Invesco Ltd. (NYSE:IVZ) Q4 2022 Earnings Conference Call January 24, 2022 9:00 AM ET
Company Participants
Greg Ketron – Head-Investor Relations
Marty Flanagan – President and Chief Executive Officer
Allison Dukes – Chief Financial Officer
Conference Call Participants
Glenn Schorr – Evercore
Brian Bedell – Deutsche Bank
Dan Fannon – Jefferies
Brennan Hawken – UBS
Craig Siegenthaler – Bank of America
Alex Blostein – Goldman Sachs
Bill Katz – Credit Suisse
Patrick Davitt – Autonomous Research
Mike Cyprys – Morgan Stanley
Mike Brown – KBW
Operator
Welcome to Invesco’s Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] As a reminder, today’s call is being recorded.
Now I would like to turn the call over to Greg Ketron, Invesco’s Head of Investor Relations.
Greg Ketron
Thanks, operator, and to all of you joining us on Invesco’s quarterly earnings call. In addition to today’s press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website, invesco.com. This information can be found by going to the Investor Relations section of the website.
Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcast are located on our website.
Marty Flanagan, President and Chief Executive Officer; and Allison Dukes, Chief Financial Officer, will present our results this morning. After we complete the presentation, we will open the call up for questions.
Now I’ll turn the call over to Marty.
Marty Flanagan
Thank you, Greg, and thanks everybody for joining us. And I’m going to start on Slide 3 if you’re following along, which is the fourth quarter highlights. The fourth quarter concluded a year of significant headwinds and volatility in global markets. Seemingly, no geography or asset class was immune to the S&P experienced the worst year since 2008, NASDAQ Composite declined over 30%, MSCI Merchant Markets Index nearly 20%, and bond markets, typically the safe heaven when equity suffer, declined significantly due to rise in interest rates with the global aggregate bond index declining by more than 15% for the year. This resulted in the worst markets we’ve seen in decades.
Rising COVID infections in China and tax loss harvesting in developed economies as the year came to a close made for a challenging organic growth dynamic in our industry. Despite industry challenges in 2022, we’re pleased to see key capabilities in areas with high client demand continued to deliver organic growth, offsetting net outflows and capabilities that experienced redemption pressure as investors express a preference for risk-off assets.
Key capabilities that delivered net long-term inflows for the year included ETFs, fixed income, Greater China and the institutional channel. The firm’s ability to deliver these outcomes demonstrates the strength and resilience of our diversified platform in the face of extraordinary market headwinds.
Although, market showed signs of stabilization in the fourth quarter, the uncertain backdrop continued to weigh on investor sentiment and impacted client demand. Invesco separated itself from most industry peers by generating net inflows in key capability areas led by strong growth in ETFs in the quarter. Our fixed income business and institutional channel continued to build on our track record of organic growth, generating net inflows for 16 and 13 consecutive quarters, respectively. The depth and breadth of our investment capabilities that Invesco brings to market that position the firm to return to organic growth when investor sentiment improves.
Invesco ETFs delivered $4.3 billion in net long-term inflows during the quarter. For the full year, ETFs brought in $28 billion of net long-term inflows, the equivalent of 11% organic growth rate. Our ETF lineup remains differentiated for most competitive offerings with a focus on higher value, higher revenue market segments like smart beta, and we continue to drive innovation in space with products such as our QQQ Innovation Suite.
Fixed income capabilities in the institutional channel have been pillars of organic growth for several years now and growth persisted in both of these areas in the fourth quarter with $800 million and $900 million of net inflows, respectively. As Allison will discuss later, our institutional pipeline remains at healthy levels. And as interest rates stabilize, we have a significant opportunity to capture growth in fixed income capabilities in 2023.
Our business in Greater China performed exceptionally well during 2022, building on our leading position in the world’s fastest-growing market class asset managers. We experienced modest net long-term outflows of $600 million in the fourth quarter due to significantly higher redemptions in fixed income throughout the industry in China and rising bond yields stroke net asset values for fixed income securities lower.
Despite these challenges, we raised over $3 billion from new product launches during the quarter in China. For the full year, our China joint venture delivered $7 billion of net inflows, the equivalent of 11% organic growth rate. Market sentiment in China will be mixed for the next few months as the country works through the transition period of higher COVID infection, stabilizing interest rates and redemptions turned to more moderate levels. That said, there are also signs that the outlook for the remainder of 2023 is improving, and I’m optimistic for a return to organic growth rate throughout 2023 in China.
Although, we maintain momentum in key capabilities, the firm experienced net long-term outflows this quarter of $3.2 billion. Active global equity remains the biggest drag on organic growth with $6 billion of net outflows in the fourth quarter, including $3 billion in our developing markets fund. As we discussed previously, client appetite for these assets have been lower than in the past, but I’m optimistic, redemptions will slow this top client appetite for risk assets will eventually return.
We entered 2023 with a strong balance sheet, giving us the needed flexibility to operate strategically in this environment. Long-term debt remains at low levels, the lowest in 10 years, and our cash balance increased to over $1.2 billion at year-end. As we discussed last quarter, we continue to be disciplined in our approach to expenses, tightly managing discretionary spending and limiting higher roles that are critical to support the organization and future growth.
We are thoughtfully managing market headwinds while investing for the long-term. We remain focused on identifying areas of expense improvement that will deliver positive operating leverage as the market recovers and organic growth resumes. We are being extremely thoughtful about capital resource allocation in this environment, and we will be well positioned to maintain investments in areas that deliver future growth.
Looking ahead, we are partnering with our clients to meet the most pressing needs in this dynamic environment. We’ve dedicated the past decade to build a breadth of investment capabilities and solutions mindset and operating scale at Invesco that few in the industry can match. I’m proud of our talented – what our talent employees have accomplished in 2022 on behalf of clients and stakeholders, and I’m optimistic for return to organic growth when market sentiment eases. Market direction may be uncertain, but I’m confident that Invesco is prepared to meet challenges that will arise in 2023 and well positioned for future growth.
