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Presentation

Invesco Ltd. misses on earnings expectations. Reported EPS is $0.251 EPS, expectations were $0.44.

Operator: Good morning, and welcome to Invesco’s Third Quarter Earnings Conference Call. All participants will be in a listen-only mode, until the question-and-answer session. [Operator Instructions] This call will last 1 hour. To allow more participants to ask questions, one question and a follow-up can be submitted per participant. As a reminder, today’s call is being recorded. Now I’d like to turn the call over to Greg Ketron, Invesco’s Head of Investor Relations. Sir, you may begin.

Gregory Ketron: All right. Thanks, Cedric, and to all of you joining us on Invesco’s quarterly earnings call. In addition to today’s press release, we have provided a presentation that covers the topics we plan to address. The press release and presentation are available on our website at invesco.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third-parties.

The only authorized webcasts are located on our website. Andrew Schlossberg, President and CEO; and Allison Dukes, Chief Financial Officer, will present our results this morning, and then, we’ll open up the call for questions. I’ll now turn the call over to Andrew.

Andrew Schlossberg: Thanks, Greg, and good morning, everyone. I’m pleased to be speaking with you today. We continued our positive momentum this quarter, executing across several strategically important areas of our business and finishing this quarter with record long-term AUM, continued robust net long-term inflows, improved operating leverage, a stronger balance sheet and higher return of capital to shareholders. We achieved this despite continued volatility globally. U.S. markets ended the quarter with strong equity returns even though we saw high intra-quarter market fluctuation as ongoing geopolitical concerns, coupled with mixed signals drove cautious investor sentiment. Long-awaited Federal Reserve cuts commenced by the end of the quarter, a new stimulus to China was announced and Japanese policymakers struck a less hawkish tone.

All factors that helped us assuage concerns and a drive a rally into quarter end as investors began to rotate money off the sidelines and into some risk assets. As a result, we began to see some broadening of investor demand in both the equity and fixed income markets. Conversely, the Chinese markets remain challenging for most of the period and fixed income appetite waned mid-quarter due to a rebound in bond yields, which drove industry redemptions. However, the recent stimulus drove a strong equity rally late in September with only a few trading days to have a material impact on our quarterly returns. Turning to Page 3. As we discussed last quarter, we maintained that our advantageous market position and clearly defined strategic focus gives us conviction in our ability to deliver enhanced operating performance and returns for our shareholders across various market conditions.

I’ll review specific areas of third quarter performance momentarily, but I first wanted to highlight a few of the areas of meaningful and measurable progress in relation to our strategic priorities and the key performance drivers noted on the right-hand side of this page. First, this quarter, we leveraged our global client network, our extensive product suite and improving investment performance to draw strong net long-term inflows of $16.5 billion or 5.2% annualized organic growth rate. Importantly, we achieved positive long-term organic flow growth from each of our three regions, led by Asia Pacific at 9%, EMEA at 5% and Americas at 4%. At the asset class of vehicle delivery levels, we continue to see strong flows and market share gains and scalable capabilities, including fundamental fixed income, SMAs and ETFs. In each of these areas, we continue to see opportunities to increase operating leverage and profitability.

Additionally, within private markets, we’re building momentum in wealth management channels, an extension of our historically strong institutional heritage. Second, we ended the period with a record setting $1.8 trillion of total AUM, an increase of 5% over last quarter and a 21% increase from the prior year. Third, we again generated positive operating leverage in the quarter. We grew adjusted operating income by 4% and drove over 70 basis points of operating margin improvement from last quarter. We’re improving the — fourth, we’re improving the financial flexibility of the firm, strengthening the balance sheet, enhancing capital returns to shareholders. Specifically, we met our zero net debt goal and executed $25 million of share buybacks during the quarter.

As you can see, we are acutely focused on our strategic priorities and driving profitable growth. We have good reason to be optimistic given our performance of what was a choppy operating environment globally this quarter. As market breadth continues to gain its footing, we are exceedingly well positioned to benefit. We have the strategic and operational clarity required and exceptional talent across the company to continue to execute quarter-by-quarter. Moving on to Slide 4. Let me expand a bit more on the third quarter asset flows results across our investment capabilities. Our growth continues to be led by our ETF platform, which had organic long-term inflows of $17.7 billion, or 16% on an annualized basis. This was among the highest ETF growth quarters in our history.

Flows in the U.S. market continued to be led by factor based equity strategies, our equity NASDAQ Innovation Suite and fixed income BulletShares. We also saw strong growth from the EMEA region with nearly $5 billion of net inflows. We continue to innovate in the quarter, launching five new products in the U.S. and one in EMEA with a focus on extending our active ETF lineup. We feel very well positioned to continue to gain market share and use our scale to drive profitability across both passive and active ETF strategies. Shifting to fundamental fixed income. We garnered nearly $6 billion in net long-term inflows in the quarter or an 8% annualized organic growth rate, marking our best quarterly results in the past three years and 3 times our flow volume from last quarter.

With the Fed now moving more aggressively, tailwinds have declined — decline technically have been strong, and we have seen investors adding duration to lock in yields. Institutional flows were the main driver for us this quarter, comprising 70% of our volume. We recorded sizable new investment grade mandates globally with particularly high demand in the Asia Pacific region. U.S. wealth management flows were also strong, led by our municipal bond strategies. This was in large part driven across our SMA platform, which continues to expand rapidly with AUM reaching nearly $27 billion or a 45% increase over the past year. With our continued strong investment performance across the fixed income risk and duration spectrum, we remain very optimistic about our ability to continue to capture fixed income flows and money increasingly rotating into these asset class — asset classes.

