Invesco Ltd. (IVZ) Q4 2017 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 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 Fourth 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. Mr. Flanagan, you may begin.

Thank you very much and thank you for joining us everybody, and if you are so inclined, you can follow the presentation that's available on the web site. So I will spend a few minutes reviewing the full year results and the fourth quarter results of 2017, give an update on where we are with the two acquisitions that we are involved in and Loren will go into the financial results and we will open up to Q&A. So let me start by talking or highlighting our firm's operating results for the full year, and I am on page 4 if you are following along. So investment performance continued to be very strong throughout the year, and looking on the back, a very strong investment performance, really our movement to focus on outcome oriented Solutions contributed to long term net inflows at $11.5 billion during the year. Organic growth rate was 1.7%. I do want to highlight that 2017 represents the ninth consecutive year of positive long term net inflows from Invesco, and I will come back to that in a minute. But again, the combination of all these efforts, performance, the capabilities and delivery for clients resulted in achieving record earnings per share for Invesco of $2.70 per share, that's up 21% year-over-year. The adjusted operating margin was 39.4% for the year, up from 38.7%. We did return $472 million of dividends throughout 2017. So if you turn to page 5, this is where I want to come back to, the consistency and the diversity of our long term flows, which really is in the context of nine years of net inflows. So this chart on page 5 shows the relationship between organic growth rate and the variability of that growth. The vertical axis is the average organic growth rate over the prior five years through 2017 and it's the public company peers. The horizontal axis was a standard deviation of those flows and it reflects the sustainability or the variability of the organic growth rate. So if you look at Invesco against our peers, it's evident that the diversification is benefitting Invesco. Invesco has the lowest standard deviation of flows of the group, reflecting a high level of flow consistency, and additionally, we are just outside the top third of the average organic growth rates of that peer group, something that we absolutely intend to close. Having strong and diversified sets of offerings and assets under management really does put us in a position to better serve our clients. But as a business, it absolutely makes us strong, by not being overly reliant on any one geography -- any distribution channel or asset class. So again, diversification is good for portfolio, it's great for business, and this is not a concept anymore, this is proven in these results. We do believe that this diversification of the business does lead to better flow consistency and represents a strong opportunity for us to reach that targeted growth rate of -- organic growth rate of 3% to 5% in the near future. And lastly, I do want to point out, despite our continuous inflows and the low volatility of those flows, Invesco continues to sell at a discount versus peers. We do not believe that our current valuation fairly reflects our ability to grow organically. As measured by history, well, what we think is based on the future potential of Invesco. So now let me turn to page 6 and take a minute to talk about the achievements over the past year, all of which were intended to strengthen our ability to help our clients meet their needs and further advance our competitive position. Investment performance is very strong during the year, as I mentioned. 64% of our assets, beat peers on a three year basis and 75% on a five year basis. And this was really what was one of the principal drivers, good performance over the past nine years, that generated the flows that we talked about and in particular, in this year, the record earnings per share of $2.70. But throughout 2017, we continued to build our competitive range of active, passive and alternative capabilities, that is really important for future success of any money manager. We did complete the acquisition of Source and announced the acquisition of Guggenheim Investments ETF business, both of which I will talk about in just a minute. In 2017, we continued to expand our Solutions business, which brings together the full capabilities of the firm to provide outcomes for clients. And again, this is a really developing and very important thing that we are seeing, that clients are looking for, from money managers. One of the things that highlighted or closed within the year, as everybody knows, was Rhode Island, about 29 accounts. But also importantly, we are seeing success with Solutions and traction within the Wealth Management platform, and our different opportunities in different parts of the world, institutionally also. Regarding our