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IVZ > SEC Filings for IVZ > Form 10-K on 21-Feb-2014All Recent SEC Filings

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Form 10-K for INVESCO LTD.


Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

The following executive overview summarizes the significant trends affecting our results of operations and financial condition for the periods presented. This overview and the remainder of this management's discussion and analysis supplements and should be read in conjunction with the Consolidated Financial Statements of Invesco Ltd. and its subsidiaries (collectively, the "company" or "Invesco") and the notes thereto contained elsewhere in this Annual Report on Form 10-K.

During 2013, economies in the developed world continued to show improvement, resulting in strong equity market gains. Equity markets such as the U.S., Japan and the U.K. produced positive returns, as evidenced by the S&P 500 index, which was up 29.6%, the Nikkei 225 index, which increased 56.7%, and the FTSE 100, which rose 14.4%. However, developing markets lagged in 2013, as questions about the impact of slowing monetary stimulus on emerging economies weighed on equity prices, resulting in the MSCI Emerging Market index declining 5.0%. Bond markets declined in 2013, as evidenced by the Barclays U.S. Aggregate Bond index, driven in part by a change in the U.S. Federal Reserve's monetary policy. The expectation of a tapering in the monthly bond purchases resulted in pressure on bond prices. This was confirmed in December 2013 when the Federal Reserve announced a reduction in the monthly purchases from $85 billion to $75 billion.

The table below summarizes the year ended December 31 returns based on price appreciation/(depreciation) of several major market indices for 2013, 2012, and 2011:

                                 Year ended December 31,
Equity Index                    2013       2012     2011
S&P 500                         29.6%     13.4%     0.0%
FTSE 100                        14.4%      5.8%    (5.6)%
Nikkei 225                      56.7%     22.9%    (17.3)%
MSCI Emerging Markets          (5.0)%     15.2%    (20.4)%
Bond Index
Barclays U.S. Aggregate Bond   (2.0)%      4.2%     7.8%

Throughout 2013, we continued to execute our long-term strategy, which further improved our ability to serve clients, strengthened our investment reputation, and helped to deliver competitive levels of operating income and margins. We also took advantage of opportunities in the market and continued to invest in our products and capabilities, our brand, our global platform and our people in ways that strengthened our business and competitive position for long-term success. In late 2013, we launched the Global Targeted Return product line, with strong flows to the new fund in the U.K. market in the fourth quarter. In addition, late in 2013, we launched a number of new "liquid alternative" capabilities. These capabilities leverage the firm's 25 years of experience managing alternative assets to bring existing institutional-quality alternative investment capabilities to our retail clients. The company launched more funds in the fourth quarter of 2013 than in any year within the last five years.

As a global investment management firm dedicated to delivering investment excellence to our clients, Invesco is committed to further strengthening and enhancing our risk management approach. We believe a key factor in Invesco's ability to manage through the economic uncertainty of the past three years was our integrated approach to risk management. Invesco's enterprise risk management approach is embedded in its management processes across the organization. Broadly, our approach includes two governance structures - one for investments and another for business risk.

Investment risk oversight is supported by the Global Performance Measurement and Risk group, which provides senior management and the Board with insight into core investment risks, and the investment teams.

Business risk oversight is supported by the Corporate Risk Management Committee, which facilitates a focus on strategic, operational and other key business risks, and related committees.

Further, functional and geographic risk management committees maintain an ongoing risk assessment process that provides a bottom-up perspective on the specific risk areas existing in various domains of our business. As a result of our efforts in this area, Standard & Poor's Ratings Services has designated our enterprise risk management rating as "strong."

In addition, we benefited from our long-term efforts to ensure a diversified base of assets under management. One of Invesco's core strengths, and a key differentiator for the company within the industry, is our broad diversification across client domiciles, asset classes and distribution channels. Our geographical diversification recognizes growth opportunities in different parts of the

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world. This broad diversification mitigates the impact on Invesco of different market cycles and enables the company to take advantage of growth opportunities in various markets and channels.

On October 15, 2013, the company announced that the Head of U.K. Equities, Neil Woodford, will be leaving on April 29, 2014. Mark Barnett will succeed Mr. Woodford as Head of U.K. Equities. As of December 31, 2013, Mr. Woodford was the named lead manager for U.K. Equity AUM totaling $46.6 billion. Between October 15, 2013 and December 31, 2013, U.K. equity income AUM experienced net outflows of $4.8 billion. Our total AUM in EMEA at December 31, 2013 is $171.9 billion. Excluding the net outflows from U.K. equity income, EMEA long term net inflows for the fourth quarter of 2013 were $4.3 billion.

