Q2 2021 Invesco Ltd Earnings Call
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.
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 10-K and subsequent filings with the SEC Invesco makes no obligation.
And we'll update any forward looking statement.
You 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 as our second quarter results conference call.
<unk> will be in a listen only mode until the question and answer session at that time to ask a question Press Star..1 this call will last 1 hour to allow more participants to ask questions. Only 1 question and a follow up can be submitted per participant today's conference is being recorded if you have any objections you may disconnect.
All part 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. Thank you operator, and thank you everybody for joining us.
We.
We have reached the halfway point in the year and we're continuing to see strong momentum in our business as you can see from our results. We reported this morning.
I begin I'd like to take a minute to recognize a hard worker per team at invesco like most everybody.
<unk> been working at a work from home or a hybrid environment for Martin.
On a year now.
And they have achieved these results.
Connected challenging environments.
Thanks, James for the dedicated focus from adaptability during this time.
And with the success of the virus many of us have been from.
Back to the office.
Working together for the last few months and I can tell you. It's good to see our colleagues once again.
And.
We are different stages of reopening of Robert.
Around the globe and 1 thing that I hear from everybody that is able to get back to the offices how great. It is to see 1 another and work together and I will say, we're at our best when we're working together collaborating innovating.
And I'm excited about the future as we continue to open our offices to more employees and welcome them back and as always.
So we're very excited we'll follow the status of Covid and local guidelines as our transition back to the office meeting client needs, helping them mature continued health and wellbeing of our employees.
So now let me turn to the results from if you're so inclined to.
Following the presentation I'm going to start on <unk>.
Slide 3 which is the highlights for the.
Quarter, we achieved a new record in the second quarter for long term net inflows totaling $31 billion.
This follows net inflows of $24.5 billion last quarter ends.
Of the $18 billion from the second half of last year growth was led by net inflows into institutional Etfs fixed income in various alternatives.
Always liabilities.
You can see on slide 3 the key capability areas.
Where we have scale investment readiness competitive strength growth growth again in the quarter. These are areas, where our investment performance is strong we're highly competitive and well positioned for growth.
Looking at our EPS, excluding the Qs that generate.
Generated net long term inflows of $12 billion during the quarter net.
Net long term inflows from alternatives during the quarter were $4.3 billion, including strength in our private markets business.
We launched <unk> during the period, raising $1 billion and generated net inflows into our real estate business over $1 billion.
We continue to focus and invest in our alternative capabilities of space.
What we also see the benefit of our partnership with Massmutual, which we highlighted last quarter mass mutual has committed over $1 billion to various alternative strategies materially increasing the speed, which you can get to market for the benefit of our clients.
Continue to innovate.
Strategies for retail investors through the launch of products, such as <unk> and the partnership we announced with UBS and which we will provide bespoke global property investment services.
Management clients of UBS, and Switzerland, other parts of EMEA and Asia. We also have $5 billion from direct real estate capital available for deployment.
We had net long term inflows of $8.8 billion into active fixed income and within active global equities are $53 billion developing markets bond a key capability that.
Came up with the Oppenheimer combination continue to see net inflows of nearly $1 billion during the quarter.
Second quarter flow.
Flows included net long term inflows of $3 billion from greater China, and our Chinese joint venture continues to be a source of strength and differentiation for us as an organization and.
In addition, our solutions enabled institutional pipeline accounts for 35 per cent of the pipeline at quarter end. This following the fund.
Large passive mandate from Australia in the second quarter, which was enabled by our solutions team.
Alison will provide more information in a moment on flows the pipeline results in the quarter, including the continued progress towards our net savings target, but I would note. The growth. We are experiencing is driving positive operating leverage producing an adjusted operating margin of 40.
<unk> 5 percentage for the quarter strong cash flow is being generated from our business improved our cash cash position, helping build a stronger balance sheet and improving our financial flexibility for the future.
Industrial scale investment readiness competitive strength.
<unk> as well going forward and we continue to focus our efforts.
41 different positive outcome clients, while driving.
With that I will turn it over to Alison Watkins the results in greater detail.
Thank you Marty and good morning, everyone.
Thank you I will turn to slide 4 our investment performance was strong in the second quarter with 72% of actively managed funds in the top half of peers or beating benchmark.
Benchmark on a 5 year and a 10 year basis net.
Collected continued strength in fixed income global equities, including emerging market equities and Asian equity all areas, where we continue to see demand from clients globally.
Moving to slide 5 we ended the quarter with 1525 trillion.
Okay.
Of the 1.
$21 and AUM growth approximately 66 billion as a function of increased market values are.
Rectified platform generated growth in flows in the second quarter of $114.4 billion.
82% improvement from 1 year ago net long term inflows in the second quarter were $31.1.
$100, representing 10, 6% annualized organic growth.
Active AUM net long term inflows were $2.1 billion in passive AUM net long term inflows were $29 billion.
The retail channel generated net long term inflows of $9.5 billion in the quarter driven by positive ETF flows.
This represents a $24.1 billion improvement in net long term inflows from 1 year ago, driven by significant improvement in equities in the Americas.
The institutional channel generated net long term inflows of $21.6 billion in the quarter augmented by the funding of the nearly $18 billion, Australia passive mandate.
1 billion looking at retail net inflows our ETF, excluding the <unk> generated net long term inflows of $12.1 billion.