digital advice platform, Jemstep, we announced partnerships with a number of large enterprises in 2017, and we are well down the implementation path with several of them, and the sales and onboarding pipeline continues to be very-very robust. In particular, we saw strong demand from banks, which view digital advice as a really important means for them to strengthen the relationship with their clients, as they build comprehensive Wealth Management services. Jemstep differentiates itself by offering advisor-powered technology, enhancing human touch, not replacing it, but enhancing them. So the partnership with our partners is really very-very important and it works quite well. We also continue to drive savings through our business optimization program, delivering more than $43 million in annual run rate savings, as of the end of 2017. We will use the savings to offset the investments in key initiatives that help us better meet client needs, strengthen our competitive position and help us grow the business, as we look to the future. A handful of the initiatives I might highlight, for example, we have improved factor-based investing, which would also improve things like self-indexing and complement to our ETF business, with a continued effort to advance our institutional business globally and expansion in China, all of which we have talked about in 2017, or we will get further updates in 2018. So now let me take a minute to update you where we are on our acquisitions in 2017. Again, both of which we are focusing on expanding and improving our global ETF platform. Both of which, we think enhance our competitive position in the upper growing ETF business, and the EMEA platform has been -- helped with the closure of Source and Guggenheim, also here in the United States. Our EMEA ETF business totaling $27.9 billion at the end of 2017, up from $26 billion at the time of acquisition. This really is a strong result of our efforts to successfully manage the integration post acquisition, which typically we did not see any of the integration issues that often happen with acquisitions. The EMEA acquisition expands the diversity of our ETFs across equity fixed income and commodities, smart beta and active ETFs. So really complementary to our platform. We did launch 10 new ETFs in the fourth quarter, the point being, we looked to take advantage of the platform in a very rapid fashion. The Guggenheim investment ETF business continued to expand assets under management and it had strong performance within that platform. We still intend to close in the second quarter of this year, and again the Guggenheim platform will add equity fixed income, alternative ETFs, again enhancing the range of capabilities we have and also will be able to create client directed proprietary indexes through self-indexing capabilities. Spending a minute on the fourth quarter results on slide 10; you will see again, the strong investment performance helped drive assets under management to $937 billion, up from $917 billion in the prior quarter. We had solid retail and institutional demand, led by the long term net inflows of $4.4 billion, and organic growth rate of 2.3% during the quarter. Adjusted operating income was $399 million as compared to $397 million in the prior quarter. The adjusted operating margin was up slightly to 40.7% and we had earnings per share of $0.73. We did return $119 million to shareholders through dividends during the quarter, and the quarterly dividend remains constant at $0.29 per share. Talking about performance, why don't we turn to flows on page 13; we saw solid demand for active and passive capabilities during the quarter. Gross sales and net inflows of active capabilities in the fourth quarter, building on solid demand in the prior quarter. You saw solid flows in a taxable fixed income, international equity firms and domestic equity. Turning to passive, we saw strong flows into domestic equity fixed income, international equity ETFs and as noted in the presentation, our ETF acquisition in EMEA is contributing to net flows and building up strong demand for ETFs in that region. We did see very strong retail and institutional demand during the quarter, as you will see on slide 14. As an example, this was a sixth consecutive quarter of net positive flows for EMEA, led by strong institutional and cross-border flows. And as you can imagine with markets continuing, ever rising as they have over the last number of months, demand for risk mitigation strategy remains strong, particularly amongst institutional investors and the pipeline of one, but not funded institutional mandate also remains very strong. We saw strong flows in the global targeted return funds, led by institutional investors, and we also saw solid flows in the Pan-European High Income as well as commodity in emerging market ETFs. So again, the flow picture continues to be quite robust and ever increasing, as we look to the future. Let me turn it over to Loren, so he can give you more specifics and then we will open up to Q&A.

