Invesco Ltd

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

An independent investment management firm, providing a wide array of investment strategies to both institutional and retail clients, with a complex structure and a cyclical industry.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Invesco Ltd. is a global investment management firm that provides a wide range of investment solutions to both institutional and retail clients. They operate across different investment capabilities, which can be generally categorized into:

Active Strategies: Focus on investment decisions that attempt to outperform benchmarks through active stock or bond picking and other strategies, often relying on the expertise of investment managers.
Passive Strategies: Aim to match market indices and performance with lower costs. These include index funds and exchange-traded funds (ETFs).
Alternatives: Include investments in real estate, private debt, private equity, infrastructure, and other non-traditional asset classes.

Revenue Distribution:

Investment Management Fees: The core revenue stream, generating income through various management fees, such as on asset under management (AUM) and performance-based fee charges. In 2022, this comprised 91% of total revenue.
Service and Distribution Fees: These revenues are collected mainly for distribution services of funds. In 2022, these comprised 4% of the total revenue.
Performance Fees: Revenue is performance based where the company gets a share of the performance profits that was generated for the client. In 2022, this comprised 4.8% of total revenue
Other Revenue: All the remaining sources of revenue, which is not that material when compared to the others.

Industry Analysis

Trends: The investment management industry is intensely competitive and influenced by several factors, including market performance, investor sentiment, technology changes, and regulatory shifts. The industry has seen a trend toward consolidation, with larger firms acquiring smaller ones to increase scale. Technological changes like AI and passive trading are changing the competitive landscape. Investors have also become more demanding of transparency and lower fees.
Competitive Landscape: The asset management industry has many players, ranging from large global firms like Blackrock and Vanguard to smaller specialized firms. The competitive landscape is very concentrated with the top firms holding the majority of assets. Competition among asset managers is typically based on investment performance, fees, brand reputation, and distribution capabilities.
Cyclicality: The business is subject to fluctuations in assets under management that are driven by the market. Because fees are typically a percentage of AUM, a falling market hurts their revenues. The business is impacted by both global growth and interest rates and the general market sentiment.

What Makes Invesco Different?

Global Presence: Invesco has a large global presence with investments into many countries and regions.
Broad Product Offering: Invesco has products across different asset classes and is able to provide products to a variety of clients.
Scale: Invesco has a very high AUM which allows them to have a stronger scale than many other smaller competitors.

Financial Performance

The financial analysis is based on the most recent Q3 report and other reports.

Revenues: The company has seen declining revenues from $1.6 billion to $1.41 billion for the current year which also included a decrease in investment management and distribution fees.
Profitability: The company has seen decreasing profits, with net income dropping to $0.19 per share, down from $0.95 per share for the same quarter last year. Operating margins have decreased from 31.5% to 26.6% on an adjusted basis in the recent year’s quarter compared to same quarter last year. The company’s margins have been declining in the past years.
AUM: The most recent AUM reported by the company is $1,404 billion. It has fluctuated in the past year due to market fluctuations.
Liquidity: Invesco had a strong cash and cash equivalents, with about $985 million for this quarter.
Debt: Invesco has a manageable level of long-term debt, with the debt to equity ratio standing at 18%.
Share Repurchases: The company’s management seems committed to returning value to their shareholders via share repurchases. The company bought back an estimated 11 million of its shares worth roughly $183 million in the most recent quarter.

Concerns / Problems

Market Volatility: Invesco is very susceptible to market fluctuations since much of the company’s revenues depend on AUM levels, which could lead to highly volatile results. The market is volatile and the risk of global recession has also increased.
Competitive Pressures: The increased competition from lower cost passive funds could hurt revenue levels since they often tend to provide similar products at a lower price.
Regulatory Risks: The company has to navigate many regulations that can have an impact on how the company can operate and on its financials.
Underperformance: In terms of performance numbers, Invesco’s AUM has underperformed benchmark returns in the last years in many investment strategies and this might be a sign of management weakness.
Expense Management: The company has been spending on operating expenses to increase their profitability. It may take some time before their efforts translate into tangible results.

Moat Analysis

After going through the company’s reports and financials, the company possesses a “Narrow Moat” with a rating of 2 out of 5 for these reasons.

Switching Costs: There are considerable switching costs for institutions that are clients of Invesco. These clients usually have several programs and assets under management in Invesco’s platform, and it would be very difficult for them to move to another competitor. Switching costs ensure a longer duration of client retention. However, even then, clients can slowly shift their assets to low-cost providers, which can act as an alternative option to Invesco, putting a cap on its pricing power. Therefore, this is only a narrow moat.
Intangible Assets: While Invesco is a fairly large and recognized name in the asset management space, its brand does not give it any pricing power compared to other major asset management firms, and many institutions and retail investors might choose other managers or funds. The company also does not own any major proprietary technologies and platforms that may be difficult to replicate by its competition.

Understandability Rating: 3 / 5

I am giving an understandability rating of 3 out of 5 because the business model itself is very straightforward and easily understood by a typical investor. The company takes fees for managing its assets and thus grows its revenue and profits when AUM and markets go up. However, the financials can get rather confusing and volatile, as the value of AUM can fluctuate with external factors and thus can fluctuate the revenues of the company from quarter to quarter. Investors might need some additional expertise to analyze its financials, understand its complicated structure, and derive insights for future performance. Thus, I’m giving the rating as a 3 for understandability.

Balance Sheet Health Rating: 3 / 5

I am giving a health rating of 3 out of 5. The company has a decent amount of cash and assets with which it can support itself and continue operating as normal. It also has low debt and high liquidity, which indicates a good position. However, its revenues are dependent on market conditions, which are beyond the control of management, and the lack of pricing power reduces its stability. Furthermore, the trend of declining profit margins creates concerns of whether the company can continue operating with a healthy profit margin. Given these factors, a rating of 3 on balance sheet health is warranted.