Invesco Ltd. (IVZ) Q3 2017 Earnings Report, Transcript and Summary

This presentation, 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 condition, 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 Web site 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 Third Quarter Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions]. Today’s conference call 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; and Dan Draper, Global Head of ETFs. Mr. Flanagan, you may begin.

Thanks very much and thanks everybody for joining us. And I’m going to spend a couple of minutes just on the results for the quarter. Dan is actually going to spend time to give further context around the acquisition of Guggenheim’s ETF business, and Loren will go into the financial review. And of course, we’ll open up to Q&A. So let me touch by hitting a few highlights for the third quarter results, which are on Page 4. Long-term performance continued to be very strong in the quarter. 67% and 75% of assets were ahead of peers on a three and five-year basis. This resulted in very strong long-term flows, $6.3 billion during the quarter. We saw this both in retail and institutional channels, and this resulted in organic growth rate of 3.4%; so all very strong during the quarter. The adjusted operating margin was up meaningfully during the quarter. It came in at 40.7% and operating – adjusted operating income increased 10% quarter-over-quarter and up 18.5% as compared to Q3 2016. So let’s spend a few minutes on flows, and that’s on Page 8. So we did see solid demand for both active and passive capabilities during the quarter. And as many of you know, we completed the acquisition of Source ETF business in August. Source has contributed to net inflows since the close of the acquisition, and it is going to continue to be a meaningful addition to our ETF business, our competitive positioning in EMEA and the greater ETF business globally. If you take a look at the active capabilities, growth sales and net flows were the strongest since third quarter of 2016. We saw solid flows with taxable fixed income and international equities as well as alternative capabilities. Taking a look at passive, we also saw strong flows in the fixed income commodity currency and international equity. So literally, by both active and passive, we saw very broad set of capabilities being in demand by clients. Taking a look at both retail and institutional channels during the quarter, on Slide 9, again very strong again on both channels as you will note. And as an example, this was the fifth consecutive quarter we saw net positive flows in EMEA, which were driven by nearly $3 billion of cross-border retail flows and strong institutional demand. And given that markets continue to test new highs, demand for risk mitigating strategies remain strong, particularly among institutional investors. And the pipeline of one but not funded institutional mandates also continues to grow and remain very robust. We did see strong flows into global target of return led by institutional investors, as you would imagine. And we also saw solid flows into European equities taxable fixed income and fixed income ETFs. So let’s spend a couple of minutes putting context around the acquisition of Guggenheim Investments, and I’m on Page 11, if you happen to be following. So as we have made very, very clear, we are intensely focused on helping clients achieve their investment objectives. And we built the entire firm with this notion in mind, the single focus on helping clients meet their needs. And so as you imagine, the investments that we make in the business are designed to position us ahead of client demand. And over the past decade, we’ve continued to expand the comprehensive range of capabilities, which has resulted in a very broad and deep set of active, passive and alternative strategies. An example of this would be if you take a look at our factor investing capabilities, we have over $200 billion in factor capabilities and have 40 years of experience. It is a real strong part of the organization and continues to grow, and we expect that in the years to come. We also have focused on enhancing our client experience. And Jemstep is an example of that, which is our digital advice platform for advisers. The demand for the Jemstep application continues to be very strong and robust. And it’s really our ability to draw on our comprehensive range of capabilities to provide solutions for our clients, which really differentiates Invesco in the marketplace and positions us for long-term growth. Turning to the Guggenheim acquisition, the ETF business from Guggenheim, it really strengthens Invesco’s global ETF platform while also accelerating our growth in the quarters and years ahead. I would like to highlight a few of the elements of that on Page 12. The acquisition will expand the depth and breadth of Invesco’s traditional and smart beta ETFs and further diversifying our offering while firmly placing us as the number two smart beta provider in the United States. We’ll also provide additional scale that will strengthen our competitive position in the U.S. while enhancing our relevance in the growing ETF business marketplace globally. Lastly, the acquisition brings scale benefits that will begin from our existing platform in investments, distributions and operations, and the addition will also build upon the momentum in the ETF business to help drive further financial performance for Invesco. With that as a backdrop, I’m going to turn it over to Dan, and Dan is going to talk about our positioning and how Guggenheim’s ETF business will enhance that as we go forward. Dan?

Thank you, Marty. As we’ve reviewed possible ETF acquisitions in the past, the Guggenheim ETF business has always stood out to us as a really complementary to Invesco, something that’s been of interest to us for some time. So I think if you look at the business today and the ability to help us continue this global growth that Marty’s talked about, the current franchise with Guggenheim’s ETF business is about $37.3 billion in assets under management. About 60% of that crucially for us is in the smart beta product suite, which I’ll go through in some more detail in a couple of further slides. Overall, they have 79 ETFs on the platform and their top five flagship products will help about half of those assets. If you look across their ability to help us, as Marty mentioned, really to continue to build out our solutions capability. This acquisition brings us multi-asset class ETF capability across equities, fixed income and alternatives. Also looking at kind of pricing and margin, very much in line with – especially in the smart beta space. If you look at the performance of the products, very strong performance. Around three quarters of their ETFs have Morningstar ratings of 3 or higher. And then I think also you just look at a very strong organic track record on the platform seeing the compound annual growth rate of 26.5% over the past five years. And also, we continue to currently see good flows. We had net inflows across the platform since we announced the transaction a few weeks ago. If you’re following on the presentation, moving to Slide 14, this is really where the addition and I’ll get into some of the additional products where a lot of the synergies come in. So if you look at Invesco’s global ETF platform, with a high focus we have on smart beta and factor investing, this is really where Guggenheim has had one of the flagship ETF products in smart beta for a number of years, and that’s the S&P 500 Equal Weight. So again, this will give us a leadership position in that category. Equal Weight is one of the simplest but, quite openly, one of the most effective smart beta strategies. And we’ve been very interested in getting this S&P 500 Equal Weight exposure really for quite some time, but additional licenses were not available, therefore, this is going to be, we think, very, very complementary. Alongside equal weighting, we are also going to have the pure style ETFs, which again very complementary to our factor capabilities. And then we think in fixed income where today PowerShares offers the third most fixed income ETFs in the industry, the BulletShares is extremely important to us. These are defined maturity products, and they also are able to utilize self-indexing. And we want to continue that, but also leadership positions where we’ve been first to market in fixed income areas like senior bank loan and others. We believe this is going to be extremely powerful and allow the ETF business at Invesco to partner even closer to Invesco’s fixed income team. Also, you have additional leading CurrencyShares product that are listed there. If we move ahead to Slide 15, again, we feel that this acquisition is going to be very, very strong for us to leverage at Invesco. Particularly a number of key factors that we think where we can actually help accelerate the already fast growth of the Guggenheim ETF franchise, notably looking at our distribution capabilities really around the world that Invesco is able to offer. Also, Marty had mentioned the solutions capability, which is one of Invesco’s biggest organic growth focuses at the moment, our ability to bring additional capabilities, customized solutions, particularly in the form of model portfolios, we really feel like these Guggenheim products will fit in very well there. Also, Invesco’s very well-known consulting business, the ability to educate clients again around asset allocation and the utilization of important vehicles like ETFs. And increasingly, as we have more of those clients really looking to access our solutions digitally, this is where again we see a lot of potential synergies through these new ETFs through our Jemstep platform. Overall, we continue to see the very strong secular growth in fixed income ETFs. We believe that many investors who previously didn’t really look at ETFs, particularly in some institutional segments, are really starting to see the benefit of the wrap [ph], or the ability to have a single ticker, a single icing solution for rebalancing a portfolio with individual bonds. And in particular, we think again having the maturity defined, our BulletShares line up to be much, much better for us to be able to engage with those types of clients. Also looking at the ability to manage the total cost of an ETF, we believe bringing our world-class capabilities and capital markets, working with a lot of sell-side firms, but again we’re going to be able to bring that value through the acquisition. And overall, if you just look at the four years of factor experience that Invesco’s built, and then also the 15 years of experience, particularly in smart beta ETFs, again we see this as extremely complementary in terms of the acquisition. Looking ahead to Slide 16, I just wanted to emphasize here. We continue to talk about the real importance of first mover advantage in the ETF space. And here’s just a quick lineup of really where the PowerShares business has been of the pioneer in getting first to market across some really important categories, including our senior bank loan ETF, looking at low volatility, bringing the FTSE RAFI range into market over a decade ago, sovereign debt, looking at high-dividend, low-volatility alternative areas like commodities, looking at innovations like variable-rate preferred, and et cetera. So I think for us to have this strong track record and layering in a lot of the pioneering ETFs such as the S&P 500 Equal Weight from Guggenheim, I think it just demonstrates I think the type of innovation that we’ve built and really what now Guggenheim is going to add even more to that. I think more demonstration is showing the $25 billion of net assets that we’ve actually raised from new products since 2011, which is the third highest in the industry. So I think the ability for us to continue to build going forward and really add innovation to clients is going to be a crucial synergy in this ETF. We also continue to believe that the barriers to entry, while they may be low, we do think the barriers to success remain very, very high. Having first mover advantage, having legacy, having track record as well as a very strong brand, we believe are absolutely crucial to investors. And as I point out on Slide 17, you can see that since 2010 or I should say 98% of the U.S. ETF industry’s AUM does belong to issuers who entered the market in 2010 or before. On a comparable metric, 96% of industry flows over the past 12 months also have gone to issuers who’ve been in the market since at least 2010. And then as we go to our targeted segment area, which is smart beta, you see a very, very similar story where 94% of the smart beta ETF AUM again belongs to issuers with track records in 2010 or prior and again net flows of 74% over the same time period. And as you move to Slide 18, I think it really shows again our core focus around smart beta and factors, and this acquisition is going to help us increase – incrementally increase our market position there by 46% and can actually – puts us just under 20% of market share in smart beta. But importantly, having the largest number of products in that category with the longest track record of being able to offer again multi-asset class solutions, equities, fixed income alternatives, 70% of those ETFs having more than a five years worth of track record that we believe positions very well for growth in this really fast-moving smart beta segment. So with that, I’ll turn it back over to Loren Starr who’s going to highlight the operating results for the quarter. Loren?