On December 31, 2013, the sale of Atlantic Trust to CIBC was completed. The results of Atlantic Trust, together with expenses associated with the sale and the gain on the sale, are reflected as discontinued operations in the Consolidated Statements of Income and are therefore excluded from the continuing operations of Invesco. Comparative periods shown in the Consolidated Statements of Income have been adjusted to conform with this presentation. Similarly, total AUM excludes the AUM of Atlantic Trust with comparative periods adjusted to a consistent basis.

Regulators in various jurisdictions have proposed or are exploring changes to the manner in which fund distributers are compensated for the services they provide. The U.K. Financial Conduct Authority has implemented its Retail Distribution Review ("RDR"), which is expected to reshape the manner in which retail investment funds are sold in the U.K. by changing how retail clients pay for investment advice given in respect of all retail investment products. Invesco has prepared for the RDR implementation by offering investment funds to U.K. investors which are priced at a reduced gross management fee, but which in turn do not result in the payment by the company of a distribution fee to the intermediary. These changes are not expected to have a significant impact on net revenues as investors move into these offerings. In the U.S., the SEC has previously proposed and may repurpose significant changes to Rule 12b-1. Other countries have announced similar distribution fee reviews.

Presentation of Management's Discussion and Analysis of Financial Condition and Results of Operations

The company provides investment management services to, and has transactions with, various private equity, real estate, fund-of-funds, collateralized loan obligation products (CLOs), and other investment entities sponsored by the company for the investment of client assets in the normal course of business. The company serves as the investment manager, making day-to-day investment decisions concerning the assets of the products.

Investment products that are consolidated are referred to in this Report as either Consolidated Sponsored Investment Products (CSIP), which generally includes consolidated majority-held sponsored investment products, or Consolidated Investment Products (CIP), which includes consolidated nominally-held investment products. This distinction is important, as it differentiates the company's economic risk associated with each type of consolidated managed fund. The company's economic risk with respect to each investment in a CSIP and a CIP is limited to its equity ownership and any uncollected management fees. Gains and losses arising from nominally-held CIP do not have a significant impact on the company's results of operations, liquidity, or capital resources. Gains and losses arising from majority-held CSIP could have a significant impact on the company's results of operations, as the company has greater economic risk associated with its investment. See Item 8, Financial Statements and Supplementary Data, - Note 1 "Accounting Policies," Note 19, "Consolidated Sponsored Investment Products," and Note 20, "Consolidated Investment Products," for additional information regarding the impact of consolidation of managed funds.

The majority of the company's CIP balances are CLO-related. The collateral assets of the CLOs are held solely to satisfy the obligations of the CLOs. The company has no right to the benefits from, nor does it bear the risks associated with, the collateral assets held by the CLOs, beyond the company's minimal direct investments in, and management and performance fees generated from, the CLOs. If the company were to liquidate, the collateral assets would not be available to the general creditors of the company, and as a result, the company does not consider them to be company assets. Likewise, the investors in the CLOs have no recourse to the general credit of the company for the notes issued by the CLOs. The company therefore does not consider this debt to be a company liability.

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The impact of CIP is so significant to the presentation of the company's Consolidated Financial Statements (but not to the underlying financial condition or results of operations of the company) that the company has elected to deconsolidate these products in its non-GAAP disclosures. The following discussion therefore combines the results presented under U.S. generally accepted accounting principles (U.S. GAAP) with the company's non-GAAP presentation. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains four distinct sections, which follow after the Assets Under Management discussion:

Results of Operations (years ended December 31, 2013 compared to December 31, 2012 compared to December 31, 2011);

Schedule of Non-GAAP Information;

Balance Sheet Discussion; and

Liquidity and Capital Resources.

