The operator welcomes participants to Invesco's Third Quarter Earnings Conference Call and reminds them that the call is being recorded. Greg Ketron, Head of Investor Relations, introduces the call and mentions that a presentation and press release are available on the company's website. He also mentions that the presentation will include forward-looking statements and non-GAAP financial measures. The call will be led by President and CEO Andrew Schlossberg and CFO Allison Dukes, with a Q&A session to follow. Before discussing the quarter's results, Schlossberg acknowledges the humanitarian crisis in the Middle East and expresses concern for those affected.

The speaker begins discussing the third quarter earnings and notes the volatility and uncertainty in global markets. They mention the challenge of investors moving to the sidelines, but also the potential for money to move back into higher risk assets. The company's positive net long-term inflows are attributed to their strong client relationships, geographic mix, and investment solutions. The ETF and SMA platforms have been particularly successful, with record flows and market share gains. The company is also seeing momentum in fixed income flows and is well-positioned to meet the demand for personalization and tax optimization from wealth management clients.

Invesco has seen growth in areas like ETFs, SMAs, and fixed income, but is facing outflows in active equities. However, they have seen improvement in global, international, and emerging market equity segments and are working to improve investment quality, product differentiation, and client engagement in these areas. The company is also undertaking a multi-quarter plan to simplify and streamline the organization to better meet evolving client demands and improve profitability. This includes establishing a unified fixed income platform and creating a single multi-asset group from three separate teams.

State Street is simplifying and streamlining its operations by bringing together leadership, strengthening its private market platform, and utilizing its State Street Alpha platform. They are also focusing on repositioning growth and efficiency in their product and distribution efforts, with a particular focus on ETFs, SMAs, and model portfolios. By reducing their product line and globalizing marketing and digital delivery, they are finding opportunities to leverage their scale and use technology to lower costs and improve capabilities. These simplification efforts are expected to drive revenue acceleration and lead to sustainable profit growth and margin expansion over time.

Investors are expected to move out of cash and increase their fixed income allocations, providing an opportunity for Invesco to capture a significant share due to their strong fixed income platform. This platform includes diverse asset classes, strong investment performance, and a mix of active and passive products. Invesco's global liquidity, stable value, municipal, and investment-grade capabilities are all well-positioned for growth and have shown strong performance. Additionally, their global and emerging markets fixed income capabilities are well-placed for growth in various markets.

Invesco believes there is great potential for growth in their fixed income ETFs and bank loan capabilities, especially as clients seek to work with fewer asset managers. Their strategic relationship with MassMutual is also highlighted, as MassMutual is one of their largest investors and has significantly increased their commitments over the years. Invesco works closely with MassMutual to manage assets through their insurance and broker-dealer channels.

Invesco's relationship with MassMutual is important and has potential for growth. Investment performance was solid in the third quarter, with most actively managed funds outperforming their benchmarks. AUM decreased due to market declines and foreign exchange movements, but the company still generated positive net flows. Invesco expects to outperform peers in terms of organic asset growth despite market volatility.

In the past quarter, our company has seen strong demand from clients for passive investment capabilities, resulting in $13.5 billion in net long-term inflows. Our ETFs, particularly the SMB 500 Equal Weight Index fund and the newer QQQM, have been top performers and continue to attract significant investments. However, we did experience $10.9 billion in net outflows in active strategies, largely due to a single redemption in our global targeted return strategy. We have announced plans to close this fund and focus on other areas where client demand is stronger. The retail channel generated $4.3 billion in inflows, while the institutional channel saw $1.7 billion in outflows due to the redemption. Overall, our company has demonstrated consistent growth in ETFs and index strategies throughout the market cycle.

In the Asia-Pacific region, Invesco experienced net long-term inflows of $2.8 billion, mainly due to growth in Japan. However, there were outflows in Greater China, particularly in fixed income. Invesco is well-positioned to capture additional share in the Chinese market as the economy recovers. Equities generated the most inflows, while alternatives had outflows due to a single client redemption. Invesco's private markets platform has a good track record and they have $6 billion available for investment, but market clarity is needed for this to materialize.

The article discusses the changes in asset mix and revenue profile of the company since the acquisition of Oppenheimer Funds. There has been a significant increase in ETF and index AUM, as well as growth in Asia-Pacific, but weaker demand for fundamental equities. This has resulted in revenue headwinds for the company over the past two years, despite strong organic growth in lower fee capabilities.

