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Edited Transcript of IVZ earnings conference call or presentation 23-Oct-19 1:00pm GMT

Q3 2019 Invesco Ltd Earnings Call

ATLANTA Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Invesco Ltd earnings conference call or presentation Wednesday, October 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory Gerard McGreevey

Invesco Ltd. - Senior MD of Investments

* Loren Michael Starr

Invesco Ltd. - Senior MD & CFO

* Martin L. Flanagan

Invesco Ltd. - President, CEO & Director

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Conference Call Participants

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* Brennan Hawken

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials

* Brian Bertram Bedell

Deutsche Bank AG, Research Division - Director in Equity Research

* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Glenn Paul Schorr

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst

* Kenneth Brooks Worthington

JP Morgan Chase & Co, Research Division - MD

* Kenneth S. Lee

RBC Capital Markets, LLC, Research Division - VP of Equity Research

* Michael J. Cyprys

Morgan Stanley, Research Division - Executive Director and Senior Research Analyst

* Michael Roger Carrier

BofA Merrill Lynch, Research Division - Director

* Patrick Davitt

Autonomous Research LLP - Partner, United States Asset Managers

* Ryan Peter Bailey

Goldman Sachs Group Inc., Research Division - Associate

* William R. Katz

Citigroup Inc, Research Division - MD

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Presentation

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Unidentified Company Representative, [1]

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

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Operator [2]

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Welcome to Invesco's third quarter results conference call. (Operator Instructions) Today's conference is being recorded. (Operator Instructions)

Now I would like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco; Loren Starr, Chief Financial Officer; and Greg McGreevey, Senior Managing Director, Investments. Mr. Flanagan, you may begin.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [3]

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Thank you very much, and thank you, everybody, for joining us. The Q3 presentation is available on the website for your reference. But to allow more time for Q&A, we're going to shorten our prepared remarks and really get into the questions quite quickly. So I'll just give a brief overview of the results and Loren will make a couple of comments, and again, we'll take the questions, so we will have more time to have a discussion.

So now we're only 4 months post the close of the acquisition of Oppenheimer and made tremendous progress bringing the 2 organizations together and you can see by this quarter it's generating meaningful results already. As we've discussed on previous calls, we do look at this as a multiyear growth story that deepens relationships in the U.S., provides us capabilities to take around the world while also creating scale for our organization. That said, the first full quarter of the combined organization has delivered powerful results.

If you look at -- very strong earnings quarter-over-quarter generating $502 million operating income, at 38% improvement as compared to last quarter. Operating margin expansion exceeding 500 basis points, taking our margin up to 40.9%. The combined firm added $200 million net revenues during the quarter while adding only less than $60 million in expenses.

And we're particularly pleased to announce that we'll bring on our expense synergies well ahead of schedule and exceeding our initial target of $475 million. We are now estimating savings of $501 million. Importantly, we achieved these results in what was a very challenging macro environment for flows and also being in the early days with combination between our 2 organizations.

During the quarter, clients reacted to the market news by de-risking, which resulted in outflows in our Americas and U.K. retail businesses. Flows in our legacy or byproducts slowed during the quarter, which we had expected. But they are stabilizing. And we will speak about that in a couple of minutes.

These outflows were offset by positive flows in China, our EMEA ex U.K. business and ETFs. So the positive flows during the quarter really demonstrate the tremendous strength and potential of the combination. Furthermore, the operating and financial strength of the combined firm enabled us to return $440 million to common shareholders during the quarter through dividends and stock buybacks. So finally, it is still very early days, but from our perspective, the initial results are very strong. Loren?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [4]

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Great. Thanks, Marty. So before we get to Q&A, I wanted to spend a few minutes highlighting some key items for you on the topics of flows and expense synergies resulting from the Oppenheimer transaction. So if you look to Page 5, or Slide 5, we had $10.5 billion of net outflows in the Americas, majority of this is attributable to the retail business. On the next page, we drilled down on this a little more.

So on Slide 6, we show that 2019 history of monthly gross sales and net flows for the Invesco and Oppenheimer U.S. Active retail products combined, which includes periods of both pre- and post-close. Said another way, this illustrates the trend for the 2 firms together over the entire period, including the pre-acquisition period.

I think there are few important takeaways from this chart. First, gross sales post-close are increasing, we see a positive trend line. However, while gross sales are improving, they're not yet to the pre-deal level. So there is obviously more room for improvement.

Second, the chart clearly highlights that the deal has had an impact on our gross sales levels. Integration of the 2 sales team are well underway, and in fact, going quite well, but they are not yet complete. And as the integration is completed, we would expect the gross sales level to come back to at least the pre-acquisition levels.

And third point, net outflows have been more elevated post-close. But this is largely a function of the abnormally low gross sales levels I just mentioned. And we'd expect net flows to improve as we complete all phases of the sales integration work this year and into 2020.

While staying on the topic of flows but moving away from U.S. retail, I'd like to point out that we continue to see a strong institutional pipeline. The institutional of won but not funded, AUM continues to build quarter-over-quarter and year-over-year. And on particular notes, we were notified this quarter of a $10 billion mandate, one buyer solutions team, which is expected to fund in the first half of 2020.

Also, we received notification of a recent $100 million win into the newly launched OFI emerging markets local debt fund on our cross-border fund range in EMEA. It's still very early days, but we're beginning to see revenue synergies from the deal. There is strong retail and institutional interest in the all 5 products and the pipeline is growing.

