Invesco Ltd. (IVZ) Earnings Call Transcript & Summary

It is my pleasure to introduce Allison Dukes and Anna Paglia. Allison is Invesco's CFO and leads all global corporate finance functions. She joined Invesco in 2020 from the SunTrust Banks, where she was also CFO. Anna is Head of Invesco's ETF and index strategies where she's imported in 2020. Thank you both for joining us. And now Allison is going to give us a quick speech here.

Yes. I'll try to keep it interesting. So thank you. Thank you for having us, Craig. We're very glad to be here, and I'm very excited to be joined by Anna Paglia, our Head -- Global Head of ETFs and Strategies, and looking forward to letting on give you a little more background and a little more color and detail on this really dynamic and important part of our business. And before I begin, I do have to remind our audience that today's discussion may contain forward-looking statements. Actual results may differ materially from these statements due to a variety of important factors, including the risk factors and our Form 10-K and our SEC filings and any forward-looking statements speak only to today, and we may not update them if our views change. So with that behind us -- before I get into the presentation, I just want to touch briefly on the announcement we made last week with the upcoming retirement of our CEO, Marty Flanagan, who has been our CEO for 18 years and the appointment of Andrew Schlossberg as our next CEO, in addition to some of the changes we announced with our executive leadership team. Marty has been an incredibly strong leader of Invesco for the last 18 years. And under his leadership, we have grown to become a $1.4 trillion industry leader with a global platform and a really unified culture under a single brand. Marty has overseen the work of building a very collaborative culture that -- where we engage, retain and attract outstanding talent, really committed to delivering exceptional results on behalf of our clients. And the changes that we announced last week have been received extremely favorably by our clients as well as by our employees. Andrew brings a track record of more than 20 years of success leading several of our largest businesses and really serving our clients around the globe. And it's given his deep industry knowledge and his connectivity and really his dedication to ensuring great outcomes for our clients and for our employees and shareholders, that he's really well positioned to lead our company in this next era. And as we look just ahead and we look at all of the organizational improvements that we're making, it's really to strengthen the execution of our long-term strategy. And to build a platform that allows us to really harness the global scale that we have and drive greater responsiveness to client needs everywhere that we do business. I do speak on behalf of the entire executive leadership team when I tell you we're really looking forward to this next era. We're looking forward to working with Andrew and creating the Invesco that we know will really build on the tremendous foundation and the legacy that are Marty has left behind after 18 years as CEO. So with that said, let me move into our presentation, and I'll start on Slide 3, where you -- can't see it, but I think -- that we are highlighting the attributes of really what we believe makes Invesco compelling on behalf of investors. We're really focused on serving our global client base and further scaling our business and really focused on delivering compelling returns on behalf of our shareholders. First and foremost, our strength rests on our global team, professionals that are really dedicated to delivering a superior investment performance. The firm is well diversified with $1.4 trillion in AUM as of December 31. And our investment teams offer a comprehensive range of investment products across asset class, investment type and investment style and vehicle. With scale and competitive strength in areas of very high client demand, we've delivered net flow performance that has consistently been in the upper echelon of our peer group and asset managers over the last 2 years, even as we have seen investors prefer risk of assets amidst declining markets. And I think you'll see today with Anna highlighting one of the key capabilities that's been driving that success, our ETFs and our index strategies. Finally, we've built a really strong operating platform due in part to resilient net flows, along with a focus on driving cost efficiencies and building future scale into our business. A priority for us over the past 2 years has been strengthening our balance sheet, and we now have the lowest level of long-term debt in 10 years, which provides us real flexibility to navigate the uncertain environment that we have found ourselves in while continuing to invest in critical growth initiatives. If you turn to Slide 4. We're focused on offering clients the capabilities they need to meet their investment objectives now and in the future. And as I've said, we're diversified across asset classes with $637 billion in equity assets under management, more than $500 billion in fixed income and money market products and a robust alternatives platform with $188 billion in AUM as of December 31. We're one of the world's largest active asset managers with over $976 billion in active AUM, and we've expanded our passive business in recent years, which you'll hear more about soon. Our platform is built to meet client demand, whether it's through mutual funds, separately managed accounts, ETFs, numerous other vehicles, and increasingly customized solutions. We are well positioned to serve clients, whether we're in an expansionary market cycle with tailwinds like we saw in '21 or a much more challenging turbulent market cycle like we saw in 2022. If you look to Slide 5, I will briefly reemphasize the key capability areas that we've discussed on