With that, Allison, I’ll turn it over to you.
Allison Dukes
Thank you, Marty, and good morning, everyone. I’m going to start with Slide 4. Overall, investment performance improved in the fourth quarter with 61% and 63% of actively managed funds in the top half of peers or beating benchmark on a three-year and a five-year basis, up from 57% and 62% in the third quarter. These results reflect strength in fixed income and balanced strategies where there is strong client demand. Performance lacks benchmark in certain equity strategies, but we experienced improvement over the past quarter in several key funds and short-term performance is trending positively in several U.S. and global equity strategies.
Moving to Slide 5. We ended 2022 with $1.41 trillion in AUM, an increase of $86 billion from the end of the third quarter as most market indices partially recovered from prior quarter lows. Global market increases, foreign exchange movements and reinvested dividends increased assets under management by $61 billion, and total net inflows were $25 billion, inclusive of $30 billion into money market products.
As Marty mentioned earlier, the firm experienced net long-term outflows of $3.2 billion this quarter, equivalent to a 1% annualized organic decline. Despite some stabilization in global financial markets, industry growth remained subdued in the fourth quarter and Invesco’s net flow performance was among the best in our peer group. Passive capabilities returned to net inflows this quarter was $7.3 billion, while net outflows were $10.5 billion in active strategies.
Several of our key capability areas continued to deliver positive organic growth, including ETFs and fixed income as well as the institutional channel. These capabilities also delivered positive organic growth for the full year along with our Greater China business, which enabled Invesco to offset outflows and strategies that experienced net redemptions as investors sought risk-off trade throughout 2022.
Invesco’s ETF lineup was once again a driver of net long-term inflows in the fourth quarter with $4.3 billion. Net inflows were inclusive of $2.4 billion in maturing BulletShares ETFs, which are included in our gross redemptions. Growth this quarter was broad-based. Our top-selling ETFs included the S&P 500 Equal Weight, the NASDAQ 100 QQQM and Invesco Senior Loan ETF.
For the full year 2022, net long-term inflows into our ETF capabilities were $28 billion, equivalent to an 11% organic growth rate and we gained market share. Excluding the QQQs, Invesco captured 3.8% of industry net inflows, higher than our 3.1% share of total industry assets under management.
Institutional channel has been a steady source of growth and that continued in the fourth quarter as the channel has now achieved 13 straight quarters of net inflows. For calendar year 2022, the channel achieved net inflows of $13 billion or a 4% organic growth rate. We sustained new fundings across geographies, asset classes and the risk return spectrum throughout the year, despite the very challenging market backdrop. This demonstrates the diverse range of client relationships we have nurtured as well as the differentiated set of capabilities that we bring to the market.
Retail net outflows were $4.1 billion in the fourth quarter, a meaningfully lower pace of outflows than the prior quarter as the channel achieved positive flows in Asia-Pacific and ETF flows improved in both the Americas and EMEA, despite an uptick in investors harvesting tax losses as the year ended.
Moving to Slide 6. Net outflows declined quarter-over-quarter in Americas and EMEA, primarily due to improvement in ETF net flows. Net inflows in Asia-Pacific were $3.3 billion, led by Japan and Australia. Our China joint venture experienced modest net long-term outflows of $400 million in the fourth quarter as fixed income products experienced a meaningful industry-wide spike in redemptions throughout China and a rapid rise in COVID-19 cases impacted the Chinese economy and financial markets.
Despite that, we raised over $3 billion in the fourth quarter from new products and investors showed signs of shifting back into equity products where we garnered $1.8 billion of net long-term inflows. Looking at full year 2022, our China joint venture delivered $7 billion of net long-term inflows, an 11% organic growth rate, and we’re gaining market share.
Building on Marty’s points from earlier, the Chinese market may remain in transition in the short-term and through the first few weeks of 2023, the higher redemptions we experienced in the fourth quarter have persisted driven by fixed income. This dynamic may be a drag on net flows in China through the remainder of the first quarter, though we expect to be launching new products after the Chinese New Year, and there is increasing optimism for the rest of 2023.
Longer term, we remain one of the best positioned asset managers, and what is expected to be, the world’s fastest-growing market for asset management. Fixed income capabilities sustained organic growth in the fourth quarter with $800 million in net inflows. The firm achieved net inflows in this area, despite the heightened redemptions on the Chinese fixed income products as well as a $2.4 billion outflow related to BulletShares ETFs that reached their planned maturity last month.
As interest rates stabilized, we have a diverse platform of fixed income offerings with strong investment performance across the full range of risk appetites and durations that are positioned to capture future growth. Alternatives experienced net outflows of $3.6 billion in the fourth quarter. Liquid alts accounted for more than two-thirds of the net outflows driven primarily by commodity focused ETFs. These strategies experienced net inflows for the full year, but gave back gains from the first half of the year. Private markets net outflows were $1.6 billion, primarily due to outflows and bank loan strategies. Net outflows in the active equity strategies have been concentrated in global and developing markets equities, which experience $6 billion of net outflows in the quarter, including $3.1 billion from our developing markets fund.
Moving to Slide 7. Our institutional pipeline was $30 billion at quarter end, an increase from $23 billion last quarter. Despite the challenging environment, we are winning new mandates, notably in fixed income and active equity in the fourth quarter, which contributed to the increase. Our pipeline has been running in the mid-$20 billion to mid-$30 billion range dating back to late 2019, and we’re pleased to see the pipeline this robust given the uncertain market environment.
As we’ve noted previously, that uncertainty is causing some mandates to take longer to fund and we would estimate the funding cycle of our pipeline has extended into the three to four quarter range versus the two to three quarters prior to the market downturn. Our solutions capability enabled one-third of the global institutional pipeline in the fourth quarter, and it remains a differentiator with clients. The pipeline reflects a diverse business mix that has helped Invesco sustain organic growth in the channel throughout the full business cycle.