Shifting to private markets, which in aggregate had flat slow growth in the quarter, leading the category though is our real estate capabilities, which recorded positive net inflows of $1.2 billion in the quarter. Growth was led by INCREF, which is our real estate debt strategy, targeting the wealth management channel. This fund was launched last year and has steadily gained momentum in the wealth space and it has now distributed through several key platforms, including adding one of the largest U.S. wealth managers late in the third quarter. These developments complement our significant real estate presence in institutional markets. I’ll also note that we have over $5 billion of dry powder to capitalize on emerging opportunities. Within alternative credit, we’ve recorded net outflows driven by bank loans, particularly in our ETF.

Moving on to Asia Pacific. On a managed basis in the region, we recorded modest outflows of $800 million. Conversely, and as I mentioned earlier, flows sourced from Asia Pacific clients were quite strong at $5 billion in the quarter. This highlights how we’re leveraging our broad product suite globally to meet demand across this important region. Specifically, we had very strong inflows in Japan for the quarter, driven by continued success in our global equity and income strategy, which generated $1.2 billion in net flows and is among the top selling active retail funds in the growing Japanese asset management market. Institutional activity was also strong in Japan with inflows in our investment grade fixed income products. This was offset by some outflows in locally managed Japanese equity strategies.

In China, market volatility reigned for the third quarter, particularly in fixed income, where we reported some outflows after a strong second quarter. During the period, we were pleased to launch four equity ETFs through our China JV. ETFs are a fast growing part of our China business and build on our strength in the U.S. and EMEA, and we anticipate this vehicle type will continue to see strong demand. At a macro level in China, we’re encouraged by the government’s recent focus on economic stimulus. We have seen some positive effects of this over the past few weeks and we believe that continued development should ultimately be very helpful for our business, particularly for equities, even if there is some volatility in the near term. Our business profile and our prospects in the Asia Pacific region remained very strong, led by our well established China JV, our long presence in Japan, and our recently announced JV in India.

Turning to our multi-asset related capabilities. We saw modest net inflows in the quarter, driven by quantitative strategies. Finally, the relative pressure on fundamental equity flows continued in the third quarter. However, as I pointed out previously, we have seen some moderation over time in the important global, international and emerging market segments. Net outflows in these strategies have slowed during the past several quarters to approximately $1 billion to $2 billion per quarter, remaining marginally lower than 2022’s quarterly peak outflows of $6 billion. Specifically, outflows in our emerging markets equity strategy has been particularly — or partially offset by continued strong inflows of our aforementioned global equity and income strategy, as well as small cap equities across multiple markets.

While asset flows in our fundamental equity capabilities remain below our long-term expectations, AUM has benefited from market gains and stands 15% higher than this time last year. Our investment leadership team to continues to focus on driving high quality alpha, upgrading our talent bench, and strengthening our risk management tools. Regardless of client demand, our focus remains on gaining market share in the fundamental equity categories in which we compete. Moving on to Slide 5. We provide an alternative aggregation to our AUM and flows to provide additional context for our performance. I’ve covered most of the key highlights around the broad strength and results of our diversified profile by geography, investment approach and channel.

But one additional item that I will point out is at the bottom right section of the slide, where you can see the continued positive net inflows coming into our institutional channel. We’re beginning to see higher levels of money in motion, particularly in fixed income and greater overall client expansion across the firm. Moving on to Slide 6. This slide summarizes our overall investment performance relative to benchmarks and peers, as well as our performance and key capabilities where information is readily comparable and more meaningful to driving results. Achieving first quartile investment performance is a top priority, and we’re making progress on this front. On a one and three year basis, we’ve increased the percentage of our AUM in the top quartile of peers with over 50% of our funds now hitting that mark for one year and 43% over three years.

Further, 71% of our AUM is beating its respective benchmark on a five year basis with 42% in the top quartile. We continue to have excellent fixed income performance across nearly all capabilities and time horizons. This supports the conviction we have in our ability to track flows as investors deploy money into these strategies. Of note, 64% of our fundamental fixed income capabilities are in the top quartile of peers on a one year basis, with 70% beating their respective benchmarks. Over five years, 81% of our funds are in the top half of peers with three quarter beating their benchmarks. We are especially focused on improving fundamental equity performance, and we continue to make incremental progress this quarter. We’ve improved the percentage of our AUM into top quartile peers across each time period shown here with 28% in the top quartile for one and five years and 24% over three years.

Additionally, on a five year basis, we now have 61% of our AUM in the top half of peers. With that, I’m going to leave it here and turn the call over to Allison to discuss our financial results for the quarter, and I look forward to your questions.

Allison Dukes: Thank you, Andrew, and good morning, everyone. I’m going to begin on Slide 7. The third quarter financial results. Total assets under management at the end of the third quarter was $1.8 trillion or $80 billion and 5% higher than last quarter end and a record high for Invesco. We also had record high long-term assets under management of $1.3 trillion, an increase of 6% over last quarter. Higher markets accounted for $50 billion of the increase, while net long-term inflows drove a $16.5 billion increase in assets under management during the quarter. Of the $50 billion increase due to higher markets, $29 billion were driven by our ETF and index capabilities, including $5 billion by the QQQ. Fundamental equity AUM increased $13 billion and fundamental fixed income AUM increased $6 billion as well due to higher markets.

As Andrew noted, net long-term inflows were strong once again at $16.5 billion, which represented organic growth of over 5%. ETF and index capabilities, excluding the QQQ led the way on long-term net inflows totaling $18 billion in the third quarter. Fundamental fixed income capabilities generated $6 billion in net inflows. Partially offsetting this was $6.3 billion in fundamental equity net outflows during the quarter. Average AUM increased $73 billion, a growth rate of over 4% quarter-over-quarter to $1.7 trillion at quarter end. Net revenue, adjusted operating income and adjusted operating margin all improved from the second quarter, and I’ll cover the drivers of that shortly. Adjusted diluted earnings per share was $0.44 for the third quarter versus prior quarter EPS of $0.43.

