 2022.

Let's pivot a little bit and spend a couple of minutes on the ETF business. Again, big area of success in increasing your revenue share gains in the ETF world, as you've pointed out in a couple of recent slide decks. Taking a step back, can you spend a minute on key areas of focus here going forward? Kind of what's your go-to-market strategy? And how you're competing against some of the larger players in the space?

Yes. Again, it's a vehicle that continues to be in high demand. And I think the evolution of the ETF market, if you think ETF, it's historically been associated with cap-weighted indexes. And that's where the bulk of the assets have been. And we're the fourth largest provider. The 3 in front of us are -- that's a huge amount of where their area of success has been. We think it's going to continue to evolve and continue to grow in the sort of smart beta multifactor area. That's where we've seen a lot of our growth in the U.S. And frankly, also now in EMEA, we're having quite a strong year there. And we started way back when in 2006. Today, the combination of those businesses is about $500 billion. We bought a company in 2006 that had $3 billion in assets under management. So the growth has been enormous, but that was a -- our focus is on the wealth management channel, and not in the capital markets. So the opportunity that we've been seeing is capital markets growth also. So institutional investors using ETFs.

Got it. The evolution of ETF space has been obviously quite significant over the years. One thing that keeps coming up quite a lot is the notion of direct indexing and the fact that, that's taken share. Is it a threat? Is it an opportunity to the way you kind of think how that could fit within Invesco?

Yes. So it's a threat if you don't have the capability. And I think people are getting confused with all the different possibilities here. So it's going to continue to be a growing area. But if you look at within Invesco, so we have our traditional ETFs. We also have a self-indexing capability that we've now used to take to institutional clients to build custom models, portfolios. It's also where we build the models for the wealth management platforms. And it will -- I look at the direct indexing capability as something that's going to sit side by side to a lot of these historical ETFs and the like.

Got it. All right. Let's talk about another kind of pillar growth for you, which has been China. And we appreciate all the kind of incremental disclosure you guys have given to us on that over the years and a couple of recent quarters. So maybe let's go through some of this. So it's a source of growth, as I said. I think it's about $100 billion of onshore AUM for Invesco. About 60% of that is coming from retail. Over the last couple of years, we've seen a lot of the product uptake in fixed income and money market funds. But recently, it feels like it's starting to expand into other asset classes.

Yes.

So let's spend a couple of minutes on how that's going and how are you distributing to? I guess, sounds like balanced is first, but then maybe equities may be private markets over time. Implications of that to your fee rate and the margins that you guys can get from the JV?

Yes. So again, you're right, it's -- we've been -- with the JV -- let me contrast where we see the competitive advantages. So we started in 2003, a long time, it's called Invesco Great Wall. Very few firms. Non-Chinese firms have their name represented there. The most important differentiator is we've had management control from the beginning. So we operate as Invesco in China with the JV and then our institutional business for the sovereign wealth engagements that many of you would also have. That's been the most important differentiator for us. And as you're pointing out, it's now -- it's -- the growth has been very broad. And this year, we've seen an awful lot into equities. And the performance is really very, very strong. It's still a developing market. So the ability to generate alpha, there's a greater opportunity. So you still have you've not seen a lot of uptake in indexes for this obvious reason. And I -- my personal view is that within the wealth management channel, China probably represents the single greatest opportunity within asset management for the next 3 years. It's probably the only market where the pie is just getting bigger. You have to be highly qualified. It's a very, very competitive marketplace, only getting more competitive. And if you look at where the distribution is, yes, the banks, yes, the insurance companies, but also those digital platforms have become very, very important. We were the first non -- first foreign fund manager to manage part of that and financial money fund. And from that, it continued, as you say, into balanced, fixed income, into the equity capabilities. But again, there is any number of these types of platforms that create opportunity there.

Great. That makes sense. Let's spend a couple of minutes on ESG. It comes up essentially in every presentation, whether and it's an asset manager, a bank, or a broker, obviously, a really important theme. How are you approaching that both from a product perspective as well as internally from a company perspective?

Yes. So as you can imagine, those of us that have businesses in the U.K., on the continent, this is not optional.

Right.

So if you are not going all in on ESG, you will not get another client. I mean it is that important. So it is a commercial imperative. So our approach is we're working through all our investment teams to have ESG inclusion. We're 75% of the way through. It will -- we still have the 25% to go. That will take a little bit of time. So that's the first bit. The second bit is education thought leadership. That's a very important element in education that we're seeing. And it's not so much there. But I'd say when you go to the United States and it's very topical, but it's nowhere near as advanced in the commitment to ESG as it is in Europe. And so that is what's pushed us as a firm, and we see it as an opportunity. The next element is, as you point out, what about products. So if you look at our ETF suite, I think we have the second largest number of ESG ETFs. We're obviously developing ESG product. The other thing that I'd probably say, in a few years, this idea of ESG inclusion within your investment teams, I don't think you'd be talking about it as a separate type of investment. I mean I think this is going to be ultimately embedded throughout the whole industry in time, and the uptake will ultimately be around the world at different paces, but again, led by Europe, right?

