Invesco Ltd. (IVZ) Q4 2020 Earnings Report, Transcript and Summary

Good morning and thank you all for joining us. As a reminder, this conference call and the related presentation may include forward-looking statements, which reflects management's expectation about future events and overall operating plans and performance. These forward-looking statements are made as of today and are not guaranteed. They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from our expectations. For a discussion of these risks and uncertainties, please see the risks described in our most recent Form 10-K and subsequent filings with the SEC. Invesco makes no obligation to update any forward-looking statements. We may also discuss non-GAAP financial measures during today's call. Reconciliations of these non-GAAP financial measures may be found at the end of our earnings presentation.

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 is being recorded. If you have any objections, please disconnect at this time. And now I would like to turn the conference call over to your speakers for today, Marty Flanagan, President and CEO of Invesco; and Allison Dukes, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you, operator, and thanks everybody for joining and Happy New Year to everybody. I think we're all very ready to turn the page on what was a very challenging 2020. And while the global pandemic remains very pervasive, we do all see light at the end of the tunnel and we look forward to 2021 with a cautious optimism that conditions will improve. Throughout 2020, we focused on executing our long-term strategy while recognizing the necessity to focus on employee health and safety, finding new ways to work and serving and delivering expected outcomes for our clients. I would like to thank all our employees and our clients during what has been a challenging period. Over the past decade, we've been successful investing ahead of shifts in client demand, placing us in a strong position to take advantage of key industry tailwinds in the future. Our investment in these capabilities and our tremendous focus on our clients is now again producing good momentum in our business that became more visible as the year progressed. By working better to anticipate, understand and meet client needs during the challenging times, we've achieved six straight months of net long-term inflows totaling nearly $18 billion in the second half of 2020 with progress across channels, geographies and asset classes. Retail flows improved in the second half significantly. Our solutions enabled institutional pipeline remained near record levels. We saw net inflows in Asia Pacific totaling $17 billion in the second half of the year, and improving flows in EMEA and the Americas over this timeframe. And net long-term flows in the fixed income remain robust during that period. All of these factors combined build a strong foundation as we head into 2021. And maybe the few highlights of the fourth quarter are on Slide 4 if you’re kind of following along. More specifically, during the quarter investment performance for a large portion of high demand capabilities were in the upper quartiles. We had net long-term inflows of nearly $10 billion during the quarter. Long-term inflows in the fixed income capabilities continued while we saw client demand for equities within ETFs, quantitative and index strategies in particular. We saw another quarter of strong inflows in Asia Pacific region. Inflows in the Americas turned positive. Allison will provide more information in a few minutes on the flows, strategic valuation and more details of the quarter, but I would like to note we also improved our operating leverage during the period, paid our credit facility to zero and made progress improving our cash position. I would like to spend a few minutes on slides 5 and 6 to talk about our additive strength and key capabilities in areas with high client demand and our focus for 2021. Slide 5 illustrates the market opportunities we see for these key growth areas and demonstrates the majority of our investment capabilities are aligned with these opportunities. In these areas, our investment forms a strong or highly competitive and well positioned for growth. And as we move into 2021, we plan to further expand our market leading position in ETFs in the U.S. and EMEA, in particular, and build our passive presence in Asia Pacific. We are the fourth largest ETF provider globally and our capabilities span passive, active strategies and establish in developing spectrum of ESG ETFs. And building on our 15-year legacy of innovation, we continue to develop new products in this space as demonstrated by the launch of the QQQ Innovation Suite and our first non-transparent ETFs that we delivered in the fourth quarter. Strong alternative platform and our focus is growing our private markets business led by our market leading real estate and bank loan businesses. Active fixed income and global equity remains areas of opportunity for us and our offerings are well positioned with strong investment performance and high client demand. In addition, we are focused on our solutions efforts. And as we have seen by the contribution to the institutional pipeline, clients value this service. The ability to offer solutions that builds on the full power of our competitive set of capability and services to clients continue to be a priority for us during 2021. We continue to invest in our leadership position in Greater China. We've been managing dedicated Chinese products for nearly 40 years. We have already seen the benefits of our early mover advantage in the China onshore market through our joint venture, which was the first scene of foreign joint venture in the industry established almost 20 years ago. Turning to Slide 6. As we noted, in the third quarter, we see opportunities to invest in areas of growth aligned with our strategic plan. These areas include ETF alternatives, active fixed income and global equities, which includes emerging markets, and we will build on our market leading position in the fast growing China market and further develop our leading solutions and asset allocation offerings. Given our investment in the business over the past decade, our most recent efforts to better align the organization with our strategy, I'm confident with the talent, the capabilities and the resources, momentum to drive future growth and success. We’re optimistic about the new year and remain focused on helping our clients achieve their desired outcomes, regardless of where the markets take us. And with that, I will turn it over to Allison to get into further details.

