景順投信 (IVZ) 2015 Q4 法說會逐字稿

The presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products, and other aspects of our business or general economic conditions.

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Welcome to Invesco's fourth-quarter results conference call.

(Operator Instructions)

Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would like to turn the call over to your speakers for today, Mr. Martin L. Flanagan, President and CEO of Invesco; and Mr. Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you very much, and thank you everybody for joining Loren and myself. I will briefly review the 2015 highlights before I get into a review of the business results for the fourth quarter, then Loren will go into more depth of the financial results. And of course, we will open up to Q&A as we always do.

Let me start by providing a brief overview of the operating results for the full year, and if you're so inclined, I'm on page 3 of the presentation. Long-term investment performance remained very strong in 2015. 79% and 85% of the actively managed assets were ahead of peers over three-years and five-years respectively at the end of the fourth quarter.

Strong investment performance, combined with the comprehensive range of strategies and solutions we offer, helped clients achieve their desired investments objectives, contributed to long-term net inflows of $16.2 billion for the year. Our efforts to deliver for clients while taking a disciplined approach to managing our business resulted in an operating margin of 41% for the full year, off just slightly from the very strong prior year.

The annual dividend totaled $1.08 per share, which represents an 8% increase over the prior year. We also returned more than $1 billion to shareholders during 2015 through dividends and stock buybacks.

Assets under management were $775 billion at the end of 2015, down from $792 billion at the end of the prior year, mostly reflecting some late-year volatility. Average assets under management were $794 billion for 2015 versus $790 billion for 2014. Adjusted earnings per share for the year were $2.44 versus $2.51 in the prior year.

As you can see on slide 4, foreign exchange had a significant impact, diluting earnings per share by $0.15 per share from the prior year. During 2015, Fitch upgraded the firm's credit rating to positive outlook, and we repurchased $549 million worth of stock.

Let me take a moment and look back over the achievements over the past year, which will provide insight into our continued long-range plans. First and foremost of course, we remain focused on delivering strong long-term investment performance, which continues to drive to grow our business. And as I mentioned, 79% and 85% of the assets were ahead of peers on a three-year and five-year basis respectively at the end of 2015.

By delivering strong investment performance and focusing on clients' needs, we achieved further growth across the business. In the US, Invesco was the only firm to appear in the top five over 1, 5 and 10 years in the Barron's Best Fund Family annual ranking. Our Asia-Pacific business continued to grow, and we saw strong inflows in a range of strategies resulting in net sales of $5.7 billion, the strongest showing in the region since 2011.

Institutional sales of $14.2 billion, nearly double the prior year. We also saw continued growth in our EMEA business, driven by a focus on delivering strong investment performance and meeting our client needs. Cross-border and institutional were particularly strong with $7 billion and $4.5 billion in net inflows respectively, and we remain in a very dominant position in the United Kingdom.

We continue to invest in capabilities where we see strong client demand or future opportunities by hiring world-class talent, upgrading our technology platforms, launching new products and providing additional resources where necessary 2015. The ability to leverage the capabilities developed by our investment teams to meet client demand across the globe is a significant differentiator for our firm, and we will continue to bring the best of Invesco to different parts of our business where it makes sense for our clients.

By delivering strong investment performance, Invesco Global Targeted Return achieved strong flows in the second year of offering, with assets under management surpassing $11 billion globally at the end of the year. We continued to invest in strengthening our fixed income platform in 2015, which is enhancing our ability to meet our client needs. We also invested in our institutional business in 2015, refining our global strategy, bringing on additional highly regarded talent and more effectively aligning ourselves to the opportunities in the marketplace.

We're seeing some early successes from this work. Institutional flows during the first quarter were among the strongest in the past several quarters in spite of the very volatile markets.

We're very focused on bringing together the full range of our capabilities to help meet our client investment objectives. The Rhode Island mandate of $7.2 billion is an example of the success we are achieving with our Invesco solutions effort. Throughout the year, we continued to innovate and expand the range of alternative products we offer, leveraging our strong teams and capabilities for the benefit of our clients globally.

Two years ago, we began leveraging our presence in China to explore and better understand the opportunities in digital and mobile technologies in that marketplace. We've also been exploring the possibilities with market-leading firms in Silicon Valley.

Our acquisition of Jemstep in mid January has now come of this research. Jemstep is one of the first digital platforms to focus exclusively on advisers and is a market-leading provider of adviser-focused digital solutions.

The Invesco Jemstep platform enables wealth management home offices and their advisors with a full suite of technologies solutions that are highly flexible, customizable and easily integrated into their existing systems. This acquisition represents an investment in our partnership with the advice community and highlights our efforts to participate in the technology evolution within our industry.

Turning to the fourth quarter, let me take a moment to highlight the results, which you will find on slide 8. Strong investment performance contributed long-term net inflows of $3.9 billion for the quarter. Adjusted operating margin for the quarter was 40.1% versus 41.4% in the prior quarter.

Quarterly dividend remains at $0.27 per share. We also returned $329 million to shareholders during the quarter through dividends and stock buybacks. Assets under management were $775 billion at the end of the fourth quarter compared to $755 billion we reported in the prior quarter.