Thank you very much, Dan. So quarter-over-quarter, you’ll see that our total AUM increased 59.2 billion or 6.9% and that was driven by the acquisition of Source ETF, which added 26 billion, including approximately 18 billion of Source-managed AUM and 8 billion of externally managed AUM. We also benefited from market gains of 15 billion. We had long-term net inflows of 6.3 billion, positive FX translation of 6.7 billion and inflows into our money markets capability of 5.4 billion. And these factors were somewhat offset by a small outflow from the QQQs of 0.2 billion. Average AUM for the third quarter was 890.8 billion, up 4.9% versus the second quarter. And our annualized long-term organic growth rate in Q3 came in at 3.4% compared to negative 0.3 in the second quarter. Before turning to net revenue yield, I just wanted to highlight one quick update on a change this quarter and how our long-term inflows are being reported. In previous periods, any dividends or capital gains that were reinvested in the funds were included in market gains and losses line item. So beginning in the third quarter and for future periods, these flows will now be included within our long-term inflows to conform Invesco’s flow reporting with general industry practices. As you also note from the footnote on Slide 20, the amount included in the long-term inflows related to this particular item was 1.1 billion. So let’s now next turn to the net revenue yield analysis. You’ll see that our net revenue yield came in at 43.9 basis points and our net revenue yield, excluding performance fees, was 41.9 basis points. That was an increase of 0.1 basis points over the second quarter. Now looking at what the causes were, we had sold one additional day in Q3 that added 0.4 basis points and we also saw the positive impact of FX and mix added 0.2 basis points. So these positive factors are within somewhat offset by the dilutive impact of the Source ETF business, as we discussed in last quarter, which reduced our yield by 0.4 basis points. And we also saw a decrease in other revenues which reduced the yield by 0.1 basis points. So next on Slide 21 is our U.S. GAAP presentation. My comments today, however, are going to focus exclusively on the variances related to our non-GAAP presentation adjusted measures, which are found on Slide 22. Net revenues increased by 70.3 million or 7.8% quarter-over-quarter to 976.6 million, which included a positive FX rate impact of 13.4 million. Within that net revenue number, you’ll see that our adjusted investment management fees decreased by 54 million or 5.3% to 1.08 billion, and that reflects our average – higher average AUM, an additional day during Q3 as well as incremental management fees from the acquisition of Source. Foreign exchange increased our adjusted investment management fees by 16.2 million. Adjusted service and distribution revenues increased by 6.3 million or 3%, reflecting higher average AUM in the quarter and FX increased our adjusted service and distribution revenues by 0.5 million. Our adjusted performance fees came in at a much higher level, obviously, 43.3 million in Q3. And they were earned by a variety of investment capabilities, but most notably 37 million from Invesco’s mortgage recovery fund. Our FX increased adjusted performance fees by 0.2 million in the quarter. The adjusted other revenues in the third quarter were 16.7 million and that was a decrease of 0.6 million from the prior quarter. FX impact on adjusted other revenues was 0.2 million positive. And next, third-party distribution service and advisory expense which we net against gross revenues, that increased by 14.7 million or 4% and that’s consistent with increased revenues derived from the related retail AUM and the additional day in the quarter. FX increased our adjusted third-party distribution service and advisory expenses by 3.7 million. Now let’s move to expenses. As you move down the slide, you’ll see that adjusted operating expenses at 579.2 million increased 29.4 million or 5.3% relative to Q2. FX increased our adjusted operating expenses by 7.3 million during the quarter. The adjusted employee compensation came in at 383.9 million. That was an increase of 23.3 million or 6.5%. And this was driven by higher variable compensation, primarily related to performance fees and as well a 5.5 million non-cash charge related to the company’s UK defined-benefit plan. FX increased adjusted employee compensation by 5 million. The adjusted marketing expenses in Q3 increased slightly by 0.4 million, 1.3% up to 30.1 million in line with the guidance that we provided last quarter. FX increased our adjusted marketing expense by 0.5 million. The adjusted property, office and tech expenses came in at 93.7 million. That was an increase of 5 million or 5.6% over the second quarter and this reflected increased depreciation cost on long-term technology projects that were recently brought into service. FX increased the adjusted property, office and tech expenses by 0.9 million. Next on to G&A, the adjusted G&A expense came in at 71.5 million. That was an increase of 0.7 million or 1% up, in line with the guidance that we provided last quarter. FX increased G&A by 0.9 million. And then going on down the page, you’ll see that our adjusted non-operating income increased 1.5 million compared to Q2 and that was driven by increases in earnings from our real estate investments that was somewhat offset by lower earnings from our private equity investment. And then moving to tax, the tax rate, effective tax rate on pre-tax adjusted net income in Q3 came in at 27.6%, a little bit higher than guidance. We do believe going forward that our tax rate should drop to again roughly 27%. That brings us to our adjusted EPS of $0.71 and adjusted net operating margin of 40.7%. So let me just quickly touch on business optimization. This is an ongoing multiyear kind of effort. As you’ve heard, given the opportunity on a number of initiatives, including those around outsourcing or back office functions, we expect the optimization work to actually exceed our original target for run rate savings. We’ve achieved the run rate savings in Q3 of 38 million and we expect to deliver an additional savings by the end of 2018 of a total run rate savings of about 65 million, which is up. And then finally, because I know we’ll get questions, we’ll just address it. Quarter-to-date, net flows through October roughly flat. We do continue to see very strong net inflows from Europe as well as from Asia Pacific. These were somewhat offset by outflows in the U.S. on the institutional side, largely quant, as well as some sub-advised U.S. retail early days, October we are obviously feeling very good about the flow picture. Marty had mentioned the robust pipeline. So again, we think the trend is going to continue. And with that, I’ll turn it over to Marty.