Each of the Consolidated Financial Statement summary sections (Results of Operations, Balance Sheet Discussion, and Liquidity and Capital Resources) begins with a table illustrating the impact of CIP relative to the company's consolidated totals. The impact is illustrated by a column which shows the dollar-value change in the consolidated figures, as caused by the consolidation of CIP. For example, the impact of CIP on operating revenues for the year ended December 31, 2013 was a reduction of $37.9 million. This indicates that their consolidation reduced consolidated revenues by this amount, reflecting the elimination upon their consolidation of the operating revenues earned by Invesco for managing these investment products.
The narrative in each of these sections separately provides discussion of the underlying financial statement activity for the company, before consolidation of CIP, as well as of the financial statement activity of CIP. Additionally, wherever a non-GAAP measure is referenced, a disclosure will follow in the narrative or in the note referring the reader to the Schedule of Non-GAAP Information, where additional details regarding the use of the non-GAAP measure by the company are disclosed, along with reconciliations of the most directly comparable U.S. GAAP measures to the non-GAAP measures. To further enhance the readability of the Results of Operations section, separate tables for each of the revenue, expense, and other income and expenses (non-operating income/expense) sections of the income statement introduce the narrative that follows, providing a section-by-section review of the company's income statements for the periods presented.

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Summary Operating Information

Summary operating information for 2013, 2012 and 2011 is presented in the table
$ in millions, other than per share amounts,
operating margins, ratios and AUM                     Year ended December 31,
U.S. GAAP Financial Measures Summary (1)         2013          2012          2011
Operating revenues                              4,644.6       4,050.4       3,982.3
Operating income                                1,120.2         842.6         882.1
Operating margin                                   24.1 %        20.8 %        22.2 %
Net income attributable to common
shareholders                                      940.3         677.1         729.7
Diluted EPS                                        2.10          1.49          1.57
Debt/equity ratio including CIP (%)                64.3 %        56.2 %        74.4 %

Non-GAAP Financial Measures Summary
Net revenues (2)                                3,252.0       2,836.0       2,791.6
Adjusted operating income (3)                   1,292.1       1,012.1       1,046.2
Adjusted operating margin (3)                      39.7 %        35.7 %        37.5 %
Adjusted net income attributable to common
shareholders (4)                                  953.3         748.6         759.1
Adjusted diluted EPS (4)                           2.13          1.65          1.63
Debt/equity ratio excluding CIP (%) (5)            19.1 %        14.5 %        16.5 %

Assets Under Management (1)
Ending AUM (billions)                             778.7         667.4         607.3
Average AUM (billions)                            725.6         645.3         617.8

(1) The company has adopted a discontinued operations presentation for Atlantic Trust. Amounts presented represent continuing operations and exclude Atlantic Trust, with the exception of net income attributable to common shareholders and diluted earnings per share. Prior period amounts have been reclassified to conform with this presentation.

(2) Net revenues is a non-GAAP financial measure. See Item 6, "Selected Financial Data," footnote 2, for the definition of this measure and the related reconciliation reference.

(3) Adjusted operating income and adjusted operating margin are non-GAAP financial measures. See Item 6, "Selected Financial Data," footnote 3, for the definition of these measures and the related reconciliation reference.

(4) Adjusted net income attributable to common shareholders and adjusted diluted EPS are non-GAAP financial measures. See Item 6, "Selected Financial Data," footnote 4, for the definition of these measures and the related reconciliation reference.

(5) The debt-to-equity ratio excluding CIP is a non-GAAP financial measure. See the "Liquidity and Capital Resources" section for a recalculation of this ratio and other important disclosures.

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Investment Capabilities Performance Overview

Invesco's first strategic priority is to achieve strong investment performance
over the long-term for our clients. The table below presents the one-, three-
and five-year performance of our actively managed investment products measured
by the percentage of AUM ahead of benchmark and AUM in the top half of peer
group. (1)
                                           Benchmark Comparison                    Peer Group Comparison
                                        % of AUM Ahead of Benchmark         % of AUM In Top Half of Peer Group
                                         1yr         3yr        5yr            1yr             3yr          5yr
U.S. Core                                 32 %        49 %        26 %           17 %            48 %         17 %
U.S. Growth                               71 %        30 %        38 %           70 %            24 %         38 %
U.S. Value                                81 %        57 %        80 %           71 %            81 %         56 %
Sector Funds                              77 %        72 %        97 %           19 %            23 %         53 %
U.K.                                      98 %        99 %        86 %           96 %            98 %         11 %
Canadian                                 100 %       100 %        73 %           96 %            72 %         56 %
Asian                                     76 %        78 %        77 %           64 %            68 %         67 %
Continental European                      96 %       100 %       100 %           67 %            94 %         94 %
Global                                    72 %        91 %        61 %           85 %            85 %         69 %
Global Ex U.S. and Emerging Markets       83 %        97 %        97 %            6 %            94 %         97 %
Fixed Income
Money Market                              52 %        58 %        58 %           96 %            96 %         96 %
U.S. Fixed Income                         60 %        87 %        81 %           72 %            95 %         84 %
Global Fixed Income                       84 %        85 %        97 %           79 %            84 %         86 %
Stable Value                             100 %       100 %       100 %          100 %           100 %         25 %
Alternatives                              32 %        49 %        47 %           67 %            60 %         26 %
Balanced                                  43 %        73 %        60 %           62 %            97 %         97 %


