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Why Invesco Sputtered in 2019 -- and Where it Goes From Here

By Dave Kovaleski - Jan 24, 2020 at 6:00AM

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The asset manager is dealing with the integration of a major acquisition.

A strong stock market like the one we saw in 2019 is generally good news for asset management firms, which invest for their clients.

But not all asset managers took advantage of those tailwinds, including Invesco (IVZ 1.56%). Now the sixth-largest money manager in the U.S., Invesco was one of the worst-performing stocks in the sector, returning just 7.4% last year -- well below the sector average. 

What factors caused the Atlanta-based firm to underperform in 2019? And where does the stock go from here?

Challenges in integrating an acquisition

One of the main challenges for Invesco last year was integrating Oppenheimer Funds, which it acquired from MassMutual last May for $5.7 billion.

Oppenheimer Funds brought to Invesco about $246 billion in mutual fund and institutional investment assets, increasing Invesco's total assets under management (AUM) to $1.2 billion. Oppenheimer Funds will complement and expand Invesco's capabilities, particularly with its international and emerging market portfolio management and robust third-party distribution platform.

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Image source: Getty Images.

Over the past six months, the company has been working to reduce expenses, eliminate jobs, and streamline its product offerings.

"We've made tremendous progress in the integration of Oppenheimer Funds, which deepens relationships with U.S. clients and expands the capabilities we can offer domestically and internationally, while further scaling our business for the benefit of clients and shareholders," Invesco President and CEO Marty Flanagan said in the third-quarter earnings release. As of that point, the company had achieved $501 million in cost savings by streamlining and eliminating duplication -- much higher than the $476 million estimate.

But the integration has led to large fund outflows, meaning investors pulled out of their funds. The firm had net outflows of $5.8 billion, which is $4.9 billion more than the third quarter of 2018. The active funds were hit the hardest, with $15.7 billion in outflows.

However, revenue grew by 28% to $1.72 billion year over year in the third quarter, due primarily to an increase in investment and service fees related to the higher AUM from the acquisition. Net income was down 36% year over year to $167 million. Earnings per share fell 44.6% to $0.38.

Eliminating Funds and ETFs

Invesco moved into the next phase of the integration in December, when officials announced plans to streamline its fund lineup. It will eliminate 42 exchange-traded funds (ETFs) and 38 mutual funds in 2020, on top of the 11 mutual funds that were liquidated last year.

The plan will further reduce costs by eliminating overlapping fund offerings and moving forward with the best products from both lineups.

It will likely be another transition year for Invesco as it fully assimilates the Oppenheimer acquisition, but the added scale in an industry that is consolidating could put Invesco on solid ground over the long term. The stock is extremely undervalued, with a P/E ratio of 7.80, and has a low entry point, trading at $18.48 per share.

For investors looking for a good value stock with growth potential, Invesco might be an option to consider.

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