Operator, so we’ll open up to Q&A please.

Thank you. [Operator Instructions]. Our first question is from Mr. Brennan Hawken from UBS. Sir, your line is open.

Hi. Thanks for taking the question. Wondering if you could maybe comment on an updated view on the impact, base it [ph] given the adjustment in applying via for the RPAs. And I know it’s really, really short notice, but we did get a no action letter out of the SEC this morning. Do you have any early reads on that and what kind of relief that might apply?

This is Marty. I’ll make a couple of comments and Loren can chime in. So it clearly is a moving target at the moment. We know where the end state is going to be. So from our perspective in Europe, the financial impact would be very manageable. The U.S., the early read is it looks like it’s contained a MiFID topic to Europe, but that’s – it’s a 30-month review so we’ll have to see what happens there. But I take it back to a bigger topic. I mean it is an industry topic. I do think that the notion of paying attention to impact on capital markets has been missed in Europe. This will have a negative impact clearly on liquidity around small cap stocks, mid cap stocks, which is not a good thing. So hopefully, the U.S. will think of capital market impact and capital formation around this topic. And I’d also say what it does is firms like us, we’re financially very strong. We have 700 analysts throughout the world. We have every resource necessary to ensure that our analysts have everything they need. It will continue to put firms like us in a competitive advantage to smaller firms. It’s just a real challenge, the onslaught of ongoing regulatory costs and cyber costs, et cetera, et cetera, on smaller firms. So as this evolves, again firms like us will just end up in a competitively stronger position. Loren?

Yes. In terms of quantifying, I think it’s a very much moving target in terms of what the impact is. I think we’ve sort of indicated it was not material, maybe tens of millions kind of without negotiations really taking place around the pricing. All that is sort of happening as we speak and therefore you’ll have a clear view as we sort of get into 2018. But I do think even as we get through 2018, it’s going to be a moving target because there is no expectation of setting sort of one price in the last – it’s locked in. I think it’s going to be an evolving topic over time.

Sure. That’s all very fair. And then for follow-up, you made reference to the fact that this is going to of course disadvantage some of the smaller firms in Europe. I guess, do you think that’s going to lead to opportunities for acquisitions as you see some of the smaller firms come under more and more pressure? And also more broadly, after – now that you’ve completed two smart beta ETF deals, should we assume that you would have continued appetite in that space, or do you feel as though you’re satiated at this point? Thanks.

I think I’d answer the question this way. Our strategy continues to be no different than in the past. And our first effort organically – is to focus organically in organic investments. And we would then approach inorganically when we see an opportunity or a gap somewhere in the lineup. We see very few gaps within the organization right now regardless of investment capability or some of these platforms. The last two ETF acquisitions really put us in a very, very strong spot in the ETF market. And in particular, the factor and smart beta where we think there is the greatest value for clients at the end of the day. Look, we all have been talking about the impact of the changing dynamic. It is just the fact that if you are a smaller money manager anywhere in the world, you have pressures that are at a level that you’ve never seen before and common sense would lead you to believe that there should be more combinations. They continue to be complicated to do because the fiduciary nature of the businesses and the people that are involved, et cetera, et cetera. So there will be more. The pace has probably been slower than what people have thought. But you could also see quite frankly organic growth for the more competitive firms pick up at the expense of smaller firms, quite frankly.

That’s fair and helpful color. Thanks, Marty.

Thank you.

Thank you. Our next question is from Mr. Bill Katz from Citigroup. Sir, your line is open. You may begin.

Okay. Thanks very much. I did join a few minutes late. It’s been a busy morning, so I apologize if this is redundant. Loren, I was wondering if you could tie together your commentary that you’re running a little bit ahead on the optimization with the pro forma impact of the margin contribution from Guggenheim investment spend MiFID and all that. How are you sort of thinking about the incremental margin both for '18 and '19 versus where we were at this time last quarter?

Good question, Bill. So we certainly had indicated on the last call that the Guggenheim impact itself was probably going to add 10 percentage points to our incremental margin. That’s a very positive thing to the original guidance that we provided, which was in that 40% to 50% range. We’ve also benefited from stronger markets, which has been helpful. Foreign exchange has generally been a positive impact as well. The MiFID II quantification, as I mentioned, is a moving target. And so at this point, I think we’d be hesitant to sort of give real numbers around that. If we gave you the worst case, it would be probably a reasonable offset to some of the good things we were just talking about. We’re hopeful that’s not going to be that case. So our thought is that we’d be in a better position as we get into year-end and maybe the next call or the one after that to provide much more solid guidance around incremental margins. But I’d say the overall trend to incremental margin has been more positive than negative for sure relative to that original guidance.

Okay. That’s helpful. And then just a little surprised by your flow commentary for the quarter. Could you maybe peel that back a little bit and talk a little bit about maybe active versus passive and maybe go around the regions in a little more depth? Some of your peers are seeing a little more robustness and just given your product mix and your repositioning, I would have thought you’d be a little bit better, all else being equal. So where are you seeing the weakness versus some of the strength?

You’re talking about October, right?

Correct. I thought I heard flat quarter-to-date.

Okay, it’s a partial month. So again, I wouldn’t read too much into and I was hesitant to even talk about it. But I knew if I didn’t, people would misread it. We’ve actually seen very good strength into Europe. I think about 1.2 billion of flows just coming into EMEA on a long-term basis. We’ve also seen very solid long-term flows into Asia Pac. So again, where is it coming in Europe, it’s the same elements that have been flowing before well across a wide range Pan-European equity, corporate bond, GTR, all very, very helpful. Institutional pipeline in Europe is the highest it’s been I think ever. And so they’ve had really great success. And so we think that is an accelerating positive thing. Asia again had a little bit of a slow down as we mentioned earlier, but they seem to be sort of recovering from that into the third quarter. The U.S. in particular, we’re just a little bit lumpy. So I talked about sub-advised. So there was one sub-advised termination that was kind of lumpy as one sub-advised client went to index, as we’ve seen that happen a few times. So that’s sort of episodic, not a trend, I would say. And then quant, we’ve seen some outflow on quant in the U.S. but that’s been offset by quant inflows elsewhere. So again, I think it’s really just too soon a timeframe to really draw a conclusion about anything. And so as I said, we’re pretty optimistic about the flow picture into Q4.

