Active To Passive Migration Will Erode Fee Yields

Key Takeaways

• Rising demand for low-cost, tech-driven investment solutions is eroding pricing power and compressing margins, challenging Invesco's traditional business model.
  
• Competition from larger, technology-focused asset managers threatens Invesco's ability to innovate and defend its market share, putting future profits at risk.
  
• Diversified growth, innovation in ETFs, global expansion, and disciplined expense management are driving stronger earnings, resilient flows, and enhanced shareholder returns.

Catalysts

A publicly owned investment manager.

• Sustained migration from higher-margin active management products to lower-fee passive solutions is eroding Invesco's net revenue yield, which may result in continued margin compression and overall lower earnings even if AUM grows.
  
• The ongoing proliferation and adoption of direct indexing and robo-advisory platforms pose a material threat to traditional fund and ETF models, risking future fee income declines and undermining Invesco's product relevance.
  
• Demographic shifts, such as the aging investor base and new generations demanding increasingly tech-driven, low-cost solutions, are likely to intensify fee pressure and further commoditize Invesco's offerings, limiting revenue growth and pricing power over the long term.
  
• Persistent underperformance and net outflows in flagship fundamental equity products, especially in core U.S. channels, point to an inability to retain assets in a secularly challenged segment, reducing asset-based fee revenue and weakening long-term earnings potential.
  
• The rapid rise of colossal, technology-first asset managers with scale advantages makes it increasingly difficult for Invesco to invest sufficiently in innovation and operational efficiency, threatening its ability to defend market share and squeezing future operating profits.

Invesco Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Invesco compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Invesco's revenue will decrease by 6.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.9% today to 21.7% in 3 years time.
• The bearish analysts expect earnings to reach $1.1 billion (and earnings per share of $2.55) by about August 2028, up from $422.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, down from 22.7x today. This future PE is lower than the current PE for the US Capital Markets industry at 27.1x.
• Analysts expect the number of shares outstanding to decline by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.53%, as per the Simply Wall St company report.

Invesco Future Earnings Per Share Growth

Risks

• The company continues to experience strong and diversified organic growth, including record-breaking net asset inflows of $15.6 billion for the quarter, bringing assets under management to $2 trillion, which could support higher revenue and operating income over time.
  
• Invesco's ongoing innovation and expansion in ETFs, active ETFs, and separately managed accounts, especially across the U.S., EMEA, and Asia-Pacific regions, are driving robust net inflows and margin expansion, directly impacting revenue growth and supporting long-term earnings.
  
• Strategic partnerships in private credit and alternative assets, such as the collaboration with Barings and MassMutual and a $130 billion private markets platform, position Invesco to capitalize on growing demand for alternatives, potentially enhancing net margins and providing larger addressable revenue streams.
  
• The firm's disciplined expense management, positive operating leverage, and improving balance sheet management-including share buybacks and debt reduction-are increasing operating margins and free cash flow, which can translate to stronger earnings and greater capital returns to shareholders.
  
• Investment performance has improved, with a majority of assets outperforming benchmarks over multiple time horizons, and global diversification (40% of AUM outside the Americas) is driving resilient flows and profit growth, which together may support stable or rising net revenue and earnings.

Valuation

• The assumed bearish price target for Invesco is $17.03, which represents two standard deviations below the consensus price target of $22.58. This valuation is based on what can be assumed as the expectations of Invesco's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $29.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.0 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $21.55, the bearish analyst price target of $17.03 is 26.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.