Thank you all for joining Bank of America's 33rd Annual Financial Services Conference. This is Craig Siegenthaler, North America Head, Diversified Financials and Equity Research. And I'm pleased to introduce Allison Dukes from Invesco. Allison is the firm's Chief Financial Officer, and she joined in 2020. And as CFO, she leads global corporate finance functions, including strategic and financial planning and investor relations. Prior to Invesco, Allison was CFO of SunTrust, which she was instrumental with the merger with BB&T. Allison, thank you for joining us in Miami.
Thanks for having me. Good to be here.
Invesco is one of the largest asset managers in the world, with $1.8 trillion in assets under management. Its business is diverse across client channel and across product, with scaled businesses in secular growth segments, including ETFs and private markets. This has helped Invesco generate the strongest organic asset growth in our coverage last quarter. Allison, maybe we'll start with the macro. I want to hit on net flows because last year, flow trends are really driven by ETFs and money market funds, which Invesco is very well positioned for. But as we look into the future, the yield curve has steepened, and we're now in year three of the equity bull market. There is a potential for clients to start re-risking into alts and extending duration into fixed income. What is your thought on this topic?
So I think we've got a couple of things going on. We've got some secular trends and some cyclical trends that we have seen. And you certainly saw a lot of the secular themes continue to play out in our flows last year. Just with the organic flow rates that you noted, our flows in ETFs in particular, very strong, as we just continue to see clients really preferring that ETF wrapper over the mutual fund and this strong preference for passive over active. And that's a secular trend that I don't think necessarily goes away. I mean, we think that there is a place for active, but the trends that are supporting that real demand and investor preference for the passive wrapper probably doesn't go away. At the same time, you've got some cyclical themes that are underneath all of this as well.
And as you noted, the rate environment has certainly had an impact on fixed income and what we've seen in some of the trends there and just the amount of money that's still in cash. And that's been continuing to sit in cash as cash has been a pretty attractive return profile for the last few years. That said, we do think that this is perhaps the year where we will start to see with a little more rate certainty, or at least a certainty of path, where we will see clients extending duration into more of the medium and longer duration fixed income assets that are out there. So I think this will be an interesting year to watch. Perhaps we'll see the pickup. We saw a little bit of a pickup in the fourth quarter, particularly in our muni franchise, where we saw some good flows.
I think we're already seeing some good demand on the corporate investment grade side as well, so we'll watch and see how this year unfolds. I think munis could be a bit more challenged as we wait to see how some of the changing legislative actions perhaps impact munis, particularly on the tax side, and I think that could have an impact on the flows we see in munis, just depending on how things continue to unfold under the new administration.
Allison, if we do see durations and extensions in fixed income, which segments or categories do you think will benefit the most?
I think, again, anything that's sort of medium and longer duration is probably best positioned to benefit. Again, I think we're already seeing some of that interest on the investment grade side. I do think munis, I mean, have remained in favor, but I think it's going to be a little bit cautious, is our assumption for the time being as we continue to see how the tax impacts may change that.
So I want to hit on the revenue side of growth because Invesco has been generating the strongest organic growth in my traditional asset manager coverage. So congrats on that.
Thank you.
Although we have monitored the decline in the fee rate too, offsetting some of the impact on revenue, so from a forecasting modeling perspective, how should we think about long-term revenue growth in light of very strong AUM growth offset by some fee rate declines?
So some of the dynamics that are impacting Invesco are, in some respects, unique to us and really, I think, symptomatic of the fact that we have a very well-diversified franchise. And we have a pretty well-built-out platform across all geographies and asset classes. And so we see some of those secular and cyclical themes, again, playing out that are really impacting that revenue dynamic. So as you noted, our net revenue yield has been grinding tighter for a number of years now, quarters really. And a lot of that is driven by the continued investor demand for passive assets over active assets. So as we continue to see a strong demand for those passive ETFs outstripping the demand for our active strategies, which, of course, are going to be higher priced, we see that net revenue yield grinding tighter.