Okay. Thank you, guys.

Thank you. Our next question is from Mr. Craig Siegenthaler from Credit Suisse. Sir, your line is open.

Thanks. Good morning.

Good morning, Craig.

You guys have completed two acquisitions in a pretty short period of time. I’m just wondering, are you still looking at building scale in the ETF space via M&A? And are there other capabilities you’d like to add, maybe in the technology or alternative space?

As I just mentioned a minute ago, we feel that the combination of both Source and Guggenheim put us in a very, very strong spot and we don’t see many gaps. And as Dan talked about, if you look at the number of ETFs that we have and really important the long-term track record really position us quite uniquely. And so the platform is very strong, very robust. And our ability to product development off that in response to client needs is very strong, and it does go back to this heritage of 40 years of factor capability and applying that to some of the work that Dan and the team does in product development. So we don’t see much of a need to continue to participate in that market. If something obvious comes up, we pay attention as we always do, but it doesn’t seem likely from that perspective. I did mention around technology like earlier. Jemstep continues to be – the demand for the Jemstep product is very, very strong. We will start to see probably impact from the middle of next year because they’re long-duration installations as all applications are. It will be very, very supportive of our solutions business, our model business. And as I’ve said, right now, we would estimate that latter part of next year, we’ll probably be working with 20,000 financial advisers in the United States that we have not before. So that’s the early indication of what’s possible in time. And we continue to invest strongly in technology, things like predictive analytics and big data for our research teams, et cetera, et cetera. So we look at that as more continued evolution of use of technology than anything else. Its core to what we do and we’ll continue to do that. Can I just add Dan? Would you add anything to that?

No, Marty. I think that’s absolutely right.

Okay.

Thanks, Marty. And then just as a follow up on pricing, there really hasn’t been much fee pressure across your business as you look at the fee rate this year. And I think a lot of us were concerned that it could be a difficult year for fees, given the DOL rule. How do you think about product pricing? When would you consider reducing pricing? And have you been tweaking breakpoints to some of your products over the last year?

Yes. Look, it all starts by why is there not pressure because we’re priced fairly. And I think that’s really the way to think about it. If you are delivering the results that you would expect at a competitive rate, you’re going to do well. And I think the way to think about it is just sort of imagine a continuum of investment capabilities and at one end, you have cap-weighted indexes. You don’t get very much formed. They’re an important tool in the toolbox, but you don’t pay much. By definition, there’s no alpha generation. If you go to actives, you’re going to expect more alpha in outperformance. The fees will follow that and they would be higher than that end. In between the two would be factor and at the highest in alternatives. And so it makes sense that the more alpha you expect, the more you would be willing to pay a fair fee and that’s how we think about pricing as an institution. And I think it resonates with clients. But it is just clarity of what clients are trying to expect and any firm’s ability to meet that performance result over a market cycle, which is very important.

Thank you, guys. Thanks, Marty.

Thank you. Our next question is from Mr. Glenn Schorr from Evercore ISI. Sir, your line is open.

Thanks.

Hi, Glenn.

Hello. A further question on the Guggenheim side. So I get and like the BulletShares, the pure style of the current ETFs and a lot of those products. And it’s just a question on pricing on the Equal Weight side. Plenty of people that feel like it’s not a race to actually zero, but that there’s constant price pressure on that side. So I’m just curious on how you get comfortable with the recent price adjustment as the right price for now. And I’ll ask a follow-up, if I could.

Dan, you want to take that?

Yes, sure. Just to state upfront that obviously the two businesses as they’re under regulatory review continue to operate separately. So kind of any pricing discussion adjustment on the Guggenheim side, that’s really done by – there’s executives in their fund board. So we’re not involved in that at this stage. But that said, if you look since the price adjustment was made in our SP, which is that ETF you mentioned, there has been a positive response in net inflows into the product. But I’d say overall, if you’re thinking about “pricing,” we feel very strongly that you have to think about pricing in a broader context. Number one, outside of pricing is performance. Particularly more sophisticated, if you will, institutionalize clients always start with performance. And while indexes or ETFs may sound similar, quite openly, the actual difference is that in index construction methodology, rebalancing can lead to substantial differences. So as we always do with clients, we start with performance first. Secondly then when you get to cost, there are a couple of different areas of cost. First, move really to the entry and exit cost of an ETF i.e. liquidity and being able to work with our sell-side partners to make sure there’s a lot of liquidity. And I think that’s where the first mover advantage, the scale, everything we’ve emphasized is crucial because you really – it take time to build the ecosystem. And as the AUM grows, the liquidity becomes really enhanced. When I think third, the other area of cost is obviously the annual management fee. And I think this is where – not just within ETFs but across Invesco, we’re very diligent, always monitoring trends and making adjustments where possible. So I think looking at in total, that’s where the ability for us with especially those clients who look at asset allocation, look at solution, those diversification benefits we have in the products around performance and risk, this is where we’re excited. And then I think we also feel we’re going to bring a little bit of enhancement we hope around capital markets and the liquidity, and then clearly we’ll continue to monitor pricing. But right now we think we’re in a good place and we’re obviously excited, especially with the adjustment in the Equal Weight S&P 500 to really see a positive response from clients thus far.

I appreciate that. Another quickie on the equity side, it could be a super short timeframe, but if I did the math right, it feels like equities might have flipped back into inflows in September for the first time in a long time. I don’t know if that’s the great performance at equity income. I don’t know if it’s something we can count on, but curious your thoughts on the equity side.

Glenn, I think you’re probably picking up something that we are seeing, which is certainly a continued interest in a fair amount of our equity. If you’re talking about in the U.S., it’s probably going to be more on the PowerShares side than necessarily our value capability. And then in Europe, absolutely the case and we’re also seeing that in Asia as well. So I think the interest in equity seem a little bit stronger globally and perhaps most in terms of the active most strong outside the U.S.

Glenn, I would just add. You’re hitting on a specific topic, but there’s something broader here. So it has been a very unique period of time since 2009, and we feel very strongly that this is a very important role for active investment management. Clients cannot hit the return objectives and manage their risk without the use of active, and it’s really a combination of passive, active and alternative. That’s how you create the best portfolios in these markets when it starts to turn like that, hopefully people will pay attention to it.

All right. Thanks.

Thank you. Our next question is from Mr. Michael Carrier from Bank of America Merrill Lynch. Sir, your line is open.

Thanks, guys. Good morning. When I look at Asia and Europe, you pretty consistently have had healthy growth in those markets. In the U.S. obviously, it’s been more challenging. When I look out over the next couple of years given what you’re doing on the ETF side, on the technology side, it seems like the retail part of the market you should have more momentum. So I just wanted to kind of get your take on how much can that offset some of the core industry pressures that we’re seeing going from active to passive. And then in the institutional side, it seems like it’s still been healthy, a little bit spotty from time to time but just where you’re seeing demand from the U.S. institutions across the product offering?