Thanks a lot Marty. So quarter-over-quarter, we saw total AUM increase $20.1 billion or 2.2%. That was driven by market gains of $14.9 billion, long term net inflows of $4.4 billion, which included $5.9 billion of reinvested dividends and capital gains in the quarter. We saw a positive foreign exchange translation of $2.5 billion and inflows into non-management fee earning AUM of $1.6 billion. These factors were somewhat offset by outflows from institutional money market products of $3.3 billion. Our average AUM for the fourth quarter was $930.3 billion, that was up 4.4% versus the third quarter and our annualized long term organic growth rate in Q4 was 2.3% compared to 3% in the third quarter. Before turning to net revenue yield as I do typically, I wanted to provide one quick update on the change in this quarter and how long term inflows are being calculated. Beginning with the fourth quarter, our flows and AUM of our unit investment trusts or UITs as they are known, as well as changes in product leverage are no longer going to be classified as long term, and instead are being presented with -- alongside with the Invesco PowerShares QQQ product, categorized as flows and non-management fee earning AUM. Since none of these products earn management fees, somewhere to the QQQ, we thought it was more accurately reflecting the nature of long term flows in AUM to exclude these products from those flows going forward. All prior periods have been restated to allow for a consistent presentation and comparability. So now let me get to the net revenue yield; our net revenue yield came in at 43.2 basis points and our net revenue yield, excluding performance fees was 41.3 basis points, so that was a decrease of 0.6 basis points versus Q3. The impact of a full quarter of results for the acquired European ETF business reduced our yield by 0.5 basis points, and we also saw a non-recurring reduction in service and distribution revenues in the quarter. That decreased the yield by 0.2 basis points. These were then somewhat offset by a positive impact of foreign exchange and on mix, which added 0.1 basis points. So ultimately, the mix improvement that was anticipated when we provided the net revenue yield guidance last quarter, did not fully materialize, to the extent that we had expected, as we did see higher outflows from some of our U.S. retail equity products, as well as a somewhat modest slowdown in flows, versus what we were expecting from our cross-border fund range in the fourth quarter. Let me move to slide 17, just quickly; that provides our U.S. GAAP operating results for the quarter. As is customary, my comments today will focus exclusively on the variances related to our non-GAAP adjusted measures, which are found on page 18. So let's move to that page; so net revenues increased by $28.3 million or 2.9% quarter-over-quarter. Just over $10 billion, which includes a positive foreign exchange impact of $2.6 million. Within the net revenue number, you will see that adjusted investment management fees increased by $37.3 million or 3.4% to $1.12 billion. This primarily reflects higher average AUM for the quarter. Then we had adjusted service and distribution revenue, which decreased by $0.1 million compared to the third quarter. Adjusted performance fees came in at $43.3 million in Q4, and were primarily earned from real estate and bank loan products. Going into 2018, we want to give some guidance here. We do expect that performance fees will be up versus our prior guidance, and we would say roughly $10 million to $15 million per quarter. Our adjusted other revenues in the fourth quarter came in at $18.4 million, that was an increase of $1.7 million from the prior quarter, and that was primarily due to increased real estate transaction fees. Looking forward to 2018, again providing guidance here; we would expect other revenues to remain at a similar level to the fourth quarter, at around $16 million to $18 million per quarter, through the remainder of 2018. Next, dropping to the third party distribution service and advisory expense line item, which we net against gross revenues, that increased $10.6 million or 2.8%, which is consistent with the increased revenues derived from our related retail AUM. Before turning to expenses, let me just summarize all the revenue guidance I just provided in terms of yield. Looking into 2018, we would expect to see our net revenue yields, excluding performance fees decline modestly, by approximately 0.5 basis points year-over-year to about 41 basis points. This decline is driven by our full year results from the acquired European ETF business, as well as inclusion of the Guggenheim ETF assets, that we would expect beginning in the second quarter of 2018, and that will reduce yield by roughly 1.5 basis points. These impacts will be somewhat, but not fully offset, by the improving foreign exchange rate that we are seeing, as well as the sales mix trends that is occurring in the business. Let me then move on to expenses; so moving on to the slide, you will see that our adjusted operating expenses at $605.7 million, that increased by $26.5 million or 4.6%, relative to the Q3 foreign exchange, with an impact on our adjusted operating expenses of roughly $0.9 million during the quarter. Our adjusted employee compensation came in at $376.3 million, that's a decrease of $70.6 million or 2%. This is driven by lower variable compensation and the $5.5 million non-cash charge related to company's U.K. defined benefit plan, which we recognized in Q3. Looking ahead into 2018, again providing guidance here, we would expect compensation expense