We further strengthened the balance sheet during the third quarter. We ended the quarter in a net cash position with cash and cash equivalents exceeding debt better than our goal of zero net debt. We also resumed share buybacks in the third quarter, repurchasing $25 million during the quarter, and we expect to continue buying back shares on a regular basis going forward. Moving to Slide 8. As we noted in prior calls, secular shifts and client demand have altered our asset mix and net revenue yields as our broad set of capabilities has allowed us to capture evolving client product preferences, which has been increasingly reflected in our results. Our portfolio is better diversified today than five years ago, and our concentration risk and higher fee fundamental equity and multi-asset products has been reduced.

The firm is increasingly better positioned to navigate various market cycles, events and shifting client demand. As we noted last quarter, we have included current net revenue yields — current net revenue yield trends on the slide. The ranges by capability are representative of where the net revenue yield has ranged over the past five quarters, and we note the net revenue yield drivers and where in the range the yields have trended more recently. We’re seeking to provide you better visibility on current net revenue yield by capabilities. To provide context for the net revenue yield trend during the third quarter, our overall net revenue yield was 25.3 basis points. The exit net revenue yield was 25 basis points, 0.3 basis points lower due to continued mix shift during the quarter.

Turning to Slide 9. Net revenue of $1.1 billion in the third quarter was $18 million higher than the second quarter, a 2% increase and slightly higher than the third quarter of last year. Investment management fees were $33 million higher than last quarter and $40 million higher than the third quarter of last year. The increases were driven by higher average AUM, partially offset by the AUM mix shift previously noted. Performance fees were $14 million lower than the second quarter due to seasonality as we typically see a decrease in performance fees in the third quarter compared to the second quarter. Total adjusted operating expenses in the third quarter were $756 million, a slight increase of $6 million or less than 1% from the second quarter.

This was also a slight increase over the prior year when taking into account the $39 million related to the organizational change expenses that occurred last year. Compensation was $6 million lower than the prior quarter, mainly due to higher performance fee related compensation last quarter. As we reported in our GAAP operating results, we took a one-time non-cash acceleration of $148 million in expense, resulting from changes to the retirement criteria related to vesting of currently outstanding long-term awards. This is a one-time acceleration of compensation expense for outstanding long-term awards for employees that meet newly defined eligibility criteria for retirement. The change will reduce the recent volatility we have experienced in compensation expense due to retirements.

Over the prior six quarters, retirement expense related to the acceleration of long-term awards was nearly $60 million and it vary meaningfully quarter-to-quarter. The changes to the criteria for retirement brings us more in line with the market for these types of plans and better aligns us with how most companies account for the expenses associated with the acceleration of long-term awards at retirement. G&A was $11 million higher than the prior quarter. Costs associated with our Alpha platform implementation increased from $12 million in the second quarter to $15 million in the third quarter, and professional related fees were higher versus the prior quarter. As the implementation of Alpha continues to ramp up, we expect Alpha related one-time implementation cost to be closer to $15 million in the fourth quarter of 2024.

We will continue to update our progress and related costs as we move forward with the implementation. Quarter-over-quarter, positive operating leverage was 100 basis points, driving a $13 million or 4% increase in operating income and a 70 basis point improvement in our operating margin to 31.6%. Our effective tax rate was 21.8% in the third quarter. We estimate our non-GAAP effective tax rate will be near the lower end of our historic range of 23% to 25% for the fourth quarter of 2024. The actual effective rate can vary due to the impact of non-recurring items on pre-tax income and discrete tax items. I’ll wrap up on Slide 10. As I noted earlier, we continue to make progress on building balance sheet strength in the third quarter. We ended the quarter in a net cash position with cash and cash equivalents exceeding debt by $155 million better than our goal of zero net debt.

We ended the quarter with no draw on our credit facility. Our leverage ratios continue to improve, and we’re now down to a leverage ratio excluding the preferred stock of 0.26 times, a significant improvement over the past several years. We resumed share buybacks in the third quarter, buying back $25 million or 1.5 million shares during the quarter. We expect to continue a more regular share buyback program going forward, repurchasing around $25 million in the fourth quarter, depending on market conditions. We further anticipate a total payout ratio, including common dividends and share buybacks, will move closer to 60%, which we expect will continue in 2025 as we continually evaluate our capital return levels. To conclude, the resiliency and strength of our firm’s net flow performance is evident again this quarter, and we continue to make progress on simplifying the organization, building a stronger balance sheet, while continuing to invest in areas of growth.

We remain committed to driving profitable growth, high level of financial performance and enhancing return of capital to shareholders. And with that, I’ll ask the operator to open up the line for Q&A.

Operator: Thank you. [Operator Instructions] And our first question comes from Brennan Hawken with UBS. Your line is open.

Brennan Hawken: Good morning. Thanks for taking my questions. Andrew, you spoke to the stimulus in China not really impacting the third quarter, but that you’ve seen some positive effects over the past few weeks. Could you maybe provide a bit more specificity to that. What have you seen and how should we be thinking about the potential impact of this stimulus on IGW?

Andrew Schlossberg: Yeah. Hey, Brennan. Thanks. Look, it’s early days in China, and we know how much volatility exists in that marketplace. The stimulus, I think, obviously, we saw what happened in markets, and that’s good for our business, that’s good for investor sentiment. I think what we’ve seen mostly is a mix shift going on. So I think what had predominantly been earlier this year and the end of last year, a focus on fixed income is starting to shift a bit more towards the equity side of things or the fixed income plus, we call it, which is a balanced portfolio. I think it’s also important to remember that the mix of our business at IGW and in the Chinese market is more skewed towards fixed income and balance. So our IGW business is about 30% equities, 30% fixed income, 20% balance, and 20% money market. So we expect to see — I think demand improved, but it’s early days to speculate too much.

