Q1 2021 Invesco Ltd Earnings Call
Okay.
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 events and overall operating plans and performance.
These forward looking statements are made as of today and are not guarantees 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.
<unk> K and subsequent filings with the SEC Invesco makes no obligation to update any forward looking statement.
And they 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 invest goes first quarter results conference call all participants will be in a listen only mode until the question and answer session.
At that time to ask a question. Please press star one.
Call will last one hour to allow more and 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.
Great and thanks, everybody for joining us and we look forward to the conversation.
As we begin 2021, we remain cautiously optimistic with vaccine grow up getting traction and therefore merged from <unk>.
Global pandemic this year.
So let me confirm by the increased second half economic activity were all seeing that said risks do remain.
The good news is invesco is off to a great start this year and as you can see and the results that we reported this morning and.
And if you're so inclined to follow along I'm going to speak speaking to the highlight slide which is <unk>.
Slide three.
Our investment and key capabilities and a tremendous focus and our clients continues to produce good momentum and our business. We have now achieved nine straight months of net long term inflows.
And the first quarter net long term and flows were $24 5 billion. This is a record level of inflows from the firm.
This follows net long term inflows from nearly $18 billion and the second half of last year and.
This represents nearly a 9% annualized long term organic growth rate led by net flows into Etfs continued strength and fixed income and net.
And flows into the balanced thoughts and.
And as you can see on slide three the key areas that were highlighted in January and you have scale.
Investment readiness and competitive strength growth and growth in the quarter. These are areas, where our investment performance is strong we're highly competitive and we're well positioned for growth.
Retail retail flow significantly improved and the quarter and were $21 2 billion.
The $4 5 billion.
Net long term flows are etfs, excluding the Qs generated net long term inflows of $16 8 billion. This is also a record for the firm which contributed significantly to the $10 billion from net long term and flows generated and the Americas.
Invesco, So U S Etfs, excluding the Qs captured six 7% of the U S industry net.
And flows.
This was more than two times or 3% market share.
Within private markets, we launched two CLO, which raised $800 million.
And we remain focused and our alternative capabilities and space, where we also see the benefits.
Mass mutual.
Massmutual has committed over $1 billion, various strategies, including providing a credit facility and one of our private funds.
We had net loss.
Long term inflows of $6 $5 billion with and active fixed income and within active global equities are nearly 50 billion dollar development Mark It's fun key capability acquired and the Oppenheimer transaction, So at $1 3 billion.
That said there are still areas of improvement with an active equities, where we continue to work and remain focused on those opportunities.
Net long term inflows into Asia Pac were $16 $7 billion and the first quarter following $17 billion net inflows and the second half of 2020.
And China JV launched nine new funds with $6 2 billion of net long term and flows. In addition, our solutions enabled and institutional pipeline has grown meaningfully and accounts for over 60% of FERC pipeline at the end of the quarter.
Alice and we'll provide more information in a few minutes on the flow as to pipeline and our results for the quarter, but I would note we generated positive operating leverage and producing an operating margin of 42% per the quarter.
Strong cash flow is being generated from our operations improved our cash and cash position, resulting in no drawdown on our credit facility at quarter end.
<unk>.
Seasonally higher demand and our cash flow the book.
And also approved a 10% increase and the quarterly dividend to <unk> 17 per share.
Given our historical investments and the business. Our most recent efforts to further align our organization with our strategy I'm confident that the talent and capabilities resources and momentum to drive to.
And to deliver for our clients and drive further growth and.
Success, and with that I'll turn it over to Alison walked through the results in greater detail.
Thank you Marty and good morning, everyone.
Moving to slide four our investment performance improved and the first quarter was 70% and 76% of actively managed funds and the top half of peers on a five year and a 10 year basis, respectively.
This reflected continued strength and fixed income global equities, including emerging markets equities and Asian equities, all areas, where we continue to see demand from clients globally.
I'll also note that our published investment performance now reflects Morningstar peer rankings for composites were a U S. Domiciled mutual fund is the most representative AUR and the composite whereas previously we had relied on lipper data. This transition mark closely aligns our data to the investment performance data reviewed by our U S clients and as Mark consistent with how our peers reflective.
That's my performance. Additionally.
Additionally, we've expanded the population of AUR and included and performance to disclosures by about $150 billion per each period presented through the addition of benchmark relative performance data for institutional AUM were peer rankings do not exist. This approach is used by certain of our peers and we believe it's Martin it more meaningfully represents the contribution of our institutional.
And two our performance metrics.
Moving to slide five you'll notice, we reorganized our ending AUM and net long term flow slides to grip, the ending AUM and that long term flows together for each cut of our data by total investment approach channel geography and asset class.
We believe this will better illustrate our flows and the context of our overall a U M for each category.
We ended the quarter with just over $1 four trillion dollars and AUM.
Of the $54 billion and AUM.
And growth approximately $25 billion is a function of increased market values.
Our diversified platform generated net long term inflows and the first quarter of $24 5 billion, representing eight 8% annualized organic growth.
<unk> AUM net long term inflows were $7 5 billion or three 4% annualized organic growth rate and passive AUM net long term and flows were $17 billion or a 31, 3% annualized organic growth rate.
The retail channel generated net long term inflows of $21 2 billion and the quarter and improvement from roughly flat performance in the fourth quarter driven by the positive ETF flows.
Institutional channel generated net long term inflows of $3 $3 billion from the quarter rigor.