our earnings calls and then form similar to this one over the last few years. Given our differentiated position, scale and investment readiness in each area, these capabilities have delivered outsized growth in recent quarters and are well positioned to continue that trajectory due to growing client demand. In particular, our business in China performed exceptionally well in 2022, building upon our leading position in the world's fastest-growing market for asset management. For the full year, our China JV delivered $7 billion of net inflows, which was an 11% organic growth rate. And though the Chinese market has experienced an uptick in volatility in the past few months. We're optimistic for a recovery there as we move through the rest of 2023. And I'd also note that in January, we experienced a slowdown in net outflows in our active global equity capabilities. As we've discussed elsewhere, investor appetite for this asset class was subdued in 2022 as many investors took a risk-off posture, but we are optimistic that there is easing of market volatility. And with that, we'll see demand recover for some of these strategies, which, along with the continued growth in our key capabilities, should get us back to sustained organic growth. Overall, we're pretty optimistic for 2023, and that we're very well positioned to continue to meet the demands of our clients in a rapidly changing environment. And with that, let me turn this presentation over to Anna. It's really under her leadership that these capabilities, specifically our ETF and index strategies capabilities, have been a key contributor to our growth. And as you'll hear more about today, we really have a differentiated product offering that's been taking market share in some of our highest growth market segments. So with that, Anna, let me let you take it away.

Thank you, Allison. And thank you, Craig, for having us. If you don't mind, I'm just going to walk around because I cannot stand still as I talk. Don't mind my thick Italian accent. If there is anything that you don't understand, raise your hand, wouldn't be the first time I hear that. So our strategy is really based on a set of beliefs. The first one is that the asset management industry is going to continue to grow. And if you look at the projections and the forecast, we believe based on data that the asset management industry will grow in the next 5 years at a rate of 5%. Within the asset management industry, we also believe that the ETF segment of the industry is going to continue to grow, and it's going to continue to grow faster than the rest of the industry. You see here, we believe that number is going to be 11%. This is not a surprise to us because as you look at where the flows went in 2022, you can see that the flows into mutual funds as compared to ETFs are kind of asymmetrical. So flows are leaving mutual funds, and they are entering the ETFs. This is a dynamic that we have seen before. And it is usually accelerated by periods of market distress. We have observed it in 2000. We have seen it again during the financial crisis, 2008 and 2009. And it happened again at the rate that is more accelerated during the COVID crisis. And there are a number of factors contributing to that. ETFs are cost effective. They are tax efficient, and they are the vehicle of choice for a new generation of investors. In the last 2 years, technology has advanced. And we see new and younger investors who can spell ETFs but cannot spell mutual funds, buying into ETFs more so than the prior generation did. And we believe that this is a trend that will continue. Now this is not just a trend that is concentrated in a particular region or in a particular country, in a particular market. We see the similar -- we see the same trend, even if with different numbers and with different scale in the different regions where we operate our business. It is a trend that is very alive and well in the U.S. It is a trend that is accelerating in EMEA, and it is also a trend that is developing in Asia Pacific. For now, Asia Pacific is not a, let's call it, a manufacturing hub. We don't see many products that are built in Asia Pacific and sold to local investors but we see a significant segment of the investor population, especially institutional investors, buying into U.S. funds and our [ usage range ]. But the bulk of the assets continues to be in North America. This is where we see a massive growth. In Europe, the growth is accelerating. And there are certain trends in the European market that really contributes to the acceleration of this growth, especially amongst banks and institutional investors. Now since we talked about the industry, let's do a double click on Invesco's business. Invesco's ETF business is really the result of a successful story of organic and inorganic growth. You have probably witnessed all the different acquisitions that Invesco made in the ETF industry. Starting with PowerShares. When Invesco bought PowerShares, that business had $6 billion in assets. It was 2006. It was a choice that was kind of unpopular because ETFs were not really common amongst asset managers. And today, we have over $240 billion in assets in that franchise alone. The story of acquisition continued with Deutsche Bank, Source in Europe, Guggenheim and Oppenheimer. And the one thing that I personally think is very impressive and tells a story about our strategy is that we never acquired a company just to add assets to our lineup. We never made an acquisition for the sake of adding scale. But all the acquisitions that we made were meant to deliver capabilities in areas that we thought were very important to our strategy and where we did not have a presence. So if you look at the names of the companies that we acquired, those names are not as important as the names and the strategies that you see underneath. That was the strength of the acquisition. We bought the Deutsche