景順投信 (IVZ) 2016 Q4 法說會逐字稿

This 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, geopolitical events and their potential impact on the Company, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand foreign pricing of our products and other aspects of our business for general economic conditions. In addition, words such as believe, expects, anticipates, intends, plans, estimates, projects, forecasts and future conditional verbs such as will, may, could, should and would as well as any other statements that necessarily depends on future events are intended to identify forward-looking statements.

Forward-looking statements are not guarantees and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in the most recent form 10-K and subsequent forms 10-Q filed with the SEC. You may obtain these reports from the SEC's website at www.SEC.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statements later turns out to be inaccurate.

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.

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

Thank you very much and thank you for joining us this morning. And if you are so inclined you can follow along in the presentation that's available on our website. And today I'll provide a review of our business results for the full year and for the fourth quarter 2016. Loren will go into greater details of the financials and then, as our practice, Loren and I will answer any questions you all may have.

So let me begin by highlighting the firm's operating results for the full year which you will find on slide 4. Long-term investment performance remains strong ending the year at 72% and 75% of assets ahead of peers on a three and five year basis. Strong investment performance and our focus on providing outcome-oriented solutions to clients contributed to long-term net inflows of $12.7 billion and an organic growth rate of 1.9% for the year.

Total net flows for the year were $22.9 billion versus $2.5 billion in 2015. This result was driven by the success of our liquidity business and represents an organic growth rate of 3% for Invesco during 2016. Adjusted operating margin for the year was 38.7% and we returned nearly $1 billion to shareholders during 2016 through dividends and stock buybacks.

Assets under management were $813 billion at the end of the year, up from $775 billion at the end of 2015. Adjusted operating income was $1.3 billion for 2016 versus nearly $1.5 billion in the prior year.

Adjusted diluted earnings-per-share for 2016 were $2.23 versus $2.44 in the prior year. We continue our stock repurchase program repurchasing $535 million worth of stock during the year.

Let's take a look back at a number of our achievements over the past year, all of which are intended to strengthen our ability to help clients achieve their investment objective and further advance our competitive position. Driven by strong client demand and a compelling suite of capabilities, Invesco PowerShares continue to gain shares in the ETF market throughout the year. Long-term net inflows for our ETF business totaled $9.3 billion and we've seen this strong broad-based inflow of momentum carry into the first few weeks of 2017.

Early in the year we completed the acquisition of Jemstep, a market leading provider of advisor focused digital solutions. This acquisition represents our investment in our partnership with the advisory community and highlights our efforts to participate in the evolving technology within our industry.

We continue to expand our solutions efforts which bring together our full capabilities to provide outcomes that help clients achieve their investment objectives. One result of this strategy was winning the Rhode Island 529 mandate of $6.5 billion which was funded in July 2016.

We also continue to invest in our institutional business by refining our global strategy, strengthening the team with additional experienced talent and more effectively aligning ourselves to opportunities in the market. This work contributed strong institutional flows during the third and fourth quarter, building on nearly two years of positive institutional flows for the full-year 2016. Institutional long-term net flows totaled $11 billion.

On slide 7 we turn to highlights from the fourth quarter. Long-term investment performance remains strong during the quarter. 72% at 75% of actively managed assets were ahead of peers over three and five years respectively. The adjusted operating margin was 38.9% and we returned $264 million to shareholders during the fourth quarter through dividends and stock buybacks.

Assets under management were $813 billion at the end of the fourth quarter versus $820 billion at the end of the third quarter. Adjusted operating income was $336 million in the quarter versus $339 million in the prior quarter. Adjusted diluted earnings per share was $0.59 versus $0.60 in the prior quarter. Our quarterly dividend was $0.28 per share, up nearly 4% from the prior year.

Before Loren goes into details on the financials, let me take a moment to review our investment performance and flows during the quarter. Turning to slide 10 we continue to strengthen our investment platform to provide global expertise and support, minimizing distractions for our investment professionals so they can focus on delivering investment results. Our strong investment performance reflects these efforts, 72% of assets in the top half of peers on a three year basis and 75% in the top half on a five year basis.

As you see on slide 11 active long-term net flows were impacted by $2 billion subadvised mandate from insurance client previously disclosed. Passive long-term net flows were impacted by outflows from UITs of $1.5 billion during the quarter. As we noted, this is primarily for short dated equity trusts that a few of our key distributors have removed from the platforms ahead of the implementation of the DOL fiduciary rule.

Long-term passive net flows were also impacted by an outflow of $1.3 billion reflecting a reduction in leverage in our mortgage capital business IVR. This move was in support of our portfolio management strategy; however, the $1.3 billion is not earn a management fee and does not impact revenues. If you back out the impact of these three items, total long-term net flows would have been more than $2 billion positive reflecting the continued momentum in our business.

As noted earlier, we continue to invest in our institutional business throughout 2016. As a result our focus in investment, institutional quarterly long-term flows for the third and fourth quarters were quite strong extending a series of positive flows that stretch back more than two years.

Solid performance of our institutional business was not enough to offset the impact of redemptions within retail. Retail quarterly long-term flows reflect the impact of the subadvised mandate in the UIT outflows noted on the previous slide.

Institutional flows during the quarter reflect IVR outflows as noted on the previous slide. Without this, IVR leverage and institutional flows would have been quite strong.

At the end of the year our institutional pipeline was up 22% quarter-over-quarter. As importantly, the fee rate on these assets was well above the overall net revenue of the term. In January we've seen flows of more than $1.6 billion so far with diversity across all geographies as well as active from asset capabilities.

So now I'd like to turn the call over to Loren.

Great. Thank you very much, Marty. Quarter-over-quarter our total AUM decreased $7.3 billion, or 0.9%. This is driven by negative FX translation of $14.8 billion and long-term net outflows of $2.7 billion. These factors were somewhat offset by market gains of $6.4 billion and inflows from the QQQs and money market of $2.7 billion and $1.1 billion respectively.