Regarding retail net inflows are etfs, excluding the Q2, two suites generated net long term inflows of $16 $8 billion, including meaningful net inflows into our higher fee Etfs.
Net ETF inflows and the U S. We're focused on equities and the first quarter, including a high level of interest and our S&P 500, equal weight, ETF, which had $4 billion and net inflows and the quarter and.
In addition to the S&P 500 equal weight ETF, we had five other etfs that reported net inflows of over $1 billion each.
These six Etfs represented $10 billion and net inflows for the quarter.
It's also worth noting that our invesco NASDAQ next Gen 100, Etfs, but Q2, Q J surpassed the $1 billion AUM, Mark and the quarter. Following its inception in October of 2020.
This was on the heels of our successful Q2, two marketing campaign and sponsorship of the N C double a championship and the first quarter.
Looking at flows by geography on slide six you'll note that the Americas had net long term inflows of $10 billion and the quarter and improvement of $7 $8 billion from the fourth quarter and.
The improvement was driven by net inflows into Etfs and institutional net inflows various fixed income strategies and importantly focused sales efforts.
Asia Pacific delivered one of its strongest quarters ever with net long term inflows of $16 7 billion.
Net inflows were diversified across the region $9 4 billion of these net inflows were from greater China, including eight 5 billion and our China JV and <unk>.
<unk> of the floods and Asia Pacific were comprised of $3 billion from Japan, and $1 9 billion from Singapore, and the remaining $2 $3 billion was generated from several other countries and the region.
Net long term inflows for EMEA, excluding the UK, our $3 7 billion driven by retail flows, including particularly strong net inflows of $1 $2 billion and to our global consumer trends fund the growth equities capability, which saw demand from across the EMEA region.
ATF net net inflows and EMEA were $1 6 billion and the quarter, including interest and a wide variety of U S and EMEA based Etfs.
We saw net inflows of half a billion dollars and to our block chain ETF and $400 million into one of our newly launched ESG Etfs and the quarter. The Invesco MSCI USA ESG Universal screened ETF.
And finally, the UK experienced net long term outflows of $5 9 billion and the quarter driven by net outflows and multi asset institutional quantitative equities and U K equities.
Turning to flow the cross asset class equity net long term inflows of $9 8 billion for some of the capabilities I've mentioned, including the developing markets bond the global consumer trends fund and Etfs, including our S&P 500 equal weight Etfs.
We continued to see strength and fixed income across all channels and markets and the first quarter with net long term inflows of $7 $6 billion. This following net inflows of $8 $2 billion and fixed income and the fourth quarter.
It's worth noting that the net inflows and the balanced asset class of $7 $3 billion arose largely from China.
And alternatives net long term inflows improved by $4 $1 billion due to a combination of inflows and senior loan commodities and newly launched CLO during the quarter.
Moving to slide seven and our institutional pipeline grew to $45 5 billion at March 31 from $30 5 billion $1 billion at year and the.
The growth and the pipeline. This quarter includes a large lower fees passive indexing mandate and Asia Pacific assisted by our custom solutions advisory team.
This is an opportunity for us to offer our solutions based differentiated passive investment to meet the needs of our key strategic client with the potential to expand the relationship over time with access to higher fee opportunities we.
We are also able to leverage our in house index and capabilities with this mandate.
Excluding this large mandate and Asia Pacific our pipeline remains relatively consistent to prior quarter levels in terms of size asset mix and fee composition.
While theres always some uncertainty with large client fundings were currently estimating that between 50 and 65 per cent of the pipeline wealth fund and the second quarter, including the large indexing mandate mandate.
The funding of this mandate will also have a slight downward impact on our net revenue yield next quarter.
Overall, the pipeline is diversified across asset classes and geographies and our solutions capability enabled 61% of the global institutional pipeline and created wins and customized mandates.
This has contributed meaning to meaningful growth across our institutional network warranting, our continuing investment and focus on this key capability.
Turning to slide eight you'll notice that our net revenues increased $23 million or one 8% from the fourth quarter as higher average AUM and the first quarter was partially offset by $71 million decrease and performance fees from the prior quarter.
The net revenue yield excluding performance fees was $35 seven basis points, a decrease of three tenths of a basis point from the fourth quarter yield level.
This decrease was driven by lower day, count and the first quarter that negatively impacted the yield by eight tenths of a basis point and higher discretionary money market fee waivers that negatively impacted the yield by three tenths of a basis point.
These negative impacts were partially offset by the positive impact of rising markets and net long term inflows during the quarter.
Going forward, we do expect money market fee waivers to remain in place for the foreseeable future until rates begin to recover to more normalized levels.
Total adjusted operating expenses increased <unk> seven per cent and the first quarter and $5 million increase and operating expenses was driven by higher variable compensation as a result of higher revenue as well as the seasonal increase in payroll taxes and certain benefits.
Offset by the reduction in compensation related to performance fees recognized last quarter and savings that we realized in the quarter, resulting from our strategic evaluation.
Operating expenses remained at lower than historic activity levels due to pandemic impact of discretionary spending travel and other business operations that have persisted in the quarter.
Moving to slide nine we update you on the progress we've made with our strategic evaluation as we've noted previously we're looking across four key areas of our expense base, our organizational model, our real estate footprint management of third party spend and technology and operations efficiency.
Through this evaluation, we will invest in key areas of growth, including Etfs fixed income, China solutions alternatives and global equities, while creating permanent net improvements of $200 million and our normalized operating expense base.
