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Invesco Ltd (NYSE:IVZ)
Q3 2019 Earnings Call
Oct 23, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Unidentified Speaker

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 and overall operating plans and performance. These forward-looking statements are made as of today and are not guaranteed. 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.

Operator

Welcome to Invesco's Third Quarter Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to your speakers for today, Martin Flanagan, President and CEO of Invesco; Loren Starr, Chief Financial Officer; and Greg McGreevey, Senior Managing Director, investments.

Mr. Flanagan, you may begin.

Martin L. Flanagan -- President and Chief Executive Officer

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 through questions so 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 get through questions so we'll have time to have a discussion.

So now only four months post the close the acquisition of Oppenheimer, we've made tremendous progress bringing the two organizations together and you can see, by this quarter its generating meaningful results already. As we've discussed on previous calls, we do look at this as a multi-year growth story that deepens relationships in the U.S., provides this capability to take around the world, while also creating scale for 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, a 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're delivering 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 achieve these results in what was a very challenging macro environment for flows and also, being in early days of this combination between our two organizations.

During the quarter, clients reacted to the market news by derisking, 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 I'll 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 demonstrated the tremendous strength and potential of the combination. Furthermore, the operating and financial strength of the combined firm enable us return $440 million to common shareholders during the quarter in dividends and stock buybacks.

So finally, it is still very early days, but from our perspective, the initial results are very strong. Loren?

Loren Starr -- Chief Financial Officer

Great. Thanks, Marty. So before we get to Q&A, I wanted to spend a few moments 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 five, or slide five, we had $10.5 billion in 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 six, 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. Just had another way, this illustrates the trend for the two firms together over the entire period, including the pre-acquisition period.

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

Second, the chart clearly highlights that the deal has had an impact on our gross sales levels. Integration of two sales teams are well under way, and in fact, going quite well, but they're not yet complete. And as 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 through 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 won but not funded AUM continues to build quarter-over-quarter and year-over-year. And in particular notes, we were notified this quarter of $10 billion mandate, one by our solutions team, which is expected to fund in the first half of 2020.

Also, we received notification of a recent $100 million when into the newly launched OFI emerging markets local debt fund on our cross-border fundraising 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 OFI products and the pipeline is going.

So next, let me move to the topic of expense synergies. If you have 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 already thought that the opportunity to stay 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 synergy that we're presenting to you today.

And as a reminder, the 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 nine of our deck, summarizing the expense synergies, this illustrates the combined firm which represented the run rate annual operating expense case. 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 met just say that, we see the potential for the long-term net flow to flows the trend in the right direction, although it 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 and gross sales that we expect will ultimately be corrected. And as the U.S. retail sales team complete their integration. We continue to work hard managing the things within our control, improving gross sales, fund 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.

Questions and Answers:

Operator

[Operator Instructions] We do have our first question from Ken Worthington with JPMorgan. Your line is open.

Ken Worthington -- JPMorgan -- Analyst

Hi. Good morning.

Martin L. Flanagan -- President and Chief Executive Officer

Good morning.

Loren Starr -- Chief Financial Officer

Good morning, Ken.

Ken Worthington -- JPMorgan -- Analyst

Can you first talk about the journey back to positive long-term net sales? So a 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 just in products or asset classes do you see driving the incrementally better sales or incrementally lower outflows that we're seeing today, the more specifically, you could be the better? And then, you know, why?

Martin L. Flanagan -- President and Chief Executive Officer

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 pointed out about the deal, because I think that's actually quite critical. The to put salesforce point in clarity, as you've said in the past, literally salesforce now represents half of old Invesco, old OFI, to literally going through training right now. We actually, as you always do you have disruption when you do transfer agency conversions in the lift, they'll probably be up and running, I'd say, fully into December, so 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. It could be when does that happen? Into next year, that will surely happen. Ideally, on the first half of next year, from our perspective, again, I put it in the context of Loren did on the it all depends on the market but, with this if this market continues that's what we foresee.