So next let me move to the topic of expense synergies. If you'll recall, we have been projecting to achieve run rate net expense synergies of $475 million by the end of the first quarter of 2021. At the end of the third quarter, we achieved 105% of our synergy target or $501 million of run rate expense reductions for the combined organizations. This represents an elimination of 15% of the expense base of the pre-combined organizations.

We always thought there'd be opportunity to save more than $475 million. By the time of the transaction closing we only had a clear line of sight, regarding the $475 million of savings. After we closed the deal, we were able to look deeper into the business and we started making significant progress on the integration. And we now see that we can run the business with this lower expense base. There is still further integration work to be completed, but we're confident that we can deliver the higher level of expense synergies that we're presenting to you today.

And as a reminder, this synergy level is net of investments made in areas that further strengthen our distribution and investment capabilities and processes and which allow us to drive future growth and avoid future cost.

We presented on Slide 9 of our deck summarizing these expense synergies. That illustrates the combined firm represented run rate, annual operating expense base. But please, do keep in mind that this assumes FX and market conditions are in line roughly with the end of Q3 levels.

So in summary, before we go to Q&A, let me just say that we see the potential for the long-term net flow to flows to trend in the right direction, although we're clearly not where we want them to be right now. One of the key areas of outflows we're experiencing is centered in U.S. retail space and that is largely due to the shortfall in gross sales that we expect will ultimately be corrected, as the U.S. retail sales team complete their integration. We continue to work hard managing the things within our control, improving gross sales, finding greater expense savings and adding to our deal-related expense and revenue synergies and continuing to invest in areas that we believe will allow us to grow more quickly in the future.

And with that, operator, I'd ask you to please open up the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have our first question from Ken Worthington with JPMorgan.

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Kenneth Brooks Worthington, JP Morgan Chase & Co, Research Division - MD [2]

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Can you first talk about the journey back to positive long-term net sales? So are positive net long-term sales, something you foresee for Invesco in 2020? And if not, 2020, when? And then, can you maybe describe the path to positive sales, which new or existing products or asset classes do you see driving the incrementally better sales or incrementally lower outflows than we're seeing today? The more specific you could be the better. And then why?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [3]

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Yes. Good question, Ken. Let me hit a couple of those and I'll ask Loren and Greg to pitch in too. So let's stay on the -- what Loren was pointing out about the deal because I think that's actually quite critical. The -- to put sales force point in clarity, as we've said in the past, literally sales force now represents half of old Invesco, old OFI, they're literally going through training right now. We, actually, as you always do have disruption when you do transfer agency conversions and the like, they'll probably be up and running, I'd say, fully into December, so I think early next year. And the quality of the team is the best we've ever had. So we view that the historical gross sales, we will exceed those. That could be -- so when does that happen? Into next year, that will surely happen. Yes, ideally, on the first half of next year, from our perspective, again, I put it in the context that Loren did of the -- it all depends on the market but -- with this -- if this market continues that's what we foresee.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [4]

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Yes, and I think in terms of the path to positive. So we're clearly saying we're going to become less negative and that's what we're saying because of the sales improving. I think the path to positive is going to be a function of some other things that are some within our control and some with -- out of our control. So one thing that is still very much weighing on, our flow picture for the firm globally, is sort of just the macro environment and some of the political uncertainty in that exists where we see risk off -- it's affecting everybody. And so for example, that risk off behavior driven flows into cash and away from active products. And that's something that we can't control but we're definitely looking to see hopefully some of these events becoming more clear, Brexit being the most obvious one. The other element that I think is moving in a positive direction and is an important precursor to the flows is performance. And we've had some headwinds around performance so that we're beginning to see sort of a turnaround in -- particularly in sort of recent months, where you can see just how strong the come back or the pull back in performance is when we see some release on some of these macro topics, for example, what we're seeing in terms of performance in Europe and U.K. has a big impact on our U.K. business. And Greg, I mean, you could speak to that a little bit if you want.

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Gregory Gerard McGreevey, Invesco Ltd. - Senior MD of Investments [5]

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Yes. Maybe, I can just get a little granular to the essence of your question, so it's that intersection between demand and performance. And I maybe point to the kind of 4 or 5 areas to get to the specific question that you asked on. One would be fixed income where, as you know, we have very strong performance, we're seeing quite strong demand in almost all markets. Part of the transaction that we talked about before with Oppenheimer was to really leverage their global equity capability, which is incredibly strong. There's quite strong demand for global equities in its various flavors in a lot of markets outside of the U.S. And so we're seeing that. I think ETFs and the traction that Loren kind of mentioned with this win, we're going to hopefully see in the first quarter when it funds and solution. We're seeing that traction really take shape in almost kind of all markets, if you will. And then global liquidity, that was kind of mentioned is what one of those areas, not only in China that we talked about on prior calls, but we're just kind of seeing that in other markets. So that's really for, I think, the gross sales side and where that demand and performance where we have that strong performance kind of intersects. Clearly, we're seeing some -- on the redemption side, some important performance improvements in a number of those funds that have had the most significant amount of outflows and happy to drill into those numbers. But I think on a year-to-date basis, which is still short-term for most of our funds, both here with the legacy Oppenheimer, we're seeing some notable improvement. That has to continue. But if we see that in concert with those things that I talked about, that's really how I think we get to the positive flow picture.

