Thank you for standing by, and welcome to Invesco's Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session. As a reminder, today's call is being recorded. Now, I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations. Thank you. You may begin.

All right. Thanks, operator, and to all of you joining us today. In addition to the press release, we have provided a presentation that covers the topics we plan to address on the call today. The press release and presentation are available on our website at 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. Andrew Schlossberg, President and CEO; and Allison Dukes, Chief Financial Officer, will present our results this morning, and then we'll open up the call for questions. I'll now turn the call over to Andrew.

Thanks, Greg, and hello, everyone, and I'm pleased to be speaking with you today. In a reversal from the third quarter, overall market sentiment in the fourth quarter turned more constructive as investors began to gain confidence, putting money back to work in the last several weeks of the calendar year. Equities and fixed income were both beneficiaries of a growing belief that central banks would cut rates sooner in 2024. The S&P was the best-performing major equity index and while outside the US, there was solid market growth in Europe, while China continued to lag. Fixed income markets performed well, led by government bonds as expectations for tightening interest rates earlier in 2024 prevailed. The market volatility and shifting macro trends exhibited this past quarter strengthened our conviction in the areas we focused on throughout 2023, and continuing to reposition Invesco to perform through various market cycles and in front of the rapid evolution underway in our industry. As discussed on previous calls, we continue to streamline and simplify the company for the benefits of our clients, colleagues, and shareholders. The focus of these efforts is to further emphasize long-term investment quality, strengthen our diverse product offering, and build on our value proposition that uniquely meets a broad range of client needs around the world. We are also tightening our financial discipline, which will further enable us to allocate resources to drive innovation and acceleration for the benefits of clients. We're going to continue to leverage our scale to more effectively invest in profitable growth and further strengthen a culture that attracts and retains the top talent in our industry. While our work in each of these areas continues, we are making good progress, and I'm appreciative of the client focus and dedication of my Invesco colleagues around the world. Our results, which are highlighted on slide 3 of the presentation, summarize many of these external and internal factors at play. During the quarter, we continued to benefit from growing client demand and assets beginning to move off the sidelines. In the fourth quarter, we delivered $6.7 billion in net long-term inflows, which is a testament to our advantageous position with deep client relationships, strong geographic mix, and a broad suite of in-demand solutions. While organic flow growth and improving sentiment drove asset levels higher, most of the gains occurred later in the quarter, limiting the revenue impact in the fourth quarter but increasing AUM nearly 7% from September 30 levels. Several factors contributed to our strong organic flow growth in the fourth quarter. Most notably, demand for our ETFs and our SMAs continue to drive market share gains in these important product platforms. During the quarter, we achieved $14 billion in positive flows in our ETF factor and index capabilities globally and hit a record high of $634 billion in AUM. We also produced our 13th consecutive quarter of positive flow growth in SMAs as we continue to see strong demand for custom tax-optimized solutions in the US wealth management channel, in particular. The second set of quarterly organic growth drivers were the return to positive flows in two of our most critical growth areas: our China business as well as the broader Asia Pacific region and private market alternatives. While overall sentiment in China remained relatively weak, our well-established position in the country drove positive organic growth in the fourth quarter. The majority of the flow growth came from the launch of seven new products, which were augmented by equity product sales in existing capabilities. Strong demand for these new products could signal a more constructive 2024 in China. Long-term, we remain optimistic about this market and our unique leadership position within it. We continue to believe that the Chinese asset management industry will grow and mature in the coming years with the development of the local retirement and capital market systems in the world's second-largest economy. In private markets, we generated net long-term inflows led by a stabilization and modest inflow into direct real estate and inflows to credit strategies, notably bank loans, which includes CLOs. We have over $6 billion in dry powder to capitalize on opportunities emerging from the market dislocation of the last several quarters, but we will need greater market clarity before we begin to see significant growth. Shifting to fixed income, which is a key area of strength for Invesco, we continue to see steady ongoing growth, having reported positive inflows in 19 of the past 20 quarters. Leading contributors in the fourth quarter included investment-grade custom SMAs, as well as municipal bond strategies. As investors gain greater clarity on inflation and Central Bank interest rate policy, we expect clients to move out of cash and extend the duration profiles of their fixed income allocations into a wider range of strategies. As previously highlighted, fixed income is one of our absolute strengths in Invesco, and we remain focused on ensuring we're well-positioned to capture an outsized share of this ongoing reallocation. Finally, pressure on active equity flows continued in the fourth quarter for both the industry and for Invesco. We continue to emphasize investment quality, product differentiation, and client engagement to ensure we remain a leading provider in this space with a focus on our in-demand capabilities where we can gain market share. Despite the continued headwinds, we have seen some moderation in certain areas of active equity flows, particularly in global, international, and emerging market segments. Our net outflows into these important strategies moderated during 2023 to $1 billion to $2 billion a quarter, significantly lower than what we experienced in 2022. These early signs of reversal have been led by our Global Equity and income strategy, which achieved top retail selling status in Japan and delivered an incremental $1.4 billion of net inflows in the fourth quarter. While we are cautiously optimistic about market conditions for 2024, we remain prepared to meet client and shareholder expectations across a range of scenarios. We have the breadth of capabilities, the discipline to drive performance as well as the organizational structure and focus to ensure we are well positioned to meet evolving client demands. As market sentiment improves, this should translate to even greater scale, performance, and improved profitability. With that, I'm going to turn the call over to Allison for a closer look at our results, and I look forward to your questions.

