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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 reflects management's expectation about future events 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 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 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.
Welcome to Invesco's Fourth Quarter Earnings Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] This call will last one hour. [Indiscernible] more participants to ask questions only one question and a follow up can be submitted per participant. 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, Marty Flanagan, President and CEO of Invesco; and Allison Dukes, Chief Financial Officer. Mr. Flanagan, you may begin.
Thank you, operator. And thank you everybody for joining us and Happy New Year. We did end up 2021 with a strong fourth quarter and momentum going into 2022. So we'll spend a few minutes looking back to the fourth quarter, and also take a quick look at 2021 because it really sets the context as we go into the New Year. Our focus has been and will continue to be on client’s employees as we execute in this COVID operating environment. And we've embedded new ways of working together to deliver outcomes for our clients. And we've maintained our focus in six key capability areas.
ETFs, Factors, Index, Private Markets, Active Fixed Income, Active Global Equity, Greater China, and Solutions. This approach has helped us generate consistent strong and broad organic growth. And we ended the year crossing over $1.6 trillion in assets under management. And as you can see on slide three, our net term, net long term inflows of $12.5 billion represents organic, annualized long term growth of 4% despite the market volatility in the fourth quarter.
This is a sixth consecutive quarter of strong growth and is a direct result of the investments we've made over time to enhance and evolve our business to meet the needs of our clients and it also speaks to the broad diversification of our business. Growth was driven by continued strength in our key capability areas as we strategically invest in areas where we see client demand and have competitive strengths.
For the year, Invesco delivered the strongest organic growth in our history. We generated over $81 billion of net long term inflows representing 7% organic growth rate, which is one of the best in the industry. Looking at our specific capabilities, our global ETF platform closed up a year very strong. Each yes generated net inflows of nearly $22 billion in the fourth quarter, including our flagship QQQ product. The QQQ product had an exceptional quarter generated $13 billion net inflows.
For the year, ETFs globally, generated a record $62 billion of net inflows and we increased our market share in both assets under management and revenue. The Q's had an outstanding year with over $21 billion of net inflows growing to $215 billion a year round. QQQ product has become the fifth largest ETF globally; its popularity has spurred growth in the rest of our global ETF platform, and laid the groundwork for the launch of the adjacent V generating products such as the Q Innovation Suite. We launched a suite in October 2020. And it has been highly successful growing to $5 billion in assets under management by the end of 2021. We continue to see clients increasing their allocation to alternative strategies as they search for diversification, higher return, and investment to build a broad real – platform real estate to meet client demands. We are confident our ability to accelerate the growth as we look to the future.
In the private real estate business, long term net inflows were $3.4 billion in 2021, comprised of new acquisition activity of $12.4 billion, and investment realizations of $9 billion. Our direct real estate assets under management grew by 12%. Our private credit business, some robust bank loan product demand, resulted in net long term inflows of $7.5 billion for the year, including the launch of several new CLOs. Our active fixed income business remained strong, generating net inflows of $9.3 billion in the fourth quarter, including $7.1 billion from Greater China and $35 billion for the year representing organic growth at 13% over the prior year.
Within active global equities, although our $45 billion in developing markets fund so on net outflows in the quarter, the fund generated net long term inflows in 2021 of $20 billion, an improvement of $4.3 billion over 2020.
On the institutional side, we finished a strong year with solutions enabled opportunities accounted for 35% of our institutional pipeline. Business in Greater China closed out an exceptional year of growth, with fourth quarter net long term inflows of $9.5 billion. For the year, net long term inflows were $28.7 billion representing organic growth of 32%. Business in China continues to be a source of strength and differentiation, and we expect strong growth in the years ahead.
On slide four, we highlight a very strong set of results for 2021. In addition to reporting net long term inflows in 2021, we generated record gross inflows of $427 trillion, a 37% increase compared to 2020. Net revenues grew 17% over the prior year, helping drive adjusted operating income to nearly $2.2 billion, a 31% increase over 2020.
Revenue growth coupled with strong expense discipline led to a 450 basis point increase in our net operating margin to 41.5%. In the second half of the year, we reported the second highest net operating margin of the company became U.S. listed in 2007. These factors start with 60% increase in our full year EPS to $3.09. Strength in our businesses generated strong cash flows, improving our cash position to the point where we are resuming our share buybacks. We intend to purchase up to $200 million in common shares during the first quarter. We remain focused on continuing to build a stronger balance sheet and improving our financial flexibility for the future. I'm pleased with the progress we've made over the last year and even more confident that Invesco was on the right path to sustainable organic growth. And as we look to the future, we're determined to continue with delivering consistent organic growth, together with our disciplined approach, expense management should enable us to generate positive operating leverage while at the same time continuing to invest in growth, the growth of our business and the efficiency of our business.
I do want to take a moment to thank our employees for the continued resilience, hard work and dedication through this COVID operating environment. Their efforts are delivering the strong results you're seeing from Invesco and breadth of our capabilities in our competitive strength position as well as we look forward. We will continue to focus our efforts on delivering positive outcomes for clients while driving future growth and delivering value over the long run for our stakeholders.
With that, I’ll turn it over to Allison. Allison?
