Invesco Ltd. (IVZ) Q4 2015 Earnings Report, Transcript and Summary

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, 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 or 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. All participants will be on listen-only mode until the question-and-answer session. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd like to turn the call over to your speakers for today, Mr. Martin L. Flanagan, President and CEO of Invesco, and Mr. Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you very much and thank you everybody for joining Loren and myself, and I'll briefly review the 2015 highlights before getting into a review of the business results for the fourth quarter, and then, Loren, will go into the more depth of the financial results and then of course we will open up to Q&A as we always do. So let me start by providing a brief overview of the operating results for the full-year, and if you're so inclined, I'm on page 3 of the presentation. Long-term investment performance remained very strong in 2015, 79% and 85% of actively managed assets were ahead of peers over three-year and five-years respectively at the end of the fourth quarter. Strong investment performance, combined with a comprehensive range of strategies and solutions we offer, helped clients achieve their desired investment objectives contributed to long-term net inflows of $16.2 billion for the year. Our efforts to deliver for clients while taking a disciplined approach to managing our business resulted in an operating margin of 41% for the full-year, off just slightly from the very strong prior year. The annual dividend totaled $1.08 per share which represents an 8% increase over the prior year. We also returned more than $1 billion to shareholders during 2015 through dividends and stock buybacks. Assets under management were $775 billion at the end of 2015, down from $792 billion at the end of the prior year, mostly reflecting some late-year volatility. Average assets under management were $794 billion for 2015 versus $790 billion for 2014. Adjusted earnings per share for the year were $2.44 versus $2.51 in the prior year. As you can see on Slide 4 foreign exchange had a significant impact diluting earnings per share by $0.15 per share from the prior year. During 2015, Fitch upgraded the firm's credit rating to positive outlook and we repurchased $549 million worth of stock. So let me take a moment and look back over the achievements over the past year, which will provide insights into our continued long range plans. First and foremost of course we made focus on delivering strong long-term investment performance, which continued to drive to grow our business. And as I mentioned 79% and 85% of the assets were ahead of peers on a three-year and five-year basis respectively at the end of 2015. By delivering strong investment performance and focusing on clients needs, we achieved further growth across the business. In the U.S., Invesco was the only firm to appear in the top 5 over one, five and 10 years in the Barrons Best Fund Family Annual Ranking. Our Asia-Pacific business continued to grow and we saw strong inflows and a range of strategies resulting in net sales of $5.7 billion, the stronger showing in the region since 2011. Institutional sales of $14.2 billion nearly doubled to prior year. We also saw continued growth in our EMEA business, driven by a focus on delivering strong investment performance and meeting our client needs. Cross-border and institutional were particularly strong with $7 billion and $4.5 billion in net inflows respectively and we remain in a very dominant position in the United Kingdom. We continue to invest in capabilities where we see strong client demand or future opportunities by hiring world-class talent, upgrading in our technology platforms, launching new products, and providing additional resources where necessary in 2015. The ability to leverage the capabilities developed by our investment teams to meet client demand across the globe is a significant differentiator for our firm and we will continue to bring the best of Invesco to different parts of our business where it makes sense for our clients. By delivering strong investment performance, Invesco Global Targeted Returns achieved strong flows in its second year of offering, with assets under management surpassing $11 billion globally at the end of the year. We continue to invest and strengthen our fixed income platform in 2015, which is enhancing our ability to meet our client needs. We also invested in our institutional business in 2015, refining our global strategy, bringing on additional highly regarded talent to more effectively aligning ourselves to the opportunities in the marketplace. We are seeing some early successes from this work, institutional flows, during the first quarter were amongst the strongest in past several quarters, in spite of a very volatile market. We are very focused on bringing together the full range for our capabilities to help meet our client investment objectives; the Road Island mandate of $7.2 billion is an example of the success we are achieving with our Invesco Solutions effort. Throughout the year we continue to innovate and expand the range of alternative products we offer, leveraging our strong teams and capabilities for the benefit of our clients globally. Two years ago, we began leveraging our presence in China to explore and better understand the opportunities in digital and mobile technologies in the marketplace. We've also been exploring the possibilities with market leading firms in Silicon Valley. Our acquisition of Jemstep in mid-January is an outcome of this research. Jemstep is one of the first digital platforms that focus exclusively on advisors, and is the market leading provider of advisor focused digital solutions. Invesco Jemstep platform enables wealth management, home offices, and their advisors with a full suite of technology solutions that are highly flexible, customizable, and easily integrated into their existing systems. This acquisition represents an investment in our partnership with the advised community and highlights our efforts to participate in the technology evolution within our industry. Turning to the fourth quarter let me take a moment to highlight the results which you'll find on Slide 8. Strong investment performance contributed long-term net inflows of $3.9 billion for the quarter. Adjusted operating margin for the quarter was 40.1% versus 41.4% in the prior quarter. Quarterly dividend remained at $0.27 per share. We also returned $329 million to shareholders, during the quarter through dividends and stock buybacks. Assets under management were $775 billion at the end of the fourth quarter compared to $755 billion we reported in the prior quarter. Operating income was $356 million in the quarter down from $373 million in the prior quarter reflecting the very volatile markets we saw in the quarter. Earnings per share were $0.58 versus $0.61 in the prior quarter. We repurchased $214 million of stock during the quarter representing 6.5 million shares. Turning to page 11 and looking at investment performance, as I mentioned during the quarter it continued to be quite strong was 79% of the assets in the top half over three-year basis and 85% were in the top half on a five-year basis. We also improvement in the one-year number which was 60% of assets beating peers. Turning to flows on page 12, you'll see that active and passive flows were positive during the volatile quarter. Active flows during the quarter were driven by a variety of capabilities including Global Targeted Return, Investment Grade Fixed Income, Real Estate, and Quantitative Equities to name a few. Passive flows were positive with renewed strength in Invesco's PowerShares ETF which saw net inflows of $2 billion. These flows were offset by $1.2 billion outflows associated with the Invesco Mortgage Capital deleveraging. This did have an impact across a number of categories. If you look at passive institutional fixed income in U.S., and if you add $1.2 billion each of those categories, you will eliminate the impact of the deleveraging of the Invesco Mortgage Capital during that quarter. Retail flows were relatively flat during the quarter, impacted by the macro environment as investors waived their options during the very volatile quarter. Institutional flows were particularly strong driven by inflows in the fixed income real estate and reflecting our continued focus on this part of the business. The pipeline of one but not funded mandate remains at near all time highs and is up more than 28% versus the prior year. Notably this excludes the previous announced $7.2 billion Rhode Island 529 win which is expected to fund sometime in the third quarter. Hope we feel good about the results for the year and the fourth quarter and that puts us in a strong position heading into a volatile year 2016. Continued strong investment performance, our focus on meeting client needs contributed solid operating results despite a very volatile environment. We continue to see strength across the global business, in particular in Asia-Pacific and EMEA. Our focus remains on strengthening our efforts to deliver strong long-term results and help clients meet their investment objectives and enhancing our comprehensive range capabilities. But given the very volatile markets, we are taking a disciplined approach to managing our business, balancing our goals of reinvesting the business for the benefit of clients with a need to run our business effectively and efficiently as we have in past very volatile markets. I would now like to turn the call over to Loren to go through the financials in more depth.