(1) AUM measured in the one-, three-, and five-year peer group rankings represents 61%, 61%, and 57% of total Invesco AUM, respectively, and AUM measured versus benchmark on a one-, three-, and five-year basis represents 72%, 72%, and 68% of total Invesco AUM, respectively, as of December 31, 2013. Peer group rankings are sourced from a widely-used third party ranking agency in each fund's market (Lipper, Morningstar, IMA, Russell, Mercer, eVestment Alliance, SITCA, Value Research) and are asset-weighted in USD. Rankings are as of prior quarter-end for most institutional products and preceding month-end for Australian retail funds due to their late release by third parties. Rankings for the most representative fund in each Global Investment Performance Standard (GIPS) composite are applied to all products within each GIPS composite. Excludes passive products, closed-end funds, private equity limited partnerships, non-discretionary direct real estate, unit investment trusts fund-of-funds with component funds managed by Invesco, stable value building block funds and CLOs. Atlantic Trust results are excluded due to its sale. Certain funds and products were excluded from the analysis because of limited benchmark or peer group data. Had these been available, results may have been different. These results are preliminary and subject to revision. Performance assumes the reinvestment of dividends. Past performance is not indicative of future results and may not reflect an investor's experience.

As of December 31, 2013, 72%, 83% and 62% of ranked actively managed assets performed in the top half of peer groups on a one-year, three-year and five-year basis respectively. Within our equity asset class, the performance of Canadian equities continued to improve in both the benchmark and peer group comparisons. The U.K., Continental European and Global Ex U.S. and Emerging Markets equities have also had strong relative performance, with 86% or more of assets beating their benchmark over three- and five-year periods. Additionally, Continental European and Global Ex U.S. and Emerging Markets reflect strong performance with 94% and 97%, respectively, of assets beating peers on a five-year basis. The U.K. shows solid improvement during the one- and three-year basis as a comparison to peer group from a brief period in which we trailed the market during 2009 in the five-year comparison. Our balanced asset class reflects strong peer group comparison with 97% in the top half on both the three- and five-year basis. Within our fixed income asset class, Stable Value products have achieved excellent long-term performance with 100% of AUM ahead of benchmark on a one-, three- and five-year basis.

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Assets Under Management

The following presentation and discussion of AUM includes Passive and Active AUM. Passive AUM includes ETFs, UITs, leveraged fund balances upon which we do not earn a fee, and other passive mandates. Active AUM is total AUM less Passive AUM.

The AUM tables and the discussion below refer to AUM as long-term and short-term. Short-term AUM includes institutional money market and Invesco PowerShares QQQ AUM. Long-term AUM is total AUM less short-term AUM. Long-term inflows and the underlying reasons for the movements in this line item include investments from new clients, existing clients adding new accounts/funds or contributions/subscriptions into existing accounts/funds, and new funding commitments into private equity funds. Long-term outflows reflect client redemptions from accounts/funds and include the return of invested capital on the maturity or liquidation of private equity funds. We present net flows into institutional money market funds separately because shareholders of those funds typically use them as short-term funding vehicles and because their flows are particularly sensitive to short-term interest rate movements. The net flows in Invesco PowerShares QQQ AUM can also be relatively short-term in nature and, due to the relatively low revenue yield, these can have a significant impact on overall net revenue yield.