Our global ETF platform again, excluding <unk> again capture flows in excess of its market share of AUM in the second quarter and for the first half of 2021.
Net ETF.
<unk> inflows in the United States included a continued high level of interest in our S&P 500 equal weight, ETF, which generated $2.6 billion in net inflows in the second quarter following $4 billion of net inflows in the first quarter.
Looking at flows by geography on slide 6 Youll note that the Americas had net long term inflows of $5 billion.
Quarter.
Driven by net inflows into Etfs, various fixed income strategies private market Clo's and the direct real estate net long term inflows that Marty mentioned.
Asia Pacific again delivered another strong quarter with net long term inflows of $28.3 billion.
Net inflows were diversified across.
The region nearly $18 billion was from the large passive Australian mandate that funded from our institutional pipeline in may.
The balance reflects $4.8 billion of net long term inflows from Japan, $3 billion and inflows from greater China of which the majority was from our China JV.
$1.8 billion from Singapore.
Poor and the remainder arising from other areas across the region.
Yeah.
Long term inflows for EMEA, excluding the U K, we're $1 billion driven by retail flows, including net inflows into alternative, particularly our U S and European senior loan funds.
ETF net inflows in EMEA.
We're $2.2 billion in the quarter.
And finally, the UK experienced net long term outflows of $3.2 billion in the second quarter, driven largely by net institutional outflows in multi asset and investment grade capabilities.
$2.4 billion of these net long term outflows relate to our global targeted return capability.
Which has $10.2 billion globally in AUM at the end of June.
The overall UK net long term outflows in the second quarter were an improvement of $2.7 billion as compared to the first quarter net long term outflows of $5.9 billion.
This improvement was driven by U K retail primarily inflows.
Flows into the European equity fund and lower net outflows during the quarter across a number of fixed income and U K equity capabilities.
Turning to flows across asset classes equity net long term inflows of $15 billion reflect a good portion of the Australian mandate and Etfs, including our S&P 500 equal weight ETF that I'm.
Yeah.
We continue to see broad strength in fixed income in the second quarter with net long term inflows of $13.6 billion.
Drivers of fixed income flows include institutional net flows into investment grade strategy and retail net long term inflows into various municipal funds and fixed maturity product in Asia.
I'm not sure it's worth noting that although we did have fund launches in China in the second quarter. They were not at the pace of what we experienced in the first quarter you would see this largely reflected in the $9.1 billion decrease from the net flows in the balanced asset class during the quarter to net outflows of $1.8 billion.
Our alternative asset class for many different capabilities and this.
If I could on the flows we saw in the second quarter.
Net long term flows in alternatives improved by $4.5 billion over the first quarter, driven primarily by our private markets business through a combination of inflows from the newly launched CLO direct real estate senior loan and commodities capabilities.
Included in these alternative flow results.
Results is also the GTR net outflow that I just noted.
If you exclude the global GTR net outflows alternative net long term inflows were $7.2 billion quite significant in the quarter.
Moving to slide 7 our institutional pipeline was $33.3 billion at June 30th reflecting the funding.
<unk> of the large passive indexing mandate in Asia Pacific assisted by our custom solution advisory team.
Excluding the impact of the $18 billion passive mandate in the first quarter. The pipeline has increased in size and remains relatively consistent to prior quarter levels in terms of assets and fee composition.
Overall, the pipeline is diversified.
Fight across asset classes, and geographies and our solutions capability enabled 35% of the global institutional pipeline and created wins and customized mandates.
This has contributed to meaningful growth across our institutional network warranty, our continuing investment and focus.
Turning to slide 11, you'll note that our net Rev.
Revenues increased $52 million or $4.1 per cent from the first quarter as a result of higher average AUM in the second quarter.
The net revenue yield excluding performance fees with $34.8 basis points, a decrease of 9 tenths of a basis point from the first quarter yield level.
The decrease was driven mainly by asset mix shift includes.
Q2, 2 and money market average balances as well as the impact of the large parts of Australia and mandate that funded in May.
This decrease was partially offset by the improvement in markets in the quarter incremental impact relative to Q1 of higher discretionary money market fee waivers was minimal in the second quarter.
Adding higher impact on the net revenue yield for the second quarter was 7 tenths of a basis point.
We do expect fee waiver to remain in place for the foreseeable future until rates begin to recover to more normalized levels.
Oh.
Total adjusted operating expenses increased 1.9% in the second quarter of 2000.
A full $24 million increase in operating expenses.
It was mainly driven by variable compensation and marketing higher variable compensation as a result of higher revenue offset by the reduction in payroll taxes and certain benefits from the seasonally higher levels that we experienced in the first quarter.
We also recognized savings.
<unk>, we also further recognize savings in the quarter, resulting from our strategic evaluation.
Marketing expenses increased $9.8 million in the second quarter, mainly due to seasonally higher levels relative to the first quarter, which is typically the low point for marketing spend annually.
We also reevaluated the timing of various.
Branding campaigns and launch targeted initiatives in the quarter across the globe.
Operating expenses remained at lower than historic activity levels due to pandemic driven impact of discretionary spending travel and other business operations. However, we did resume some client activity and business travel late in the second quarter, which is reflected in both marketing.
And G&A expense.
As we look ahead to the third quarter, our expectations are for third quarter operating expenses to be modestly higher compared to the second quarter, assuming no change in market and FX levels from June 30th we.
We expect that the higher AUM levels, driven by net inflows and market improvement in the second quarter will have a modest.