Bank business because we wanted to have a presence in the commodity market. We bought Source because Source was the greatest ETF sponsor in terms of size, offering the leading synthetic platform in Europe. We bought Guggenheim for the equal weight S&P 500 and the BulletShares. And if you look at the beginning assets and ending assets, we were able to grow each one of those franchises at a rate that was faster than what we believe those franchises in itself thinking in isolation would have been able to deliver. Same thing for Oppenheimer. And then 2.5 years ago, we started offering institutional indexing solutions to clients that were trying to use a model of solution approach to their portfolio or a barbelling approach. And that business went from 0 to over $55 billion. So that also was a story of organic success. And this is not a coincidence because our strategy and our philosophy has never been around being the biggest, being the largest, offering scale at low cost. We have built our strategy based on value-add proposition. We don't compete in the bulk data segment of the market. We have created a franchise revolving around concepts of smart beta, laser focused solutions, what we call power tools. So we have products that are -- that span from ESG to thematic, to smart beta, to commodities. We want to provide our clients value add solutions that also command a higher price. So when people associate the words, the letters ETFs to low cost beta, this is not what we do. And we usually present ourselves or used to present ourselves as the fourth largest providers of ETFs globally. We moved away from that because that really doesn't tell a story of who we are. We don't compete in the bulk beta segment of the market. And for this reason, it's really hard to say we are the fourth largest provider. But if you look at all of these bubbles here, this is an example of our first-to-market capabilities. These are strategies that we brought to market, and we pretty much invented them before they become household names. Equal weight opportunities, BulletShares, solar ETFs, fundamentally weighted indices. This is all something that really resonates with who we are and the value proposition that we want to give to our clients. Our value proposition is really summarized into pioneering the new possible because we want to be first, we want to give our clients something that they didn't have, and we want to provide our clients with power tools that can really maximize the outcome of their portfolios. And this is the league table that is really important to us. This is not -- we are the fourth largest provider, but this is where do we compete? Look at these segments. These are the segments that are very important to us. The smart beta segment fixed income, commodities innovation. And those are segments where we are not the #4 provider, we are leading providers. And how do we know that? We look at a number of different metrics. And these metrics are all equally important. We look at the number of ETFs that we have in market. We look at the track history of funds because having a track history that spans over a decade is also a testament to the resiliency of those strategies. And then we look at scale. We look at the number of funds with assets exceeding $0.5 billion. Scale is important, especially when it comes to ETFs. And when we calculate all of these metrics together, you can see where we rank in the league table. That's something that we watch every month, every week, every day, dropping 1 place, dropping 2 places, this is what hurts. This is what we keep monitoring. This is where we want to win. And the power of our platform is that unlike many of our competitors, we have a global platform, which gives us the ability to leverage global capabilities and gives us the ability to be in market, close to clients, boots on the ground. Proximity to clients is incredibly important because this is not a solution. These are not products that stand on their own. If we don't solve the problem for a client, we are not really innovating. There is no innovation if innovation doesn't solve a problem. And having the ability to be boots-on-the-ground, close to clients, also gives us the unique opportunity to leverage the global platform while at the same time create solutions that are driven by regional needs. And you can see that translated in our product offering. This is not a one size fits all. We don't have products in the U.S. that we export everywhere just because we believe that whatever is working in a region can work everywhere. We have products in the U.S. that really tilt toward a better and smart beta. And then we have a different European platform that is more bulk beta related synthetic S&P 500 market segment related. And why do we do that? Because this is what our clients want. So being able to match global platform to regional capabilities gives us a unique competitive advantage over most of our competitors. And -- this is probably the most important slide when I look at the deck, at least for me, in building a strategy, because the one thing that my team doesn't like to hear, which is very true, and I keep repeating it regardless, is that ultimately, what I think, what they think, doesn't matter. The only thing that matters is what our clients think because we can have the best idea, the more complex product strategy, but if our clients don't want it, it's worthless. So we have to look at our client base, and this is how we are -- this is the segmentation of our channels. And you can see that in the U.S., our clients are very different from our clients in Europe. In the U.S., the bulk of our flows comes from advisers, home offices, RIAs, the intermediate segment of the market. Whereas in Europe, the bulk of our assets come from private banks, institutional investors. And to us, that's critical. You cannot build a strategy, you cannot be client-centric if