And I always say in every earnings call, every opportunity, we don't manage net revenue yield. It's an outcome. It's just an average of where we see client demand. It's an average of where we see that flow growth coming from. Of course, market has some impact, but I would say demand is having a greater impact than even the market growth. So the secular trends, again, continue to be a real theme in driving that net revenue yield tighter. But the other impact that we're seeing is the demand for assets really in the U.S., that very narrow demand that we've seen across markets for the last few years for U.S. assets. And our franchise is fairly tilted to ex-U.S. So we have a very well-diversified global international emerging equities franchise. And the cyclical demand has just not been there.
I think, and so that's had an impact for us in terms of where we've seen growth or lack of demand, lack of growth. Those outflows and fundamental equities have really created that challenge for us on the net revenue yield, so our objective has always managed to revenue. We're really focused on revenue growth and, more importantly, operating income growth, and so managing our expenses in a very disciplined fashion against that revenue environment. We want to make sure we've got the right strategies well-positioned for where demand will be. I can't control where the demand will be, and it does have a pricing impact on it, but I also think a lot of that is behind us as we've not all of it.
I don't want to imply that we are at a stable net revenue yield yet because I think we will continue to see this strong demand for the passive capabilities. But I think we've seen a lot of the biggest declines are perhaps behind us as we are now at a net revenue yield that's at a 24 kind of context around it. We anticipate there will continue to be some modest decline in future quarters, but probably not at the pace we were seeing a few years ago as we continue to see these assets really mixed in at this point.
So as we move through the EPS algorithm from flows, revenues, now operating leverage, you had a 40% margin a couple of years ago. The bear market put pressure on everyone's margins in 2022, but you've been making some improvements there. This could be a huge accelerant to EPS if that upward trajectory continues here. How should we think about long-term expense growth and how does that flex in different market environments, strong or weak?
Yeah, so coming out of 2021 into 2022, where we did see that real margin compression, the biggest driver of that margin compression was the risk-off mindset that we were all contending with, but also, again, developing markets and global equities really being out of favor. That for Invesco was the biggest driver for us, and I think a bit unique to us given that our franchise skews so ex-U.S. Now, that's not to suggest we don't have a very well-built-out U.S. growth, U.S. core, U.S. value. We have a pretty significant franchise there, but our tilt towards global and developing markets and those really falling out of favor was the biggest impact to our revenue that created the margin compression that we saw. We've been really digging out of that as we have seen demand kind of come back in a balanced way for the breadth of our platform.
We're still, I think, I don't think global equity demand is quite where we would hope it would be. And that's just, we've got to wait for that to come back as we work through some of the macro factors. But coming back to that operating leverage and the math underneath that, how we think about expenses, the guidance we gave on our earnings call a couple of weeks ago is we're looking at an expense growth, long-term expense growth or total operating expense growth for 2025 to be 1%. So very well managed this year at 1%. That's inclusive of all of our costs that include the installation of the Alpha platform, where we've had implementation costs that are running in that $10-$15 million range each quarter. So 1% growth inclusive of all of the implementation costs there against, and that's assuming flat markets.
So really looking at managing our expenses in a very disciplined way. We've been on this journey for a few years. We still have the opportunity to continue to think about how do we just shift our expense base, and we're looking every day at places where we can harvest some of those expenses, invest less to reinvest more in other areas, and really remixing that expense base to make sure that we're creating that positive operating leverage in any market environment. The number one driver on revenue will be narrowing the outflows that we've seen in our fundamental equity platform. Our performance there has been a little bit worse than the industry, and so as we think about what can we do to really drive revenue faster, it's getting that organic decay rate to no worse than the industry.
And of course, the industry's in organic decay there as well. We're trying to look at pockets of defense and where we've got pockets of growth to really cut those outflows to be no worse and ideally better than the industry. Against that, we've got all these other investment capabilities that, as you noted, have been flowing really nicely, and we've been putting up some of the best organic growth rates in the industry. If we can manage our expense base to be at that 1% expense growth in 2025, we can start to see the operating leverage and that operating margin improvement that we've seen for the last three quarters, and we think we've got the momentum to continue to do that this year.