We have our impact on both revenues and associated variable expenses in the third quarter.
We also expect a modest seasonal increase in marketing related expenses, that's been typically increases in the third and fourth quarters.
1 area that still more difficult to forecast at this point is when COVID-19 impacted travel and entertainment expense levels will begin to normalize.
Karen you're engaging in more domestic travel and in person engagement and we do expect to see continued modest resumption of these activities across the third quarter.
Yeah.
Additionally, our U S. Mutual funds board has approved certain changes to the pricing of transfer agency services that we provide to our funds.
As a result, we anticipate that our outsourcing.
Sourced administration path, which we reflect in property office and technology expenses will increase by approximately $25 million on an annual basis.
Offsetting this will be a corresponding increase in service and distribution revenues, resulting in a minimal impact to operating income.
We expect this new pricing structure.
To go into effect in the third quarter and to be fully in place by the fourth quarter.
Oh.
Moving to slide 9 we update you on the progress we have made with our strategic evaluation.
As we've noted before we are looking across 4 key areas of our expense base, our organizational model, our real estate footprint management of third party spend and technology.
<unk> operations efficiency.
Through this evaluation, we will continue to invest in key areas of growth, including Etfs fixed income, China solutions alternatives and global equities.
In the second quarter, we realized $7.5 million in cost savings.
$2 million of the savings was related to compensation expense and $5 million related to property.
And technology expense.
7 and a half million dollars in cost savings or $30 million annualized combined with the $95 million in annualized savings realized through the first quarter of 'twenty, 1 brings us to $125 million in total or 63% of our $200 million net savings expectations.
As it relates to timing, we still expect approximately $150 million or 75% of the run rate savings to be achieved by the end of this year with the remainder realized by the end of 'twenty 2.
Of the $150 million of net savings by the end of this year, we anticipate we will realize roughly 70% of the savings through compensation.
<unk> expense, the remaining 30% would be spread across occupancy tech spend in G&A.
We expect the total program savings to be 65% and comps and compensation with about 35% spread across the other categories.
With $125 million of the expected $150 million of net savings by the end of this year already.
In the quarterly run rate the degree of net savings per quarter will continue to moderate going forward.
In the second quarter, we incurred $20.20 million of restructuring costs in total we recognized nearly $170 million of our estimated $250 million to $275 million in restructuring costs that were associated with this program.
We expect the remaining transaction costs for the realization of this program to be in a range of $85 million to $105 million through the end of 2022.
As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.
Moving to slide 10.
Adjusted operating income.
With $38 million to $541 million for the quarter driven by the factors we just reviewed.
Adjusted operating margin improved 130 basis points to 41, 5% of compared to the first quarter.
Most importantly, our degree of positive operating leverage reflected in our non-GAAP results was 1.8 times for.
The quarter underscoring our focus on driving scale and profitability across our diversified platform.
I'll also point out that our adjusted operating margin back in the third quarter of 2019, which was our first full quarter. Following the Oppenheimer acquisition was 49%.
At that time, we reported a net revenue.
Revenue yield excluding performance fees of 47 basis points.
At the end of the second quarter of 2021, our net revenue yield ex performance fees was 34.8 basis points.
Yet our adjusted operating margin was 41, 5%.
We have been building out our product suite to meet client demand and client demand has been in lower.
Your fee products, we're focused on aligning our expense base with changes in our business mix, enabling the firm to generate positive operating leverage and operating margin improvement.
Non operating income included $42 million and net gains for the quarter.
Compared to $26 million and net gains last quarter, primarily from increased unreal.
Unrealized gains on seed money and co investment portfolios.
The effective tax rate for the second quarter was 22, 8% as compared to 24% in the first quarter.
The effective tax rate on net income was lower in the second quarter, primarily due to a change in the mix of income across taxing jurisdictions.
Our non-GAAP effective tax rate to be between 23, and 24 per cent for the third quarter. The actual effective rate may vary from this estimate due to the impact of nonrecurring items on pre tax income and discreet tax items.
A few comments on slide 11, our balance sheet cash position was $1.3 billion at June 30th.
And approximately $750 million of this cash is held for regulatory requirement.
Our cash position has improved considerably over the past year, increasing by nearly $350 million largely driven by the improvement in our operating income.
Our debt profile has improved considerably as well with no draws on our revolver at quarter end.
We estimate as a result, we have substantially improved our net leverage position.
During the quarter, we repaid the remaining $177 million forward share repurchase liability in April and there are no remaining share repurchase contract liabilities.
In terms of future cash requirements.
In the second quarter we.
Good and adjustment to the MLP liability associated with the Oppenheimer purchase reducing this liability from our original estimate of nearly $385 million down to $300 million.
We anticipate funding this liability in the fourth quarter of 'twenty 1.
While we do anticipate a degree of insurance recovery.
We've recorded to the matter the insurance claims process is inherently complex and we do not have an update at this stage as to timing or size of that recovery.
Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility.
In summary, we continue to see growth in our key capabilities, we remain focused on executing.
Really in the strategy that aligns with these areas, while completing our strategic evaluation and reallocating our resources to position us for growth.
And finally, we remain prudent in our approach to capital management, we're in a strong position to meet client needs run a disciplined business and to continue to invest in and grow our franchise over the long term.
With.
The Cutie Mark the operator to open up the line for Q&A.