Turning to Slide 8. Markets partially recovered in the fourth quarter, but the significant market declines that we experienced in the third quarter, especially in September, drove assets under management lower at the start of the period. Net revenue of $1.1 billion – $1.11 billion and the fourth quarter was flat the prior quarter and 19% lower than the fourth quarter of 2021. That’s primarily due to lower active assets under management.
Total adjusted operating expenses were $769 million, an increase of $28 million from the prior quarter, and a decrease of $27 million as compared to the fourth quarter of 2021. Compensation expenses increased by $8 million as compared to the third quarter, inclusive of incentive comp paid on the $56 million of performance fees earned in this quarter. As we’ve discussed, we manage variable compensation to a full year outcome in line with company performance and competitive industry practices.
Historically, our compensation to net revenue ratio has been in the 38% to 42% range on an annual basis. During periods of revenue decline, as we experienced in 2022, the ratio tends to move towards the upper end of this range. For the full year 2022, our compensation to revenue ratio was 41%. At current AUM levels, we would expect the ratio to trend towards the higher end of the range for 2023.
As a reminder, looking to the first quarter, we expect seasonally higher compensation taxes and benefits of $20 million to $25 million consistent with prior year trends. We would expect this to be largely offset by lower incentive compensation on performance fee revenue after seasonally high revenues received in the fourth quarter. Marketing expenses were $4 million higher than prior quarter, consistent with the seasonally higher activity we typically see in the fourth quarter. Though marketing expenses were $9 million lower than the fourth quarter of 2021.
Property, office and technology expenses were $6 million higher than the prior quarter. As we’ve mentioned previously, we’re in the process of moving to our new Atlanta headquarters, which we expect to be complete by the middle of this year. However, we may experience moderate delays as a result of flooding that took place when bitterly cold temperatures cause pipes to burst around Atlanta in December, and we’re working with relevant parties on a resolution. In fourth quarter, we also incurred $2 million of expenses related to the decommissioning of our current office building. These expenses are not repetitive in nature.
Technology expenses in the fourth quarter included investment in ongoing technology programs that will benefit future scale, such as upgrading our human resources operating environment and the move of our financial systems to the cloud. G&A expenses were $10 million higher than prior quarter, influenced by $4 million of foreign exchange rate revaluations associated with the impact of currency movements on our balance sheet, and an additional $2 million of value added taxes paid in non-U.S. jurisdictions. As I mentioned earlier, we are investing in foundational technology projects that will enable future scale in our operating platform. These expenses span SG&A and property, office and technology expenses, and they are included in our results.
We’re investing in our key growth capabilities, while balancing the need to diligently manage expenses in this uncertain environment. We have focused near-term hiring in the growth areas that we’ve outlined and deferred hiring for most other positions. Over the longer-term, we’re building a platform that will rapidly and efficiently scale, delivering positive operating leverage and margin expansion as markets recover.
Now moving to Slide 9. Adjusted operating income was $339 million in the fourth quarter, $30 million lower than the prior quarter due to flat net revenues combined with higher operating expenses. Adjusted operating margin was 30.6% as compared to 33.3% in the third quarter and 42% in the fourth quarter of 2021 prior to the steep market declines that we experienced in 2022. Earnings per share was $0.39 as compared to $0.34 due to higher non-operating income driven by gains on our seed capital and co-investment portfolios as markets increased from third quarter lows.
The effective tax rate was 26.9% in the fourth quarter lower than 28.7% in the prior quarter due to losses and lower tax jurisdictions last quarter that did not recur. We estimate our non-GAAP effective tax rate to be between 25% and 27% for the first quarter of 2023. The actual effective tax rate may vary from this estimate due to the impact of non-recurring items on pre-tax income and discreet tax items.
I’m going to conclude on Slide 10. Maintaining a strong balance sheet remains a top priority, further underscored by the volatile environment that we have been navigating. Total debt was managed lower to $1.5 billion as of December 31, which is the lowest level in 10 years. We built cash in the fourth quarter as we ended the year with over $1.2 billion in cash and cash equivalents, an increase of more than $200 million from September 30.
Our leverage ratio as defined under our credit facility agreement was 0.8x at the end of the fourth quarter, slightly higher than the 0.7x the third quarter as declining markets have led to lower EBITDA. Our leverage ratio was flat in the fourth quarter of 2021. If preferred stock is included our fourth quarter leverage ratio was 3.2x. In the face of one of the most challenging markets of the past half century, Invesco continues to capture client demand in high growth areas, and our net flow performance has been among the best in our peer group. Meanwhile, we’ve been building balance sheet strength and financial flexibility needed to navigate these uncertain times. We will be extremely disciplined in expense management and resource allocation, while ensuring that we are meeting the needs of our clients and positioning the firm for long-term growth.
With that, we’re going to go ahead and open it up for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Glenn Schorr with Evercore, your line is open.
Glenn Schorr
Hi. Thanks very much. Just my question is on great trend. I’d like seeing obviously opening up a little bit, getting the $3 billion new flows on the new products. I guess my question, as we watched this develop over the last couple of years, you seem to get great flows when you launch new products. We don’t talk much about the legacy or the older products. I wonder if you could just give us a little more color on. Is the bulk of the flows come through the new issued pipeline? And the reason why I ask it is, historically you’ve done best from a profitability standpoint when your products hit real scale. And you seem to be developing a huge set of new products, but most of the flows come through on day one. So I wonder if you could help with that color that’d be great. Thanks.
Marty Flanagan
Yes. Glenn, let me start and Allison, please chime in. So look, it’s very – that’s really how that market is operating right now. In time you had to get a little mature to something more similar to the United States where you’ll have your launches, there will be fewer of them and you’ll have the ongoing flows into those capabilities. But there are follow on inflows, but really the bulk of it comes through these launches. And again, it’s just unique to the market.