Thank you, Marty. Good morning, everyone. Moving to Slide 7, we had 61% and 70% of actively managed funds in the top half of peers on a five-year and a 10-year basis, reflecting strength in fixed income, global equities including emerging market equities and Asian equities, all areas where we continue to see demand from clients globally. Looking at our AUM on Slide 8, we ended the quarter with $1.35 trillion in AUM. Of $132 billion in AUM growth, approximately $95 billion is a function of increased market values. Turning to flows on Slide 9, our diversified platform generated long-term net inflows in the fourth quarter of $9.8 billion, representing 3.9% annualized organic growth, which generated positive net inflows in activate AUM of $400 million and passive AUM of $9.4 billion. Our ETFs experienced net inflows of $6.1 billion, including $4.7 billion in long-term ETFs and $1.4 billion in our QQQ. Our U.S. listed ETF, excluding the QQQ, had their best quarter in their 15-year history. We saw net long-term ETF flows in the U.S. focused on equities in the fourth quarter, including a high level of interest in our S&P 500 equal weight ETF, which had $2.7 billion in net inflows in the quarter. Two of our top five inflowing ETFs were ESG related. We continue to see momentum in our ETF business and demand for ESG funds, and as Marty highlighted, the market opportunity is significant for this key growth area in 2021. Retail net outflows were $800 million in the quarter helped by the positive ETF flows. On the institutional side, we had net inflows of $10.6 billion. I'll provide a little more color on these flows on the next few slides, but importantly the growth in our passive AUM and our institutional AUM is meaningful for the firm and contributed to the positive operating leverage we generated in the period. Also, as Marty noted earlier, we're seeing the mix of ETF inflows being weighted towards higher fee generating products. Looking at flows by geography, you'll note that the Americas have net inflows of $2.2 billion in the quarter, an improvement of $6.6 billion from the prior quarter. This improvement was driven by net inflows into ETFs, institutional inflows, various fixed income strategies and importantly, focused sales efforts and improvement in redemption rates. Our global equity products improved by over $1 billion, or 37% from Q3, driven by our developing markets fund, which returned to positive net flows in the fourth quarter following negative net flows in the first three quarters of the year. UK experienced net outflows of $100 million in the quarter as positive flows into our institutional quantitative equity capability were offset by net outflows in multi-asset and UK equities. EMEA net outflows were $1.4 billion driven by institutional lumpiness and ETF outflows largely in our S&P 500 and NASDAQ 100 UCITS ETFs. And finally, I noted last quarter that Asia Pacific delivered one of its strongest quarters ever with net inflows of $8 billion. In the fourth quarter, net inflows were even higher at $9.1 billion. Net inflows were diversified across the Asia Pacific region. $4 billion of these net flows were from Japan, $3.8 billion arose from our China JV, and the remaining $1.3 billion was generated from several other countries in the region. It's worth noting that we continue to see strength in fixed income across all channels and markets in the fourth quarter, with net long-term inflows of $8.2 billion, this following net long-term inflows of $8.8 billion in the third quarter and $6 billion in the second quarter. It's also important to note that of the $26.1 billion in fixed income net inflows in 2020, 25 billion of these net inflows were from active fixed income capabilities. Active fixed income has been a growth area for us in 2020, and remains a key investment area in 2021. Now moving to Slide 10. Our institutional pipeline remains robust at $30.5 billion on the heels of strong pull through in the institutional pipeline during the fourth quarter. This pipeline is diversified across asset classes and geographies. And our solutions capability has contributed to meaningful growth across our institutional network, warranting our continued investment in this key capability in 2021. Turning to Slide 11. You'll note that our revenues increased $135 million, or 12.4% from the third quarter, driven by higher average AUM in Q4 as well as a meaningful increase in performance fees. Net revenue yield, ex performance fees, was 36 basis points flat and flat of the Q3 yield level. The impact of rising markets on our yield was offset by modest fee rate decline from the mix shift we experienced across products in the quarter, as well as the impact of non-management fee earning AUM. We recorded performance fees of $78 million in the fourth quarter. $48 million of these performance fees arose from our real estate business and $21 million from our institutional business in our China JV, two of our key growth areas. Seasonally, we tend to see higher performance fees in the fourth quarter. Total adjusted operating expenses increased 8.3% in Q4. The $57 million increase in operating expenses was driven by higher variable compensation as a result of both market growth and compensation related to the performance fees in the quarter. Operating expenses remained at lower than historic activity levels due to pandemic-driven impacts to discretionary spending, travel and other business operations that persisted in the quarter. That being said, we did see a seasonal increase in marketing expenses as expected. Moving to Slide 12. We wanted to update you on the progress we have made with our strategic evaluation. As we noted previously, we conducted a strategic evaluation across four key areas of our expense base; our organizational model, our real estate footprint, management