Allison, you've really strengthened the balance sheet in the last couple of years. So now that you're generating cash flow that you can do different things with, how do you rank the different potential uses? And then when we think about M&A, how do you view large-scale consolidation type transactions today?
So yes, thank you on the balance sheet. We've focused on that quite a bit the last few years and feel really good about where we are. So we finished 2024 in a net cash position, $100 million of net cash. We have $900 million left of debt on the balance sheet. Part of that is a $500 million note that matures in January of 2026. So we have really focused on managing our cash in such a position that we can chip away at the balance sheet little by little so that we can manage the leverage profile down. And so our debt to EBITDA, kind of pure debt to EBITDA, it's about a quarter turn. So it's come in quite nicely. As we think about it from here, we're constantly managing cash to satisfy all of our needs.
Our first and most important opportunity with our cash is to continue to reinvest in our business. We have been reinvesting in our business even while managing the balance sheet to a much better place over the last few years. We've been investing in things like Alpha and other technology platforms where we have, over the last five years, overhauled a number of our core systems and invested in those. We've also been launching new products and capabilities, so we're always launching new products and capabilities. Some of them are much more capital-intensive than others, particularly those in the private market space.
When we think about our cash and capital opportunities, we start with what are our product capabilities because those are our future revenue streams and how can we make sure we're setting the franchise up for that next leg of growth where we think client demand will be in the next three, five, seven years. After that, we look at the balance sheet. And the balance sheet is something that we've paid off over $1.5 billion in debt over the last couple of years. So a lot of focused and disciplined cash management there to really make sure we can do both at the same time while also returning capital to shareholders.
And we have been, as we noted, we started share buyback, more regular share buyback in the second half of last year, buying back around $25 million a quarter, which will put us this year at about a payout ratio of around 60% between the common dividend and share buybacks. All of those things are important to just running the business and keeping the trains running every day. You brought up M&A. We're constantly thinking about how do we continue to build cash so that we can be opportunistic there. I can touch on M&A maybe a bit deeper, which is we look at our franchise and we're pretty well built out. We're in all the geographies that we want to be in.
We have a very diverse franchise across North America, across Europe, and also across Asia with really strong businesses in China and Japan and India, really in all the places you want to be. We also have all the investment capabilities that we need across both our active and our passive strategies, a very well-built-out fundamental equity platform, fixed income platform, as we noted, the ETF platform, and then our private markets business, which is about $130 billion. Within that private markets business, it's both a real estate business and a credit business. The real estate business is around $80 billion. The credit business is around $50 billion. When we look at across all of that and think about where are there any capability gaps, private credit's probably the one place where between credit and infrastructure, we still have an opportunity to fill in some gaps there.
So M&A for us doesn't necessarily look like something large, transformational, but rather tuck-in opportunities to create capabilities either through partnerships or acquisitions where we can continue to really build out those capabilities.
So you kind of hit on my next question. But in terms of product gaps, you said there's not a lot. You kind of addressed that. Is tuck-in a small strategic acquisition? Could it look like a team liftout? It could be either.
It certainly could. It could be, and I think that's, you see, it across the marketplace right now. Things are getting done in different ways. It doesn't have to be just a holistic acquisition, but rather partnerships, tuck-ins, team liftouts, all of those things we've done in the past. Invesco's really a product of all those different methodologies and the way in which the capabilities we have today have come together over a series of decades, so it could. We've got a terrific distribution team, and so that's a real asset we have. We've got a balance sheet. Of course, capital's always something that could be an opportunity through partnerships. That's always valued, but where we're lacking maybe the expertise in the team situation, we could look at a liftout, certainly.