Brennan Hawken: Got it. Thanks for that. That’s helpful. And then, Allison, you have effectively delevered the balance sheet really well and it’s certainly encouraging to see the buyback restart. But I’m curious, if you considered rather than buying back common approach MassMutual to see whether or not you could do a buyback program for the preferreds. When you talk to investors, the preferreds are one of the big issues and executing on that type of buyback could effectively continue the delevering efforts that you guys have done so well in the past few years.

Allison Dukes: Thanks, Brennan. Yes. We have ongoing conversations with MassMutual about the preferred. It is a non-call instrument, as you know, and they own 100% of it. So it is certainly with negotiated conversation and one that given the duration of that piece of paper and the liabilities that they were against it, it’s not a straightforward exercise to think about any opportunity that might exist to repurchase any element of that. Certainly top of mind for us and something we’ve been talking about for years now, but not straightforward, not simple and one that I think they certainly understand as well as they are, as you know, our largest common shareholder and take quite a bit of attention into how that preferred impacts from both sides of the equation as well.

In the meantime, our strategy has been, and as you noted, to successfully delever around that preferred instrument everywhere we can. And I think, we’ve done a nice job doing that. We’ve got a little bit further to go, the next maturity isn’t until 2026. In the meantime, we’re really focused on continuing to build capital and liquidity and returning capital to our common shareholders.

Brennan Hawken: Got it. Thanks. Well, good luck, with those continued discussions. Hope they go well.

Allison Dukes: Thanks, Brennan.

Operator: Thank you. The next question comes from Dan Fannon with Jefferies. Your line is open.

Daniel Fannon: Thanks. Good morning. Allison, I wanted to follow up on the change in some of the accounting associated with the awards you obviously took a charge this quarter. Curious about the benefit as we think about things going forward, if there’s anything to the adjusted results. And also, are you anticipating any change in the pace of retirements or is this to incent some behavior internally as well?

Allison Dukes: Sure. Thank you for the question. So a couple of things. One, we really have not had clear criteria around retirement in the past and so that is the motivation for this change. And the benefits are really, there are multiple benefits. One is, it does put us more in line with how most companies handle retirements, recognizing everybody is going to retire eventually and creating clear criteria around it in terms of both age and years of service is very helpful. It provides clarity and transparency for our employees. It also gives us an opportunity from an accounting perspective to really better plan for those events, and this acceleration is the acceleration of all of those employees that meet those eligibility requirements today and accelerating the awards that have already been issued.

They will all be paid eventually, but it allows us to go ahead and accelerate the expense associated with that. The benefit is, which as I noted before, we — just in the past few quarters, we’ve had about $60 million of retirement and without eligibility requirements, you can’t recognize the acceleration of those awards until the day in which they tell you they’re retiring and then you kind of take the full hit. So it creates volatility and uncertainty in our compensation expense and therefore in our earnings. And so this really will reduce that volatility. You saw quite a bit of it last year as we announced some of those executive retirements and a lot of the repositioning. Had we had this criteria, you wouldn’t have seen that kind of volatility in our earnings profile in 2023 because those that were already retirement eligible, those awards would have already been amortized over a shorter time frame.

Daniel Fannon: Okay. Understood. And then, Andrew, just following up on fixed income. Obviously, a good quarter for you in terms of flows. Can you talk about the dialogue and where you see opportunity, particularly both I guess, the U.S. and globally? And maybe in the context also you guys used to give us a backlog of unfunded wins? Just curious how that sits today and the makeup of that in terms of the contribution of asset classes?

Andrew Schlossberg: Yeah. Thanks for the question. Let me start and then Allison can chip in on the pipeline a little bit. From a fixed income perspective, as I noted, 70% of the volume we saw this quarter inflows came from institutions. And maybe the first thing I’ll say is, I think we’re starting to see more money kind of move into motion, partially with greater clarity around interest rates. But I think also with backlogs of mandate and reallocations that had kind of been put on hold and quarters delayed as we talked about previously. So in the institutional marketplace, I just think it’s — we’re just sort of seeing a greater velocity in particular, in fixed income. And then, in the retail space, the wealth space, we continue to see positive flows largely for us in the municipal space.

In the U.S., it’s been quite strong, and that’s both mostly active, but some passive. And then people using separately managed accounts in wealth management, again, particularly in the U.S., that’s starting to increase more rapidly in fixed income, in particular, where we have a really — we have a competitive edge and a strength, and we were relatively early in that space. So volume is definitely picking up across the board for fixed income, and you saw it in our flows this quarter. With regard to the pipeline, Allison.

Allison Dukes: Yeah. The pipeline continues to be — it’s pretty consistent quarter-to-quarter for the last few quarters. I’d say, it hovers right around $15 billion. Sometimes — some quarters a little higher, some quarters a little bit lower. But we’ve just seen sort of consistency there. And hence, the reason we really didn’t find it all that valuable either because when you look at our flows in any given quarter, about a third of our institutional flows come from the pipeline, but about two-thirds come from outside the pipeline. So it’s an interesting barometer, but it doesn’t — it isn’t that great a forward indicator. But it is around $15 billion. It’s pretty balanced across our regions. And as Andrew noted, we are starting to see a greater and greater interest on the fixed income side.

Andrew Schlossberg: I mean, we have about $350 billion of long-term fixed income. It’s a scaled platform, profitability will continue to improve. And in particular, as people sort of go further out this – the duration curve, which is what we’re seeing.

Daniel Fannon: Great. Thank you.

