景順投信 (IVZ) 2017 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 for and pricing of our products and other aspects of our business or general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future conditional verbs such as will, may, could, should and would as well as any other statement 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 our 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 statement 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 would like to turn the call over to your speakers for today: Marty Flanagan, President and CEO of Invesco; Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thanks very much, and thank you for joining us, everybody. And if you're so inclined, you can follow the presentation that's available on the website. So I will spend a few minutes reviewing the full year results and the fourth quarter results of 2017, give an update on where we are with the 2 acquisitions that we're involved in. And Loren will go into the financial results, and we'll open up to Q&A. So let me start by talking about -- highlighting the firm's operating results for the full year. And I'm on Page 4, if you're following along.

So investment performance continued to be very strong throughout the year. And really on the back of very strong investment performance, really, our movement to focus on outcome-oriented solutions contributed to long-term net inflows of $11.5 billion during the year. Our organic growth rate was 1.7%. I do want to highlight that 2017 represents the ninth consecutive year of positive long-term net inflows for Invesco, and I'll come back to that in a minute.

But again, the combination of all these efforts, performance, the capabilities and delivery for clients, resulted in achieving record earnings per share for Invesco of $2.70 per share. That's up 21% year-over-year. The adjusted operating margin was 39.4% for the year, up from 38.7%. We did return $472 million of dividends throughout 2017.

So if you turn to Page 5, this is where I want to come back to the consistency and the diversity of our long-term flows, which really is in the context of the 9 years of net inflows. So this chart on Page 5 shows the relationship between organic growth rate and the variability of that growth. The vertical axis is the average organic growth rate over the prior 5 years through 2017, and it's the public company peers. The horizontal axis is the standard deviation of those flows, and it reflects the sustainability or variability of the organic growth rate.

So if you look at Invesco against our peers, it's evident that the diversification is benefiting Invesco. Invesco has the lowest standard deviation of flows of the group, reflecting the high level of flow consistency. And additionally, we're just outside the top third of the average organic growth rates of that peer group, something that we absolutely intend to close.

Having a strong and diversified set of offerings and assets under management really does put us in a position to better serve our clients. But as a business, it absolutely makes us stronger by not being overly reliant on any one geography -- excuse me, any distribution channel or asset class. So again, diversification is good for our portfolio. It's great for business, and this is not a concept anymore. This is proven in these results. We do believe that this diversification of the business does lead to better flow consistency and represents a strong opportunity for us to reach that targeted growth rate of -- organic growth rate of 3% to 5% in the near future.

And lastly, I do want to point out despite our continuous inflows and the low volatility of those flows, Invesco continues to sell at a discount versus peers. We do not believe that our current valuation fairly reflects our ability to grow organically as measured by history or what we think is based on the future potential of Invesco.

So now let me turn to Page 6 and take a minute to talk about the achievements over the past year, all of which were intended to strengthen our ability to help our clients meet their needs and further advance our competitive position. Investment performance is very strong during the year, as I mentioned. 64% of our assets beat peers on a 3-year basis and 75% on a 5-year basis. And this is really what was one of the principal drivers of good performance of the past 9 years that generated the flows that we talked about, and in particular in this year, the record earnings per share of $2.70.

But throughout 2017, we continue to build our competitive range of active, passive and alternative capabilities. We -- that is really important for future success of any money manager. We did complete the acquisition of Source and announced the acquisition of Guggenheim Investments' ETF business, both of which I'll talk about in just a minute.

In 2017, we continued to expand our solutions business, which brings together the full capabilities of the firm to provide outcomes for clients. And again, this is a really developing and very important thing that we're seeing, what clients are looking for from money managers.

One of the things that highlighted that closed within the year, as everybody knows, was Rhode Island 529 account. But also importantly, we are seeing success with solutions and traction within the wealth management platform and our different opportunities in different parts of the world institutionally also.

Regarding our digital advice platform, Jemstep, we announced partnerships with a number of large enterprises in 2017, and we're well down the implementation path with several of them. And the sales and onboarding pipeline continues to be very, very robust. In particular, we saw strong demand from banks, which view digital advice as a really important means for them to strengthen their relationship with their clients as they build comprehensive wealth management services.

Jemstep differentiates itself by offering adviser par technology, enhancing the human touch, not replacing it, but enhancing them. So the partnership with our partners is really very, very important, and it works quite well.

We also continue to drive savings through our business optimization program, delivering more than $43 million in annual run rate savings as of the end of 2017. We will use the savings to offset investments in key initiatives that help us better meet client needs, strengthen our competitive position and help us grow the business as we look to the future.

A handful of the initiatives I might highlight, for example, would include factor-based investing, which would also include things like self-indexing, a complement to our ETF business. We have continued effort to advance our institutional business globally and expansion in China, all of which we have talked about in 2017 or we'll give further updates in 2018.

So now let me take a minute to update you where we are on our acquisitions in 2017. Again, both of which we're focusing on expanding and improving our global ETF program -- platform, both of which we think enhance our competitive position in the ever-growing ETF business. And the EMEA platform has been -- helped with the closure of Source and Guggenheim also here in the United States.

Our EMEA ETF business totaled $27.9 billion at the end of 2017, up from $26 billion at the time of acquisition. This really is a strong result of our efforts to successfully manage the integration post-acquisition, which typically we did not see any of the integration issues that often happen with acquisitions. The EMEA acquisition expands the diversity of our ETFs across equity, fixed income and commodities, smart beta and active ETFs, so really a broad complementary to our platform. We did launch 10 new ETFs in the fourth quarter, the point being, we look to take advantage of the platform in a very rapid fashion.

The Guggenheim Investments' ETF business continued to expand assets under management and had strong performance within that platform. We still intend to close in the second quarter of this year. And again, the Guggenheim platform will add equity, fixed income, alternative ETFs, again, enhancing the range of capabilities we have. And also, we'll be able to create client-directed proprietary indexes through self-indexing capabilities.

And then a minute on the fourth quarter results on Slide 10. You'll see again the strong investment performance helped drive assets under management to $937 billion, up from $917 billion in the prior quarter. We had solid retail and institutional demand led by long-term net inflows of $4.4 billion and an organic growth rate of 2.3% during the quarter. Adjusted operating income was $399 million as compared to $397 million in the prior quarter. The adjusted operating income was -- excuse me, operating margin was up slightly to 40.7%, and we had earnings per share of $0.73. We did return $119 million to shareholders through dividends during the quarter. And the quarterly dividend remains constant at $0.29 per share.

I've talked about performance, so why don't we turn to flows on Page 13. We saw solid demand for active and passive capabilities during this -- during the quarter; gross sales and net inflows of active capabilities in the fourth quarter, building on solid demand in the prior quarter. We saw solid flows in taxable fixed income, international equity funds and domestic equity.