A large element of the savings will be generated from compensation, which includes realigning our non client facing workforce to support key areas of growth and repositioning to lower cost locations. The remainder of the savings will come through property office and technology and G&A expenses.
And the first quarter, we realized $16 million and cost savings $15 million of the savings was related to compensation expense the remaining $1 million and savings was related to facilities, which is shown in the property office and technology category.
$16 million and cost savings or $65 million annualized combined with the $30 million and annualized savings realized in 2020 brings us to $95 million or <unk> 48 per cent of our $200 million net savings expectation.
As it relates to timing, we still expect approximately $150 million or <unk> 75 per cent of the run rate savings to be achieved by the end of this year with the remainder realized by the end of 2020 two.
The $150 million and net savings by the end of this year, we anticipate we will realize roughly 65 per cent of the savings through compensation expense.
Remaining 35% would be spread across occupancy tax spend and G&A.
The breakdown for the remaining $50 million and net cost saves in 2022 will be similar.
With $95 million of the expected $150 million and net savings by the end of this year already and the quarterly run rate. The degree of net savings per quarter will moderate going forward.
And the first quarter, we incurred $30 million of restructuring costs.
In total we recognized nearly $150 million of our estimated $250 million to $275 million and restructuring costs that were associated with this program.
We expect the remaining transaction cost for the realization of this program to be and the range of $100 million to $125 million over the next two years with roughly one half of this amount occurring and the remainder of 2021.
As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.
Our expectations are for a second quarter operating expenses to be relatively flat to the first quarter, assuming no change and markets and FX levels from March 31.
We entered the second quarter with one four trillion dollars and AUM.
Driven by net inflows and market tailwind from the first quarter.
These <unk> will have a modest impact on both revenues and associated variable expenses the.
And the impact on expenses will be offset by lower compensation expense related to seasonality and payroll taxes and benefits plus incremental savings related to the strategic evaluation.
We also expect a modest increase and marketing related expenses as the first quarter is typically the low point and marketing spend annually.
One area that is still more difficult to forecast at this point is when COVID-19 wrote impacted travel and entertainment expense levels will begin to normalize.
And the rollout of vaccines, we believe we might begin to see a modest resumption of travel activity later in the second quarter, and perhaps more and the third quarter.
Okay.
Moving to slide 10, adjusted operating income improved $18 million to $503 million for the quarter driven by the factors. We just reviewed.
Adjusted operating margin improved 70 basis points to 42% as compared to the fourth quarter.
Most importantly, our degree of positive operating leverage reflected in our non-GAAP results is to ask for the quarter underscoring our focus on driving scale and profitability across our diversified platform.
Non operating income included $25 $9 million and net gains for the quarter compared to $31 $9 million and net gains last quarter as higher equity and earnings primarily from increased CLO marks were more than offset by lower market gains on our seed portfolio as compared to the prior quarter.
The effective tax rate for the first quarter was 24 per cent compared to $21.
7% and the fourth quarter the effective tax rate on net income was higher and the first quarter, primarily due to an increase in income generated in higher taxing jurisdictions relative to total income.
We estimate our non-GAAP effective tax rate to be between 23, and 24% for the second quarter. The actual effective tax rate may vary from this estimate due to the impact of nonrecurring items on pre tax income and discreet tax items.
Turning to slide 11.
Our balance sheet cash position was $1.158 billion at March 31, and approximately $760 million of this cash is held for regulatory requirements.
Cash balances are impacted by the typical seasonal increases in cash needs and the first quarter related to our compensation cycle.
We also paid $117 million on a forward share repurchase liability and January.
In addition to using excess cash to reduce leverage we seek to improve liquidity and our financial flexibility. Despite.
Despite the increased cash needs and the quarter. The revolver balance was zero at the end of March consistent with our commitment to improve our leverage profile.
Additionally, the remaining forward share repurchase liability of $177 million was settled in early April.
We also renegotiated our $1 $5 billion credit facility extending the maturity date to April of 2026 with favorable terms.
We believe we are making solid progress and our efforts to build financial flexibility and as such our board approved a 10% increase and our quarterly common dividend to <unk> 17 per share.
The share buybacks dating back to last year on slide 11, which reflects $45 million and the first quarter of this year are related divesting of employee share awards.
We remain committed to a sustainable dividend and to returning capital to shareholders longer term through a combination of modestly increasing dividends and share repurchases.
In summary, Marty highlighted the growth, we've seen and our key capabilities and our continued focus on executing the strategy that aligns with these areas. We're also executing on our strategic evaluation and reallocating our resources to position us for growth.
And finally, we remain prudent and our approach to capital management, our focus on driving greater efficiency and effectiveness and to our platform combined with the work we have done to build a global business with a comprehensive range of capabilities puts invesco and a very strong position to meet client needs run a disciplined business and to continue to invest in and grow our free.
<unk> over the long term.
With that Phil I'll open it up to the line for questions.
Thank you at this time, if you would like to ask and audio question. Please press Star one you will be announced prior to asking your question. Please pickup your handset when you're asking your question to withdraw your request press star two.
One moment for the first question.
Our first question is from Dan Fannon with Jefferies. You May go ahead.
Hi, Thanks, good morning.
Can you discuss the strength and Asia more broadly I know you gave a lot of detail of Robert flows will come from it and balanced as well as being a source of all day.