of third party spend, and technology and operation efficiency. Through this evaluation, we will invest in key areas of growth, including ETF, fixed income, China, solutions, alternatives and global equities, while creating permanent net improvements of $200 million in our normalized operating expense space. As we noted, a large element of the savings will be generated from compensation, which includes realigning our non-client facing workforce to support key areas of growth and repositioning to lower cost locations. In the fourth quarter, we realized $7.5 million in cost savings. $7 million of these savings were related to compensation expense, as depicted on Slide 12. The remaining $500,000 in savings were related to facilities which are shown in the property office and technology category. The $7.5 million in cost savings were $30 million annualized. It’s 15% of our $200 million net savings expectation. Of the remaining $170 million in net savings, we anticipate we will realize roughly 50% of the savings through compensation expense. The remaining 50% would spread across occupancy, tech spend and G&A. As it relates to timing, we still expect approximately $150 million or 75% of the run rate savings to be achieved by the end of this year with the remainder recognized by the end of '22. We estimate that we will realize roughly 75% of the anticipated compensation reductions in 2021, roughly 50% of the anticipated reduction in occupancy expense also in 2021, and all of the reduction in G&A this year. The majority of efficiencies identified in our tech spend will not be realized until 2022. In the fourth quarter, we incurred $104 million of our estimated 250 million to 275 million in restructuring costs. We expect the remaining transaction costs for the realization of this program to be in a range of $150 million to $175 million over the next two years, toughly two thirds of this remaining amount occurring in 2021. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results. With respect to Q1, after improved market performance and asset inflows in the fourth quarter, we start the year with over $1.3 trillion in AUM. Given the market improvement was more back end weighted towards the end of the quarter, we expect both operating revenues, excluding performance fees, and the associated variable expenses to be modestly higher in the first quarter. This reflects the follow through from the market and slow growth that occurred over the course of the fourth quarter, even if we assume no change in markets from year end. On the expense side, this will include higher associated variable compensation than the seasonal increase in payroll taxes, partially offset by lower compensation related to the seasonal decline in performance fees and the execution of our targeted cost savings. Turning to Slide 13. Adjusted operating income improved $78 million to $485 million for the quarter, driven by the factors we just reviewed. Adjusted operating margin improved 230 basis points as compared to the third quarter to 39.5%, demonstrating the operating leverage in our model. This helped drive the $0.19 increase in adjusted EPS to $0.72 a share. In addition, we've benefited from higher non-operating income and lower non-operating expenses in the quarter. Non-operating income included $31.9 million in net gains for the quarter compared to $15.2 million in net gain last quarter. The increase was driven by unrealized gains primarily in our seed money holding. Interest expense of $24.4 million was 28% lower than the prior quarter. Q3 was the final quarter in which we paid dividends related to our forward purchase agreements, a portion of which we settled in January, with the remaining portion to be settled in April of 2021. Our tax rate for the fourth quarter was 21.7%. The reduction in the rate reflects the lower taxes on unrealized gains in our seed portfolio due to the jurisdiction of our holdings. We estimate our 2021 non-GAAP effective tax rate to be between 23% and 24%. The actual effective tax rate may vary from this estimate due to the impact of non-recurring items on pre-tax income and discrete tax items. A few comments on Slide 14. As Marty mentioned, we reduced our revolver balance by $90 million to zero in the quarter, consistent with our commitment to improve our leverage profile. In addition to using excess cash to reduce leverage, we seek to improve liquidity and our financial flexibility. To that end, our balance sheet cash position improved to $1.4 billion in the fourth quarter from $1.1 billion at the end of Q3. $764 million of this cash is held for regulatory requirements. I will note we paid $117 million earlier in January to settle a portion of the forward share repurchase liability with the remaining liability of $177 million to be settled in April. We believe we're making solid progress in our efforts to build financial flexibility. We remain committed to a sustainable dividend and to returning capital to shareholders longer term through a combination of modestly increasing dividends and share repurchases. In summary, Marty walked through our key capabilities, the organic growth opportunity each presents and are focus on executing this strategy that aligns with these areas. We're also focused on our strategic evaluation and reallocating our resources to position us for growth. And we remain prudent and cautious in our approach to capital management. Our focus of driving greater efficiency and effectiveness into our platform, combined with the work we have done to build a global business with a comprehensive range of capabilities, puts Invesco in a very strong position to meet client needs, run a disciplined business and to continue to invest in and grow our franchise over the long term. With that, I’ll ask the operator to open up the line for questions.