Thanks, Marty. Quarter-over-quarter, our total assets under management increased $19.8 billion or 2.6%. This was driven by market returns of $21 billion, long-term net inflows of $3.9 billion, and inflows from the Q of $2 billion offset by negative FX translation of $5.3 billion, and outflows from money market of $1.8 billion. Our average AUM for the fourth quarter was $783.7 billion and was down 0.7% versus the third quarter. Our net revenue yield came in at 45.2 basis points, a decrease of 0.6 basis points versus Q3. FX translation reduced the yield by 0.4 basis points and change in mix reduced the yield by another 0.4 basis points. These impacts were offset by an increase in performance fees and other revenues in the quarter, which in combination added 0.2 basis points. Next let's turn to the operating results. You'll see that net revenues declined by $16.9 million or 1.9% quarter-over-quarter to $886.1 million, which includes a negative FX rate impact of $8.1 million. Within the net revenue number, you'll see that investment management fees fell by $29.3 million or 2.8% to $1.01 billion. This reflects the lower average AUM during the quarter as well as changes in the AUM product and currency mix. Foreign exchange decreased fourth quarter management fees by $10.1 million. Service and distribution revenues decreased by $7.2 million or 3.4%, again reflecting the change in mix and lower average AUM during the quarter. FX reduced service and distribution revenues by $0.1 million. Performance fees came in at $18.8 million in Q4 and this was earned from a variety of different investment capabilities, including $9.8 million from real estate, and $3.2 million from UK equities. Foreign exchange decreased performance fees by $0.1 million. Other revenues in the fourth quarter were $29 million, an increase of $1.4 million driven by a higher real estate transaction fees. Foreign exchange decreased other revenues by $0.1 million. Third-party distribution, service and advisory expense, which we net against gross revenues, fell by $17 million or 4.3%. This movement was in line with our lower retail management fees and service and distribution revenues. Foreign exchange decreased these expenses by $2.3 million. Moving on down to slide, you'll see that our adjusted operating expenses at $530.4 million increased by $0.8 million or 0.2% relative to the third quarter. Foreign exchange decreased operating expenses by $3.9 million during the quarter. Employee compensation came in at $338.8 million, a decline of $8.1 million or 2.3%. This was due to lower incentive compensation for the quarter. FX reduced compensation by $2.3 million. Marketing expenses increased by $8.8 million or 34% to $34.6 million. This is a function of seasonally higher expenditures for advertising and other marketing costs particularly in EMEA. FX reduced marketing expense by $0.4 million in the quarter. Property, office and technology expenses were $80.4 million in the quarter, an increase of $0.5 million over the third quarter. FX decreased these expenses by $0.5 million. General and administrative expenses came in at $76.6 million and that fell by $0.4 million or half percentage points. FX decreased G&A by $0.7 million. Going on further down the slide you'll see that non-operating income decreased $3.3 million compared to the third quarter. Included in the fourth quarter were a $7.3 million loss on the disposition of private equity partnership interest, as well as a $2 million mark-to-market on paid money investments. These were offset by gains from consolidated sponsored investment products compared to a loss in the prior quarter. The firm's effective tax rate on pre-tax adjusted net income in Q4 was 26.6%, up slightly from 26.5% in the prior quarter which then takes us to our adjusted EPS of $0.58 and our adjusted net operating margin of 40.1%. And before I turn things back to Marty, I would like to provide a little more detail on the business optimization work that we began to implement in Q4, in light of the current market volatility and as well as in light of our lower AUM levels. We believe this optimization work will make Invesco an even stronger company further increasing the efficiency and effectiveness of our operating platform. The business optimization work that's underway is primarily focused on our use of our shared service centers, outsourcing, automation, and office location strategy. In the fourth quarter, U.S. GAAP results we recognized $16.2 million of expenses primarily in the form of staff severance cost and we expect costs associated with the optimization initiative to continue through 2016. Total costs for 2016 are estimated to be up to $85 million. Reducing our run rate operating expenses in 2016 and in future years is an important outcome of this work. And we expect the ongoing benefits of this project will be well in excess of the projected one-time implementation cost I just discussed. We anticipate the project will achieve cash payback within less than three years and it will add an estimated $0.06 to $0.08 EPS accretion in fiscal year 2017 and beyond. Finally, in terms of reporting and consistent with our past approach to dealing with material one-off expenses, the incremental optimization charges will continue to be adjusted out of our non-GAAP presentation but will be detailed and tracked each quarter in the U.S. GAAP reconciliation table within the earnings release. Additionally we will provide you updated estimates of the implementation cost and benefits of this initiative to the extent that these change in any material way. So one additional item for me to note is that new for this quarter we've included a schedule detailing the impacts that the change in foreign exchange rates had on our non-GAAP operating results and expenses for the quarter. The amounts presented on Slide 17 represents the impact of the change in exchange rate movements in the quarter and the year and were calculated by applying the prior period FX rates to the current period non-U.S. dollar earnings. Going forward, the schedule will include each quarter and can be found in the Appendix of our earnings presentation. And with that, I will now turn it back to Marty.