Thanks, Marty. And good morning, everyone. I'll start with slide five. Our investment performance was strong in the fourth quarter was 64% and 75% of actively managed funds in the top half of peers or beating benchmark on a 5-year and a 10-year basis. These results reflect continued strength in fixed income and foreign equity, most notably emerging markets and Asian equity, all areas where we continue to see demand from clients globally.
Turning to slide 6, we ended the year with over $1.6 trillion in AUM, a 19% increase over year end 2020. As Marty noted earlier, our diversified platform generated net loan term inflows in the fourth quarter of $12.5 billion representing a 4.1% annualized organic growth rate.
Active AUM net long term inflows were $1.8 billion and passive AUM net long term inflows were $10.7 billion. Net market gains led to an increase in AUM of $18.4 billion in the quarter. The retail channel generated net long term inflows of 3 billion in the quarter driven by inflows into global ETF products and Greater China.
Institutional channel demonstrated the breadth of our platform and generated net long term inflows of $9.5 billion in the quarter with diverse mandate, both regionally and by capability funding in the period. Inflows in the Asia Pacific region were particularly strong.
Regarding retail net inflows, our ETF capabilities generated net inflows of $21.7 billion. Excluding the QQQ, our net long term inflows were $8.8 billion. As Marty noted, in 2021, our global ETF business generated record net inflows of $62 billion, which was more than 2.5 times net inflows in 2020. Our global ETF platform captured 5.6% of net new flows in 2021 increasing our market share of ETF AUM to 4.9% at the end of 2021.
Our share capture of incremental ETF revenues was also above market share at 5.2%, excluding the QQQ. Looking at flows by geography on slide 7, you'll note that the Americas had net long term outflows of $4.3 billion in the quarter. While we saw strength in ETF and our institutional business, we did see pressure from select active equity strategies, including developing markets and diversified dividends.
Our bullet share suite also experienced year-end maturity activity, which is expected. Asia Pacific delivered another strong quarter with net long term inflows of $12.9 billion. Net inflows were diversified across the region, including a record $9.7 billion of net long term inflows from our joint venture in China, Invesco Great Wall and $3.2 billion from other countries including Australia, with $1.8 billion in India at $800 million. EMEA excluding the U.K. also delivered a strong quarter of net long term inflows totaling $4.7 billion, representing organic growth of 12%. This was driven by strength in ETF, sales of senior loan products and institutional mandates and investment grade fixed income.
From an asset class perspective, we continue to see broad strength in fixed income in the fourth quarter with net long term inflows of $9.1 billion. Drivers of fixed income flows include institutional net flows into various fixed income strategies through our China JV and EMEA, global investment grade, stable value and municipal strategies.
Our alternatives asset class holds many different capabilities and this is reflected in the flows we saw on the fourth quarter. Net long term flows and alternatives were $3.1 billion, driven primarily by our private markets business, which included direct real estate property acquisitions, a new newly launched CLO and senior loan capabilities. When excluding global GTR net outflows of $700 million, alternative net long term inflows were $3.8 billion.
The strength of our alternative platform can be seen through the flows it has generated over the past four quarters with net long term flows totaling over $17 billion, representing a 10% organic growth rate over this time, excluding the impact of GTR net outflows over the period.
Moving to slide 8, our institutional pipeline was $26 billion at year-end. The decline in the pipeline from the prior quarter was due the funding of several significant mandates in the fourth quarter as reflected in our strong institutional inflows for the quarter. While the size of the pipeline will fluctuate quarter-to-quarter, it remains consistently strong, typically running in the $25 billion to $35 billion range dating back to 2019.
The pipeline also remains relatively consistent to prior quarter levels in terms of fee composition. Overall, the pipeline is diversified across asset classes and geographies. Our solutions capability enabled 35% of the global institutional pipeline in creative wins and customized mandates. This has contributed to meaningful growth across our institutional network.
Turning to slide 9, you'll notice that net revenues increased $40 million, or 3% from the third quarter as a result of higher than expected performance fees as well as higher average AUM in the fourth quarter. The net revenue yield ex-performance fee was 33.4 basis points, a decrease of one basis point from the third quarter yield level. The decrease was driven mainly by asset mix shift including higher QQQ and money market average balances. The incremental impact from higher discretionary money market fee waivers was minimal relative to the third quarter and the fullest impact on the net revenue yield for the fourth quarter was six tenths of a basis point.
Looking forward, we expect most of the dynamics impacting net revenue yield will continue. In addition, the first quarter contains two fewer days than the fourth quarter which always impacts net revenue yield. Regarding discretionary money market fee waivers given the current process for higher rates in the near term, we anticipate that 75% to 90% of these waivers would cease within the first 60 days to 90 days after the first 25 basis point increase in the Fed funds rate. That would result in a recovery of about four-tenths to five cents [ph] of the negative impact waivers have had on our annualized net revenue yield.
Performance fees for the fourth quarter were $53 million, higher than our expectations, and were driven by certain portfolios that have annual absolute return performance hurdles, including approximately $20 million from our JV and China. Given the strong influence of the market on these portfolios, these performance fees are clearly difficult to forecast.
Total adjusted operating expenses increased 3.1% in the fourth quarter, the increase was mainly driven by the typical seasonal increase we see in marketing and higher G&A expense, which were partially offset by a decrease in compensation expense. Also impacting marketing and G&A expense was an increase in client events and travel in the fourth quarter before we saw the impact of the new Omicron variant. But the impact of the new variant we have seen a slowdown of travel and in-person client activity in January, we would not expect first quarter activity to be as high as fourth quarter.