Thank you. [Operator Instructions]. Our first question this morning is from Dan Fannon from Jefferies.

Thanks. Good morning. My question is on the fee rates and kind of the outlook. First, just I guess in terms of the fourth quarter, is there anything abnormal in this period? Obviously mix and beta were positive. So just want to clarify that this is a good exit kind of run rate for the fee rate. And then thinking about next year, assuming flat markets and the mix of business that you're seeing in terms of demand and institutionally and otherwise, how we should think about the trends in the fee rate for next year?

Good morning, Dan. So I'd say first on the fourth quarter, your question around was anything abnormal. Let me just start with obviously we had pretty high performance fees in the fourth quarter. So excluding performance fees, as you saw net revenue yield was flat at 36 basis points in the third quarter and the fourth quarter. It's fairly straightforward in terms of what was driving that. You've got the impact of the rising markets on our yield, which was a positive of course. And then we've got some offset there, given the modest pressure we continue to see just from the client demand and the mix shift that’s there. We've got consistent with industry, high interest in our passive capabilities and some churn within our active and that does put some downward pressure on net revenue yield. And this was a quarter where the impact of really strong market growth helped to offset that. In terms of what does that mean for this year, I would say that trend right there we would expect to continue. I do expect we will continue to see high interest in our passive capabilities and some continued churn within active. What does that mean for net revenue yield going forward? It's very difficult to predict, as you know. What I would point you to is that our focus is not simply on net revenue yield. We've really got the breadth of capabilities to serve our clients well. I think that's really starting to be demonstrated in the results over the last couple of quarters. And as we focus on that, we really are focusing on operating margin and making sure that we are managing our expense base to the top line of the firm and really driving profitable growth across our platform.

Great, thanks. And then just as a follow-up on expenses and your commentary sequentially, both an increase in revenue and expenses, so obviously performance fees will be lower given the seasonality. So just want to clarify. You're still talking sequential comp increase from $1 perspective in the first quarter, and then also on the synergies -- the kind of expense saving, just the cadence as we think about the year. Are they more backend loaded in terms of the realization? I get the exit by year end numbers you gave, but just thinking about kind of the flow-through through the year how we should think about the timing throughout '21?

Sure. Yes, let me start with Q1. And there are a lot of puts and takes as you think about it just given the really strong growth that we saw in the back half of the fourth quarter. That market growth, excluding performance fees, really did come in the back half of the year and we started the year with a very high level of AUM and you see what I see in terms of the markets thus far that we enter with strong revenue growth, as that maintains, and we hope that maintains. And then along with that we've got the associated variable compensation, and that does drive compensation higher, all things being equal for the quarter. And then we have the seasonality of payroll taxes and some pension expenses that occur in the first quarter of the year. Now, those are going to be offset by what we're doing in terms of our targeted cost saves and of course the lower compensation that we would have in this quarter, excluding performance fees. The net of all of that, the puts and takes, it’s hard to say exactly given the strong run up in revenue and the associated expenses. But it's, I would say, flattish and I’m talking total expenses for the quarter. In terms of the cadence of the cost saves, I think it's reasonable to look at those being spread relatively equally over the year. There may be a little bit of frontend loading into the first half of the year, but relatively equal.

Thank you. And our next question is from Craig Siegenthaler from Credit Suisse.

Thanks. Good morning, everyone.

Good morning, Craig.

I wanted to see if you could update us on your M&A priorities. And specifically, what investment capabilities or distribution efforts would Invesco target or be interested in adding?

Thanks, Craig. So our perspective really has not changed. As we look at M&A, it always has to start, has to be strategic, it has to be additive to the business in areas of client demand where we just really don't have a competitive capability, or have the scale to compete. We also very much are focused on the culture of the organization, as I've pointed out. Historically, you have to have cultural alignment to be successful. And that will continue to be our criteria. And what we don't think it makes sense is sort of the roll-ups where there's just a lot of duplication. Clients don't like it and shareholders don't like it. It's just really hard. And so we will continue to stay away from that.

Got it. And then just as my follow up, when we think of potential M&A targets in the various sizes of different businesses, I'm wondering what are the largest managers by AUM that investor could target or what is the upper band of the universe of firms that you would consider acquiring?

Look, Craig, it's always facts and circumstances. And I think size is a factor. But size, the level of complexity is quite different with any organization. So it would really be facts and circumstances as opposed to some hard and fast rule.

Thank you. Our next question is from Glenn Schorr from Evercore.

Hi. Thanks very much. So a lot of good things to point to in the quarter. I do want to get a little more color on a lot of flows coming on the institutional side, retail seemed in the flat range. So wondering what efforts you can do to spur growth there. And then also, if you can focus on the outflows on the alternative side and what the plan is for private markets from here. Thanks.