Operator: Thank you. And our next question comes from Bill Katz with TD Cowen. Your line is open.

William Katz: Thank you very much for taking the questions, this morning. So maybe a big picture question now that your balance sheet is more healed, there’s been a significant amount of M&A around you, whether it be some of the traditional managers trying to bulk up in the alts or the all managers trying to bulk up further into the alt space, all with a sort of focus on driving opportunity to fix income replacement or retail democratization. I was wondering, if you could talk a little bit about how you’re positioned to participate in those trends, either de novo or perhaps inorganically? Thank you.

Andrew Schlossberg: Yeah. Hey, Bill. Thanks. Look, the number one thing for us, as you mentioned, in terms of opportunity and growth is in the private market space. And you can see, as I mentioned, what’s happening there in wealth management. For us, there’s a ton of organic opportunity for us to continue to pursue, especially, if we take our real asset capabilities and our alternative credit capabilities to that wealth management market and we’re beginning to see sort of that pace pick up. With our real estate debt strategy, in particular, the interest has been quite high in the U.S. wealth management arena. We were added to another one of the largest platforms just at the end — or the latter part of the third quarter. So I guess, what I’m saying is, we continue to see lots of organic opportunity to take private markets into wealth management, where we have distribution strength.

We have product origination capability. We’ve invested in already the specialized skills and tools you need to pull that through and create less friction in the marketplace. And we’ll continue to look inorganically if there’s places where we can bulk on to that set of strategies, but we really do feel like we have a tremendous amount of opportunity right here in Invesco.

William Katz: Okay. Thank you. Just as a follow-up. As you think about the go-forward mix of the business, it sounds like at the edges, some of the higher fee products could have some incremental demand into the new quarter. But broadly speaking, it continues to be passive in fixed income and SMA. So as you think about the interplay between the fee rate and operating leverage, I was wondering, can you continue to drive positive operating leverage if there’s really no change to the underlying drivers to growth?

Allison Dukes: Yes, we can. Yeah. I would say, a couple of things. And hopefully, Slide 8 does help you in seeing some of this. I mean, we are certainly seeing good strong growth across a number of our investment capabilities. And we are seeing, underlying, I would say, green shoots and positive dynamics just about everywhere. We’re really focused on driving that positive operating leverage by driving growth, incremental progress in every single one of these investment capabilities. These are really the areas where we have deliberately chosen to compete. We are focused on strengthening our capabilities inside of each one, strengthening our investment performance, really driving broad distribution across both our retail and institutional clients and it’s incremental progress in each one that drive that positive operating leverage.

I think notably, we’re working very hard. I think we’ve demonstrated that strength around expense management and really demonstrating expense discipline and controlling our expenses, so that we can generate that positive operating leverage with all incremental growth on the top line. So, certainly, net revenue yield is just a mathematical sort of output of how we grow across these investment capabilities. Our key focus is on revenue growth, and I think we demonstrated that again this quarter.

Andrew Schlossberg: And Bill, just to further emphasize what Allison was saying, I mean, we’re going to be – we’re focused on each of these areas on profitability quarter-on-quarter and continuing to show operating leverage. I think there’s some other areas of growth across Asia Pacific, and we’ve talked about that market beyond just China as really giving us some good positive growth in a place where we can continue to see revenues expand over time.

William Katz: Thank you, both.

Allison Dukes: Thank you, Bill.

Andrew Schlossberg: Thanks, Bill.

Operator: Thank you. And our next question comes from Glenn Schorr with Evercore. Your line is open.

Glenn Schorr: Hi. Thank you. So as you said some, like, $170 billion in gross sales. So there’s obviously huge brand and powerful distribution. And so a follow-on to maybe Bill’s question is, if you don’t have everything now that clients want, you can build organically, it takes a long time. You could buy stuff. You commented on that. Is there a room in the repertoire? And I’m curious, how you think about the general concept of partnerships to lever your brand, lever your distribution, and strike while the iron’s hot and client preferences are changing for something that you might not have on the shelf?

Andrew Schlossberg: Yeah. Let me start. I mean partnerships have been part of our history and even our risk — recent history with what we did in India with our joint venture. We’re going to continue to look for ways to create partnerships. And we’ll continue to look for them geographically. We’ll continue to look for them from a distribution standpoint and as well as investment capabilities. And so while there’s nothing specific more to point out this quarter, just look to what we did in India, looked to what we did in China, looking at how we grew our ETF business over time, just to indicate how much we see partnership being an avenue to our future growth.

Glenn Schorr: Maybe I’ll stay on theme and ask a follow-up on MassMutual. I feel like you commented plenty on the press issue, but there is a great opportunity to grow within their channel, further penetrate their retail network and do more with them. Can you talk about some of the things you’re thinking about working on with them as obviously a big distribution partner and not just a big owner?

Andrew Schlossberg: Yeah. One of the — there’s several. We’re starting at about a little over $13 billion, $14 billion of assets that we manage on behalf of MassMutual, either general account or the affiliated distribution. And what I’d say, one of the bigger opportunities is model portfolios into their broker dealer network, which we think is a huge growth area. It’s a place where they’ve been successful. We have a strong models business and certainly lots of capabilities underneath to populate them alongside other players. The other is, just as we continue to build out sub-advised into their insurance products and capabilities, and that could exist across equities and fixed income. So those are just a few of the things that we’re working on regularly with the MassMutual. And I agree with you that, that should continue and can be a powerful partnership.

Glenn Schorr: Thanks, Andrew.

Andrew Schlossberg: Thank you.

Operator: Thank you. And our next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Craig Siegenthaler: Hey. Good morning, everyone. I had a question on Alpha. It looked like integration expenses rose $3 million sequentially in the quarter, so when should expenses peak and when will you start to see a net quarter-over-quarter improvement in profits on Alpha, especially because Alpha will save Invesco money over time?