Our average AUM for the fourth quarter was $809 billion, that was down 0.6% versus the third quarter. Our annualized long-term organic growth rate in Q4 was negative 1.5%, again, based on the reasons that Marty just gave. If you look at the adjustments provided around some of the large client redemptions, the organic growth rate would have been closer to 1%. But that was still down from 7.1% in the third quarter.

Our net revenue yield came in at 42.7 basis points, which is 0.7 basis points higher than the prior quarter. Elevated performance fees and other revenues increased the yield by 0.7 basis points and 0.2 basis points respectively.

Net revenue yield was also benefited by year-end contract adjustments and third-party service and distribution expenses which increased the yield by 0.6 basis points. These three positive factors were somewhat offset by the impact of FX on the mix which acted to decrease our yield by 0.8 basis points.

Moving on to slide 15, as we have done before we're showing you our US GAAP operating results for the quarter. However, my comments today will focus exclusively on the variances related to our non-GAAP adjusted measures which will be found on the next slide, slide 16.

Net revenues increased by $9.1 million, or 1.1%, quarter-over-quarter to $863.8 million which included negative FX rate impact of $17.7 million. Within the net revenue number, you will see that our adjusted investor management fees decreased by $17.6 million, or 1.8%, to $965.1 million. This reflects a lower average AUM during the fourth quarter compared to the third quarter of 2016 along with the impact of changes in the AUM product and currency mix.

FX decreased our adjusted management fees by $20.3 million. Adjusted service and distribution revenues decreased by $4.3 million, or 2%. That was reflecting the lower average AUM for the products that receive these fees. FX decreased adjusted service and distribution revenues by $0.2 million.

Our adjusted performance fees came in at [$17.9 million] in Q4. And these were earned from a variety of investment capabilities, including $5 million from our UK investment trust, $4.9 million from real estate, $4.2 million from our global asset allocation strategies. FX decreased these fees by $0.6 million.

So going into 2017, a little guidance here, we expect performance fees to follow a similar pattern to 2016 with Q1 fees about $15 million to $20 million, driven mainly by our UK investment trusts and then moving to a roughly $5 million to $7 million per quarter for the remainder of the year. I would remind everyone that forecasting performance fees unfortunately is not a precise science.

Our adjusted other revenues in the fourth quarter came in at $23.2 million and that was an increase of $3.9 million from the prior quarter. This was primarily due to an increase of $5.3 million in transaction fees from real estate, offset by $3.8 million decrease in our unit investment trust revenues. Foreign exchange decreased our overall other revenues by $0.2 million.

Again, looking forward to 2017 we'd expect other revenues to decline to $12 million to $15 million per quarter through the year. This is due to two factors.

First, we continue to see pressure on our short dated equity UITs as a result of the early adoption of DOL rules and we do expect that pressure to continue on into 2017. The second factor is a structural change in the way our real estate products are priced if more performance fee-based accounts being used in fewer transaction fees based accounts. In future years, we would expect increased performance fees, however, to help offset some of the impact on other revenues.

Moving on down in the P&L, in Q4 our third-party distribution service and advisory expenses, which we net against gross revenues, decreased by $13 million, or 3.6%. That was driven by lower retail AUM at year-end and contract adjustments. FX decreased these expenses by $3.6 million.

And so before turning to expenses let me try to summarize all the revenue guidance I just provided in terms of yield. Looking into 2017 we would expect to see our net revenue yield, excluding performance fees, declined by approximately 1 basis point year-over-year. This net 1 basis point decline is due to a negative 1.5 basis point impact, 1 basis point of that is from foreign exchange and another 0.5 basis point is from other revenues which I then expect will be partially offset by a positive 0.5 basis point impact from asset mix and flows.

So breaking that down even further, taking into account day count, our net revenue yield, excluding performance fees, should fall to 41 to 41.5 basis points in the first half of 2017. In the second half of the year this range would increase by 0.5 basis points to 41.5 to 42 basis points. As a reminder, these yields that I'm guiding you to all assume flat markets and foreign exchange from today's levels.

So next let's get into expenses. Moving down the slide you'll see that adjusted operating expenses at $527.8 million decreased by $12.4 million, or 2.4%, relative to the third quarter. Foreign exchange reduced our adjusted operating expenses by $9.2 million during the quarter.

Our adjusted employee compensation came in at $337.9 million, that was a decrease of $1.2 million, or 0.4%. Foreign exchange decreased our adjusted compensation by $5.5 million.

Again, looking ahead to 2017 seasonal payroll taxes and a one-month impact from base salary increases will lift Q1 compensation by approximately $20 million. This should then drop off into Q2 and level out to roughly $345 million per quarter into the last half of the year based, again, on flat markets and foreign exchange as well as the revenue guidance that I provided.

Our adjusted marketing expenses in Q4 increased to $8.6 million, or 32.1%, to $35.4 million. This reflected the seasonal increases in advertising, client events and other marketing costs in support of the business.

Foreign exchange decreased our adjusted marketing expenses by $0.8 million. Looking forward into 2017, we would expect our marketing expense to follow 2016 with roughly similar levels as well as seasonal quarterly seasonality.

Our adjusted property, office and technology expenses came in in Q4 at $85 million, that was an increase of $2.9 million, or 3.5%, over the third quarter this was due to higher outsourced administration and software costs. Our foreign exchange impact on this line item decreased expenses by $1.2 million. As some large technology-related projects come into service in 2017, including investments around data and cybersecurity, we would expect to see property office and technology expenses increase to approximately $88 million per quarter.

Next our adjusted G&A expenses came in at $69.5 million and that was an increase of $2.1 million, or 3.1%, quarter-over-quarter. This increase was driven by costs associated with several new product introductions and other product related costs. Our foreign-exchange impact on this line item increased -- decreased G&A by $1.7 million.