Loren Starr -- Chief Financial Officer

Yeah. 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 without our control. So, one thing that is still very much weighing on, our flow picture for the firm globally is sort of just macro environment and some of the political uncertainty that exists where we see risk off, it's affecting everybody. And so, Europe for example, that risk off behavior driven flows into cash in a way 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 more clear Brexit being the most 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 have had some headwinds around performance, so that we're beginning to see sort of turnaround, particularly in the 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.

Greg McGreevey -- Senior Managing Director, Investments

Yes. Maybe, can just a little more granular to the essence of your question. So it's an intersection between demand and performance. And I may be point to the kind of four or five 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 you know, 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 and 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 when we're going to hopefully see in the first quarter, and when it funds in solution, we're seeing that traction, really take shape and almost kind of all markets, if you will.

And then global liquidity, it was kind of mentioned is one of those areas, not only in China that we talked about on prior calls, but we're 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 in performance improvements and a number of those funds that have had the most significant amount of out flows 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.

Ken Worthington -- JPMorgan -- Analyst

Okay, thank you. And then on the synergies, can you talk about the outlook from here, both synergies and dissynergies, so maybe starting with dissynergies, I believe there's still a 529 plan outflow, I think that's a fourth quarter event, correct me if I'm wrong, any other deal related by dissynergies 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 reinvest it? Are you going to reinvest some of the 501 and if not, any idea on how much more we'll be able to shareholders will be able to keep that wouldn't be reinvested?

Martin L. Flanagan -- President and Chief Executive Officer

So Ken, on the first point, the dyssynergies, you are correct, there is a $2 billion New Mexico outflow that is to be expected in the fourth quarter, that is the dyssynergy. The only other dyssynergies are the ones we just talked about in terms of gross sales been abnormally low, some of the kind of general disruption related to FCA conversions and those have been the 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 dissynergy. And if anything, you know, again, we're seeing more positive revenue synergies to take on potential for the products in a few cabs in year. For example, this is a good real life flow coming in.

In terms of the 501, that number is net of investments. So that is the number that we are saying you'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, you know to 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 the 501. And we will continue to keep you updated in terms of the potential upside on that number.

Ken Worthington -- JPMorgan -- Analyst

Thank you very much.

Martin L. Flanagan -- President and Chief Executive Officer

You're welcome.

Operator

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

Mike Carrier -- Bank of America -- Analyst

Good morning and thanks for taking the questions. First one, just on the sales in the flows, I think Marty, you mentioned over the past, probably one to two years, there's been some negative impacts the business, whether it was Brexit and some of the European, you know, headwinds in it on the value side versus growth, that being the headwind.

It seems like some of those, things are at least starting, to potentially, you know, shift gear. But just wondering if you're seeing any early signs some like improvement on that front?

Martin L. Flanagan -- President and Chief Executive Officer

Yes. So look, what we think our fundamental strength of our organization, so thinking EMEA, think Asia PAC, Brexit and trade wars, just tremendous headwind for us and again, so closely results in light of that it's not excuse, it's just a reality.

We are sensing Brexit in particular, certainly endgame coming here. But you're starting to see just recently the performance of centric of very strongly, which is a very good sign. And so, again, it's I say hope is not a strategy but you definitely are sensing some relief here.

Look, when Sterling being at what is 129, a whole lot different than 119. So again, some of these we will continue to manage through, but any relief is just really powerful. They get on a few managing own performance.

Greg McGreevey -- Senior Managing Director, Investments

Yes, Michael, OK. I think the rotation is starting to happen from grow to value to market staring 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 be index.

And that really goes 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 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 what we've seen over the course of the last 10 years. So that gives us some comfort. That when this does, it change given the strong teams that we have we'll be able to generate the performance we come to expect.

Mike Carrier -- Bank of America -- Analyst

Okay. Thanks. And then, Loren, maybe just on the fee rates, you got the bump this quarter, you and Oppenheimer. The trend over the past couple of years has been a little more than 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 that's come under pressure as well on some platforms.