At this time, if you would like to ask an audio question. Please press star 1 you will be announced prior to asking your question. Please pick up your handset when asking your question to withdraw your request. Please press star 2.
Our first question comes from.
That all onshore with Evercore ISI your line is open.
Hi, Thank you very much.
Wonder if we could talk a little bit about private markets.
Can you talk a little bit about what went well in the second quarter, but curious if we could maybe get a bigger picture view of.
What has the highest.
Good potential what specifically you're doing on the retail side to drive.
Growth and maybe I'll.
Take a chance to see how what's your vision of how big the segment can can be.
Yeah.
Thank you for that.
So obviously, it's been an area of focus for.
Most of the industries.
Our principal driver right now has been real estate is very strong.
Global real estate group direct real estate.
From a more recent development since then youre trying to get that into the retail channel.
Which is.
Non public right.
Yes.
Smells available in the U S. It's early days.
Also what was funded by mass mutual for about $400 million, which was really important.
Do you think that has great potential.
And the next year or so assets in the marketplace based on the historical performance.
Our real estate group. The other was really a venture with UBS and offering same thing direct real estate with some listed real estate securities.
Through.
Switzerland.
Other parts of EMEA Asia Pac so those seem to be.
Immediate opportunities and quite frankly, some of our private credit.
It has more recently been.
Gaining attention.
Institutional investors they have a very good track record.
With that track record and are now seeing the follow on the vessel.
We look at this is very.
Very important part of our business is reasonable.
Okay.
Thanks.
From a street just a quick 1 for Alex from House and you you you mentioned about the modest pick up on the expense side and 3 Q.
Well, if we could just I don't know if you're able to level set up from how much below normal are we.
I appreciate you don't know normal travel normal spend is happening, but if we just said you know right.
Maybe you have generally normal expenses with really strong markets and flows but not so normal expenses can you give us a way to dimensionalize that.
Yes.
It's a hard 1 because we have to look back yet to where we were in the last half of 19 to try to figure out what.
They might've been I'm not sure that that's normal going forward and I think that's the real challenge I'd say.
We're probably.
$10 million to $15 million per quarter below what we would've seen in the last half of 2019 and I don't expect we'll see all of that come back.
Back just when we get back to whatever some permanent state is and you know I think we're a ways off from that just given the international travel restrictions that looked like they're going to be in place for a while.
But I do think we are.
We're certainly starting to see a resumption of domestic travel within regions that are allowing it and were.
Normally seeing as we reopen offices, some pickup and just client activity overall so.
Probably a good estimate as to think about being maybe $15 million below what normally used to be.
And some element of that will come back over time.
That's awesome. Thank you Phil I appreciate.
Thank you. Our next question comes from Ken Worthington with J P. Morgan Your line is open.
Hi, Good morning, Thanks for taking my question Super High level, maybe first for you Marty.
As you look to the future maybe over the next 3 to 5 years, what do you see as the most significant factor that's influencing.
Action, you're taking invesco I think if I asked that question, maybe 5 years ago, you might have said something like factor based investing but what are your thoughts today.
Yes.
China is a good question I think.
You've raised this quarter. If you look at the firm right now a number of the investments that we've made over the years are coming.
Through in a very material way and probably.
First and foremost the impact of China, and Youre, just seeing it just continues to be a source of strength for us as an organization and quite frankly, I think by many estimates.
Within asset management globally, we've seen things it could be.
Explain half of all the flow was within our industry in the next 5 years, whether that's right or not I don't know, but what I can say, it's a major.
Factored the other element is really.
Our solutions is embedded in almost all of our client engagements.
Crucially, we've called it out you'll see that.
But by the way it is.
Also true in retail engagements that were seeing.
And you mentioned factors, we talked about that 5 years ago, It's a huge part of our.
ETF business and frankly, our index business and it's going to continue to be an important part of what we do.
As you do know just recently.
Recently, the last 2 years, we've taken.
That factor capability indexing capability to institutional clients and we get it.
With a very strategic view with recognition that.
Clients are using fewer and fewer money managers and they want the totality of the capabilities coming from money managers.
<unk>.
You've seen some of the impact most recently.
The <unk> win in Australia, but what you'd really do is you become fairly important clients holistically. So.
Those would be the biggest trends that I would point to and I think.
The reality, it's actually happening right now so.
So.
That's my personal perspective.
Great. Thank you and then maybe Allison.
You mentioned U K outflows, including some outflows from GTR does the decline in GTR assets lowered the capital that you're either required to operate within Europe or vault.
Year to hold to operate in Europe or is the growth Els elsewhere in Europe or the U K mitigating these declines.
Unfortunately, the short answer to that question is now a U M. A decline there it does not impact the regulatory capital.
She told it's a little more complicated than that.
Okay, there's a little bit more on.
The P&L specifically expenses.
It does.
Level.
Okay, great. Thank you very much.
Thank you. Our next question comes from Robert Lee with <unk>.
Your line is open.
Great. Thanks for taking my questions Marty a question for you on greater China. So.
Some of your competitors have opened up holding on opening day OEM.
Wholly owned subsidiaries others have been able to.
On the.
Majority stake in.
We have talked about it for a while but can you update us on where greater China stands if you're moving to.
At least economically taking oh.
A majority stake in new operational use.
Just bear with us.
Yes, great.
So.
I know you said might be somewhat repetitive, but sort of remind everybody. So we own 49% of the joint venture right now.
Our.