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Kenneth Brooks Worthington, JP Morgan Chase & Co, Research Division - MD [6]

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And then on the synergies, can you talk about the outlook from here, both synergies and dis-synergies? So maybe starting with the dis-synergies. I believe there is still a 529 plan outflow, I think that's a fourth quarter event, correct me if I'm wrong. Any other deal related dis-synergies that we should expect in the near term? And then on the cost side, you took out $501 million, is that the end number we should expect? In other words, if you get more, do you want to reinvest it or are you going to invest some of the $501 million? And if not, any idea on how much more we'll be able -- shareholders will be able to keep that wouldn't be reinvested?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [7]

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So Ken, on the first point the dis-synergies, you're correct, there is a $2 billion New Mexico outflow that is to be expected in the fourth quarter, that is the dis-synergy. The only other dis-synergies are the ones we just talked about in terms of the gross sales being abnormally low and some of the, kind of, a general disruption related to TA conversions. And those have been dis-synergies to the flow picture that should and we're seeing beginning to improve over time. But there isn't anything else that we know of in terms of a dis-synergy. And if anything, again, we're seeing more positive revenue synergies that take on potential for the products in the few cabs in Europe, for example, is a good real-life flow coming in. In terms of the $501 million, that number is net of investment. So that is the number that we are saying we're going to get, there is no intention for us to invest through that number. So that's the bottom line. There are more opportunities for us to, sort of, generate more synergies. We believe some of that may get invested, some may drop to the bottom line. We're, at this point, comfortable with $501 million, and we will continue to keep you updated in terms of the potential upside on that number.

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Operator [8]

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Our next question comes from Mike Carrier with Bank of America.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [9]

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First one, just on the sales and the flows, I think Marty, you mentioned over the past, probably 1 to 2 years, there's been some negative impacts to the business whether it was Brexit and some of the European headwinds and then on the value side versus growth, that being the headwind. It seems like some of those things are at least starting to potentially shift here. But just wondering, if you're seeing any early signs, if some slight improvement on that front?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [10]

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Yes. So look, what we think of fundamental strengths of our organization, so think EMEA, think Asia Pac, Brexit and trade wars, they're just tremendous headwind for us. And again, so posting results in light of that it's not excuse, it's just a reality. We are sensing with Brexit in particular, sort of, an endgame coming here. Greg can talk about, you're starting to see just recently the performance is starting to pick up very strongly, which is a very good sign. And so again, they say hope is not a strategy but you definitely are sensing some relief here. Look, Sterling being at what is $1.29, is a whole lot different than $1.19. So again, some of these -- we will continue to manage through, but any relief is just really powerful. Greg, I don't know if you have anything on the performance.

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Gregory Gerard McGreevey, Invesco Ltd. - Senior MD of Investments [11]

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Yes, Mike, look, I think the rotation is starting to happen from growth to value. The market is starting to recognize but not all companies are the same. Some make better capital allocation and are able to produce different returns on investments. So we're starting to see probably the most impactful thing as a lower correlation of stocks to the index. And that really gives our active managers the ability to use their strong stock picking skills. And so I think that's part of the reason when we kind of look at our year-to-date performance improvement, which really is the result of some of those factors that has, kind of, allowed our performance to improve. The $64,000 question is always, is that going to continue? The one thing we know, is it's not going to continue forever in terms of what we've seen over the course of the last 10 years. So that gives us some comfort that when this does change given the strong teams that we have we'll be able to generate the performance you've come to expect.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [12]

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Okay. And then, Loren, maybe just on the fee rates. So you got to bump this quarter with Oppenheimer. The trend over the past couple of years has been a little bit more on the negative side, just given the expansion on the ETF fund and then the industry is seeing some pricing pressures. There is some news on SMAs that's come under pressure as well on some platforms. But just, when you look at some of the investments that you guys are making and now with Oppenheimer on the platform, I know it's tough to predict. But do you see some areas that you have like higher fee, like momentum or trends versus some of the areas they're going to pressure that fee rate over time? Just any update on how you're thinking about that and then managing expenses with that mind?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [13]

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So it's very dynamic. There are a lot of puts and takes in the fee rates. There are some -- definitely some positive things in our fee rates. In terms of what we talked about in the past our institutional pipeline where the assets that are funding are at a higher fee rate then the assets declining. We continue to build out I think a strong set of capabilities around alternatives which tend to have a higher fee rates and aren't going to be, sort of, pressured by indexing. We are also very supportive and like our ETF business and we want to continue to grow it. And so those are coming in at lower fee rates and that is a good thing for us. We have a great margin products, as long as you can grow them quickly and, sort of, create scale in those products, we embrace that phenomenon and want to grow that part of the book. I think it is very hard to provide guidance on this measure, just in general and really there's so much that's outside of our control in terms of the mix of products, not to mention currency in markets. So we're probably not in a great position or we're probably more likely to refrain on providing guidance on fee rate going forward just because it is so dynamic. But I would say it's a real even fight in terms of the things that are sort of helping us on the fee rate on the positive side versus things that maybe putting it to the flip side.