G&A expense in the fourth quarter also included a non-recurring $10 million charitable contribution to the Invesco Foundation. The Invesco foundation exists to support our communities and further progress and pillars of education and financial literacy. We're pleased to have the ability to make this contribution at the conclusion of a very strong year.
As we look ahead to the first quarter of 2022 consistent with prior years, we expect an increase in compensation expenses related to the seasonal increase in payroll taxes and the reset of other benefits, such as our 401k plan match.
Typically, this is about $25 million to $30 million higher in the first quarter relative to the fourth quarter. As noted, one area that's still more difficult to forecast at this point is when COVID impacted travel and entertainment expense levels will begin to normalize.
Moving to slide 10, we update you on the progress we have made with our strategic evaluation. In the fourth quarter, we realized $5 million in savings. $4 million of the savings was related to compensation expense, reflecting the plan transition a certain roles in concert with our strategic review, and a million dollars related to a reduction in property expense as we continue to right size our facilities portfolio. The $5 million in cost savings are $19 million annualized, combined with $148 million in annual life savings realized through the third quarter in 2021 brings us to $167 million in total, or 84% of our $200 million net savings expectation.
As it relates to timing, the remainder of our net savings will be realized by the end of 2022 as planned. The expected total program savings of $200 million through 2022 would be roughly 65% from compensation and 35% spread across property, property office technology and G&A expense.
In the fourth quarter, we incurred $32 million of restructuring costs related to the initiative. In total, we recognize nearly 220 million of our estimated 250 million to 275 million in restructuring costs associated with the program. We expect the remaining restructuring costs for the realization of this program to be in the range of $30 million to $55 million in 2022. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.
Going to slide 11, adjusted operating income improved $16 million to $578 million for the quarter, driven by the factors we have reviewed. Adjusted operating margin was relatively stable at 42%. Excluding the non-recurring contribution to the foundation, we generated positive operating leverage in the fourth quarter. For the year the degree of positive operating leverage was 1.8 times underscoring, our focus on driving scale and profitability across the company's diversified platform.
Non-operating income was $51 million, driven primarily by recognition of gains from funds that are in liquidation. The effective tax rate was 21.9% in the fourth quarter, compared to 24.4% in the third quarter. The decrease in the effective tax rate was primarily due to a decrease in the valuation allowance recorded against net operating losses and a decrease in the expense for unpaid tax positions in the fourth quarter.
We estimate our non-GAAP effective tax rate to be between 23% and 24% for the first quarter of 2022. The actual effective tax rate may vary from this estimate due to the impact of non-recurring items on pretax income and discrete tax items.
Slide 12, illustrates our ability to drive adjusted operating margin improvement against the backdrop of the clients demand driven change in our AUM mix and the resulting impact on our net revenue yield excluding performance fees. We also illustrate the impact of the exceptional growth of our QQQ product which does not earn a management fee has had on our net revenue yield. Our operating margin two years ago in the fourth quarter of 2019 was 39.9%. At that time, we reported a net revenue yield of 40.5 basis points.
In the fourth quarter of 2021, our net revenue yield declined a little over seven basis points to 33.4, yet our operating margin improved to 42%. As Marty noted earlier, the operating margins we have generated in the third and fourth quarters of 2021 are the highest since Invesco became a U.S. listed company in 2007. This is against the backdrop of a mixed driven declining net revenue yield. We have been building out our product suite to meet client demand and client demand has been skewed towards lower fee products including the highly successful QQQ product.
Growth of the QQQ product over this period is remarkable growing from 7% of our AUM mix in the fourth quarter of 2019 to 13% in the fourth quarter of 2021. Even though we do not earn a management fee as sponsor of the QQQ, we manage the over $100 million annual marketing budget generated by this product. Growth in the QQQ accounts for two basis points of the net revenue yield decline over this period shown on this chart. And as I noted earlier, discretionary money market fee waivers account for six tenths of a basis point decline in the net revenue yield. The combination of the extraordinary growth in the QQQ combined with a temporary drag for money market fee waivers account for over one third of the decline in net revenue yield over this time period.
Realizing our business mix is shifting, we continue to focus on aligning our expense base with these changes. This has enabled the firm to generate positive operating leverage and operating margin improvements, despite the decline in the net revenue.
Now turning to slide 13, a few comments here, our balance sheet cash position was $1.9 million on December 31st and approximately $725 million of this cash is held for regulatory requirements. The cash position has improved meaningfully over the past year, increasing by nearly $500 million. We were able to drive improvement in our cash position, while also funding the resolution of the remaining contingent liabilities in 2021.
These included $294 million in forward repurchase liabilities that we funded earlier in the year and the $254 million in fund shareholder reimbursements to complete the remediation of the MLP matter in the fourth quarter. We also received an insurance recovery of $100 million related to that matter in the fourth quarter. Our debt profile has improved considerably as well. As a result, we substantially improved our leverage position that the leverage ratio as defined under our credit facility agreements as 0.79 times at year end, as compared to 1.37 times a year ago. If you choose to include the preferred stock, leverage is declined from almost four times to 2.47 times.