Allison Dukes: Yeah. Thanks, Craig. I think as we noted last quarter, we expect to be transitioning our AUM onto the Alpha platform in a series of ways. We expect that first wave to be in the fourth quarter of this year and really run through 2025. And as we continue to test and learn with these waves even perhaps early into 2026. We are incurring implementation costs as we go. We expect to — we will be paying State Street fees on the AUM as we transition that AUM on. And so, to your question, yes, it did. The implementation costs were up a little bit in the third quarter. We expect it to be relatively consistent here in the fourth quarter as the implementation continues to ramp up, as we get into next year, and we’re paying State Street fees on the AUM that we’re transitioning it over and we’re still paying on some of the other platforms where we will be running parallel for some time.

We expect overall costs to start to peak next year and we’ll be giving you more guidance around all of that as we get into 2025. And then in 2026, we expect to start to see the benefit of ramping some of those other systems off and really starting to extract the benefits of going to a single platform. It’s been a long time coming, and we’re deep into testing and we’re learning quite a bit, but we’ll continue to give you guidance as we evolve into this one going into 2025.

Craig Siegenthaler: Thank you, Allison. And for my follow-up on the ETF business, BulletShares flows were particularly strong in the quarter. So I was hoping you could talk about the key drivers and if you expect this to continue over the next few quarters, given that interest rates are somewhat declining now, which may benefit longer duration strategies.

Andrew Schlossberg: Yeah. I mean, so BulletShares are — thanks for pointing it out. I mean BulletShares are a great franchise and we have a very built out diverse range. And it’s our leading fixed income franchise inside our ETF capabilities or one of them. And so the same trends I mentioned before about investor demand happening in the wealth space and institutional, frankly, apply to the BulletShares. And so we — it’s not just been this past quarter, but the previous quarter, we saw good BulletShares growth and I think I’d expect that to continue. There are maturities that happen every year in December, that then get repopulated into the first quarter. So I continue to watch that, we feel great about the BulletShares range.

Craig Siegenthaler: Thank you.

Operator: Thank you. And our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Alexander Blostein: Hey, everybody. Good morning. Thanks for the question. I was hoping to double-click into the private real estate flows you highlighted in the prepared remarks and a couple of times in the Q&A. So it sounds like the contribution was relatively healthy from maybe one of the platforms that got added towards the end of the quarter. Was that the bulk of the growth and does that come from almost kind of like one-time-ish sort of benefit since you just got added or the growth and the strength there has been a little bit more broad-based? And I guess on the institutional side, could you update us on what the queue and redemptions look like? It sounds like that’s starting to ease a little bit for the industry. So I’m just curious, if you’re seeing the same.

Andrew Schlossberg: Yeah. Thanks for the question. And let me clarify a little bit on the real estate credit side. The platform that we got added to the large U.S. wealth platform that happened at the end of the quarter, doesn’t come with flows, it just comes with opportunity. And so none of the flows in the quarter really were materially related to that, so that’s maybe call it on the come. The demand for our real estate debt strategy is where a significant part of the real estate flows for this quarter came from though. That strategy has been out in the market for the better part of a year. It is already on one other large U.S. wealth platform and several others that relate to the independent and RIA channel. So we started to see that volume pick up, and hopefully, that flywheel continues as we get into next year. Allison, you want to talk about the redemptions?

Allison Dukes: Sure. I mean, and I would just add, maybe, Alex, to double down on that. While that product was a strong driver of the real estate flows, it wasn’t the only driver of our real estate. And so we also saw really strong growth in our real estate SMAs. And I think just improvement overall in demand for this asset class, which is really encouraging. As it relates to the redemption queue, yes, I mean, the pressures have certainly started to moderate there a little bit with just the overall improvement in the broader markets that has an impact on the denominator effect. Still maybe a little bit higher than they are through sort of a normal cycle as we start to see slow improvement. But certainly, I would say, some cautious views on that as people are really trying to get their arms around the path of interest rates and what that means for transaction activity overall, but certainly seeing the pressure abate there and overall, more encouraging signs in the private real estate business.

Andrew Schlossberg: And just to remind everybody, it’s — of our real estate assets, the $70 billion or so that’s direct, only about half of it are in funds. So the rest are in separate accounts and closed-end vehicles on a global basis.

Alexander Blostein: Great. That’s helpful. And Allison, just a quick question for you, the service and distribution fee looks like came down sequentially despite higher markets and higher AUM levels, which tends to correlate. It’s something that, I think, started to become a little more disconnected recently. And I guess, at the same time, distribution expense increased sequentially. So kind of the net effect of that on profitability continues to become a bigger drag. I know they’re not perfect. There’s a few things that go in there, but maybe just expand on kind of what drove the decline on the revenue side and kind of further creep up on the expense side?

Allison Dukes: Sure. I mean, just a couple of things. One, there is a relationship between service and distribution fees and the third-party distribution contra revenue line item, because there’s an element of pass-through between those categories. And so you really do have to look at them together and you can net them against management fees. When you do that, you look over kind of historical time period of the last few quarters, several years. Over several years, it’s really run historically in that 13% to 14% range as a percentage of management fees. But in more recent quarters, it’s trending towards the higher end of that range and that’s really due to the product mix shift towards the higher ETF flows in the more recent quarters.

And ETFs don’t generate as much service and distribution fee revenue as mutual funds do and there are third-party expenses such as licensing fees. So it tends to make that ratio skewed slightly higher. Yeah. I think that mix shift and is something obviously we’re increasingly seeing as we’re seeing not just in our own mix, but just across the industry, that demand for ETF outstripping the demand for the mutual fund wrapper. If you expect that to continue, then I’d say it’s reasonable to expect that relationship to be closer to 14% than it has been historically 13%. So I know that was kind of a detailed answer there, but I think it’s the way to really look at it, the way we’re wrapping our heads around it year-to-year kind of quarter-to-quarter right now.