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Operator [14]

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Our next question comes from Brian Bedell with Deutsche Bank.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [15]

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Maybe wondering if you could just go -- is it just the integration process and you realize, obviously, you've hit the $500 million of cost saves, but like you said, there's definitely still more to do. It's still pretty early. Maybe just can you outline what types of things are being done over the next couple of quarters? For example, the -- any kind of back office arrangement on custody, fund accounting in mid-office, if that's in process for the combined organization? And any thoughts on how much product rationalization has contributed to the $500 million? And any future rationalization that might be planned from that?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [16]

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That's -- let me hit a couple of things and then, Loren and Greg can pitch in. Yes. So all the systems have converted over to our systems from Oppenheimer, so that's a good development. We still have, with the transfer agency, one more software upgrade that will happen at the end of November. All the middle and back-office will end up converting through next year again. So still think first quarter 2021, as we said, so that's in progress, too. And those are the areas where -- look, we'll know more when we get in -- further into it. But that's all underway right now.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [17]

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Yes. I think, listen it's the fund mergers and those types of product rationalizations have not happened yet. So that's not part of inherently the $501 million. There may be some sort of incremental savings associated with that. There's probably some incremental investments as well that we're hoping to do. So I'd say it really it is -- the $501 million is a number that we feel extremely confident that we'll be able to deliver through -- in variety. Well, we're there right now, we are going to continue to look at some of the other integration opportunities, really around tech, around operations as well. There's all sort of efficiencies that we can still continue to create in our sales efforts as well as our investments efforts. So with -- I can't get too specific at this point, but ultimately, we're still looking at a wide range of opportunity around this integration as we get closer to the business.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [18]

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I do want to come back to the product rationalization. I think it's a small thing, not a big thing. And I think there's been some overreaction to it in the past. So it's a small thing, not a big thing. Just remember that.

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Gregory Gerard McGreevey, Invesco Ltd. - Senior MD of Investments [19]

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Yes. Maybe just to put a finer point on that, Marty, I think when you look at the impacted assets, we think it's around 2% of our total assets, roughly 14 legacy Invesco, it may be 15 OppenheimerFunds. So we're not in the grand scheme of our whole product mix. It's really a -- both small percentage of funds and it's an even smaller percentage of assets.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [20]

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That color is really helpful. It's clear to think that operating margin obviously is going up from the 40% that we're already seeing because there sounds like there will be incremental saves, of course, revenue dependent. But maybe just also talk about the gross sale initiative and the potential to improve that from even levels before the deal to what extent can you do that through the institutional offering of the Oppenheimer products and the potential sale of Oppenheimer retail in Europe? And I guess, any color of the $10 billion mandate on the solutions teams in terms of what disciplines that's coming in?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [21]

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Yes. So look, I could be repeating myself, but there is nothing -- we are full steam ahead on driving gross sales right now. And it says -- as I said previously, if you look at the most acute area where there was disruption it was the U.S. Wealth Management Platform. We think January 1 we'll be on the front feet and full steam ahead and we anticipate seeing higher gross sales on the back of that. Greg mentioned, we do now have -- or Loren -- we do now have 6 OppenheimerFunds on the C cap range, that just had road shows in Europe for 2 weeks, 2 weeks ago, so early days. But as Loren said, here, we saw already $100 million. It's not going to change our world. But that's very, very fast and it's going to continue. And so what we're seeing institutionally is, as Greg talked about, lot going on fixed income, lot going on in real estate. So that's really the [all] parts of the business continues to be in high demand institutionally and looking for some opportunities in the retail channel. So we're very excited about what's in front of us.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [22]

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Yes. And I think we also haven't yet fully, sort of, explored the full opportunity with MassMutual and their -- the revenue synergies, working with their advisers. Again, as we talked in the past, they have 8,500 advisers, they're the seventh largest distribution force in the wealth management space. And so we are now actively working with MassMutual with our products and our solutions, that we try to understand what is a good fit, within their network. That is yet to sort of get plugged in. So that will provide some further lift that was not there pre-deal for any of the combined firms, just to give you an example.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [23]

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And again, what we have not talked about is, we really like our position in China and we can see that rapidly growing in the quarters and years ahead.

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Gregory Gerard McGreevey, Invesco Ltd. - Senior MD of Investments [24]

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Yes. And I think it just relates to Oppenheimer maybe given we just put a finer point on it. One of the biggest opportunities we see is to promote the legacy OppenheimerFunds in to both retail and institutional channels. And we've been spending a lot of time post the merger between investments. Marketing and distribution. Those would be things like our global equity suite, things on the global fixed income side maybe bonds to mention kind of 3 very specific areas. So we're optimistic. It's still kind of early days. But we really come together across those 3 areas to see again -- and that intersection between demand and where we have some custom capabilities. So where we're going to be able to get out to prospects and clients.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [25]

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And Brian, just on the color on the $10 billion solutions, well, it's not appropriate for us to talk about it. It's just that the client has not sort of released their own notification of that. So when this comes in public we will be able to talk more about that deal.

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Operator [26]

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Our next question comes from Alex Blostein with Goldman Sachs.

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Ryan Peter Bailey, Goldman Sachs Group Inc., Research Division - Associate [27]

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This is actually Ryan Bailey on behalf of Alex. I was wondering, on going back to Slide 9, if we're looking at that $2.9 billion number, is that the right run rate, I guess, as we should be thinking about the expense base entering 2020? And then are there any puts and takes in that number? And then I'm maybe coming back to the $501 million, that's a net synergy number. Can you give us a little bit of color around like maybe how much investments would be included in the gross number? And then where those investments are going?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [28]

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Yes. So on the $2.905 billion that is the right run rate for you to be assuming going into through and through 2020, we feel confident, again, assuming kind of markets flat to September. And if that's, that number is definitely achievable. If not, it's one that we could do better on. In terms of the $501 million that is a net number. There is about $30 million of investments that is already been done relative to the Oppenheimer transaction. So you can think about our gross number being closer to $531 million instead of the $501 million. And those have been areas where we invested around technology sort of the sales team effectiveness really again trying to create a better platform for WMI business to be successful. We do think there's opportunity for us to invest more and we do plan to invest more to continue to grow and make our team more effective. That we'll be some -- we will be entirely funded by further, sort of, integration savings. But with that said, there is opportunity for us to deliver more net synergies to the bottom line beyond the $501 million we believe, but we're not at the point where we are able to commit to that.