Yes. So, look, the U.S. is probably – market is probably going through the most changes in the retail market in particular. As providers are changing how they’re reforming their businesses, it is a period of change. I think the important thing is the assets to manage are not going to go away. And so it’s a transition period. And it is those firms, we believe we’re one, that have the broad range of capabilities, good performing products and this range of active-passive alternatives, those are the winners. And so we think we are positioned very, very well. What are some of the headwinds that Loren has talked about? So UITs and some of the movements with the insurance company and the sub-advised, those are headwinds in, what do you want to call it, the intermediate term. But we look out in the next year and a half or so, some very strong things are heading our way. And again, we’ve been talking about them. The solutions capability is real. It’s meaningful for us. We’re uniquely placed to be able to do that. Jemstep is an important tool for our distribution partners, is a very important tool along the way. And as Loren started to mention, the institutional capability region by region is probably as strong as it’s ever been and that would include the U.S. The U.S. is probably behind Asia and Europe in its development for us. We feel very good about the team there. And the same thing we’re seeing in one but not funded is growing quite materially. So we look at the U.S. as a very important part of our business and the opportunities are material, and we think we’re managing to where we see the client needs are.

Yes. And in terms of the U.S. clients, I think it’s around the normal things we’ve seen in the past. Real estate would be a big continued draw. We certainly see continued interest in some of our fixed income capabilities including stable value, multi-asset capabilities as well and then increasingly GTR-type offering has been of interest. So it’s certainly a third – at least a minimum, a third of our pipeline is coming from the U.S. and the rest from Europe and Asia.

Okay. And then just – Loren, just a quick follow up on the P&L. So just anything – it seemed like the expense lines were fairly normal, ex-comp because of performance fees and then just the performance fee outlook. I guess just given which products have performance fees and given how strong the backdrop’s been, any indication just going forward in terms of what to expect or any nuances whether it’s fourth quarter or going into '18.

Mike, you know how good I am at forecasting performance fees. So yes, I think the performance has been quite good on the alternative side. The idea that we may continue to see some good performance fees into 2018 is something we would certainly support and offer up. In terms of the actual guidance and when they hit, very, very hard for us to really nail that down. I think obviously this one very large performance fee coming from the mortgage recovery fund I’d say is a little bit unique and unusual and isn’t something that I would necessarily say is going to happen again with certainty into 2018. But real estate bank loans continue to offer performance fees, as does some of the private equity offerings that we have as well. So I think the level of performance fees maybe ex what we’ve seen in this particular mortgage recovery is certainly something you should build into the thinking for next year. And into Q4, again, I just don’t have a line of sight that I can offer with great certainty other than sort of – I think we said 5 million to 7 million is kind of the guidance. And I know it’s not helpful, but that’s what I would offer again for Q4.

And I just might come back to your bigger questions and put in context of beyond a quarter. If you go back – as a firm, we’ve been in net inflows since 2009 in total. And if you look at the strength of the organization by – if you look at flows by region, it has always rotated. 2009 UK was a leader; '10, '11, '12, the U.S. was the leader; '14, '15 Europe was; last year, Asia; back to Europe. It’s a fundamental strength of the firm and you’re starting to see it now with the organic growth rate above 3. And again if the market sort of – without a shock to the market, we anticipate – we see it growing and so you’re seeing evidence of it this quarter.

That’s helpful. All right, thanks a lot.

Thank you, Michael.

Thank you. Our next question is from Mr. Ken Worthington from JPMorgan. Sir, your line is open.

Hi. Good morning. My question’s on ETF distribution. So can you talk about your expectations for how ETF distribution evolves and maybe how access to ETF distribution evolves, particularly in the U.S. and Europe? It’s been sort of interesting to see Vanguard eliminated from a number of platforms, based seemly due to its unwillingness to pay platform fees. So talk about the evolution of payment for shelf space in ETFs, either directly or indirectly in the context of DOL rules, RDR, MiFID, so a lot of rule changes. And is there any extent to which having an active platform really helps secure or maybe even subsidizes distribution for ETFs. Thanks.

Let me take the last part of the question and then maybe Dan can pick up and Loren. So our basic view has not changed, right? We really believe strongly what are clients looking for and think of intermediary clients, whether it be a distribution platform or a consultant or a large institution around the world. A firm that has a depth of capabilities is much more attractive to those firms because it’s easier to work with firms that way and the more you can get from firms like ourselves, whether it be thought leadership or a client experience that’s differentiated. And so where that takes you is there’s no question in my mind that as the business evolves, those firms that have a range of active, passive and alternatives are uniquely placed, and it does reinforce the ongoing success – distribution success of an organization. But Dan, do you want to pick up on your thoughts maybe on the ETF revolving landscape distribution?

Yes. Thank you very much, Marty. I think it’s a great question. Let me just start from the top. I think if you look at kind of global regulations whether it’s DOL, MiFID II in Europe, you previously had retail distribution review in the UK, I think all of those have clearly been net positives for ETFs for different reasons. As you look at distribution, I think it’s really important to kind of separate out the U.S. market from, say, Europe and EMEA. In particular, the U.S. is heavily and always has been dominated by the wealth management intermediary space, particularly areas like RIAs. But what we’ve now seen is with DOL in particular in the U.S., the stronger focus by many segments like the Wirehouses, for example, as the focus on more advisory accounts, fee-based moving there, and I think that’s where Invesco’s long-standing strength covering those clients, those home offices and having access, I think the ability to educate, position our products in those areas as more advisory business grows, not just wires but IBDs and other areas that we see. That’s a huge advantage to be able to leverage those long-term relationships. I think overall in the U.S, we continue to see, as Marty said, the portfolio of model builders and others in this new fee-based world really focused on combining the best of active, passive and alternatives. So there’s a huge amount to leverage and I think that we’re obviously in the midst of adapting and working on that way at Invesco. If you move to Europe, Europe is very different. Europe, I would estimate probably has over 80% of the current demand for ETFs in institutional space. Now by definition, we would include discretionary portfolios to private banks in that institutional definition, but that’s why scale is absolutely crucial in Europe. You have yet to see broad-based retail demand emerge for ETFs in Europe. I think MiFID II, quite clearly, with a lot of the focus on transparency of fees, but particularly for ETFs. ETFs were actually omitted from the original MiFID. By including ETFs, this is actually a big advantage. You’re actually going to have – the requirement now for market makers to have pre and post-trade reporting, for example, of ETFs. So a lot more transparency around the liquidity, which is an important building block step to eventually getting bigger retail demand in Europe. So we think that’s positive, but I think that’s where the crucial step for us to buy Source to really get the bigger platform, because these bigger institutional investors in Europe, they have concentration limits normally. They need to have bigger ETFs, bigger platform, bigger scale before they can engage with the provider. So hopefully that helps with that overview.

Okay, great. Thank you very much.

Thank you. Our next question is from Mr. Alex Blostein from Goldman Sachs. Sir, your line is open.

Great. Hi. Good morning, everybody. Marty, question for you guys around Jemstep. It seems like it remains a pretty big source of investments for you guys. You increased headcount there substantially, and Guggenheim I guess is supposed to further kind of enhance growth profile there. Can you help us better understand and really kind of track the progress you guys are making in that platform? I heard you say earlier 20,000 FAs and that’s obviously a lot of access but anything with respect to assets that those FAs have that could come onto the platform, what percentage of those you hope to get Invesco product in and where that could go sort of over time, and when the platform is ultimately supposed to break profitability? It seems like an important element here without a ton of color yet.