So if I look at the returns in private markets since 2021, private credit by far the strongest, and that's a big business for you. But real estate for the industry by far the weakest, and that's also a big business for you. So maybe you can give us a state of the union of your private market business. And I'm also curious how redemption requests and sales have been trending in the real estate business too.
So the private market business, again, about $130 billion. Real estate's $80 billion of that, and private credit's $50 billion of that. The real estate business, as you noted, has been weaker. It's been challenged these last few years, and the rate environment has had a big impact on that. In this higher-for-longer kind of environment, it has challenged the real estate market, and the availability of debt financing at attractive rates has slowed transaction activity, which has slowed overall interest, and redemption queues have been running on the higher side. So redemption queues for us, we tend to see 5%-6% as the kind of standard redemption queue and through kind of an average cycle running a bit higher than that in more challenging times. We've been running a bit higher than that for a year or so now. No real changes, I would say, and very manageable.
A lot of these are going to be closed-end in nature, and they're going to be patient. We're working with the client. So it's not anything that's unmanageable. It's kind of consistent with what we have seen in cycles like this before. We are starting to see a little bit of a pickup come back in terms of some demand on the real estate side. I think, again, as we start to see maybe some certainty in the path of rates this year, it could be a more positive year for real estate. What we've also seen, and we've had some real success in, is the demand for real estate debt given the dislocation in the markets and in this higher-for-longer environment. So we launched a strategy called INCREF for the wealth management channel about two years ago.
It's already up to about $2.5 billion in AUM, and that is a real estate debt strategy. And that's where we're really starting to see some demand in absence of real demand on the real estate equity side and very encouraging.
So India's become a more exciting market for you. You just formed a joint venture. To me, the playbook looks a lot like what you did in China with Great Wall like 20 years ago. What are you doing in India? And also, is this something you can replicate? You said you feel very good for your geographic presence, but I know you don't have a lot of business in Brazil or South America at this moment.
That is true. I'll come back to South America. You're right. We don't have business there. I'm not sure that it's necessarily our area of focus right now, but it's an interesting one to keep an eye on. In India, as you noted, we did announce a joint venture of our Indian asset manager about a year ago. That is not closed. We are still working through regulatory approvals there. Our business in India is about a $13 billion asset manager, and we announced an intention to sell 60% of that business to the Hinduja Group, which is a large Indian conglomerate with a financial services focus as well. The success we've seen in India, most people understand sort of the demographic opportunities that exist in India, and we've seen real good success on the wealth management side there.
Our view was this is an opportunity to really capitalize on a distribution partner. The Hinduja Group and their financial services focus also has good bank retail wealth management access. So it gives us the opportunity to really strengthen the distribution there. We are, I think, the fifth largest foreign-owned asset manager in India. It's a top 20 asset manager overall. Our objective is to grow and, as you note, to really capitalize on some of the same success that we saw in China with the JV that we formed there over 20 years ago. In doing so with this partner in India, we think we've got an opportunity to really grow India at some of the same scale, same clip that we've been able to demonstrate in China over the last 20 years.
So before we go to Q&A, I'd like to get your perspective on what we could be missing from the Invesco stock today. I know you own some stock. I know it's important to you, but you do speak to a lot of investors, sell-siders like myself. What do you think we're missing? What do you think we need to know about Invesco?
Well, I always think there's a lot that people are missing about Invesco. I think that there's a lot that's underappreciated. I wouldn't be doing my job if I didn't think the story was a bit underappreciated at the moment. If you look at it, look, you noted our organic growth rates, which have been terrific and have been durable. We've really demonstrated growth. Of course, 2022 was a challenging year for everyone, but we came out of 2022 very strong in terms of those organic flows. And we continue to build on that quarter after quarter. And I think that's a testament to the diversification of the platform. Again, I'll start with the geographic diversification with about two-thirds of our business in North America. But we also have a very well-built-out business across all investment capabilities in Europe and continuing to build out those investment capabilities in Asia-Pacific.