Operating income was $356 million in the quarter, down from $373 million in the prior quarter, reflecting the very volatile markets we saw in the quarter. Earnings per share were $0.58 versus $0.61 in the prior quarter. We repurchased $214 million of stock during the quarter, representing 6.5 million shares.

Turning to page 11 and looking at investment performance as I mentioned during the quarter, it continued to be quite strong with 79% of the assets in the top half of our three-year basis, and 85% were in the top half on a five-year basis. We also saw improvement in the one-year number, which was 60% of assets, leading peers.

Turning to flows on page 12, you will see that active and passive flows were positive during the volatile quarter. Active flows during the quarter were driven by a variety of capabilities, including global targeted return, investment grade fixed income, real estate and quantitative equities to name a few.

Passive flows were positive with renewed strength in Invesco PowerShares ETF, which saw net inflows of $2 billion. These flows were offset by $1.2 billion outflows associated with the Invesco mortgage capital deleveraging.

This did have an impact across a number of categories. If you look at passive institutional fixed income in the US, if you add $1.2 billion to each of those categories, you will eliminate the impact of the deleveraging of the Invesco mortgage capital during that quarter.

Retail flows were relatively flat during the quarter, impacted by the macro environment as investors weighed their options during the very volatile quarter. Institutional flows were particularly strong, driven by inflows in the fixed income real estate and reflecting our continued focus on this part of the business.

The pipeline of one but not funded mandate remains at near all-time highs and is up more than 28% versus the prior year. Notably, this excludes the previously announced $7.2 billion Rhode Island 529 win, which is expected fund sometime in the third quarter.

We feel good about the results for the year and the fourth quarter. It puts us in a strong position heading into a volatile year in 2016. Continued strong investment performance, our focus on meeting client needs contributed solid operating results despite the very volatile environment.

We continue to see strength across the global business, in particular in Asia-Pacific and EMEA. Our focus remains on strengthening our effort top deliver strong long-term results and help clients meet their investment objectives and enhancing our comprehensive range of capabilities.

Given the very volatile markets, we are taking a disciplined approach to managing our business, balancing our goals of reinvesting the business for the benefit of clients with the need to run our business effectively and efficiently as we have in the past very volatile markets. I would now like to turn the call over to Loren to go through the financials in more depth.

Thanks, Marty. Quarter over quarter, our total assets under management increased $19.8 billion or 2.6%. This was driven by market returns of $21 billion, long-term net inflows of $3.9 billion and inflows from the Qs of $2 billion, offset by negative FX translation of $5.3 billion and outflows from money market of $1.8 billion.

Our average AUM for the fourth quarter was $783.7 billion. That was down 0.7% versus the third quarter. Our net revenue yield came in at 45.2 basis points with a decrease of 0.6 basis points versus Q3.

FX translation reduced the yield by 0.4 basis points, and change in mix reduced the yield by another 0.4 basis points. These impacts were offset by an increase in performance fees and other revenues in the quarter, which in combination added 0.2 basis points.

Next, let's turn to the operating results. You will see that net revenues declined by $16.9 million or 1.9% quarter over quarter to $886.1 million, which includes a negative FX rate impact of $8.1 million.

Within the net revenue number, you will see that investment management fees fell by $29.3 million or 2.8% to $1.01 billion. This reflects the lower average AUM during the quarter as well as changes in the AUM, product and currency mix. Foreign exchange decreased fourth-quarter management fees by $10.1 million.

Service and distribution revenues decreased by $7.2 million or 3.4%, again reflecting a change in mix and lower average AUM during quarter. FX reduced service and distribution revenues by $0.1 million.

Performance fees came in at $18.8 million in Q4, and this was earned from a variety of different investment capabilities including $9.8 million from real estate, and $3.2 million from UK equities. Foreign exchange decreased performance fees by $0.1 million.

Other revenues in the fourth quarter were $29 million, an increase of $1.4 million, driven by higher real estate transaction fees. Foreign exchange decreased other revenues by $0.1 million.

Third party distribution service and advisory expense, which we net against gross revenues, fell by $17 million or 4.3%. This movement was in line with our lower retail management fees and service and distribution revenues. Foreign exchange decreased these expenses by $2.3 million.

Moving on down the slide, you will see that our adjusted operating expenses at $530.4 million increased by $0.8 million or 0.2% relative to the third quarter. Foreign exchange decreased operating expenses by $3.9 million during the quarter.

Employee compensation came in at $338.8 million, a decline of $8.1 million or to 2.3%. This was due to lower incentive compensation for the quarter. FX reduced compensation by $2.3 million.

Marketing expenses increased by $8.8 million or 34% to $34.6 million. This is a function of seasonally higher expenditures for advertising and other marketing cost, particularly in EMEA. FX reduced marketing expense by $0.4 million in the quarter.

Property, office and technology expenses were $80.4 million in the quarter, an increase of $0.5 million over the third quarter. FX decreased these expenses by $0.5 million.

General and administrative expenses came in at $76.6 million, and that fell by $0.4 million or a half percentage point. FX decreased G&A by $0.7 million.