Yes, a couple of things. So again, as you saw, gross flows were a record high for us. And taking them region by region, channel by channel, Allison, I think went through that pretty clearly. We continue to see momentum in the retail channels. It slowed down in EMEA as Allison spoke of. Some of that was from Brexit related sort of risk off as it came down to final negotiations. And quite frankly, there was some look over to the elections in the United States. The U.S. retail channel is really starting to make tremendous change and progress. We're not where we want to be, that's for sure. But the momentum there, the gross flows are there. We're seeing flows as you look into the year outside of ETFs in the traditional asset classes, these short duration fixed income. Emerging markets is actually picking up which is really good news as that back into flows, so cautiously optimistic. Within alternatives, it's largely been around GTR and that was really the driver this past quarter. Bank loans were also an area that we're still in outflows. As we look into this year, we'll see what the opportunities are with bank loans in particular. But again, we're obviously very, very focused on any area where we're relatively underperforming.

The only thing I'd add to that on the alternative outflows was the third area we saw some outflows would be in real estate dispositions, and that would be somewhat in the normal course of that business, but it did contribute to the negative flows there. And I'd say one positive point as it relates to our retail flows is if we look at our active U.S. retail net outflows, they were actually $2.6 billion better than the third quarter. Now, they were still negative at $6.7 billion but that was an improvement of $2.6 billion over the prior quarter, really on the heels of higher gross sales and redemption levels that were significantly lower than what we saw across the industry. So signs of growth and improvement there.

I appreciate all that color? Just maybe one little follow-up on the alternative side? Do you feel like you have the suite of products you want to, Marty as you said, compete and scale effectively as growth continues there or is that one of the areas where you could see Invesco head into overtime, right, but it’s right there obviously?

Good question. So, look, we clearly have a leadership position in real estate and bank loans. Private credit has been an area where it’s had some good performance. We don't have the scale that we would want. The team is very strong, trying to do a three-year track record. So that's an important opportunity for us as we look forward. And again, we'll just continue to focus on expanding that business over this next year.

Thank you. Our next question is from Robert Lee from KBW.

Great. Good morning, Marty. Good morning, Allison. Thanks for taking my questions. I was wondering if maybe, Marty you could put a little bit, I guess a little bit more meat on the bone. If I think of the areas for growth talking about leveraging solutions, client engagement sales, but could you maybe dig into that a little bit about leveraging technology, the reorganization of sales function or reengineering of it, kind of maybe you could give a little bit of feel for what that is and what's driving it?

Yes. Okay, good. So, look, this has been in the making for, I don't know, four years now. And so all of a sudden, it's the overnight success. Our approach has been to have a very talented quantitative solutions team that’s very strong at asset allocation, building anything from models to customized solutions for clients and also advisory to the clients, whether it be sort of the corner office suites in the retail channel, but quite frankly large pension plans around the world. And our approach has been to use our capabilities, whether it be our passive capabilities or active capabilities all the way through alternative capabilities. So it's not a duplicative set of skills. It's literally using what we've had in existence. We have built what is a very, very strong analytical tool that we use with clients as a way to help them analyze their portfolios. That's how the engagements happen and any one of those outcomes can happen simply from an advisor engagement to building a customized solution. During that journey, as you build it out, how you engage, how you faceoff with clients, there are clearly modifications to how you do that. And we seem to have found ourselves in a situation where we seem to have the formula right based on the outcomes that we're seeing. And I come back to -- this really is the fundamental topic that is driving the change in the industry is that clients are working fewer money managers. They're expecting more from money managers. So if you don't have that breadth of capability and if you don't have the ability to serve clients through these engagements, you're truly disadvantaged. And so it is really making a difference for us and we expect that will be the case in the years ahead. So hopefully, that gives you a little more color.

Yes. And then maybe a quick follow up just on capital management. Can you update us – in terms of the forward contract, it pretty much revolves down to zero. You had reset the dividend. You're building liquidity. But once you get through the April payment, how are you thinking at that point about your capital management priorities? Should we think that you may go back to starting to kind of restart some dividend growth or reengage in share repurchases? How should we think of kind of the priorities kind of post April full in payment?

Sure. Rob, I'll take that. So, look, as we think about just sort of where we are now and as I think about rolling forward over the next couple of quarters, you'll know we built our cash balances. I'll also just remind everyone, we do have seasonality and comp expense that is seasonality and cash flow related. Comp expense in the first quarter, historically, the company has drawn on the revolver in the first quarter. We've obviously managed our cash balances a little bit higher. There is strong cash flow, just given the AUM dynamics that we see right now. I don't know what that will look like exactly as we work through the quarter. And we do have the liability to settle in April. All that said, we're in a very strong position and I continue -- I expect us to continue to build our cash balances longer term and improve net leverage. And then as I think about just what does that mean for the financial flexibility that we're looking to achieve and returning capital to shareholders, we are committed to that financial flexibility. We do want to invest in the business first and foremost to support future growth in the business. And we do remain committed to strengthening our balance sheet. And ultimately, we want to be in a position to return excess cash to shareholders. And I do expect that we'll be doing that through a stable and modestly growing dividend and eventually share repurchases. And so we are coming up soon here on the one year of having made some decisions around that and we've got the opportunity to think about what our return of capital to shareholders looks like, and we will be working through that in the coming months. I'll say that we're pleased to be in a very strong position to be having those conversations and look forward to sharing more.