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Ryan Peter Bailey, Goldman Sachs Group Inc., Research Division - Associate [29]

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Got it. Okay. And then maybe if we turn to capital for a second. So you've done 2 forwards over the last 2 quarters, it's about $500 million today. It sounds like you have to pay out between sort of 1Q and 2Q '21. Do you expect to do any more of these over the next, call it, year or so? And then, is there any shift in capital priorities overall?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [30]

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Good question. The answer is no. We don't intend to do anymore forward. At this stage we think that we'll still be doing buybacks but there is only $260 million left on the remainder stub of what our commitment is, and that's one that -- a commitment that we think we can complete over -- through open market purchases easily and effectively without using forward purchases. So that is going to be done probably through the course of 2020. In terms of changes to the capital priority, there are no changes to the capital priority. We continue to focus on first returning capital to organic needs through seeds, not seen significant needs around seed beyond expectations. So we think that is marginally sort of status quo. We want to continue to be able to grow our dividend every year under all markets, and so that's still part of our priority. And then the remainder of capital will be returned to shareholders through buybacks. So that priority still exists. I will say that we still -- it is very important for us to maintain our investment credit, rating and we also want to continue to build cash so we have a $1 billion of cash in excess of what is required from a regulatory perspective. All that is consistent with our past priorities and all are still intact in terms of our thinking.

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Operator [31]

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Our next question comes from Brennan Hawken with UBS.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [32]

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Just wanted to follow-up on that last one on the expense comment and the $2.905 billion. Loren, I just wanted to kind of clarify because previously you guys have walked through the synergy, the expense synergy quarter-by-quarter and you've upsized the ultimate target, so $475 million goes to $501 million, that's really clear that your end run rate for expenses would be the $2.905 billion. But I had thought in your response to the prior question, you said that the $2.905 billion would be the run rate entering in 2020. But I thought previously, you had said the expense synergies you get there by the time you exit 1Q 2021. Is that -- is the previous timeline still intact or you accelerating the timeline too?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [33]

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We're accelerating the time line. So we're delivering the full synergies, 105% of the synergies effective this quarter. So pretty much all that kind of wait for it to come is gone. We can declare victory effectively in terms of bringing you that run rate effective this quarter. I think the point that we're trying to make or I have been making that there's still integration work happening in the background. But we are getting the synergies and those savings effective this quarter into Q4 into '20 -- first quarter of 2020 so forth. So that is -- hopefully it helps answer your question.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [34]

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It does. It's very clear. Sorry, if that's -- if it was redundant and previously indicated. I just wanted to clarify.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [35]

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(inaudible)

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [36]

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Yes, agreed. Good and helpful. So there was previously referenced the announcement we got recently from Wirehouse expected to launch program optional for participating asset managers on SMA products. Is this the sort of, product that you think would be compelling? I know that a lot of times on the shelf having a -- you got to have a good product it's got to be -- the performance has to be strong, the value-add has to be clear, but it also has to be at a compelling value, compelling fee rate especially versus the peers. So is this the sort of program, well on that -- maybe not commenting specific any program because I know you wouldn't want to do that until -- and front run. But is this the sort of program that you think would be compelling? Is this sort of program that you think you'd participate in? And do you think it would help accelerate your sales in that important broker sold channel for you?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [37]

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Yes. So Brennan, I think just to put some context, in terms of SMA business generally, we're currently ranked 36th in the industry. So it's not a big part of our business, we have sort of under $10 billion, in overall SMA business. I think related to that, particular platform that you're talking about, our exposure is probably less than $0.5 billion. So it's not a big deal for us, just in general. We did see it. It is a little too early for us to say just how interesting and attractive it might be for us. There is definitely some potential upside but also some things that we have to get an understanding before we said it would be interesting for us to participate. And...

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [38]

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Yes, and I'd just add, just listening to our conversation today, we just have so many opportunities in different channels to work in within the United States retail institutional globally and our focus continues to be there. And that's where we see the excitement and really what's going to -- these are the force behind, the consumer growth of the organization. So again, we've plenty to work with what's on our plate right now.

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Operator [39]

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Our next question comes from Patrick Davitt with Autonomous Research.

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Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [40]

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Another one on the $2.9 billion run rate, understanding that's kind of a baseline for 2020. Should we still assume to the extent we assume asset inflation in our model some upside to that with kind of normal increase in expenses-related to asset build? Or is that really kind of what you think it will be and can go lower from there?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [41]

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Yes. So I think we made a caveat which is -- that's based on sort of assets, based on September AUM, if we saw a huge market uptick, there's definitely some amount of variability in our incentive plans that would scale up, which is what we -- you'd expect that. Similarly, if we saw down market, we would also sort of see that flex down. So there's normal kind of variability that would happen around incentive plans but ultimately, there is no -- we should not expect any sort of hidden inflation numbers into 2020 on this number at all. This number we're feeling is comfortable based on the current AUM levels.