Turning to passive. We saw strong flows into domestic equity, fixed income, international equity ETFs. And as noted in the presentation, our ETF acquisition in EMEA is contributing to net flows and building on strong demand for ETFs in that region.

We did see very strong retail and institutional demand during the quarter, as you'll see on Slide 14. And as an example, this was the sixth consecutive quarter of net positive flows for EMEA, led by strong institutional and cross-border flows. And as you can imagine with markets continuing ever-rising as they have over the last number of months, demand for risk mitigation strategy remain strong, particularly among institutional investors. And the pipeline of won but not funded institutional mandates also remains very strong.

We saw strong flows into global targeted return funds, led by institutional investors. And we also saw solid flows in the pan-European high income as well as commodity and emerging market ETFs. So again, the flow picture continues to be quite robust and ever-increasing as we look to the future.

Let me turn it over to Loren to give you more specifics, and then we'll open it up to Q&A.

Thanks a lot, Marty. So quarter-over-quarter, we saw total AUM increase $20.1 billion or 2.2%. That was driven by market gains of $14.9 billion; long-term net inflows of $4.4 billion, which included $5.9 billion of reinvested dividends and capital gains in the quarter. We saw positive foreign exchange translation of $2.5 billion and inflows into nonmanagement fee earning AUM of $1.6 billion. These factors were somewhat offset by outflows from institutional money market products of $3.3 billion.

Our average AUM for the fourth quarter was $930.3 billion. That was up 4.4% versus third quarter. And our annualized long-term organic growth rate in Q4 was 2.3% compared to 3% in the third quarter.

Before turning to net revenue yield, as I do typically, I wanted to provide one quick update on a change this quarter on how long-term inflows are being calculated. Beginning with the fourth quarter, our flows in AUM of our unit investment trusts, or UITs as they are known, as well as changes in product leverage are no longer going to be classified as long term and instead are being presented with -- alongside with the Invesco PowerShares QQQ product as flows -- categorized as flows in nonmanagement fee earning AUM. Since these products -- our managed products earn management fees similar to the QQQ, we thought it was more accurately reflecting the nature of long-term flows in AUM to exclude these products from those flows going forward. All prior periods have been restated to allow for a consistent presentation and comparability.

So now let me get to the net revenue yield. Our net revenue yield came in at 43.2 basis points. And our net revenue yield, excluding performance fees, was 41.3 basis points. That was a decrease of 0.6 basis points versus Q3. The impact of a full quarter of results for the acquired European ETF business reduced our yield by 0.5 basis points. And we also saw a nonrecurring reduction in service and distribution revenues in the quarter. That decreased the yield by 0.2 basis points. These were then somewhat offset by the positive impact of foreign exchange and -- on mix, which added 0.1 basis points.

So ultimately, the mix improvement that was anticipated when we provided our net revenue yield guidance last quarter did not fully materialize to the extent that we expected, as we did see higher outflows from some of our U.S. retail equity products as well as a somewhat modest slowdown in flows versus what we were expecting from our cross-border fund range in the fourth quarter.

Let me move to Slide 17 just quickly. That provides our U.S. GAAP operating results for the quarter. As is customary, my comments today will focus exclusively on the variances related to our non-GAAP adjusted measures, which are found on Page 18.

So let's move to that page. Net revenues increased by $28.3 million or 2.9% quarter-over-quarter, to just over $10 billion (sic) [$1 billion], which includes the positive foreign exchange rate impact of $2.6 million. Within the net revenue number, you'll see that adjusted investment management fees increased by $37.3 million or 3.4% to $1.12 billion. This primarily reflects higher average AUM for the quarter.

Then we had adjusted service and distribution revenue, which decreased by $0.1 million compared to the third quarter. Adjusted performance fees came in at $43.3 million in Q4 and were primarily earned from real estate and bank loan products.

Going into 2018, we want to give some guidance here. We do expect that performance fees will be up versus our prior guidance, and we would say roughly $10 million to $15 million per quarter.

Our adjusted other revenues in the fourth quarter came in at $18.4 million. That was an increase of $1.7 million from the prior quarter, and that was primarily due to increased real estate transaction fees. Looking forward to 2018, again, providing guidance here, we would expect other revenues to remain at a similar level to the fourth quarter at around $16 million to $18 million per quarter through the remainder of 2018.

Next, dropping to the third-party distribution service and advisory expense line item, which we net against gross revenues. That increased $10.6 million or 2.8%, which was consistent with the increased revenues derived from our related retail AUM.

Before turning to expenses, let me just summarize all the revenue guidance I just provided in terms of yield. Looking into 2018, we would expect to see our net revenue yield, excluding performance fees, decline modestly by approximately 0.5 basis point year-over-year to about 41 basis points. This decline is driven by full year results from the acquired European ETF business as well as the inclusion of the Guggenheim ETF assets that we would expect beginning in the second quarter of 2018. That will reduce yield by roughly 1.5 basis points. These impacts will be somewhat but not fully offset by the improving foreign exchange rate that we're seeing as well as the sales mix trends that is occurring in the business.

Let me then move on to expenses. So moving on down the slide, you'll see that our adjusted operating expense is at $605.7 million. That increased by $26.5 million or 4.6% relative to the Q3. Foreign exchange had an impact on our adjusted operating expenses of roughly $0.9 million during the quarter. Our adjusted employee compensation came in at $376.3 million. That's a decrease of $7.6 million or 2%. This was driven by lower variable compensation and the $5.5 million noncash charge related to the company's U.K.-defined benefit plan, which we recognized in Q3.

Looking ahead into 2018, again providing guidance here, we would expect compensation expense of roughly $410 million to $415 million per quarter. The increase in the first quarter reflects the seasonality of payroll taxes as well as the 1-month impact from the base salary increases as well as the impact of higher foreign exchange.

The seasonal taxes should then drop off in Q2, but they'd be offset by the costs for the Guggenheim ETF business as well as variable compensation being reflected. So note that this guidance, of course, is based on flat markets, consistent net foreign exchange and as well as the revenue guidance that I provided earlier around fee rates.

So our adjusted marketing, moving to that line, in Q4 increased by $9.7 million. That's 32.2% higher or $39.8 million. That was related to marketing campaigns related to the acquired ETF business as well as the cross-border funds and normal seasonal increases in advertising, client events and other marketing costs. Looking into -- forward to 2018, we would expect marketing expenses to come in at roughly $32 million per quarter.

Dropping down to the adjusted property, office and technology line item. That came in at $100.8 million. That was an increase of $7.1 million or 7.6% over the third quarter. This reflects increased outsourced administration costs associated with MiFID II reporting as required and other regulatory compliance costs as well as higher software costs. Now looking into -- forward to 2018, we would expect property, office and technology expenses roughly in line with the fourth quarter levels, around $102 million to $104 million per quarter.