And closed.
It's about seasonality and that part of the world versus maybe what we see and the U S.
We typically have a strong Christian and kind.
And kind of the outlook for that region given the strength.
Sure.
And the first quarter.
Dan was Asia I'm, sorry from Asia, Yes, Yes, let me make a couple of comments and elegant bill syndrome and speak to it also so look.
There's just a little question and I think we've all talked about the strength of Asia and China in particular.
China's real China's real for us is very meaningful and you've seen the recent growth over the last couple of years.
And you say the first quarter is really really strong and there's no question.
Holiday.
Follow the market and try to pull back you have to anticipate that that's going to slow down a little bit here that said it doesn't.
And when you're looking for four years is going to continue to be an important contributor and we're.
And we're just looking for further growth.
And in the years to come so that's our perspective at the moment, yes. The only thing I'd add you know, obviously sentiments, maybe shifted just a little bit there and the recent months very strong cinema fourth quarter very strong sentiment and the first couple of months of the first quarter, we've definitely seen a little bit of a softening there and well pull back in March and into April.
And so it's going to be a place to watch I will say that broadly speaking for Asia Pacific We are starting to see flows.
It really start to come in and and a balanced profile across the region, China being very significant as Marty said.
And total little North of $9 5 billion of those flows came from ITW and greater China.
But we as I mentioned and saw $3 billion and flows from Japan, and a couple of billion from Singapore to <unk> 3 billion from some of the other regions and of course, as we noted and the pipeline we're seeing very strong.
And <unk>.
<unk> mandates coming and broadly from Asia Pacific, So and I think it's.
I don't know that its seasonality so much as maybe.
Sentiment that we've got to keep an eye on there and I would note and the nine funds that we launched and the first quarter and <unk>. They generated $6 billion and flows in that first quarter and most of those were balance balanced equity funds.
And the fee rates there are very strong they are they are better than the firm average and real meaningful contributors to our growth.
Thanks, that's helpful and then.
And Robert.
Sure.
Having progress concerning the quarter yet thank you back to the 200 million and aggregate.
And that number would you be considered a little bit this quarter.
And above that.
Back in the business or is there.
And the potential for some upside.
And.
You know I'd say, you definitely see us, making good progress with $95 million of the 200 and we feel like achieved at this point the 200 and remains our net target and we are very focused and reinvesting savings and continuing to reallocate those savings into areas of growth. So at this point I don't think were.
We would be suggesting that the 200 is conservative we are going to be consistently looking at how do we continue to transform our business and make sure that we are spending and the areas, where we can generate the most growth and really looking at allocating our expenses and reallocating our expenses with that mindset.
Great. Thank you.
Thank you. The next question is from Patrick Davitt with Autonomous Research you May go ahead.
Hey, good morning, everyone.
Okay.
A little more color on the kind of somewhat outsized redemption rate on the institutional side anything idiosyncratic or a common theme you could point to and that acceleration and.
And then that Dan.
Lumpy redemptions as an offset.
Strong unfunded pipeline and highlighted.
Yes.
So I wouldn't call it a one specific thing and.
And the institutional redemption, Scott, it's similar to one when it comes and it just really is hard to.
And predict quarter to quarter, so I wouldn't.
So and elevated levels of redemptions.
Going forward, Dan It will just continue to.
Follow clients desires from on the timing of redeeming or give you much money.
Yeah, I would agree I mean, you know it's it's.
It's lumpy theres nothing specific happening there.
The the gross funding out of the institutional pipeline was about 'twenty, one and a $5 billion.
And again, you're seeing the pipeline, even excluding the significant mandate really maintain its size.
And we're seeing a lot of the funding.
Fundings come not just from the pipeline, but existing client augmentation augmentation and activity outside the pipeline and I think it's important to remember that the pipeline is not the only source of our institutional flows. It's certainly a strong indication, but as we continue to grow these relationships and really deepen the relationships they become much more strategic.
T J, which generates additional flows but nothing specific to point to there.
Thank you. The next question is from Craig Siegenthaler with Credit Suisse. You May go ahead.
Thanks, Good morning, everyone.
And I wanted to follow up on Dan's question on Asia, and I heard your commentary on flows by geography that was very helpful. But could you also help us walk through what the product mix would've looked like inside the 17 billion of flows and any color in terms of channel mix retail versus institutional.
Yeah.
So I can have some of the high levels and all.
And can I add to it so within China its yield it's heavier.
And call it rebalance in particular.
That has been a historical driver.
Japan continued to be fixed income.
During the quarter.
And excuse me the big flows were really coming from retail.
Although the Japan.
And there was institutional.
And in terms of and <unk>.
Asset class mix I'd tell you.
And the half of it is coming from balanced.
And the remainder coming across equity and fixed income capabilities, but our balanced products. They are really driving a significant amount of the flows in terms of the retail and institutional mix and there was about 13 billion and on the retail side out of the total $16 6 billion.
Great Super helpful. There.
And then just as my follow up I wanted your perspective on the May 24th lockup expiration from mass mutual I'm wondering is there any thought on extending that into the future and if it isn't.
We expect some stock sales from mass mutual later this year.
Yes. So look let me just talk about the relationship continues to be very very strong.
And we continue to.
More and more together as I mentioned Joseph.
Ron alternatives for us.
The risk and recover obviously, not just with equity, but also with the preferred and.
And I can't speak for them, but what I can tell you is they've told us.