The overall net revenue yield of the company has decreased due to a shift in their asset mix, not a decline in their investment strategy yields. The company's portfolio is now more diversified and better positioned to navigate market cycles and changing client demand. Net revenues in the third quarter were slightly lower than the same period last year, but expenses were higher due to organizational changes and compensation expenses. The company expects to see benefits from their simplification efforts in the future and has identified $50 million in annual expense savings.

The company incurred $39 million in restructuring costs in the third quarter and expects an additional $15-20 million in the fourth quarter. They have managed variable compensation to align with company performance and have reduced marketing expenses. Property, office, and technology expenses remained unchanged. G&A expenses decreased by $6 million from the previous quarter, but increased by $2 million compared to the same quarter last year. The third quarter also included $8 million in spending on their Alpha platform. Adjusted operating income for the quarter was $309 million, including costs related to organizational changes.

The company's adjusted operating margin for the third quarter was 28.2%, but excluding costs related to organizational changes, it would have been higher. Earnings per share was $0.35, but would have been $0.07 higher without expenses related to organizational changes. The effective tax rate was 23.6% and is estimated to be between 23% and 25% for the fourth quarter. The company has made progress in building balance sheet strength, with a cash balance of over $1.2 billion and a net debt of less than $250 million. The company aims to bring net debt down to zero by the second half of next year. The company's leverage ratio was 0.7 times at the end of the third quarter and they plan to further address outstanding debt with the maturity of $600 million in senior notes. The company's net flow performance has remained resilient in a difficult environment for organic growth. They are simplifying the organization and investing in key capability areas while also driving profitable growth and maintaining a high level of financial performance.

The speaker, Andrew Schlossberg, responds to a question from Glenn Schorr regarding the strength of fixed income flows. Schlossberg explains that clients are waiting for clarity from central banks and a reason to move off the sidelines before investing. He also mentions that conversations have been active and that there has been a repositioning in the treasuries market. Allison Dukes adds that 85% of their money market portfolio is managed by corporate treasurers, who are seeking higher yields and are unlikely to invest in riskier strategies like equities.

The speaker discusses the composition of their money market client base, noting that 85% is institutionally owned. They also mention that the fee rate on fixed income is lower but flows into this area would be accretive to overall margins. They expect fixed income to be a key area of growth and are seeking to scale up in this area. They also mention that 25% of portfolios are currently in cash waiting for rates to stop going higher. When asked about which bond verticals they are most positive on in 2024, they mention that they are positive on active fixed income and expect growth in this area, but also anticipate flows from passive investments through their ETF platform.

The company believes that the market for both active and passive investments will continue to grow. They are well-positioned in the municipal and European corporate bond markets and are seeing strong performance in their short-term fixed income portfolio. They also expect to see a rebound in flows from China, as the government works to stabilize the economy and improve sentiment.

In the third quarter, the company expects to see $50 million in savings from recent changes, with the majority of those savings materializing in the fourth quarter. The severance and reorganizational expenses were higher in the third quarter due to pulling forward some of those savings. The company expects to see around $10 million in compensation expense improvements in the fourth quarter, with the total savings expected to reach $40 million. The company is confident in its position for when the market rebounds, although it is difficult to predict when that will occur.

The company is making streamlining decisions across the entire organization, from operations to investment teams. They are seeking to simplify and globalize processes. The majority of the savings will come from compensation expenses. The institutional pipeline for the quarter was $20 billion, with $17.5 billion in gross inflows from the institutional channel, 43% of which came from the pipeline. The pipeline is a good health measure and has been consistent in the $20 billion to $30 billion range.

Ken Worthington asks about the backlog for alternatives and where they stand in the pipeline. Allison Dukes responds that alternatives held steady while equity shrunk. The majority of the $6 billion in dry powder for private markets is in real estate, with a focus on opportunistic and stressed opportunities. Real estate debt is seeing the most demand.

The speaker, Allison, discusses the company's performance in private credit and traditional direct lending in Europe and the US. The next question is about the pressure on fee rates, but Allison explains that the net distribution line is in line with historical averages and should be viewed on a year-to-date basis rather than quarter-to-quarter. The speaker also suggests providing more detailed information on fee rates and revenue by asset class in future reports. Lastly, the loss of a single account with GTR is mentioned.