Partner 1 on power, we have been in conversations for 2 years to take a majority stake.
There has been an agreement in principle, but it has not moved forward 4.
Various reasons COVID-19 being 1 of them.
Frankly.
That would be the principle reason, but it has not hurt us I think this is really important thing. It's a contrast are positioned to others. We've had management control since the beginning of the adventure and assets really is what separated our success as compared to our competitors. So we literally operates as 1 entity.
In China.
From the retail market share invesco, great wall, but institutionally.
We'll go to large institutions with the retail platform and our institutional platform. So again, that's really what's enabling the growth. We also have a wholly owned subsidiary focused on other elements within China and I think.
<unk> looked at.
<unk>.
Where others are I think what's important to look at as separate announcements from actual hasnt happened.
Generally it's slowed down.
Over the last 18 months from most institutions trying to get to market.
With some of these new undertakings.
Okay.
And maybe my follow up on it.
No I haven't talked about too much for awhile, but I.
I guess a year or so ago.
You launched on the city platform I saw the other day I think it was April and start using the platform you maybe update us on where that is.
It's meeting your expectations.
As it rolls out do you see that contributing.
New product sales.
Yes, so right now there's a trillion dollars in assets under advisement, so you've seen some nice growth.
State farm is.
An important.
Addition, obviously, it's very early.
If you lose and type of relationship with Citi.
Really the focus of the passenger was really pulling together the different elements of Intel a flow and creating sort of a single.
Operating platform to go to the clients Holistically and Youre now starting to see the outcomes of that.
<unk>.
There'll be more specific sort of events.
Our material enough to have that conversation, but.
Again, we're starting to get the momentum back in the business and again last year slowed down some just with the COVID-19 environment, but.
Telephone.
Great. Thanks for taking my questions.
Yep.
Thank you. Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great. Thanks.
Good morning folks.
If I can just start with might be.
Good morning.
The organic base.
Growth as compared with your organic growth if you could just maybe I'll just touch on.
What do you think the outlook for the advisor or prevent it from the net revenue yield.
Coming into the third quarter, given the shift, giving given the strong growth in passive versus active in the second quarter and you know can you benefit at all.
Lower money market fee waivers given the.
The reason I owe you are right.
Yes.
So I mean, I would say a couple of things just keeping in mind. The biggest drivers of net revenue yield quarter to quarter as you're only going to be the mix of flow.
And that's really just a function.
<unk> of client demand and making sure and again, we feel like we have we're driving scale across a really well diversified platform. So we're going to capture demand where demand exists.
But that mix will certainly have an impact on net revenue yield and market impact obviously is going to be always impactful on any given quarter in the money market waivers.
As I noted the money market waivers right now in this quarter.
For about 7 tenths of a basis point of a drag and in terms of where do we see that going.
It would be helpful. Moving in fed funds would certainly be more impactful, but it isn't perfectly correlated as just that because theyre competitive.
With dynamics as well and so we're going to be thoughtful about.
We're positioned vis vis the competition and making sure we're being thoughtful and smart about these waivers share.
Sharing in them with our distribution partners across the institutional.
Element of our waivers.
I would note our money market waivers or kind of 80% to the institutional.
<unk> channel at about 20% to retail.
So we are able to share.
Some of these waivers as we work with our partners to ensure our clients are really getting the outcomes that they're expecting.
So coming back to net revenue yield I do think we'll probably see a modest sort of grind down but what I'd.
I'd focus you on is some.
Some of the comments, we are making as we look back at 2019.
Net revenue yield 6 basis points lower than it was a couple of years ago and yet our operating margin is higher at 41.5 per cent.
So.
I recognize net revenue yield something that we want to make sure we get into <unk>.
But really we don't think about net revenue yield quarter to quarter, we think about revenue and driving positive operating leverage across our platform and I think our performance over the last year, especially really dry it really underscores our ability to do that.
Yeah, that's a good point and thank you for that and then just unsustainable product flows.
Either either mark or your Alison could you talk a little bit about.
First of all.
How much did sustainable products.
Active and passive dry foods in the second quarter and then what's your.
And what you would classify sustainable products, it's an update an update on that and then just in terms of.
The game plan for product launches going forward in this area, even if it's even if you can sort of generalize what it is.
Strategy.
Make a couple of comments from some sort of sustainable ESG capabilities, and then I'll let.
What else pick up so obviously for US we look at ESG is incredibly important.
What we do and.
We are absolutely focused on integrating ESG capabilities across the whole organization 75 per cent of all our assets now have integrated ESG.
Within our capabilities I think as you know, it's really been driven.
EMEA in the first instance.
Absolutely businesses have seen and we think it is throughout the totality of our organization and if you look specifically at.
Dedicated ESG assets under management is about $52 billion today.
We continue to see growth there.
If you look at our Etfs.
If 1 of the highest.
Market share is up.
ESG Etfs.
The good track.
Track record again, they'll continue to see flows.
<unk> of that so but again if you look at this is just an absolute imperative for us to get right.
And throughout the organization, whether it be how we manage money, but also the capabilities from the marketplace and literally working with.
With clients to ensure that.
We're hitting.
What is important to them.
We've worked through those.
Yes, I mean, I think Marty head on most of it.
In terms of flattish for the quarter they were softer than the first quarter I think it was a little less than $2 billion, we saw quite a bit stronger.
In the first quarter, which really I Wouldnt say there is anything specific driving the lower flows in the second quarter other than perhaps some market headwinds, we certainly saw them.