And that they are very happy with the relationship they are very happy with the investment and.
Yes, we just anticipate that would continue.
Okay.
Yes.
Thank you.
Yes. Thanks.
Thank you. The next question is from Ken Worthington with J P. Morgan you May go ahead.
Hi, good morning.
So capital gains and dividend tax rates seem poised to rise materially for the wealthy.
What do you think are the implications for wealthy investors in terms of their investments do you think this drives any meaningful reallocation.
As these new taxes goes through and are there opportunities for invesco and product development.
These wealthy investors adapt to a much higher U S tax rate and probably higher taxes global globally.
Yeah, Ken Great question, and if I knew the answer I would have this job probably but.
But the reality we're very.
Very focused on it and I'd say the firm's gotten too right now even with the individual investors. Since you were talking about the way that we have.
Moved our businesses quite frankly, no focus onto a lot of high net worth.
Individuals within the wealth management channels and really supported by the solutions capability that we've developed over the last number of years in fact, that's where it started and so.
Text managed was.
Our focus before surely going to be continue to be a focus now.
Yes, the good news is things like.
And this will bonds are going to continue to be very very important.
We have and up a very strong franchise, there, but needless to say people are going to want.
Access to equity for growth.
And you see what we can work on but I don't have anything specific beyond that.
Okay. Thank you and then for a follow up.
Dividend and and capital management.
And so you paid off or paid down and number of obligations through April 1st balance sheet is and much better shape than it was a year ago. So how do we think about the balance of capital return and further strengthening of the balance sheet and should we look through to the rest of the year and how are you thinking about a payout ratio for 2012.
And one.
Sure. Thanks, Ken.
And so I'd say, our capital priorities are consistent with what you've heard us say repeatedly from last several quarters and I am very pleased to say, we're making good progress against those and you can really see the evidence of that progress and some of what we've announced today and we remain committed to financial flexibility, which gives us the opportunity to really reinvest and the business and support our future.
Growth and that is our priority first and foremost first and foremost is creating that financial flexibility to reinvest and the business and growth capabilities there.
We also want to improve the strength of our balance sheet and continue to return excess cash to shareholders. So pleased we were able to announce the increase to the common dividend today.
We are committed to a stable and modestly increasing dividend and terms of a payout ratio and we're being thoughtful about how we continue to improve the payout ratio and the decision we made a year ago to cut the dividend was not one that was made lightly as you know it was not an easy decision, but absolutely and I think we would reflect and say it was a good day.
Session, because it's given us the opportunity to continue to improve that financial flexibility through the more uncertain times last year.
As we have made progress so far and some of those liabilities with the forward share repurchase liabilities, both now completely paid out and.
And our leverage well managed and it does give us the opportunity to continue to think about modestly increasing that dividend. We felt like 10% was the right level for where we are today and the earnings profile. We have today, but we think we have an opportunity to continue to improve that over time, we just want to be thoughtful and measured and our pace there.
Okay, great. Thank you very much.
Thank you. The next question is from Brian Bedell with Deutsche Bank You May go ahead.
Hi, good morning folks.
Maybe I'll just stay with you on and metabolism.
Of expenses.
If you can talk a little bit about the outsourcing.
State Street, I know thats, a longer term endeavor and a leader.
Thats over and above the 200 million.
It's too early to frame the potential net savings from that but maybe just to characterize.
The timing of that and whether the vast majority of fees.
And that's good that are serviceable, let's see treater and moving to that platform and.
And whether that you know.
And a normal market environment.
Whether you feel that you have confidence and you can save up to 40% operating margin level.
Yes.
Sharp. Thank you for the question, Brian and yes, I mean as you note. This is definitely a longer term installation and you did see the announcement via State Street, a couple of weeks ago, and the installation of going to a benefits that'll be realized on a time horizon and that really extends beyond our existing cost transformation program. So as you know.
And that really runs through 2022, and as we think about the benefits that we can generate from alpha those are going to be things that actually won't be realized until 'twenty three 'twenty four and beyond and so it's too early at this point for us to put any contours around what we think it could generate for us and we do expect to be able to do that at a later day.
I would say broadly speaking and we absolutely expect there to be operational efficiencies and risk mitigation and elimination of redundancies and me all of these things are going to create real benefits as we scale over the coming years.
But too early just yet to point to what that could look like.
Anything you want to add Marty and I will look.
It's going to be a very important undertaking for us and.
Deborah front frontal airbags and industrial.
All of our restaurant platform monitors can be very beneficial to the firm.
Okay. That's good color and then Marty just on the ESG and obviously, that's a topic you've talked about quite a bit just.
I guess first question is are you able to size.
And the ESG fluids to the franchise and the core.
And then the level of what you considered.
USG.
And then secondly, maybe you can just talk more broadly about what you're seeing.
And demand for those products and and any update on the.
Integration of of ESG.
And throughout the investment process from one.
Yes, So let me make a couple of comments and also talk so right now 75% of all our investment capabilities of ESG inclusion and obviously our incentives to be 100%.
Right now Thats two.
2023, our goal is to Poland and closer if you look very specifically at ESG specific mandates assets under management, just about $40 billion from.
And so to be clear, that's excluding that's not counting ESG inclusion I mean, thats really the way of the world. This is really dedicated ESG product offerings, where the SP.
ESG considerations within it.
And.
Flows have been quite strong it's really from a historical for and it's great.
And with our ETF lineup.