And next, our adjusted G&A expenses came in somewhat higher than we had guided. As we know, $88.8 million, that was an increase of $17.3 million or 24.2% more than Q3. The fourth quarter reflected an increase of $9.3 million and really related to regulatory -- or preparing for regulatory changes. There were business growth initiatives, which included product costs and legal, consulting and professional service costs within that line item. These increased costs also led to an increase overall of $1.7 million in irrecoverable taxes as compared to the third quarter.

In terms of the guidance, we would expect to see our G&A run rate decrease going into 2018. And this decrease will, of course, be partially offset by the costs incurred related to the MiFID II hard dollar payments that we have talked about in the past. But overall, the guidance is that quarterly rate should be around $80 million to $83 million per quarter for 2018.

Based on the guidance provided today and assuming flat markets and foreign exchange, we believe our margin is certainly sustainable at current levels into 2018. And our incremental margin target for the year remains at that 40% to 50% level, consistent with our prior guidance. Looking into 2019 and beyond, we certainly believe that our incremental margin could return to the 50% to 65% level, consistent with our historical guidance.

So back on to the current results, going down the page, I will just quickly finish this out. You'll see our adjusted nonoperating income increased $3.2 million compared to Q3, driven by mark-to-market gains on seed money investments.

And moving to taxes, the firm's effective tax rate in the quarter came in at 26.8% as expected. Our 2018 effective tax rate will be impacted by the Tax Cut and Jobs Act, which was enacted last month. Given our domicile in Bermuda, we have always paid tax under a territorial system in the jurisdictions where income's earned, but we will benefit from the lower U.S. tax rate on our U.S.-generated earnings. And therefore, our current analysis guides us to an overall effective tax rate for Invesco that is going to be between 20% to 21% for 2018. This estimated rate could be impacted as we continue to review, of course, the rules and if there are additional guidance provided on the legislation.

Other point is just on the GAAP results. You will note that we had a onetime benefit of $130.7 million in the quarter. That was reflecting the revaluation of our deferred taxes at the new lower corporate tax rate. This amount, of course, was adjusted out for purposes of our non-GAAP results. And our intention, just in general, as this question's come up about the cash related to the benefit on the tax rate, is to use this cash to reduce our anticipated outstanding balance on the credit facility, which will be used to fund the majority of the Guggenheim acquisition at the beginning of Q2. After the acquisition is completed and our leverage ratios are reduced to the preacquisition levels we see today, any residual excess cash will certainly just follow our stated capital priorities. And as a reminder, these priorities are that we will reinvest cash back in the business as needed through seed money and co-investments. But then it goes to dividends and, finally, share repurchases.

That brings us back to the current quarter. January EPS, $0.73; adjusted operating margin of 39.7% for the quarter. And before I turn things back to Marty, I just wanted to offer an update on net flows, as we've always done. In January, we continue to see significant strength in our EMEA business as well as Asia Pacific, both on the retail and the institutional side. This has been somewhat offset by some weakness in the U.S. flows, largely in the retail space. But overall, we've seen through January 29 $1 billion of long-term net flows. So we're not done with the month. And certainly, there's some institutional activity that happens at end of month, so that number hopefully could improve from the number I just gave you.

And now I'll turn it over to Marty.

Thank you, Loren. So operator, can you open it up for questions please?

(Operator Instructions) Our first question is from Ken Worthington of JPMorgan.

I guess maybe first in terms of ETFs in Europe, has MiFID II impacted the conversation on ETFs and factor-based investing yet? How is the conversation changing now that rules are in place? And then can you talk more about the marketing effort you're putting behind Source in the U.K.? And then maybe lastly, what are the lessons you've learned so far from Source that you could apply to Guggenheim?

Thanks, Ken. So look, everything at the time of the announcement that we talked about, the landscape in Europe in advancing MiFID being very supportive, of ETFs being even a more important part of the investing landscape. It's all in place, right? So we think it's going to result in a very important business for us. So nothing has changed there. We're just moving strongly ahead. As I mentioned earlier, the integration has gone very, very well. It's a very talented group of people. It really is complementary to what we have, so we think we're going to see the results we talked about. And from a marketing point of view, again, it just extends what we've been doing as an organization, using a combination of active, passive and alternative, so again, very, very supportive. But let me back up even more before I come back down to it. So as a firm, I talked about the flows and the consistency of the flows. Yes, we have a stated target of 3% to 5% organic growth rate. We are absolutely focused on driving gross sales to get the net flows that we want, and we're pulling every lever that you can imagine. So focus on distributional excellence, so not just limited to Source, but throughout the organization, retail, institutional and also looking very much at the brand positioning of the firm and anything that we can do to further strengthen, ultimately, the outcomes for clients and resulting net flows is what we'll do. But again, Source becomes a very important part of our overall global ETF business. And again, nothing has changed from what we thought at the time of the announcement.

One thing I would mention, too, is I know our institutional salespeople are extremely excited about the prospect of using ETFs within a solutions context. It's something they've not really had available to them. And so as we've added more resources around solutions and being able to provide solutions to institutions, the ETFs business is absolutely factoring into those conversations. So again, it's a little bit early days to say where it's going, but it's absolutely becoming a different part of the conversation than we've been able to have in the past.

Okay. And then, Marty, you've highlighted a couple of times in recent calls the investment made in Europe, Asia and U.S. institutional sales. I believe that Asia institutional sales have weakened somewhat, but we're not yet seeing kind of the improved net or gross sales in the institutional side yet, at least it's not material. And it seems like gross sales are sort of flat lined around this $8 billion, $8.5 billion level. So is the good news coming? When the good news comes, what level of gross sales would you expect we should expect? Does it -- are you thinking like $9 billion, $10 billion? Like, how good is good when good comes?

Yes. I'm going to make a couple of comments then turn over to Loren. So good is coming, and it's real, and we expect the -- if you look out a couple of years, quite material. Our aspiration and intent is to have a very different set of outcomes than what you're seeing. And from my perspective, everything is in place to have that happen. Again, it's things that we've been talking about, just the factor capability, the alternative capability, the solutions capability, the quality of the team and where we are. And again, it's not a plan. We're actually executing the plan. So Loren, do you want to make a couple of comments?