Thank you, Andrew, and good morning everyone. I'll begin on Slide 4. Overall investment performance was solid in the fourth quarter with 64% and 71% of actively managed funds in the top half of peers were beating benchmark on both a three-year and a five-year basis, respectively. Investment performance improved considerably on a five-year basis, going from 65% in the third quarter to 71% in the fourth quarter reflective of improved performance that we're seeing across several categories, including in US, global, and international equity. We continue to have excellent performance in fixed income across nearly all capabilities and time horizons. An important fact given our strong conviction in our ability to attract flows as investors deploy money into these strategies. Turning to Slide 5. AUM was nearly $1.6 trillion at the end of the fourth quarter, $100 billion higher than last quarter end. The fourth quarter began with weak markets in October and then recovered as the quarter progressed, ending the year with equity and fixed income markets higher versus the third quarter. Higher markets, coupled with net long-term inflows and favorable foreign exchange movements drove the increase in assets under management during the fourth quarter. We generated $6.7 billion in net long-term inflows, which was an organic growth rate of 2.4%, but we expect to once again outperform peers in what has been a challenging environment for organic asset growth. Looking at flows by investment approach, client demand for passive capabilities remain strong as we garner nearly $14 billion in net long-term inflows during the quarter. ETF inflows were $12.4 billion, an annualized organic growth rate of 17%, marking this as one of our best quarters for ETFs. The S&P 500 Equal Weight Index Bond once again led the quarter with $4.6 billion of net long-term inflows. This ETF was also our leading flow driver for the year with nearly $13 billion of inflows. Our Q2 QM ETF through the second-highest inflows in our ETF suite with over $2 billion for the quarter. The Q2 QM was launched a little over three years ago and now stands at over $18 billion of AUM, making it our third largest ETF outside the QQQ. We demonstrate the ability to sustain growth in ETFs throughout the full market cycle with organic growth in 13 of the past 14 quarters. Offsetting some of the growth in passive was $7.2 million of net outflows in active strategies. What's encouraging is that the level of outflows in the fourth quarter was the second lowest since the market sell-off began in early 2022. The lower level of net outflows was driven by growth in active fixed income products, led by our custom fixed income SMA, which totaled $2.1 billion in inflows. Regarding active equity strategies, we experienced another quarter of strong growth in Japan with our Henley Global Equity and income fund garnering $1.4 billion of net inflows from Japanese clients. This fund continues to be the top-selling retail fund for the industry in Japan on both a quarterly and a year-to-date basis. Active global equity products experienced net outflows of $1.6 billion, of which $1.2 billion came from the developing markets fund. The level of outflows from this investment class has declined after significantly elevated redemptions in the second half of 2022. Looking at flows by channel, the retail channel generated $4.6 billion of net long-term inflows, while our institutional channel had net inflows of $2.1 billion. Driving the growth in the retail channel were the ETF products I noted previously, as well as the custom fixed income estimate. Growth in the institutional channel resumed after net long-term outflows in the third quarter that were driven by the global targeted returns redemptions. Moving to Slide 6 inflows by geography. Asia Pacific delivered net long-term inflows of $5.8 billion, representing organic growth of 12%, driven by growth in Japan and a resumption of growth in our China joint venture. Japan's net long-term inflows were $3 billion in the fourth quarter, representing an organic growth rate of 21%, driven by the Henley Global Equity and income fund as well as fixed income products. We believe Japanese markets are seeing the most constructive conditions for risk-on assets in many years, and we're well-positioned to capture that growth. Our China joint venture generated $1.7 billion in net long-term inflows driven by ETFs and fixed income strategies. Turning to flows by asset class. Equities generated $8.3 billion and net long-term inflows, mainly driven by the strong growth in ETFs. Fixed income flows were impacted by our planned BulletShare ETF maturities that occur each December, which totaled $2.8 billion. This is an annual occurrence, and these outflows are typically offset by new BulletShare products launched in the first quarter, where we are already seeing strong inflows in January. Excluding these maturities, fixed income and net long-term inflows were $2.9 billion. In Alternatives, we generated $1 billion of net long-term inflows in bank loans, including CLOs and $400 million in net long-term inflows into direct real estate. These inflows were offset by outflows in other products that we classify as Alternative products, such as global asset allocation and commodity ETFs. We have a strong track record in our private markets platform with Alternatives and are well positioned to capture long-term flows in this asset class as client demand shifts to these strategies. Moving to Slide 7. Secular shifts in client demand across the asset management industry, coupled with more recent market dynamics have significantly changed our asset mix since the acquisition of Oppenheimer Fund. Going back to 2019 after the acquisition, ETF and index AUM, excluding the Q2, have grown from $171 billion or 14% of our overall $1.2 trillion in average AUM in 2019 to $362 billion or 22% of our average AUM of $1.5 trillion in the fourth quarter. In Q2Q, a product we earn no management fees from, but does provide a substantial marketing benefit has tripled in size over this time going from $74 million to $230 billion or from 6% to 14% of total average AUM. We've also seen very strong growth in global liquidity going from $82 billion or 7% of average AUM to $170 billion or 12% of average AUM in the fourth quarter. These product areas carry lower net revenue yields compared to our overall net revenue yield. During the same time frame, we've seen weaker demand for fundamental equities and multi-asset products, which carry higher net revenue. This has been driven in part by the risk-off sentiment that was sparked in early 2022, coupled with the pressure that we experienced in developing markets and global equities as well as the closure of our GTR capabilities. Our fundamental equity portfolio in 2019 was $348 billion or 29% of our average AUM. By the fourth quarter, that portfolio had declined to $261 million or 16% of our average AUM. Multi-asset also declined from 7% to 3% of the average AUM over this time frame. Looking at the fourth quarter as compared to the third quarter of 2023, we continue to experience similar dynamics with ETF going from 21% to 22% and the QQQ going from 13% to 14% of