Alexander Blostein: I know. That makes perfect sense. All right. Thank you very much.

Allison Dukes: Thank you.

Andrew Schlossberg: Thank you.

Operator: Thank you. And our next question comes from Ben Budish with Barclays. Your line is open.

Benjamin Budish: Hi. Good morning and thanks for taking the questions. I wanted to first ask about the competitive dynamics in the fixed income business. You called — in the prepared remarks, you called out a number of factors, new investment grade mandates, U.S. wealth management flows. But just curious, I guess, I suppose you don’t always know where the flows are coming from, if they’re coming from somewhere else, but is there an opportunity from — for share gains in that sort of space? Is there — was there anything you saw in the quarter? Do you see that as an opportunity for the fourth quarter or is this more sort of money in motion, rates coming down, more of a kind of organic pickup?

Andrew Schlossberg: Yeah. It’s a great question. It’s also hard to parse it completely. I think the trends are — what we’re largely seeing is money that’s in motion for the reasons that we mentioned before. Fixed income is the competitive space. And so you’re largely also having to compete and take assets from competitors even as money is in motion could be growing, but also its takeover mandate. There’s nothing in particular that I can — that we can point to from this quarter in that regard. I’d also say that a lot of the assets that are flowing into fixed income aren’t just coming here in the United States. They’re coming out of Asia. They’re coming out of Europe as well. So it’s really been a global phenomenon for us across global investment grade, corporates, even elements of EM. And then as I said before, municipals included in the United States.

Benjamin Budish: Got it. Very helpful. Maybe one more kind of follow-up on the private wealth side. Just you mentioned that you launched on a very large distributor. Just curious, how would you describe your current distribution capabilities relative to kind of broader in Invesco as it applies to just the private markets products? Thank you.

Andrew Schlossberg: Yeah. So we have a generalist specialist model in how we take private markets, both in the institutional and in the wealth space. Over the last several years, we’ve been strengthening that mix. And so, we’ve been adding specialists to the team to sit alongside our generalists in private markets, in particular in the U.S. wealth space. And we think that’s working pretty well, given the pickup that we’re seeing. We’ve made those investments already. I don’t expect to see us doing a whole lot more there in terms of investing behind those areas of distribution. Now it’s just a matter of taking the products that we have on platform and growing the volume and continue to find a few new products that we can bring to that wealth space.

I’d say, we’ve also and we’ll continue to invest in beyond just distribution. It’s all the things that are required to minimize the friction that’s in place in bringing mandates on, servicing those mandates, and the specialized things that are required in private markets. So it’s more in the product and distribution to win in private markets in the wealth space. We feel like we’ve made most, if not all, those investments.

Benjamin Budish: Got it. Thank you very much.

Operator: Thank you. The next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Michael Cyprys: Thank you. Good morning. I was hoping you could talk a little bit more about the India JV that you set up. If you could maybe just elaborate a bit on the opportunity set that you see, how you see that marketplace opening up and talk about some of the steps that you’re looking to take in your approach there and any sort of lessons back — lessons learned looking back at the Religare relationship that you’ve had over the years and how that may inform your approach here? Thank you.

Andrew Schlossberg: Yeah. Thanks. So we’re still working through regulatory approvals and that joint venture and the disposition of our portion of it. We’re planning to have completed in the first quarter. But as it relates to opportunities and lessons learned, first, I think it’s important that you pick a good partner, and we feel like we have a good partner in India that’s going to — that has captive distribution, that’s bank oriented, and that can really help us expand the clients we serve and help us to continue to grow in India. We believe very much in the Indian market. Really for us, it was less about India and more about really wanting to make sure we’re focusing our attention in other — in all the areas that are critical to us that we’ve talked about and concentrating and consolidating our efforts.

So we’re pleased to be able to participate in the Indian market as a minority investor in this JV and as a provider of investment capabilities behind that, that our JV partner and the company can take forward to the marketplace. And look, on the lessons learned, I’d just say, back to the earlier question, partnership is a great way for us to expand in certain markets around the world, and it will continue to be a place that we look to for distribution and product going forward as well. And so each partnership, you learn something, but I think our appreciation of them is only growing.

Michael Cyprys: Great. Thanks. And then just a follow-up question on the expense outlook. It was something you could maybe elaborate on how you see that taking shape here into the fourth quarter or next year? How you see expenses trending? And if you can maybe help quantify how much the State Street Alpha fees on AUM might be? How meaningful might that be next year? And as you think about scope for continued positive operating leverage as you look out from here, how much uplift in market beta do you need to drive that positive operating leverage? Thank you.

Allison Dukes: Okay. Lots there. Let me actually take your last one first. We can drive positive operating leverage without market beta, so long as we continue to drive good, strong organic growth, and maintain that expense discipline that I think we have been able to demonstrate over these last couple of years. Positive market beta is obviously tremendously helpful, but we’re really focused on delivering operating leverage and operating income and margin improvement with or without market gains. And that’s really fundamental to how we’re planning for the company. And as we’ve said several times before, our focus is on getting ourselves back to a mid-30s operating margin. We’ve demonstrated two quarters of operating margin growth.

We’re pleased with that, but we’re nowhere near where we want to be or intend to be. And so our focus is on really building the business so that we can outperform or at least deliver positive operating leverage with or without market improvement. It’s not easy, but that’s the focus. Second, in terms of — kind of going backwards on your question, as it relates to Alpha and the State Street fees, I can tell you it’s immaterial for the fourth quarter, just given this is really based on the AUM that we move and we move it in waves, and it’s certainly dependent on the level and the quantum of AUM in each wave. So as we’re continuing to scope out this wave, it has a pretty material impact on the fees that we’ll be paying next year in terms of this fourth quarter immaterial, less than $5 million.