What we are seeing.
Institutional clients and particular Horton per solutions group is really creating spokes outcomes.
To meet their ESG goals and we're also leveraging.
And our self indexing capabilities with a number of these institutions to.
And to meet their ESG goals, so it really no different to us and that is <unk>.
For basis.
And I'd say.
The strongest area right models.
Okay Europe.
Following this and quite frankly and Asia. It's also very very strong so.
Needless to say, if you don't have the wherewithal or the capabilities to.
And your fronts, ESG youre going to be quite.
The disadvantage.
Yeah, I would say are the flows that would be specifically attributed to our ESG capabilities and the quarter were around $4 billion.
And I'd say, notably we are the second largest ESG ETF provider in the United States. We have nine Etfs right now that are dedicated ESG Etfs and the United States, where we have about $9 $5 billion and.
AUM there.
At $4 billion is a global number and flows over the first quarter. So we are absolutely seeing real strength.
It just underscoring the importance, we all understand around ESG capabilities.
Area, where the bulk of it has been a direct real estate, where you could imagine.
And the other is really through our quantitative team.
The other area.
The balance of the dedicated ESG capabilities.
Great great great color. Thank you so much.
Thanks.
Thank you. The next question is from Robert Lee with <unk> You May go ahead.
Great. Thanks, and good morning, everyone.
And.
And maybe Martin you had spoken.
Okay.
All of the Memorial day.
Thanks Colin.
And also need.
Some technology investments and other Julien.
Dan.
And the roads and sold.
Andy.
Davidson.
Huge.
And where that is.
And the organization.
And even spoken language.
Williams.
Hum.
Relationships.
It ships from.
Cumulative strength.
Yeah. Good so.
As you point out.
And you'll remember smaller bolt ons around that technology.
Yes.
And it has all been pulled together over the past year that was the effort last year. It's now.
And the banners and Taylor flow and.
And where the success is really bad and it's.
More immediately as through something called vision, which is.
And the technology that is and.
Analytical tool that we work through our solutions team with.
And our institutional clients.
The next area, where we are looking to expand outside of the U K's and Directv financial adviser channel.
And try it again this will return and our retention beginning this year too.
And so we did take a year to pull the rest of the platform together and it will frankly be focused on the <unk> channel in particular.
And I mean.
And <unk>.
And then also which we touch them.
And then.
Yes.
Yes, Bill right now there's about.
$900 billion of AEP.
And within that platform.
And the core capability continues to grow.
And again.
Historical focus on yield.
And financial advisers has not changed and we think thats going to be Robert.
The future is for that platform.
Okay.
Okay.
Alright, those are my questions.
Thanks Ross.
Thank you. The next question is from Brennan Hawken with UBS you May go ahead.
Alright, Thank you and good morning. This is Adam Beatty and for Brennan wonderful up on the fee rate, which has trended fairly well recently, how would you characterize the exit rate. If you will from the quarter versus the blended average through the quarter was it kind of trending upward trending downward or what and also.
In terms of the pipeline and extra large low fee mandate.
Is the fee rate on that pipeline higher or lower than the current blend for the firm.
Yeah. Thanks, Adam.
Hard to decompose the trending of the fee rate exactly just given the puts and takes of how the calculation is done throughout the quarter, but I would tell you just generally speaking.
It probably.
And the puts and takes I would say, we're actually probably made the trending relatively stable. So if you think about what are the fee rates sort of the change and the first quarter fee rate net revenue yield ex performance fees relative to the fourth quarter and.
Lower day, count and the quarter as I mentioned impact net revenue yield by eight tenths of a basis point that was meaningful and.
And and money market fee waivers were pretty consistent through the quarter and that would have been about three tenths of a downward impact overall in the quarter now I would say baked into that was what we were experiencing and money market fee waivers and prior quarter. So it's probably about a six tenths of a basis point impact overall in terms of the fee waivers.
And the quarter to three times higher than the prior quarter.
Those were largely offset however by the positive impact of rising markets and net long term flow. So that's why I say I'm not sure the and the entry rate and the exit rate where that dissimilar given the nature of the puts and takes and side of the quarter.
And so I think as you think about it going forward and getting to I think probably where youre going with the pipeline as well and theyre going to be a couple of things that we think about as we think about the fee rate moving into the next quarter, one day count as less of a drag going and the second quarter. It's a very modest and I'll say very modest help with just an additional day.
As I mentioned, I think money market fee waivers and I think that impact will be consistent through the quarter and so I think that's going to be a bit of a neutral but negative impact.
And on an absolute basis.
And then looking at the pipeline and the pipeline being very significant obviously and absolute side. If I exclude this large significant Asia Pacific Index mandate.
The remaining pipeline actually looks pretty consistent with prior quarters, both in terms of absolute size.
And the fee composition and as we've noted in the past that the average fee rate on the institutional pipeline is below the firm average not significantly below but I'd say modestly below the firm average and it's been it's held quite steady for the last three or four quarters, and so I don't expect that to be.
A different impact bought this very significant sizeable win which will fund sometime in the second quarter will be a modest drag on net revenue yield and the second quarter more so going into the third quarter. When it is fully realized on a run rate.
Excellent makes sense. Thank you for the detail turning to alternatives and the flow outlook there.
And there's a few different cross currents.
Oh issuance last quarter, you pointed to some kind of routine dispositions and real estate.