With respect to our capital strategy, we are committed to a sustainable dividend and to returning capital to shareholders through a combination of modestly increasing dividends and share repurchases. As we stated, we intend to build towards a 30% to 50% total payout ratio of the next over the next several years by steadily increasing our dividends and resuming a share buyback program.
As Marty noted earlier, given our strong and growing cash position combined with continued opportunity in our valuation, we expect to repurchase $200 million in common shares during the first quarter. Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility and our 2021 results demonstrate that progress.
In summary, 2021 was a very strong year for Invesco. We remain focused on executing the strategy that aligns with our key areas of focus, and we continue to invest ahead of client demand in these areas. At the same time, we're focused on optimizing our organizational model and disciplined expense management. This approach has resulted in strong organic growth, driving positive operating leverage and operating margin improvement. This has also facilitated stronger cash flows, further strengthening our balance sheet and driving the improvement in our leverage profile.
As we look towards the future, investors are in a very strong position to deliver value over the long run to all of our stakeholders.
And with that operator, I'd ask you to open up the line for Q&A.
[Operator Instructions] Our first question comes from Brennan Hawken with UBS. Your line is open.
Good morning. Thanks for taking my questions. Just was curious, Allison, thanks for all that color on the expenses and whatnot, but if we think about the 2022 is not really off just to a great start here in the equity markets. So if we think about where we stand here year-to-date, do you have any sense about what kind of impact that could have on net revenue yield? And how -- what kind of position are you in to maintain the operating margin level, even if we see adverse equity market conditions? Thanks.
Get, doesn't help either. But even in rising markets, as we continue to see really strong demand for our passive capabilities, and I think that's evidenced by some of the organic growth rates we just walked through. And we continue to see real pressure on the overall net revenue yield. And if I look at net revenue yield of our active AUM, it's actually held up pretty nicely over the last year or two years. And it's really that strong demand for our passive AUM that's creating this pressure. And so we do expect there to continue to be downward pressure on the revenue yield overall, as we continue to see that demand and the shift of our business mix. And hopefully some of the detail and the color we provided on the, the pressure that we also see just from money market fee waivers and the Q's, one of which is temporary, and maybe an opportunity if we do see rates increase over the course of this year.
As it relates to then what does that mean for our operating margin? What Yes, the volatility we're experiencing so far in January, and it does put pressure on it. I mean it will require us to be incredibly disciplined from an expense management standpoint. I think we've made terrific progress. When I look at 450 basis points of operating margin improvement year-over-year, and we've got ourselves to a new a new place, a new position that we can operate within, and it might not be as high as what we experienced in the last quarter or two. But I don't think we do get anywhere near back to where we were a couple of years ago. And we're being very disciplined and very thoughtful about that exact issue, as we look at the -- our budget for the year and how we think about a pretty significant expense base.
Yes, now that the progress on the profitability has been in really, really great. So agree on that. Then shifting gears a bit to the follow up, there's the $200 million buyback you announced for the first quarter. But as you flagged there was $100 million insurance settlement. So when we, if we're thinking about calibrating to the run rate, if we, if we shift to your comments around the payout, it would suggest that the 1Q probably has a little bit of excess from that insurance recovery. And so backing that out is probably the right way to think about, it seems like the right way to think about a run rate. Is that fair? And is that the potential for more insurance recoveries behind this one? Or is that this 100 million, probably the end that we should expect? Thanks.
Yes, so a couple things to point out. That $100 million recovery is actually an -- our non-GAAP results and our transaction, integration expense. So it really doesn't in our adjusted net income, you don't see it there. So it's, it's really not a factor. I do think it's important to note the resolution of that MLP matter and that it was fully resolved in the fourth quarter with the $254 million getting that liability behind us is really terrific progress after a couple of years. So I don't want that to go unnoticed because we've really cleared out all these contingent liabilities. But the $100 million recovery against that somebody irrelevant to our payout ratio targets a 30% to 50%.
No, I just meant in the $200 million balance, there was clearly some extra capital that you now received. Did that support the 200 million pace [ph] in the first quarter. That's all I meant by that not the payout ratio.
Fair enough. Look at that the $1.9 billion cash balance. And so I would think about it from a cast perspective, and the fact that our cash did grow about $500 million over the year after resolution of all of this contingent liabilities $100 million insurance recovery with a positive there. It does somewhat factor into the timing of moving forward with this in the first quarter, and also our valuation and these rather attractive prices factor into the timing as well, if not now, when is in our thinking as well.
Yes, that's fair enough. Thanks very much.
Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great, thanks. Good morning, folks. Again, thanks for the call outs on expenses. Just want to come back to the operating margin. And in the context of the Great Wall JV obviously, seeing really good success, they're continuing on the organic growth side, do you view that as the more scalable part of the model. And if you continue to have this type of success there, that that could be a positive contributor to the operating margin dynamic.
Yes, absolutely. I mean, as we said before, if you take a macro picture, the opportunity in China for asset managers is phenomenal. It's in, you pick your estimate out there, but there's various assessments of if you’d look at the next three to five years, 50% of the organic growth in inflows could be coming from China. So being very, very strong in China is an enormous opportunity. And it's very scalable. And so we continue to anticipate continued strength of the business, and we think we're, it's a very, very strong position that we have there. And like just big enough that strength is really follow.