Yes. Ken, I mean, if it's any indication, I know we don't get into exact numbers, but our won but not funded pipeline is up 34% through the course of 2017. The fee rate is well above the firm's overall fee rate at about 35% higher than the firm's overall fee rate. I think, again, good news. We've seen outflows have been a little bit of a topic around the institutional business. The sort of things that we see in terms of terminations are down 33% versus last year, so down significantly. And by the way, the fee rate on what is likely to terminate is around 45% lower than the overall firm's fee rate, so significantly lower impact in terms of outflows versus the ones coming in. So I mean, based on what we're seeing -- and by the way, that is robustly distributed across all our regions, both the U.S., Asia and Europe. It's extremely good. The other thing I'd say that's even more exciting just to look at is another category of things that we track around qualified opportunities. And so those are active dialogues that we're having with our clients and that is at an all-time record, double literally versus where it was last year. And probably, the largest growth right now is happening in Europe and then Asia as well, so very, very exciting what's happening. A lot of resources have been continued to be added to our institutional business, and it is certainly seeming to pay off. So again, I can't tell you exactly which quarter, other than I think the line of sight to things flowing in, which we saw a lot of things in the fourth quarter move into the first quarter just because we felt that might happen with some volatility. And I believe it is happening. So we certainly would expect to see some near-term benefit from some of those mandates flowing into Q1.

Next question is from Jeremy Campbell of Barclays.

(technical difficulty)

You guys change your inflows to contemplate kind of reinvest the dividends and capital gains. I'm just wondering, is the Q going to separate out what's kind of gross sales and what's reinvestments. I know you have the footnote for the total flow profile but not really stratified on a product or active, passive basis. And I think the incremental disclosure is probably extremely helpful for us on the sell and buy side.

I think -- the first part of your question got a little bit cut off. But I heard your question about providing detail around capital gains and dividend reinvestments at a more detailed level. We can certainly look at that. Some of it is hard to actually obtain because it's -- we're sold through third parties. And so getting the data that we just got took a long time, so it is something we can aspire to try to give you more detail. We did do that, of course, because we felt it was more consistent with some of the largest industry peers that we've done, and we'll look to see if we can get more details that's helpful.

Sure, yes. I mean, even something as simple as like using what your old disclosures were and then adding that extra line to get to what you're defining as flows now would be (inaudible).

Yes. We have -- we're not trying to do anything cute by distributing this, I think. We'll see if we can get you more detail.

Yes, and then I just wanted to know, I don't know if I missed it or not, but what do you guys expect for kind of full year MiFID expenses in 2018?

Well, we said in terms of the payment of hard dollars for research, we've said tens of millions, which is the quantification, not very specific because it is a very dynamic and fluid discussion as we go through this process. So I think I'll leave it at that, other than it is our hope. And certainly, early indications may prove out that it's not just a hope, that some of the costs associated with payments for hard research may decline over time as the industry kind of corrects and adjusts and reaches an equilibrium level in terms of pricing for research.

Right. I think the point is also, though, the full impact is included in the guidance that you gave in G&A for the year. So (inaudible)

Absolutely, yes. So we've included that tens of millions impact in the G&A line item, which is where it sits today. And that's at a reduced level versus Q4.

Right. Then just finally, I guess, relating to Guggenheim, how has that been performing as a group since we had our last call here that talked about kind of the flows and AUM levels? They're kind of tracking line with what you guys expected, that sort of like that compound growth?

It's certainly grown. I think it's at roughly $48 billion in size versus $27-something billion when we announced.

$37 billion.

I'm sorry, $37 billion, $37 billion, excuse me. I think in terms of flows since the announcement, it's about $700 million of long-term flows, which is roughly in line with where it was historically. I think it actually -- prior to the announcement, it was -- it may have gone negative, and then it seems to have improved a little bit. Obviously, there's not anything we can do to do -- to improve the flows right now. We certainly believe that once it becomes part of Invesco, we're going to be able to accelerate its growth trajectory significantly. That is certainly our hope and our plan. But right now, it's more than tracking what we hoped in terms of a higher AUM level.

Next question is from Craig Siegenthaler of Crédit Suisse.

So just starting on Jemstep, and I know you already announced a few wins here, and some of these wins are already on the path to implementation. But can you help us just on timing? When will the related business wins start to show up in flows and revenues?

Yes. So I think you have to look to 2019, right? So I keep coming back to -- it's very exciting. We think it's a strategic competitive strength that we're developing. We think it will be -- really enhance our business in the future. But again, these are just -- it's just slow. I mean, from the standpoint of implementation, it is -- it's just the nature of what it is. But again, we couldn't be more excited about what's developing.

Got it. And then I saw some of the comments in the slide deck on Jemstep and the sales pipeline. You note it as especially robust among banks. I'm just wondering, what is the characteristic of sort of the average bank in that pipeline? Like, what does it look like in terms of size, client base, things like that?

Yes. We have to be a little careful because they're not all announced. But I mean, from regional banks to very large banks, it is really quite broad. So it's, again, something that we think is a very important development for us, and the partnership between ourselves and the banks seem to line up very, very nicely.

Next question is from Patrick Davitt of Autonomous Research.

There's been a lot of chatter about, I guess, troubles with the new all-in expense reporting with MiFID II. I'd like to get your thoughts on that. And within that theme, how you think you came out on those metrics.

Sorry, I've not kept up with the chatter, but what I can tell you is...

We haven't heard about it enough.

Yes, I don't think we have a problem because we've not heard about it. So sorry about that. Sorry, I wish I had more color. I just don't.

Yes, sure. And then just as a follow-up on the earlier color. All of the, I guess, institutional pipeline data you just went through, was that just Europe and Asia? Or is that the total pipeline?

That's the total pipeline for all of Invesco. But as I mentioned, it's about 1/3 in each region.

Right. And then the $1 billion of long-term net flows in January, is there a lot of reinvested dividend and capital gains in that?

None, none that reflected right now in that number.

Next question is from Bill Katz of the Citigroup.

Just coming back to some of the expense guidance. Can you parse out for us how much is being contributed by Guggenheim versus how much is just sort of core investment into the business? And then relatedly, as you think about the drivers for the incremental margin to '19, is it a function of bending down the expense curve? Or is it bending up the revenue growth? Just trying to get a better understanding of what the driver will be.

So Guggenheim is, yes, as we said, coming in at incremental margin of about 85%. We're assuming it's coming in really at the beginning of Q2. Total expenses associated with Guggenheim are a little in excess of $10 million for that period of time. So that's one element of the spending that's coming through.

The other amounts of investment are sort of incremental to that related to funding the growth in Jemstep, institutional, factor-based, these are the things that Marty was talking about earlier, as well as further growth of our existing ETF business above and beyond just the Guggenheim business, to name a few. And that's ultimately what's driving down the incremental margin by roughly a little more than 10 percentage points for the year. So hopefully, that gives you some color of what that -- I do think our revenue trajectory, because of the mix of the products that we're selling, and also our hope to accelerate the growth, is what's going to be driving our margin expansion going into 2019 and beyond.