Thank you. And so Loren and I happy to answer any questions, people might have.

Thank you. [Operator Instructions]. Our first question is coming from Mr. Michael Carrier of Bank of America. Sir your line is open.

All right, thanks a lot. Hey guys may be just first on the flows in the quarter and then I guess the outlook. It seems like a lot of the strength, Marty, you highlighted you're coming from the institutional side of the business. And then, Asia, you mentioned a pipeline near at all time high. Just wanted to get a sense from a mix standpoint what's driving may be that pipeline. And then when we think about it may be for Loren like from a mix shift on products obviously the market or the beta side is having an impact for everyone. But just wanted to try to get a sense on how that pipeline is relative to the current mix or the fee rate?

I will be happy to pick that up, Mike. So the pipeline is being driven really in four big buckets, probably one of the biggest is direct real estate probably 30% of the pipeline continues to be strong driver. Fixed income generally, across broad fixed income, alternative fixed income, stable value, probably another 30%. And then, the remainder is split between asset allocation and multi-asset solutions and then quantitative and regional equities would be other. So it's fairly well diversified and generally high fee. And so when we look at the fee rates of the pipeline, it's actually at one of the highest levels we've ever seen it, it's well above our current net revenue yields for the firm as a whole. And so, as these assets come in it will be accretive to our fee rates, which is great news. Obviously the negative that we've seen in our fee rate is due to the compression on equities just given what's happened in the market and then foreign exchange has also had an impact as well. But in terms of the mix overall on the pipeline, institutional pipeline we think it's very positive for our fee rates.

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

And the other thing I would just mention I mean we would expect our fee rate I mean given stability in assets and stability in FX to grow across 2016.

Okay. That's helpful. And then just quick follow-up, Loren, usually or sometimes you will give, some guidance just on like the expense lines and I don't know if it's because of some of the work that you guys are doing here to streamline the expenses, as you get into '17. But just any, I guess color I think comp you typically had the 1Q seasonality but may be the marketing you have some 4Q seasonalities. So any color on the expense outlook just given the volatility in the markets right now.