average AUM, while fundamental equities declined from 17% to 16% and multi-asset from 4% to 3% of average AUM in the quarter. The result of revenue headwinds created by these dynamics has weighed on our results over the last four-plus years. While we've experienced excellent organic growth and lower fee capabilities like ETFs and global liquidity, it was not enough to offset the revenue loss from higher fee fundamental equity and multi-asset outflows. Our overall net revenue yield has declined meaningfully during this time frame, but that decrease has been driven by the shift in our asset mix not degradation in the yields in our investment strategy. Net revenue yields by investment strategy have been relatively stable within the ranges provided on the slide. The other point that I want to emphasize is that this multiyear secular shift in client preferences has been increasingly captured in our results. Our portfolio is better diversified today than four years ago, and our concentration risk in higher fee fundamental equities and multi-asset products has been reduced. These dynamics, though challenging to manage through as they occur should portend well for future revenue growth and marginal profitability improvement independent of market gains. Further, we now have a more diversified business mix, which better positions the firm to navigate various market cycles, events, and shifting client demand. Turning to slide 8. Net revenue of $1.05 billion in the fourth quarter was $62 million lower than the fourth quarter of 2022 and $52 million lower than the third quarter of 2023. The decline from last year was due largely to a $35 million decline in performance fees and the shift in our asset mix that was just discussed. The decline in performance fees was mainly driven by lower fees generated from real estate-related and other private market activities. The decline from the prior quarter was primarily due to incremental asset mix shift and lower average assets under management, partially offset by higher performance fees in the quarter. Total adjusted operating expenses in the fourth quarter were $771 million, relatively unchanged from the fourth quarter of last year. Included in the fourth quarter 2023 are $22 million related to organizational change expenses and $12 million of Alpha platform-related implementation expenses. Adjusting for these items, fourth quarter expenses were $32 million lower than the fourth quarter of 2022. Total adjusted operating expenses were $18 million lower than the third quarter, more specifically, looking at employee compensation that has been impacted by the organizational change expenses. Compensation was $26 million lower in the fourth quarter, which includes $11 million in expense savings related to the organizational changes that I'll provide more detail on shortly. Marketing expenses of $28 million were $6 million lower than the fourth quarter of 2022 as we continue to tightly manage discretionary spend given the ongoing challenging revenue environment. Property office and technology expenses were flat to last year and $4 million higher than last quarter. G&A was $19 million higher than last quarter as we typically see higher G&A in the fourth quarter. We also had $12 million in spending related to our Alpha platform implementation, higher than the $8 million incurred in the third quarter due to incremental implementation costs in the fourth quarter. Going forward, we expect one-time implementation costs to be approximately $10 million per quarter in 2024 with some fluctuation quarter-to-quarter. We will continue to update our progress on the implementation and related costs as we move forward. Now, moving to slide 9. We realized $11 million in expense savings in the fourth quarter related to the organizational changes. On an annualized basis, we have achieved $44 million or nearly 90% of the $50 million in expense savings we expect to realize in 2024. We expect to realize the remaining $6 million in the first quarter. We're not expecting any further significant restructuring costs associated with these efforts. The full benefits from our simplification efforts will be seen over time as we generate revenue growth and margin recovery. As we've discussed, we managed 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, trending towards the upper end of the range and periods of revenue decline. At current AUM levels, we would expect the ratio to be at or slightly above the higher end of this range for 2024. Seasonally, we see approximately $25 million in higher compensation expenses related to payroll tax and other benefit reset in the first quarter. As a result, we would expect the ratio will exceed 42% during the first half of 2024. Moving to slide 10. Adjusted operating income was $275 million in the fourth quarter, which included the costs related to organizational changes. Adjusted operating margin was 26.3% for the fourth quarter. Excluding the costs related to organizational changes, fourth quarter operating margin would have been 210 basis points higher. Earnings per share was $0.47 in the fourth quarter. Excluding the costs related to organizational changes, fourth quarter earnings per share would have been $0.04 higher. Effective tax rate decreased to 9.9% in the fourth quarter from 23.6% last quarter. The decrease was primarily due to a discrete tax benefit related to the resolution of certain tax matters, favorable tax treatment related to a gain on sale of certain Hong Kong pension sponsorship rights, and the favorable impact of a change in the mix of income across tax jurisdictions. We estimate our non-GAAP effective tax rate to be between 23% and 25% for the first quarter of 2024. The actual effective rate can vary due to the impact of non-recurring items on pre-tax income and discrete tax items. I'll conclude on slide 11. As stated, our priority for us is building balance sheet strength. This quarter, our cash balance was $1.5 billion, and we ended the year with nothing drawn on our credit facility. We have lowered our net debt significantly, and it now stands near zero. We have a $600 million senior note maturing on January 30, and we are in a position to redeem the notes at maturity. We estimate we'll have approximately $500 million in excess cash and will draw approximately $100 million on our credit facility to fully redeem the notes. The first quarter is a seasonally high cash usage quarter, so we do expect to have a balance on the credit facility at quarter end, which will pay down as we move through the second and third quarters and reach our goal of zero net debt. We also hope to begin a more regular stock buyback program as we move towards this goal. To conclude, the resiliency of our firm's net flow performance in a difficult market for organic growth is evident again this quarter, and we're pleased with the progress we're making to simplify the organization and build a stronger balance sheet while continuing to invest in key capability areas. We're committed to driving profitable growth and a high level of financial performance, and we have the right strategic positioning to do so. And with that, I'll ask the operator to open up the line for Q&A.

