Invesco's Fourth Quarter Earnings Conference Call was opened by the operator, and the call was turned over to Greg Ketron, the Head of Investor Relations. The presentation provided covered the topics to be discussed, including forward-looking statements and non-GAAP financial measures. President and CEO Andrew Schlossberg and CFO Allison Dukes presented the company's results and answered questions. The overall market sentiment in the fourth quarter was more positive, leading to investors putting money back into equities and fixed income. This was due to a growing belief that central banks would cut rates sooner in 2024.

The S&P was the top-performing equity index, with solid market growth in Europe but lagging performance in China. Fixed income markets also performed well, led by government bonds. Invesco has been focused on streamlining and simplifying the company, emphasizing long-term investment quality and strengthening their product offering. They are also tightening their financial discipline and leveraging their scale for profitable growth. In the fourth quarter, Invesco saw $6.7 billion in net long-term inflows, demonstrating their strong client relationships and in-demand solutions.

In the fourth quarter, the company saw strong organic flow growth, driven by demand for ETFs and SMAs. They also had positive flows in their China business and private market alternatives. The majority of the flow growth in China came from new product launches, indicating potential for growth in the future. The company remains optimistic about the Chinese asset management industry and saw net inflows in private markets, particularly in direct real estate and credit strategies.

In this paragraph, the author discusses Invesco's financial position and performance in various areas. They mention having over $6 billion available for investment opportunities, but acknowledge the need for market clarity before significant growth can occur. In terms of fixed income, Invesco has seen steady growth and expects this trend to continue as investors gain more clarity on inflation and interest rates. However, active equity flows have been under pressure, though there has been some moderation in certain segments. The company remains focused on quality, differentiation, and client engagement to maintain its leading position in this space. They also mention seeing signs of reversal in outflows in global, international, and emerging market strategies, particularly in their Global Equity and Income strategy. Overall, Invesco is cautiously optimistic about market conditions for 2024 and is prepared to meet expectations in a range of scenarios.

The company has a strong range of capabilities, disciplined performance, and a focused organizational structure to meet client demands. Investment performance was solid in the fourth quarter, with a majority of actively managed funds outperforming their benchmarks. AUM increased by $100 billion, driven by higher markets, net inflows, and favorable foreign exchange movements. The company expects to continue outperforming peers in organic asset growth.

In the second quarter, client demand for passive investment capabilities remained strong, with $14 billion in net long-term inflows, including $12.4 billion from ETFs. The S&P 500 Equal Weight Index bond was the top-performing ETF, with $4.6 billion in inflows for the quarter and $13 billion for the year. The Q2 QM ETF also saw significant inflows, with over $2 billion for the quarter and over $18 billion in AUM since its launch. However, there were $7.2 million in net outflows from active strategies, although this was the second lowest level since the market sell-off began in early 2022. Active fixed income products, particularly the custom fixed income SMA, saw strong inflows, while active equity strategies saw mixed results, with strong growth in Japan but net outflows from global equity products, particularly in developing markets.

In the fourth quarter, the retail channel had $4.6 billion in net long-term inflows, while the institutional channel had $2.1 billion. This growth was driven by ETF products and custom fixed income strategies. In terms of geography, the Asia Pacific region saw the most growth with $5.8 billion in net long-term inflows, driven by Japan and our China joint venture. Equities had $8.3 billion in net long-term inflows, mainly from ETFs, while fixed income was impacted by planned maturities but had $2.9 billion in inflows excluding those. Alternatives saw $1 billion in inflows from bank loans and $400 million in direct real estate, offset by outflows in other products.

The company has a strong track record in private markets and is well positioned to capture long-term flows in this asset class as client demand shifts. Since the acquisition of Oppenheimer Fund, the company's asset mix has significantly changed, with ETF and index AUM growing from 14% to 22% of overall AUM. However, there has been weaker demand for fundamental equities and multi-asset products due to risk-off sentiment and other factors.