Going on further down the slide, you will see that non-operating income decreased $3.3 million compared to the third quarter. Included in the fourth quarter were a $7.3 million loss on the disposition of private equity partnership interest as well as a $2 million mark to market on feed money investments.

These were offset by a gain from consolidated sponsored investment products compared to a loss in the prior quarter. The firm's effective tax rate on pre-tax adjusted net income in Q4 was 26.6%, up slightly from 26.5% in the prior quarter, which then takes us to our adjusted EPS of $0.58 and our adjusted net operating margin of 40.1%.

Before I turn things back to Marty, I would like to provide a little bit more detail on the business optimization work that we began to implement in Q4 in light of the current market volatility and as well as in light of our lower AUM levels. We believe this optimization work will make Invesco an even stronger company, further increasing the efficiency and effectiveness of our operating platform. The business optimization work that is underway is primarily focused on our use of shared service centers, outsourcing, automation, and office location strategy.

In the fourth quarter US GAAP results, we recognize $16.2 million of expenses, primarily in the form of staff severance costs, and we expect costs associated with the optimization initiative to continue through 2016. Total costs for 2016 are estimated to be up to $85 million.

Reducing our run rate operating expenses in 2016 and in future years is an important outcome of this work. We expect the ongoing benefits of this project will be well in excess of the projected one-time implementation cost I just discussed. We anticipate the project will achieve cash payback within less than three years, and it will add an estimated to $0.06 to $0.08 EPS accretion in FY17 and beyond.

Finally, in terms of reporting and consistent with our past approach to dealing with material one-off expenses, the incremental optimization charges will continue to be adjusted out of our non-GAAP presentation but will be detailed and tracked each quarter in the US GAAP reconciliation table within the earnings release. Additionally, we will provide you with updated estimates of the implementation cost and benefits of this initiative to the extent that these change in any material way.

One additional item for me to note is that new for this quarter, we have included a schedule detailing the impact that the change in foreign exchange rates had on our non-GAAP operating results and expenses for the quarter. The amounts presented on slide 17 represent the impact of the change in exchange rate movement in the quarter and the year and were calculated by applying the prior-period FX rates to the current period's non-US dollar earnings. Going forward, the schedule will be included each quarter and can be found in the appendix of our earnings presentations. With that, I will now turn it back to Marty.

Thank you. Loren and I are happy to answer any questions people might have.

(Operator Instructions)

Michael Carrier, Bank of America.

Thanks a lot. Hi. First on the flows in the quarter and I guess the outlook. It seems like a lot of the strength you highlighted are coming from the institutional side of the business and then Asia. You mentioned the pipeline near or at all-time high.

I just wanted to get of sense, from a mix standpoint, what is driving that pipeline. And then when we think about it, maybe for Loren, from a mix shift on products, obviously the market or the beta side is having an impact for everybody. I just wanted to get a sense on how that pipeline is relevant to the current mix or the fee rate.

I will be happy to pick that up, Mike. The pipeline is being driven really in four big buckets. Probably one of the biggest is direct real estate, it is probably 30% of the pipeline, continues be a strong driver.

Fixed income generally across broad fixed income, alternative fixed income, stable value, probably another 30%. And the remainder is split between asset allocation and multi-asset solutions. And then quantitative and regional equities would be others. So it is fairly well diversified and generally high fee.

So when we look at the fee rate of the pipeline, it is actually at one of the highest levels we've ever seen it. It is well above our current net revenue yields for the firm as a whole. So as these assets come in, it will be accretive to our fee rates, which is great news.

Obviously the negative that we've seen in our fee rates is due to the compression on equities just given what has happened in the market, and then foreign exchange has also had an impact as well. But in terms of the mix overall on the pipeline, institutional pipeline, we think it is very positive for our fee rate.

I don't know if I can add much to it other than it is a part of the business where we turn our attention. It is really seemingly getting stronger and stronger, frankly in each region of the world, in the Americas, in EMEA and in Asia-Pacific. It is really quite broad-based, so it is very positive.

The other thing I would just mention is we would expect our fee rate, given stability in assets and stability in FX to grow across 2015.

That is helpful. Then just a quick follow-up, Loren, sometimes you will give some guidance on the expense lines. I don't know if it is because of some of the work that you are doing to streamline the expenses as you get into 2017, but just any I guess color.

I think comp you typically had the 1Q seasonality, but maybe the marketing you have some 4Q seasonality. So any color on the expense outlook just given the volatility of the market right now.

I'd say given the volatility, we are probably not going to give any explicit guidance around line items at this stage. There is a lot of work obviously that I discussed being done around some of this optimization work, which will have some impacts on those line items as well.

Generally we're working hard to bring expenses down. As you can imagine, year-over-year decline in expenses, our compensation generally moves and flexes in line with operating income, so those will be down. Some of the optimization work, especially around what we just mentioned, some of the severance, will also help bring some of the compensation lines down.

But the benefits of the optimization work will probably spread across most of the other categories other than marketing explicitly. But we are looking at marketing, that is another interesting topic for us.