Changes in AUM were as follows (1):

                                         2013                                2012                                2011
$ in billions              Total AUM     Active    Passive     Total AUM     Active    Passive     Total AUM     Active    Passive
January 1                     667.4      553.4      114.0         607.3      511.0       96.3         599.6      518.8       80.8
Long-term inflows             179.6      137.0       42.6         131.9      102.2       29.7         138.0      102.5       35.5
Long-term outflows           (157.9 )   (123.9 )    (34.0 )      (121.5 )   (102.7 )    (18.8 )      (123.3 )   (102.2 )    (21.1 )
Long-term net flows            21.7       13.1        8.6          10.4       (0.5 )     10.9          14.7        0.3       14.4
Net flows in Invesco
Powershares QQQ fund            3.7          -        3.7           0.2          -        0.2           3.1          -        3.1
Net flows in institutional
money market funds              9.0        9.0          -           0.1        0.1          -           5.3        5.3          -
Total net flows                34.4       22.1       12.3          10.7       (0.4 )     11.1          23.1        5.6       17.5
Market gains and
losses/reinvestment            78.8       64.5       14.3          48.3       41.3        7.0         (15.0 )    (12.9 )     (2.1 )
net                               -          -          -          (1.7 )     (1.7 )        -             -          -          -
Foreign currency
translation                    (1.9 )     (1.0 )     (0.9 )         2.8        3.2       (0.4 )        (0.4 )     (0.5 )      0.1
December 31                   778.7      639.0      139.7         667.4      553.4      114.0         607.3      511.0       96.3
Average AUM
Average long-term AUM         613.7      523.3       90.4         543.5      466.1       77.4         524.4      458.2       66.2
Average short-term AUM        111.9       75.6       36.3         101.8       69.0       32.8          93.4       68.3       25.1
Average AUM                   725.6      598.9      126.7         645.3      535.1      110.2         617.8      526.5       91.3
Revenue yield
Gross revenue yield on AUM
(2)                            64.4       75.6       11.6          63.1       74.2        9.3          64.8       74.3       10.8
Gross revenue yield on AUM
before performance fees
(2)                            63.6       74.7       11.6          62.4       73.4        9.3          64.4       73.8       10.8
Net revenue yield on AUM
(3)                            44.8       51.8       11.6          43.9       51.1        9.3          45.2       51.2       10.8
Net revenue yield on AUM
before performance fees
(3)                            43.9       50.7       11.6          43.3       50.3        9.3          44.8       50.7       10.8

(1) On December 31, 2013, the company completed the sale of Atlantic Trust. All AUM amounts quoted in the tables exclude the AUM of the discontinued operations, Atlantic Trust. As of December 31, 2012, the excluded Atlantic Trust total AUM were $20.3 billion ($18.0 billion at December 31, 2011; $16.9 billion at December 31, 2010) with $18.5 billion in balanced at December 31, 2012 ($17.4 billion at December 31, 2011; $16.9 billion at December 31, 2010) and $1.8 billion in equity at December 31, 2012 ($0.6 billion at December 31, 2011; none at December 31, 2010).

(2) Gross revenue yield on AUM is equal to annualized total operating revenues divided by average AUM, excluding joint venture (JV) AUM. Our share of the average AUM in 2013 for our JVs in China was $4.0 billion (2012: $3.0 billion, 2011: $3.3 billion). It is appropriate to exclude the average AUM of our JVs for purposes of computing gross revenue yield on AUM, because the revenues resulting from these AUM are not presented in our operating revenues. Under U.S. GAAP, our share of the net income of the JVs is recorded as equity in earnings of unconsolidated affiliates on our Consolidated Statements of Income. Additionally, the numerator of the gross revenue yield measure,

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operating revenues, excludes the management fees earned from CIP; however, the denominator of the measure includes the AUM of these investment products. Therefore, the gross revenue yield measure is not considered representative of the company's true effective fee rate from AUM.
(3) Net revenue yield on AUM is equal to annualized net revenues divided by average AUM. See "Schedule of Non-GAAP Information" for a reconciliation of operating revenues to net revenues.


There are numerous drivers of AUM inflows and outflows, including individual investor decisions to change investment preferences, fiduciaries and other gatekeepers making broad asset allocation decisions on behalf of their clients and reallocation of investments within portfolios. We are not a party to these asset allocation decisions, as the company does not generally have access to the underlying investor's decision-making process, including their risk appetite or liquidity needs. Therefore, the company is not in a position to provide meaningful information regarding the drivers of inflows and outflows.

AUM at December 31, 2013 were $778.7 billion (December 31, 2012: $667.4 billion; December 31, 2011: $607.3 billion). During the year ended December 31, 2013, long-term net inflows increased AUM by $21.7 billion, net inflows of short-term AUM included institutional money market funds of $9.0 billion and net inflows in . . .

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