Yes, I would say given the volatility we're probably going to not give any explicit guidance around line items at this stage. There is a lot of work obviously that I discussed being done around some of this optimization work which will have some impacts on those line items as well. Generally, we are working hard to bring expenses down. Right, as you can imagine year-over-year decline in expenses. Our compensation generally moves and flexes in line with operating income, so those will be down. Some of the optimization work especially around, we just mentioned some of the severance, will also help bring some of the compensation line down. But the benefits of the optimization work will probably spread across most of the other categories other than marketing explicitly. But looking at marketing that's another interesting topic for us, it is one of these conundrums when you're in this market, your clients want to hear from you and you want to be out with them, but at the same time it certainly is a discretionary expense in this format where we're continuing to look at. So I'd say we're obviously going to be very vigilant to making sure that we manage expense very smartly in this environment with no presumption of snapback or some reversal. The other thing I would like to just mention there is some impact just to the acquisitions that we discussed in terms of Jemstep and in terms of Religare Asset Management completing our 100% ownership there. It's absolutely immaterial in terms of the earnings impact, so you don't have to worry about EPS impacts, but it does add probably roughly $15 million of expense and although bit more in revenue in 2016. So you will see some of those line items go up just as a result of those acquisitions but offset by obviously higher level of revenues. So we normally wouldn't be surprised by that. The optimization work that we're doing should have a benefit in 2016 that you will see. So again we will quantify that as we get through it. But that will help drive expenses down year-over-year.

Okay. Thanks a lot.

Yes, I would just add to Loren's point. I mean, we feel like we're really quite capable at this, and if you look at our history, we use these volatile periods to really advantage of opportunities as they show up. It is a period where I think '16 for the industry is going to be quite interesting, where clients will be looking for those firms that are in a position of strength and we're one of those firms and we feel we're operating from a position of strength right now. And so we're going to be very responsible on the expense side but we have some real opportunities that we want to continue to advance at the same time. So that's what we're working through and we will continue to make sure that we're communicating very clearly with everybody.

Our next question is from Daniel Fannon of Jefferies. Sir your line is open.

I guess first can you expand upon the 529 mandates. I think the $7.2 billion you mentioned is going to fund in the third quarter. Is that -- can you talk about the mix of products that's going to be and then also it's obviously very large is that something that is a new channel for you guys or can you talk about how that evolved and may be the other opportunities within that sub-segment?

Yes, so it will fund in January --

July.

Excuse me, in July. It's two plants. The vast majority of the money is in one plant is just the Rhode Island alone that's ETFs alone sort of a broad range of ETFs. It was -- it's driven by our Solutions team, so they are building the portfolio consistent with what's Rhode Island the CIO has set their as a set of investment objectives with a much larger part of the plan which is probably $6.8 billion of that is a broad range of active and passive capabilities again managed by our Solutions team. And from my point of view Rhode Island has been very, very thoughtful and it is really well constructive approach and again as our Solutions team is managing the capabilities. With regard to the channel, it is new channel for us; from the standpoint of as we all know many, many people use 529s for kids and et cetera, et cetera. And so it will be available in the advice channel throughout the country and it's one of the largest 529 plans in the marketplace and we just think it's going to be that much more competitive. Our goal is to help Rhode Island meet the needs of the people in the portfolio but frankly they also want to grow their plan too and we work very hard to do that.

Great. And then you mentioned part of the strength in the fourth quarter has been in Asia and Europe, I think that has been for some time, I guess. Given the volatility to start the year, as this demand changes, as this demand kind of trends changed at all or kind of how would you characterize the start of the year?

It's really hard to -- I think we all know the psychology day-by-day, week-by-week changes. It does feel like it's, as the markets are seeming a little more calm, and you're getting some more clarity, I will say business in Asia last week and all the business I have were all very, very strong, so I would anticipate continued strength there, as Loren said, in EMEA but it feels like we're starting to see a little bit more positive reaction to the environment. But again it's so early to say anything with dollar.

I mean I think your point that you made before Marty is good, I mean institutional the strength on the institutional side is actually strong across every region.

Right.

Great pipeline. The retail behavior has been sort of hard to gauge sort of in and out as pharmacy go off. But generally I would say in EMEA we feel very, very comfortable and confident that the retail side is going to be quite strong. The GTR product is doing very, very well, pharmacy has been quite strong, and we think that will help continue to allow us to grow both in the UK and in Europe on the retail side.

Great.

And the other thing is the quantitative product as well is unbelievable off the chart performance, so also very, very strong performance and demand.

Thank you. Next we have Glenn Schorr of Evercore ISI. Sir you may proceed.

Quick follow-up on the 529 I'm just curious on how the fee structure works. Do you get a fee on each of the underlying assets is it a wrapper up top and is it at a normal institutional rate?

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

And that's down to somewhere around 35 basis points.

Right.

Something like that. Yes, that's going to, sorry net down to something around 35 basis points on the basket.

Got it. Helpful. And then a question on Jemstep, I saw your details and rationale for growth in the slides. I just had a follow-up question. How do you expect the distributors to use it, and then more importantly, how do you differentiate because I'm assuming there's going to be many large asset managers having their version and may be even the distributors doing their own version. I'm just curious as to say early mover advantage that it makes their lives easier but just curious how you expect that to shape up?