of roughly $410 million to $415 million per quarter. The increase in the first quarter reflects the seasonality of payroll taxes, as well as the one month impact from the base salary increases, as well as the impact of higher foreign exchange. The seasonal taxes should then drop off in Q2, but they would be offset by the costs for the Guggenheim ETF business, as well as variable compensation being reflected. So note that this guidance of course is based on flat markets, consistent to foreign exchange and as well as the revenue guidance that I provided earlier around fee rates. So our adjusted marketing, moving to that line; in Q4, increased by $9.7 million that's 32.2% higher or $39.8 million. That was related to marketing campaigns, related to the acquired ETF business, as well as the cross-border funds and normal seasonal increases in advertising, client events and other marketing costs. So looking forward to 2018, we would expect marketing expenses to come in at roughly $32 million per quarter. Dropping down to the adjusted property, office and technology line item, that came in at $100.8 million, that was an increase of $7.1 million or 7.6% over the third quarter. This reflects increased outsourced and administration costs associated with MiFID II reporting, as required, and other regulatory compliance costs, as well as higher software costs. Looking forward to 2018, we would expect property, office and technology expenses roughly in line with the fourth quarter levels, around $102 million to $104 million per quarter. And next, our adjusted G&A expenses came in somewhat higher than we had guided. As we know, $88.8 million, that was an increase of $17.3 million or 24.2% more than Q3. The fourth quarter reflected an increase of $9.3 million, primarily related to regulatory -- preparing for regulatory changes. There were business growth initiatives, which included product costs and legal, consulting, and professional services costs within that line item. These increased costs also led to increase overall of $1.7 million in irrecoverable taxes as compared to the third quarter. In terms of the guidance, while we would expect to see our G&A run rate decrease, going into 2018, this decrease will of course be partially offset by the costs incurred related to the MiFID II hard dollar payments that we have talked about in the past. But overall, the guidance is that quarterly rate should be around $80 million to $83 million per quarter for 2018. So based on the guidance provided today and assuming flat markets and foreign exchange, we believe our margin is certainly sustainable at current levels into 2018 and our incremental margin target for the year, remains at that 40% to 50% level, consistent with our prior guidance. Looking into 2019 and beyond; we certainly believe that our incremental margin could return to the 50% to 65% level consistent with our historical guidance. So back on to the current results, going down the page, I will just quickly finish this out. You will see that our adjusted non-operating income increased $2.2 million compared to Q3, driven by mark-to-market gains on seed money investments. And then moving to taxes, the firm's effective tax rate in the quarter came in at 26.8%. As expected our 2018 effective tax rate will be impacted by the Tax Cut and Jobs act which was enacted last month. Given our domicile in Bermuda, we have always paid tax under territorial system in the jurisdictions where our income is earned, but we will benefit from the lower U.S. tax rate on our U.S. generated earnings, and therefore, our current analysis guides us to an overall effective tax rate for Invesco, that is going to be between 20% to 21% for 2018. This estimated rate could be impacted, as we continue to review of course, the rules, and if there are additional guidance provided on the legislation. Other point is just on the GAAP results; you will note that we had a onetime benefit of $130.7 million in the quarter, that was reflecting the revaluation of our deferred taxes at the new lower corporate tax rates. This amount of course was adjusted out for purposes of our non-GAAP results and our intention, just in general, as these questions come up, about the cash related to the benefit on the tax rate, is to use this cash to reduce our anticipated outstanding balance on the credit facility, which will be used to fund the majority of the Guggenheim acquisition, beginning of Q2. After the acquisition is completed and our leverage ratio is reduced to the pre-acquisition levels you see today, any residual excess cash will certainly just follow our stated capital priorities. And as a reminder, these priorities that we will reinvest cash back in the business, as needed through seed money and co-investments, but then it goes to dividends and finally, share repurchases. So that brings us back to the current quarter, [indiscernible] EPS to $0.73, adjusted operating margin of 39.7% for the quarter. And before I turn things back to Marty, I just wanted to offer an update on net flows as we have always done. In January, we continue to see significant strength in our EMEA business, as well as Asia-Pacific, both on the retail and institutional side. This has been somewhat offset by some weakness in the U.S. flows, largely in the retail space. But overall, we have seen through January 29, $1 billion of long term net flows. So we are not done with the month, and certainly there is an institutional activity that happens during the month. So that number hopefully could improve from the number I just gave you. And with that, I am now going to turn it over to Marty.