But just, when you look at some of the investment 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 in some of the areas that are going on pressure into that fee rate over time? Just any update on how you're thinking about that and then managing expenses with that mind?

Loren Starr -- Chief Financial Officer

So it's a very dynamic. There are a lot of puts and takes in the fee rates. There are some -- differently some positive things in our fee rates. In terms of we talked about in the past, our institutional pipeline where assets that are funding are at a higher fee rate and the assets declining, we continue to build up, I think, a strong set of capabilities around alternatives, which tend to have a higher fee rates and now it's 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. Great margin products as long as you can grow them quickly and in a sort of create scale on those products, we really 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 quite 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.

Mike Carrier -- Bank of America -- Analyst

Okay. Thanks a lot.

Loren Starr -- Chief Financial Officer

Yeah.

Operator

Thank you. Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Brian Bedell -- Deutsche Bank -- Analyst

Great. Thanks. Good morning folks. Maybe going into just the integration process and realize obviously you've hit the $500 million of cost. But like you said, there's definitely still more to do with this pretty early. Maybe just can you outline what types of things are being done over the next couple of quarters? For example, any kind of back office arrangement on custody fund accounting and mid office, if that new process for the combined organization? And any thoughts on how much product rationalization has contributed to the $500 million in any future rationalization that might be plan from that?

Martin L. Flanagan -- President and Chief Executive Officer

Okay, Brain. Let me hit a couple of things and then, Loren and Greg can pitch in. So yean, so all the systems have converted over to our systems from Oppenheimer, so that's a good development. We still have with transfer agency one more software upgrade that will happen in the end of November. All the Midland 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 of the areas where we'll know more when we get in further into it. But that's all under way right now.

Loren Starr -- Chief Financial Officer

Yeah, I think the fund raisers managers 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 the number that we feel extremely confident that we'll be able to deliver in a variety there right now. We are going to continue to look at some of the other integration opportunities, really around text, around operations as well. There's all sorts efficiency that we can still continue to create in our sales efforts as well as our investment efforts.

So I can't get too specific at this point, but ultimately, we're still looking at out a wide range of opportunity around this integration as we get closer to the business.

Martin L. Flanagan -- President and Chief Executive Officer

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

Greg McGreevey -- Senior Managing Director, Investments

Yes, maybe just to put a finer point on that volume. And I think when you look at the impact of assets, we've taken around 2% of our total assets, you know, roughly 14 legacy funds in Invesco and maybe 15 Oppenheimer funds. So we're not in the grand scheme of our whole product mix. It's really a -- both small percentage of funds and it can even be smaller percentage of sales.

Brian Bedell -- Deutsche Bank -- Analyst

That's really helpful. Just clear-- think that operating margin obviously is going up from the 40% that we're already seeing because it sounds like there will be incremental sales cost revenue dependent. But maybe just also talk about the gross sale initiatives 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 to the 10 billion you've mandate on the core disciplines that's coming?

Martin L. Flanagan -- President and Chief Executive Officer

Yes. So look, I could be repeating myself. But there is nothing you know, we are focusing ahead on driving gross sales right now. And it's -- 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 will be on the front feet and full steam ahead and we anticipate seeing higher gross sales on the back of that. And Greg mentioned, we do now have a long -- we now have 6 Oppenheimer Funds on the C Cap range to set road shows in Europe for 2 weeks ago. So early days, but those long segment we saw already $100 million. It's not going to change our world, but that's very, very fast and is going to continue. So what we're seeing institutionally as Greg talked about, lots going on the fixed income, lots going on the real estate lot -- so that really 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.

Loren Starr -- Chief Financial Officer

Yes, I think it's real to happen yet fully sort of explore the full opportunity with MassMutual and their revenue synergies working with their advisors. Again, as we talked in the past, they have 8,500 advisors, that's a seventh largest distribution force in the wealth management space.

And so we are now actively working with MassMutual with our products and solutions and we try to understand what is a good fit within their network. That is yet 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 an example.

Martin L. Flanagan -- President and Chief Executive Officer

And again, we talked about this as we really like our position in China and we just see that rapidly growing in the quarters and years ahead.