Yes that's a great question. So I think you’re going to and we are expecting the large distributors will have some version of their own. That's historically what we've done in the past. We've still contacted them and but that would be our -- what we're going to anticipate. It's really just sort of the other channels, though there is a high degree of interest in this. And really what it is, it's just partnering up with our distribution partners and more effective we can be with them, at the end of the day, that's a good thing for their clients and for us also. I don't believe that they're going to be, let me say it the other way, I believe strongly there is a first move advantage to this, because quite frankly multiple distribution partners are not going to have yes, multiple I think, three, four, five, six, 10 of these within the system they don't need it. And it's like any other application is, it's education and investments to move it forward. So that is our other core belief.

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

Yes.

Okay, good. Last one, Loren, with the cash balances hitting your internal hurdles and the valuation in my words at a ridiculous level. How you think about the payout ratio relative to the past like can we start seeing 100% payouts even through you have a lot of things going on?

I think you saw something probably very close to that this last quarter. So again we certainly have demonstrated our willingness to respond when the stock is, as you call ridiculously low, and we would tend to agree with you on that one, just given our sense of optimism around our ability to grow over the long-term. So you should expect us to continue to pay a lot of attention, you know our needs for internal organic growth CDs and so forth are still pretty sizable, lot of opportunities, so we need to balance those against returning capital. But you should certainly expect us to be operating in the stock buyback around in a non-business as usual approach which is somewhat similar to what you're seeing in the fourth quarter may be not at the actual level but something between business as usual and what you've seen us do.

Next we have Mr. Bill Katz from Citi. Sir, your line is open.

Just trying to reconcile some of the numbers on the optimization program you delineated a little bit, Loren. You mentioned that you spend; I guess roughly $100 million between the charge in the fourth quarter and then what you expect for this year, and sort of in the three year payback, $0.06 to $0.08 accretion in '17. Is it accretive to non-GAAP earnings for '16 and the reason I'm asking is I guess you got to run the expenses through the GAAP line. I presume if it's a three-year recovery either you really back ended in '18 or you would get some pretty sizable savings this year as well. I’m just trying to figure out the cash flows?

So the execution of the optimization is going to happen all through 2016. So the three-year payback is really going to be in, at full throttle in 2017 and beyond. We will get savings in 2016 probably somewhere around $15 million is what our non-GAAP run rate, positive impact would be -- are -- is what we expect and that would certainly ramp up significantly into 2017 and on. So again our estimate is based on what we know today based on the activities that we're engaged in today. But we're going to be pretty that's the way we do believe that it won’t be no more than $85 million in terms of what is required for us to implement that long-term run rate savings which again is somewhere $30 million to $45 million in run rate cost savings post 2017.

Okay. That's very helpful. And then, Marty, may be both of you guys you gave a nice delineation also where by region and by product but the one area that seem to sort of not be within that list was more traditional equity mandates. What are you hearing from clients on the institutional side, is a still more this barbell notion or is there any sort of interest in more traditional playing vanilla type of mandates?

Yes, so there are actually I mean this again I'll just use the A structures because I was there but I wouldn’t limit it to there. I mean you’re actually seeing institutional clients recognize this is probably the time to increase their exposure to the equity markets. So you’re actually hearing very constructive things and also you’re starting the year by the way this is a time where active management can really start to add value in a way that was harder from sort of a beta run from 2009 on. So I think you're at a point where you're actually going to see, if you're a high conviction manager, you're going to continue to start to do well. So I don’t know what you put in traditional but clearly international equities are high, we’re seeing a lot of regional capabilities people are interested in. So I think it's just where we're in the market cycle and I think you're going to continue to see, excuse me, you will begin to see much more commitment to active management.

Thank you. Next we have Mr. Patrick Davitt of Autonomous. Sir, your line is open.

I have another follow-up on the Rhode Island mandate. One, maybe I misunderstood how you frame this. But does this mean that there is a $7.2 billion of outflows coming from other people ETFs and funds on this fund?

Yes.

Yes.

Yes. And then two, I imagine that that approval of capital like this has a pretty stick inflow stream. Is that the case and if so can you kind of help us frame what the organic growth of it has been kind of over the last few years?

It's a very good question; I don’t think I have a satisfactory answer. What I would say is that the first decision was to engage us to meet the program of the investment that they had in place that was the first desire. Secondly, they recognized the depth and breadth of our retail distribution capability with some very important distribution partners throughout the country, and so their anticipation of growth in the plan is part of what the decision was, and obviously we’re very interested in it and we think it will be a new channel for us and we think we'll be quite successful with it. And I guess the other way to put it in context and again I don't have to assist -- they were successful enough to become I think as the third largest 529 plan in the country, and we would look for growth to be stronger than what it had been in the past.

And I would agree with your characterization about it being sticky right?

Right.

As long as performance, everything else continues right.

Right.

And finally I guess on that again. Was this kind of a broad, kind of beauty show, what was kind of the decision process in terms of that?

Yes, you've to think about it as typical, institutional, beauty show, and obviously you -- we have the choice of anybody they wanted to work with in the country and who is very competitive and because we know this is the largest 529 transfer that's happened in the industry.