So #2 largest player in ESG products within the ETF spectrum. How are you thinking about that for the active product? I mean I think a lot of active managers try to position that as a way to combat passive in a little bit more of a differentiated way? Is that an opportunity for Invesco?

It is. But I think, first and foremost, the U.S. has some catching up to do. What you don't want is some of what we've heard. So the green washing idea for people that sort of create a sort of marketing pitch when it's not really achieved. The other reality is the definitional part of what ESG is something that's having to advance and it is, and you're also going to see the regulators because of some of the greenwashing get much more involved. We think that's a good thing for the credibility of ESG. It's actually going to be more costly. So that's going to again put more pressure on those asset managers that aren't as well resourced. So again, I just look at it as this is going to be core to what you have to do as a money manager. Secondarily, there is an area of sustainability investing and building exclusionary portfolios. There will definitely -- that's clearly an opportunity, but we still see the vast majority of the growth would just be in core capabilities being sort of ESG enabled.

I got you. Kind of makes sense. All right. Let's pivot a little bit from the product side to the distribution side of the ledger. A few years ago, you guys acquired a number of digital distribution platforms. Obviously, a lot has happened since. There's a couple of -- there's obviously larger deals that happened between those. So maybe a quick update on where you stand with Intelliflo and that sort of integration? And kind of how are you thinking about the role of digital distribution in the context of Invesco?

Yes. So what got our attention was actually our experience in China about 5 years ago when -- on one of the business. Just seeing how advanced China was in using mobile digital technology in financial services beyond payments, this was now into investing. And so it was -- this is something we need to get in front of, and that's when we started going down the path of looking at digital capabilities. Today, it's called Intelliflo. It's got $1 trillion of assets under administration. We started by buying something called Jemstep and realized that the breadth of capabilities wasn't deep enough. That's when we acquired Intelliflo. Intelliflo is a U.K.-based digital platform. It has a 40% market share, and it continues to grow. We think, for us, the next opportunity is here in the United States in the RIA market. We think there's a need there. The main distributors here, they have their capability, they don't need our help, right? And so we see that as an opportunity. And much of last year was really pulling together the different digital platforms we had into a single platform. It is also something called Vision, which is our analytical tool part of that platform. And that is a tool that has been -- our solutions team uses that has been behind a lot of the success that we've had with institutional business.

Great. All right. Let's shift gears a little bit. And I want to focus on a couple of areas that's been a bit more challenging for you guys over the last couple of years. And granted have gotten less challenging in the last year or so, but still remain an area of headwind. So that's, again, largely active equities and part of the liquid alts book, maybe the GTR product but again, it's gotten much smaller. I guess how do you think about the remaining downside risks from these products, right? Because that, in a way, is kind of shielding or masking some of the success you're seeing in other areas?

Yes. So it's 2 things, right? When you think of success, it's client demand in the first instance. And secondly, how are you performing? And if you look at domestic equities, in particular, over this period and value, specifically, it was a very challenged area, not much in the way of client demand and we had some underperforming capabilities. So not a good mix, I have a high degree of confidence in the talent. And if you look year-to-date, on probably -- all but one of the mutual funds, dramatically, in fact, impressive investment performance. That doesn't create client demand, but it surely slows down redemptions, and that's been a very important element. And the domestic equity is largely -- it's been challenged by ETFs, right, as FAs think through their fee budget. But a big believer in active, and we'll just have to -- that will probably be the area where you just have to perform, or you're really going to be in a net redemption area. If you continue through our active capabilities, we have some very strong teams and we think they'll continue growth. Emerging markets is an area of great opportunity. International equities is an area of great opportunity. We have some very good performance in small cap, mid cap. And again, these are areas where performance -- we'll see continued demand. And -- but as you say, with the performance improving on the value suite, we'll see slowing redemptions, which we started to.

Great. That's good to know. All right. Let's pivot a little bit and spend a couple of minutes on the P&L. And starting really with the conversation around expenses and margins. We obviously have been hearing inflationary pressures throughout the day today.

Yes.

Not the first time we're hearing this. We're all going to see, hear more of that tomorrow. So as you think about the various investments you need to make in the business to support the growth, net of the remaining savings because you guys obviously still going through the savings program.

Yes.

How are you thinking about the outlook for expense growth into '22? Again, tough to know with the markets, but assuming normal markets, so I guess that's kind of part A.

Right.

And part B, and that's probably even more important, with the net operating margin is kind of low 40s, is there much room for those margins to expand materially from here? Or this is kind of as good as it gets?

Yes. So where to start here, many different thoughts. So even though we've gone through this focus on expenses, that's all after net investments in the organization. So we've made very important investments during this period of time while taking out the costs and many of the areas we just talked about, right? So I won't repeat them. So areas of growth, we get dollars to there. It's also investments into, if you want to call it, core infrastructure type things. We've mentioned converting our investment platform to Alpha NextGen at State Street. That's a very important one. Continued movement to the cloud. I think most of us are suffering through that necessary transition, the costs associated with it, but that's really what's enabling simplification within the platform, which ultimately drives cost savings, right? So we continue to reinvest.