Looking into 2017 we would expect G&A expenses to be roughly in line with 2016 levels around $65 million to $67 million per quarter. Continuing on down the page, you'll see that our adjusted non-operating income increased $0.3 million compared to the third quarter. Fourth quarter included a $7.8 million gain realized in our pound Sterling/US dollar hedge.

The firm's effective tax rate on pretax adjusted net income in Q4 was 27.7%. This increase in rate was driven by the FX rate movement impact on our profit mix as well as by gains from our FX foreign currency hedge contracts.

Looking forward to 2017, we believe our tax rate should stand at roughly 27%. Which then brings us to our adjusted EPS of $0.59 and the adjusted net operating margin of 38.9%.

So next let's turn to slide 18 where I'll spend a little time just providing more color on the impact of foreign exchange on our results. We have presented our 2016 results on a constant currency basis by restating the 2016 amounts using the average foreign exchange rate for 2015.

As you will note, the FX impact has been significant, removing $109.6 million in net revenue and $55.9 million operating income from our 2016 results. The FX movement has also had a material impact on many operating metrics, driving a 40 basis point decline in our adjusted operating margin and a 0.7 basis fall in our net revenue yield.

As you know, we protected against some of the negative currency impacts to cash flow and to EPS through the use of our pound Sterling and euro hedges. These hedges are in place through the end of 2017. We will consider whether to extend them based on our ongoing review with the Brexit situation as well as based on the overall cost of hedges.

So at the risk of beating a dead horse, let's just go to the last page here on 19. We hope that this slide is going to help with your modeling the impact of foreign exchange on our financials. What we shown here is the impact of a 10% appreciation or depreciation of both the Sterling as well as on euro on our operating results.

So on the top part of the page you'll see that our adjusted operating EPS, or unhedged EPS, would flex by plus or minus $0.07 based on a 10% appreciation or depreciation of the pound. This, of course, is hypothetical since we are in fact hedged. The adjusted EPS, the hedged EPS, would decline only $0.02 under a 10% depreciation scenario for the pound, it would appreciate $0.06 under a positive 10% move.

Our adjusted operating margin would be plus or minus 30 basis points and our net revenue yield, excluding performance fees, would move plus or minus 0.8 basis points. The impact of the euro on our financials is much less than it is based on what happens to the pound at 10% appreciation or depreciation of the euro would have only a plus or minus $0.02 impact on our unhedged EPS.

On our hedged EPS, again, the reality for 2017 -- no material impact on the down scenario of minus 10%. We would see plus $0.02 on an upside. Our adjusted operating margin would be plus or minus 10 basis points and our net revenue yield would move by plus or minus 0.3 basis points.

Hopefully that's helpful. And with that, I'll turn it over to Marty.

Operator, can we open it up for questions please?

(Operator Instructions)

Michael Carrier, Merrill Lynch.

Hi. Thanks, guys. Loren, maybe first, from all the guidance, just given the lower level on the other revenues that you guided to, just wanted to get some sense on are there any expense offsets for those types of revenues? It seems maybe the G&A line being flat in terms of your guidance there is some there. But just wanted to get a sense of if that does come in at the low end of that, is there anything that can be done to offset that?

We are continuing to focus on optimization opportunities. Those impacts are in fact reflected in some of our expense guidance. It is possible that we can do better than we are suggesting here. So that's obviously some potential positive upside. There is some potential positive upside on performance fees as well. We are guiding based on what we know but, again, there are definitely positive potential surprises there which would be very accretive to our incremental margins and to earnings.

Overall, I think we are very focused on continuing to invest behind the business. We think it's important that we do continue to position ourselves competitively, particularly given the rapid changes that we are seeing in the environment. But we are obviously going to continue to be very focused on expenses to try to provide a result that you would view as acceptable.

Okay. And maybe as a follow-up and, Marty or Loren, on the DOL fiduciary rule just as the industry is moving forward, just wanted to get some sense on where things are trending, how you expect it to impact whether it's fee rates, revenue shares, anything that you are starting to get some color and how you guys are positioning for that as we approach.

My view is similar to yours and it sounds like others. I think there is some anticipation that the DOL rule will get delayed. I don't know anybody in the industry, whether it be a money manager or our distribution partners, that are slowing down. So the movement towards advisory it is in place and it will just continue. It would be a mistake not to take that as the case.

The feedback that we're getting from our distribution partners, what they are looking to do is to work with firms with a broad range of capabilities and that have good performing capabilities and also competitive expense ratios. And so on each point, and more specifically what is of interest, a focus on how to combine active and passive capabilities within the channels and an evolving focus on how to use factor capabilities, ETFs in particular. So we are positioned very well from that point of view, both solutions and with our capabilities and factor.

The other topic is a keen interest now in looking at use of alternative capabilities within the retail channel. That's been a topic for a number of years. And as we have talked in the past, it did not move as fast as anybody in the industry thought for a number of reasons. One being just distribution partners getting organized around and secondly how to use it within the financial advisor. And there was a lot of regulatory focus around it also. So that seems to be an evolving focus.

So we look at ourselves as, we think we are positioned really quite well with this as we look forward. Now, again, there is going to be takes and puts and we talked about UITs. UITs are something we have already seen a negative impact to us. The good news is what we are starting to see is a greater focus on the use of ETFs in replace of UITs. So, again, it's going to be some evolving how we partner with our different distribution partners. But, again, I'd say at the moment we feel pretty good about it.

Okay. Thanks a lot.

Ken Worthington, JPMorgan.

Hi. Good morning. First I want to talk about your marketing objectives for the coming year and your allocation of marketing dollars. Are there any meaningful changes as we think about 2017, areas where you are increasing or decreasing marketing spend either by regions, asset classes or even products? And if so, can you give us some flavor with regard to what you are thinking?