Our next question is from Michael Kim of Sandler O'Neill. Sir you may proceed.

First any early read into quarter-to-date flow trends particularly given the seasonal step-up we typically see in retirement accounts in the first quarter. And then related to that, I think in the past you sort of targeted may be a 3% to 5% organic growth rate. So just assuming a more cooperative market backdrop going forward which realizes a big assumption these days. But in that sort of environment is that still sort of a reasonable range to expect?

Yes, I'll make a couple of comments and Loren continue. So we still look at that 3% to 5% organic growth rate is very achievable. And again, as Loren and I have talking about such as this ever previously we just continue to see ongoing strength throughout the regions, both retail institutional, so we think that is fully in place. You're now talking about a few weeks of January very, very hard to anticipate the quarter quite frankly and this week is a whole lot better than the first week of January. So I wish I could give you some great insights I really can't. That said, I do know and Loren made this point very clear that the institutional investors are continuing to move forward, the retail investors tend to be more risk on, risk off, depending on the daily movement in the markets although it feels like that's coming down probably the best I could describe at the moment. Could you add?

Yes, Marty, I think that's about right. Probably say there is lot of risk cost behavior in the early part of January and so it's getting healthier.

Okay, fair enough. And then so if we focus on kind of the alternatives bucket net flows have been consistently positive for a number of years. I know the real estate business represents a big chunk of those assets but there is also number of different strategies that are in there. So just wondering if you could sort of give us a sense of where you're seeing the best growth opportunities. And then, as it relates to fee rates, any sort of color there because I think the range of the respected fee rates within that bucket can be pretty wide?

So Mike, I think the other probably even larger in terms of what we're seeing certainly in the fourth quarter is GTR I mean just continues to grow. I think it's brought in about $1.5 billion in net flows in the fourth quarter; it's about $11 billion in total size to-date. So that is one that certainly outside the U.S. has really taken on a lot of good momentum and I think the product that it competes with in the marketplace had some issues around its performance. And so the positioning is even better probably now than it's ever been. Still early days in the U.S. for us and so we like nothing more to see GTR sort of reach its appropriate timeframe and sort of get through all the hurdles that we need to get through for it to be on the platform. But I think that in real estate and then perhaps as well alternative fixed income is still an area where we believe we can play at a much more significant level than we have in the past and there are lot of products that are still sort of early days in terms of their track record. So I think it's really GTR and real estate right now are the primary drivers for us and where the demand is.

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

Yes, so that was previous time where we were warehousing partnership in just before they were put into a vehicle for our clients and unfortunately the mark-to-market on that really hit us before I got into the vehicle and so that's what that is. Normally we would be able to get it in there faster but there was just again some exposure to a pretty volatile market and that's what you saw.

Next we have Craig Siegenthaler of Credit Suisse. Sir your line is open.

I was looking for a little more color on excess capital. I think historically you would like to provide a sort of guidance here in terms of cash and investments versus long-term debt and they're pretty close here. So could you just provide an update here and may be you're pretty comfortable where it is right now?

Well so I think you'll see that we had about $1.85 billion in total cash at the end of the quarter. The amount that is required from a regulatory perspective in the UK and Continental Europe is around $550 million. So we are about $1.3 billion in excess of our rate capital requirements we've talked about in the past that we want to be at least $1 billion. So again we are feeling strong in terms of our cash position and our ability to use our capital to the benefit of our clients probably better than we have in a long time. And with that said, assets have dropped a little bit and so our cash flow is definitely having some -- there is some impact to our operating cash there. But overall we are feeling very, very strong and then optimistic about our ability to deploy our capital for the benefit of our shareholders in terms of return on capital.

That's very helpful, Loren. And then just my follow-up on Jemstep. I just wanted to get a better understanding for how this business will function, how it will generate profits and sort of what really attracts you to do this business?

Yes, well, I probably said what's the attraction, as I said we -- our view is, it's a mistake not to pay attention to what's going on in the digital world and it’s really easy to just ignore, we think that's a mistake that's why we went and spent some real good time researching what is happening and we came to the conclusion that a digital mobile tool that could help us with our distribution partners will be a very wise thing to do. It's a simple thought and your thought is that. There will be a combination of and I don't want to get into pricing on Jemstep where there will be a combination of things that we think will be accretive, if you want to call it to the organization. First of all, the most important thing is well deeper relationships with our clients; we will be able to do better job with our clients. We'll be able to offer more effectively the broader range of investment capabilities we have to our clients, and those at the end of the day will ultimately result in increased assets under management if we again that we have to be performing et cetera all the obvious. But we think that's the fundamental thoughts of why we try Jemstep was very important development for us.

Thank you. Next we have Mr. Ken Worthington of J.P. Morgan. Sir your line is open.

First also on capital management. We're getting to the point in the year where I think you will be recommending to the Board the dividend increase for the coming year. In recent years the dividend increase has been particularly big. But given where the stock price is, how are you thinking about the kind of the mix of capital return between dividend and buyback as we look forward to the next year?