We’ve not colored it yet on purpose. So as we’re moving through this from the standpoint of – again, the demand is very high. We are taking on clients. We, as an organization, do a much better job of telling you what the answers are as opposed to predicting, but here’s what’s happening. So you’re seeing a pipeline that is growing and very strong and the challenge is the lead time. It’s application install. So I think six months to nine months for a large institution, that’s the tail. So you have to invest to get – to have the application come on line. It is open platform and can use a range of capabilities, ETFs for mutual funds. So it is a very attractive part of a digital strategy for a number of firms. And secondarily, it will be default models in those portfolios. And our – what we are seeing is more likely than not if you think of the relative market share of a firm like Invesco’s model that a existing platform versus what could happen out of Jemstep, you could see materially different asset levels or market share of models on those portfolios. So we are anticipating an Investor Day first part of next year that we will give a much deeper communication of the strategy and where we are.

Got it. Thanks for that. And then just wondering if you guys could give a bit of an update on GTR and sort of where things stand there? Obviously it’s been a big growth initiative that could drive outflows for you guys outside the U.S. I think in the U.S., things have been a little bit slower. I think the product has a three-year track record right now, but I don’t think it’s been a big contributor to flows just yet. So maybe just speak to the reception and different channels to the product, what’s sort of been the hurdles and what do you guys need to see to accelerate growth of GTR in the U.S.? Thanks.

Yes, we’ve seen GTR really grow much more rapidly outside the U.S. than in the U.S. right now. Although I’d say on the institutional side it’s beginning to get rated and so we’re actually quite hopeful that we’re going to see growth maybe on the institutional side even faster than the retail side in the U.S. The take on has been extremely robust, as you know, over the last year and plus. We are in the midst of launching new product GTI, which is the income-oriented flavor of GTR in the UK and that’s a fair amount of marketing is going to be put behind that effort in Q4, and we’d expect to see some takeoff if the performance has been good. Asia has really been the door that has opened much wider now in terms of using GTR and we’re seeing some big wins in places like Australia and China in terms of the use of GTR. On the retail side, I think the story around GTR is still excellent, but it’s not probably as well known or understood as it is in the UK. And I think generally, we’re seeing the product get through kind of the gatekeepers and get a better understanding of that, but it’s still been slow, which has generally been the case I’d say for alternative offerings in retail that we’ve seen sort of a slowdown of the take-on of the alternative retail product. And so I think that’s somewhat consistent with an overall theme in the U.S. as opposed to a GTR-specific story.

And I think the reason for that is by twofold. Some of the headwinds would’ve been – what is the derivatives’ role, what was the impact on a product like that. So the platforms were very cautious and slow to take it on. That was one of the headwinds. And then secondarily most of the platforms are focused on product rationalization at the moment, not product additions. And so again two basic headwinds that are somewhat intertwined there. But again, we think it’s a very, very strong good capability and we anticipate in time we’ll continue to have success in the United States too.

Makes sense, great. Thanks, guys.

Thank you. Our next question is from Mr. Dan Fannon from Jefferies. Sir your line is open.

Thanks. Can you talk about the early traction with Source and kind of what they contributed to flows? I know it was a link close for partial quarter. And then I guess from an integration perspective, can you talk about what you’re doing with distribution with the three brands now and how we should think about the sales effort? How that might change?

Dan, do you want me to – Draper, do you want me to handle the flow part and then you can talk a little bit on the other aspect?

Yes, that’s great.

Okay. So in terms of flows, it’s been good, probably not off the charts good. I think they contributed about 0.5 billion in the last two months, which is about a 12% organic growth rate. I think there has been some degree of slowdown just as the integration has been going forward and the repositioning of the brand and so forth is being contemplated. There are a number of new product launches that are in the pipeline, which I think will help really sort of reboot the growth and the efforts there. So there’s a lot of work that’s being done right now to sort of improve the competitive positioning of the products and the lineup and really sort of accelerate the growth opportunity around Source. And certainly, some of the synergies that we haven’t explicitly been talking about have taken place. And so I think in terms of the profitability of the business, as we originally said it wasn’t really making money, is beginning to sort of all come into play in a positive way. So Dan, I don’t know if you want to get a little more explicit about kind of some of the things that are happening around repositioning of the brand overall on a global basis.

Yes. So I think just to state upfront, I think clearly the intention, Invesco has one ETF business and I think it’s going to be reflected through one brand. Guggenheim, for example, they’re clearly – Guggenheim Asset Management will remain in mutual funds. UIT is another area. So that’s probably the most apparent. So they’re clearly keeping that name for the overall business. So you’ll probably see a little bit more of a rapid transition. But again, we have kind of a longer lead time to closing into next year on that. The Source, obviously a strong brand within this space, but again we’re in the middle of transitioning that into 2018. They’re currently co-branded having Source and PowerShares. But again, you’ll see a single brand emerge from that in 2018. I think, overall, looking at how Source, the integration, and Source actually had quite a strong pipeline even going into the sales process. So they continue to execute well, as Loren mentioned, net inflows since we announced and closed the deal on August 18, and those flows are fairly well diversified, commodities have been strong for them this year, picking up equities. What we really have been focused on is on product development. That’s where the product development pipeline in Europe had slowed a bit during the sales process with Source. And particularly looking at fixed income, and we also launched our first joint – or not joint, but the first product since the close a couple of weeks ago in preferreds. There was no preferred offering and we were able to take kind of our U.S. capability and launch it in the usage fund in Europe, and that’s gotten off to a really good start. I think you’ll see us continue to fill up the new product pipeline with fixed income being a headline. So I think really continuing the momentum that Source has built with clients in Europe, I think getting more products to those clients is a big priority and then just continual integration in larger Invesco in EMEA.

Great. That’s helpful. And then Loren, can you – just looking at the balance sheet and thinking about capital return from a buyback perspective, as you look into 2018, how should we think about capital return?

Dan, thanks for asking that question. Again, I think as we described related to the Guggenheim acquisition and similar to what we’ve done with respect to financing the Source acquisition, we’ve curtailed the buyback program as we are building up cash right now in order to largely pay for the acquisition through the use of our credit facility and also through spare cash. So our thought is through the course of 2018, we’re going to curtail the buyback – continue to curtail the buyback, still being opportunistic if certain situations present themselves. But largely, we want to make sure that our leverage ratios are going to be, by the end of 2018, in line with where they are pre-Guggenheim acquisition. So I would say, generally, put in minimal, if any, in terms of buyback expectations through the course of 2018 until those leverage ratios get back in line.

Great. Thank you.

Thank you. Our next question is from Mr. Brian Bedell from Deutsche Bank. Sir, your line is open.

Great. Thanks very much. A question for Loren in the short term and then a longer one for Marty. Just on the fourth quarter, Loren, I might have missed some of these. But did you give – I don’t know if you gave color on the non-comp expense outlook for 4Q? And then also what your overall fee – your core free rate, ex-performance fees, would be with a full quarter of Source? And then also just on – I appreciate the 1 billion of dividend inclusion into the total flows, but fourth quarter can be seasonally higher in that. I don’t know if you have an --

All right. So the last part of your question I didn’t quite get the full thing. Let me get the first parts and then you can just clarify the last one. So in terms of the guidance, I think we’re roughly in line with what we provided before. The only sort of deviation in guidance this quarter relative to last quarter was with respect to compensation, which was really due to the some of the outsized performance fees. So I think we originally said around 370, and so that’s roughly kind of where we would expect. All the other elements are in line with what we prior guided, which again was, if you need it was, adjusted marketing was 36 to 38. We provided guidance on the adjusted property, office and tech of 92 to 94 and then G&A was in the range of 70 to 73. So all that is kind of roughly in line, barring some FX and other things, right, which obviously have a little bit of a inflation factor on those levels. So that was kind of your first question. Could you just make sure I cover the other two?