That said, I think it’ll evolve over time. But I just want to – again, Allison hit on this, I did. It’s a really volatile time over the next few months here, but we just think the future is very, very bright in China for us. And when the COVID transition completes itself, we anticipate 2023 being a very strong year in China.
Allison Dukes
Yes. Glenn, I would maybe say if you think about the flow drivers in China, I mean it’s maybe with these new product launches, maybe somewhere half to two-thirds in any given quarter might come from these new product launches. It’s not all of it, but it is as Marty said, it is a – it’s really the way the market works there right now. It’s certainly a less mature market. And for now that is a large driver of flows. I don’t want to leave anyone with the impression that’s 100% of the flow drivers each quarter. But it’s an important part of functioning in that market and is an important driver of market share growth overall. To your point, it’s nice to see flows coming from beyond China and across the region. But it’s an interesting time in China right now.
Glenn Schorr
Okay. Thanks, Allison. Maybe one quick one for you on expenses, so the – or I guess margins in general. Market was up – your AUM was up 6.5% in the fourth quarter, so some of that’s going to flow through into the first quarter revenue. So maybe you could start, just help us with the jumping off point on starting the first quarter. Because sometimes there’s some seasonal items on the expense side, so just how to think about the jumping off point in Q1? Thanks.
Allison Dukes
Sure. There are many puts and takes. I think as we think about the revenue side of it, you’re right, markets have been a little bit better only a few weeks into January. That’s certainly a positive. But I do think it’s really important to underscore the mix shift that we saw in our portfolio overall in the fourth quarter. We pointed to the $6 billion of outflows in two particular active equity strategies, developing markets as well as global and international funds. Those are – that has an impact overall in the jumping off point as we think about the revenue dynamics. At the same time, a lot of encouraging signs as we’ve pointed to, as we see real strength in inflows, in our ETF capabilities and fixed income in particular. But as you certainly understand that comes at a different revenue level than what we’ve experienced as we see some of the remixing of the portfolio.
So while market could be a positive this quarter, there’s also a bit of a headwind in the jumping off point in terms of remixing relative to prior quarters. As we think about expenses, overall I noted in comp expense, you should expect a usual seasonality of $20 million to $25 million in the first quarter. That would be offset by what we would – would not expect any recurrence and performance fees like we saw in the fourth quarter just given the seasonality there. And of course the market will be what the market will be, we’ll adjust for that.
So hopefully that gives a little bit of color as you think about some of the puts and takes. Overall it’s a difficult environment to navigate because you see a lot of forces moving at the same time and we’re trying to get our arms around that as well.
Operator
Thank you. And now Brian Bedell with Deutsche Bank.
Brian Bedell
Great, thanks. Good morning folks. Thanks for taking my questions. Maybe just one more on expenses, Allison, just to finish that thought, just the – I missed the number I think that you said in property office and technology that seemed like it was one-time in 4Q. So did you also want to get the jumping off point there? I realized that you’re going to have some duplicate expense I think in the first half, as you transition to new headquarters. But maybe just an outlook in that context for 2023 if you can. And then also in G&A considering that spiked up in 4Q, but it sounds like you’re working on some cost saves during the year in G&A.
Allison Dukes
Sure. Let me do my best to try to walk through a few of these. On property office and technology, a couple of points on some of, what we’re experiencing really specific to our Atlanta headquarters. As a reminder, we’re carrying the cost of two headquarters right now. That will persist for a few more quarters. That’s somewhere between $2 million to $3 million of incremental expense. We had a $2 million non-recurring charge in the fourth quarter related to decommissioning the existing, or I’ll say outgoing headquarters we are in. We also pointed to some uncertainty, because we had a pipe burst in our new building on Christmas Eve and that happened around Atlanta and that will cause some delay in moving. And so there is a little bit of uncertainty right now as we try to work through what all of this means.
That combined with G&A, in G&A, we pointed to a lot of FX revaluations and higher VAT taxes in the fourth quarter obviously FX has been a pretty meaningful driver in some of the significant movements we saw over the last few quarters there. I would say, overall as we think about property office and technology, and G&A, I will just continue to underscore a lot of these key foundational projects that we are working on and they really spam those two categories in terms of both technology and professional services.
We have been – we are working on installing in a new HR environment. We are wrapping up moving all of our financial systems to the cloud, and we are in the early stages of Alpha NextGen. And so as these projects are rolling off and rolling on there is quite a bit of investment and focus right now and really creating scale for the future.
Overall, as I think about G&A for the year and the fact that we do expect to be back in a full travel mode this year, and we do expect the reopening of China to allow us to get back to a really important region that we have not been able to get to for the last three years. I expect G&A this year on an average basis is somewhat consistent with G&A last year on an average basis, when you think about some of the efficiencies and our – discretionary expense management we’re trying to manage, but at the same time, the reopening of travel as well as some of these foundational investments we are making.
Brian Bedell
That’s fantastic color. Thank you. And then just to follow up on the revenue side, obviously the revenue yields pressured, sounds like a lot of that came in the Oppenheimer Funds complex given just the outflows there. So two part question would be, are you seeing increasing demand or risk appetite given you foreign markets and especially emerging markets are starting to year off pretty well in performance? Are financial advisors that you’re speaking with starting to warm up to that are seeing some risk on appetite from their clients and can that help their revenue yield if that rebounds? Probably not in 1Q, but as we move through the year.
Marty Flanagan
Yes. I’ll make just a comment. The contrast is dramatic, right? If you went through last year there was really no interest at all in emerging markets in particular very much risk off and the like, it’s too early. But what we are seeing is, starting to be some early interest in emerging markets in China, driven by China, quite frankly. And developing markets in Q4 had some very, very, very solid performance, which needs to have, and it’s a really talented team. So the answer is, if the client appetite is there we should do quite well, which would be a nice change from this past year.