you don't know who your clients are. And if you start the bottom up, if you look at your clients and build the strategies for them, this is where we really compete, and this is where we draw our wins. If you look at the trends -- so these are the trends that are now dominating the ETF market. They go from ESG thematic fixed income commodities. So this is something that you have seen in a couple of slides ago. ESG is a very interesting trend because in the U.S. is very polarizing. And we don't see as much as an aggressive flow in ESG strategies in the U.S. as we see in other markets. So for example, the European market or the Canadian market, this is the absolute biggest trend in those markets. Innovation is -- this is a story of growth. And I'm sure that all of you are very familiar with our flagship product, which is the Invesco QQQ trust We have built an innovation suite around the QQQ. We have the junior QQQ, we have the next generation QQQ. We have a smart beta technology NASDAQ-listed companies driven. And that entire package, which we have labeled our Innovation Suite is something that tells a story about growth and continues to be relevant even if there is a little tilt towards value in the current market. We have seen very good flows in the innovation suite, and we believe that the combination of innovation, technology and growth is a story that continues to resonate with our clients. And again, going back to what do our clients think about us. We track that. We monitor that. How well do our clients know us and what's our reputation in the marketplace? In 2018, we took a very significant step, and that was eliminating the Invesco sub-brands. You may recall the old PowerShares, which was the initial brand of our ETF business. So we moved that to a single brand, that single brand being Invesco. That was an emotional decision because when you are so passionate about something, you really wear the name on your sleeves. All of our employees show up on Friday, casual Friday, with the PowerShares jersey. So it was an emotional decision. But that was the absolute right decision because unifying everything under a single brand really provided the markets the perception of one company, one brand, speaking with a single voice, which is scale, which is relevant. And if you look at how the perception of Invesco as a leader in the ETF space grew over the last 4 or 5 years. So you will see that our clients are embracing our value propositions as leaders in the ETF marketplace. And the other thing that I usually say is that -- English is my second language, so I don't like words too much, but I like numbers more. So let's look at the numbers. Let's look at the results. In the last 2 years, we had -- we were successful in bringing net flows of $127 billion. That was a 25% -- 21% growth rate. Of this, $92 billion were flows into our ETF wrapper. And more importantly, which is going back to ETFs are not all created equal, and not just low-cost beta ETFs are being solved in today's market environment. We generated $173 million of net new fees for Invesco, where it counts the bottom line within that our investors pay premium price for value add strategies. And we are growing. What is our aspiration? If the ETF segment of the market is growing faster than the asset management in itself, we want to grow even faster than the ETF segment of the market, not only in terms of assets, but also in terms of fees. And you can see that where we start from our market share of AUM and we add the flows and we had the revenues generated, we are gaining market share. We are chipping away with our market share. And this is exactly what we want to see. New money is coming into the ETF industry. We don't want to be lifted just because the way this lifting everybody. We want to grow bigger and faster than the market. And when that happens, we know that our strategy is working. And you can also measure that with a different visual. And by the way, this presentation was uploaded this morning. So you can look at the numbers at your leisure. We also measure market share of revenues. And if you can see from this slide, we started with a market share of revenue of 4.9%, and we ended up last year with a market share of 5.6%. So we were able not only to capture flows, but we were also able to capture a higher percentage of revenues coming into the marketplace. And this is another example of what really makes us proud about what we do, the quality of our products. We intentionally eliminated the names of our competitors. But if you look at the flows generated since January 2021 by Invesco and the 2 largest competitors, you can see that our net revenue yield was 30 basis points. And for our competitors, it was 5 or 12 basis points. So our products carry a premium price. And not just because we want more money, but because it is reflective of the value proposition of what we offer in the marketplace. Look at the top 5 products in the last 2 years in terms of flows. Competitor A and B, they are commoditized, they are interchangeable. You walk into a client office and you have to explain why your S&P 500 is better than the competition, and they carry the same fees. That's not what we do. Look at the quality of our offering. Equal weight, innovation, low volatility, commodities, BulletShares. This is a story of quality. It's not just a story of assets and scale. And because of that, we were able to generate really significant revenues for Invesco's bottom line, started the assets with 2.7% of AUM, and we capture revenues of 5.4% of the revenues hitting the ETF landscape. So with that, I think I want to leave you with just 4 takeaways. So the first one is that top 4 ETF provider globally doesn't always tell the story. You have to do a couple of clicks down and understand in those segments where we compete, we are not #4. We are #1, we are #2, that's the league table that is important to