Yes. Interesting, Ken. So it's an area that we are actually putting a lot of focus on now as an organization on just strategically what should we be doing. And I think the reality is of where the market is going a brand recognition actually matters a lot. And I'd say that's somewhat different than years gone by. Maybe it's a reflection of more competitive maturing industry.

So our focus globally is extending the brand because what you get with that is, quite frankly, your reputation precedes you and you do end up doing better in the retail markets, in particular, very strongly placed in the UK brand recognition. EMEA also has been improving dramatically as in the United States. We're probably not where we wanted to be. That would probably be the weakest brand reputation vis-a-vis the other parts of the world. So, again, we're just trying to refine that and continue to focus on enhancing the reputation of the firm.

Thank you. Invesco's US active equity retail franchise has been pretty consistent outflows with the exception of maybe IBRA and diversified dividend in recent years. I would say performance wasn't great. It wasn't bad and value was out of favor. 2016 seems to change both the prominence of value investing and the relative performance of many, if not even most, of your US active equity funds. What are your thoughts about the US equity retail business as we think about 2017 and 2018 given both that increase prominence of value investing and the significant improvement of the former Van Kampen funds? Is there hope or expectations that what's been in moderate but pretty consistent outflows has a chance of turning around?

Yes, Ken we are. So our basic view, as we talked before, let's go one step higher, it is this debate about is it active or is it passive? And our basic view is both. That is the reality going forward. In the retail channel active and passive is going to be used. Good news is we are very well-positioned for that dynamic. And then specifically it has been a headwind for US equities of value in particular over the years for the reasons we know from 2009 on that beta run. I think the world has changed.

I've always been a believer in active. It does play an important part in somebody's portfolio. I'm probably preaching to the choir here. So that said, I think when you start to see the relative out performance in quite a material way, it will be used in US portfolios. And we would look to, as you suggest, just an absolute relative strength of the value franchise, we would expect that advisors would start to more actively use those capabilities.

Just lastly, Loren, in terms of UITs, what kind of AUM do you have in UITs right now? And any sense of the scheduled maturity of products in 2017 versus what was scheduled to mature in 2016?

We have about $9 billion in equity, $8 billion in fixed-income UITs. In terms of the maturity, the equities tend to mature more rapidly so they are probably more like an average 18 month maturity level. So you can assume a book that's every 18 months is going to go away. So you can just take that nine and assume a bleed out at worst case where goes away in 18 months.

Great. Thank you very much.

Glenn Schorr, Evercore.

Hi. Thanks very much. It's a combo question. You talked about combining active to passive. And I'm curious if we can get a little more color into the sounds good but how do you actually do it? How much is relying on Jemstep? How much is wholesale in the channel? How much is your solutions effort and will we see that in PowerShares flows overtime as you combine the two?

Great question. So it's beyond theory. And so when we've been talking about where have we been investing and for what reasons, the solutions build out is an important one for us. Actually the media focus has been actually on US retail. And that might be different than some other focuses. That's because of the dramatic changes going on in the advisor channel.

So it's really having solutions experts matching off at home offices to help build different models and solutions for the advisors and then out to the field helping with the models. And it's starting to take shape. I think it's going to be an important way that the business is changing going forward.

It will result in greater ETF sales. There's little question in my mind about that. Jemstep is also been a year since we closed. It is actually being really introducing us to a really new channel of distribution. It's advisor focused, it's not direct. I want to make that very clear. So it's partnering with our advisers. But the inquiring of firms that we are working with are firm that we never had relationship before.

So I look at the financial impact to that and the flow impact, probably the latter part of this year starting to kick in because you have to think of it, it is an application installation and we're well underway in a number of areas. So it is a combination and within Jemstep it is actually using our models that advisors can use. And, again, it's not closed so we can actually -- they can use their own models, et cetera, et cetera. So it's a combination thereof, Glenn.

Okay. I appreciate that. And then a follow-up on your flow commentary, the $2.7 billion of outflows but $2 billion of inflow if you exclude the three one-offs. I take a step back and I see you guys haven't had an outflow year since 2008. And gross sales in the quarter were actually up 7% year on year. So maybe just the high level, which products do you think are going to drive growth? I saw Asia was really good in the quarter. What do think is going to drive growth besides what we just talked about in terms of PowerShares?

You are going to get that -- so extend my power comments, that will continue. The other area where we are still seeing real success is the institutional business and I'd say regionally; all three regions. We're at different stages of success in the different regions but we just continue to see, as we said, the pipeline just continues to strengthen. And so we will just continue to see greater impact institutionally around the world.

Okay. Thanks very much.

Dan Fannon, Jefferies.

Thanks. If you could build on the last question and talk about the UK specifically where obviously Brexit and some of the macro factors are out there and an overhang for probably gross sales but then you've seen performance within that franchise also on a shorter term basis come in. And what's your outlook as you think about 2017 for that segment?

Let me make a comment and then I'm going to turn it over to Loren and he can be more specific. Quite frankly, it is -- the EMEA capability within our firm is very, very strong. And I think it's been looked at more I think from investors as more of a liability than an asset, which is exactly wrong. We just look to continue to improve our position and we think even with the conversations of Brexit we continue to look to 2017 with things stabling and then moving into growth as we go forward. But, Loren, do you want to add?

Just a little color. So one thing I would say, in particular of the roughly $1.6 billion of long-term inflows that we have seen through January, more than half is coming from EMEA. So the region is very, very healthy. We are seeing cross-border again coming in. We're seeing very strong institutional inflows. The UK retail situation has always been somewhat in outflow just given the size of the book and it's not a growing area of demand. But it is certainly be more than offset by the flows coming in through the rest of the region.

So the opportunity that we believe that exists in EMEA is significant. It's one that people should not see as being sick or damaged or impaired through this Brexit situation. And it's one that we feel we are very well-positioned to continue to flow in. So hopefully that gives you a sense of how we feel. Obviously the Brexit topic is a bigger topic around currency. And we been talking about all that but in terms of the actual business and the flows coming into the UK, it is pretty much not yet seen itself having an impact.