But the pipeline looks pretty solid so I just wanted to get your thoughts on on how that looks going forward. Thank you.
And I'm, sorry, I missed the very beginning of alternatives on alternatives on the pipeline.
So it continues to be real estate and just be very very strong bank loans are combating.
Challenge last year for sure.
Uh huh.
And <unk>.
<unk> is really.
And the headwind within alternatives otherwise, it's been continuing to build out that pipeline quite strongly.
Yes, I don't think we would point to anything notable are sizable in terms of the pipeline or any any real differences as it relates to alternative.
Great. Thank you Alison and I appreciate it.
Thank you. Our next question is from Mike Carrier with Bank of America. You May go ahead.
Hi, good morning, Thanks for taking the question and you see.
And the next day, the expectation for rising rates and potential inflation, just wanted to get your sense and out of fixed income and balanced platform.
Listen to that backdrop, both in here.
Daniel performance and pack and in client demand.
Yeah look it's a great question and I think rising rates, you're probably hope helps our fixed income outside of the United States, obviously from institutional investors from that perspective.
I think it's really going to be the pace and the magnitude of the <unk>.
Rise of interest rates and if it's slow and steady I think.
And we'll be fine.
Some of the areas that will be.
And mitigate things large.
Bank loans and a lot of things that reset.
Yes, so right now we've really not.
Headwind emerge from the rising rates, but needless to say, we're paying close attention to it.
The other recent.
Recent increase.
I'll start with that.
Top client book, you've got it.
Alright, Great and then just quick follow ups on the institutional pipeline and trying to get a sense of what change you're driving a robust pipeline this quarter last quarter.
Over the last year.
And the investments and distribution and geographies strategies pricing.
Just because it's such a big shift relative to yes.
Yes.
Yes look.
The reality is it's sort of overnight success after from a multiple years of investments.
And it really is a combination of capabilities that we've had.
Can you just how we're mesh and ill skins clients around the world.
Really the solutions capability is really really important but you need solutions you need self indexing you need a range of capabilities.
And you have to have deep relationships with institutional clients and that's all coming through.
And the only thing I would want to maybe connect the dots. So we started talk about.
Some of the large.
Institutional.
A mandate sort of calm and thats very consistent what we've been talking about strategically where.
Every client that we deal with around the world and again not unique to us they are dealing with fewer money managers and want more from us and so that also includes a range of asset classes to create the outcomes.
So historically, we did not take our.
Indexing capability to institutional clients.
And needless to say, we've changed recently and it just creates a deeper better relationship with the clients. The reality is large institutions around the world are going to use passive capabilities and we want to be able to provide that along with the <unk>.
The rest of the range of capabilities, we have all the way from alternatives and the combination of all those things and that's really what's driving the change.
Great. Thanks, a lot.
Yes.
Thank you. The next question is from Bill Katz with Citigroup. You May go ahead. Okay. Thank you very much for taking my questions. This morning.
And one for you and I haven't talked about M&A, a little while to sort of what your latest thinking on when you look at your footprint, what if anything would make sense that you don't have and how you're thinking about maybe more aggressively leveraging the platform as you build more efficiencies.
Yes, you're right Bill we haven't talked about this last quarter or so.
Kidding.
Look our thoughts have not changed right I think.
Yes, it was really important for us to.
And obviously.
And complete what we did with Oppenheimer last year, obviously the pandemic.
And it didn't help getting off on.
Great.
Start after that but if we look at the capabilities of the firm right now.
We feel like we have most everything we need and the things we would probably pay attention to would be.
Areas, where there could sort of be bolt on capabilities largely probably.
And.
And areas that we want to continue to expand that could be around credit and could be around infrastructure.
So I hope Bill Yeah. That's helpful. And then maybe just my second question leads into that and just wondering if you could maybe expand your comments a little bit on what you're doing.
Deep and your opportunity set and the private markets.
Yes, so that's why it's growing so look.
We've been extending the real estate capability and to infrastructure, but it's very early days for US right. So it's an area that's very competitive and it's one that we want to be.
Credit event.
Off of the bank loan capabilities and continue to build out private credit.
And the direct lending capabilities private credit is going quite well the distress capability in particular and also the team and.
Direct lending.
And it's been building a nice track record is once you get the scale, though so that's the areas that we've been focused on.
Thank you.
Yes, Thanks Bill.
Thank you. The next question is from Mike Cyprus with Morgan Stanley You May go ahead.
Hey, good morning, Thanks for taking the question here.
Just maybe turning back to your investment spend and I think you had mentioned on the expense saves and Thats net of the investment spend and the business. So just hoping you could maybe help quantify maybe how much you're investing back in the business or how do you think about that in terms of points on the margin and how would you characterize that piece of investment spend today versus what you had been doing say two to three years ago.
And how different might that pace b as you look out over the next two to three years.
Okay.
Well, let me start with we're not quantifying.
What's been reinvested.
And what we've what we put forth is the $200 million net target and that's really what we're tracking to and as we think about the reinvestment it really is.
One it can be rather difficult to trace and track the <unk>.
<unk> reinvested that absolute level, because we're always investing and that business, but what we're looking to do is really.
Make some changes that are discrete.
Line items of costs that we can take out and again create more than 200 million. So that we do have some gross savings to be able to reinvest back into the business and the way we're thinking about it is really about driving operating margin.
I can let Marty comment on the past and some of how the thinking may differ and prior to my time at Invesco, but I would tell you. Our focus now really is on delivering that profitable growth and so as we think about reallocating.