Just the – for fee rate now that we have the full quarter of Source for the fourth quarter?

Yes. So I think we had said the fee rate was going to – in the second half was going to be largely in line with the second quarter. Obviously, it’s slightly off. There was more money market and some other sort of passive lower fee product growth coming into play. So I think sort of in line with current levels ex-performance fees is probably the right guidance for now.

Is it the 41.9 basis point?

Yes, exactly.

Okay. And then longer-term question for Marty. I guess with the Precidian application and with the SEC sort of getting – moving a little bit closer, I think Legg commented last night they were a little bit optimistic on that. Always tough to predict what the regulators are going to do. But as – I guess broader thinking out loud a little bit but more broader, Marty, what’s your view on active non-transparent ETFs? And if that does get approved – I think PowerShares is included in that application if I’m not mistaken. But if that does get approved, obviously a different angle than the factor-based strategy that you’ve embarked upon. But what would your view be on the potential growth for nontransparent active ETFs longer term for the industry?

Yes, I’ll make a comment, but then I’m going to ask Dan because Dan spent more time on it. Look, it’s hard to predict. At one level, you could say – you can imagine a take-up there. I just point to our experience where the active ETFs that we launched now – I’m going to lose track of time, maybe eight years ago, there is no traction behind them at all. And so all we can point to is our experience historically. But Dan, why don’t you comment?

Thanks, Marty. So yes, we know Precidian very well. We had – we were included in an earlier filing. As you are aware, the SEC has asked them previously to kind of remove filings. So there’s been a couple of swings, if you will, at this in the past. We continue to monitor closely and we’ll be – remain engaged in those discussions. But I don’t think we feel there’s anything that’s going to happen urgently in the development of that space. But clearly, I think – the ability for Invesco to participate in that if it evolves. One thing I would point out though, that if you do see nontransparent active evolve, you’re still going to have the same kind of financial [ph] situation you have with active today where particularly some strategies are going to be capacity-constrained, because it’s really being driven – or seeking out for around security selection. So I think that’s where you see the predominance of ETFs really coming more from an asset allocation and particularly the larger products which are much more scalable. So absolutely could there be demand, should we, if you will, technology be approved? Yes, and we’d clearly be participating in that. But I think, again, the big growth in ETFs and the large products that we see continue to be much more asset allocation-focused. But quite frankly, the transparency is much more of a requirement and the ability to go out and build more scalable products, that’s the core of the range. Again, we’ll continue to monitor and engage. But again, at this stage we don’t really see the approval being imminent really in the short term. But again, we’ll remain engaged and I think adjust our business model, if necessary. One thing I would say though is away from just the nontransparent active, we do see as we mentioned in the Guggenheim transactions, self indexing becoming a bigger part of our business. As Marty mentioned, we do active transparent. We obviously work with leading third parties and I think really for us to bring forward the self indexing piece we think is probably a more immediate growth opportunity that we’re excited about.

Okay, that’s great color. Thank you.

Thank you. Our next question is from Mr. Chris Shutler from William Blair. Sir, your line is open.

Hi, guys. Two questions. First on the equal weighted ETFs at Guggenheim. Can you give us a sense of what percentage of those assets today are in the retail or adviser channel relative to institutional?

Dan, do you know that?

Yes. I can’t give you a specific number, but I would say a high – a very high percentage is going to be in what we’d call the wealth management intermediary space, particularly in the hands of RIAs and some of the other platforms, home offices, what have you. But a very high percentage is retail today.

Okay. And then secondly, a different question. On the UK equity franchise, maybe just talk about – they have great long-term performance but the one and three-year numbers are challenged. What are you seeing there from a flow standpoint on retail and institutional? I think it’s mainly a retail franchise, but just give us an update there. Thanks.

Chris, it’s actually quite benign. The flow picture is not – we haven’t seen accelerated outflows at all. Sales may have come down just a bit. But overall, the levels of flows in that product, in those products are as good as they’ve ever been in terms of history. So I think people understand the rationale. Mark Barnett and his team have described their position and why they believe some of the holdings that they have are smart and are going to ultimately pan out. And so they’ve been through periods of underperformance in the past and have gone through that with significant outperformance following it. So I think people are being patient and not sort of reacting on a short-term basis.

Okay. Thanks, guys.

Thank you. Our next one is from Mr. Michael Cyprys with Morgan Stanley. Sir, your line is open.

Hi. Good morning. Thanks for taking the question. Just wanted to circle back on some of the investments that you’re making in the business, in particular on the institutional side if you could just update us on that front and how you see that business evolving over the next couple of years in terms of your positioning and some of the initiatives that you’re putting in place?

Yes, so a little bit of a repeat. So the way that we look at the business is, first of all, you have to have a set of capabilities that the institutional market wants. And so over the last decade, that has developed very, very strongly; a lot in the alternative area, a lot in the fixed income area, strong performance, strong reputations. So that’s the first critical building block of the whole thing. Now with the leaders that we have in place in each of the three regions, I think they’re some of the strongest leaders – they are absolutely the strongest leaders we’ve ever had and I’d say they’re some of the most talented people in the industry. And as Loren had spoke of, the won but not funded pipeline globally has really never been higher and it continues to grow, so I would use that as a proof point. We would say that we’re not where we want to be or need to be, so we see it as a rapidly growing part of our business and it’s beyond an aspiration, it’s actually happening right now and I think we’ll look back in three years from now and see if it would have been an important contributor to our success as an organization.

Okay. Maybe just circling back on performance fees outside of private equity and outside of real estate and those sorts of alternative strategies, can you just remind us how much AUM is subject to performance I guess in some of your more traditional strategies and how that’s changed and evolved over the past couple of years? And then if you were to kind of look out over the next couple of years from here, how do you see that evolving, in particular with asset owners we’re hearing seeking more performance fee structures and better alignments. Just curious and any color you could share on that front.

We don’t have a large – if you look at percentage of assets, not very large at all. And this topic of performance fees, there are vehicles where it makes sense. There are others where it does not. You talk about alignment of interests and some of the things that are emerging, I think they do not align interests really at all. I’d get back to my comment earlier. I think what you really need to have a fair competitive fee and what you really want to do is hold the manager accountable to their investment philosophy and process and measure them over a period of time. The issue with performance fees is that – how does the misalignment come, because they are based on various measures that are based on where by calendar quarter or performing against an index or a benchmark and it almost always goes counter to what you want the portfolio manager to do and what the organization to do. And the risk of the investment organizations, you would hope not, but making bad decisions because of the economics being so difficult in the downturn really I think is quite dangerous, personally.

In terms of the trend, I don’t think we’re seeing a significant trend one way or the other in terms of use of performance fees. Certainly on the retail side, not. I think on the institutional side as we continue to build out our capabilities, it’s probably growing in line with our overall institutional business. So we may see more performance fees just generally as we become more institutionally-oriented. But I don’t think it’s something that has a philosophy where sort of saying let’s deliver more performance.

Let me be clear. I want to clarify the point that Loren is on. There are vehicles or strategies where it makes sense and – whether it be in the number of the alternatives, in private equity, in real estate, it makes sense. You get the alignment. It makes a lot of sense. We do that. It makes sense, very supportive of it. To me it’s this fulcrum fee notion that tends to happen in the retail environment that is really countercyclical typically to what you want to have happen. So thanks for the point there.