Brian Bedell
Great. Thank you.
Operator
Thank you. Our next Dan Fannon with Jefferies.
Dan Fannon
Thanks. Good morning. I wanted to follow up on the alternative suite of products. You saw some outflows. This is the second consecutive quarter of a little more elevated outflows. But you did highlight private credit? Or as seeing inflows, and I think you said some of the liquid strategies goes. Could you talk about the mix of fees within alternatives and kind of where the positive and negatives are shaking out?
Allison Dukes
Sure. I’ll start, Marty, chime in. I mean, I would say a couple of things as we look at alternatives, again, a lot of what we saw in terms of outflows would be the liquid alternatives. So commodity ETFs in particular, currency ETFs. So, I think from that perspective that would be – those would be lower fee alternatives that were flowing out. Boiling that down to private markets that also was an outflows at about $1.6 billion, but that was largely driven by global bank loans, direct real estate, we were an outflows to the tune of about $200 million there. So that’s really, again, realizations net of acquisitions there, negative $200 million. Continue to gather commitments and have a fair amount of dry powder and direct real estate about $7.5 billion coming into the year overall on that side.
On a private credit perspective, I think it’s been a – it’s an interesting environment. It was an interesting year for private credit overall, just the floating rate nature of loans and some of the attractive fundamentals there have helped mitigate losses, but certainly as recession fears kind of persist and trying to navigate what that may or may not look like, that certainly impacts credit appetite overall. And so we continue to navigate that. I think we, coming into this year, we’re bullish on all of our private market asset classes. We feel like we’re really well positioned. We feel very good about the funds that we have launched and will be launching and that they’re going to be well positioned for where we expect to see client demand this year.
But certainly your perspective on higher yields and what the attractive entry point is going to really dictate how our flows come together as we make it quarter-to-quarter through thus. So, overall I think we’ll continue to see good strong demand there. But the liquid alt and some of the movements and currencies and commodities have put overall downward pressure on the flows there.
Dan Fannon
Got it. Thank you. And then I think, Marty, you mentioned for fixed income, obviously the positioning and is positive and you’re helpful for pickup and demand, but I think you need to, you said interest rate stabilizing is the kind of key factor for decision making. So, as we think about growth sales or redemption activity, do you feel like it’s more stagnant and so we kind of get more of a direction of where rates are on a global basis and then we start to see much more assets in motion?
Marty Flanagan
Yes, absolutely. So, look, I think that’s true of equities also, right? Some certainty to the future is going to be a really, really important thing for how investors react this year. But for fixed income, absolutely that’s going to be the case. It’s on the back of a broad set of capabilities, very good performance. And I’ll just follow on to Allison’s point in REIT, which we’ve talked about over the last year. It is now being launched on a very important Wirehouse [ph], which is one of the things we’re waiting for. And we’re also in development of some follow on capabilities in our private markets that will end up in the wealth management channel. But again, that will be a multi quarter introduction. But we’re now underway. So it’s again, this won’t be immediate, but we’re now moving forward, which is a really important thing for the firm.
Dan Fannon
Thank you.
Operator
Thank you. Now, Brennan Hawken with UBS.
Brennan Hawken
Good morning. Thank you for taking my questions. We’d love to start on flows. Marty, you had some commentary in the press release suggesting, you were waiting on a recovery in flows, some of the indications, maybe a week start to China, slower funding on the institutional side. So are you all generally signaling that you’re expecting flows to remain soft here, just given that uncertainty that you’ve talked about based on what you can see in the activity here?
Marty Flanagan
Yes, look, I think that’s a rational line would get you there, right? But as I say, we’re, from my perspective, we’re a lot closer to the end of the uncertainty than the beginning. And what we point to is just look at our relative flows, vis-à-vis our competitors how we’re positioned. There’s a lot of things that are going well and you don’t need a lot of change and sentiment to really start to make a really meaningful impact in our flows. And so as they say, they don’t ring the bell at the bottom, but we’re a lot closer to that, and I think that’s going to be a really positive development for Invesco.
Allison Dukes
Yes, Brennan, I might point to just the improvement we saw from the third quarter to the fourth quarter. Look, it’s a dangerous game to predict flows, and we’re certainly not going to try to enter that game, but as we look at the drivers coming out of the quarter and just some of the overall market sentiment right now, we saw the decay rate. Yes, the decay rate in third quarter was 2.9%. That improved to a negative 1% in the fourth quarter and some really positive drivers there that again, this is a dangerous game, but we would expect those to continue to hold up through the first quarter. So the ETF platform in particular and our strategies there 7% organic growth in the fourth quarter. Despite some of the tax loss harvesting and the bullet shares maturity, again, a lot of strength coming into the year there.
Fixed income for the reasons we’ve just discussed have has performed well and certainly hinges quite a bit on the rate environment. But we feel like the fundamentals are strong there. We’re well positioned. The institutional channel does seem to be coming back underscoring Marty’s point that perhaps we’re closer to the end than is the beginning. And so, as we saw a lot of institutions sit on the sideline, and remix depend – waiting on some conviction that, that could improve here at this quarter.
Active equities very difficult quarter for us in the fourth quarter. I think a lot depends on just some of the earlier conversation around developing markets and as people find the right time to come back into that asset class and that exposure just diminishment and that headwind will help us quite a bit. And then the wildcard at the moment is China. What’s happening there is really unique. And as they’ve changed their COVID strategy and done a 180 [ph], it’s having a real impact, but we also expect that to be relatively short term and the fundamentals are really still strong there. So, I think, we feel maybe a little bit better than we did a quarter ago. But that sure is a hard place to be at the moment because it’s been a wild ride of a year. And we’ll see where things go over the next month or two.