Okay. That's helpful. And then, Marty, just a question for you a little bit off the run from today's topics. But how are you thinking about the institutional cash business at this point in time? How critical is it to you? And how do you sort of think that, that business more broadly evolves for the industry? Is it a more commoditized service or is there a real growth opportunity here?

Look, it's an important business for us. We think it's a growth opportunity for -- there's a need, there always has been a need, there will continue to be a need, but really what's happened, and I know you know this as well as anybody, the consolidation of the players has just been striking with the money [fund] reform. And so they're just -- I've lost track of their numbers, but it's down by 50% of the people. It's probably down more than that right now. So anyway, yes, to be in the business, you have to be really committed to it, you have to have some scale. And we think it's an important business for us. We do it very well.

Next question is from Brennan Hawken of UBS.

First, Loren, a follow-up on your effective tax rate guide. Does the 20% to 21% here in 2018 include the impact of the share-based comp accounting change that went into effect last year?

Yes, it does. And good that you bring that up, because I do think there is typically a first quarter impact that you see there, and that will happen again this quarter.

Okay, terrific. And then if we were to back that out, what would be -- how -- what sort of order of magnitude do you have embedded into that 21% -- or excuse me, 20% to 21% for 2018, just so we can think about longer-run run rate ex that noise?

That noise always will be there every year, so I'm not sure it's something to factor in. So again, unfortunately, I don't have the exact calculation. I assume it's something we can develop, but I can't imagine it's more than 1 percentage point.

Sure, and we can follow-up later on that, that's no problem. And then the guidance, just a quick question here. So the rev guide was better than we were looking for. Expense guide, maybe a bit worse. So I just wanted to -- being the optimist I am, I wanted to follow up on the expense guide. It seems like the tens of millions that you spoke to included in G&A, but I think you also referenced, and I might just have not heard it correctly, that the property and tech line also included an up with -- for MiFID. So was the idea that, that tens of millions guide was more purely to fund the research, and then incremental investment and expense for technology for MiFID was exclusive of that, so all-in cost is going to be a little bit above that baseline, is it the right way to think about that?

Well, on the G&A, I mean, that's a run rate element around paying for research. Again, there may be some benefit over some period of time as those numbers drop, but that includes the tens of millions. In the property, office and tech, this is really related to what we need to ultimately pay our third-party provider who helps us with a lot of the transfer agency services and so forth. And unfortunately, that does not go away. That is a run rate as well. That gets just -- the cost of the business has gone up due to MiFID II. So that's reflected in that guidance that we gave you of $102 million to $104 million per quarter. So unless the regulations themselves change or get sort of maybe less stringent, I think that number is going to go up.

Next question is from Robert Lee of KBW.

Marty, can you just update us maybe on a -- a lot of large intermediaries and others continue to kind of whittle down their shelf space. I guess Morgan Stanley is going through another round soon. So could you maybe just update us on how you kind of feel you're faring in that? And also maybe to what extent your ETF platform is helping you kind of sustain shelf space or giving you new opportunities in those distributors?

Yes. Your question almost summarized it very well. We continue to, yes -- again, that is a fact. The big platforms are narrowing who they're working with and the number of funds. Yes, so far, we've done quite well through that. We expect that in the future. That's not to say that our smaller funds or underperforming funds won't suffer during that, but it tends to be a very, very small percentage of our assets under management. So you can contrast that to our ETF business. So I think really what's important is, as you would imagine, we have a very strong conviction in the opportunity of factor investing or smart beta, and that has really not been fully embraced by the platforms yet, and -- but we are already starting to see more of our ETFs just really in the last quarter start to go onto these platforms. And so again, we are early days in the opportunity. And so we really do strongly believe that the strength of the firm is really going to be the range of the factor capability with our alternatives and traditional active capabilities to these platforms. So far, so good, and we're confident about the future.

Maybe a follow-up on the Guggenheim transaction. I mean, as you pointed out, since you've announced the deal, assets are up some. But at the same time, you also had a decline in the go-forward tax rates. That will clearly will reduce the value of the tax shield. But can you maybe update us on how you're thinking about the incremental accretion from Guggenheim at this point? Or does some of that get kind of priced away, so to speak, in terms of your purchase price? Just trying to get a sense on where that stands.

Yes, I mean, it largely offsets one another. The value of the tax shield is half the value. Obviously, that was like, I think, roughly $30 million in tax benefit in a year. But obviously, the value of the purely U.S.-based operating income is significantly more. So it ultimately is not impactful to the full value of the business to us, (inaudible) of those offsets.

Okay, great. And then one last simple question. I'm just curious with the U.S. changing to a more territorial tax system, still a benefit from being domiciled in the Bermuda?

I mean, I think it -- there's no impact, really. They are both territorial. So it's an equal level playing field now, which I think is absolutely fine. It doesn't impact us, it doesn't make us need to change where we are. Ultimately, I think we need to continue to look at what happens with the legislation, understand it fully before there's any consideration of do we like where we're domiciled, or do we think about changing it. But it is something that certainly is on our radar screen.

Next question is from Michael Carrier, Bank of America.

Loren, just on the expense guidance. If I put that in kind of to the outlook, it seems like the expense growth, this may be in the low double digits, so call it 10%, 11%. I just wanted to break that down, and you gave us some color, but I'm just trying to figure out, you got the deals, you got some of these investments and then you kind of have your core run rate. And I know 2019 is a ways out. But when I think about like the core run rate of what you think the business needs post the deals and some of these investments, is any way for us to think about that versus maybe the elevated level that we're seeing in '18?

You're asking me to really look out into the future a lot. I mean, all I can say is, in terms of our forecast and what we see, I mean, the expenses -- the good news is, I mean, the expenses aren't escalating through the course of 2018. We think they are roughly stable and fixed. I think that's very good news in terms of the expansion that we would expect to see in margin through the course of 2018 without any further benefit of market or foreign exchange. So I think for us, as it's always been, we'd see a fairly large incremental margin, more fixed than variable expenses. We've said and stated that we invested heavily around certain things. This is building out our run rate. But I'd say, that run rate, we think we're going to manage it so it's going to be roughly sort of flat expenses through the course of 2018. And you're into margins that are well above 40% by the end of that year, assuming no market increase from here.

Okay. And then, Marty, just on the opportunities in Asia, and I guess particularly with China. Just given that the market continues to look like it's opening up more and more, just how are you guys positioned, and how do you see that playing out over the next few years?

Yes. Look, I think we're as well positioned as any manager in China. If you look at the institutional business, you'd probably point to China as being one of the absolute strengths. We have multiple mandates with all the organizations there, institutions that you would want. The joint venture is very, very strong in China, and it just continues to get stronger. We have the same view that you do. We look at the next 3 to 5 years as a huge opportunity, and we've been there for almost 20 years now. And longevity and knowledge and experience really does matter in that market. And we think it's a very important opportunity for us, and we intend to continue to pursue it.