It is one of these conundrums when you're in this market. Your clients want to hear from you and you want to be out with them, but at the same time, it certainly is a discretionary expense and it's one that we're continuing to look at. So I'd say we are obviously going to be very vigilant in making sure that we manage expenses very smartly in this environment with no presumption of snapback or some reversal.

The other thing I would like to just mention, there is some impact just due to the acquisitions that we discussed in terms of Jemstep and in terms of Religare Asset Management completing our 100% ownership there. It is absolutely immaterial in terms of the earnings impact, so we don't have to worry about EPS impact. But it does add probably roughly $15 million of expense and a little bit more in revenue in 2016.

So you will see some of those line items go up just as a result of those acquisition but offset by obviously higher levels of revenue. So we don't want anyone to be surprised by that.

The optimization work that we're doing should have a benefit in 2016 you will see. So again, we will quantify that as we get through it, but that will help drive expenses down year over year.

Okay, thanks a lot.

I will just add to Loren's point, we feel like we're really quite capable at this. If you look at our history, we use these volatile periods to really take advantage of opportunities as they show up.

It is a period where I think 2016 for the industry is going to be quite interesting, where clients will be looking for those firms that are in a position of strength. And we are one of those firms, and we feel we are operating from a position of strength right now.

We're going to be very responsible on the expense side, but we have some real opportunities that we want to continue to advance at the same time. That is what we are working through, and we will continue to make sure that we are communicating very clearly with everybody.

Got it, thanks.

Daniel Fannon, Jefferies.

First, can you expand upon the 529 mandate? I think it was $7.2 billion you mentioned that is going to fund in the third quarter? Can you talk about the mix of products that is going to be?

Also, that is obviously very large. Is that something that is a new channel for you, or can you talk about how that evolved and maybe other opportunities within that sub segment?

It will fund in July. It is two plans. The vast majority of the money is in -- one plan is just for Rhode Island alone. That's ETFs alone, a broad range of ETFs. It is driven by our solutions teams, so they are building the portfolio consistent with what Rhode Island, the CIO has set there as a set of investment objectives.

The much larger part of the plan which is probably $6.8 billion of that is a broad range of active and passive capabilities, again managed by our solutions team. And from my point of view, Rhode Island has been very thoughtful, and it is a really well-constructed approach. And again, it is our solution team that is managing the capabilities.

With regard to the channel, it is a new channel for us from the standpoint of -- ad we all know, many, many people use 529s for their kids, et cetera. So it will be available in the advice channel throughout the country, and it is one of the largest 529 plans in the marketplace.

And we just think it will be that much more competitive. Our goal is to help Rhode Island meet the needs of the people in the portfolio, but frankly they also want to grow their plan to, and we work very hard to do that.

You mentioned part of the strength in the fourth quarter has been in Asia and Europe, and I think that has been for some time. I guess given the volatility to start the year, have those demands changes, have the demand trends changed at all, or how would you characterize the start of the year?

It is really hard to -- I think the psychology, day by day, week by week changes. It does feel like as the markets are seeming a little more calm, you are getting some more clarity. I will say I was just in Asia last week, and all of the visits I had were very strong.

So I would anticipate continued strength there as Loren said, and in EMEA. But it feels like we are starting to see a little bit more positive reaction to the environment. But again, it is so early to say anything.

I think your point that you made before, Marty, is good. The strength on the institutional side is actually strong across every region. Great pipeline. The retail behavior has been hard to gauge in and out, risk on and risk off.

Generally I would say in EMEA, we feel very comfortable and confident that the retail side is going to be quite strong. The GTR product is doing very well. The performance has been quite strong, and we think that will help continue to allow us to grow both in the UK and in Europe on the retail side.

Great.

The other thing is the quantitative product as well is unbelievable, off the charts performance. So also very strong performance and demand.

Thanks.

Glenn Schorr, Evercore ISI.

Quick follow up on the 529 plan. Just curious on how the fee structure works. Do you get a fee on each of the underlying assets? Is it a wrapper up top, and is it at a normal institutional rate?

I can't remember exactly where it comes, but just think of an institutional rate on the whole portfolio.

I think it nets down to somewhere around 35 basis points.

Right.

Something like that. Did you hear that, Glenn? I'm sorry -- nets down to something around 35 basis points.

Got it, that's cool. And then a question on Jemstep. I saw your details and rationale for growth in the slide. I just have a follow-up question, how do you expect the distributors to use it?

And more importantly, how do you differentiate because I am assuming there is going to be many large asset managers having their version and maybe even the distributors doing their own version. I am just curious, is this an early mover advantage that will make their lives easier? I'm just curious how you expect that to shape up.

That is a great question. I think you are -- and we are expecting the large distributors will have some version of their own. That is historically what they've done in the past. We've still contacted them, but that would be what we would anticipate.

It is really just the other channels, though, there is a high degree of interest in this. Really what it is it is us partnering up with our distribution partners, and the more effective we can be with them at the end of the day, that is a good thing for their clients and for us also.

I don't believe that they are going to be -- let me say it the other way. I believe strongly there is a first mover advantage to this because quite frankly, multiple distribution partners are not going to have multiple -- three, four, five, six, 10 of these within the system. They don't need it.