Brennan Hawken
Thank you for that all that color. That is very, very helpful. Shifting gears a little and thinking about real estate and your capabilities there. Allison, I believe you made some positive commentary on how the year shook out there on the real estate front. And I think, Marty, you referenced that you’re getting close to a warehouse launch on a product. I guess, number one, on the wealth management side, have you been looking at what some other products and some of the struggles and the gates that we’ve seen in some of these products on the retail side? And how are you making adjustments? How you’re thinking about structuring your own product in light of some of the lessons learned there? And then, on the institutional side, there’s been some press around the queue building on redemptions and yet prioritization sort of given to the not addressing the queue, but rather addressing the needs of sustained investors, which makes perfect sense. It’s just how are you managing maybe that delicate customer service dance in order to make sure relationships aren’t damaged?
Marty Flanagan
Yes, it’s a great question and needless to say it’s been in front of everybody. Look, we’ve not had that issue. I’d also say we don’t have the magnitude of size that where that has been sort of topical. So again, our client experience has been very different. But again, I recognize the relative scale that is what comes along with creating availability into these capabilities. And I think that’s – that would be a lesson for the market. And I think if you want to get exposure to some of these capabilities in extremely challenging times, you’re going to run into some situations like that. And my personal perspective is if we do a really good job educating investors and they have the time horizons that’s necessary for these exposures, they’re going to do really well. So I would not make a decision not to have – to provide access to individual investors during just an extremely challenging time. So I don’t know if that’s helpful, but that’s how I think about it.
Brennan Hawken
And then on the institutional side?
Marty Flanagan
I’m sorry, can you repeat the question?
Brennan Hawken
Yes. There was some press coverage around the institutional – your institutional capabilities on commercial real estate and the fact that you – there’s a large queue rather of redemptions, but they’re – given the illiquid nature, it’s going to take time to work through that. And there’s prioritization given to the existing investors in the actual strategy. And so just it’s an understandable dance to try to balance, but how are you sustaining and maybe limiting damage control as far as relationships go around that inherent friction?
Marty Flanagan
We’re not experiencing what you’re describing. So when there are reductions, it’s – we have very, very strong relationships with our clients and they’re managed really quite well. So we’re not feeling the friction that you’re referring to. So…
Brennan Hawken
Okay. I’ll follow up later. Thanks.
Marty Flanagan
Thank you very much. Yes.
Operator
Thank you. Now, Craig Siegenthaler with Bank of America.
Craig Siegenthaler
Hey, good morning, everyone.
Allison Dukes
Craig.
Craig Siegenthaler
So given the rise that we’ve seen in interest rates, I just wanted to see if you have a view on the potential reallocations in the fixed income in 2023? And also do you have a view within that on the potential mix between active and passive? And then how do you think Invesco is positioned within that to win these potential rebalancing?
Marty Flanagan
It’s a great question and I’ll give you an answer. I’m sure it’s wrong. But net-net I think getting, the rise in interest rates get into more natural interest rate levels is healthy for the marketplace. I think it’s healthy for active equities over time. And again, as I said before, once it sort of hits its stability level, I think it’s good for different types of asset classes and fixed incomes say. [Ph] I really don’t know what the relative allocations are, but it’s been a long time that you’ve had a market where it’s positive for stock pickers and active equity.
And yes, my personal view, once you get relative outperformance, you’ll start to see money go back to active equities and various elements of it. And that would probably not be a popular view. And history suggest that that’s not been the case. But that’s how I think about it.
Craig Siegenthaler
Thank you, Marty. And maybe just a follow-up on the other question on real estate, maybe asking a different way. So we have really great I think visibility into your liquid public funds and also INREIT’s investment performance. But maybe could you talk about how some of the performance in the other products, the private products trended in 2022? I’m especially looking for core real estate debt and also the opportunistic drawdowns?
Marty Flanagan
Look, I don’t have a specific performance in front of me, so hard to answer the question. What I will say it’s a strong – a very, very strong team. The core capability is, it’s just a fundamental strength to the organization and the client relationship has been very, very strong over an exceeding long period of time. So again, I’m sorry, I don’t have the specific performance that you’re asking about.
Craig Siegenthaler
No worries. Guys, thanks for taking my questions. Thank you, Marty.
Marty Flanagan
Appreciate it.
Operator
And now, Alex Blostein with Goldman Sachs.
Alex Blostein
Hey Marty and Allison. Quick, maybe just a quick follow-up to Craig’s question around fixed income. I was hoping you guys could give some details around Invesco’s position with some of the specific products that you feel most kind of optimistic about if the recent recovery and fixed income flows from the industry continues. And how are you thinking about your ETF positioning in fixed income versus the active book in fixed income?
Marty Flanagan
I’ll make a couple comments. Just with our – within the ETF franchise, fixed income continues to be an opportunity for us, right? The strength has come historically from equities. We surely think we have the capabilities to grow off the ETF franchise and fixed income. So we would look at [indiscernible] going into the year. With regard to fixed income in particular, the suite of capabilities of performance is really quite strong. So it’s really going to be driven by what we see in our client demands. There’s been the munis, in the retail channels in the United States, muni bonds is a very attractive all the short duration elements. Bank loans continue to be very strong. So again, it depends on the market and where we are. But Allison, do you have any further insights from your perspective?
Allison Dukes
No, I mean, I think, whenever it is that inflation at least – well, inflation declines and you start to see some pausing with the Fed and rate movements, I think we expect total returns to be strong overall. We would expect that to be sometime in 2023. I think Marty hit on the areas of real strength. Munis, certainly, we see that as our customers continue to focus on taxes as being an area that we expect to hear even more bullish sentiment over the course of this year. Our global liquidity is held up very nicely and we expect demand to continue there. Fixed income SMAs that’s been a very strong area for us that continues to be a wrapper that’s in real demand. Stable value has been a leading capability for us for a very long time. So, I think, it really does depend on your perspective on rates and credit of course. But we do expect there to be an inflection point and continued demand across a lot of our capabilities this year. I think overall net flows are still favoring ETFs over some of our active strategies, but we feel well positioned in both.