Next question is from Brian Bedell of Deutsche Bank.

Just back on MiFID II, I think if I recall correctly, the tens of millions was based on the adoption for European clients only, correct me if I'm wrong on that. But if you were to adopt that globally, how would that impact the tens of millions run rate? And what kind of, I guess, time frame are you looking at that as potentially adopting them globally?

I think that is -- we've certainly looked at the potential of this regulation being applied on a more global basis and what that impact might be, similar to what we did in Europe when we saw this potentially happening. I mean, we had started to rationalize and effectively optimize our use of research in advance of that. We are doing that right now in the U.S. and elsewhere. Again, without any full view that this actually will happen, but ultimately it could. So I think it'd be premature to put out a big number that really has no bearing on reality at this point. I mean, obviously, it's more than my tens of millions, but I don't think it's anything that at all would be enormously material to our financial position. And if we see this sort of benefit of being able to take what was a pretty large number when we first started in Europe and bring it down to something maybe half the size, that would have -- that would make me feel pretty comfortable that it's not going to be a big deal if it were to happen in the U.S.

In other words, yes, it sounds like you're able to scale some of that investment essentially?

Absolutely, because the same rigor and disciplines that we're using in Europe, we're now applying into the U.S. And there's more to come and more work to be done. I don't want to declare a victory at all, but it is something that we believe and everyone agrees make sense for us to do here.

Okay. Great. And then, Marty, just maybe a broader question, just on factor-based investing broadly, obviously, there's a lot of compelling components of that. But more recently, we've seen a lot of the ETF flows really be a beta rally. I think it's about -- I want to say the smart beta is about 20% of the ETF industry and you only captured about 10% of ETF flows in 2017. And in January, according to our measure, it's more like just 1%. So just broadly speaking, what do you think it's going to take to get factor-based investing to become a stronger flow category broadly?

Yes. No, it's a good question. I mean, look, the flows since whatever, the market bottom, that has really been cap-weighted indexes, and we can all identify the issues with cap-weighted indexes in this market, too. I think that is the concern that I have, and I think others, that too many people aren't understanding the risks that they're taking within the cap-weighted indexes today. That said, back to your question, more and more, what are we seeing clients do? And it doesn't matter if it's a retail client or a large institution, more and more they are building their portfolios with a combination of, if you want to call it, cap-weighted, factor-based, high-conviction active and alternatives, and they are moving up the risk return spectrum. And what correlates with that is the level of fees, and so it is the way of the future, and that's very consistent with our efforts in solutions also. So it's really a combination of the breadth of capabilities we have, the solutions capabilities, you put them together and really responding to clients, not just to build the portfolios they want, but it's also being responsive to the totality of the effective fee rate that they want to build.

So what we are seeing, and coming back to what I said earlier, the bulk of, if you want to say in the ETFs in particular, in the retail channel specifically, the platforms have been focused on cap-weighted indexes over the past decade. Every single one of them have turned their attention to factor. They look at it as an important tool and building blocks for their advisers going forward. But it is really having the muscle memory and the skill to -- it's one thing to intellectually understand it, it's another thing to put it in a manner that the financial advisers can build the portfolios that they want. And again, this goes back to our factor capability that I mentioned and some other -- excuse me, the solutions capability. And we're actually seeing success with it on the wealth management platforms because, yes, there is a need to do that. And again, we're seeing this type of thing actually in China. Honestly, some of the insurance companies are looking for organizations that can help them build these portfolios very holistically. So I'd say we're early days with the success. And again, within factors in particular or smart beta within ETF, by the time Guggenheim closes, we will be the second-largest factor player, very close to the top player. And we think it's, again, an important part of our future.

And do you think Jemstep can be a material contributor to flows in 2018? Or is that also more like a 2019?

I think it's 2019. And again, so -- yes, this is really the point of connecting all the dots. What is Jemstep? It is open platform for the platforms. It really helps the institutional advice -- helping the financial advisers within our partner clients, but also what they've asked for, many of them, we've built many, many models of combination of active and passive and just factor-based alone. So again, it's going to be these models that are available on these platforms through Jemstep. So again, it's a combination of all of these things that really put us uniquely in a position to where we think our clients are moving. And I think it's very hard to turn the switch and catch up to do all the things that we are doing right now.

Next question is from Chris Harris of Wells Fargo.

Can you guys remind us how your fixed income business is positioned with respect to higher rates? And then a related question to that. I believe you have a lot of income in dividend strategies. So how might higher rates affect the demand for those strategies in particular?

Yes. And maybe I'll take the equity piece, Loren will take the fixed income. I think what you're seeing, largely, if you look at our value suite, it is from -- where there's been historically a lot of investments in the dividend strategies, what you've seen with some of the markets, the relative performance falling off, that's been traded off to really the deep value capabilities just getting much stronger. And again, we said that all along. It is something that we've anticipated and we would anticipate the flows to switch accordingly. Though again, as you would predict, that's what we're beginning to see.

Yes. I think in the fixed income discussion, we were fortunate that we have a substantial amount of our assets, money market, bank loans, all on a more floating type of basis, so they won't be necessarily significantly impacted by rising interest rates. I think the part of our business that is more long duration would be in Europe, where we have the corporate bond offering, but they tend to position their portfolio with lower duration. So on a relative basis, if and when rates start rising in Europe, that would be well positioned. So there isn't any significant exposure. We do have some core longer-term fixed income. I don't want to say there is none. That could be affected, but it's not a substantial part of our business. The majority of our business is actually more short term and floating than it is -- and stable value is another component of that, by the way, which is in excess of [$40 billion, too], so also that helps.

Yes, it does. And the other question I had really was just on your organic growth. I mean, you guys absolutely do rank very competitively versus peers, you pointed that out. But just wondering where you guys think you are in terms of organic revenue growth? That's a little bit harder for us to see.

Yes. I mean, I think we have a lot of things moving around in our mix, and -- but I do believe, given the significant growth on the institutional pipeline, as we talked about, and certainly our cross-border with fund range, which is the fastest-growing part of our business, it's certainly one of the fastest-growing part of our business, is at a much higher fee rate than the firm overall, our mix impact on revenue yield is actually positive. But obviously, we're sort of going through some large step-function changes with these acquisitions that cloud trend lines. But I would say the overall mix of the flows of the assets that are coming in will still provide a higher lift on our fee rates over the course of years to come than be driven by more commoditized low-fee products.