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Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [42]

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Okay. Great. That's helpful. And then, when you announced the deal you kind of announced an expectation of, I think, 2 basis points of revenue yield deterioration from breakage, is that related to the rationalization process? Or we should still expect that when you do rationalize or is that something separate?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [43]

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That is something that would include the potential for breakage with those rationalizations, and again, that was $45 million. We don't think it's going to be anywhere near that amount, as I think it was already discussed. It's a small number of amounts of products or assets, in general. So I think as I mentioned in the past that $45 million could be an upside to the overall modeling and the fee rate deterioration that we've provided in terms of deal economics.

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Operator [44]

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Our next question comes from Bill Katz with Citi.

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William R. Katz, Citigroup Inc, Research Division - MD [45]

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Unfortunately, I do want to spend a little more time on this $2.9 billion because I'm still actually a little confused, so I apologize for my denseness. So is there enough synergies go forward from here that could offset the inflation to the extent that flows were to build against the path that you can think that could play through? And just assuming a "normalized market," let's call it $0.07 for equities. Just trying to sort of see how that $2.9 billion might trend as the business gets a little bit better?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [46]

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I think we haven't done the sensitivity. I mean, I think if you look at how the firm -- it's bonus pools. It's really the largest component of it. And it's a percentage of PCBOI, it's in the proxies, it's kind of -- that's how we operate. It's the same concept that's going to come into effect going forward. So if we see flows really driving higher levels of AUM, which we love to see. Or if the market improves from here, you're going to see sort of just a normal type of flex around those types of bonus pools. So again, I would point you to kind of our past experience, the same kind of set of ratios that you've seen in the past in terms of how complex is with revenues and assets.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [47]

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Well, I -- Bill, I think, to point out the profitability will improve, it's actually the underlying question and you will get your margin expansion in that scenario, which we're talking about. That's the fundamental question.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [48]

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Yes, the incremental margin is still at the high level of 50% to 65% as assets and revenues grow.

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William R. Katz, Citigroup Inc, Research Division - MD [49]

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Okay. That is very helpful. Just 2 more questions, and I'll just play devil's advocate for a moment. On the institutional channel, I certainly appreciate the notion that your pipeline is getting better and the fee rate underneath that is better than the what's going out the door. But when I look at just over the slide that continues to sort of point to flattish flow -- Page 5 -- flattish flows overall, at what point, some of that very strong pipeline feed into maybe a more positive growth? Or maybe another to think about is, where you're losing traction, where you're you gaining traction?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [50]

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I think in terms of pipeline, as we said, we are gaining traction in some of the places that were quite successful in China, Greater China. So geographically, that's been really a strong area for growth across all sorts of asset classes, Chinese equities, fixed income, that's I think has a lot of upside for us as we continue to see success and further penetration in that market. We do think that Europe is -- it's got a lot of opportunity, particularly, as we build out solutions capabilities and we are meeting the needs around fixed income and general use of factors and other capabilities that have been part of our growth engines stories for some time. So those are upsides. Real estate continues to be a major driver of opportunity for the firm, overall. I think I'm in terms of downside, there isn't a tons of downside, we don't see, it's like a big, likely to terminate or sort of big ugly story on the downside for institutional. The reason it hasn't turned negative here has been largely because of the volatile market that we've been in and some of the fundings have slowed just because of the uncertainty work that we're doing in Europe. And U.K. has definitely slowed to some extent just because of the risk loss behavior that we're seeing as people want to understand what direction -- things are going in. So we do believe that I mean, those numbers are going to fund, it's just a matter of timing.

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William R. Katz, Citigroup Inc, Research Division - MD [51]

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Just one last clarification, I apologize, I think you've covered before. On that $10 billion mandate that you expect to fund in the first half of the year, is there a way to think about the fee rate associated with that? I apologize if you already covered that.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [52]

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Yes, now, again, just because it hasn't been disclosed publicly, we're not going to talk about it because it really will be transparent to the client if and when may disclose it. So we just don't think it's appropriate for us to be talking about fee rates for clients.

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Operator [53]

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Our next question comes from Dan Fannon with Jefferies.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [54]

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My question is around the U.K. Obviously, Brexit has been an overhang but also there's been the scrutiny of Woodford and the asset management industry as a whole. Could you talk about kind of Perpetual because they are being brought into the same discussions around the platforms and how these funds are being sold and you, obviously, your performance there has been hit. So I guess just, in general, can you talk about the outlook for perpetual what any ramifications what you may or may not expect from some of the platforms and how funds are sold and how your business practice might differ from the way it's been written about in the press for other funds?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [55]

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Yes, look, it's a good question, obviously it's very topical in the U.K. And I can't speak for win. But what I will say, one of the most fundamental things that we did strategically was purchasing a TeleFlow. And that's early days but that is really a very powerful platform that we think is going to make quite a difference for us in that marketplace. And yes, we realize they have 35% market share, we just released the model portfolios. It's early, clients are started to go on the platform it's going to start picking up next year. And I think that was a very important strategic decision that we made. And with regard to investment performance, again, these markets more recently have been very, very positive for us and those teams. And the combination thereof, I think, puts us in a good place. And this is I'm speaking at a retail level, I think is what you're addressing. Now institutionally, we continue to be very, very strong in the market and growing. But Greg, I don't know if you want to add?