Great. And following up on the UIT segment and as well as the performance fees and in the context of thinking about incremental margin for the overall business, it's my understanding the UIT business is very profitable for you. As you think about the incremental margin outlook on a combined basis for the firm, has that changed at all as we think about UITs being lower and performance fees being maybe pushed out and lower ongoing other the revenues up front?

No, I think because, as Marty suggested, we are seeing the opportunity to substitute UITs with ETFs and the incremental margin on ETFs are certainly at the same level as UITs. There should be no degradation due to that particular factor. Overall, the biggest impact on our incremental margin this year, 2017, is everything to do with just FX having a depressive impact on our net revenue yield.

The mix is going to be positive. We are seeing positive net revenue yield lift due to our mix. We don't expect that to change. And so overall we think we are going to be back in that guidance area that we've talked about in the past. In that 50% to 65%, again, but that assumes flat markets and flat affects year over year which has certainly not been the case.

And in an interesting way, this refocus on UITs or how they are being used in the retail channel actually is turning out to be an opportunity for us longer term from the standpoint of we are having much deeper conversations with the advisors on how to use ETFs and how to build their books. So we ultimately see that as a much more important opportunity as we look out into the future for us.

The great. Thank you.

Brennan Hawken, UBS.

Good morning. Thanks for taking the questions. I just wanted to start out maybe following up on some of the questions on the UK. So we have seen the FCA take a closer look at pricing for asset management products in the UK. Can you maybe give your perspective on where you see that going and whether or not you see that leading to pricing pressure and how we should think about it?

Yes it's -- look, it's still early days. Everybody is now responding to the initial report. There is an absent focus really on value for money. And we come out very, very strongly through that analysis. So we sit in a good position because of that. We are very engaged like others in the marketplace.

The firms that are at risk are, and again it was a direct focus on people -- benchmark huggers charging active fees is an area that is probably never a good idea to do that. I don't think people were really focused on doing that on purpose but that's really a real big pressure point. And we will just have to see where we come. There's really probably not going to be any direct feedback until much later in the year, probably nine months from now I would guess.

Okay great. And then can you size for us the subadvised portfolio? And was the loss of the subadvised mandate, was that BA related mandate? And is the rest of the subadvised portfolio, what portion is BA?

Let's see, I'm not sure if I have exact numbers in front of me. But our overall subadvised book is probably under 10% of our overall exposure in the retail space, maybe 15% to 10% out of $170 billion mutual funds. So that gives you a sense of the overall exposure. This particular client was an insurance client.

I don't know if we have all the specifics or have provided much specifics around that but it is one that the fee -- it was not the highest fee business for us. So, again, it's not relative to our overall net revenue yield, it is going to be accretive in terms of its loss. I don't think there is a trend here on subadvised per se. We obviously -- there are some big changes that need to happen here and there as certain clients decide to change the way they manage their portfolios. But at this point I don't think there's something where we are saying there's that risk a lot of subadvised assets.

Okay. And then just one follow-up for the UIT, just to help us think about what the role rates are. For this quarter when you had the investors roll into the next series, what percentage of investors did you see opt to roll into the next series? Just help us gauge that $9 billion over the next 18 months and what portion, at least based on early days, might actually roll off?

It's actually been a little bit better. In the fourth quarter things actually improved somewhat. So, again, it's a dynamic situation. We are painting somewhat of a bleak picture on the UIT business in terms of the equity outflow. But it is still a pretty dynamic discussion and one quarter -- I just don't know if there's a trend line I can actually point to, to allow you to model this effectively.

It's something that we are continuing to monitor. And so because it's moving around quite a bit, I think it's probably wrong to assume the worst case scenario that I talked about before. Just as another level of information, the fee rate on the equities are roughly 55 basis points. So that's on the sale but then you have to take that number and divide that by an average life of 1.5 years.

And you guys recognize that not -- I thought you recognized that up front.

We do. We recognized it up front. But just in terms of how the fee rate yield shows up, we're taking that up front number and we're dividing it by the overall assets that are in place in the book.

Okay. Thanks for the color.

Bill Katz, Citi.

Thank you very much. I appreciate taking the questions. So, Marty, you mentioned that in the retail channel that the distributors are a little more focused on expense ratios which we are hearing from a bunch of your peers. And BlackRock cut some pricing, T. Rowe announced this morning -- I'd speak with them. They've had some pricing cuts as well.

When you look at your retail footprint, putting aside the passive business, how do you look at the active business? Is that an area that might need some -- how does this stack up when you look at the expense ratio? Could there be any strategic moves to try and increased volume by bringing pricing down perhaps?

A couple things. It is an area of focus. It has always been an area of focus for us. And if you look at what we've done over the last decade we have repriced our retail funds downward to the point where, Loren correct me, about 90% of our assets are below median and two-thirds are in the lowest quartile of expenses. So we are placed very, very strongly. We historically -- this is not a new topic for us so we think we're placed very nicely. I also think it's a mistake to think that the first thing that people are looking for is expense ratios.

Low expense ratios with bad performance is -- I don't care how low, you can give it to somebody, it's not going to be a factor to drive growth. And still, the primary focus is investment quality. Is it going to generate the returns for the clients in the portfolio? And I think people -- don't forget that. That is the driver. I don't think price cuts are going to change the flow dynamic. What I would say, though, if you are above median and not performing well, that's not a good place to be.

Okay. That's probably an understatement. (laughter) Okay so the other question I have for you is that when you -- in the $1.9 billion, $1.7 billion or the roughly $2 billion of flows this quarter, can you, I appreciate the EMEA in the institutional side but, from a product demand perspective, what are you seeing? And then maybe the broader question, if you have time, is everyone hopes that active makes a comeback, is there any real-time dialogue with the distributors in the US in particular that's arguing that you are actually seeing any pick-up in active demand? Because from the industry level data, you are really not seeing it.