So let me add to that. And the way to think about it for us as an organization, and I was talking about this earlier -- I mean, so if you just think of the continuum of investment capabilities, from cap-weighted indexes being very low fee, sort of get what you pay for; and factor, higher fee, high conviction; active, higher; alternative, higher fee again. And so when you see the mix of our business changing where -- with the acquisitions of Guggenheim and Source, and into factor, which is a lower effective fee rate, but it's very responsive to clients and it is much more scaled business where there's limited capabilities, at some point with active capabilities, you close them down. So it's really -- we think what's important about our business is the range of capabilities and the fees that we have. They're competitive fees, and I think that's the other point, right? So you need to have competitive fees and you have to have that continuum to meet the client needs. And so that's really what Loren is getting to, where if you're just looking at our overall effective fee rate, it's quite difficult to ascertain, and actually really gets back to the things that Loren has pointed out, is our overall margin as we are building this.

And we said this before. I mean, the fee rate is one measure. But I mean, obviously, the margin on some of these lower-fee products are as good, if not better, than from a lower margin. So it requires scale and growth, which is what we're planning to do with these products. So there's really a lot of things going on that will drive cash flow and our value going forward. And we're not trying to maximize fee rate as a single kind of objective. So I think where we will probably not be purposely going into ETFs and some institutional areas. But we do know that if we get good scale and growth, these things are going to provide huge upside on our margin.

Dropped the mic there. Anybody else?

Next question, speaker, is from Glenn Schorr of Evercore.

Just 2 quick follow-ups. On the whole MiFID cost conversation, I just want to make sure, have you seen any evidence, have you had any client dialogue that would suggest it would take on a more global nature in the coming 2 years?

No. Look, we know what you know, right? You've seen the public dialogues. I think just back to what Loren said, it created a complicated situation. The MiFID regulation versus the U.S. regulation, that's where you had really all the debates publicly.

I would just come back to, what do we do? We are a responsible consumer of research. We will continue to be. We are well aware of the possibility of it becoming a global event. And if it is, it is something that we think we will do very well. And I'd come back to -- the good news is, a firm like us, we're in a position to do quite well with changes like that. The bad news is, if you're not a firm of scale, you'd be really disadvantaged. And I don't think that's a great outcome, but it is just a fact of the matter. So we really don't know what the outcome is going to be, but we are adopting all the techniques that we did during MiFID globally for us as a firm. I wish I could be more specific.

No, that's helpful. I appreciate it, Marty. The last one I have is, I'm just curious on how the rebalancing dialogue is or is not happening with clients and consultants after such a divergence of returns in 2018 between equity and fixed income. I know it's more complex than that. I'm just curious if that is hot and heavy right now, if we expect, given the growth outlook, for people to let equity allocations run higher. Just curious what you're seeing.

Yes. It's a good question. I can't say that I have any -- I've not picked up sort of the energy that you're describing. But I think a lot of the institutional clients, I mean, they tend to have a longer-term view and tend not to react that quickly to environments like this. I wish I had some more insights, but I really don't.

I mean, the only thing I would say, I mean, there seems to be just some increased appetite, both on the retail and institutional side, for asset allocation products that ultimately provide the flexibility and the nimbleness to navigate through these changes, which certainly are occurring in different ways in different parts of the regions that we operate in. And so that is factoring in a big way in terms of our pipeline of won-not-funded and the potential opportunities. And certainly in terms of some of our sort of recent positive activity around the retail side in the U.S. and elsewhere, I think asset allocation is (inaudible).

That's a very good point. That's probably a good way to (inaudible). You're also seeing it with GTR and the like. So I guess at some level outside the conversations, individuals or institutions are really sort of voting with their feet, I guess, is the way you'd say it.

Next question is from Kenneth Lee of RBC Capital Markets.

Just stepping back, looking at the flow volatility organic growth chart, how do you think about any potential trade-off between attaining higher organic growth rates and the impact on flow volatility potentially? And relatedly, wondering if the shift towards increasing exposure to institutional clients would potential impact flow volatility down the line.

Yes. It's a good question, and we look forward to that problem. So our intention is this, so yes, underline -- the fundamental fact is the global diversification of the institution, the global diverse -- retail and institutional channels and the asset mix, yes, those are underpinnings that will not change. And I think that is really what's going to continue to keep this low volatility. Our focus is really by -- if we do a good job for our clients, driving the gross number of them, that is our focus. But I really don't think you're going to, all of a sudden, see a switch to a very volatile environment. Now we all do know the good news is when you win a large institutional mandate, you're excited about it. And then when you get terminated, you're less excited about it because (inaudible) is just the nature of what it is.

Yes, and the only thing I would say is, obviously, in terms of the low standard deviation, that's a function of just the breadth of the capabilities that we offer in the different regions. And I would say we probably have one of the greatest breadth of capabilities of the peers that we compete with. We also have a very focused approach around managing the portfolios, and the investment teams will close them down when they see that performance is being impacted by too much growth or -- and so you're not going to have huge concentration of assets in a particular capability just because of the nature of sort of diminishing returns to clients. And so we do think you will probably always be at the low end of the volatility side. What we're really trying to do is, through greater capabilities and effectiveness on our institutional platforms and also scaling the capabilities that we have on a more global basis, that we can move the growth rate up.

Great. And just one bit about the performance fees. I think in the past you mentioned that real estate bank loans, private equity, these kind of products generate a lot of the performance fees. Just wondering what drove most of the fees in this quarter. And also, what's potentially driving the potential increase in guidance for performance fees in 2018?

Yes. So in terms of this quarter, we saw mostly coming from real estate, about half of it. Bank loans was about the rest of it, between that and global asset allocation. So those are the primary drivers. In terms of the build-up for 2018 and the guidance that we gave, it's going to be a very similar profile. We believe it'll be coming from the similar places that we've seen in the past. And so again, and we continue to grow each of these areas in a very nice way.

Your next question is from Alex Blostein of Goldman Sachs.

Just one around a product-specific issue. The performance in the U.K. business faced some challenges recently, and I know they had a tough 2017 as well. Can you remind us, I guess, when you look at the equity business in the U.K. what the asset base today, sort of kind of what are the fee rate channels? And more importantly, I guess the sensitivity you think the customer base there could have to such a meaningful underperformance, albeit over the short-term basis?

Well, I think on U.K. retail is about $65 billion in total, and that is not at all equity income. I think maybe about less than half is equity income, so there's about $30 billion of that. Obviously, we have some other places where that -- those products and that team operate, but it's become a much smaller part of the overall business. And in terms of impact, it's actually been really stable. The performance, even though it's a little bit challenged, has not really driven outflows in the business in any material way. I mean just -- I think it was more than offset by what's going on in terms of the cross-border situation. So ultimately, there is some underperformance in this net equity income capability, but it is certainly not stopping the growth of the overall U.K. retail business given the GTR capabilities, the fixed income capabilities, pan-European equity capabilities. So we're not -- at this point, it's certainly not creating a business topic for us.