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Gregory Gerard McGreevey, Invesco Ltd. - Senior MD of Investments [56]

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Yes. Look, I think this highlighted the year-to-date improvement that we've seen in our Henley business overall, especially on the equity side, with a number of our assets, especially those that have had the most significant size in the top half of peers and pretty dramatically from 2018 and '17. So don't want to get too far ahead of the fact that it's relatively short-term performance but September was an especially strong month for performance within the Henley equity side. And so what we're trending definitely in the right direction if you will, and we've seen significant improvement also within the Henley fixed-income side. So the one thing that I think on that business because it kind of gets to outflows and what we may see there, I think that group, historically, like a lot of our other equity teams has an incredibly strong culture, skill and capabilities. And I think that team historically has produced incredibly strong performance. It's really been the recent market environment in the short run that's kind of impacted our performance, notwithstanding what -- the positive things that have happened on the year-to-date basis. So I'm highly confident that we will be able to given those skills to return back to what we would expect that group and what they historically have produced in terms of performance.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [57]

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And look, you're on a point. The Brexit coming into the market environment it has been a tremendous headwind for us. But that's high degree of confidence in our investment teams. And at some point, it will not be a risk-off world, and we anticipate participating very strongly in it.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [58]

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I guess to clarifying the performance, I am looking at Slide 14 and I look at the U.K. under 1, 3 and 5 year numbers. And so what improvement are you citing, I guess, or is it somewhere else that I could see that?

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Gregory Gerard McGreevey, Invesco Ltd. - Senior MD of Investments [59]

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Yes. So the -- yes, so this is at the end of -- so this is looking at it on a 1-year basis, I was giving you year-to-date numbers. So the fourth quarter of last year, as I think you know, has been an especially troubling year for kind of all equity performance. And so that really impacted when you look at the 1-year performance at the end of September of '19, those numbers -- if you looked at that on a year-to-date basis, you would definitely see improvement and then I was referencing specifically the September number where we had roughly about 90% of all of our assets within the Henley Group in the top half of our peer group. So again, it's relatively short-term, but we're starting to see that trend in the right direction for the same reasons that we talked about earlier. I hope that clarifies?

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [60]

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Yes, yes, it does. And then just follow-up. On Asia, outside of money markets, I guess, what products are selling in that region? And kind of what, I guess, or what are you -- or where do you see potential other kind of avenues of growth in that region?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [61]

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Yes. So through Invesco Great Wall, it's very broad. Equity products are very, very strong, highly performing. They're recognized as one of the top local money managers there. Institutionally in China, it's very broad, heavy real estate fixed income.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [62]

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Emerging market debt.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [63]

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Emerging market debt. So very broad and very deep in that area.

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Operator [64]

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Our next question comes from Michael Cyprys with Morgan Stanley.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [65]

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Just hoping to dig in a little bit more on the institutional channel, good to hear that the pipeline is improving here. Just hoping you could talk a little bit about some of the investments that you've been making in the institutional business, particularly around data, technology and also the ability to customize? And I guess the question is how is your approach different today versus, say, 2 years ago? And what might be most different that you look out over the next 2 to 3 years?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [66]

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Yes. Look, it's a great question. And let me hit on a couple of points and I'll have Greg pitch in too. I think we and all our competitors would tell you it's a great opportunity. The other reality is the demands on clients have never been -- from clients have -- has never been stronger. And so there's depth and breadth in this, investment capabilities has mattered, but right behind it exactly what you're talking about investments in technology around analytics, insights, has been very material. And when you look at that as beyond -- it's a necessity as you're going to compete and win with institutions. But leadership is another area that becomes very, very important in these conversations. Because what we're seeing with the clients is they're wanting to work with us very deeply and very broadly. And so it's effectively opening up the organization to whatever sort of capabilities that we have. And so it's been material and it's been real. Greg, what would you...

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Gregory Gerard McGreevey, Invesco Ltd. - Senior MD of Investments [67]

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Yes, I think the big 3 areas that we've invested in our capabilities on the solutions front, the client experience which would be both technology and systems as well as thought leadership where we've added with very strong content from our investment teams' ability both on marketing and within that group to be able to provide that content into the marketplace. On the solutions front, it's been one of the largest investments, I think, we've made as an organization and the ability to partner with clients to help them create outcomes that they really desire is where the market is moving to and it gives us, I think, an ability because of the individual resources and expertise that we've added are to really have the conversations that we need to and provide those outcomes that I think are so -- the clients are looking for. Part of the reason that we were able to talk about of that client on the institutional side and a lot of the other pipeline is really the result of that investments that we have made a number of years ago in solutions. We wouldn't been able to attain that client when we talked about it was $10 billion without the investment that we made. And we're seeing a lot of momentum with other clients as a result of those 3 areas that I kind of talked about and Marty talked about within the institutional inside. And we think that's only going to be a trend that we'll continue, so we're excited about that.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [68]

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Great. Just a quick follow-up. Is there any way to sort of quantify, I guess, how much investment spend is currently in the expense run rate? And how we should we think about that if anything kind of peeling back over the next couple of years or is that just, kind of, get recycled into other investments? How should we be thinking about that?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [69]

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So we have an enormous amount of investments in our run rate. I think we've -- while I [said] sort of $100 million of investments just generally around the firm across a variety of growth engine areas that we've talked about it in the past around China, around solutions, around factor-based investing, so that is in our run rate. We expect to continue to build that number over time but offset that with further savings as we talked about through synergies and just general sort of prudent to expense management and discipline.