Thank you. The first question comes from Glenn Schorr with Evercore. Your line is open.

Hi. Thank you. I'm sure you said something very intriguing towards the beginning. You said you expect clients to move out of cash into longer duration fixed income at some point. And I think a lot of us have been waiting on that. You saw some fixed income flows, but a lot more money market outflows in the last couple of quarters. I'm curious where the money market outflows are going in general? And how do we determine the cash sitting on the sidelines is actually waiting to move out versus it's just treasuries and money markets that used to sit in cash, meaning is it just another cash alternative or is it actually waiting? I hope that makes sense.

Yes, it does. Let me start and Allison can pick up. It's a little of both. So, some of the money market flows out of Invesco and our business is largely corporate treasurers they're buying T-bills directly. So I wouldn't look at that as a great indicator from Invesco. As we're out talking to clients and we're looking at where flows are going, early signs have been clearly into ETFs, which might be telling you a little bit about conviction and maybe the lack of their full conviction. And then on the fixed income side, active and otherwise, starting to move into municipal bonds, in particular, some investment-grade strategies. Europe is picking up a little bit, but I'd say it's pretty early days on assets moving off the sidelines.

To clarify our money market products, especially our liquidity offerings, approximately 85% of our client base consists of institutional clients. When we observe changes in some of these balances, it reflects corporate treasurers responding to the increased T-bill rates by shifting assets from money markets to T-bills. Only about 15% of our clients are retail, and on the institutional side, their options are somewhat limited, so they tend to remain invested in cash-yielding products. The retail component represents a smaller portion of our client base.

Makes sense. So, in that revenue yield slide, you showed us the come down and you talked about not degradation of product pricing, but just mix shift. With the markets up so much, average assets ending assets way above average assets, how much of that revenue yield pickup could we see coming back the other way in the first quarter? I'm not sure you've gone through that math yet, but obviously, markets are up a bunch.

Yes, they definitely are. The exit rate for net revenue yield was slightly higher as we entered the first quarter. The delay in market recovery during the fourth quarter impacted revenue, but it does bode well for the average asset under management as we start the quarter, providing a net revenue yield that is marginally higher than the previous exit, around two basis points. This increase is quite small. Looking at the asset categories we presented, it's really about the mix within those categories and between them. One factor affecting our revenue performance this quarter was the net revenue yield from our passive offerings, which saw a decline of about a basis point during the quarter. This reflects the client demand trends, particularly for some of our lower fee products like the Q2 QM and the S&P 500 Equal Weight product I mentioned earlier. We continue to observe strong client demand, though predicting its direction in the first quarter is challenging, and it significantly influences our revenue. Overall, the market gains have been beneficial.

And the other thing I'd add, and you're seeing it as well. I'm sure the broadening out of the market, and as Allison mentioned earlier, the greater diversification in our overall portfolio of client assets puts us in a position under any kind of market environment where we think we're relatively well positioned.

All right. Thanks. Thanks for all of that. Appreciate it.

Thanks, Glenn.

Thank you. And our next question comes from Daniel Fannon with Jefferies. Your line is open.

Thanks. Good morning. I wanted to follow up on Slide 7 and talk a bit more about the Alternatives in private markets dynamics in the quarter and more prospectively, how you were thinking about the potential growth in that business, considering the broader alts bucket has been seeing outflows for you, but yes, I think there's some underlying trends. I think you've talked about seeing some inflows. But curious to get a little bit more of an update.