It is like any other application. You have education and investment to move that forward, so that is our other core belief.

To that end, is that your point with, we have 300 people on the ground selling and educating as we speak?

Yes.

Last one, Loren, with the cash balances hitting your internal hurdles, and the valuation, in my words, at a ridiculous level, how do you think about the payout ratio relative to the past? Can we start seeing 100% payouts even though you have a lot of things going on?

I think you saw something probably very close to that last quarter. Again, we certainly have demonstrated our willingness to respond when the stock is, as you call it, ridiculously low. And we would tend to agree with you on that one, just given our sense of optimism around our ability to grow over the long term.

So you should expect us to continue to pay a lot of attention. Our needs for internal organic growth, CDs and so forth are still pretty sizable, a lot of opportunities, so we need to balance those against returning capital.

But you certainly expect us to be operating in the stock buyback realm in a non-business as usual approach, which is somewhat similar to what you have seen in the fourth quarter. Maybe not at that full level, but is something between business as usual and what you have seen us do.

Okay, I am good. Thank you very much.

Bill Katz, Citigroup.

Just trying to reconcile some of the numbers on the optimization program you delineated a bit, Loren. You mentioned that you're spending I guess roughly $100 million between the charge in the fourth quarter and then what you expect for this year with a three-year payback, $0.06 to $0.08 accretion in 2017.

Is it accretive to non-GAAP earnings for 2016? The reason I've asking is I guess you're going to run the expenses through the GAAP line.

I presume if it is a three-year recovery, either you are really back ended in 2018 or you would get some pretty sizable savings this year as well. I'm just trying to figure out the cash flows.

So the execution of the optimization is going to happen all through 2016, so the three-year payback is really going to be in full throttle in 2017 and beyond. We will get savings in 2016, probably somewhere around $15 million is what our non-GAAP run rate positive impact would be or it is what we expect.

And that would certainly ramp up significantly into 2017 and on. So again, our estimate is, based on what we know today, based on the activities that we are engaged in today, we are going to be - - we do believe that it will be no more than $85 million in terms of what is required for us to implement that long-term run rate savings which again is somewhere $30 million to $45 million in run rate cost savings post 2017.

Great, that's very helpful. Then Marty or both of you, you gave a nice delineation also by region and by product, but the one area that seemed to not be within that list was more traditional equity mandates.

What are you hearing from clients on the institutional side? Is it still more of this barbell notion? Was there any interest in traditional, plain vanilla type of mandates?

There are actually. Again, I will just use the Asia trip because I was there, but I would not limit it to there. You are actually seeing institutional clients recognize this is probably the time to increase their exposure to the equity markets.

So you are actually hearing very constructive things. And also, you're starting to hear -- by the way, this is the time where active management can really start to add value in a way that was harder from the beta run from 2009 on. I think you are at a point where you are actually going to see, if you're a high-conviction manager, you are going to continue to start to do well.

So I don't know what you put in traditional, but clearly international equities are high. We are seeing a lot of regional capabilities. People are interested.

I think it is just where we are in the market cycle. I think you're going to continue to see -- excuse me, you will begin to see much more commitment to active management.

Thanks.

Patrick Davitt, Autonomous.

Good morning. I have another follow-up on the Rhode Island mandate. One, maybe I misunderstood how you framed this, but does this mean that there is a $7.2 billion outflows coming from other people's ETFs and funds when this funds?

Yes.

Two, I imagine that a pool of capital like this has a pretty sticky inflows stream. Is that the case, and if so, can you help us frame what the organic growth of it has been over the last few years?

That is a very good question. I don't think I will have unsatisfactory answer. What I would say is that the first decision was to engage us, to meet the program of the investment objective they had in place. That was their first desire.

Secondly, they recognize the depth and breadth of our retail distribution capability with some very important distribution partners throughout the country. So their anticipation of growth in the plan is part of what their decision was.

And obviously we were very interested in it and we think it would be a new channel for us. And we think we will be quite successful with it.

I guess the other way to put it in context, and again, I don't have -- they were successful enough to become the third largest 529 plant in the country. We would look for growth to be stronger than what it had been in the past.

I would agree with your characterization about it being sticky, as long as performance and everything else continues.

Finally I guess on that, was this a broad beauty show? What was the decision process?

You have to think of it as a typical institutional beauty show. And obviously they had the choice of anybody they wanted to work with in the country, and it was very competitive. And as best we know, this is the largest 529 transfer that has happened in the industry.

Great. That is all.

Michael Kim, Sandler O'Neill.

Good morning. First, any early read into quarter-to-date flow trends, particularly given the seasonal step-up we typically see in retirement accounts in the first quarter?

And then related to that, I think in the past you targeted maybe a 3% to 5% organic growth rate. So just assuming a more cooperative market backdrop going forward, which I realize is a big assumption these days, but in that environment, is that still a reasonable range to expect?

I will make a couple comments and Loren can -- We still look at that 3% to 5% organic growth rate as very achievable. Again, as Loren and I have been talking about not just this but previously, we continue to see ongoing strength throughout the regions, both retail and institutional. So we think that is fully in place.