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

[Operator Instructions]. And speakers, our first question is from Ken Worthington of JPMorgan. Your line is open.

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

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

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

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

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

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

Okay. Thank you very much.

Thank you. Next question is from Jeremy Campbell of Barclays. Your line now is open.

You guys changed your influence to contemplate kind of reinvested dividends and capital gains. I am just wondering, is if you got to separate out what's kind of gross sales and what's reinvestments? I know you have the footnote from the total flow profile, but not really stratified on a product or active-passive basis and I think the incremental disclosure is probably pretty extremely helpful for us on the sell and buy side?

I think the first part of your question got a little bit cut off. But I heard your question about providing detail around capital gains and the reinvestments at a more detailed level. We can certainly look at that. Some of it is hard to actually obtain, because of -- we don't sell to third parties, and so getting the data that we just got, took a long time. So it is something that we can aspire to, to try to give you more detail. We did do that, of course, because we felt that it was more consistent with some of the largest industry peers that we have done, and we will look to see, if we can get more details, that's helpful.

Sure. Yeah, I mean, even something simple as like, using what your old disclosures were and then adding that extra line to get to what you are defining as flows, now would be --

Yeah we have -- absolutely. We are not trying to do anything cute [ph] by distributing this. I think we can get you more detail.

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

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

Right. I think the point is also though, the full impact is included in the guidance that you gave in G&A for this --

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

Great. And just finally, I guess, related to Guggenheim, how has that been perform as a Group, since we had our last call here, that talked about kind of the flows at AUM level? Is it kind of tracking in line with what you guys expected, as sort of like that compound growth?

It has certainly grown. I think it's at relatively $40 billion in size versus 27 something when we announced.

$37 billion.

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

Great. Thanks a lot.

Thank you. Next question is from Craig Siegenthaler of Credit Suisse. Your line now is open.

Hey, good morning Marty, Loren.

Hey Craig.

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

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

Got it. And then, it's also in the comment in the slide deck on Jemstep, that you know, the sales pipeline. You noted as especially robust among banks. I am just wondering, what is the characteristic of sort of the average bank in that pipeline? What does it look like in terms of size, client base, things like that?

Yeah. I would be a little careful, because the [indiscernible] announcement. But I mean from regional banks to very large banks, it is really quite broad. So it's, again, something that we think is a very important development for us and the partnership between ourselves and the banks seem to line up very-very nicely.

Got it. Thanks Marty.

Thank you. Next question is from Patrick Davitt of Autonomous Research. Your line now is open.

Good morning. There has been a little chatter about troubles with the new all-in expense reporting with MiFID II. I'd like to get your thoughts on that and within that theme, how you think you came out on those metrics?

Sorry, I have not kept up with the chatter. But what I can tell you is --

Never heard about it.

[Indiscernible], because I have not heard about it. Sorry about that. I wish I had more color. I just don't.

Sure. And then just as a follow-up on the earlier color, all of the -- I guess, institutional pipeline data you just went through; is that just Europe and Asia or is that the total pipeline?

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

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

None. None that's reflected right now in that number.

Perfect. Thank you.

Thank you. Next question is from Bill Katz of Citigroup. Your line now is open.

Okay. Excuse me, apologize for the voice here, having a little flu. Just coming back to some of the expense guidance; parse out for us, how much will be contributed by Guggenheim versus how much is just sort of core investment into the business? And then relatedly, as you think about the drivers for the incremental margin to 2019, is it a function of bending down the expense curve or is it bending up the revenue growth? Just trying to get a better understanding of what the driver will be?