So let me start with just maybe an update on the flows. So I think we noted modest inflows on the direct real estate side, so about $400 million. And again, that's really divestitures net of acquisitions. And so we continue to see some modest improvement, which is nice to see just given some of the challenges in the real estate market. On the private credit side, we talk about $1.2 inflows. Again, our business there is only about $42 billion. So a relatively nice pickup inflows there. That was primarily driven by bank loans and CLOs. And some modest inflows in there are distressed credit capabilities as well. That's all on the private side, and that was largely offset by outflows on the public alternative side. And that's driven by commodity ETFs, listed real estate and global asset allocation that I noted on the call. So you've got a bit of a mix in our alternative strategies, again, with good gains on the private side being offset by some outflows in the public alternative strategies.

And as we look forward, we continue to view private markets and alternatives as one of our best opportunities. As Allison said, on the credit side, about $45 billion in assets. And on the private real estate side, another $70 billion in assets and seeing some moderation of flows and some positive gains, as Allison mentioned, we're first to see in this environment. I think if we take the long-term view, what we've been very focused on over the last several years is diversifying from a largely institutional base into a wealth management base and the issuance of our non-traded REIT credit, real estate credit strategies, and other sort of distressed and direct lending strategies, both into institutional, but probably more impactfully into retail, we continue to see as a great long-term opportunity for us.

Understood. And then just switching to expenses. I understand some of your comments. But maybe Allison, if you could talk to the State Street project? Is the goal to ultimately reduce expenses or just flat – get flatter growth going forward? So I just want to understand the components post the $10 million a quarter you mentioned for this year. And then underneath that, how we should think about the general growth rate of kind of G&A and other expense items for the year in terms of inflation or other factors?

Let me start with Alpha. The implementation costs have been increasing over the last few quarters, with $7 million in the second quarter, $8 million in the third quarter, and $12 million in the most recent quarter. Our projection is about $10 million per quarter throughout 2024, though there will be some fluctuations. This estimate comes as we are heavily engaged in the implementation phase, leading to some variability and uncertainty from quarter to quarter. However, I believe that the $10 million expectation is reasonable based on our current knowledge. We are aiming for a peak in our expenditures, after which we anticipate some costs will decrease, particularly from 2025 onward. We are not yet in a position to provide precise guidance on that, but the costs are not just leveling off; rather, we are preparing for a peak followed by a decline as implementation expenses diminish. Additionally, we are looking to simplify and optimize our systems, leading to reduced expenses thereafter. This entire effort focuses on eliminating redundant systems and overly customized processes to move towards a single operating model, which will enhance our client experience. Regarding some other expense items, the general and administrative expenses were seasonally high in the fourth quarter, but I expect them to decrease slightly in the first quarter. As for compensation expenses, there is usually seasonality in the first quarter; we normally see an increase of about $25 million due to taxes and related costs, but we also anticipate fully realizing our $50 million in expense savings, with an additional $6 million expected in the first quarter. All of this is, of course, contingent on flat market conditions as of December 31. I hope this provides clarity on the primary factors influencing alpha seasonality, specifically with G&A expenses decreasing and compensation expenses increasing modestly, balanced by our expected expense savings.

Great. Thank you.

Thank you. Our next question comes from Ken Worthington with JPMorgan. Your line is open.

Hi. Thanks for taking my question. I wanted to follow-up on margins on slide 10. Excluding the unusual items, margins in 4Q 2023 were the lowest level on the page. Can you give us some color as to how business mix is impacting margins? To what extent is margin pressure being impacted by growth of lower fee, lower margin businesses and slower negative growth in higher margin, higher fee businesses? And I know it used to be some of the non-US businesses were the highest margin. At this point, can you kind of call out what are your highest margin and lowest margin businesses?

Sure. The fourth quarter, when we adjust for severance expenses, represents our lowest quarter. There are several factors influencing this, primarily related to our business mix. It's important to note that for the years before the last three quarters, we had TIR as a line item, which constituted a significant portion of our expenses. Over the last three quarters, our expense base has been fully loaded, including all the alpha implementation costs, contributing to margin pressure, although this is not the sole reason. The shift in business mix and a decline in revenue are also significant factors. We’ve seen a transition from fundamental equities to lower fee products like ETFs and indexes, as well as global liquidity. Even within these passive offerings, there's been a noticeable shift in demand over the past couple of quarters, favoring products like the S&P 500 Equal Weight and QQQM over traditional commodity ETFs, bank loans, and other higher fee options. This business mix pressure is evident across and within categories. Regarding margins, they remain relatively consistent by region. In China, for instance, our margins have typically been strong, and even after accounting for our joint venture, they are still above the firm average. However, with the recent regulatory fee cuts in China, margins have decreased slightly, though they remain attractive overall. The fourth quarter was our first full quarter experiencing the impact of these fee cuts, which is affecting our revenue by about $10 million each quarter.

Great. Okay. Thank you very much.

Thank you. Ken.

Thank you. The next question comes from Bill Katz with TD Cowen. Your line is open.

Okay. Thank you very much for taking the question this morning. Maybe to mix up a little bit. I was wondering if you could just sort of expand a little bit on where you stand with your relationship with Mass Mutual and the opportunity to potentially accelerate growth either into the alternative segment or perhaps even on building out some retail democratization products?