Yes.

So first point, while saving money, we've made investments that are way beyond what we've done there, and that was important. As we look into next year, and I think most organizations are thinking this, what does the new normal look like? And there's probably 2 elements that getting back to travel and where might that go and some of the investments or dollars that we spend around there. They're not hugely material, but from what was close to 0, right, it's numbers. But we look at 2022 with -- I think the other point that you're making is also important. It's probably been the tightest labor market that I recall in a very long time. So I think all of us are going to have to really make sure that we get the dollars in the right hands during this pay cycle for all of us. So those would be the upward pressures. But again, we're just in a position because of -- we've been very aggressive in sort of reallocating dollars into growth areas and trying to be very balanced in investing for the future and being very responsible for shareholders.

Got it. And the way it all shakes out in the margin. I guess, like kind of earlier, we talked about, obviously, a lot of the growth you're seeing is coming from lower fees, but good incremental margins.

Right.

Net-net, that feels like it should result in better overall company profitability and profit margins. But is there a room to go up from low 40s?

Look, when you're at 42% profit margin, that's pretty good, right?

Yes.

And so you take the good times to make the necessary investments. And we would -- the way that we would think about it would be with -- this is when we want to make necessary investments in a good market while being very responsible to deliver the results to shareholders. So it's not an infinite increase. And again, I think it's pretty strong where they are.

Yes. Makes sense. Let's shift gears a little bit to capital management. You guys made a ton of progress on the balance sheet. A little bit more work to do there, but it's in a much better place than it was a couple of years ago. Allison talked about working your way back towards a 30% to 50% payout. Relative to today, I think it's in the low 20s. Assuming, again, normal market conditions, a big if, how long do you expect it will take Invesco to get kind of into that range? And how we should think about the balance between dividend increases once you kind of get into that range and reinstating the buyback?

Yes. So we'll get -- we'll be back to the future a little bit on that. So the goal would be an ever-rising dividend increase.

Yes.

Sorry -- but being thoughtful in doing that. And the rest of the excess capital will be stock buyback. So as you say, we've been very focused on improving the balance sheet and, yes, good progress. Still more to go. So we'll balance that. But you'll see us -- dividend increases and stock buybacks. And as you say so next year 2022, we have a $600 million piece of paper coming due. We want to be in a position, which we will be, to have the option to pay that down. And we don't want to commit to that at this moment. It will be driven by the market and common sense decisions at the time, but deleveraging has been a very important part of what we've been thinking about.

Yes.

But you should hear very much capital returns to shareholders are something we're committed to, and you'll continue to see happen.

Got it. So second did you leverage it, hopefully, at some point later in '22, early '23 or something like that? All right. Let's talk a little bit about acquisitions. So Invesco obviously has been acquisitive over the years. You've done some bigger deals. You've done some smaller deals. We talked about private markets. It sounds like that's an organic build for you guys.

Yes.

So I don't know if that's an area you would consider, but it sounds like not really. So when you think about the appetite for more M&A, whether it's smaller deals or larger deals, where is your kind of stance on that?

Yes. And again, I sound like a broken record on this, but this is the lens that we look through. It has to be strategic. And what that really means it has to make us a better firm. It has to be really a capability that we don't have. And we've concluded it would take -- we couldn't build or take too long to build. It has to be something that if it's an investment capability that there's client demand. There's -- paramount to that. We also go through this lens of it cannot be duplicative of what we're doing as an organization. Clients don't like it. Employees don't like it. Shareholders don't like it. It's just way too much breakage. We also put a high premium on ensuring cultural alignment. And again, we've all been in this business for a good period of time. If you're not aligned culturally, you're going to have a problem at some point, and that's not very healthy. So that's the lens that we look through. And -- so when you think of us, if it doesn't fit that checklist, we're really not going to be there. And as you said, we in the past done anywhere from bolt-ons to something larger, but they're all consistent with that process that we just did.

Right. Is the capacity still a bit of a constraint? Again, if you're thinking about something more transformative and like Oppenheimer, I would put in a category of more transformative type of deals?

Yes.

Given your kind of balance sheet comments, is that a constraint still?

Yes. It's really important that it's just not strategic and generates the returns that we want.

Yes.

We have to have the balance sheet capability to continue to -- weather a challenging market, we all know we're going to have a bear market at some point and also have the resources to invest.

Right.

So it has to be an important part of that consideration, right?

Right. All right. Very helpful. All right. We got a couple of minutes left on the clock. So if there are any questions in the room, we can take them now. So if you have a question just raise your hand, and we'll have somebody come around with the mic. All right. Well, it sounds like we were very thorough.

Good.

Marty, thank you very much. I really appreciate you being here.

Good to be here for you buddy. Yes, take care.