I can think of a number of conversations that I have been in. There is a very strong interest, beyond interest, a very important part of the strategy of the distributors to use active capabilities. And in particular for us, there is -- the discussions are as high as they have ever been in understanding how to use alternative active capabilities.

So I think you are right though from whenever you want to think this started -- the end of last year so December on just beginning to see a really strong out-performance of active. It will be taken up, I do believe. But if you look at history, it's always trailed. It doesn't start exactly when you should be doing it.

And in terms of what's really working for us this last quarter in active, we saw the outcome-oriented types of products are doing very well like GTR was probably one of our largest winners. I think it was roughly $2.4 billion of long-term net inflows into that capability. Our diversified dividend capability -- so the yield oriented equity capability; $1.4 billion. We saw real estate, bank loans, CLOs as well all being positive in the active space.

And then obviously the detractors, the outflows, were related to some of the, as we talked about, the big subadvised client as well as there was about $1 billion of just the disposition related to a real estate holding. And this was all talking about 4Q right now, just to be clear. Going into next year, as I said, I think those trends are continuing and we are seeing similar take on of that type of product.

And I would just come back to if you recall more than three years ago we launched a broad range of alternative retail mutual funds. And if you remember the conversation at the time, we thought the wise thing to do was a broad introduction, knowing that you needed three-year track records largely before you start to get traction. We've hit that three-year mark and I think in hindsight I think that's going to look like it was a wise thing to do at the time.

Okay. Thanks for taking all my questions today.

Alex Blostein, Goldman Sachs.

Hi, guys. Good morning. A couple of questions, pausing with implementation, but thinking through the potential reversal of the rule, who knows whether or not it actually happens, but playing that out through the P&L for you guys, are any of the revenue challenges you highlighted on the other revenue line, due to potentially some DOL of changes, could they potentially reverse? Or do you think this is more of a permanent phenomenon?

I think it's a mistake not to think it's a permanent phenomenon. Our distribution partners prefer the advice model and the DOL was already moving that way. The DOL was the impetus to advance it. In some ways I don't believe the fiduciary rule is going away. I think there could ultimately be some modifications and some -- the SEC syncing up a synched definition of the fiduciary rule which would be a healthy thing in some elements of the rule that could be better dealt with could get addressed during that process. So that's our view.

Got it. And then around some of the expense guidance, particularly I wanted to touch on the higher cost of data. So, Loren, you mentioned you that guys are expected to spend a little bit more there in 2017. Can you give a little more color? What are (inaudible) you're spending there on? Is it more reactive? Meaning that data providers are just charging more. Or is it proactive where you are just finding actually more value and more expanded data services and how you are incorporating that in your product offering?

Maybe I was not very clear it in my term data. So it has more to do with actually the systems and our overall management of data through the firm in terms of our investment book of records having one system as opposed to multiple bespoke systems. So it's really been a redo, a revamp of how we manage data through the firm really giving us even more effective efficient with our information, less manual processing, more straight through processing.

That's been a major investment. It's not really the cost of data which, of course, does go up every year. That's not what we're talking about here per se.

Got it. All right. So feels more temporary. And then last one for me on the hedge, can you remind us again when the hedge expires and how we should think about that going forward? I understand you guys have a hedge for still a couple quarters but what happens after?

Right now the hedges are in place through the end of 2017. And so if we were to do nothing there would be no further hedging after that. So as I mentioned earlier, we're going to continue to look at opportunistically whether it makes sense for us to extend those hedges either both in the pound and euro or maybe just the pound. And that will be based on our risk assessment of Brexit and obviously the cost of the hedges as an insurance policy.

Got it. Great. Thanks a lot for taking the questions.

No problem.

Brian Bedell, Deutsche Bank.

Hi. Good morning

Hi, Brian.

Marty, maybe just come back to the active/passive comment, I appreciate your comments around that momentum into January. Maybe can you just talk about how that has changed say pre-the Trump administration as you think about how advisors have been thinking about potentially changing portfolio allocations to comply with DOL earlier in the fourth quarter? Has that changed significantly since the Trump win and into this year?

And then also your comments on the alternative side that's been more brewing longer term I believe. Where are you seeing that really perk up much more recently?

So, again, it's hard to decipher exactly what the impetus was. I would say the advisors looking more to build broad portfolio allocations for their clients has been something underway for a number of years. I think DOL moved ahead. And then this rally, if you want to say from election day on, has by the combination of all of those three have really put a focus on: I want to use active and passive; I want to understand how to use factor within that with active; I also want to understand how to build alternatives into this asset allocation.

So it's all those things coming together. And there's always been a belief too, and it was Ken's question earlier, that, I think it was Ken, that over the long term, active, even US equities is a value add for multiple reasons; risk adjust return, downside protection, et cetera, et cetera. So it's hard to point to one thing as the impetus to this. But there is a very, very focused effort on using the broad range of answers to build these asset allocation capabilities for the advisor community.

Great. And then maybe, Loren, if you could parse out the flows for January a little bit more, if it's possible, and to, I assume it excludes QQQs, but just between active equities and fixed income and alternatives and ETFs. And then on the GTR, I think that's $19 billion in assets, if I'm right. Can you talk about your view on the US distribution of that? I know that's been an area that's been building.

Sure. Within the number, the $1.6 billion, we've got some puts and takes as you imagine. The passive PowerShares, you've got that number yourself if you go to the website. But we are seeing more than $1 billion on the traditional in terms of inflows, long-term inflows. So that continues to be a high-growth area for one that we don't expect to slow down at all. In terms of what is in demand, it has been largely around fixed income and alternatives is where we are seeing most of the interest, as I mentioned, on the active side.

We are seeing multi-asset being about $0.5 billion positive in the number. And Asia continues to see growth but largely around fixed income, both bank loans and core fixed income offerings. So around real estate as well that continues to be an area where we see flows coming in. So hopefully that gives you some good enough color in terms of what's driving the flow picture.