I think it's probably not great for us to be talking about this in event of our discussion with our Board. But generally it's I think our sense of more modest, a modest dividend could be appropriate stride in light of the fact that that will create more capital for buybacks which I think given the market pricing of our stocks may be the better way to use that cash. But again we need to wait before we get in front of our Board, before we sort of signal anything quite honestly.

Okay. Thank you. And then just little ones the pound hedge, the pound obviously fell a lot in 2015, can't really tell how much you made at the end of the day on that. Bill said in your release you're hedged out to March, I thought you were actually hedged out to May. How are you thinking about hedging out the currency as we think about 2016 and actually what did you end up making in 2015 on it? Thank you.

Yes, great question. So the hedge as you know was structured, hedges were structured 1.493 that is reflective to the average rate for the quarter and so there was no quarter in 2015 that had a rate that averaged below 1.493. So we made nothing this year or last year in 2015. On the current quarterly hedges definitely in the money and again, so again more to come on what the value there is it's moving around. But it's certainly something we would see at this rate noticeably, notable number. We are expecting to hedge our currency going forward around the pound. In particular, we believe that the pound is potentially going to be still a little volatile in light especially with the BREXIT discussions that are going on. And so those are again as we've done in the past hedges we put in place that would be out of money puts that really will protect us from the downside, allow upside to occur and again would protect our cash flow in particular as opposed to operating results which we can't really protect against.

Thank you. Next we have Brennan Hawken of UBS. Your line is open.

Most of my questions have been asked and answered. Just one left as far as the U.S. equity performance you saw some deterioration here this quarter. Could you speak to that? And I think that you referenced last quarter that there was some loading up in energy stocks did that play a part here?

It did. And again my perspective on that is overall the performance is still very, very strong and is very short-term in nature and frankly it didn't improve last quarter to this quarter. But it's -- then again it's all very short-term. But yes, moving into this year, it just continued to strengthen. So those portfolio sets will have the energy exposure we think that plays very, very well and they are going to do hopefully do very, very well for our clients.

And the other thing I would say is that the improvement that we saw in the one-year numbers relative to Q3 were due to our small cap growth equity team as well as our growth in income products. So there were definitely some equity capabilities that can show improvement in the quarter relative to last quarter.

Our next question is from Robert Lee of KBW. Sir your line is open.

Hi I have got two questions. The first one is kind of curious --

Hey Robert, it's hard to hear you.

Sorry. Is it any better?

Good, thank you.

Okay. Couple of questions you did mention in the release a couple of regulatory targets strictly private equity. Kind of curious what that is and even though adjusted that for EPS should we expecting quarters, a filling quarter it's kind of --

Hey Rob we're really having a hard time in hearing you. I don't know you kind of grabled.

You know what I will call you offline. I'm on a cell phone that's probably not working well.

Sorry about that.

Sorry, Rob.

We're getting every other word.

Next we have Mr. Chris Harris of Wells Fargo. Sir your line is open.

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

So a couple of things. I think when you want to think about us, think about it beyond smart beta it is really factor investing. So one of the delivery mechanisms are PowerShares, ETFs but factor investor team is really the one team you’re seeing real demand for factor investor team outside of the United States both retail and institutional, institutional in particular in Europe, institutional in particular in Asia, and we’ve been doing it for 20 years. And I think the other thing if you look at the PowerShares line up what is important is that differently than mutual funds you really can’t have more than three in a category. So there is a first mover advantage topic within ETFs is something very, very real. And if you look at the length of the time that our smart beta ETFs have been in the market, they have liquidity, they have real track records and when you're the incumbent you're really in a strong position. So we think other people come in into smart beta areas, it's a confirmation that it’s a better way to create exposure and to passives. And again, we're just seeing continued strength within PowerShares in particular in fact investing outside of the United States.

Okay. My one follow-up would be on the cost optimization plan. Can you guys give us a little bit more detail about what those costs really are; I mean is it a combination of project spending and layoff comp or is it something else. And then sort of related to that, I’m wondering why the spending is taking sort of it's sort of backend loaded if you will, you would think it was layoffs are something of that nature it would -- benefits would be pretty immediate?

Okay, yes, it's good question. Thank you. So we will make sure it's clear. These are long dated infrastructure type program. So many years ago we have a low hanging fruit is we call that's long on it's been long on for long time. So these are efficiency related undertakings hardcore system upgrades, process improvements type things. So it's large projects by having all of our institutions but they're pretty broad right now.

Yes, in many ways they are transformational around processes and the way we do things. So it's not just trimming people that kind of behavior, you're right. That could be done very quickly. This is very thoughtful that will make us a stronger better company at the end of the day. And again in an environment like this, we will move more quickly to get those things done, they have been on our list, and we have all these things that we would like to do to continue make ourselves a better company. But we’re absolutely accelerating a lot of these activities right now but they do take time to implement thoughtfully. Operator Next we have Mr. Chris Shutler of William Blair. Sir you may proceed.