Got it, great. And then just bigger picture and going back to the flow discussion. So -- and just really more a clarification, but I guess when I look at your target of 3% to 5% organic growth, I'm assuming that follows the new convention of disclosing flows. And I guess, based on '17 results, reinvested dividend to add about 1 percentage point or so to the organic growth, the way you guys describe it now. So is apples to apples, is this really kind of 2% to 4% if we were to compare that to the way you guys used to talk about flows?

Yes, it will put us probably at the higher end of our aspirations of that range, sort of immediately, versus the lower end because of that. So yes, we certainly factor that into our thinking about trying to get in that target. I mean, we have not reached that target, even with the capital gains reinvestment. So we're filling in terms of getting to that level. So that -- I mean, we still think 3% to 5% would be a good place for us to get to.

Right. But the 3% to 5% is with the reinvested dividends?

It is, yes.

Your next question is from Dan Fannon of Jefferies.

Just a follow-up on the institutional. I guess looking at the Slide on -- Slide 14, I just want to reconcile this year, kind of the quarterly growth sales being down each quarter, year-over-year, but if I recall your comments, generally being close to record backlogs or backlogs all being up, so -- just throughout the year. So just curious as to kind of what the -- kind of connect the dots there for us.

Well, I think the fuller picture, as I mentioned, we have a lot of won but not funded business that we thought was going to come into fourth quarter that has -- that got moved into 2018. And so it was actually surprising how many things moved. And I think it was just a little bit of the volatility around tax rates and knowing what was going to happen versus not. So that's my explanation, is that there was uncertainty which caused the slowdown, which should then be offset by a pickup in Q1.

Okay. But I just -- I guess that's the 4Q, but if I recall, throughout the year, you guys did talk about kind of high or record levels of backlog and the gross sales were down throughout the year. I guess I'm just looking at the year-over-year dynamic. And so is the -- are the funding periods across the board just taking a lot longer to materialize?

Well, I mean, that's a good question. I mean, a lot of the funding will take 6 months. It could be longer in terms of what they are ultimately required to get done. So there has been some movement within the pipeline around timing. That was probably more than we had expected generally. So granted, I think, yes, we do not see as much materialize on the sales side on institutional business in 2017 as we would have originally expected based on the pipeline that we were looking at. You can say, well, that still may be the case, and possibly it is, other than I'd say our teams seem far more -- feel like they have line of sight that the business is going to fund in 2018.

And your last question is from Greggory Warren of Morningstar.

I just wanted to follow up a little bit on the retail distribution platforms. You noted that you weren't having that much of an issue. But just kind of curious, how much pressure is there on you guys or on the industry on, say, fees and performance, especially with a lot of the culling we've seen in the last 2 years, both from Merrill and Morgan Stanley? And then just on top of that, how much of your actual platform is really exposed to what's going on within that particular part of the business? You've had 68% of your business in retail, but I know it's not that much that's exposed to, say, what's going on with the U.S. third-party platforms.

Let me try to address some of it. As I said, so what are the factors that the platforms are looking at? It's really what they determine that -- the asset classes that they want on their platforms. They are looking at the quality of the managers, the historical performance and competitive fee rates. And that is the criteria, generally, that is used. And also, once they get beyond the specific, if there is a -- if they can end up using fewer providers, that is also a factor. And so those are the criteria that we are judged on, and we have done quite well. I think on top of just the fund-by-fund analysis, and I'm going to lose track of the magnitude, but the last update I had on some of the platforms, more than 1/3 of the managers in total have been terminated. So it's not just a fund consolidation but a manager consolidation at the same time. So that is -- and so I'd be repeating myself a little bit from the prior conversation. So it is the totality of the offering, so it's just not mutual funds. It is ETFs. It is also alternative capabilities, all of which that we have. So again, if we continue to have high-quality capabilities and we can serve our clients, which I think we do well, and -- we will continue to be one of the firms that will do quite well out of this.

And I think the other part of the focus that -- where the focus has not turned to, those managers that remain on the platform will be net beneficiaries because of the obvious, there'll be fewer managers and fewer -- the money will ultimately go to the managers who remain on. Now that's going not to happen quickly because you're not -- rightfully, you're not -- if you've been taken off the platform, the client is not forced out of their holding, which is exactly the right way to do it. So again, I don't know if I'm telling anything you don't know, but that's...

No, I was kind of curious to see if there was any real pressure at all on you guys on that side. And I guess to follow-up on that, you talked about the smart beta products being sort of a newer entry for you guys on a lot of these platforms. And I'm just curious, you were kind of earlier to the market with a lot of these products, but there's been a lot of additional competing products that have come out in the market since you guys bought PowerShares in the beginning. Just wondering, do you feel like you're appropriately priced relative to what's going on? I mean, the fee compression hasn't been as dire in that part of the business as has been in the plain vanilla index. But I just wonder if you guys feel you're well positioned with that product set as well.

We do. And I think going to back to my comments, if you just follow the notion of taking the investment capability and what is the return set that it's meant to generate, fees follow that, right? So cap-weighted index, we shouldn't get paid much for it. It doesn't do much, right? It's an exposure. It's important. A lot of money has gone into it, probably too much money has gone into it. And I think also importantly, just because you launch an ETF, it doesn't mean you're any good at it. And I think there's been a lot of ETFs that will just fail, right? There is a low barrier to entry and a very high barrier to success, and it's much more than just launching an ETF. And if you look at our smart beta ETFs, it's one of the broadest range of ETFs with long track records. So 10-year track records, and I think that's also what is important. And it's just not the fee itself. It's also liquidity with the ETFs. And I think that also is what gets lost on a lot of people. So it really makes it difficult for new entrants. So if you have a long track record and liquidity, it's a really important set of combinations when you consider what clients are ultimately looking for. And so I think that bodes very well for factor investing as you look to the future of these platforms.

Perfect, Marty. So that's good insight on that side. I just had one quick follow-up, too, on the MiFID II stuff. How much of your AUM is -- because you talked about tens of millions in cost, but how much of that AUM does it really sort of relate to? Does it relate to everything that's in Europe, U.K. and Europe exclusive? I mean, I know some of that's probably institutional, so probably not as exposed, but I'm just sort of curious how much of your AUM is really sort of exposed to the MiFID II rules and it's going to cost you more to pay for the research.

Yes. It's largely the European business. So you'd have to look at the full value of that AUM, which is several hundreds of billions.

So probably about -- you have $238 billion right now, so I'd assume maybe 5% of that is institutional. Or...

It probably is about 10% that's institutional in that business.

Thank you. At this time, there are no further questions in the queue.

Great. Well, thank you very much for everybody's time and happy 2018. We'll be in touch soon.

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