From some highs in the first quarter and a little bit of a pullback from that could be could point to just some post election highs that were driving the first quarter and some modest shifts from growth.
While our ESG capabilities continue to be quite strong in terms of bad performance and demand and as Mark noted we are capturing more than our fair share of the market in terms of.
Flows into these ESG capabilities.
Great Great. Thank you for the update.
Thank you.
Our next question comes from Dan Fannon with Jefferies. Your line is open.
Hi, Thanks, good morning.
Wanted to follow up on your comments around balanced I think Allison you mentioned there were fewer fund launches.
Obviously, you had some outflows but performance is good so maybe if you could give us an update on kind of the outlook for that category.
Hey guess, what really drove the real strength in the first quarter, where the fund launches in China in particular, we had.
<unk> a high water Mark just given the strength of those launches both in terms of the size and performance overall.
I think inside of China on the JV.
Robert Seventh fund launches again in the second quarter I think about 5 of them were balanced.
Again, driving about $1 billion in flows.
<unk> continues to be strong overall.
Just some lumpiness quarter to quarter, I wouldn't necessarily point to anything specific beyond that.
We have filled the woman she's doing a strategic evaluation and understand the targets and kind of where you sit today, but I'm curious as you've kind of gone through this in the areas of investment that you're looking to put some of those savings in some of those buckets. If theres been any real changes from your original expectations, but you're allocating more dollars to we're seeing more growth or it seems like.
We're getting the same kind of message each quarter, but curious if there's any more detail around things that might be different than when you originally outlined it.
I'll start and let Marty chime in there I would say you are getting the same message each quarter, because our strategy isn't changing and I think it's that focus on our strategy and the continuity of that.
Okay.
The consistency is something I hope, you'll pick up on because theres consensus consistency and our focus on our approach and the key areas of investment. These key capabilities are things that we really do believe are the areas, where we need to be invested.
Ahead of client demand, we're seeing client demand in some of these capability today, but we expect there to.
Well tenured demand and we're going to stay focused on those key capabilities in terms of changes you know I don't know that I.
I would say there is anything specific that would cause us to change we're always going to see sentiment may soften in China, a little bit I don't think that takes away from our focus or our belief that that is a.
To become a.
A key growth area for us despite what market sentiment or.
Political.
Noise may be out there quarter to quarter, our solutions capability, I think whereas convicted as ever.
That is a key capability for the future and I think you really see how that is driving.
Our growth.
The Institute.
Additional pipeline and overall.
Our ETF capabilities continue to be real drivers of growth as we are capturing.
More than <unk>.
Our market share in terms of flows I think our capture of our flows this past quarter was somewhere around 4.2% our market share is 2.7 per cent, but even more important than that is our.
Capture of the revenue pool, we captured about 8% little north of 8% of the revenue pool of flows in Etfs over the last quarter.
I think really points to the strength of our capabilities their how their position. They are some of the higher fee capabilities relative to the ETF universe, and there's real demand because they're differentiated in.
Terms of performance and outcome.
So you know I don't know that we've had any surprises as I think back over the last year.
It's been a supportive market and this past year and that's helpful.
But that doesn't deter our focus on making sure we're aligning our cost base.
To deliver exactly what you've seen us deliver on this past year, which is.
Real strength in our operating margins and operating income growth.
That's well said Dan.
No mistake when you look at the second quarter highlights, where we call out per key capability areas. They haven't changed because that's where we see that as the greatest opportunity for us as an organization to align with some of those macro trends that we've talked quite a.
A few minutes ago and it has been disproportionate investment from us and also disproportionate results. So.
Youre not going to change much quarter to quarter.
Thank you.
Yes.
Thank you. Our next question comes from Brennan Hawken with UBS. Your line is open.
Hi, good morning, Thanks for taking my questions.
When you think about the success that you've had with your solutions offering.
How do you build on that strength and how do you maintain differentiation or are you seeing competitors try to emulate the success that you've had there.
And how do you step.
Stay a step ahead.
And also.
Is it how much of this business actually.
<unk>.
Whether that be.
A few quarters or a few years subs.
Subsequent.
I know it's early but.
Any stats you can provide or estimates or sense you have on that.
Yes, let me.
So it's a great question and.
Yes.
I can.
Describe what the competitors are joined but our approach was a little bit different from a standpoint of we started with the recognition of any number of years.
Years ago that our clients wanted a broader range broad range of investment capabilities and that's what we've been building out as we talked about.
Importantly, what we did building our solutions team as it sits on top of the investment team. So it does not compete with the investment teams that uses the investment our existing capabilities and that is somewhat unique as best we can tell in the marketplace.
And so.
The client engagements are such that it's literally indication where the clients understand what are they trying to accomplish with the portfolios.
Delivering.
Rachel capabilities, along the lines. So that's what we've seen.
From a more recent 1 though as I've mentioned, a few minutes ago was introducing index capabilities to institutions.
The totality of that is what creates the importance of relationship with clients and you end up expanding your capable.
Your mandates per clients in these relationships so it does.
Early days, but we're seeing it is persistent and time and.
<unk>.
And again as I said, a few minutes ago, we're seeing that it's very important institutionally. It's also quite important.
In the retail channel also so we just look at it this way.
It's the way that business is being done.
We look to the future.
Okay.
Then.
Second.
More probably more for Allison.