In this paragraph, Allison Dukes is answering a question from Brennan Hawken about the fee rate for a single large investor in the alternative business of the firm. She points to Page 9 for more information and explains that the fee rate for this capability was higher than the firm's average. She also acknowledges the challenge of embedding this information in financial models and expresses a desire to make the data more digestible. The next question comes from Michael Cyprys who is greeted by the speaker.

The speaker is asked about the potential impact of the Basel III capital requirements on the asset management industry and their business. They explain that the regulations have little to no impact on them, but they see opportunities in private credit and real estate debt financing. They also mention their innovative approach in bank loans and liquidity. They do not see Basel III as a focus for their business.

The company is focusing on streamlining its organization and using generative AI to improve efficiency. They are currently experimenting with traditional applications and hope to use AI to lower costs, speed up processes, and improve the client experience. They have not yet started to use AI for investments, but are using it internally for sales. They plan to continue investing in this area, but it is too early to quantify the benefits. On a different note, the company's fundamental equities franchise has shrunk as a proportion of their overall asset base but remains the highest revenue yielding area.

Andrew Schlossberg discusses the investments being made in the fundamental equities franchise and the potential of active ETFs. The focus is on improving performance, risk management, and distribution. The international, global, and emerging markets are seen as areas with high potential for growth and differentiation from passive investments. These areas are experiencing the most improvement in net flows.

The company saw $1 billion in net outflows for certain categories globally in the quarter, and expects to see growth in the future. They are well positioned in the ETF platform and plan to bring active strategies to market in various vehicles, including SMAs. The development of active ETFs will take time, but the company plans to be a frontrunner. The $10 million improvement in the compensation line for the fourth quarter does not include the impact of charges from the previous quarters. The company anticipates further cost savings in the future. Marketing expenses in EMEA are typically high in the fourth quarter, and the company expects to see savings from the State Street output. There are no other comments on the property and G&A lines for the fourth quarter.

The speaker, Allison Dukes, is discussing the company's expenses and how they have been impacted by executive retirement, reorganization, and severance costs. She mentions that when these factors are removed, expenses have remained consistent. She also notes that Alpha, a subsidiary, has been contributing to expenses since the second quarter and will continue to do so as the company simplifies its operations.

The company will continue to focus on finding efficiencies and managing expenses to improve operating margin. Next year, revenue will be a key factor in improving margins, but the company is also focused on managing expenses, especially with the implementation of the new Alpha system. The company is pleased with their third quarter flows, which highlight the diversification of their platform and its alignment with client demand.

The organization is making thoughtful decisions to simplify and invest in technology to create positive operating leverage. They are also focused on expense discipline and streamlining efforts to grow revenue and be more efficient. The net revenue yield is expected to stabilize due to diversification, but there will be a $10 million impact on revenue from changes in China's fee rates. This will not have a significant impact on operating income, as there will also be a reduction in comp expenses.

The speaker responds to a question about the potential impact of fee rate changes on their business in China. They mention that while there may be some initial impact on revenue, they believe their company is well positioned to benefit from regulatory changes and fee rate decreases for smaller players. They also mention that they expect to see continued downward pressure on their fee rate due to market trends, but their net revenue yield was higher this quarter compared to last.

The downward pressure on fees is expected to moderate as the company's fee rate gets closer to the average passive fee rate. The company's focus on fundamental equity and passive investments has resulted in outflows and a decline in average AUM, but other areas such as APAC managed, private markets, and multi-asset investments are expected to be accretive to the overall fee rate and help stabilize the decline. The company plans to grow its average AUM, which will also contribute to stabilizing the decline in fee rate. The company's underperformance in market share capture and redemptions is expected to improve and eventually lead to positive flows.

During a recent earnings call, Allison Dukes, the CFO of a financial firm, discussed the impact of their ETF business on margins. She stated that the ETF business used to be a drag on margins, but it is now accretive to the firm's margin and they are focused on growing it further. The firm is also working on expanding their private markets product offerings through partnerships, but it is unclear if this will involve organic product development or focus on existing partnerships.

In this paragraph, the speaker discusses the private market seeding for the strategies mentioned earlier and how much of it has already happened. They also mention their partnership with MassMutual and their focus on growing third-party assets from institutions and wealth managers. The speaker concludes by expressing their belief in Invesco's opportunities and their efforts to simplify and streamline the organization for improved profitability.

This summary was generated with AI and may contain some inaccuracies.