You are now talking about a few weeks into January. Very hard to anticipate the quarter, quite frankly. This week is a whole lot better than the first week of January, so I wish I could give you some great insights, but I really can't.

That said, I do know and Loren made this point very clear, the institutional investors are continuing to move forward. The retail investor tend to be more risk on, risk off depending on the daily movement in the markets, although it feels like that is calming down. That is probably the best I could describe it at the moment.

Yes I think that is about right. There was a lot of risk off behavior in the early part of January, so it is getting healthier.

Okay, fair enough. And then so if we focus on the alternatives bucket, net flows have been consistently positive for a number of years. I know the real estate business represents a big chunk of those assets, but there is also a number of different strategies that are in there.

So I am just wondering if you can give us a sense of where you are seeing the best growth opportunities. And then as it relates to fee rates, any color there, because I think the range of the respective fee rates within that bucket can be pretty wide.

I think the other, probably even larger in terms of what we're seeing, certainly in the fourth quarter, is GTR. It just continues to grow. I think it has brought in about $1.5 billion in net flows in the fourth quarter. It is about $11 billion in total size to date.

So that is one that certainly outside the US has really taken on a lot of good momentum. And I think the product that it competes with in the marketplace had some issues around its performance. So the positioning is even better probably now than it has ever been.

It is still early days in the US for us, and so we would like nothing more than to see GTR reach its appropriate timeframe and get through all the hurdles that we need to get through for it to be on the platform. But I think that and real estate, and perhaps as well alternative fixed income is still an area where we believe we can play at a much more significant level that we have in the past.

There are a lot of products that are still early days in terms of their track record. I think it is really GTR and real estate right now are the primary drivers for us and where the demand is.

Got it. And then just one quick one. You mentioned or you called out the $7.3 million realized loss related to the disposition of private equity partnership interest. Can you just give us some more color on exactly what that related to?

That was a period of time where we were warehousing partnership interest before they were put into a vehicle for our clients. And unfortunately, the mark to market on that really hit us before it got into the vehicle, so that is what that is. Normally, we would be able to get in there faster, but there was some exposure to a pretty volatile market, and that is what you saw.

Got it. Thank you for taking my questions.

Craig Siegenthaler, Credit Suisse.

I was looking for a little more color on excess capital. I think historically, you like to provide a guidance here in terms of cash and investments versus long-term debt, and they are pretty close here.

So could you just provide an update here? Maybe you're pretty comfortable with where it is right now.

I think you will see that we had about $1.85 billion in total cash at the end of the quarter. The amount that is required from a regulatory perspective in the UK and continental Europe is around $550 million, so we are about $1.3 billion in excess of our rate capital requirements.

We have talked about in the past that we want to be at least a billion. So again, we are feeling strong in terms of our cash position and our ability to use our capital to the benefit of our clients, probably better than we have in a long time.

With that said, assets have dropped a little bit, so our cash flow is definitely having some -- there's impact to our operating cash. But overall, we are feeling very, very strong and optimistic about our ability to deploy our capital for the benefit of our shareholders in terms of returning capital.

Very helpful, Loren. Then just my follow-up on Jemstep, I just wanted to get a better understanding for how this business will function and how it will generate profits and what really attracts you to this business.

What is the attraction? As I've said, we -- our view is it's a mistake not to pay attention to what is going on in the digital world. Is really easy to just ignore it.

We think that's a mistake. That is why we went and spent some real good time researching what is happening. And we came to the conclusion that a digital mobile tool that can help us with our distribution partners would be a very wise thing to do.

It is as simple a thought as that, and there will be a combination of -- I don't want to get into pricing on Jemstep, but there will be a combination of things that we think will be accretive, if you want to call it, to the organization. First of all the most important thing is we will deepen relationships with our clients.

We will be able to do a better job with our clients. We will be able to offer more effectively the broader range of investment capabilities we have to our clients.

And those at the end of the day will ultimately result in increased assets under management. If we -- again, we have to be performing, et cetera, all the obvious, but we think that's the fundamental thoughts of why we thought Jemstep was a very important development for us.

Ken Worthington, JPMorgan.

Good morning. Also on capital management, we are getting to the point in the year where I think you will be recommending to the Board the dividend increase for the coming year.

In recent years, the dividend increase has been particularly big. But given where the stock price is, how are you thinking about the mix of capital return between dividend and buyback as we look forward to the next year?

Ken, I think it is probably not great for us to be talking about this in advance of our discussion with our Board, but generally our sense of a more modest dividend could be appropriate. In light of the fact that that would free up more capital for buybacks, which I think given the market pricing of our stock may be the better way to use the cash,. But again, we need to wait before we get in front of our Board before we signal anything, quite honestly.

Thank you. And then just a little on the pound hedge, the pound obviously fell a lot in 2015. I can't really tell how much you made at the end of the day on that.

Bill said in your release you're hedged out to March. I thought you were actually hedged out to May. How are you thinking about hedging out the currency as we about 2016, and actually what did you actually end up making in 2015 on it?