Greg McGreevey -- Senior Managing Director, Investments

Yes. I think that it relates to Oppenheimer maybe just to put fight our phone on one of the biggest opportunities we see is to promote the legacy Oppenheimer funds into 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 in that intersection between demand and where we have some customer capabilities. So, where we're going to be able to get out to prospects and clients.

Loren Starr -- Chief Financial Officer

And Brian, just on the color on the $10 billion solutions when it's not appropriate for us to talk about it. It's because 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 the deal.

Brian Bedell -- Deutsche Bank -- Analyst

Okay. Fair enough. Thanks for all the help. That's very helpful.

Operator

Thank you. Our next question comes from Alex Blostein with Goldman Sachs.

Ryan Bailey -- Goldman Sachs -- Analyst

Good morning. This is actually Ryan Bailey on for hopping for Alex. I was wondering 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 in 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?

Loren Starr -- Chief Financial Officer

Yes. So on the $2.905 billion that is the right run rate for you to be assuming going into through and through 2020, which we're confident. Again, this is kind of markets flat to September. And if that's -- that number is definitely achievable. It's not -- it's one that we can 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 in terms of $501 million. And those have an area 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 an opportunity for us to invest more and we do plan to invest more to continue to grow and make our team more effective. That will be some -- we'll be some -- will be empower 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 $501 million we believe, but we're not of the point where we are able to commit to that.

Ryan Bailey -- Goldman Sachs -- Analyst

Got it. Okay. And then maybe if we turn to capital for a second. So you've done two-forwards over the last two quarters, it's about $500 million today. It sounds like you have to pay out between sort of 1Q and 2Q 2021. 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?

Martin L. Flanagan -- President and Chief Executive Officer

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 stop of what our commitment is, and that's one that -- a commitment that we think we can complete over through open market purchases and effectively without using foreign purchases. So that is going to be done probably through the course of 2020. In terms of changes in capital priority, there are no changes to the capital priority. We continue to focus on first returning capital to organic needs through seeds -- seen significant needs around seed beyond expectations. So we think that is largely 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's very important to 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.

Ryan Bailey -- Goldman Sachs -- Analyst

Got it. Thank you very much.

Martin L. Flanagan -- President and Chief Executive Officer

You're welcome.

Operator

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

Brennan Hawken -- UBS -- Analyst

Good morning. Thanks for taking the question. Just want to follow-up on that last one on the expense comment and the $2.905 billion. Loren, I just wanted to kind of clarify, as 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 $2.905 billion. But I 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 could get there by the time you exit 1Q 2021. Is that -- is the previous timeline still intact or you are accelerating the timeline too?

Loren Starr -- Chief Financial Officer

We're following the timeline. So we're delivering the full synergies 105% of synergies effective this quarter. So pretty much all that kind of wait for us to come is gone. We can declare victory effectively in terms of bring you that run rate effective this quarter. I think the point that we're trying to make or I have been making is 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 2020 so forth. So that hopefully helped to answer your question.

Brennan Hawken -- UBS -- Analyst

It does. It's very clear. Thank you. Sorry, if that was redundant and previously indicated that, I just want to clarify.

Loren Starr -- Chief Financial Officer

Clarified.

Brennan Hawken -- UBS -- Analyst

Okay. Yes, agreed. Good and helpful. So there was previously reference the announcement we got recently from wirehouse expected to launch program optional for participating asset managers on SMA products. Is this 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 sort of a program well not -- maybe not commenting specific to any program because I know you wouldn't want to do that until in front run. But is this sort of a 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? Thanks.

Loren Starr -- Chief Financial Officer

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, so we have sort of under $10 billion 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...

Martin L. Flanagan -- President and Chief Executive Officer

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 excitements and really what's going to be the force behind the continued growth of the organization. So, again, we've got plenty to work with what's on our plate right now.

Brennan Hawken -- UBS -- Analyst

All right fair enough. Thanks for taking my question.

Operator

Thank you. Our next question comes from Patrick Davitt with Autonomous Research. Your line is open.