Thanks for the color. And then maybe it's an organic growth, if you can get some color on traction in sustainable product ESG products on both the active and ETF side, and where you stand in terms of integrating ESG across the investment process. That's completely done now, and then just is that helping or do you expect that to help inflows in Europe? Both, I guess, on the institutional side, and also, your traction and gaining ETF share in Europe on that painful [ph] side as well?
Yes, let me make a couple of comments. And I was going to chime in too. So right now, if you look at our assets under management it’s now 96% of our assets under management, or ESG, that's up this quarter, almost $45 million, and where they're going there, it was converted 69 funds of $45 billion to Article eight, in the fourth quarter. And let's stay on Europe for a second. ESG is as fundamental to any money managers success there. And whether it's retail or institutional, you really have to have ESG integration at a minimum, that's really our effort with Article eight, and you're going to continue to see that.
So it's not just a business opportunity, its business imperative. In the U.K., and I'm going to comment right now, and it's lingering through the rest of the world. Our commitment is to have ESG integration across all of our investment teams. Right now we are 75%. So we've made very good progress. And, again, from my perspective, you're going to be out, three years out, you're really not going to probably be talking about ESG as sort of a separate category. The integration piece at least, seeing the ability could be in the light, but it's just a reality of money management right now.
Let me just clean up one thing. It's not 96% of our AUM, it's $96 billion, our AUM would be ESG qualified. And as Marty said, 75% of our funds are now what we would consider kind of minimal but systematic ESG integration.
Great. And then just deployed in the fourth quarter on sustainable product.
Flows. There we had modest outflows in the fourth quarter, continue to see a little bit of pressure there. A lot of our ESG capabilities are somewhat I think somatic in nature as we continue to build them out. And so they could come in and out of favor, definitely continuing to see demand overall in terms of institutional mandates for these ESG capabilities, but flows, I would say were relatively soft on this flattish in the quarter. And one thing I would note in particular as we see some outflows are related to our GTR capabilities. We've talked about GTR, quite a bit. GTR was about $800 million of outflows that also contributes to what we would consider ESG outflows as well.
So, there are places where we see positive flows. There are other places of pressure for very specific reasons. But overall, continue to see this as just an important component of our portfolio. And I think as Marty said, in a few years, we don't think we'll really be talking about ESG as its own separate kind of category, but rather a standard that we hold ourselves to across the board.
Yes, that's great color. Appreciate it. Thank you.
Our next question comes from Glenn Schorr with Evercore. Your line is open.
Hello there, one of the first follow up on Greater China, if I could. You talked about the six new funds factoring two and a half billion in long term flows 7.2 from existing products on a base of 106 billion ending the quarter that's a really high growth rate as some of that is ramping. So I know you talked about the big opportunity. But maybe we can talk about, the next two years 2022 and 2023. On -- are there new products in the pipeline, and how box in this growth rate is probably not sustainable, but could be in in, in the early years as new funds are ramping, so let’s talk about how product is moving. Thanks.
Yes, a couple of comments and Allison will chime in also. So look the year-over-year organic growth it was 32%. I mean, it's quite phenomenal. And if you look back, we've really maintained that over the last three years. And it's just say it's decades later, overnight success. So a number of things have come together. And we anticipate strong growth in the next year, two years, recognizing every market will have its volatile moments. What we are seeing last year is a very, very strong launches at the beginning of your new product. And as you're talking about some of the more recent ones.
We are starting to see greater flows into existing products too. So there'll be I think that would be a sign of a market developing where you get ongoing flows into existing products as opposed to sort of a constant launch, but it'll be both as we look forward. So we're anticipating continued strong growth in China, both at a retail level and institutional level as we look forward.
One thing I'd add to that is I do think in the very near term, China is experiencing some pretty new dynamics with COVID that they have not experienced in the last couple of years, while they've been in a bit of a locked in state, and they've been operating normally within the region. But now with case counts increasing, if you've extended much softening of that domestically there, and we're seeing that a little bit as we go into the Chinese New Year here soon. So I say, it's uncertain what impact some of the measures will have on just sentiment overall within the region. As a counterpoint to that, however, where we see real strength and continued demand in our capabilities within our JV is specifically for our fixed income and our balance products.
And so as we continue to see, perhaps, a flight to safety and some conservatism, if we see some softening of sentiment, we were very well positioned with our capabilities through our JV. And we're seeing that so far this year.
I appreciate that. That’s a perfect really to the follow up, I was curious and you alluded to the market drops so far during the volatility, it's always it's a couple of weeks. But just curious if you give us insight into both institutional client behavior as the markets get a little wacky here.
I think we try to stay away from real flow updates enter quarter, but I will, or in for months. I will say this, I think you could see with some of the publicly available data that with what we can control in terms of sales and redemption rates and the like, we feel very good about where we are so far in the year. And one of the benefits of having a very broad and diversified platform is we have that breadth of capabilities as people look to rebalance and shift some of their allocations we’re able to capture a lot of the flows even in a risk-off environment. At the same time, there's a lot of pressure in the market and a significant amount of volatility, as we all experienced yesterday, in particular, and I think the next couple of days, with the Fed meeting, and the minutes coming out of that are going to be quite informative as well. And so with what we can control, we feel very good about it. And I say, the conversations with clients continue to be very constructive and very positive and we're where we need to be. But this is an interesting market.
Appreciate that. Thanks.
Our next question comes from Craig Siegenthaler with Bank of America Securities. Your line is open.