Great question. So the hedge, as you know, was struck -- those hedges were struck at 1.493%. That is reflective to the average rate for the quarter.

And so there was no quarter in 2015 that had a rate that averaged below 1.493%. So we made nothing this year, last year in 2015. The current quarter hedge is definitely in the money.

Again, more to come on what the value there is. It is moving around. But it's certainly is something you would see at this rate. It is a noticeable number.

We are expecting to hedge our currency going forward around the pound in particular. We believe that the pound is potentially going to be still a little volatile, especially with the discussions that are going on. And so those are again, as we have done in the past, the hedges we put in place would be out of the money puts that really would protect us from the downside, allow upside to occur, and again would protect our cash flow in particular as opposed to operating results, which we can't really protect against.

Great. Thank you.

Brennan Hawken, UBS.

Good morning. Most of my questions have been asked and answered, but just one left.

As far as the US equity performance, we saw some deterioration this quarter. Could you speak to that?

I think you referenced last quarter that there was some loading up and in energy stocks. Did that play a part here?

It did. Again, my perspective on that is overall the performance is still very strong, and it is very a short-term in nature. And frankly it did improve last quarter to this quarter.

But then again, it is all very short-term. Moving into this year, it continued to strengthen. Those portfolios that have the energy exposure, we think they're placed very well they're going to hopefully do very well for clients.

The other thing I would say, the improvement that we saw in the one-year numbers relative to Q3 were due to our small-cap growth equity team as well as our growth and income product. So they are definitely some equity capabilities that show improvement in the quarter relative to last quarter.

Robert Lee, KBW.

Thanks very much. Couple quick questions.

Rob, it is hard to hear you.

Is this any better? I'm on a cell.

Yes.

Couple questions. You mentioned in the release a couple things with private equity. I'm curious what that is, and even though adjusted that for EPS and (inaudible).

Rob, we are really having a hard time hearing you. You're kind of garbled.

I will call you off-line. I am on a cell phone that is probably not working well.

Sorry Rob. We're getting every other word.

Chris Harris, Wells Fargo.

A few questions on PowerShares. Are you seeing any fee pressure at all in that business? And then related to that, given how competitive smart beta is and it just keeps getting more competitive, do you think ultimately we might see fee pressure in the area?

Couple things. I think when you want to think about us, think about it beyond smart data. It is really factor investing.

One of the delivery mechanisms, our PowerShares ETFs, but our factor investments, really the [quan] team, you are really seeing real demand for factor investing outside of the United States, both retail and institutional. Institutional in particular in Europe and institutional in particular in Asia. And we have been doing it for 20 years.

I think the other thing, if you look at the PowerShare lineup, what is important is that differently than mutual funds, you really cannot have more than maybe three in a category. So there is a first mover advantage topic within ETFs.

It is something very, very real, and if you look at the length of the time that our smart beta ETFs have been in the market, they have liquidity, they have real track records. When you are the incumbent, you are in a really strong position.

We think other people coming into the smart beta area gives us confirmation that it is a better way to create exposure and to passives. Again, we are just seeing continued strength within PowerShares in particular and factor investing outside the United States.

Okay. My one follow-up would be on the cost optimization plan. Can you give us a little bit more detail about what those costs really are? Is it a combination of project spending and layoff comp? Or is it something else?

And then related to that, I am wondering why the spending is taking -- is backend loaded. You would think if it was layoffs or something of that nature, the benefits would be pretty immediate.

That is a good question, so we will make sure it is clear. These are long-dated infrastructure type programs. So many years ago, you had the low-hanging fruit as we called it. That is long gone, has been long gone for a long time.

These are efficiency related undertakings, hard-core system upgrades, process improvement type things. So large projects probably happen in all of our institutions, but they are pretty broad right now.

In many ways, they are transformational around processes and the way we do things. So it is not just trimming people, that behavior that could be done very quickly. This is very thoughtful that will make us a stronger, better company at the end of the day.

And again, an environment like this means we move more quickly to get those things done. They have been on our list, and we have all these things that we would like to do to continue to make ourselves a better company. But we are absolutely accelerating a lot of these activities right now. But they do take time to implement thoughtfully.

Got it. Thank you.

Chris Shutler, William Blair.

Good morning. On US and global fixed income, you have really terrific performance, over $10 billion of active flows in 2015. Can you maybe just talk about that area with rates maybe rising a little bit here with changes in the credit market and how you see the pipeline shaping up for 2016 and beyond?

I would say the effort that we started three years ago broadening our fixed income capability, probably almost four years ago now, is really proving to bear real fruit. And as you say, if you just look across the fixed income performance, it is very strong.

And we are seeing growing demand, all channels, all regions, within fixed income. And some of that is still not at the level that we anticipate because some of the capabilities do not have three-year track records. They are getting close, but we are starting to get commitments on them because the performance.

Quite frankly, institutions in particular looking for another high-quality provider of fixed income capabilities. So not just good performance, but we do think it is -- we are not seeing the highest level of contribution yet from the area. So we are very positive on it.