us. We have about $450 billion in ETFs and other index capabilities. That's important. Scale matters because there are very low barriers to entry when it comes to ETFs, but scale is important. If you don't scale, you will not be able to be successful in this market, you will not be able to be relevant with a large number of the investor population. In nontraditional ETFs, which is no market, not bulk beta ETFs, we are market leaders. And the QQQ is giving us a huge advantage when it comes to brand recognition. We have built a multiyear partnership with the NCAA. We work with students and student athletes and [indiscernible] but also financial education, how to buy securities, what an ETF is, how to buy ETFs in their portfolio, and that's important because this is the new generation of investors. In the next 10 years, we will see a shift of [ wealth ] in our industry. And those students and student catalysts today are the ones that are going to really carry the decision-making ability when it comes to the shift of work. And for us, it's important. We are approaching a march madness, and our goal is not to be able to wake up in the morning without seeing Invesco QQQ. Whether you listen to the radio, you watch TV or you do as little as wake up in the morning and go for a coffee, you will see us, so we will be impossible not to see. And leveraging the brand recognition of QQQ is also something that lifts the Invesco brand altogether. So I know that we are running out of time, as you -- I mean, as you can tell, I can keep talking for the rest of the day. But with that, I'm just going to take a breather and let's see if there are questions currently.

Great. Anna, that was great. And I heard you say earlier that this slide deck was just uploaded to the IR website, if anyone want to check it out later. Let me just start with a question actually for Allison. Allison, you announced some big changes last week. Marty will be retiring, Andrew will be your next CEO. How does this affect the long-term growth strategy, if at all? And should we expect additional organizational changes in the future? A lot of times you get them with somebody new running the company.

Yes. I think what's really important in all of this is this is not a change in strategy. This is actually an amplification of our strategy, the strategy that we've been talking about pretty consistently for the last couple of years and namely, that's our investment in our key growth capabilities, ETFs, which you've just heard all about as well as our private markets products, China, fixed income, our solutions capability and those being our primary growth drivers, and I'd have to also say, well, active equity has certainly been under pressure and seen a lot of headwind over the last year in particular. We are highly committed to our active equity strategies as well. So with this change, this is not a change in strategy. This is really an amplification of our execution against that strategy. As an executive leadership team, we've been working on some of these changes in terms of the organizational alignment over the last couple of months, and we're incredibly excited. It's really an opportunity for us to simplify our approach through some structural alignment that's going to allow us to execute faster against that strategy as we scale. And so the excitement inside of the company is very real. Because, again, it gives us the opportunity just to align ourselves in a way that we can execute faster.

And my second question is for Anna. Anna, in -- PowerShares is not used anymore. But once upon a time, it was an independent ETF provider. There's still some ETF providers out there that are independent. But your ETF business is part of a $1.4 trillion global asset management firm. The distribution across the world, scale in key channels like the retail channel, how does that benefit your ETF business, which some other independent ETF businesses may not have that same advantage?

So that's a good question, Craig. It's -- so first of all, the ability to leverage the platform is incredibly significant. I'll give you an example. We have global trading desk that can execute trades in many different regions, and it takes a lot of time and efforts to build such a big trading desk. We also have the relevance, and we do have the resources to execute large trades in a way that is invisible to the market. Now think about a $500 billion index business. And think about the volume that we have to digest every time we rebalance one of those portfolios. The QQQ is now $160 billion. At the peak in 2021, it was $200 billion. That fund rebalances once a year. You need to have a really strong infrastructure to be able to do this larger scale of imbalances in a way that is completely invisible to the market. Think about emerging markets debt, fixed income, bank loans, the ability to trade in asset classes that are not as liquid as equity, really differentiates us from the competition. This is not something that you can do as a small provider. Or the cost of regulation, ESG. Having a global platform that can provide legal, compliance technology, it is something that not everybody can afford and not everybody can do well. And then the other thing I would say is technology. Contrary to popular belief, there is very leader passive in passive investing. Or as one of my colleagues said, you have to be quite active to be purely passive. You have to be able to make decisions to track the index. You have to have the appropriate technology. We have been building our internal systems of our passive investments for the last 20 years. And the ability to leverage a big infrastructure and big investments in technology is really what can make or break and being part of a global platform like Invesco this is what really gives us the ability to do everything we do.

Great. At this moment, let me just see if there's any questions in the audience.