So on U.S. and Global Fixed Income, you have really terrific performance, over $10 billion of active flows in 2015. Can you may be just talk about that area with rates may be rising a little bit here with changes in the credit markets and how you see the pipeline shaping up for '16 and beyond?

Yes, so I'd say the effort that we started three years ago broadening our fixed income capability, probably almost four years ago now is really proving to bear real fruit and as you said, if you look across the fixed income performance it is very, very strong. And we're seeing growing demand all channels, all regions within fixed income and some of it is still not at the level that we anticipate because some of the capabilities don't have three-year track records. So getting close but we're starting to get new commitments on them simply because the performance is quite frankly institutions in particular looking for another high quality provider of fixed income capabilities. So not just the performance but we do think it's -- we're not seeing the highest level of contribution, yes from that area. So we're very positive on it.

It's only growing for us. I mean, it's such a big market and we're still underpenetrated that our opportunity to continue to grow, even if there is some rate impacts. I think they is significant.

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

Yes, it's a good question, and again I think we're all -- we're imagining right, so it's hard to imagine. But what I can say and this probably gets back to some of these other topics that we talked about. The breadth of capability, depth of capability matters a lot. We think quite frankly high conviction managers in fundamental investing and factor investing is really important. We think we're obviously one of very few firms that has and do the range of those types of things. And quite frankly the other thing that Jemstep does it's an enabling tool for our advisory clients to get broader deeper relationships with their clients and serve clients that may -- yes, individuals that could ultimately totally disadvantage by the fiduciary role that's been put in place, so that's part of the work we’re thinking of how Jemstep can help us and our clients with a rule that we don't know exactly what is going to be at the moment. But so that's how we've been thinking about it and so hopefully that's helpful.

Next we have Alex Blostein of Goldman Sachs. Your line is open.

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

Nothing more than what we have quite frankly so.

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

Got it. And then I guess along those lines, when you think about the product dynamic and the sources of organic growth that we've seen in the industry this quarter and frankly for the last couple quarters, European retail, UK retail has been a source of strength for you guys, for BlackRock to some extent, for Threadneedle to some extent. So some of the bigger US players. What -- when you take a step back, how has the competitive dynamic evolved in that market? And I guess more importantly, are you seeing share gains from other firms, or is the pie kind of still growing from whether it's bank deposits coming into the investment products or some of the captive asset managers just continuously losing market share?

So is this in particularly in the UK?

UK and the European market.

So if you look over the last four years and let's do kind of Europe first, I mean it has been really the independent global asset managers largely U.S. that have been continuing to take greater share on accounts. I know there are some other good competitors -- very good competitors that participate but that has been the fact for whatever reason. And over the last number of years as you've seen, I mean we just continue to make stronger and stronger inroads on the continent, we still think that is the case, we still have, we think quite a way to go to penetrate the market and that continues for us. In UK it's really quite different. I mean it is really competitive markets; very few, very few non-UK firms are successful in the UK. And it is really that the heritage of our presence in the UK is why we're so strong there and again it just continues to be competitive, but we're very well placed there and we think we will continue to do well. But that would probably be another market that largely driven by regulatory developments and really what I would say what's starting to happen here in the United States, very difficult to be a smaller firm, and I think we're strong just going to get stronger in UK that's going to be the case in the United States too.

Next we have Mr. Brian Bedell of Deutsche Bank. Sir your line is open.

Hi, thanks for taking my question. Most of them have been asked. Just this one on the solutions asset Marty, if you want to talk a little bit more about that. I guess first of all, would you consider that Rhode Island wins one of your best successes in the solutions effort? And how do you think you might be able to leverage that, whether you will use this as a template to further broaden the effort across your sales force.

Yes, so Rhode Island would be the highest profile in the United States I would say. But again we're seeing -- one of the components of being able to do that, I mean it is really those combination of broad range of capabilities and from our point of view high conviction factor and fundamentals. So we have both of those and I think that is actually really important if we’re going to be successful in solutions and it’s continuing to carry on through us in each of the regions so the U.S., Asia-Pacific, frankly China in particular, and on the Continent in particular. And so will this continue to go down that path and there is growing opportunity in the area. And again I think it's you really have to be a broad gauged set of offerings to be successful and that's where we start and then the overlay of very some talented people that can do the solutions work for the clients.

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

So it is hard to when we, probably like you and everybody else we do our looking forward to try and understand where the strength will come. It's -- it will be a contributor for sure and a growing contributor over the two or three years out from where we are right now. So that's another reason why have such confidence in sort of the 3% to 5% range.

Okay. And just may be just lastly, on the solutions side, do you feel that's more fixed income oriented or really completely broad --or I should say fixed income alternative oriented or really completely broad across your asset classes?

It's been 100% broad across the asset class utilizing anything from as I said really factor based capabilities two alternatives. So it’s client dependent but it has used the full range of capabilities in most cases.

No further questions sir.

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