Patrick Davitt -- Autonomous Research -- Analyst

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

Loren Starr -- Chief Financial Officer

Yeah. So I think we made a caviar, which is -- that's based on assets. Based on September AUM, as 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. Similarly, if we saw a down market, we would also see that flex down.

So there's normal variability that would happen around incentive plans but ultimately, there is no you should not expect any hidden inflation numbers in the 2020 on this number at all. This number we're feeling is comfortable based on the current AUM levels.

Patrick Davitt -- Autonomous Research -- Analyst

Okay, great. That's helpful. Thanks. And then, when you announced the deal, you kind of announced an expectation of I think two 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?

Loren Starr -- Chief Financial Officer

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 have provided in terms of deal economics.

Operator

Does that answer your question, Patrick?

Patrick Davitt -- Autonomous Research -- Analyst

Yes, thank you.

Operator

Thank you. Our next question comes from Bill Katz with Citi. Your line is open.

Bill Katz -- Citi -- Analyst

Okay. Thanks very much for taking the questions. First, I do want to spend a little time on the $2.9 billion because I'm still actually little confused, so I apologize for my deafness. So is there enough synergies go forward from here that could offset the inflation to the extent that flows to build gets impact, you think they can play through and just assuming the clinical normalized market, lets sort of call it $0.07 for equities. Just trying to see how that $2.9 billion might trend as the business gets a little bit better?

Loren Starr -- Chief Financial Officer

I think we haven't done the sensitivity. I mean, I think if you look at how the firm -- it's bonus pulled. It's really the largest component of it. And it's a percentage of PCDOI, it's in the proxy, it's kind of -- that's how we operate. It's same concept that's going to come to affect going forward. So if we see flows really driving higher levels of the AUM, which we love to see, or if the market improves from here, you're going to see a normal type of flex around those types of bonus pools.

So, again, I would point you to our past experience, the same, kind of, sort of, ratios that you've seen in the past in terms of how complexes with revenues and assets.

Martin L. Flanagan -- President and Chief Executive Officer

Bill, I think I want to point out that profitability will improve successfully in the underlined question and you will get your margin expansion in that scenario, which we're talking about. That's the fundamental question.

Loren Starr -- Chief Financial Officer

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

Bill Katz -- Citi -- Analyst

Okay. That is very helpful. Just two more questions and I think that was added at the moment. On the institutional channel, I certainly appreciate the notion that you're pipeline is getting better and the fee rate underneath that is better than what's going out the door. But when I look at just over the slide that continues to point to flattish flow, page five, flattish flows overall, at what point, some of that very strong pipeline key into maybe a more positive growth? Or maybe another way to think about is, where are you loosing traction and where are you gaining traction?

Loren Starr -- Chief Financial Officer

I think in terms of pipeline, as we said, we're gaining traction in some of the places that were quite successful in China. So geographically, that's been really a strong area for growth across all sorts of asset classes, equities, fixed income, that's one I think has a lot of upside for us as we can see success and further penetration in that market.

We do think that Europe is -- has 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 upside. The real pick continues to be a major driver of opportunity for the firm, overall.

I think in terms of downside, there isn't a ton of sound downside, we don't see its a big likely to terminate or it's a big ugly story from the downside for institutional. The reason it turns negative here, 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 while behavior that we're seeing as people want to understand what direction -- things are going in. So we do believe, I mean, those numbers are going to fund, it's just a matter of timing.

Bill Katz -- Citi -- Analyst

Thank you. Just one last clarification. I apologize, I think, 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.

Loren Starr -- Chief Financial Officer

Yes, no, 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 in -- even when they disclosed it. So we just think it's an appropriate for us to be talking about fee rates for clients.

Bill Katz -- Citi -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Dan Fannon with Jefferies. Your line is open.