Really thinking about how do we reallocate some of those savings into areas, where we think.
When we get the fastest growth and really drive that margin enhancement and I think you see some of that margin enhancement and what we've been able to deliver over the last two or three quarters and I don't know that we can deliver that margin enhancement at that magnitude quarter after quarter into perpetuity, but again it gives us the opportunity just in.
Really leverage the scale that we think we are starting to create across a real diversified platform and making sure that our investments are and those key capabilities that really dropped profitability to the bottom line.
Martin.
It will be quite simple so if you.
There is on the highlight slide.
We've talked about.
The focus on investment solutions and China.
Equity fixed income.
Private market factors and indexes and those have been the areas, where we've been just laser focused EMEA and the net beneficiaries of that also underneath it really everything digital as you would imagine so.
All of our digital capabilities as we face off against client that is just clients, which has changed quite dramatically from everybody last year Joseph answered quite dramatically and I think also what youre seeing really and the platform to make it much more efficient and effective and.
Alpha Nexgen is an example of that and it's beyond just.
More efficient more effective it's really moving everything to the cloud and also creating a data capability, that's really enhances our ability to get all of the information we need to make better decisions. So it really is quite focused.
And I think it's showing up and the results.
Great. Thanks, and just a quick follow up with the improving performance trends that we're seeing maybe you could just remind us and how much.
Is eligible to earn a performance fees, which strategies would you say the largest contributors there ISI and remember I think in the past maybe with real estate and just given the improving performance trend. How are you thinking about performance fee revenues for this year compared to what we've seen in prior years.
Sure I'll take that.
Our AUM thats eligible to earn and performance fees around $58 billion and we tend to see in terms of what comprises that AUM that is largely real estate.
Of contracts that would relate back to.
China Asia Pacific.
Broadly speaking, but specifically China.
And so as I think about it going forward. It is just inherently difficult to predict the level of performance fees given it varies by contract.
And by client relationships.
I really can't give you a lot of guidance there I would point to the fact that fourth quarter performance fees were <unk>.
North of $70 billion as you know as I look at performance fees this quarter pretty consistent to what we saw and the second and third quarter of last year.
And I wouldn't necessarily suggest that that is what you should expect every quarter because it is so difficult to predict but I do think looking at some of those historical trends as at least <unk>.
<unk> and somewhat helpful.
Great. Thank you.
Thank you. The next question is from Chris Harris with Wells Fargo. You May go ahead.
Great. Thank you.
So a record quarter for flows.
Flows improved.
A lot of different areas.
Yes, the one one area that was a bit of a headwind was the UK I'm wondering if you can talk a little bit about you know.
What drove the weakness and the UK this quarter and how you're feeling about the outlook.
Yes, so look.
K equities continues to be a headwind.
Yes.
For a period of about one.
Just the asset class, which were historically larger.
And I'm sure within the asset class and historical performance.
The performance is still a headwind that said.
We've made the changes to the portfolio managers and I feel really good about the teams there.
It's still early days for them, but that is co leader.
And then focal point there.
Okay got you and and one quick follow up for Allison other.
Other revenue.
Was up quite a bit and the quarter, what drove that and how should we be thinking about the run rate for that line item.
Yes, it was up quite a bit.
And it's largely due to higher <unk> and front and transaction fees.
It is almost all of other revenue is transaction based as opposed to AUM or volume based and so it can be I would say as you think about a run rate a little bit.
More difficult to predict I'm just.
Double checking that yeah I mean.
I think we had a and.
Unusually large quarter and there were some specific items in there as it relates to some of the UIT and front and transaction fees I don't know that you should expect that same level of revenue quarter to quarter.
Got you and thank you.
Thank you and our last question comes from Glenn Schorr with Evercore you May go ahead.
Thanks, So much I just wanted to ask and industry level of follow up on on the M&A backdrop.
Charlie you guys, obviously have done a much much better the industry flows had been better margins up and down better markets are Wap and valuations have Republic from.
And I'm curious if at all if that changes the industry narrative and consolidation team takes any of the pressures for that need for scale or <unk>.
And you've seen.
A continuation of what we've seen so far in terms of bigger is better.
Yes look I don't think it does.
And it provides relief for.
Yes, the sector, if you would say.
The rising tide rises all boats with reality.
Of where the industry is has not changed I mean has all the characteristics of a mature and industry where.
And again fundamentally I mentioned.
From a couple of minutes ago every client is expecting more from money managers. They are.
Working with fewer money managers around the world and.
You really need scale and multiple levels across the organization, whether it be and investment capabilities operational scale and the ability to invest and technology.
And just not gone away and so yes, there's going to be consolidation, but it's going to be two ways. As we've talked about in the past is going to be inorganic protocols. So organic literally just money, leaving to go to those firms that are performing better for the clients and.
Sure.
Still the other reality of M&A within the sector. It's hard I mean, you really need a skill set to be successful at it and Thats still even if you do have those skills is just art and.
And you've got to be really focus and be able to execute it. So I don't think the.
And the strategic dynamic has changed.
And frankly.
I appreciate that thanks Martin.
Yes.
And that one.
Question.
Operator, thank you and on behalf of Alex and myself. Thank you very much for participating and thanks for the questions and.
Well.
With everybody very soon and thank you.
Thank you that does conclude today's conference. Thank you all for participating you may now disconnect.