Great. Thank you for taking my questions.

Thanks, Rob.

Thank you. And our next question is from Ken Worthington from JPMorgan.

Hi. Good morning.

Good morning, Ken.

Long-term organic asset growth was I think 3.9% in the quarter. Can you estimate your organic revenue growth in the quarter? There's lots of cross currents, inflows, outflows by different products and geography. So how does it all shake out from an organic revenue perspective? And then maybe I'll sneak in my follow up at the same time. As we think about the shift from active to passive, how is that impacting your margins? So you're cutting costs. Equity markets have appreciated meaningfully. FX is now helping. But if we exclude those and just focus on these inflows and outflows and migration to passive and solutions in your mix, does that end up helping margins? And if so, to what degree is that helping?

Okay. Let me take your first one around the long-term organic revenue growth. I guess it's not a number we would disclose or think about exactly. But if you think about -- what you're looking at is excluding market and you surely look at the fee rate associated with where interest expense, as we point to every quarter, you continue to see a little bit of mix shift from some of the higher fee products to some of the lower fee products. So that does put pressure on your organic fee growth, no question. Without some market improvement in there, you would see downward pressure there. Our focus then really does shift to profitability. So I'll come to your second question. How do we think about the profitability given those dynamics, because markets go up and markets go down and we've seen the pressure that can put on the top line? As we think about the profitability and I'm not sure I'm going to answer your question exactly, I'm not sure I caught all the different puts and takes you were thinking about there, but I guess I would answer it in this way. While the absolute fee rate of some of our lower fee products would be lower, so take an ETF, for example, in the United States, the absolute fee rate there would be about half of a U.S.-based mutual fund. That said, the margin contribution is about the same, very similar, because you have lower servicing costs. So the margins on both are neutral to positive to our overall firm margins. And it really then becomes a function of volume. Because while the margin is the same, the absolute operating income yield would be lower and so you have to drive more volume over a lower fee product to contribute the same dollar of operating income that you would over a higher fee product. And that's really how we think about it. These are just the facts of our business and the facts of where demand is and making sure we're positioned to capture all of that demand, and then making sure we're well positioned to maintain our margins at a minimum, even in markets where we could be under pressure.

Okay, that's super helpful. But I guess part of the core of this, and maybe you can opine on this for a second, the organic growth, organic asset growth was quite good this quarter, like 3.9%. Is that contributing to revenue or is the underlying mix such that even though it was a solid 3.9% asset growth, is that actually just detracting from revenues? Because it happens to be, EMEA was out, some alts [ph] were out, you've got high fee ETFs, but they're not quite high enough. And even 3.9% asset growth isn't enough to boost revenue growth. I guess that's kind of what I was really hoping to get. And I'm still not sure I have a sense of that answer.

In a quarter like this, 3.9% organic growth is contributing to revenue. Yes, it's contributing to revenue. And then obviously even contributing more if we look at the positive operating leverage that comes from it, but you do get positive contribution. The high fee, low fee products are not necessarily always obvious as to what category they're in and you do see revenue contribution in a quarter like we just have.

Thank you. Our next question is from Bill Katz from Citigroup.

Okay. Thank you. Good morning, everybody. So first question is a two part question for Allison, then a follow up for Marty. Allison, could you just unpack the compensation dynamics between the fourth quarter and the first quarter, maybe help us understand what might roll off for the performance business? They were so elevated. And maybe the seasonal increase, if you will, just trying to get to sort of like a level of how to think about maybe the exit pacing for the second quarter.

So I'll do my best to unpack that. If you look at just the performance fees and the compensation expense that’s associated with those, it's going to be kind of closer to 50%. So it comes at a higher rate than what you would see in terms of the compensation associated with other elements of revenue. So that's a roll off. And then in terms of what would be higher, the seasonality of payroll taxes and some benefits, so that's somewhere in the $25 million to $30 million range. Then you've got the targeted cost saves that will be in there somewhere. We're not giving specific guidance around that any more so than what I've already provided. And I think that's probably the best way to think about it. The one thing that is not totally the same is the run up in the fourth quarter is what -- we only had that for kind of call it six weeks or so at the end of the quarter. If asset levels hold where they began the year and we've certainly seen them hold thus far into the month, you can expect that revenue and the associated compensation expense would be higher than what you would see in the fourth quarter, and that's just thinking about the typical relationship between revenue and compensation expense.

Okay. And then you mentioned in terms of building cash. Well, where are you in terms of your excess cash goal?

Our cash balances at the end of the year were $1.4 billion. We have $764 million of that is committed to European regulatory and liquidity requirements.

Thank you. Our next question is from Patrick Davitt from Autonomous Research.

Hi. Good morning.

Good morning, Patrick.