I know, we've seen liquidity continue to improve.
You laid out the idea that we're going to be having the MLP.
Liability.
Funding later this year.
So still some some calls on liquidity, but without question, a far better position than without those costs dramatically lower than they were a year ago. So with that in mind. What are your updated capital management priorities, how should we think about.
The likelihood of a.
Question on the buyback I know, we got the increase in the dividend recently, but how are all of those different.
Calls on liquidity.
How do they rank in your mind from your house.
Sure. Thanks Brennan.
Yes.
A resolution of the MLP matter will be.
A terrific milestone for us to get through that's been out there for a while now and something we've been anticipating and reserving for and so as we think about the funding of that matter and the fact that the liability at this moment does appear to be lower than what we were previously anticipating is good news and we do look forward to.
I should note that in the fourth quarter as we get through that that does in fact clear out a lot of these I'll call them contingent liabilities that were things we needed to be cognizant of and manage our cash flow for over the past year, plus and so we look forward beyond the resolution of that I mean, I would say a couple of things 1 we continue to focus on just the improvement of our.
Our balance sheet overall.
Our leverage profile as I noted continues to improve with the strength of EBITDA.
Yeah.
Depending on how you think about our leverage but looking at the non preferred element of the capital structure. I mean, we're below 1 times now with the results from the second quarter and that's strong improvement we're going to continue.
To be focused on opportunities that we have to improve our balance sheet.
And I don't know what that means just yet, but we do have maturities as you know that come up in 'twenty, 2 and 'twenty 4 and those remain areas of Optionality for us as we think about balance sheet improvement.
Beyond that we are going to continue to be committed to that sustainable and modestly.
Modestly increasing dividend, we as you noted increased the dividend last quarter and we will continue to look for opportunities to increase the common dividend.
Concurrent with improvement and our performance on our results.
And then longer term resuming share buybacks I don't know when that will be.
I said, we want to get through the MLP matter.
And we continue to be focused on the leverage profile, but share buybacks certainly remain an opportunity for us to continue to return capital to shareholders.
Thanks for that color.
Yeah.
Thank you. Our next question comes from Bill Katz with Citigroup. Your line is open.
Okay. Thank you very much.
Questions. This morning.
Mark maybe a question for you just as you think about your relationship with mass mutual.
Where does that go from here.
Maybe you can think to discuss maybe the seed capital need versus maybe opportunity to grow organically through their distribution pipe and then maybe any opportunity that you could see working with them.
Taking a per day.
Yes, Thanks Bill so.
Again, it has been multifaceted as youre pointing out so no 1 is sort of a.
Co investors see the enabler and alternatives that's been very very positive not just for you.
Yes.
The investment itself, but really the credit.
The ability of a sophisticated investor with other institutional clients.
And as you saw the retail channel or so.
Correct me almost about $10 billion on our retail platform right now where the number 2 flowing organization within that right now.
As you know the recently closed acquisition of <unk>.
On M. A business that looks like it's going to be an opportunity for us moving forward.
So again, we just continue to work together on a burger place us on various opportunities.
You know as we look to the future.
With regard to M&A.
Sure.
<unk>.
Yes.
They understand our strategy very much as an organization and if something made sense along the lines, we've talked about in the past that.
It improves our strategic position as complementary to our business.
There's sort of protocol.
The necessity of cultural.
Quite a bit.
I'm sure they would be supportive of that.
And the 1 thing I'd say, we manage about $5 billion on their broker dealer platform excuse me sorry, Dan.
Yeah.
And flow there.
Okay. That's helpful. And then just a follow up coming back to capital management for a moment certainly appreciate.
A little uncertainty as you go to the end of the year with the liabilities still outstanding, but just given where the stock is trading today against your relative positioning I'm just surprised that buybacks would be fourth on your list could you talk a little bit about maybe the internal rate of return assumption you have between new business growth coming in the door versus the opportunity to grow our buyback.
Robust stock at these price points. Thank you.
Yes, I mean, I don't want to imply that it's fourth on the left and as we've said before it's not quite as needed. The waterfall as that would imply we are being thoughtful about the timing and when we would resume buybacks and certainly we are thoughtful about how we think about that internal rate of return.
Buybacks into other opportunity low 1 thing I didn't say and I said is that is there.
Number 1 opportunity we have is to continue to invest in our own growth.
And we are constantly thinking about the opportunity we have to invest in our own product launches to invest in our own capabilities.
And we think that drives longer term growth.
Growth that shareholders are really looking for.
Buybacks aren't fourth and last by any means but we've had a number of parallel path. We have been running over this past year in resolving some of these contingent liabilities as well as improving the balance sheet overall, we're making good progress there and we're going to continue making progress as we think about all these opportunities we have.
Thank you guys.
Thanks, Bill Thank you.
Thank you. Our next question comes from Alex Blaustein with Goldman Sachs. Your line is open.
Great. Good morning, Thanks for taking the question as well I was hoping to go back to private markets discussion for a second and really zone in on the retail.
Opportunity you see from Invesco.
Maybe just a little more color on what product, specifically, you're sort of aiming to penetrate the retail footprint with sort of kind of what is your go to market strategy there and.
Considering significant amount of kind of open space and building uptight for private market solutions in.
The retail channel can.
Can you get there organically or do you think you need to acquire additional capabilities.
Yes so.
It's a very good question and.
I searched tirelessly in rate, which is being introduced to the retail market right now.