Hey, Bill, thanks for the question. Maybe just to refresh everyone's memory Mass Mutual in addition to owning our common and being a preferred shareholder, has about $12 billion invested with us across broker-dealer, annuity, sub-advised general account capabilities. One of the most important parts of that has been the $3 billion they have invested into the seating and co-investment of many of our private market strategies, in particular, the ones we've been bringing to wealth management over the last several years. And so it's a very, very important partner in that regard. And that's a multiple of three times, what we carry on our own balance sheet around those sorts of strategies. So opportunities to continue to develop the relationship there are something we're focused on, although a lot of that growth has come already. I think the second area is just taking our relationship further where it makes sense on their insurance platform, with things like our alternative strategies, models, SMAs, and ETFs and then select fixed income and equity products. And we're well placed there, but we're continuing to look for opportunities and ways to grow effectively. So it's an important partnership on many levels.

Maybe just a follow-up on capital. So it sounds like you're in a much better spot just in terms of reengaging on buyback. Allison, are you expecting to be able to buy back stock in concert with carrying the line of credit? Or do you need to get on the other side of that before you'd restart buyback? And then more broadly, what kind of payout rates should we be thinking about now that your earnings are more diversified and the earnings power is higher?

All good questions. The short answer is yes, we are very committed to reducing our net debt to zero. This has been a clear objective for us, and we have been working closely with our Board to strengthen our balance sheet. As we get closer to that goal, we look forward to discussing with the Board and assessing the potential to resume regular share buybacks. I believe our payout ratio will remain in the modest range of 40% to 60% as it has in the past. This range seems reasonable for us as we consider gradually increasing the common dividend each year as well as buying back stock. However, we are a couple of quarters away from reaching our target due to the seasonal cash needs we will face in the coming months. For the first time in a long while, we see progress in our balance sheet, the growth in cash, and the direction of our debt. It truly feels like we are moving toward a position where we can be much more opportunistic than we've been in recent years.

Thank you.

Thank you. And next question comes from Mike Brown with KBW. Your line is open.

Thank you for addressing my questions. I wanted to follow up on the topic of capital allocation. As you make progress with your balance sheet goals, do you anticipate that mergers and acquisitions will return to the mix? I mean, not necessarily large acquisitions, but possibly smaller ones to enhance capabilities and adjust your strategic asset portfolio as you look ahead to 2025?

Hey, it's Andrew. At the moment, the focus is very much on the organic side, the priorities around the balance sheet and the uses of cash, as Allison described stay true. As we have described in the past, the place where we see opportunity for us to add on in time for the right situation, opportunity would likely be in that private market space as extensions to the things that we already believe we do well today and could continue to grow both organically and inorganically. And that would be in the real asset space and in the private credit areas. But for now, very focused on the work we have to do organically.

Okay, great. That's good to hear. And then maybe if I just change gears to the developing markets fund. You had flagged performance has improved there. That product is still outflowing, but assuming that performance can continue to improve. I guess my question is what causes client interest to really come back to this fund, just given that seems like investor sentiment and interest in EM strategies is just kind of remains tepid. Is this going to be more about a kind of lower redemption story and kind of narrowing on the redemptions? Or can that eventually translate to more of a growth story?

Yes, you explained the question well. It's likely a combination of factors. First, we need to continue enhancing investment performance. We are a recognized manager in emerging markets and well established in wealth management. What we can control is the quality of our investments. We've begun to notice some improvement in redemptions, which is a positive early sign. However, it will take increased demand in the marketplace from investors before we see a significant rise in gross sales. We have been anticipating this moment but have not yet seen it; predicting it is challenging. This category is crucial, and similarly, our efforts in international and global equities are also facing some pressure. While our performance has improved significantly and redemption rates are decreasing, the same applies to gross sales.

Okay. Thank you, Andrew.

Thank you. Our next question comes from Brennan Hawken with UBS. Your line is open.

Good morning. Thank you for answering my questions. Allison, I appreciate the information on first quarter expenses. When considering the full year 2024, should we use the adjusted figure of 3.06 billion as the basis for growth? Additionally, can you maintain those expenses at a flat rate, or will there be some upward pressure throughout 2024?

Good morning. Brennan, good question. Yes. If you look at the expense base and 2023 adjusted for the severance and retirement expenses that we incurred in 2023, which we aren't anticipating at this point, more of at 2024. When I look at our 2024 expectations relative to where the markets are, where we ended the year in AUM, the usual caveat of all things being equal, I would say we expect the expense base to be flat to 2023 to just relatively very, very modestly, perhaps higher. But I'm going to call it just flat plus, and that, importantly, in 2024 is inclusive of a full year of all four quarters, no TIR. So it is a four-quarter no TIR year as compared to a three-quarter year last year, inclusive of some of the inflationary pressures, merit increases and the like. So we did a lot of work on our expense base last year. We've got a lot going on as it relates to output implementation costs in the $10 million per quarter guide we put out there. All those things taken into account, we're expecting relatively flat this year. And I'll note with that, with some of where we are in the market, some of what we've seen in terms of the appreciation and average AUM exiting the fourth quarter and coming into this year. We are optimistic that we start to see modest improvement in operating margin from here.