So bond loans have obviously been a bright spot for you and others, but concern around kind of taper tantrum or even more significant rate shock has grown over the last few weeks with investors seemingly particularly worried about how large bond complexes will perform through that. So through that lens, could you remind us of Invesco’s experience in the 2013 tantrum and maybe compare or contrast how you feel Invesco is now positioned for another tantrum or even bigger rate shock from here?

It's an interesting question. 2013 was a long time ago. But as we get through it and I suspect what's really going to matter I think the question is, where are the concentrations within your fixed income if there's something like that. And if you look at the range of fixed income capabilities that we have, it really is quite broad and heavy concentration in an area where sort of long duration shock could be quite painful to the organization. So that's my initial reflection on the question, if that's helpful.

Sure. Thank you.

Our next question comes from Brian Bedell from Deutsche Bank.

Great. Thanks. Good morning, folks. Thanks for taking my questions. The first one is on ESG. You mentioned that has a potential increase in contributors '21. If you can talk a little bit about what you think your ESG dedicated AUM is as of now? I know it's being integrated more thoroughly throughout the organization. And then talk about how much do you think that can potentially contribute to your institutional pipeline, and whether you see it becoming a bigger factor in the U.S. as well?

Yes. So, look, let me start with the bigger question gets specific. ESG is something that we're integrating throughout all our investment management teams, probably the most advanced through our capabilities; in EMEA, our fixed income teams, real estate, so we’re pretty well into it right now. We’re not done. But that is something that is absolutely a top focus of ours as an organization. The reality is if you are not skilled at managing ESG capabilities even within your traditional asset classes, you really are going to be challenged in EMEA. I'd say in the United States, it is moving beyond what was a conversation 12, 18 months ago to being something very, very real. And you're seeing commercial implications of it. And that is the same thing in Asia Pacific. Specifically using that more narrow definition, so we have about $34 billion in ESG AUM, but it’s really quite broad. We have about 90 ESG funds or mandates that comes through. And I think the other area what we're seeing outside of institutional is really picking up on the retail basis. And right now we're the second largest provider of ESG ETFs in the United States. And there's about $9 billion in those assets. So, again, more to go, as I said. We have a developed capability, but it's also developing and we're really being quite aggressive in the area.

Great. That's super helpful. And then just the follow up is on M&A. I guess from two different sides, thanks for the commentary about reiterating your stance on that. From a product perspective, how would you view adding a beta ETF franchise as opposed to a smart beta suite that you have right now? And then just in terms of overall stock price that we've seen for the asset managers in the last few years, we had a peak in early 2018, and very few managers have been able to make it back to that peak? You've tripled your stock price since the lows of last summer? But I guess what's your confidence in being able to get stock back to that peak early 2018 level organically?

So let me start with the stock price. And again, I have to be careful. That's your words, not mine. What drives stock price is operating outcomes and business momentum. And as Allison had talked about today, you're just seeing a markedly different set of outcomes in the last couple quarters. As you look into 2021, again without getting into forward guidance, it is many more tailwinds behind the organization that I've seen since 2018, and it's quite broad by region and by channel, and also within your various capabilities where we pointed out there’s very, very high demand. Now that said, there's always areas where we have areas for improvement and we'll continue to do that. But again, the tailwinds are very different than what we've seen since the middle of 2018. So from my perspective, that's going to drive stock price. With regard to adding a beta provider through M&A, again, I'll just answer the question as I had before. It all depends on facts and circumstances. It has to be additive to the organization. It can't be something that is a net negative through the combination. So again, it just really depends on the situation.

Thank you. And our next question is from Brennan Hawken from UBS.

Good morning. Thanks for taking my questions. The operating metrics in Great Wall look impressive and thanks for providing the flow. It’s definitely a big contributor. But what are the options for your stake with that entity? Marty, I think in the past you've referenced getting your ownership above 49%. But I think your last comment on that was a little over a year ago. So is that still on the table? And what would be the timeframe for that? How should we think about the potential impact of you getting over 50% there?

Yes, good question. So let me answer that in two parts. So I think what has been differentiated, which is important to recall is even 49%, we uniquely have management control, so it is really operated as part of Invesco. So we operate as Invesco in total within Mainland China and that has helped our institutional business, therefore, our traditional Invesco and also we go through Invesco Great Wall, institutional also and retail. So, that's really -- the success is because we've been able to operate as really a single organization there. With regard to the 49%, it is a conversation we continue to have with one on. It’s obviously slowed down. I'd say the conversations between the U.S.-China were not helpful in advancing that. So we'll just have to see. I really can't put a timeframe on it. As clarity between the relationship between U.S. and China, if it eases I think that'll be a net positive.

Okay, that's fair. Thanks for that.

The bottom line, it's not getting in the way of our business success, so I think that's really the bottom line I want to make.