Good morning, Marty, Allison, hope you're both doing well. And congrats on the 7% organic growth this past year.
Thanks, Craig.
So I'm sorry about this. But I have another one on China. And I just wanted update on your effort to increase your equity stake in the joint venture, because I don't think you've done that yet. But you're, you're working on that. And then also you previously disclosed as the percentage of flows that come from digital platforms, like and financial, I think it was trending around 50%, before 4Q. So I don't know if you have an update on that number either.
Yes. And hope you are doing too, and hope you had a good New Year. So just on the -- we continue to be in dialogue with our joint venture partner to increase our stake over 50%. So a positive conversation, we've not accomplished that. That said, I'll come back to the most important element is that which differentiates us even though we have 49% of the ownership, we have management control. And we have had since the beginning, and that is really what has allowed us to be so effective and successful in China.
So that's the main point to look at. But we do feel in time that we will be able to end up a majority stake in our joint venture. It is not impeding progress at all. Secondly, with regards to digital platforms, they continue to be really very, very important part of the market dynamic there. And the number really hasn't changed. It's still about 50%. But again, it's a very strong part of the future success that we'll see in China.
And then just for my follow up on the private REIT business, you have the U.S. business and then you have the global distribution partnership with UBS. It looked like the U.S. vehicle only raised about 16 million through month end November. And I don't have the December number yet but I was wondering if you could update us on the progress of those two products and any kind of flow or AUM detail.
Yes, I'll make a couple of points. Just the -- we're still in the process of onboarding various institutions and I don't want to get too specific but it is now being on board in the United States and it will probably take you into the second quarter of this year before we would get to a level where we feel that it's sufficiently boarded at the various places that you would hope it would be. But again it's an area of great opportunity for us. And the recessions been very, very strong. It's just literally, the, the due diligence process of working through those types of things.
Thank you, Marty.
Thank you.
Our next question comes from Robert Lee with KBW. Your line is open. Hi, Robert, please hit your mute button.
Sorry about that. Thank you. Thanks for taking my questions. And Happy belated New Year to everyone. Hope you're both doing well. There may be my first question, like to just go back to maybe begin to flows a little bit. So I mean, obviously, even strong organic flow growth for the year. I mean, that's great. But you may be begin a little bit since there was such a focus on fee realization rates and whatnot, help us better, maybe get a sense of the economic impact of the inflows. I mean, I don't know if you have, for example, the net revenue, net organic revenue or EBITDA growth, maybe that'd be a better metric, anything that can help us get a better sense of the economic impact you're seeing from inflows? This will be my first question.
We don't disclose it in that way. And the way that I think where you're going. I mean, I'd point to a couple of things, which is with the strong organic growth rate and we're generating positive organic revenue throughout the year on the flows. There are points of strengths and points of, challenges against that. And as I noted, the active and that revenue yield inside of our active capabilities is actually held up pretty strong, it's barely moved in the last couple of years. And it's really just the challenges we have there with just the demand is not as strong as it is for our passive capabilities. And so what I would point you to is, and I, we've talked about this a few times as well, in our passive capabilities and our ETFs in particular, I'll point that out. Our operating margin that we generate from that is, consistent whether a little better than the firm average operating margin, it takes a higher volume, that's more of a scale play for us.
And so as we continue to really see the positive demand for those capabilities, we are able to not only generate positive organic revenue growth, but also really contribute both operating absolute operating margin and absolute operating profit and sustain our operating margins at the same time.
Great, thank you. And maybe as a follow up, going back to expenses I mean, can you just remind us, as you were given a difficult start to the year, with the market so far, can you just remind us kind of how much flex or variability you feel like you may have in the expense basis, that may be linked to, whether it's pre-tax, operating income or asset levels or flows, just trying to get a sense of what's kind of a natural built in Flexi could have to respond to more difficult revenue to start the year.
Sure. A couple of things one, about a third of our expense base is variable in nature. And so we would expect that to flex up with stronger revenue and flex down if we don't see it. And so, that's point one and the two thirds of our expenses, and that is more fixed in nature. That's really some of where we continue to look at our expense discipline, and where we can look at opportunities to unlock costs, and some cases allowing that to fall to the bottom line and other cases, reinvesting it in places where we think it can be more productive for us.
And so we do feel like we have continued opportunity there. We've made good progress on our strategic review, as we've talked about, where the 267 million, they're still got a little ways to go. Our real estate properties portfolio is a place where we continue to make progress and we continue to look. And that's an element of a fixed expense that we continue to evaluate in an operating environment. But not only is it different than it was a couple of years ago, it continues to evolve. And we're being responsive to that as is everybody else right now, and really looking at how do we continue to unlock some of the fixed costs there.
Great, thanks for taking my questions.
Our next question comes from Dan Fannon with Jefferies. Your line is open.
Thanks. Good morning. Just a follow up, one more for you on expenses. As we think about the sequential change from 4Q to 1Q, and you highlight it as normal seasonal stuff, but curious about this past fourth quarter, where you had elevated performances, what we should normalize for compensation within that, and then the other maybe one time or items to think about the kind of 1Q to I’m sorry 4Q to 1Q effects kind of the market impact.