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Gregory Gerard McGreevey, Invesco Ltd. - Senior MD of Investments [70]

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And I think the key thing for where we're at within solution which is kind of a broad area, we feel quite confident that the majority of the investments that we've made within solution has already been made. But the other things that we might need to do on the distribution side and in other areas to kind of support that. But we really feel like we've made the significant amount of headway into the individuals that we need to hire there.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [71]

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And I really, again, just to put some, how do we see it and what have we done? Our solutions team uses our capabilities, right? And I think that's quite different then what a number of our competitors do. So it literally sort of sits on top of -- we're looking through all the investment capabilities that we have and it's really hand-in-hand with the clients. And what we're seeing clients do where, if you go back 2 and 3 and 4 years, it was more of a what product does a client want? And what do we have that doesn't match up. Much more -- it's becoming a much more holistic engagement with our clients. Now it might be a capability or second capability, but it's really that insights and analytics that is really just changing the dynamic with the client for any institutional money manager to be successful in our view.

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Operator [72]

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Our next question comes from Glenn Schorr with Evercore.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [73]

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I wanted to drill down a little bit more on the MassMutual potential. You mentioned the 8,500 advisers, you also in the past have talked about the general account. The advisers are not the same type of businesses as say, the RECO broker-dealers, the Wirehouses. So could you talk about what you expect to be selling into that channel? What did it typically consume and how quickly that can be? And then anything you could add on the general account that would be great?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [74]

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So look, with MassMutual, again, I'd say early days, it's a very strong robust relationship and we're working through those multiple areas that we've talked about. What we will be better on is telling you once we have accomplished something as opposed to what's coming. That's not been received. So (inaudible) on these calls. That said, with the 8,500, we're looking at us building models for that sales force. And you can think of traditional investment capabilities that would be available in some of the other Wirehouses. So it's not as different as -- it is different, but again, the commonality is there that you (inaudible) and frankly, we're in multiple conversations around the general accounts right now with MassMutual. And again, once we accomplish something, we'll let you know.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [75]

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And the models, are that a product of Jemstep? Being the...

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [76]

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It's really the solutions team that's doing them. So building a combination of our active and factored capabilities in consultation with the CIO and what they are looking for their client base.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [77]

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Cool. And then, maybe just -- if you could just update us on GTR. I always thought in the past and choppy markets like we saw this quarter that was -- decent backdrop for GTR, just -- if you could just talk about what you're seeing on the ground in terms of potential demand?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [78]

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I mean, I think, what we've seen is there's been a fair amount of outflow in the retail side, particularly in EMEA as that product has underperformed somewhat. And I think there's sort of generally been, again, as I mentioned, sort of risk loss and people have sort of moved into cash. It still actually appeals to a lot of people in principle in terms of what it's trying to achieve as an outcome, lower risk, then equity markets with good return over cash. It's currently, I think somewhat underperforming that level maybe by 200, 300 basis points. It's been improving, in the current market. And so the performance has sort of come -- is moving in the right direction. So again, we are hopeful that we can see that product at least stabilized at minimum as opposed to sort of currently where it's in that flow.

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Operator [79]

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Our last question comes from Kenneth Lee with RBC Capital Markets.

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Kenneth S. Lee, RBC Capital Markets, LLC, Research Division - VP of Equity Research [80]

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Just a follow-up on the U.K. flows. Looking at it from a broader perspective, just want to get some of your thoughts, whether any of the recent regulatory activity or Brexit have been changing client preferences over the past year? And maybe just how would you characterize the sentiment of clients within the U.K.?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [81]

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Yes. Look, it's really wearing on clients, right? It's been about -- Brexit transition has been long and difficult. But from our perspective, where it's really come to light, where we can feel it is, it's really '18 into this year. I mean, you can see it in our business, you can see it in the actions of clients and what they're doing. So it's more of a movement to risk off cash type things. And we're seeing less of a movement towards Passive as you see here in the United States. And so again, it has been a headwind. Again so what we have done about it? We think it's been very important to change our way to support our clients, and then TeleFlow is an important part of that. And again, Greg talked about the asset performance is picking up. What we are introducing though in our portfolios are, we are bringing factored and passive into the market. And that is also something that would be beyond even TeleFlow also. That trend will pick up there in our mind and, again, I think you can see it just more broadly from our ETF flows throughout EMEA, they're just incredibly strong. And right now, we're the #2 flowing ETF provider in that part of the world. So again, source transaction was very important for us, and we see that pace just picking up as we look to the future. And if you remember, when you go back, when we announced it you can look at the ETF business in EMEA literally looks like it's 10 years behind where the United States was. And that was a couple of years ago, you are absolutely seeing that demand pickup as we anticipate it and we're beneficiary of that. And we look at that as another area of very important growth for us.

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Kenneth S. Lee, RBC Capital Markets, LLC, Research Division - VP of Equity Research [82]

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Great. That's helpful. And just one more. Looking further out when you take into account potential synergies with MassMutual, a fully integrated sales force being able to leverage a broader product set, any updates thoughts on what could be like a long-term potential organic growth expectations for the combined Invesco and OppenheimerFunds complex?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [83]

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Yes. I wish I had that crystal ball, but what I will tell you is our organic growth rate would exceed that of our competition. And we've strongly believed what we're building and what we have built puts us in a very strong position for where the industry is going and how we're positioned against it. And yes, we are starting to see that in very -- the areas that we've talked about on this call. Are they all at full potential? Absolutely not, but they're absolutely contributing right now, we're seeing it, you are seeing it and we're very excited about it.

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Operator [84]

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At this time, we have no further questions.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [85]

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Again, on behalf of Loren, Greg and myself, I thank you for your time and appreciate the questions and the dialogues. And have a great day.

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Operator [86]

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That concludes today's conference. Thank you for participating. You may disconnect at this time.