So Guggenheim is, as we said, is coming in at incremental margin about 85% we are assuming is coming in, really at the beginning of Q2. Total expenses associated with Guggenheim are a little in excess of $10 million for that period of time. So that's one element of the spending, and that's coming through. The other amounts of investment are sort of incremental to that, related to funding the growth in Jemstep, institutionals, factor-based, these are the things that Marty was talking about earlier, as well as further growth of our existing ETF business above and beyond just the Guggenheim business, to name a few. And that's ultimately what's driving down the incremental margin, by roughly, no more than 10 percentage points for the year. So hopefully, that gives you some color of what that is. I do think, revenue trajectory, because of the mix of the products that we are selling, also hope to accelerate the growth, is what's going to be driving our margin expansion going into 2019 and beyond.

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

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

Okay. Thank you very much.

Thank you. Next question is from Brennan Hawken of UBS. Your line now is open.

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

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

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

Well that noise always will be there, every year. So I am not sure, if it's something to factor in. So again, unfortunately, I don't have the exact calculation. Certainly [ph] something we could develop. But I can't imagine it's more than a percentage point.

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

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

Okay. Thanks for the color.

Thank you. Next question is from Robert Lee of KBW. Your line now is open.

Great, thanks. Thanks for taking my questions guys. Marty, could you just update us maybe on -- you know, [indiscernible] larger intermediaries and others, that contain a kind of whittle down there, shelf space. I guess, Morgan Stanley is going through another round soon. So could you maybe just update us on how you kind of feel like you are faring in that, and also, maybe to what extent your ETF platform is helping you kind of sustain shelf space or giving you opportunities in those distributors?

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

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

Yeah. I mean, it largely offsets one another. The value of the tax yield is half the value. Obviously, that was, like I think roughly $30 million in tax benefit a year. But obviously the value of the purely U.S. based operating income is significantly more. So it ultimately is not impactful to the full value of the business to us, if it goes off [indiscernible].

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

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

Great. That was it. Thanks for taking my questions.

Thanks Robert.

Thank you. Next question is from Michael Carrier, Bank of America. Your line now is open.

Thanks guys. Loren, just on the expense guidance, if I put that [indiscernible] to the outlook, it seems like the expense growth is maybe in the low double digits, call it 10%, 11%. Just wanted to break that down, and you gave us some color. But I am just trying to figure out, you have got the deals, you have got some of these investments, and then you kind of have your core run rate. And I know, 2019 is way out, but when I think about the core run rate of what you think the business needs, post the deals in some of these investments, is there any way for us to think about that versus maybe the elevated level that we are seeing in 2018?

Your estimates really look out in the future a lot. I mean, all I can say is, in terms of our forecast and what we see, the good news is, I mean, expenses aren't accelerating through the course of 2018. We think they are roughly stable and fixed. I think that's very good news in terms of the expansion that we would expect to see in margin through the course of 2018, without any further benefit of market or foreign exchange. So I think for us, as it has always been, we see a fairly large incremental margin, more fixed than variable expenses. We have said, we have stated, that we have invested heavily around certain things. This is building out a run rate. But I'd say, that run rate, we think we are going to manage it, so it's going to be roughly, sort of flat expenses through the course of 2018, and you know, you are into margins that are well above 30% by the end of that year. So I mean, no market increase from here.

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

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

Okay. Thanks a lot.

Thank you. Next question is from Brian Bedell of Deutsche Bank. Your line now is open.

Okay. Thanks for taking my questions. Just back on MiFID II, I think if I recall correctly, the tens of millions was based on the adoption for European clients only? And correct me if I am wrong on that, but if you were to adopt that globally, how would that impact the tens of millions run rate, and over what kind of, I guess, timeframe are you looking at that, as potentially nothing [indiscernible]?

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

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

Absolutely. With the same rigor and discipline that we are using in Europe, we are now applying into the U.S. and there is more to come and more work to be done. I don't want to declare victory at all. But it is something that we believe and everyone agrees, it makes sense for us to do here.