That is clear from the results, but thanks for that, Marty. Follow up is a two parter. So first, you've got some questions so far today and a bunch in the past on M&A and Invesco as a buyer, but – and just to be provocative, how should we think about you as a seller? I know -- the company's large and so the list isn't really long of who could buy you. But there are some large buyers out there talking pretty vocally about writing checks. So curious about how you would think about that. And I believe you have had -- there's been at least one Board meeting since Nelson Peltz and Ed Garden joined the Board. So could you add maybe some color on what kind of impact that has had on the Board dynamic? And any incremental details about plans or areas of focus for your new Board members? Thanks.

Good questions. It’s a good way to get three questions in not two, but very good. You've done this before. So, look, with regard to -- let's be very, very clear. Today, the Board is actually dedicated to driving success of this organization. They value Invesco being an independent global asset manager. And again, the results are, as I said, you can see the momentum and can anticipate we're on a good track. So that's the first point. Secondly, within any conversation around M&A, my comments would be very similar to somebody looking at any money manager. And if it's not strategic, if there's a lot of overlap, if it's inconsistent with what clients want, it is very hard to do. And so as you say, that would get you to an even narrower set of options if you considered something like that. So, again, the criteria works both ways and I think that's important to understand. And then with regard to the Board, again, we've had a very strong Board. And Nelson and Ed and Tom Finke from Barings have joined. All three are very, very talented. Tom was the former CEO of Barings. Nelson had been around this space for a very long time. They know the space. They obviously are very outspoken about the opportunities that they see within the asset management space and the dynamics have been very good. You brought three new experts onto the Board. And again, just making sure we as an organization are laser focused on providing for clients and shareholders. And with the existing Board members, I think if anybody is on the stock, they should feel really good about it.

Thank you. Our next question is from Mike Carrier from Bank of America.

Good morning, and thanks for taking the question. Just one question just on growth versus value. On the performance chart in the appendix, it looks like growth performance remained strong. The value continues to be on the weaker side. So I just wanted to get your thoughts. If we continue to get a shift towards value, do you have some active products that are performing well that can benefit from flows versus maybe what we see in the chart, which is just the average across the full category?

Yes. So, the value related equity given delays have been the area of focus for us as an organization, there’s no question about relative performance. We're absolutely focused on making sure that the portfolios are in a position to perform. And again, I don't want to get too far ahead of myself, but if you look at that value suite during the fourth quarter, the relative performance was really, really quite strong. And that said, let's be clear. It's a quarter. It's not one year, three year, five years, but it was important to see that within the fourth quarter.

Okay. Thanks.

Thank you.

Chris [ph], you’re line is open.

Yes, great. A question on operating margin. You guys have a target in mind for this as you execute on your expense savings plan and then related, what do you think is the long-term potential for this business as it relates to operating margin?

Good question. We have not set a targeted operating margin coming out of this. Our focus has really been to think about the continued dynamics that are really driving client demand and thinking about getting our business oriented to capture that demand and make sure we're doing so in the most profitable way. And we continue to see how these trends are playing out. What do I think is long term, I think that's a hard one to answer, because I think we continue to see some of these shifts. We remain committed to our active capabilities and we do believe we will continue to see interest there and demand there, and we could see even more positive growth coming from that. So, as client preferences continue to evolve, we're going to continue to evolve our platform to operate at the highest profitability we can with it.

Okay. Thank you.

Thank you. And our next question is from Chris Shutler from William Blair.

Hi, everybody. Good morning. Marty, what are your thoughts on the potential for direct custom indexing? And is this a place that Invesco plans to participate? And if so, how?

Sorry, I didn't get the question. I apologize.

Sorry about that. Just director custom indexing, is that a place where Invesco plans to participate?

We have a self indexing capability and it actually has been an area of growing success recently. We just turned our attention to it a couple of years ago and the works really been -- it's through the Solutions Group where we’ve had the greatest success in building unique indexes for clients. So again, we look at it as a real area of growth. But going forward -- what we’re really looking forward is just really building that deeper relevance for our clients, and it's off to a very strong start.

Okay. And then separately just on the registered investment advisor space, maybe – or just the financial advisor space overall, can you give us an update on Jemstep and Intelliflo and what's been going at those platforms? How are they growing? And at what point should we expect those to generate some meaningful flows for Invesco?

Yes, it's a good question. There is about 900 billion in assets under administration right now. And the last year has been really focused on pulling together that platform through the last couple of acquisitions. And so we're looking for this year to be the beginning of some additive growth after a period of just really pulling out that platform. So again, we'll have more to say later in the year. But we're hopeful that we're at that spot right now.

And I am showing no further questions at this time.

Okay. Again on behalf of Allison and myself, thank you for your time and the questions. I appreciate the dialog and we'll be in touch. Thank you.

Thank you. This does conclude today’s conference. You may disconnect at this time.