In the fourth quarter of 2023, the company experienced similar trends with ETF and QQQ increasing while fundamental equities and multi-asset declined as a percentage of average AUM. This has resulted in revenue headwinds over the past four years, but the company's overall net revenue yields have remained stable. The company's portfolio is now more diversified, reducing concentration risk in higher fee products. Net revenue in the fourth quarter was $62 million lower than the previous year, primarily due to a decline in performance fees and a shift in asset mix.

In the fourth quarter, the decline in performance fees was due to lower fees from real estate and private market activities. Adjusted operating expenses were relatively unchanged from the previous year, but lower than the third quarter. Employee compensation was impacted by organizational changes, resulting in $11 million in expense savings. Marketing expenses were tightly managed, while property, office, and technology expenses remained flat. G&A was higher than the previous quarter, and there was an increase in spending related to the Alpha platform implementation. Going forward, onetime implementation costs are expected to be around $10 million per quarter in 2024.

In the fourth quarter, the company achieved $11 million in expense savings and expects to reach $44 million in annualized savings by 2024. They do not anticipate any further restructuring costs and expect the full benefits of their simplification efforts to be seen over time. The company's compensation to net revenue ratio is expected to be at or slightly above the higher end of the 38% to 42% range in 2024. Adjusted operating income was $275 million in the fourth quarter, with an adjusted operating margin of 26.3%. Excluding costs related to organizational changes, operating margin would have been 210 basis points higher and earnings per share would have been $0.04 higher. The effective tax rate decreased to 9.9% in the fourth quarter from 23.6% last quarter.

The company's decrease in tax rate was due to certain tax benefits and changes in income mix. They estimate their non-GAAP effective tax rate to be between 23% and 25% for the first quarter of 2024. The company's priority is to build balance sheet strength, and they have significantly lowered their net debt. They plan to redeem a $600 million senior note and hope to begin a regular stock buyback program. The company is committed to driving profitable growth and has a strong strategic positioning. The line is now open for questions from analysts.

During an investor call, Invesco executives discussed the movement of clients' cash into longer duration fixed income. They noted that while there have been some fixed income flows, there have been more money market outflows in recent quarters. The executives stated that some of this money is likely going into ETFs, indicating a lack of conviction, while other clients are moving into municipal bonds and investment-grade strategies. They also mentioned that their corporate treasury clients are buying T-bills directly, and that their money market products are primarily used by institutional clients.

The speaker explains that their company will continue to focus on cash yielding products in the retail sector, as it is a smaller part of their client base. They discuss the impact of market performance on revenue yields, with the market up significantly in the fourth quarter. They expect a modest increase in net revenue yield in the first quarter due to this market performance, but note that client demand and product mix also play a significant role in revenue. They also mention that demand for lower fee products has been strong.

Allison Dukes provides an update on the flows in the Alternatives and private markets business, noting modest inflows in direct real estate and private credit, while public alternatives saw outflows. The business is seeing growth potential in private credit, driven by bank loans and CLOs, but is facing challenges in the real estate market. Overall, the business is well positioned in a broadening market and diversified portfolio.

The speaker, Andrew Schlossberg, discusses the company's focus on private markets and alternatives as a key opportunity for growth. He also mentions their efforts to diversify into wealth management and retail markets. In terms of expenses, Allison Dukes explains that the State Street project will result in some fluctuations, but they expect an average of $10 million per quarter through 2024.

Management expects expenses to increase until 2025 and then start to decrease as implementation costs fade and systems are rationalized. The focus is on eliminating duplication and streamlining operations to improve the client experience. The first quarter is expected to see lower G&A expenses, higher compensation expenses, and the realization of expense savings. This assumes flat markets as of 12/31.

The speaker is addressing a question about margins on slide 10 and explains that excluding unusual items, margins in 4Q 2023 were the lowest on the page. They attribute this to a combination of factors, including business mix and underlying expenses. They mention that the implementation of TIR has also had an impact on margins. The shift in business mix towards lower fee capabilities, such as ETFs and index funds, is also a factor. Within these categories, there has been a shift towards certain products, like the S&P 500 Equal Weight and QQQM, which have lower fees compared to other higher fee capabilities. Overall, business mix is a major driver of the margin pressure.