Okay, great. And then Marty, just maybe a broader question, just on factory based investing broadly. Obviously, there is a lot of compelling components of that, but more recently, we have seen a lot of the ETF flows really be abated now. I think it's about -- and once it's [indiscernible], it's about 20% of the ETF industry and you only captured about 10% of ETF growth in 2017 in January, according to our measures, more like just 1%. So I mean just broadly speaking, what do you think it's going to take to get factor based investing to become a stronger flow category broadly?

It's a good question. The flow, since, whatever, the market bottom in 2009 has really been cap-weighted indexes and we can all identify the issues with cap weighted indexes in this market too. I think back to this concern that I have and I think others, that too many people aren't understanding the risks that they are taking within the cap weighted indexes today. That said, that's your question. More and more what are we seeing clients do, and it doesn't matter if it's a retail client or a large institution. More and more, they are building their portfolios, with a combination of, just want to call it, cap-weighted factor based, [indiscernible] act as an alternative, and they are moving up the risk-return spectrum, and what correlates to that, is the level of fees. And so it is the way of the future, and that's very consistent with our effort and Solutions also. So it's really a combination of the breadth of capabilities we have, the Solutions capabilities put together, and really I mean, the clients, not just to build the portfolios they want, but just also be responsive to the totality of the effective fee rate that they want to build. So what we are seeing and coming back to what I said earlier, the bulk of, if you are going to say, in the ETFs in particular and the retail channel specifically, the platforms have been focused on cap-weighted indexes over the past decade. Every single one of them have turned their attention to factor they look at as an important tool and building blocks for their advisors going forward. But it is really having the muscle memory, and the skill to just wanting to intellectually understand it. It's another thing to put it in a manner, that financial advisors can build the portfolios that they want. So again, this goes back to our factor capability that I had mentioned -- sorry, the Solutions capability, and we are actually seeing success with it on the Wealth Management platforms, because there is a need to do that. And again, we are seeing this type of thing actually in China, some of the insurance companies are looking for organizations that can help them build these portfolios very holistically. So I'd say early days with the success, and again within factors in particular or smart beta with an ETF, by the time Guggenheim closes, we will be the second largest active player, very close to the top player, and we think it's again, an important part of our future.

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

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

Great. Thanks for taking the question.

Yeah. Thank you.

Thank you. Next question is from Chris Harris of Wells Fargo. Your line now is open.

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

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

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

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

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

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

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

Thank you. Next question speakers is from Glenn Schorr of Evercore. Your line now is open.

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

No We know what you know, right? You have seen the public dialogs. I think just back to what Loren said, it created a complicated situation, the MiFID regulation versus the U.S. regulation, that's where you had really all the debates, publicly. I would just come back to what do we do? We are a responsible consumer of research. We will continue to be. We are well aware of the possibility of becoming a global event. And it is something that we think we will do very well, and I'd come back to. The good news is, a firm like us, we are in a position to do quite well with changes like that. The bad news is, if you are not a firm with scale, you are really disadvantaged, and I don't think that's a great outcome, but it is a fact of the matter. So we really don't know what the outcome is going to be, but we are adopting all the techniques that we did during MiFID, globally for us as a firm. So I wish I could be more specific.

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

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

The only thing I could say, I mean, this seems to be just an increased appetite. So both on the retail and institutional side on asset allocation products. Ultimately it provides the flexibility and the nimbleness to navigate through these changes, which certainly are current in different ways in different parts of the regions that we operate in. So that is factoring in a big way, in terms of our pipeline of one not funded and potential opportunities, and certainly in some of our sort of recent positive activity around the retail side in the U.S. and also, I think asset allocation --

That's a very good point. That's probably a good way to expand your opportunity with ETR and the likes. So I guess at some level, outside the conversations, individuals are -- institutions are really -- sort of both want to [indiscernible].

Right. All right. Thank you both. That's awesome.

Thank you. Next question is from Kenneth Lee of RBC Capital Markets. Your line now is open.