We touched on India. Our business in Japan is about an $80 billion business where we have seen really strong growth across Japan, participating in some respects in the growth of the economy, but really punching above that too as we continue to see demand for a number of capabilities that are offshore manufactured really being in demand in Japan and starting to grow that business at a pace that we're outpacing a lot of the competition there. And then in China, where we have an asset manager that's about $95 billion in AUM. We've been there for over 20 years. We are the second largest foreign-owned asset manager in China. That's a business where we see operating margins that are north of 50%, net revenue yields that are higher than the firm average, a strong demand there for fixed income, fixed income plus, equities, and money markets.
China, while it's grown as much as it's grown, the retirement industry is still in the earliest stages of being built out. So we were there. We were there early. We've participated in building out where they are in the retirement system today, but an opportunity just to continue to scale that business, especially as we start to see demand for ETFs and some of the passive capabilities that were just introduced to China a couple of years ago, but really the opportunity to scale those. So there's the geographic diversification. There's the product diversification that I've spoken about, but it's really that active business and the passive business. Our passive book, our ETF book is about $800 billion in AUM. You exclude the Qs, and it's about $500 billion in AUM. So a very significant passive book. We're the fourth largest ETF provider in the world.
Our flow share continues to be about two times our market share. So our flow capture rate's about two times our market share. So we're taking market share there. And it's because our ETF business is focused in some spaces where some of the larger competitors are not. We don't focus quite as much on the bulk beta space. It's much more thematic, factor-based, innovation-based. So we continue to see strong demand for those capabilities. Private markets business, we've talked about $130 billion private markets business, continuing to grow out some of the, I'd say, wrappers and areas that are becoming more and more interesting. So our SMA business has about a $30 billion SMA business and very strong growth demand there. Active ETFs participating and continuing to build that out. We think that's a real opportunity for the future. We have about a $10 billion active ETF portfolio.
But when you look at our active teams that are managing passive and index strategies, that grows to about a $30 billion book of business altogether. So we're well-positioned in all of these areas that we think are the areas that are going to drive continued growth over the next few years. And we've got scale. And that scale comes back to that operating leverage math, where with that scale, continuing to drive these flows and revenue over the platform we have, we think it's entirely possible to get back to that mid-30s operating margin, mid-30s on a path to high 30s. I never want to imply that's the destination. But as we finished last year with an operating margin in the fourth quarter that was around 33%, full-year operating margin that was just over 31%.
Again, I think with a relatively supportive market and continued demand for risk assets, and perhaps we start to see money coming out of money markets and out of liquidity products and back into the market and really positioning those allocations more for growth this year, I think we are well-positioned to see continued improvement in the operating margin. All of these things, I think, are underappreciated about the Invesco franchise.
Actually, I just had one follow-up on China.
Sure.
As you pointed out, second most successful foreign-owned firm. But a lot of American firms and a lot of European firms have tried to grow in China. They haven't been as successful. More recently, a number of firms have started wholly-owned ventures in China. So my question is, first, how has Invesco been so successful over 20 years? And is there an opportunity to take your stake up in that JV? Because I believe it's around 49%.
49%, yes. I think part of the success is we got there at the right time. And timing is everything. With a lot of what we've already talked about, for us or anybody else, being there early helps build a bit of a moat around what you're doing. And so we have been there for almost 22 years. And we were on the early side. We also have a good JV partner. And that has been helpful as well because we are viewed as a domestic for a domestic business. So this is entirely Chinese investment vehicles invested in Chinese assets with Chinese end investors on the other side. So this is a domestic business with a strong domestic partner. And we are seen as a Chinese business there. And that has been quite helpful as well.
We have never injected capital beyond the very first injection of capital over 20 years ago. It has been self-sustaining since then, and again, with operating margins that are north of 50%. We've had a good, strong set of investment teams that have performed well and have invested in the right assets at the right time, and I don't mean to oversimplify it and imply that it was easy. It wasn't easy, and it's certainly not easy to break into that market today, but being there early and starting to scale the business at the time we did positioned us quite well.