It is only growing for us. It is such a big market, and we are so under-penetrated that our opportunity to continue to grow, even if there are some rate impacts I think is significant.

All right. And then maybe a last one topic. The DOL fiduciary standard, given the increasing thought that that's going to through, I just want to get your latest take there on --. And realizing that the final rule is not out, what could be the impact to Invesco's strategy and maybe any impact on expenses that we should think about?

It is a good question, and I think we are all -- we are imagining, right? It's hard to imagine, but what I can say, and this probably gets back to some of these other topics that we talked about, breadth of capability, depth of capability matters a lot. We think quite frankly high-conviction manager and fundamental investing and factor investing is really important.

We think we're obviously one of very few firms that can do the range of both types of things. Quite frankly, the other thing that Jemstep does, it is an enabling tool for our advisory clients to get broader, deeper relationships with their clients and serve clients that may-- individuals that could ultimately be totally disadvantaged by the fiduciary rule that's being put in place.

That is part of what we are thinking of how Jemstep can help us and our clients with a rule that we don't know exactly what it's going to be at the moment. That's how we've been thinking about it, so hopefully that's helpful.

Thank you.

Alex Blostein, Goldman Sachs.

Good morning. Bigger picture on the expenses. When you take a step back, I understand the initiative may have been in the works for some time but the revenue probably accelerated some of that. But when you take a step back and you look at your fixed expense base versus the variable expense base, to achieve that 3% to 5% organic growth, what inflation and investment do you need to see in your fixed portion of the expense base to achieve that target?

Nothing more than what we have, quite frankly.

We're just leveraging in many ways capabilities that are in our view not -- can scale much more than they are today and taking capabilities that are somewhat focused on a particular region and unlocking them on a global basis. We can use existing sales people, we can use existing teams, so there is no new infrastructure that we necessarily need to put in place to support that activity. It is more a matter of coordination, education, and making sure that our team -- sales teams in particular -- understand these products and can articulate the benefit to their clients.

I guess along those lines, when you think about the product dynamic and the sources of organic growth that we've seen in the industry this quarter and frankly for the last couple quarters, European retail, UK retail has been a source of strength for you guys, for BlackRock to some extent, for Threadneedle to some extent. So some of the bigger US players.

When you take a step back, how has the competitive dynamic evolved in that market? And I guess more importantly, are you seeing share gains from other firms, or is the pie still growing from -- whether it is bank deposits coming into the investment products or some of the captive asset managers just continuously losing market share?

Is this in particular in the UK?

UK and the European market.

If you look over the last few years, and let's do Europe first. It has been -- really the independent global asset managers, largely US, that have been continuing to take greater share on accounts. I know there are some other very good competitors that participate, but that has been the fact for whatever reason.

And over the last number of years as you have seen, we just continue to make stronger and stronger inroads on the continent, and we still think that is the case. We still have -- we think quite a way to go to penetrate the market, and that continues for us.

In the UK, it is really quite different. It is a really competitive market. Very few non-UK firms are successful in the UK. It is really the heritage of our presence in the UK is why we are so strong there.

Again, it just continues to be competitive, but we are very well-placed there, and we think we will continue to do well. But there would probably be another market that is largely driven by regulatory developments and what's starting to happen here in the United States. It is very difficult to be a smaller firm, and I think the strong are just going to get stronger in the UK as that will be the case in the United States too.

Thanks for taking the question.

Brian Bedell, Deutsche Bank.

Thanks for taking my question. Most of them have been asked. Just this one on the solutions asset [merty], if you want to talk about that. I guess first of all, would you consider that Rhode Island win of your best successes in the solutions effort? How do you think you might be able to leverage that, whether you will use this as a template to further broaden the effort across your sales force.

So Rhode Island would be the highest profile in the United States, I would say. But again, we are seeing -- one of the components of being able to do that, it is really this combination of broad range of capabilities and from our point of view, side conviction factor and fundamentals. We have both of those, and I think that is actually really important if you're going to be successful in solutions.

And it is continuing to carry on for us in each of the regions, so the US, Asia-Pacific, frankly China in particular and on the continent in particular. So we will just continue to go down that path.

There is growing opportunity in the area, and again I think it is -- you really have to be a broad-gauged set of offerings to be successful. And that is where we start, and then the overlay of some very talented people who could do the solutions work for the clients.

And would you say in terms of the effort going forward on this, in your 3% to 5% organic AUM growth targets, would you say solutions is very substantial part of that?

Hard to -- we, probably like you and everybody else, we do our looking forward to try to understand where the strength would come. It will be a contributor for sure and a growing contributor over the two and three years out from where we are right now. That is another reason why we have such confidence in the 3% to 5% range.

And just maybe lastly, on the solutions side, do you feel it is more fixed income oriented or really completely broad --or I should say fixed income alternative oriented, or really completely broad across your asset classes?

It has been 100% broad across the asset class, utilizing anything from a factor based capabilities to alternatives. So it's client dependant, but it has used the full range of capabilities in most cases.

Thank you very much.

No further questions, sir.

On behalf of Loren and myself, thank you very much for your time and we look forward to talking to you next quarter. Have a good rest of the day.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.