The speaker discusses the company's relationship with Mass Mutual, a preferred shareholder with $12 billion invested in the company's broker-dealer, annuity, and private market strategies. The partnership has been beneficial and has helped the company bring new strategies to wealth management.

The company has a strong partnership with another company and is focused on growing it further. They are looking for opportunities to expand their relationship in areas such as insurance, alternative strategies, and fixed income and equity products. The company plans to reengage in share buybacks once they have reduced their net debt to zero, which is a stated goal. They expect their payout ratio to remain in the 40% to 60% range, with a focus on increasing the common dividend and buying back stock. However, they are a few quarters away from reaching this goal due to seasonal cash needs.

The speaker is pleased with the progress of the balance sheet and the growth in cash. They feel they are in a position to be more opportunistic with their investments. They are currently focused on organic growth but may consider small acquisitions in the future. The developing markets fund has improved in performance but is still experiencing outflows.

The speaker is discussing the performance of a fund and the factors that could potentially lead to an increase in client interest. They mention the importance of strong investment performance and a decrease in redemptions, but note that an increase in gross sales will likely depend on overall market demand. The speaker also briefly mentions the performance of other categories and the potential impact on expenses for the full year.

The speaker discusses the expense base and expectations for 2024, noting that they expect it to be flat or slightly higher due to inflationary pressures and implementation costs. They also mention the potential for modest improvement in operating margin. The conversation then shifts to the QQQ franchise and the potential for monetization of the asset base, with QQQM at $20 billion in AUM and QQQ at more than 10 times that.

The QQQ is a valuable asset for Invesco, providing brand awareness and marketing opportunities. The QQQM has been a successful cannibalization strategy, but it has a lower net revenue yield. The relationship with NASDAQ has been key in growing the QQQ franchise.

The QQQM is an alternative to the traditional QQQ and is geared towards long-term investors. The ETF industry is seeing a shift towards being preferred by both short-term and long-term investors. The company plans to invest in areas such as ETFs, SMAs, factor and indexer capabilities, and private markets to drive growth.

The company's institutional product capabilities are its main strength, and they are investing in and building out these capabilities for client demand. They are also investing in education and improving the client experience through technology and systems. The company is also pruning and closing less in-demand product lines and focusing on delivering products through vehicles like ETFs and SMAs.

Craig Siegenthaler asks about the 40% to 60% payout target and why it's not higher. Allison Dukes explains that they want to have the ability to execute on M&A opportunities and continue to build cash. Craig then asks about the $3 billion in alt seed capital for MassMutual and how successful it has been. Andrew Schlossberg mentions the non-traded REIT and real estate debt strategies as the most important ones, with MassMutual still being a large partner in the non-traded REIT strategy.

The speaker discusses the company's strategic plans, including investing in various capabilities and showing up at wealth management platforms with new packages. They also mention a goal of increasing margins to the mid-30s in the next few years.

The company is focused on controlling expenses in 2024 despite facing headwinds, such as implementation. They plan to hold expenses flat and eliminate unnecessary expenses or reinvest them in areas that will fuel growth. They are also planning to launch new products in the wealth space, such as real estate debt and private credit strategies, in various regions. The last question asked was about expenses.

Allison Dukes, in response to a question about operational efficiency and expense management, states that the company is aiming for a one-third variable expense base in relation to revenue. She also mentions ongoing efforts to streamline costs and evaluate past practices, such as office space rationalization, in order to drive greater operational efficiency. These efforts will continue in the coming years.

The company has been working on streamlining their business for the past year, and this has been one of their most impactful efforts. They have brought together different areas of their business and are now able to think about margins and strategies at scale. As they enter 2024, they feel well-positioned to help their clients navigate market changes and are confident that this will lead to improved profitability.

The speaker expresses gratitude to colleagues, executive leadership team, and Board of Directors for their efforts in 2023 and their focus on clients and shareholders. They mention a smooth transition and excitement for the future of Invesco. The speaker thanks everyone for joining the call and invites them to reach out to the Investor Relations team for any questions. The call concludes and the operator thanks everyone for participating.

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