Dan Fannon -- Jefferies -- Analyst

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

Martin L. Flanagan -- President and Chief Executive Officer

Yeah, look its good question. And obviously, it's a very topical in the UK, and I can't speak for winning. But what I will say one of the most fundamental things that we did strategically was -- purchasing a Teleflo. 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 you see realize have 55% market share with just based the model portfolio. It's early. You know clients are starting to go on the platform. It's going to start picking up next year. And I think that's 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, I think puts us in a good place. And this is how speaking at a retail level. I think that's what you are addressing. You know, institutionally we continue to be very, very strong in the market and growing. Greg, if you want to say

Greg McGreevey -- Senior Managing Director, Investments

Yes. Look, I think, just highlight the year-to-date improvement that we're seeing 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 proven pretty dramatically from 2018 and 2017. 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 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 equity teams has an incredibly strong culture, scale and capability. And I think that team historically has produced incredibly strong performance. It's really been this recent market environment in the short run it's kind of impacted our performance, not withstanding what -- a positive things that have happened on the year-to-date basis. So I'm highly confident that we will be able to give them those skills to return back to what we would expect that group and what they historically have produced in terms of performance.

Martin L. Flanagan -- President and Chief Executive Officer

And look, you're on a point. Brexit -- coming into the market environment done a tremendous win for us, but that' high degree of confidence in our investment teams. And at some point, it would not be at risk of world, and we anticipate participating very strongly in it.

Dan Fannon -- Jefferies -- Analyst

I guess, the clarifying the performance, I am looking at slide 14, and I look at the UK and the 1, 3 and 5 year numbers and so what improvement are you sighting, I guess or is it somewhere else that I can see that?

Greg McGreevey -- Senior Managing Director, Investments

Yes. So the -- yes, so this was at the end of so this is looking at on one-year basis. I was giving you year-to-date numbers. So the fourth quarter of last year, I think, you know especially troubling you for kind of all equity performance. And so that really impacted when you look at the long performance at the end of September of 2019. Those numbers if you look at it on a year-to-date basis should you 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?

Dan Fannon -- Jefferies -- Analyst

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

Martin L. Flanagan -- President and Chief Executive Officer

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

Loren Starr -- Chief Financial Officer

Emerging Markets debt.

Martin L. Flanagan -- President and Chief Executive Officer

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

Dan Fannon -- Jefferies -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Michael Cyprys -- Morgan Stanley -- Analyst

Hey good morning. Thanks for taking the question. I was just hoping to dig in a little bit more on the industrial challenge, good to hear that the pipeline is up improving here.

Just hope 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 a two years and go? And what might be the most different that you look out for the next two to three years?

Martin L. Flanagan -- President and Chief Executive Officer

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 and clients have never been -- front clients have -- has never been stronger. And so there's differently breadth and excellent capabilities have mattered, but right behind is exactly what you're talking about investments in technology around analytics, insights, has been very material.

And when you look at that beyond as 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 work to set of capabilities that we have. And so it's been material and it's been real. Greg, what would you--

Greg McGreevey -- Senior Managing Director, Investments

Yes, I think the big three areas that we've invested in our capabilities on the solutions front, the client experience, which will both technology and systems, as well as thought leadership where we've added with very strong content from our investment team ability both in 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 to because of the individual resources and expertise that we've added to really have the conversation 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 other pipeline is really the result of that investment that we have made a number of years ago in solutions.

We wouldn't have been able to attain that client when we talk 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 three areas that I kind of talked about and Marty talked about within the institution inside. And we think that's only going to be a trend that we'll continue to see. So, we're excited about that.

Michael Cyprys -- Morgan Stanley -- Analyst

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

Loren Starr -- Chief Financial Officer

I mean -- so, I mean we have an enormous amount of investments in our run rate. I think we've -- well in excess 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 expense management and discipline.

Greg McGreevey -- Senior Managing Director, Investments

I mean 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 investment 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 individual that we need to hire there.

Martin L. Flanagan -- President and Chief Executive Officer

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 during what the number of our competitors do. So, I think literally that sits on top of looking through all of the investment capabilities that we have and it's really hand-in-hand with clients.

And we see clients do where, if you go back two, three and four years, it was more of a what product does a client want and what do we have in terms of that shop? Much more is becoming -- much more holistic engagement with our clients.