So it really — it’s TBD a bit next year as we continue to work through the waves and the quantum in each wave. So we’ll give you more guidance as we continue to have certainty around that. As it relates to expenses, in the fourth quarter, we always have some seasonality in the fourth quarter in terms of both marketing and G&A, and compensation, usually is a little bit higher in the fourth quarter, dependent on performance fees. So those are the three areas that I would look to and expect a little bit of seasonally higher expenses. I would say overall, our expense base is trending pretty consistently for the year to the guidance we gave at the beginning of the year. We said we expected our total expenses to be around $3 billion for 2024 without any market improvement.

We’ve certainly seen some revenue and market improvement since the beginning of the year. And so we would expect our expense base to be a bit higher than that. But on a year-to-date basis, you could see how that’s trending. And then I would expect some seasonally higher increases, modestly higher in the fourth quarter.

Michael Cyprys: Great. Thank you.

Allison Dukes: There was a lot of that question, hope I covered it all.

Michael Cyprys: You did. Thanks.

Andrew Schlossberg: Thank you.

Operator: Thank you. Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Brian Bedell: Great. Thanks. Most of my questions have been asked and answered. Maybe just a couple. Maybe just one going back to the Great Wall JV. Andrew, you talked about this earlier in the presentation. But is there an opportunity for the fee rate to improve if you look at the contrasting elements of the fee cuts and obviously, the shift out of fixed income, but you’re — I think, correct me if I’m wrong, but you’re thinking that we may see a positive mix shift into equities, in the Great Wall coming in 4Q. Maybe if you could just discuss that dynamic and whether we could see a rebound in that fee rate in — as early as 4Q versus 3Q.

Andrew Schlossberg: Yeah. Thanks for the question. And as mentioned earlier, the dynamics that have occurred in the last several weeks certainly have changed a lot in China and will have an impact. Both have had an impact on the market and certainly have an impact on our business. Equities, as I mentioned before, is an important part of the business, it’s 30% though, just keep that in mind. But we certainly exited the month feeling a lot better than we did or exited the quarter a lot better than we did intra-quarter, and you continue to see what’s happened in the marketplace since then. With flows coming out of fixed income and more going into equity over time, both passive and active from a fee rate perspective, that’s a generally a good thing for our business. But again, lots of volatility in China. But we exited, as you can see, the quarter at some of the highest asset rates that we’ve seen in some time.

Brian Bedell: Got it. Thanks. And then just on the global liquidity, if you could just comment on that, I think we had the outflows here in 3Q. Maybe just if you can talk about any seasonality factors in 4Q? And then do you expect liquidity flows to benefit from the rate cutting cycle or are there other dynamics that might pressure it — the flows?

Andrew Schlossberg: Yeah. Thanks. On the cash liquidity business, just a reminder, most of our assets and liquidity business are institutionally oriented, about 85% of them. And so these institutions do have other tools that they can use outside of money market and our cash tools when interest rate pictures are changing. I think that probably was the most material part of the impact in the third quarter and things were skewing a lot more towards the banks that have dominated that space going forward. Our liquidity business is $170 billion. It’s a profitable part of our company. It’s a place that we’re continuing to expect a lot out of and we have the scale. So I think time will tell here in the fourth quarter, what occurs. But do keep in mind, it’s different than a lot of other asset managers given the institutional skew that we have.

Brian Bedell: Okay. Fair enough. Okay. Great. Thank you.

Gregory Ketron: Hey, Cedric. We have time for one more question.

Operator: Sure. Thanks. Our last question comes from Patrick Davitt with Autonomous Research. Your line is open.

Patrick Davitt: Thanks a lot. I have a quick follow-up on that last question. Obviously, a narrative a lot of people have been trying to push for a while now is this idea that cash on the sidelines will fuel the bond allocations. But we’re seeing both money funds and bond funds broadly with big inflows over the last few months. You have a sense of where in the allocation stack, I guess, these strong bond flows are coming from for you, where it’s rotating from within your clients’ allocations because it certainly doesn’t appear to be money funds at this point? Thank you.

Andrew Schlossberg: Yeah. I mean, I’m not sure it’s from our client allocation as much it’s from their own allocations. We’re definitely seeing people go further out in duration. We’re seeing that in our SMA business, which went really short to more intermediate. We’re seeing that in — just in the core fixed income space, both in institutional and retail. So we’re definitely seeing both money come off the sidelines and money go up the duration curve as well. In terms of where it’s coming from in our business, as I said, it’s not coming from our money fund business, that’s a totally different dynamic. We think that it’s coming from the sidelines or from competitors.

Patrick Davitt: Great. Thank you.

Andrew Schlossberg: Thank you.

Operator: Okay. And back to you, Mr. Schlossberg.

Andrew Schlossberg: Okay. Well, thanks, operator. In closing, we are well-positioned to help clients navigate the impact of evolving market dynamics and subsequent changes to their portfolios. As market sentiment improved and client convictions strengthen, this should translate to even greater scale performance and improve profitability for Invesco as we’ve discussed today. Given all the work that we have done to strengthen our ability to anticipate, understand and meet evolving client needs, I’m very excited for the future of Invesco. I really want to thank all my Invesco colleagues for their continued hard work, I’m proud of our collaboration with one another and our focus on our clients. Thanks, everybody, for joining the call today. Please reach out to our Investor Relations team for any additional questions, and we appreciate your interest in Invesco and look forward to speaking with all of you again soon.

Operator: Thank you. That concludes today’s conference. You may all disconnect at this time.