Yes. Compensation expense maybe to speak to it sort of broadly, it tends to run somewhere between 38% and 42% of our revenues. If you just look at that on an annualized basis, that's been the range in which we've operated for quite some time. And 2021, it was 38%. So it's on the low end of that range, which is what you would expect in a really strong year. And so I think that is still a very reasonable range to be thinking about, as you think about just our overall compensation expense, regardless of revenue, whether it's coming from, from performance fees or management fees, that that range is the right range to think about.
Looking towards expenses in the first quarter overall, I would say a couple of things. Look, marketing tends to be seasonally high in the fourth quarter, you certainly saw that in the fourth quarter of this year, we've got the $25 million to $30 million increase that is the seasonality and compensation expense. And the other point that we're trying to get our own arms around is we did start to see something that looked like a return to normal in the fourth quarter and the Omicron variant really didn't impact in person activity and travel until we were almost on the holidays.
And so we were pretty active, right? So that and then things changed, just as the holidays would have brought a natural sort of closure to things for a few weeks. And we obviously haven't seen any traveler engagement really pick back up just yet. I do think we'll start to see some return of that later in February. We're certainly hopeful. And, I think that's an area that we hope continues to grow throughout the year. We've said that now for a while, and we just haven't seen it. But fourth quarter was the first time we started to feel like it was close to normal. So hard to guide as to whether or not we as to when we see the pickup, but I do expect it comes down a bit in the first quarter relative the fourth quarter.
That's helpful. And then just looking at slide 12, I mean appreciating obviously, the what you've been highlighting around the margin expansion versus to see, mix shift that's happening, but if we flat markets assume for the next couple of years, and the trends hold is margin expansion for you still part of the story, or we think about that more maintaining and without markets as you have this mix shift that's ongoing.
So sorry, as I was flipping to slide 12, you're asking if markets hold so they level for the markets hold is operating margin expansion, a possibility? Was that your question?
With the same underlying mix shift and flows? Yes. So just markets out?
Yes, I'd say it is the -- I would be thinking about flat-to-modest expansion in a market where an environment where markets hold, and we continue to see this mix shift. The question is really just the pace of the mix shift. If it's, if it's quite fast that we're looking at flat, if it continues at the pace we've seen, we could get some modest expansion out of that. We said before, we don't intend to run our business with an ever increasing operating margin. And I'll reiterate that. And we do feel like we're in a pretty nice operating range, we would be happy to see it, improve some, but we're not going to start the business in order to allow it to grow. We've got some key investments, we want to continue to make ahead of where we see demand. And so, I think that in a flat markets with real mix shift could get us to a flat operating margin.
Yes, and I do just want to reiterate that, it's really important for us to continue to invest in the business. And we're going to continue to do with along the way that we've been have you continue to look at areas of opportunity and look at our expense base, can we reallocate and invest, and it's going to be in those areas of clients demand where there's growth, that's going to continue to be ETFs factors, private markets, etcetera, and also the investment of technology that we need to do. So it's, it's a really, really competitive marketplace. And one of the things that's really important is, as we drive results for shareholders, we're also investing in the business for shareholders and for clients. And that's really what was reflected in the results that we had this year. And, again we're going to very much stay focused on that path as we go forward.
Thank you
Operator, do we have any other questions?
Yes. Our next question comes from Ken Worthington with JPMorgan. Your line is open.
Hi, good morning. Marty, I wanted to step back and think, bigger picture. It's a new year. So maybe first Happy New Year. Invesco had a great year in 2021. But as we look at the stock price over a longer period of time, the stock price is at about the same level as it was a decade ago. And it seems like Invesco has executed well, on a value creation roadmap that resulted in size and scale in better positioning, but one that hasn't really been reflected in shareholder value creation as measured by the stock price. So you have an activist investor that continues to build a position in the company. I guess, are you thinking about things differently in terms of how you're approaching shareholder value creation, when you're making investment and capital allocation decisions? And as you think about driving improved results for shareholders, what is sort of top of mind for you, as you think about you know, 2022 and beyond?
Yes, look, it's a great question. And that doesn't go beyond this either. And I think what's really important is get the result that you're talking about share price. From our perspective, you really have to deliver results for clients, and you have to do it a very thoughtful and meaningful way and ensuring that we're hitting with all the constituents need. And I think again, you just look at where the business has evolved, we think we've evolved it very strongly to meet those needs. And it's been reflected in the operating results. And so our perspective is continue to be very focused on that, and also not just clients, but with shareholders in mind. And in time, this share price should reflect that. Just today, as we talked about looking to buy back our stock, we think it's a very, very attractive for all the reasons that you've laid out.
I mean, I would only add to the valuations frustrating to us. And so what we focus on is what we can control and where we can influence. I think as Marty said, really making sure we're delivering for clients and building out our capabilities so that we are capturing client demand, the 2021 results would point to our success, and that's one of the highest growth rates in the industry. And we're certainly winning vis-à-vis the competition there. We also made meaningful progress with 450 basis point improvements in our operating leverage. I mean it was important, we had some work to do there. And we needed to get ourselves back into the right operating range. And there was a lot of hard work that went into that. And we feel very good about the work that we've done there. And that falls to the bottom line. And then the balance sheet needed some work. And we've made tremendous progress in strengthening the balance sheet and continue to work on that and put ourselves in a position to do further work on the balance sheet as the year unfolds.