Allison, let's see if there's any questions from the audience. If you have a question, raise your hand. We can get you a mic.
I have a question. I'm going to get a lot of work. There's a couple of quick questions for you. Refinancing says too few people starve, but it's a non-fee-paying asset. So what's the benefit of that? And lastly, BlackRock's acquisition. I was very shocked, you know. How are you thinking about that? You have scale already. Is it worth acquisition here?
Yeah.
Right. What's going on?
Right. Three good and diverse questions. So let me start with the 2026 notes. That's the $500 million note that is coming due in January of 2026. Short answer is I don't know yet if we will refinance that or pay it down. It really depends on the opportunities that are out there. As we do have the leverage profile to a nice place today, I am pretty comfortable with where we are. It depends on the rate environment. It depends on other opportunities. If we don't have a better use of the cash at the moment, we will have ample resources to pay it down. We have a $2 billion revolver that is unfunded today. So that's always an opportunity for us to think about the way in which we might continue to delever. So I like the optionality.
We're continuing to manage that optionality and put us in a position to make a decision in the back half of this year. On the Qs, yes. So the QQQ, which is about a $300 billion ETF today, does not pay a management fee. That is a trust where the compensation we receive is in the form of a marketing support budget. And that comes in a way that we have to use it to market the QQQ. Now, you see us marketing the QQQ pretty broadly if you watch TV at all. And it says QQQ powered by Invesco, which is a halo brand for us. And it does create a pretty significant brand awareness for Invesco. So that's been very valuable.
We've also launched the QQQM, which is about four years ago now that we launched that strategy, which is really meant to be to draft behind the QQQ, and that is an ETF that is full revenue-paying. It's actually priced a little bit better than the QQQ, and it has grown to $40 billion in AUM, so we've had tremendous success growing that ETF to $40 billion in AUM in only four years. It's now our third largest ETF, and it does pay revenue, so we are seeing continued success with that and really building on the QQQ, which is at a point that it's pretty large in size and creates a very significant marketing budget for us, and that's the value it creates, and then your third question around M&A, so yes, BlackRock did some very sizable acquisitions.
I don't know that that's necessarily our strategy to do something that large, sizable, and transformational. I think our opportunity, as we continue to look at the diverse set of opportunities we have and we think about our own size and scale, might be to continue to build out those capabilities on the private credit side and infrastructure side, as I noted, looking at how we might participate in some of the success that's there. I'll come back. We've got about a $50 billion business. That is primarily bank loan and CLO-oriented with a distressed and direct strategy that are each around a billion dollars. We've really built out some capabilities there organically. I think we could probably find opportunities that maybe give us the opportunity to build that out inorganically a little faster. I say that.
We've been very consistent in saying this for a year. I'm not saying anything new here. It isn't easy to find something that is the right cultural fit, that is the right price, that has the right capability set, that isn't overly duplicative. These are not always easy to say, not easy to do.
Thank you for the question. Do we have any other questions in the audience? We have one in the front here. Get a mic.
Your ex-US business has generated strong growth from your teams over the years. Can you just highlight which products have been driving this growth and is the gap pretty sustainable?
Yes. So some of the probably higher demand products would be the QQQM, as I noted. That $40 billion that didn't exist a few years ago has been just a tremendous inflow for us. The S&P 500 Equal Weight, that's been an RSP, a very strong grower for us. BKLN, which is our senior loan ETF, has been in pretty strong demand. We've also seen of late our S&P 500 Momentum series, where we continue to see demand broadening out there. I point to those as some of the fastest growing that we've seen. But as you note, I mean, it's a pretty broad, diversified platform. I should also note Europe. We saw real demand for ETFs in Europe in 2024 and really start to pick up in the third and fourth quarter in Europe. I think our ETF platform's around $130 billion today.
We're starting to see demand broaden out there and pick up a little bit faster.
So Allison, I think with that, we are out of time and out of questions. So on behalf of all of us at Bank of America, thank you very much for joining us.
Thank you.