Alex Blostein
Got it. Thanks for that. And then, Marty, you mentioned strong balance sheet and I think the commentary you’ve made around it is sort of enabling you to operate strategically. Could you expand a little bit on that? Does that just mean sort of build liquidity and then eventually resume more active capital return program? Or do you think this environment opens up incremental M&A opportunities for Invesco?
Marty Flanagan
Yes. Let me make a comment then Allison can pick up. So, what we’ve been using our balance sheet for right now, and we’ve talked about it in different ways are really investment that are going to continue for any other company to grow in the future. So the alternative capabilities, this scenario, where we’ve been using the balance sheet. Yes, we’ll continue to do that. And you’ve heard us talk over time. MassMutual has been an amazing partner helping us to really augment our balance sheet to a very material degree. So that’s really been the more specific we’re talking about now in some of these foundational enterprise programs that Allison was referring to. They might not be “interesting” if they’re necessary, but that’s what creates scale within an organization. And so that’s the other way that we’ve been using very, very short term. But Allison, you want to pick up more on the other elements of the balance sheet?
Allison Dukes
Yes, I mean, I think, Marty hit some of the high points. But again, we just continue to be focused on supporting our future growth and maintaining a really strong balance sheet to do that. And part of that is continuing to be really good stewards of our capital overall, being very thoughtful about the debt on the balance sheet, which has been top of mind for us and we’ve been shipping away at and feel really good about the progress we’re making there, making progress there. It’s freeing up capacity for us to again, continue to focus on our own future growth. Some of that is investing in our product launches. We are fortunate to have a really good strong strategic partner there with us. But we continue to really prioritize investing in ourselves, both in terms of our product launches, but also the technology projects and some of the foundational capabilities that we know are really going to be necessary to create the scale and this business that we expect to have over the coming years. Hopefully, that’s helpful?
Alex Blostein
Yes. Thanks so much.
Operator
Thank you. Bill Katz with Credit Suisse. Your line is open.
Bill Katz
Terrific. Thank you very much for taking the questions. Appreciate all the colors so far. Marty and Allison, you both mentioned sort of the longer-term outlook for China does sound very strong. Could you help unpack a little bit about where you have a queue for product launches for 2023? And if you could break down the mix between equity and fixed income and other assets in the region? That’d be super helpful.
Allison Dukes
Sure. Well, I’ll take a stab at it. I would say in terms of product launches, overall, hard to say exactly, but I’ll tell you the demand there does favor balanced and fixed income products over equities. So it would probably skew a little bit more to the balance side than fixed income than equity. But that’s not a perfect science, as I think about just the mix overall in China. I would say it’s skews probably 50% or so balanced and fixed income maybe as much as 60%. Balanced is a very popular asset class there. So equity is probably a little bit smaller in the overall mix there relative to what you might expect to see and a portfolio in the United States.
Bill Katz
Okay, thank you. And just to follow-up certainly hear you on sort of all the different drivers for flows. When you think about the base fee rate exiting the year entering 2023, where does that sit today and should we presume sort of a gradual decline just given the ins and outs between across geographies products and distribution channels?
Allison Dukes
Yes, I mean, I would say the factors that impacted the net revenue yield and the just the overall base fee rate in the fourth quarter, we would expect a lot of those to continue into the first quarter primarily as we continue to benefit from the demand for our ETF and our passive strategy. So while that is a significant positive, and we are capturing demand where demand is right now that does put downward pressure on our average fee rate. And we would expect a lot of those trends to continue into the first quarter at developing markets in particular in global equities. And what happens there in terms of redemptions and demand overall, that will remain a headwind. If nothing else, just given the exit rate of those particular asset classes in December as we come into this year, that does put downward pressure overall because of the outflows that we experienced in the last probably three quarters there.
And overall though, I’ll just say, as I do every quarter, we’re not focused on managing to a net revenue yield or an average fee rate. We’re focused on managing the operating income and operating margin of the company overall. And so while we see that downward pressure given the mix shift in our portfolio, and that mix shift really did accelerate in 2022. We are really focused on how do we continue to operate the business to create scale and to get to scale and these passive capabilities.
We’ve taken market share, we’ve gained quite a bit in terms of our organic growth over the last few years, but we’re not at scale in those capabilities and getting to scale and continuing to remix our expenses and reallocate against these higher growth capabilities is our primary focus. And that’s what’s ultimately going to give us the opportunity to improve operating margin.
Bill Katz
Thank you very much.
Operator
And now Patrick Davitt with Autonomous Research.
Patrick Davitt
Hi, good morning everyone. Most of mine have been asked, just one quick one on credit ratings. I think S&Ps on record is saying their ratings and outlook are based on the expectation that your leverage ratio with the preferred will be in the two and a half times to three times range, which you went over in 4Q. I suppose the market recovery could already have that back below three times, which could you speak to any potential risks to your capital return or new investment outlook around that issue? And based on your past experience, how much of a grace period can we expect from the ratings agencies after kind of breaching that three times bogey for one quarter?
Allison Dukes
Hi, Patrick, I’ll take that. Look, we are – we’ve had no conversations with S&P that would indicate we have a risk there. I think the important point is all the work we have done in continuing to manage our debt balances lower. So, while EBITDA has declined, given the market impact, one would expect that to be more temporary in nature. Given we do expect there will be an inflection, excuse me, in the market at some point. And at the same time we’ve managed not only the debt on the balance sheet to the absolute lowest level in 10 years, but managed a number of contingent liabilities that would’ve been present when they made that statement two to three years ago. Those have all been taken care of as well.