And then on the active equities, are they still outflowing at a similar pace as December in the fourth quarter?

Yes. There has not yet been a [sea] change at on the flow picture. It's pretty much business as usual unfortunately. Even though performance is strong, we still see outflow. The only other place, as I mentioned early, where we're seeing very strong outflow would be diversified dividends which is well in excess of $1 billion in the last quarter.

And GTR for January, if you've got that?

And GTR for January was about more than $0.5 billion.

Thanks so much.

No problem.

Robert Lee, KBW.

Thanks and good morning, everyone. Just curious, I know you have had over this past year some efficiency initiatives in place and you have talked about in the release about starting to see some impact. But as we look forward and given some continued revenue headwinds, whether it's from FX or whatnot, how should we -- do you think there's much more you can do in that front as we think ahead to next year or the year after? Or do you feel you have pretty much gone to the well?

Never have we gone to the well. There's always opportunity. We can only do so much at one time. So obviously we've got some -- sequencing has been a continued move to improve use of technology, reducing manual, the need for manual work, using our global centers more effectively, more efficiently. I think themes like digitization and robotics are huge opportunities for our industry in aggregate. And we're running after them quite heavily but it's still early days in terms of seeing the full benefits of those technologies finding root.

So I think there will be an ongoing -- there has to be an ongoing focus for driving efficiency through Invesco as well as the industry for us to maintain profitability. And I think it requires some investment to get there. So that's the flip side. But we've been making those investments over the last several years. And we feel we are very well-positioned to continue to drive our expenses as a percentage of our assets under management down as we have seen continuously over the last many years.

And, Rob, I would probably add to that the other perspective is where we see ourselves position as a firm and where we see the future of the industry, we think we are aligned against very well. And so through these savings we have been reallocating, creating capacity to continue building up solutions, the global institutional business, the PowerShares business, those things that are absolutely making a difference.

I think what the other side of it is you could stop doing that. And I think it's the most dangerous time not to be investing to demands in the marketplace. And I think those firms that have stopped investing you are going to find yourself competitively at a material disadvantage. And the good news is we have been after this for a good number of years and we're really seeing the impact along the way.

Thanks. And maybe a follow-up question. One of the theoretical impacts as firms look to prepare for the DOL rule, whether it happens or not, as you said, it's happening, but is that it would continue to spur demand for SMA accounts versus funds.

So I'm just curious if you're actually -- obviously it's been a trend for a while but if you are seeing a change in that dynamic and if you think of your own flows how you would characterize funds versus SMAs. And maybe also update us on your thoughts about how you are positioned in that part of the retail market.

So we have the SMA capability. There's many firms. And, again, it is an area that will continue to be a focus with our distribution partners for various different types of investment capabilities that they are trying to make available to their clients. So I'd say it's a continuation of what spend there in the past, quite frankly.

Okay. And then maybe just one last question if I could on capital management. Two accelerated share repurchases this year, as we look to the coming year. How much of that should we think maybe pulled forward share repurchase. Is that maybe next year would be lower than average or something? But how should we think about your appetite for share repurchase in 2017 given what you did this year?

Great question. We are obviously operating with our normal capital priorities that have been in place for years. First call on the capital would be ceding products. Next would be dividend growth, modest single-digit growth followed by [soft] buybacks. And so that's the process we are in place. We want to maintain roughly $1 billion of cash in excess of what's required from our regulatory capital perspective. And we are largely there plus or minus a couple hundred million.

So our focus this year or last year was certainly being opportunistic on the buybacks because we saw what we thought was an over reaction, obviously, to the whole Brexit news and certainly the DOL impact on our franchise we thought was overblown. So we're going to continue to operate with those types of triggers in mind, opportunistically going in perhaps at a higher level because we have the financial flexibility to do so.

But I would say our preferences, obviously, is to be back into a more normal approach around our capital management. And we do have some pretty, I'd say, sizable [Dee] capital needs coming into next year as we continue to see our client demand for alternatives grow. We need to seed some of those capabilities or co-invest along some of those capabilities. And so that will be probably, again, as I said, our first call on capital.

Great. Thanks for the color. Thank you.

No problem. Thanks, Rob.

Chris Shutler, William Blair.

Hi, guys. Good morning. It looked like the passive yield was up quarter over quarter for I think the third consecutive quarter. Maybe just talk about the drivers there and what you are expecting?

I think that was largely because of things like IVR leverage which was a big outflow and had zero fee impact. So it's more noise than anything else. There's nothing really going on, I think per se, in the mix. Although I would say the one thing is there's been a pretty significant drive-up in the use of bank loan ETFs. And bank loan ETFs are at a much higher fee than the overall average; I think up in the 60, 70 basis point level.

Okay. That's helpful. And then on the half basis point of help that you are expecting and the fee rate in 2017 from mix, just want to be clear, so that's based on existing mix and AUM? Or does that include your assumption where flows are going to shake out? And given the outflows you have been seeing in equities, are you expecting that to continue and just be offset by alternatives? Just trying to understand what's in your expectations.

That's actually based on a very detailed bottom up, built up forecast, region by region, product by product, institutional retail, equity fixed income alternatives across the globe. And so it represents our expectation. It reflects our pipeline of won but not yet funded products, which as Marty had mentioned, has a much higher fee rate than the firm's overall average. It reflects obviously the increased client demand we're seeing around the alternatives. And I think we're also seeing obviously growth in places like EMEA and Asia-Pac where they tend to have a higher fee rate. So that's what's driving the overall fee rate improvement.

Okay. And then can I just ask one more real quick one? In the other revenue that you guys talked about, what's driving that change in the real estate contract structure; be more performance fee versus transaction fee? Thanks.

I think clients are just more interest in seeing this back-end loaded type of fee as opposed to the transaction fee. And so we are just responding to the client trends that are in place where I think the clients would rather not be paying transaction fees.