Okay. Thanks for that color. I appreciate it.

Thanks, Brennan.

And our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Hi, good morning everyone. Thank you for taking my questions. I want to shift the discussion to the QQQ franchise. Obviously, there are the earning products, but do you consider ways to monetize the entire franchise? Can you elaborate on how you might be able to monetize that asset base? The QQQM has around $20 billion in assets under management, while QQQ is over 10 times that amount. First, regarding the 15 basis points on QQQM, does that represent the asset management revenue yield, or is it solely the expense ratio? Also, are there potential opportunities to strategically shift focus from QQQ in favor of developing a more fee-generating QQQ franchise at the Invesco level?

Great questions. And precisely, the topic we spend a lot of time talking about thinking about and really working on as a team. The QQQ is a tremendous asset for us, and the brand awareness that that creates can't be underestimated. The opportunity that creates for us in terms of the marketing budget that comes from that. All of our sort of ad campaigns, the brand work we do is really fueled by the QQQ. So it is a tremendous asset to us. And it is certainly unique in nature and that's the value it creates. So we have to be very thoughtful about how do we optimize the value that is created from that capability. The QQQM, as you note, is approaching $20 billion and has been a cannibalization strategy and a very successful one, given it's only about three years old, and it has grown that quickly and assuming there is continued demand in the underlying or interest in the underlying exposure there, we expect the growth in that capability to continue. In terms of the actual net revenue yield from the published fee rate, it would be about half net of all of the costs there. So it would be one of the lower-yielding capabilities, again, part of what we were pointing to in terms of the business mix that is driving some of the pressure on net revenue yield overall. So it's a two-sided coin but one that is certainly well positioned to capture client demand.

The relationship with NASDAQ regarding the Q has been ongoing for nearly 25 years. As Allison described, we have been nurturing this relationship. The QQQ serves as an alternative, while the traditional Q caters more to traders, whereas the QQQM is designed for buy-and-hold investors. This reflects a broader trend in the ETF industry, which is now a preferred option for both short-term and long-term investors. Our strategy aligns with this trend, and you can expect to see more developments from us, whether in a passive or active capacity.

That's great information. Following up, Allison mentioned that you're investing in the business by reinvesting some cost savings. Could you share the top two or three areas from an investment management perspective where you are focusing your investment to drive Catalyst growth? You already mentioned the QQQ franchise, so perhaps you could leave that out. You also noted that private markets are an investment area, which could also involve M&A. Could you discuss a couple of other areas where you're particularly excited about the investment dollars you're allocating and the potential growth that could come from that?

I would point you back to our key capability areas, which are where we’ve concentrated our efforts on growth and investment. Within our ETFs and SMAs, we are focused on enhancing our factor and indexer capabilities to meet client demand. In private markets, we are investing for both retail and institutional channels. Our institutional product capabilities, which are our legacy strengths, continue to evolve, and we are dedicated to expanding these areas in response to client needs, especially on the retail side. It’s not just about launching products; it's crucial to develop the distribution capabilities and collaborate closely with clients, expecting that this change will take time and involve significant educational efforts. I’d also highlight our continued investment in China, which is self-funded and a highly profitable and cash flow positive business. While your question centered on product and client-facing capabilities, it’s important to note that much of our investment supports client benefits beyond just products—it's about improving systems and overall client experience. A significant portion of our investment goes into enhancing our platform, technology, and capabilities to ensure we deliver a better experience for our clients.

And to a forward room on our shelf for that, I mean, we've been routinely pruning and closing parts of the product line that we haven't seen demand in and closed several hundred strategies over the last few years. The only other thing I'll point to beyond what Alison covered would be it's probably less investment capabilities that you'll see extensions on and more how it gets delivered to the market. So the trend towards vehicles like ETFs and SMA and bringing things beyond passive capabilities or fixed income capabilities is something we're going to continue to seek to lead in.

Okay. That’s great color. Thank you.

Thank you. Our next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Thanks. Good morning, everyone. My first question is on the 40% to 60% payout target after you reach your goal of zero net debt later this year. So why not a higher payout target because it sounds like M&A isn't a big part of the intermediate-term strategy?

Reasonable question. I would say, as Andrew said, we do continue to think about the opportunities we have from a bolt-on perspective with certain capabilities from an M&A perspective. And given our balance sheet, is returning to a better position, but we want to be in a position to continue to build cash as we think about some of those opportunities and making sure we're in a position should we find the right bolt-on capabilities to be able to execute. So it's a balance of making sure we have the ability to execute on several of those priorities, and it's not going to be all in returning cash to capital to shareholders.

Makes sense, Allison. And just as my follow-up, with the $3 billion in alt seed capital for MassMutual, can you remind us, which products the $3 billion has been invested in and then to date, how successful has that been? Like one way to quantify that is how much third-party AUM have you been able to attract around that $3 billion of initial seed capital from MassMutual?