Real estate capability.
<unk>.
Our view is that.
The largest opportunity for growth for.
Direct real estate capability is in the retail channel globally.
That's not unique to us I think many firms have tried to figure out how best to alternative firms in particular, how to best access.
That channel and its very hard from the standpoint of most firms if you're an alternative firms have the capability, but you really need that.
Killed presence with distributors.
Wholesalers NOI to be successful and so the very few firms like us that can pull that off and so we look at this.
Really important development for us so again, just what we've done.
Hung with UBS and now through multiple distributors here in the United States. So.
We don't think that we.
We have the capabilities that are in demand within that channel and its early days.
Far as I'm concerned for what we're going to see.
As we move forward here.
Okay. So it sounds like organically as kind of the path year on profit market alts as opposed to anything inorganic.
Yes, yes, we have plenty to do with.
The capabilities that we have right now in the retail channel.
Great and interest maybe quick follow up.
Allison for you.
Apologies if I missed it but can you talk a little bit about the fee rates associated with the $33 billion institutional pipeline.
Then curious again within the old part of the institutional pipeline what strategies does that comprise off thanks.
Sure.
If I look at the pipeline.
Line and look at the fee rate I think what we've disclosed previously is the fee rate from institutional pipeline tends to be.
The firm average, but it tends to be in the kind of high <unk> low <unk>.
Basis points and as I look at the fee rate or the pipeline at the end of the second quarter.
It's the highest I've seen since I've.
At Invesco, and so I'm quite bullish as I look at the pipeline both in terms of besides that it was replenished back to 33 billion. Following the $17 billion funding of the Australian mandate.
The composition of the pipeline itself in terms of average fee rate and.
It's been months across both regions and asset classes.
Pretty balanced across the United States.
Asia Pacific and EMEA and.
And in terms of asset classes.
Coming back to the second part of your question, it's actually a little bit higher on the alternative side than it has been in the last few quarters.
Not really.
I think again.
Since 2 are private markets capabilities, both our real estate capabilities as well as our senior loan capabilities and.
I think again speaks to just the strength of those capabilities the demand that exists in the institutional channel and our performance overall.
Great. Thanks very much.
Thank you and our last question comes from Michael Cyprus with J P. Morgan Your line is open.
Hey, its Mike Cyprus from Morgan Stanley. Thanks for squeezing me in here just a question on China given the success that you guys had over there just hoping you could talk a little bit about your approach to distribution.
China, What's worked what hasn't worked as well what lessons do you take away from her deep experience in the really in the region as it relates to distribution and maybe you could also touch upon some of the digital distribution initiatives as well and how that's evolving.
Yeah, Okay. Thanks, Mike.
Great question so.
Needless to say, it's a very.
Very very competitive market and success is only going to come from retail channel more deeply embedded in China. That's half your business driven by our local Chinese which is the case for us.
And you have what.
It would be a little more typical of what we might see.
I would say it's worth it.
Very important engagements with large banks insurance companies getting on platforms and service some of that but I will say half of our retail flows right now on some type of a digital platform.
<unk>.
It started with us with ant financial was when he came in early.
I think the first foreign money manager to their very large money fund.
And then expanded from that from 2 other capabilities and then onto other platforms within the marketplace.
What you also see is the digital engagement is at a level that is the most sophisticated in the world and how.
<unk>.
Engage with clients the demands on the organization.
Are quite extraordinary but by the way the benefit as it just has helped us in other parts of the world as we think that those types of engagement as they continue to evolve in different marketplaces.
From the retail channel institutionally same thing some of the most sophisticated.
Institutional.
Investors in the world and it is.
You just have to bring.
The best and brightest within the organization, representing the full range of capabilities and this is another example, where.
Some of the largest penetrations with those institutional clients multiple mandates gets in China for us.
And it just really reflects the necessity of the depth and breadth of an organization and to be able to serve these huge clients at a.
A very high level, so I don't know if thats insightful, but thats whats worked for us.
Great. Thanks, and just a follow up question, maybe more for Allison around the impact of market movements on your expense base I think in.
You've said, maybe about a third of the expense base is variable or so or moves with markets is that still right and then I see you called out about $18 million or so impact on the comp side.
<unk> from market movements on slide 9 should we think about that.
Being driven by the 5% market appreciation in your AUM in the quarter translating into that 18.
$18 million impact so $72 million annually, how should we be thinking about that.
So a couple of things 1 I'd say, yes here the Ah ha.
A portion of our expenses that would be variable in nature, and primarily driven by market, but certainly are there.
Those would drive it as well.
We'd.
Would be about a third.
In terms of that Mark at variable comp on slide 9 and there's FX in there as well so do keep that in mind.
Yes, you can really kind of look at that relationship with just comp to revenue, even and see theres, some consistency, but as revenue increases.
A.
Performance all of these things drive compensation in and drive the increase in variable compensation.
I wouldn't point, you to any break and the historical relationship there, it's still consistent with what we've guided to in the past.
Yeah, So I'll leave it at that did that answer your question.
Sure. Thank you.
Okay.
Operator, I'm, sorry, I cut you off.
Go ahead, Sir Okay.
Yes, good I just wanted to LSI just on behalf of Ella side. Thank you very much for your time and appreciate the engagement and we'll be in touch have a good rest of the day.
Thank you that concludes today's conference. Thank you for participating you may disconnect at this time.
Okay.
Okay.