Okay thank you.

Chris Harris, Wells Fargo.

Thank you. How do you guys think your platform is positioned for a sustained period of higher US interest rates? And part of the reason I ask is there is a perception in some circles that you guys have a lot of dividend income producing products that would really be negatively impacted by that?

If you look at -- I think you're quite focused on that diversified dividend fund which has been so successful. But if you look at the value suite, there's three elements to it. That has been an area where there's been a lot of focus. There's a deep value capability which is performing very, very well -- somewhere between diversified dividend and deep value that's also performing very, very well. So we are positioned, I think, extremely well as you look forward.

Okay very good. And then you guys have a much lower tax rate than many peers and you guys do have a distinctive corporate structure. Any thoughts on how tax reform in the US will flow through to you guys? I assume there would be some benefit but maybe you could help walk us through the puts and takes there?

Assuming -- we don't know fully, obviously, what's really happening but what we would benefit from would be the lower tax rate in the US on our US business, which is clearly the largest part of our operating income right now. So that would be a direct benefit to us. There would be no, per se, benefit to us relative to the business outside the US since we are currently living in a territorial tax regime based on our domicile. So I think it would be limited in terms of what it offers us perhaps relative to other pure US-based firms. And as we have mentioned, we are free to bring back dividends without any tax consequences and we do so. And if there was some tax repatriation element that would not provide any immediate new opportunity for us, we do it all the time.

Got you. Okay. Thank you.

Michael Cyprys, Morgan Stanley.

Hi. Good mourning. Thanks for taking the question. Just curious if we could turn to M&A for a moment. Just wondering how you're thinking on M&A is evolving just given the tough operating environment. To what extent would it make sense for Invesco to drive a bit more scale efficiencies in the business maybe with some M&A both on and even large-scale M&A here?

Again, as we have discussed this in the past, it is a reality now that scale does mattered more than it really ever has historically in the asset management business. The good news is we have some good scale. That said, if you could find asset management complementary to what we are to improve capabilities, that has always been our primary focus and get scale at the same time, that would be ideal. So, again, we just continue to be open-minded to those opportunities. I would say there's nothing blatantly obvious at the moment as we continued to look at the marketplace.

Okay. And maybe we could just turn to your Asia business for a moment, seeing a lot of success there. Looks like the AUM and Asia-Pacific is up about 26% year on year, if my numbers are right. So can you just talk about how you are thinking about building out your business in Asia? What inning do you think you're in terms of the build out and what's left on your to-do list in terms of is it more product focused or distribution? And how do you see the business five years from now?

Look, it's a very important part of our business. It is really, as you say, now generating an important contribution to the firm. And the focus really right now is on distribution excellence. We feel we have the capabilities in place, very, very strong Management Team leadership and we would imagine that it will continue to be a more important part of the business in five years from now. And I'll stand at that.

And in terms of products, we have seen already great take on of products like real estate and fixed income. I think we're seeing growing product take on multi-manage and multi-asset allocation products. So that's a newer theme that is coming in and generally just around the alternatives overall is something where we see more and more opportunity for us in the region.

And I'd just add, we really strongly believe we are uniquely positioned in China, both at a retail level and institutional level, and we think that the future is very, very positive there for us.

Okay. If I could just ask one last one there on Asia, any sense in terms of the breakdown in terms of countries that are larger or smaller than others in terms of contribution at AUM there and any particular ones where you see more outsized growth?

I think our biggest contributor would be China, generally, probably followed by Japan would be next. And then you get into much smaller -- Taiwan and Australia. So those would be the two big ones.

Super. Thank you.

[Patrick Davitt], Autonomous.

Good morning. Thanks. I just have a quick one on bank loan trend. And from the data we can see, it looks like retail is taking a lot of flow share and on the other end of the spectrum it looks like we've seen some institutional outflows from traditional separate account vehicles broadly. Are you seeing it become, or the ETF structure become more popular with institutions in that asset class in the Trump rally inflows there?

I don't know if we have seen the institutional outflows that you are talking about. We have seen actually strong take on, and, again, this comment though is on a global basis. So globally there's just no question that bank loan, separate accounts, definitely in growth mode. In terms of our US presence, I think it's still been pretty positive. But ETFs have been clearly taken on at a much higher pace in the US than any other region. So maybe de facto, your comment is correct because we're seeing that BKLN grow quite a bit.

Is that flow institutional or retail?

It's a little bit of both, I would say. Our presence has historically been more retail than institutional. And so I would say it would most likely be mostly retail just because of our install base. But we know that there is some institutional buyers of that product as well.

Okay. Thank you.

Brian Bedell, Deutsche Bank.

Great. Thanks for taking my follow-up. Just one quick one, Loren, on the third-party distribution service expense, that's been moving down a little bit more than the assets and the advisory fees. So that sounds like it's been helping results relative to some other areas. So if you can give some color on the trajectory of that line in 2017 and what some of the big factors in moving that are?

I think it is -- there was a little bit of movement down this quarter that had more to do, as I mentioned, around contract adjustments at year end, which tends to happen, true-ups and things of that nature around some of the distribution arrangements and new ones coming in getting signed.

So the trajectory is pretty stable. I don't think there's a major change in terms of that number relative to our net revenue yield in aggregate. So it's one where from the UK obviously the RDR impacts are fully through. And so we have seen the pay way go away on that part. But in the US, which may be more the point that you are getting to, there's nothing material changing on that line item.

Okay. And is it the base, the 351 base, would that be actually higher ex the contract adjustments then?

Yes, that's right.

Do you have a magnitude of that?

I'm sorry.

That's okay. That's alright. Thanks so much.

Okay.

Thank you very much for joining us. And I'm sure we will be talking to people soon. So have a good rest of the day.

Thank you and that concludes today's conference call. Thank you all for joining. You may now disconnect.