Now, it might be a capability or second capability, but it's really that inside analytics that is really just changing the dynamics with the client for any institutional money manager to be successful in our view.

Michael Cyprys -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Glenn Schorr with Evercore. Your line is open.

Glenn Schorr -- Evercore -- Analyst

Thank you. I want to drill down a little bit on the MassMutual potential. You mentioned the 8,500 advisors, you also in the past have talked about the general account. The advisors are not the same type of businesses as say the recap broker-dealers, the warehouses.

So, could you talk about what you expect to be selling into that channel? What did a typically consume and how quickly that can be? And then anything you could add on the general account that would be great?

Martin L. Flanagan -- President and Chief Executive Officer

So look, with the MassMutual, again, I'd say early days, it's a very strong and robust relationship and we're working through those multiple areas and we've talked about what we will be better on is telling you once we have accomplished something as opposed to what's coming does not received.

So we'll have these calls that said with the 8,500. We're looking at building models for that sales force. And you can think of traditional investment capabilities that would be available, some of the other warehouses. So, it's not as different as -- it is different, but again, the commonality is there that respect. For some, frankly, we are in multiple conversations around the general accounts right now with MassMutual. And again, once we accomplish something, we'll let you know.

Glenn Schorr -- Evercore -- Analyst

And the models, are that a product of Jemstep being deployed?

Martin L. Flanagan -- President and Chief Executive Officer

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

Glenn Schorr -- Evercore -- Analyst

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

Loren Starr -- Chief Financial Officer

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 responses and people have sort of moved into cash. It's still actually appeals to a lot of people in principle in terms of what it's trying to achieve as an outcome and lower risk than the 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 the right -- is moving in the right direction. So again, we are hopeful that we can see that product at least stabilize at a minimum as opposed to sort of currently where it's in that flow.

Glenn Schorr -- Evercore -- Analyst

Okay. Thanks, Loren.

Loren Starr -- Chief Financial Officer

Sure.

Operator

Thank you. Our last question comes from Kenneth Lee with RBC Capital Markets. Your line is open.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi. Thanks for taking the question. Just to follow-up on the UK 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 UK?

Martin L. Flanagan -- President and Chief Executive Officer

Yeah, 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 comfortable, right where you 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 toward passive as you see here in the United States.

And so, again, it has been a headwind. And again so what we've done about it? We think it's been very important to change our way to support our clients, and then telephone is a part of that. And again, Greg talked about the asset performance was picking up. But we are, as we seeing now in our portfolios we are bringing factors and assets into the market, and that is also something that will be on telephoned from 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 that this incredibly strong.

And right now, we're the number two 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 that you can look at the ETF business in EMEA, it literally looks like it's 10 years behind where the United States was. And that was a couple of years ago. We are absolutely seeing that demand pickup as we anticipate it, and we're beneficiary of that. And we look at that was another area and very important growth for us.

Kenneth Lee -- RBC Capital Markets -- Analyst

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

Martin L. Flanagan -- President and Chief Executive Officer

Yeah. I wish I had a crystal ball. But I will tell you is our organic growth rate will exceed that of our composition. And we 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 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.

Kenneth Lee -- RBC Capital Markets -- Analyst

Great, thanks.

Martin L. Flanagan -- President and Chief Executive Officer

Yeah.

Operator

At this time, we have no further questions.

Martin L. Flanagan -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Unidentified Speaker

Martin L. Flanagan -- President and Chief Executive Officer

Loren Starr -- Chief Financial Officer

Greg McGreevey -- Senior Managing Director, Investments

Ken Worthington -- JPMorgan -- Analyst

Mike Carrier -- Bank of America -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

Ryan Bailey -- Goldman Sachs -- Analyst

Brennan Hawken -- UBS -- Analyst

Patrick Davitt -- Autonomous Research -- Analyst

Bill Katz -- Citi -- Analyst

Dan Fannon -- Jefferies -- Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

Glenn Schorr -- Evercore -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

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