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

Yeah. It's a good question. We would look forward to that problem. But [indiscernible], our intention is this. So underlying -- the fundamental fact is, the global diversification of the institution, the global retail institutional channels and the asset mix, those are underpins that will not change and I think that is really what is going to continue to keep this low volatility. Our focus is really by -- if we do a good job for clients, driving the gross number up and that is our focus. I really don't think you are going to all of a sudden see a switch to a very volatile environment. Now we all do know, the good news is when you win a large institutional mandate, you are very excited about it and then when you get terminated, you are less excited about it, because of the banks. But that is just the nature of what it is.

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

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

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

Okay. Great. Thank you very much.

No problem.

Your next question is from Alex Blostein of Goldman Sachs. Your line now is open.

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

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

Got it, great. And then just bigger picture going back to the full discussion, and just some -- really more of a clarification. But I guess, when I look at your target of 3% to 5% organic growth, I am assuming that follows the new convention of disclosing flows and I guess, based on 2017 results, reinvested dividends at about a percentage point or so to the organic growth, the way you guys describe it now. So is apples-to-apples, is this really kind of 2% to 4%, if we were to compare that to the way you guys used to talk about [indiscernible]?

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

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

It is.

Yeah. Got it. Great. Thanks.

Thank you. Next question is from Dan Fannon of Jefferies. Your line now is open.

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

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

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

I mean it's a good question. I mean, a lot of the funding will take six months, could be longer in terms of what they ultimately require to get done. So there has been some movement within the pipeline around timing. That was probably more than we had expected generally. So granted, I think we do not see as much materialize on the sales side on the institutional business in 2017, as we would have originally expected based on the pipelines that we were looking at. We could say, well that's maybe the case, and possibly it is, other than I'd say our themes seem far more -- feeling like they [indiscernible] that the business is going to fund in 2018.

Great. Thank you.

And your next question is from Greggory Warren of Morningstar. Your line now is open.

Yeah, good morning guys. Just wanted to follow-up a little bit on the retail distribution platforms. You noted that you wouldn't have that much of an issue, but just kind of curious, how much pressure is there on you guys or the industry on, I would say fees and performance, especially with a lot of the calling we have seen in the last two years, both from Merrill and Morgan Stanley. And then just, on top of that, how much of your actual platform is really exposed to what's going on within that particular part of the business? You have 68% of your business in retail, but I know it's not that much, as [indiscernible] opposed [ph] to say, what's going on with U.S. third party platforms?

Let me try to address some of it. So what are the factors that the platforms are looking at, it's really what they determine of the asset classes that they want on their platforms. They are looking at the quality of the managers, the historical performance and the competitive fee rates. And that is criteria, generally that is used, and also, once they get beyond a specific, if there is a -- if they can end up using fewer providers, that is also a factor, so those are sort of the criteria that we are judged on and we have done quite well. Taking on top of just the fund-by-fund analysis and I am going to lose track of the magnitude. But the last update I had on some of the platforms, more than a third of the managers, in total have been terminated. So it's just not a fund consolidation, but a manager consolidation at the same time. So that has been so -- I'd be repeating myself a little bit from the prior conversation. So it is the totality of the offering, so it's just not mutual funds, it is ETFs, it is also alternative capabilities, all of which that we have. So again, if we continue to have high quality capabilities, and we conserve our clients, which I think we do well, and we will continue to be one of the firms that will do quite well out of this. I think the other part of the focus, where the focus has not turned to, those managers that remain on the platform will be net beneficiaries, because of the obvious, there will be fewer managers and money will ultimately go to the managers and remain on. Now, that's not going to happen quickly, because your math -- [indiscernible] your math, if you have been taken off the platform, the client is not forced out of their holdings, which is exactly the right way to do it. So again, I don't know if I am telling anything you don't know, but that's our analysis.

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

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

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

Yeah. I mean, it's largely the European business, so you'd have to look at the full value of that AUM, which is hundreds of billions.

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

Probably about 10% that's institutional of that business.

Okay, it's perfect. Thanks guys. Good quarter.

Thank you very much.

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

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

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