Thank you.

Thank you. Our next question is from Mr. Kenneth Lee from RBC Capital Markets. Sir, your line is open.

Thanks for taking my question. Just want to focus on the Guggenheim ETF business. From the earlier comments, it sounds like the business is mainly focused on the retail side. Maybe tell us more about the opportunity for expansion to institutional customers? What would need to be done before you can start getting traction on that side?

Dan, will you take that?

Yes, sure. So I think just looking at kind of legacy strength and focus on distribution, I think that’s – at Guggenheim, that’s where you’ve seen a lot of the strength and their success thus far. I think as Marty and Loren both have mentioned, I think the growing strength of our institutional business at Invesco I think just plays into that bigger, wider distribution opportunity we have taking this business in-house. So I think frankly getting more education, I think particularly in fixed income. So if you look at these BulletShares products, having a final maturity date on the ETF is very unique. Having an open-ended fund but with a final maturity, that allows for things such as asset liability matching, which clearly plays very strongly into the insurance space, for example. So I really kind of hope that we’d be able to particularly get in front of some of Invesco’s strong insurance relationships with the BulletShares existing products but perhaps even more importantly, building new products for some of those. And I don’t want to limit that. I think the BulletShare also would have interest, particularly with endowments, smaller pensions, other areas in institutional. So that’s why we’re really keen to look for additional kind of synergies through that. I do think also if you look at the way that many institutions have been looking at factors really for decades or longer for us to really introduce some of this factor exposure in the ETF wrapper. So the wrapper may be new to them, but helping, again educating with white papers, research, overall thought leadership to institutional clients we think is pretty exciting. But I’d definitely put my finger on the fixed income BulletShares as the area that we probably start with expanding and leveraging the institutional capabilities at Invesco.

Great. And just a follow-up question on ETF sales in Europe. It sounds as if post-MiFID II, there could be some material pickup in ETF retail sales due to the increased transparency. Would that be a fair statement or are there still some additional structural changes that are needed in the European market before we see more rapid adoption of ETFs? Thanks.

Dan?

Yes. So I think our view overall if you look at growth trends, we believe that overall AUM growth in Europe is probably seven to maybe ten years behind where the U.S. was in that growth curve, but obviously growing quite rapidly. As we have mentioned, broad-based retail demand is not yet present. I think with the MiFID II impact, we do think medium to long term, it will be significant, and ETFs will be a beneficiary. However, short term, if you look at – there was a regulatory change in 2013 in the United Kingdom, so retail distribution review had an impact, very similar, with transparency, eliminating conflicts of interest, for example, in certain product areas. ETFs did get a bit of a boost but it was fairly modest. I think it continues to grow. I think our expectation therefore for MiFID II is that this is a crucial cornerstone change I think particularly improving the liquidity. On-screen liquidity of ETFs will hopefully happen sooner under MiFID II. As I mentioned, there were no requirements for market makers in Europe to put up pre and post-trade reporting. So those indications are really important to encourage liquidity. So I think if you get liquidity moving earlier, then I think you’ll get more confidence, more visibility for ETFs with retail investors and their advisers. So just to manage expectations, we do think it’s a medium to long term, very positive. But short term, based on kind of the RDR UK experience, it will probably be modest out of the gate, but we’ll continue to monitor. But I think this is where, again, having the scale platform that has been built largely through institutional demand in Europe that Source brings, that’s really where, when the retail demand does come, they’re going to be looking for scaled products, good liquidity with the track record. And that’s where everything that we’re doing now with the distribution business, ETF business in Europe is really crucial when that retail demand does come.

Great. Thank you very much.

Thank you. Our next question is from Mr. Chris Harris from Wells Fargo. Sir, your line is open.

Thanks. Hi, guys. Just a couple of follow-ups on Jemstep. So things are going well there. You highlighted that. Yet Jemstep isn’t the only platform of its kind, I don’t believe. So can you guys talk to us a little bit about what differentiates Jemstep, why an adviser would choose Jemstep over another offering? And then related to that, as the market evolves, do you guys envision advisers coalescing around just a few of these digital offerings, or do you expect the market to be a lot more fragmented than that?

So the characters that are unique to Jemstep, first of all, the digital technologies are being adopted quite broadly all throughout our industries in different ways. The robustness of the Jemstep infrastructure is unique. It was eight years in development and that really becomes, all of would know being in this industry, the piping in the industry is complicated and it’s necessary to be robust and strong. So that’s one. But really, it is the open architecture nature of it so – and it’s directed to advisers only. So it is not available direct to consumer. So there is no channel conflict. It is to support our clients’ business, and that’s very attractive. It also can use a range of vehicles, which is more unique, so ETFs, mutual funds and the like. Those are absent in most of the competing capability, and its ability to be embedded in an organization’s infrastructure is unique. So it’s not a black box. So those are some of the characteristics that make it unique. And so think of it as a – we’ve all been through it. You are installing in an application and we all know it’s hard work, it takes time. The notion that an organization would have more than one of these is hard to believe. And so there really is a first mover advantage to it and we think we’re in a very strong position and just the demand would suggest that. Coming back to a prior question of how big can it be and the like, it’s just a long tail. And we never put our chin out there to speculate about the possible impact, but it has all the makings of being a very, very strong contributor to the firm.

The one thing I would just add too, that really makes it even more unique is the fact that we’ve got this incredibly robust offerings around models and solutions that we can bring alongside it. So it’s just not a technology solution that is being offered, it’s actually – some of the most valuable part is the ability to tailor models to the clients’ needs at a very attractive price. And so I think when you add all those things in, in terms of the open architecture, the fact that we’re integrating this into people’s systems, and it’s not a black box, and we’ve got the models actually positions it almost in a way that is – does make it stand out as a unique offering.

Very good. Thank you.

Thank you. Our last question is from Mr. Robert Lee from KBW. Sir, your line is open.

Hi, everyone. Good morning. Thank you for taking my question. This is actually Andy McLaughlin in for Rob. I just had one quick question, a lot of mine have been asked already, but I appreciate the update you gave on the business optimization. Kind of how should we think about those balancing between needed investments going into next year and what line items in particular might we see the optimization in?

So I think, again, in terms of the guidance on the ultimate need for investment, I think we’ve already built-in into that guidance our need for investment. More savings helps offset some of the – or boosts the incremental margins. So that’s a positive thing in terms of the things that help improve our incremental margin outlook. We still think we’re in a situation as a firm and the industry that there’s so much change going on that the need and the criticality of investing behind some of these trends are key for success in the future. But again, there’s only so much you can actually invest in at once and do it well. So that’s kind of some context to thinking why generally the things that we’re talking about are helpful for our incremental margin story. In terms of – I’m sorry, the other question that you had was --

Just kind of where we might see --

…see the savings. Yes, so because of the – a large part of it has to do with outsourcing really in looking at moving expenses out of compensation and then moving them into that property, office, tech, which is where we have all the third-party payments for outsourced services. And so it would really be a movement into expenses, into that category off of comp.

Great. Thank you very much.

Thank you. I’d like to hand the floor back to our speakers.

On behalf of Loren and Dan and myself, just want to thank you very much for your time and interest and look forward to engaging in the future. Have a good rest of the day.

Thank you everybody.

Thanks.

Thank you. And that concludes today’s conference call, and thank you all for joining. You may now disconnect.