So in terms of the overall liabilities, we’re in a significantly better place than we were when they made that statement a few years ago. We did receive an upgrade last year from Fitch. We do feel like we are overall in a good position as far as our credit ratings are concerned.
Patrick Davitt
That’s helpful. Thank you.
Operator
Mike Cyprys with Morgan Stanley. Your line is open.
Mike Cyprys
Hey, good morning. Thanks for squeezing me again here. Just to follow-up on expenses, Allison, just coming back to the transformational project that you were mentioning earlier. I guess just how much might that lower run rate expenses as you kind of look out over the next couple of years, and as you think about expenses for this year, how are you thinking about the bookends for growth rate and expenses?
Allison Dukes
So in terms of transformational projects, lowering expenses in the next couple of years, I would say they will not contribute to lowering expenses in the next couple of years. As we’ve noted before, the Alpha NextGen is really our most significant investment that we will be making. We will be in the next couple of years deep into the investment period of that, and then we’ll be running parallel for some period of time before we can start to streamline and decommission apps on the other side. So, we are several years away from seeing the benefit of that investment. Again, it’s the right near-term and long-term move for us as a company overall as we think about building to the scale we want to be at in the next five years, seven years, 10 years. But it’s an investment and it will take some time before we see the payback on that investment.
In terms of the bookends of expenses, look the biggest driver of that’s going to be comp and the biggest driver of that’s going to be market related. And so as you think about the variability and our expenses and what could move, the most beyond our expectations and beyond some of the guidance I already gave it would be compensation related. The good news in that is that comes with revenue. And I think that right now as we think about what expense flex we have on the year? I want to make sure it’s clear, we are managing discretionary expenses at every level and really focused on the must haves only, and all the nice to haves are things we are foregoing.
But there are a lot of must haves in this business that we think really position us well to capture demand over the next several years. And we want to stay the course on that even in some of these challenging market conditions. And we’re reallocating the discretionary expenses to some of these foundational investments that we think will serve us well and create the operating leverage for the future.
Mike Cyprys
Great. And just a follow-up question on the cash position, $1.2 billion, how much of that is discretionary? And how do you think about the scenario where buybacks might resume? Thank you.
Allison Dukes
So the $1.2 billion, about $640 million is held for regulatory purposes, so it’s a little bit higher than the last quarter, and that’s really FX related. So you could consider the amount above that $640 million roughly discretionary. As I think about buybacks, I’ll just underscore our capital priorities. The first is supporting our future growth, and we’ve got a lot of investments we want to make in ourselves, and we think that’s going to serve shareholders the best over the long run. We want to focus on maintaining that strong balance sheet and continue to focus on the leverage levels that we have and managing those down. And we also continue to focus on returning capital shareholders, but that we’re going to do first through dividends and steady dividend increases, and it’s really excess cash that we’ll think about for buybacks.
Mike Cyprys
Great. Thank you
Allison Dukes
Marty, anything else?
Marty Flanagan
Yes, excuse me. I get off mute. I do want to follow-up just on this conversation on expenses. So there’s some longer term investments that Allison was talking about, which we’ve talked about some, and then the obvious elements around discretionary. But as a management team, we are absolutely focused on what we call, driving scale within the organization against capabilities that are in client demand. And we’re deeply into that process and we’re constantly doing it. And from that, you get the opportunity to make a decision to invest in a capability for a client, let’s say, or have it dropped at the bottom line. So that’s another element that we have been working on very, very diligently.
And it’ll make us a better company, but at the same time, at some point the markets recover, you’ll get further operating leverage with, from the organization. So, I think you should look at it as three different elements, and that’s nothing new. You’ve seen us do it, time and time again. And it’s a normal practice from us and again, it’ll just create better outcomes for sure, shareholders and clients.
Operator
Our last question is from Mike Brown with KBW. Sir, your line is open.
Mike Brown
Great. Hi, good morning. I wanted to ask you a couple follow-up questions on the real estate business. So, I believe the total real estate exposure for Invesco is around $92 billion and $75 billion or so is in the direct real estate side. So within direct real estate, how much is tied to the U.S. and then how much is tied to office and retail?
Allison Dukes
I would say in terms of how much is tied to the U.S., probably around two-thirds is probably roughly, I’d have to – we can follow up with you on specifics there, but I’d say roughly. We’ve been managing our exposure to office and retail quite a bit over the last couple of years, three years probably in particular. And really favoring asset classes like cold storage and industrial and medical office buildings and, some of the asset classes you would expect us to be in. So the story around retail has been known for quite a long time, probably five years or six years. Office has obviously been quite challenged since the advent of COVID and we’ve been managing those exposure.
So those are not a real concern overall. And as I think about really where our acquisitions have been focused over the last two or three years, they’ve been in these areas of real high demand. Multifamily would be another example of an asset class we’ve been favoring.
Mike Brown
Okay, great. Thanks Allison. And then just specifically in terms of some of the line items here, how much does real estate contribute to performance fees? So of the $68 million, how much was from real estate, and then how much do real estate transaction fees contribute to other revenue?
Allison Dukes
So on the performance fees this quarter real estate was the majority of the performance fees. If I think about prior years, you would’ve seen more coming from IGW China overall than what we saw this year. So the two biggest drivers in any given year would be China and real estate, but in 2022 it was definitely coming more from real estate. In terms of other revenue, I would say it’s a – I’d have to come back to you on what portion of it is. I will say the increase in other revenue in the fourth quarter was driven largely by higher real estate transaction fees.
Mike Brown
Okay, great. Thanks for the color there.
Marty Flanagan
Okay. Well look thank you very much everybody appreciate the engagement, the questions and we’ll be chatting next quarter. So have a good rest of the day. Thank you.
Allison Dukes
Thank you.
Operator
Conference has concluded. Again, thank you for your participation. Please go ahead and disconnect at this time.
Be the first to comment