And so as we look at, what should influence that return to shareholders, we think we're making real progress against each one of those. And it's not a quarter-to-quarter game, and it's a long term game. And we're going to stick to this plan, because we think it's actually really yielding the results that investors are looking for, and certainly has the support of our board as well.
Well, I know it's a tough question, but it's great to hear your comments. Thank you again.
I'm glad you asked. Thank you.
Our next question comes from Patrick Davitt with Autonomous Research. Your line is open.
Hey, good morning everyone. A quick follow up on Brennan's re-purchase question, eyeballing it looks like the 200 million in 1Q would already get you to the 35% to 50% payout. So should we assume that's more of a one-off or when we're modeling this or assume a resumption of more regular repurchases in every quarter beyond that?
Hard to say this yet, you're right, that does get us into that range. And we did feel like the timing was right to actually move further aggressively on it for all the reasons that we talked about earlier, and feel good about that. Whether or not we will continue to do more as the year unfolds, I think we'll just have to address that as the year unfolds and results will dictate that.
Alright, fair enough. And then mass mutual recently announced a new reinsurance platform with Centerbridge and bearings, acting as the asset managers, just curious how you think that news fits with your relationship with them? And does it change your thinking on the opportunity for managing more of their assets at all?
No, it does not. And as I said, it's a very strong relationship, obviously, to board members on our board, they own 60% of the company. They've been very helpful and supporting our alternative business, they'll continue to do that. We couldn't be more aligned, and it's a very strong relationship.
Thank you.
Our next question comes from Bill Katz with Citigroup. Your line is open.
Okay, thank you very much for taking the question this morning. So Marty, I think you've mentioned that you hope to deliver some operating leverage going fully VAG spend in your opening remarks. And then Allison maybe sort of qualified that. You're not here with infinite margin improvements. So as we look into maybe 2023, can you unpack maybe your gross spending rate and then the net spending rate, just kind of see as you get to the final part of your $20 million realization, how we should be thinking about the core expense growth into 2023 as I appreciate we’re sitting here in January 22? Of course.
Yes, I can go ahead and tell you, we're not going to give guidance into 23. I think, yes, we've tried to give some color as to what we expect in the first quarter and the operating margin within which we intend to operate.
Yes, and Bill I think you're asking a question was connected to some of the other questions that were asked. You're trying to do many things here, right? You're trying to invest for the future and be competitive to drive results for clients and ultimately, shareholders. And we think we've done that, right. If you look at the business today, look at where it was five years ago, is a very attractive business invested in China, ETFs, private markets, etcetera. That just was not where Invesco was five years ago, 10 years ago. And at the same time, we talked about the margin expansion year-over-year. With that expansion, we've also been able to invest in the business to improve our competitive positioning. So you're really trying to do any number of things all at once, and we're showing that we can do that.
Okay, thank you. And then just one last one for me. Thanks for taking both of them. So a couple of your competitors have been spending pretty aggressively to build out their platforms, particularly alts [ph] bucket. I think you guys are probably a little bit further along strategically. But how do you think about M&A from here? I know you certainly gave us some guidance around terms of capital term. But how does M&A incrementally fit into discussion from here?
Yes, you're going to get tired with the answer cause it could be the same one. But look, we look at business very strategically. And we look at where client demand is coming from, and can we meet our client’s needs, and we're always going to look internally first, to develop what we can. And when we come up short there, that's when we'll start to look to the market. And it has to be a capability that there is client demand for it. It's, additive to our capability sets. And it's something that we think also can fit very nicely within the business from a cultural point of view. So, again, our first focus is internally, but we will continue to pay attention to the market when it makes sense.
Thank you.
Thanks, Bill.
Our last question comes from Michael Cyprys with Morgan Stanley. Your line is open.
Hey, Marty, Allison, thanks for squeezing in here. Just want to circle back on expenses. You mentioned one third of the expense base is variable about two thirds fixed or so I guess where would you like to see that mix over time? And how do you see that evolving? And when you think about the margin, more medium to longer term, where do you see that operating margin is it mid 40s? Achievable? Does that make sense for the business? Have you think about that?
In terms of the variable set mix, I think it's, it's actually probably accurate where it is. And I don't necessarily see it evolving to be terribly more variable over time. So, I think one things we focus on quite a bit is driving scale over that fixed expense cost is actually where we deliver that operating margin growth. And in terms of where we could be, look 450 basis points of improvement one year was pretty extraordinary. I don't expect to replicate that year, after year after year. We had work to do to get it back and to the range where we are. The strategic review that we have been in it's not easy, but looking at those opportunities that gave us, we gave us the chance to look at a lot of good opportunities that made sense for us.
In terms of where could you be, could you beat mid 40s overtimes? That's a longer term comment. I couldn't tell you by when or how. And certainly we need some very supportive market dynamics behind that as well. So I'll never say never. But I can tell you, it certainly won't be in 2022, probably not in 2023 because we really are focused on investing in the business. And getting to a margin of that level in the next couple of years would require us to do things as I think Marty noted a few times that just really aren't tenable because it would not position us well in terms of investments that we need to build the platform for the future. And so, I think in the short term, the low 40s is a really good operating range for us to be in.
Great, I'll leave it there. Thanks. Thanks. Thanks so much for taking the question.
Sure, thank you. That was our operator. I think that brings us to the end.
Yes. Thank you for your participation today. You may disconnect at this time.
Thank you very much.