Let me start and then Allison can pick up. Probably the two most important strategies were the non-traded REIT or in REIT strategy where MassMutual was our early seating partner. I don't have the exact percent that they have, but I would say it's still relatively large, although we've been generating a decent amount of volume over time from one of the big wealth platforms in the US. And then the second one was our real estate debt strategy that we just brought to the wealth management market. That was the other sort of strategically important strategy. But I'll turn it to Alison maybe for more specifics on the numbers you asked about.

I would say it's largely their general account and where they want to ensure they have exposure across various capabilities. They are invested in everything from Enrique, which we've publicly discussed, to areas like municipals, CLOs, and some of our private credit offerings. It encompasses the breadth of those types of capabilities where you would see them significantly invested.

And aside from the capital, which is clearly important, I think the signaling and showing up at these wealth management platforms in particular, not with new investment capabilities, but there are new packages that we're putting things together in. And I think that's really critical in terms of credibility that we show up at these platforms with.

Andrew, thank you.

Thank you. The next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Hey, guys. This is Luke on for Alex. I appreciate some of the color on expenses and revenues in 2024, and I appreciate that it's not easy to forecast going out so far. But do you have any high-level goalposts for margins over the longer period into 2025, especially as some of the State Street Alpha costs coming down? Thanks.

Our primary long-term objective is to return our margins to the mid-30s. We are not satisfied with our current margin levels, and we aim to achieve quarterly margins exceeding 30% as we work towards the low to mid-30s over the next few years. For 2024, our focus is on maintaining strict expense discipline. We've made significant progress on our expense base, despite facing challenges, particularly during implementation. Our goal is to keep our expense base relatively flat. We understand that predicting expenses on a quarterly basis can be challenging due to revenue fluctuations in the market. Therefore, we must remain disciplined in managing what we can control and look for opportunities to reduce unnecessary expenses and reinvest in areas that promote further growth.

Awesome. Thanks for the color. Just for my follow-up. You guys highlighted the plans to continue to shift from institutional to wealth, and some of the strategies that you're looking to build on. Do you have any upcoming product launches in the wealth space that you guys are either working on or are free to talk about at this point? Thanks.

I think it’s important to discuss the real estate debt strategy since we're seeing significant demand and interest in that area. You can expect more activity in the market regarding this, and we will be addressing it more in the future. Additionally, we are looking at private credit strategies, including both distressed and direct lending, and how they can be integrated into our wealth channels. To clarify, this focus is not limited to the US; it extends to Europe and Asia Pacific as well.

Operator, we have time for one more question.

Okay. And our last question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Hey good morning. Thanks for squeezing me in here. Just a follow-up question on expenses. I was hoping you could maybe elaborate on some of the steps you guys are taking to drive greater operational efficiency in the business, additional steps you might look to take over the next couple of years? And how is the variable nature of the expense base evolve? And how should we think about the sort of sensitivity of expenses if markets are up, say, in 2024? I know you guided to around flattish expenses adjusted for things, but that was assuming flat markets. If markets are up 10%, how do we think about the impact on expenses?

Thanks, Mike. I believe maintaining a relationship where our expenses are about one-third of revenue is still a reasonable expectation for future growth. Given the current revenue pressures, it has been challenging since part of our expense base is fixed. However, as we start to recover revenue-wise, I think this one-third ratio remains a valid expectation. Regarding our approach to streamlining, we will continue to assess our expense base thoroughly. We are examining our margins in detail to identify areas where we can reduce costs and reconsider past practices that may no longer be necessary. We have been working for several years on optimizing our facilities and office space, which will remain a focus. This process is long-term, and we are committed to these initiatives. Additionally, we aim to enhance our overall operational efficiency, which is part of a broader strategy that began almost a year ago. With that, Andrew, feel free to share some closing thoughts on this.

Yes, Mike, thank you for the question. We believe that the simplification efforts in 2023 were among the most impactful initiatives we undertook, and we expect them to pay off as we move forward. Our goal was to integrate elements of the investment platform with areas such as distribution, marketing, and product, while aligning our enterprise and operational functions with a more streamlined platform. This consolidation allows us to reassess the margins in those businesses and how we generate revenue, shifting our focus from just the investment side to a scalable platform side where necessary quality improvements can be achieved. Overall, the simplified organization benefits us in several ways.

Great. Thanks so much.

To conclude, as we look ahead to 2024, we feel well-prepared to assist our clients in navigating the effects of changing market dynamics and the adjustments we anticipate in their portfolios. I had the opportunity to meet with many clients worldwide this past year, and their feedback has reassured me that we are indeed positioned effectively across a broad spectrum of outcomes. As market sentiment improves, we expect this to lead to greater scale, enhanced performance, and increased profitability. I would like to express my gratitude to my colleagues globally, the executive leadership team, and our Board of Directors for their hard work in 2023, their dedication to our clients and shareholders, and their support during a smooth transition throughout the year. Given our efforts to strengthen our capability to anticipate, understand, and fulfill evolving client needs, I am genuinely excited about the future of Invesco. Thank you all for joining the call today. Please feel free to reach out to our Investor Relations team with any further questions. We appreciate your interest in Invesco and look forward to our next conversation. Thank you.

Thank you, and that concludes today's conference. You may all disconnect at this time.